What the Market Wants: Unprecedented Move in Cyprus
This week began on a very ugly note after the IMF, ECB, and EC revealed over the weekend they are requiring Cyprus to levy a tax on its depositors. This, they felt, was needed to raise approximately one half of bailout funds needed by the government to, among other things, shore-up its banks after taking “big hits” to their capital structure from the disastrous fall in Greek bonds held by the Cypriot banks. Under the plan approved by the troika but subject to approval by the Cypriot parliament, depositors with less than 100,000 euros would be taxed 6.75% while higher deposits would be taxed at 9.9%. First of all, it is unprecedented to seize government insured deposits. Perhaps the real target was the wealthy and maybe nefarious Russian weapon dealers or money launderers, but to introduce a new fear that insured bank deposits are not sacrosanct for such a minor amount of money (from the viewpoint of the entire Eurozone) seems ludicrous.
Fortunately, the Cypriot parliament has asked to have until Friday to approve the bailout. Perhaps cooler heads will prevail and insured bank deposits can remain sacrosanct, saving yet another serious financial crisis for the entire Eurozone (potential contagion of the idea that insured bank deposits are not sacrosanct). Think about Italian, Spanish and Portuguese banks for openers. Containing Russian pride is no small thing either.
As for what the market wants, it wants no shockers. This week is likely to be quite volatile if this crisis doesn’t resolve itself without a “jump off the cliff.”
Last week seems like ancient history, but it was quite placid with minor gains across most of the markets as they teetered near new highs. Surprisingly, Small-cap Growth led the week up 1.43% and Large-cap Growth trailed, up only 0.35%, as Apple (AAPL) finally rose from its recent bottom. Industrials, Healthcare and Financials led the way with Non-Cyclical Consumer products, Basic Materials and Telecom all in the red. Stay away from Financials this week; the Cyprus situation and the travails of JPM have created an unpredictable situation.
Volatility was up sharply today due to the crisis in Cyprus, and it is likely to stay up most of the week as the political parties in the scene will no doubt start to posture. A hedge using one of the VIX derivatives would probably be astute.
3 Stock Ideas for this Market
This week I created a large-cap search in MyStockFinder for growing undervalued companies with dividends.
AAPL (Apple Inc.)
- Trading for 10x current earnings, 9x forward earnings
- Increased optimism that Apple will increase its 2.4% dividend by as much as 50%
- 19% proj 5-year EPS growth rate, 0.2% 2013, 12.6% 2014
ESV (Ensco plc)
- 3.4% dividend yield
- 11.7x current earnings and 7.5x forward earnings
- Projected EPS growth: 30% 5-year, 23% in 2013, 13.8% current quarter, 23% next quarter
MGA (Magna International Inc.)
- 2.3% dividend yield
- Trading for 9.2x current earnings and 8.8x forward earnings
- Most analysts covering have revised their earnings estimates upward for the current quarter