SET Monthly Issue November 2012

| November 20, 2012

November 2012


As you know, the last few months have been a miserable slide lower for the markets.

Watching the markets get hammered day after day is frustrating, to say the least.  But the stock market has shown some signs of life over the last few days.

Has the stock market finally reached a turning point?  Or is this nothing more than a dead cat bounce?

Here’s the thing…

When stocks are in a real free fall, investors get scared.  And investors buy insurance or some sort of protection to prevent a total loss.

But big investors aren’t buying protection during this pullback.  In fact, credit default swaps on the large US banks haven’t budged during the recent stock market pullback.

Did institutional investors with exposure to large US banks just decide they’ll just go down in flames with the banks?

Of course not… The current situation simply isn’t bad enough to cause them to buy protection.

That’s a clear indication the recent selloff is due to something other than a deteriorating economy.

Can you think of anything that would fit the bill?

The one that come to my mind is President Obama’s reelection and the impact higher taxes will have on investors.

Look, it’s no secret the wealthiest Americans own the majority of the stock market. And right now it looks like the tax rate on capital gains and dividend income for the richest Americans is going up.

It only makes sense to sell those investments and take the gain at a lower tax rate now than to continue holding it and pay more in taxes when you sell it later on.

In fact, the majority of the recent selloff can be linked to portfolio rebalancing and restructuring ahead of the coming tax changes.  But that’s only temporary…

Once the profits have been taken and the portfolios are rebalanced, investors are still looking to make money.  And money will flow to the stocks, industries, and sectors that treat our money the best.

One area that has a long history of treating money right and has been hit hard ahead of the coming tax changes is dividend paying stocks.  But they still look like a good investment even with a higher tax rate.


Ahhh… Dividends.

I rarely meet an investor who doesn’t like a stock that pays a nice dividend.  And for good reason… it’s one of only a few ways a corporation can repay their shareholders for their investment.

And over the long run, dividends are a critical part of the total return an investor will get over a lifetime of investing.  In fact, dividends are responsible for 4%-5% of the markets total return every year.

But over the last few weeks, investors have been shedding dividend paying stocks left and right.

Macro/Economic Trend:  Still The Best Way To Generate Income

It’s no secret, the Obama White House has put upper income Americans in his crosshairs.  He wants to increase taxes on the rich to help close the gaping hole in the federal government’s budget and help pay down the deficit.

Unfortunately, these new taxes on investments are creating a whirlwind of activity in the stock market as investors reposition and rebalance their portfolios ahead of the new tax laws.

But when it comes right down to it, investors are going to put their money in the best investments.  And for income investors, that still means dividend paying stocks.

As you know, dividend paying stocks are one of the few ways investors can generate income today.  Savings accounts pay next to nothing.  And corporate bonds and Treasuries aren’t much better.

Once the tax rates have been settled and dust has settled, dividend paying stocks are still going to be the best way for investors to generate income.

It may not be quite as good as it was before, but dividends will still be leaps and bounds ahead of the paltry sums you can generate on other investments.

One sector that’s known for the slew of stocks that pay dividends is consumer staples.

These companies produce everyday goods that consumers use no matter how strong or weak the economy is.  They typically operate in a mature market without big opportunities for growth.  So they return profits to their shareholders through steady quarterly dividend payments.

After the recent selloff, the Consumer Staples Select Sector SPDR (XLP) looks like a screaming buy.

Fundamentals:  A closer look at XLP

XLP tracks the S&P Consumer Staples Select Sector Index, a weighted average market cap of 44 of the best consumer staples stocks.

It has a modest 0.18% expense ratio and has a 2.77% dividend yield.

Currently, the top five holdings and percentage weight for XLP are –

Company Name Ticker % Weight
Proctor & Gamble PG 13.69%
Philip Morris PM 10.65%
Coca-Cola KO 10.53%
Wal-Mart WMT 8.50%
Pepsico PEP 4.53%

Technicals:  The charts lead the way

As you can see, XLP has tumbled from a recent high of $36.59 to $34.41 today.


But more importantly, it’s fallen back to support (red line) of the previous highs the ETF hit back in April and May.

