Look At That Froth! December Market Strategy

This is an excerpt from John Blank’s latest Market Strategy report. To access the entire PDF, click here.

This 2200 S&P 500 Value Looks OK Only on an Optimistic Forward Look

Bottoms-up strategists have valued S&P 500 earnings at $118 in 2016. Tie on a 16 forward P/E to do that “fair value” math. Hence, 1904 on the S&P 500 looked to be a decent “fair value” lower bound.

Above 2,200 on the S&P 500, early DEC shows us the latest EPS “fair value” calculation has support solely on a forward look.

Consult earnings yield “fair value” math too. The risk-free 10-year U.S. Treasuries offered a 1.80% rate on Nov. 1^st. This rose to 2.4% in early DEC. Historically, a stock earnings yield is +3% higher than this 10-year U.S. Treasury rate. Meaning U.S. stocks should offer a 5.4% return.

So, turn the S&P 500 P/E ratio on its head to attain a stock index’s earnings yield. Divide $118 in projected earnings for 2016 by an S&P 500 trading at 2200. That begets a 5.36% earnings yield. After a +32% rally in 2013, and +12% returns in 2014, evidence is getting sketchy on ongoing S&P 500 index undervaluation, unless you look ahead very bullishly.

The latest 12-month EPS “Look Ahead” on the S&P 500 has $131.59. Multiply by 16. You get an S&P 500 “fair value” calculation at 2105.

The Russell 2000 May Correct

The “risk on” rally took the Russell 2000 (RUT) from 1000 in Feb to near 1350 in late NOV. The RUT trades at 1352 as I write on Dec. 7^th. “Risk-on” rallies usually show small cap and international stock indexes move together.

My DEC call: Hold off a bit buying the RUT, but not international… on excess optimism. A big RUT run has taken place. The way forward is not as attractive for a few weeks/months on the RUT. A RUT pullback should happen.

Rates and Currencies Tell Independent Story on Their Own

Outside the U.S., the euro is 1.08 again. A 1.08 euro/USD rate came into play late last year. The rate was 1.13 last fall. Euro parity may now happen, as earlier consensus projected. European share indexes have recovered weakly after Brexit.

Does a Fed Taper tantrum aka 2013 hit in 2017? That’s unlikely. We are clearly climbing the wall of worry outside the U.S. The U.S. is solidly at full employment.

Risks -- on China -- have changed complexion. NOTE: The renminbi keeps getting cheaper… on its own! The stealth gov’t renminbi -2% depreciation happened during Brexit. Now, the gov’t in China is worried about unchecked capital flight from China.

Another KEY: Enhanced Europe “QE.” Negative rates and fiscal stimulus are on in Japan. These two big macro players hold global rates down and keep stocks aloft.

Zacks Sector/Industry/Company Telescope: OPEC Demonstrates Power

The latest Zacks Industry Ranks show slim pickings – Energy is Very Attractive. Info Tech is Attractive. Semiconductors remain red hot. Materials and Financial sectors went to Market Weight. Look into Steel and Metals Non-Ferrous. Health Care went to Market, too. Consumer Staples and Discretionary are at the back of the line at the moment.

(1) Energy stays Very Attractive. Tops are Coal (benefits from Trump), Drillers and the E&P guys. Oil industries will get more lift from the OPEC deal. That will give EPS lift next month.

Top Zacks #2 Rank (BUY) Stock: Williams Partners LP ( (NYSE:WPZ) )

This $20 billion market cap stock currently offers a 9.7% annual dividend and carries a Zacks VGM score of A.

Williams Partners L.P. is a master limited partnership. The company is engaged in gathering, processing, transportation and storage of natural gas and natural gas liquids. It operates primarily in U.S. and Canada. Williams Partners L.P., formerly known as Access Midstream Partners, L.P., is headquartered in Oklahoma City.

(2) Info Tech stays Attractive. Again: Semiconductors are hot.

Top Zacks #1 Rank (STRONG BUY) Stock: Advanced Materials ( (NASDAQ:AMAT) )

This $34 billion market cap stock also offers a Zacks VGM score of A.

Applied Materials develops, manufactures, markets and services semiconductor wafer fabrication equipment and related spare parts for the worldwide semiconductor industry.

Customers for these products include semiconductor wafer manufacturers and semiconductor integrated circuit manufacturers, who either use the ICs they manufacture in their own products or sell them to other companies.

(3) Materials fall from Very Attractive to Market Weight. The boost to China manufacturing PMIs is restricted to Steel and Metals-Non Ferrous. All other industries fell into a muddle-through status.

Top Zacks #1 Rank (STRONG BUY) Stock: Vale SA ( (NYSE:VALE) )

This $45 billion market cap stock also offers a Zacks VGM score of A.

Vale SA is a mining company engaged in the mining of iron ore and pellets, nickel, manganese and ferro-alloys, gold, nickel, copper, kaolin, bauxite, alumina, aluminum, and potash. It operates logistics systems in Brazil, including railroads, maritime terminals and a port.

Vale SA is based in Rio de Janeiro, Brazil.

(4) Financials fall from Very Attractive to Market Weight. The leader is stock market led Investment Banking & Brokering and the smaller Banks & Thrifts. Real Estate, Major Banks and Insurance Cos. lagged at the back.

(5) Health Care stays at Market Weight. Medical Care looks attractive, while Medical Products and Drugs are muddle-through industries.

(6) Industrials stay at Market Weight. The leader is Business Products, Business Services, Aerospace & Defense (benefits from Republican control) and Conglomerate. Losers: Pollution Control & Industrial Products-Services.

(7) Utilities stay at Market Weight. The best niche is Utility-Gas Distribution now that winter is here. Rising Trump long-term rates hurt dividend-paying stocks.

(8) Consumer Discretionary falls from Market Weight to Unattractive. Leaders remain Consumer Electronics and Publishing and Other Cons. Discretionary. Losers are Autos/Tires/Trucks, Apparel & Home Furnishings-Appliances.

(9) Consumer Staples falls from Unattractive to Very Unattractive this month. Losers are Beverages, Soaps & Cosmetics, Food/Drug Retail, and Misc. Staples

(10) Telcos falls to Very Unattractive. The Utility-Telephone industry rests at the bottom. Rising Trump long-term rates hurt dividend-paying stocks.

This is an excerpt from John Blank’s latest Market Strategy report. To access the entire PDF, click here.