Good morning,

Markets are called to open higher this morning. This is what's happening today:

  • In the USA, the House of Representatives voted in favor of the Senate’s budget legislation as Republican lawmakers abandoned their effort to add spending cuts to the bill, removing one impediment to recovery in the world’s largest economy;
  • China will work toward bolstering global growth this year, President Hu Jintao said in a New Year’s Eve address;
  • The dollar weakened against most of its major counterparts while the yen fell past 87 per dollar for the first time in 2.5 years and slid to an 18-month low versus the euro – This is a typical risk-on market, where the yen and dollar are sold;
  • 10-year Italian debt is yielding 3.81%, 10-year Spain is yielding 5.232%, 6.881%;
  • Brent is trading at $111.79/barrel;
  • Gold is trading at $1680.03;
  • Apple closed the session at $532.17

2013 starts with a bang! Early this morning the house of representatives passed a senate backed fiscal cliff deal. The end of the fiscal cliff drama came when a large bloc of House Republicans, who had stubbornly opposed the bill, caved in and reluctantly joined Democrats to pass it comfortably by 257 to 167. The bill is a short-term fix. Without the bill, every taxpayer in America would have faced rises from 1 January. Instead, the increases are confined to the top 2% wealthiest part of the population. The Congressional vote amounts to only a partial victory for Obama. He had promised the new taxes would kick in at $250,000 but, to the dismay of left-wing Democrats, agreed to compromise, in the face of Republican opposition, on $450,000. The Republicans had wanted the threshold set at $1 million.

2012 was a very good year for stocks and high yielding bonds. The high yield bonds were the best performing asset class for the year. The Nasdaq closed 15.9% up for the year, the Dow 7.26% and the S&P 13%. Financials in the US were up 26%. In Europe we also had a very good performance with the DAX up 29% and the Greek market being the best perfoming market for the year, up 32% (beating the DAX). And as is seems, with the encouraging speech by the Chinese President on NYE regarding his optimism for 2013 and the deal in the US, investors are putting risk back on the table. The dollar weakened against most of its major counterparts while the yen fell past 87 per dollar for the first time in 2.5 years and slid to an 18-month low versus the euro – This is a typical risk-on market, where the yen and dollar are sold.

The following is are two interesting observations by Citi in a report issued on 31.12.12 titled 'Themes for Thirteen' –

1 – 'Excess cash holdings and cash flow provide corporations with a variety of shareholder friendly options. The dividend theme continues to make sense in view of attractive yields relative to cash or Treasuries (despite likely higher taxation) and there are various ways to take advantage of the dislocation, including low CDS and above-average yielding names even as some think dividend yielders are overvalued. In addition, true share shrinkers offer unique opportunities for investors seeking alpha, but the consistent shrinkage of share count is meaningfully different than mere stock buybacks and fits in better with Citi’s de-equitization views. While M&A should pick up due to the wide spread between cash flow and junk bond yields, picking buyout candidates is inherently speculative.'

2 – 'Large cap stocks should outperform smaller cap names. Given the potential for some overall operating margin pressure, valuation and lead indicator signals, it would appear as if large cap names should outpace small cap ones. In addition, the dividend yields are higher in the large cap universe and foreign investors wanting to participate in US growth typically buy larger well known companies when they venture outside their local core competencies. Furthermore, growth indices are expected to outperform value styles.'

I'd like to conclude this blog with some investor education on diversification by Citi. 'Investors have become enthralled with themes in the past few years as they seek performance nirvana, especially following a decade-plus of dismal aggregated US equity market returns. But themes also play another critical role, in that there is the opportunity to buy a cluster of stocks around a particular idea that does not rely on selecting one or two names that potentially could blow up the portfolio. By purchasing a number of companies, there is an inherent diversification hedge that reduces single stock risk.

Nevertheless, one has to be careful in not buying such long dated themes such as the aging of America since such demographic trends can outlast a portfolio manager’s return time horizons and thereby endanger his or her job security. While we have no issue with long investment time frames versus probably excessive short-term trading that may cost too much in terms of transaction fees, we also worry that stock prices soar initially on the excitement about the long-term potential (think social media investing, for instance) and investors lose loads of money upfront.'

My opinion is to stay invested in equities at this point in time. In the short term I don't seek weakness in high yield though with prices where they are today there is not much more one can squeeze out of the high yield market. Whereas for equities the story is different. Stocks are still trading on low multiples compared to their long term average. And with the outlook for the global economy post 2013 and governemental involvement across the board to kick start growth, there are many arguements why 2013 should be another successful year.

Stocks to watch – This year the 'stocks to watch' section will be done differently. Instead of giving you a different stock each day which different analysts are bullish on, I will give you 5 stocks in Euro and 5 stocks in Dollar which I think should do well in 2013. I will also give you daily updates on the stocks and inform you when a stock is removed or added to the list. However the list will always remain with 5 stocks in each currency (not to make it too complicated).

Euro stocks:

1 – DAX

2 – SAP

3 – BNP

4 – Arkema

5 – BMW

US stocks:

1 – Apple

2 – Footlocker

3 – Ingredion

4 – SPDR Gold Shares

5 – Google

Good day and happy trading!

Kristian Camenzuli