Welcome
to this week’s edition and the last edition for 2012 of the Lewison
Letter. I wanted to get one last
letter in to hopefully help everyone prepare for what could be the best buying
opportunity of 2013, the Fiscal Cliff.
It seems pretty clear as to what will happen over the next couple days,
and that is that Washington will get little to nothing done. In my opinion, what’s going to happen
is pretty obvious. I don’t think
it’s a matter of Republicans thinking that millionaires should be taxed more,
because they do believe that. I
think the real issue is that it’s a matter of Republicans not wanting to give
in to Obama on his tax policies.
So…what will happen is that the two sides will not get a resolution by
January 1 and taxes will go higher for everyone. What that means is that the taxes will revert back to
Clinton-era tax rates for the millionaires, which is what Obama wanted. Now the Republican’s can say that they
never gave in to Obama and never raised taxes on the rich, keeping those supporters
in their corner. Within the first
2 weeks of January, Congress will reduce all tax rates on households earning
$250,000 or less to the Bush-era tax rates, where now both parties can say they
lowered taxes on the middle income Americans (which in reality everyone knows
they didn’t really lower any taxes).
Republicans are already getting the full blame for this debacle so going
over the fiscal cliff for a couple weeks isn’t going to do them much more harm,
in fact, may actually help them, for the reasons I previously mentioned (lower
taxes on middle class and not giving in to Obama’s tax increases).
What
is the best way to play the fiscal cliff saga? Most people would say to hide out in “safe havens” like
Treasuries, US Dollar, Yen, gold, etc…until it’s resolved. The problem is that out of all of those
investments, none of them are really “safe havens” except for Treasuries. First, the Yen. What really got me going about this was
reading the paper this morning and reading about the Yen being a place to hide
out in during uncertainty. Well,
last time I checked, which is as of this writing, the Yen is at multi year lows
and has traded lower for 7 straight weeks and on a monthly chart, has built a
massive bearish head-and-shoulders formation for the last 2.5 years. Next, the US dollar. If people are buying the dollar, why is
it just $1.66 of the 52 week low and about $4.50 off the 52 week high? Not only that, but the US dollar, much
like the Yen, also has a bearish head-and-shoulders formation built over the
last 1.5 years. Next, gold. Since the November election, gold is
down about $100/oz. or 8%. An 8%
drop in a 45 days, is not my idea of safety. If gold were really a “safe haven” it would be flat or
higher, given all the uncertainty on the fiscal cliff and debt ceiling. The only true “safe haven” out there is
US Treasuries, which have stayed relatively flat since Obama’s
re-election. Unless you have
access to futures contracts, the only real way to play Treasuries are through
the TLT (iShares Barclays 20+ Year Treasury Bond Fund), which is up 5.7% this
year including the 2.5% dividend.
While a 5.7% return for an investment that is very low risk is very good
compared to a savings account or CD, you were much better off forgetting the
whole “safe haven” idea and sticking with stocks, where the S&P is up 11.3%
in the same time period.
Because
none of you trade futures and commodities, where it makes sense to be in and
out of investment vehicles, how about you do the right thing and buy high quality
stocks and stick with them. As an
investor, you should want to go over the fiscal cliff, temporarily of course,
because it will give you a great chance to buy stocks that are unfairly hit,
very cheap. After seeing how
strong market has performed in the last month with all the negativity about the
fiscal cliff, my price target for the S&P next year is 1575 (all-time
highs), which would imply only a 12% move from Friday’s close. Stocks will be the place to be in 2013. After all, if you had bough the market
on January 1, 2012, you would have bought the low for the entire year.
One
place to put your money to work is in the retail industry, where those stocks
have been hammered over the last few weeks due to the fiscal cliff and dock
strike on the east coast. However,
yesterday the dockworkers agreed to go back to work through the middle of
February where by then a new deal should be in place. Just about the only sector that rallied during Friday’s
miserable trading day were the retailers, with Macys, TJX Companies, and
Nordstrom all trading higher.
Those three, along with Amazon are the best ways to play retail. My first preference is Macys, which I
bought early Friday before it rallied, as it’s trading at just 10x 2013
earnings and is the cheapest among its competitors.
Another
stock that I love, which unfortunately has already rallied sharply over the
past few weeks and seemingly will not pullback, is Ford. In my opinion, it’s the best way to
play the global growth story that will happen in 2013. Ford is up 46% since making a new
multi-year low in August (up 10% just this week) and is just $0.18 off it’s
52-week high of $13.05. They
already have very strong US sales and Europe and China are recovering, which
will only boost their global sales numbers. My price target on Ford is $15.65, a 22% gain from Friday’s
close. With that being said, I
don’t necessarily recommend buying Ford on Monday, but instead, wait for a
pullback closer to $12 and then buy aggressively.
I
am also looking for another big year in technology stocks, let up by the one
stock that has been beaten to pulp since hitting an all-time high back in
September, Apple. While there are
many reasons that Apple has gotten hammered (slow down in iPhone and iPad
growth, possible lack of new products, increased competition, etc…), I think
the main reason the stock has sold off about $200 is because of profit taking
going into higher taxes next year.
Compound that with individual investors panic selling and you get Apple
at $509.59, trading around 10x 2013 earnings or a 30% discount from its
historical P/E. The stock looks
like it wants to hold the $500 level, which it did on November 16th
and December 17. I would be a
buyer of Apple but wouldn’t take it much lower than $480. That’s about a 6% risk for a stock that
I predict will trade back up to $660 next year, or about 30% from Friday’s
close.
Other
stocks I like for next year are Caterpillar, Starbucks and Dunkin Donuts, Visa
and Mastercard, McDonalds, Harley Davidson, Nike Under Armour, and Petsmart.
Happy
New Year
Full disclosure: I am currently long Macys (M)
Jeff Lewison
