2q 2012 almost in the books – should we dig a hole and hide ?

The headlines are unrelenting negative:

1.) Europe and the fear of a Lehman-type moment as worries over bank runs captivate headlines. This seems like it will go on for years too. Very few talk about economic growth, just the pain of austerity. Economic growth cures a lot of ills;

2.) The Supreme Court decision on healthcare – just about every talking head thinks that the individual mandate will be overturned, and that SCOTUS will gut the Obama Healthcare bill. I’ve always been fascinated by how conservative jurists appointed to the Court, almost universally seem to gravitate left, over the years. Left-leaning appointees seem to stay left, while right-leaning Court appointees almost invariably drift to the center. That isnt a political statement, just an observation / opinion. I am self-employed and have had cancer twice – you can imagine how much i pay for healthcare insurance, which doesnt cover all that much:  my out-of-pocket costs for anything healthcare-related is still about 50% of hospitalization and doctor expenses. Cant help but wonder if the individual mandate wouldnt eventually lower premiums.

It is always tough to predict how SCOTUS will come down on anything. Dont bet too heavily on the consensus around the bill – we are long large-cap pharma stocks like Merck and Pfizer, but prefer to wait and see how the SCOTUS rules before buying more, despite the decent technical formations. Medical device makers like Zimmer and Stryker could move sharply given the tax levied to pay for the President’s healthcare plan.

3.) The Presidential election – Brian Wesbury wrote the other day that if ObamaCare is upheld and is the President is re-elected, we will be in for more government regulation, and stock p/e’s will compress. Big business is the enemy right now, but it is big and small business that creates jobs. “More of the same” in terms of the Washington environment wouldnt be good (in my opinion). The above isnt a political statement either. Why has wealth creation, finance, and business somehow become the enemy of the populist masses ?

4.) The Fiscal Cliff – another reason the election is critical. Likely Republican nominee Romney and a pro-business Congress would change the Washington dynamic. I dont think “the Cliff” is a dire as the press is posturing. We are long Boeing (BA) and United Technologies (UTX) to take advantage of depressed defense valuations. Boeing Defense Systems (BDS) has had expectations reined in dramatically and analysts arent giving these divisions very much upside, given Iraq ending and a reduced US presence in Afghanistan. UTX has had their p/e compressed due to the Goodrich acquisition. Defense as a sector has low p/e’s, good dividends, and a lot of Defense budget anxiety built into the valuations in the group. UTX guidance for 2012 is $5.80 – $6.00 (ex-Goodrich acquisition) and is a mid-single-digit organic grower.

In general, the headlines are so bad right now, it is depressing. Andrew Ross-Sorkin, the auther of “Too Big to Fail” and now a CNBC morning host, said that “American Dream has now morphed into an American Entitlement Dream” and Joseph Stiglitz, also on CNBC noted that in his opinion, “America is no longer the land of opportunity”.  (Wow, the paparazzi is giving up on America in droves…)

You would think from a sentiment perspective, the US stock market would be close to a bottom. However, you are starting to hear more and more market thinkers (like Jeff Miller of “A Dash of Insight”) openly start to worry about 2nd quarter earnings, which start July 9th with Alcoa (AA). Jeff Miller who i think is one of the best bloggers in the investment world, thinks that q2 earnings and the resulting guidance might be a cause for concern. As of last Friday, the forward 4-quarter estimate for the S&P 500 is still $107.52, pretty steady over the last month, leaving the S&P 500 trading at 12(x) earnings. q2 ’12 earnings will likely grow 6% – 8% – certainly well off the 25% – 30% annual growth seen in late 2009, and 2010, but inline with the long-term average of 7%.  The forward 4-quarter estimate has remained pretty stable and the behavior of estimates and revisions is pretty consistent with quarter-end analyst actions.

At some point this environment will change – we are now almost the exact opposite of the late 1990’s. As my friend Jeff Miller wrote last week on his blog “A Dash of Insight”, a lot can go right, and when it does it will happen in a hurry.

Dont buy into the media and headline depression. The S&P will likely be down about 6% for the quarter, and the Nasdaq down 7% – 8% for q2 ’12, absent a sharp rally into quarter end, but the indices are still higher for the year-to-date return.

Case-Schiller (just released) data for April looks pretty good. year-over-year increases in 19 of 20 cities, for the first time in many moons. (See, there are positive datapoints out there – you just have to look really hard to find them.)

Long MRK, PFE, BA, UTX, AA

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