What the Market Wants: Recapitalization Scenarios
The week started out well as insured depositors were spared in Cyprus, and that resonated well with investors. Furthermore, last week’s domestic economic data was quite positive especially for housing. The Philadelphia Fed Survey was much better than expected; Initial Jobless Claims remained in the low 300K area; and LEI were as expected. Looking ahead to this week, we are expecting much improved Durable Goods Orders tomorrow along with rising Consumer Confidence and continued strength from the Existing Home Sales. However, I should point out that Existing Home Sales are likely to be as robust as New Home Sales were last week. Nothing negative is expected from the Initial Jobless Claims on Thursday, and the third estimate of Q4 GDP is expected to be revised upward. Finally on Friday, Personal Income and the final Michigan Sentiment reading for the month are both expected to be much better than the previous month’s numbers while the Chicago PMI is expected to be a tad lower.
All sounds good, right? Wrong! After the strong opening this morning with the S&P 500 up 0.5% in early trading along with similar strength from the Dow and Nasdaq, the market succumbed to a gradual sell-off throughout the day. Traders in Europe soured when the top finance minister-Jeroen Dijsselbloem-told Reuters and the Financial Times that the Cyprus bailout would make a fine template for solving other European bank woes. Specifically, he indicated that the Troika (IMF, ECB and EC) should look to shareholders and bondholders first, and then, if necessary, to uninsured depositors to recapitalize failing banks. European markets lost their gains and domestic markets followed suit.
But we are not so sure he got that wrong. It is very similar to the process that we have always used in the U.S. What does “limits on insured deposits” mean if not to imply some higher risk than fully insured depositors? Surely he didn’t mean an equal sharing of risk among the three groups; you would expect shareholders to have the most risk, followed by bondholders, and then if necessary, followed by uninsured deposits.
Fueled by Apple’s (AAPL) recovery, Large-cap Growth was the only positive style/cap, up +0.08% despite the nasty report and decline from Oracle (ORCL). Small-cap Value was worst, down -0.79%. Sectors followed the classic flight-to-safety format with Consumer Non-Cyclicals, Telecom, Healthcare, and Utilities at the top. Consumer Cyclicals, fueled by the housing numbers, was the only other positive sector. As we expected, Financials took the full brunt of the Cyprus and JP Morgan (JPM) woes, falling a nasty -1.4%.
3 Stock Ideas for this Market
This week we have selected three large-cap stocks for you to consider, diversified across the top sector groups.
LyondellBasell Industries NV (LYB)--Basic Materials
2.5% dividend yield
Trading for 12.8x current earnings, 9x forward earnings
Projected EPS growth: 10.4% 5-year, 15.4% 2013, 30% current quarter
The Kroger Co. (KR)--Consumer Non-Cyclicals
1.9% dividend yield
11.8x current earnings and 10.75x forward earnings
Projected EPS growth: 8% 5-year, 12% in 2013, 12.8% current quarter
Amgen Inc. (AMGN)--Healthcare
1.9% dividend yield
17.5x current earnings and 11.5x forward earnings
Projected EPS growth: 10% 5-year, 10% in 2013, 13% current quarter