This looks like a good entry point for investors looking for a low risk price point to buy XLP.

Trade Alert

Buy:  Consumer Staples Select Sector SPDR (XLP) up to $36.00
Recent Price:  $34.41
Price Target:  $42.00
Stop Loss:  $32.00

Remember:  Consumer staples stocks are some of the most stable businesses with strong histories of delivering shareholder value through stock buybacks and dividends. The recent pullback has investors adjusting their portfolios ahead of the tax law changes and should be viewed as a fantastic buying opportunity.


Consumer Discretionary (-3.3%)

High end retail has taken a hit as wealthy consumers dial back.  But strong consumer confidence levels should lead to a stronger than expected holiday shopping season.

Our SPDR S&P Retail Fund (XRT) is down as we move into the holiday shopping season.  But it’s on the verge of bouncing back… Continue holding XRT for bigger gains.

The SPDR S&P Homebuilder ETF (XHB) was drug down in the latest pullback.  But as I said, this has more to do with the investors adjusting their portfolios than a change in the fundamentals.  Continue holding for bigger gains.

Consumer Staples (-4.4%)

Consumer staples are the proverbial baby being thrown out with the bath water in the most recent selloff.  In fact, this is just too good of a buying opportunity to pass up. We’re recommending the Consumer Staples Select Sector SPDR (XLP) this month… see trade alert for more details.

Energy (-5.5%)

Oil and natural gas prices are down as investors fret about the future of the global economy.  But a cold winter and uptick in the US housing market could spur economic activity and energy use in the weeks and months ahead.

Our SPDR S&P Oil & Gas Equipment & Services ETF (XES) has had a bumpy ride so far.  After being up as much as 8%, we’ve seen those gains evaporate over the last few months.  But as I mentioned earlier, expectations have already fallen so low we could see a modest improvement in earnings spur a big rally in XES.  Buy these shares up to $36.00.

The rally in our First Trust ISE Revere Natural Gas Index Fund (FCG) has taken a breather.  But the future for this ETF is bright! Natural gas prices have nearly doubled from the April lows.  And those higher prices will translate into positive earnings momentum in 2013.

The ALPS Alerian MLP ETF (AMLP) has taken a hit along with most dividend stocks. But the selloff seems overdone.  And AMLP should bounce back quickly.  Continue holding.

Financials (-4.4%)

Our iShares FTSE NAREIT Residential Plus Capped Index Fund (REZ) has held up well in the recent selloff.  The dividend paying stock should rebound in the weeks ahead.  Grab you shares of REZ if you haven’t already.

Healthcare (-4.8%)

Healthcare stocks were caught up in the market wide selloff.  But with Obama remaining in the White House, healthcare stocks should continue to benefit from healthcare reform.

Industrials (-3.2%)

Industrial stocks limped lower last month.  But the pullback was in line with the broad market pullback.  So it’s nothing to be overly concerned about.

The Market Vectors Agribusiness ETF (MOO) has fallen back a bit from its recent high.  But the uptrend is still in place and fundamentals are still strong.  Continue holding for a bounce back.

Technology (-8.0%)

Tech stocks have been swamped as the sector leaders like Apple (AAPL) have been crushed.  The selloff that started months ago has accelerated to the downside as investors took profits ahead of the impending tax increases.  And who can blame them… anyone’s that held AAPL for the last few years is sitting on some tidy profits.  It only makes sense to lock in those profits at a lower tax rate today.  But this selling pressure should only be temporary.

Materials (-5.0%)

It can’t get much worse for basic materials stocks.  The expectations for global economic growth are pretty much rock bottom.  And with new stimulus efforts popping up around the country, we should see demand expectations rebound as well.

Utilities (-6.2%)

Utilities were socked with a sizeable loss last month.  These defensive dividend paying stocks are surely being punished ahead of the looming tax increases.  And the threat of an economic slowdown cutting into demand isn’t helping.

But the impact the tax hikes and the economic slowdown will have on utility companies has been largely overblown.

Portfolio Changes

  • This month we’re buying XLP.


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