Wednesday, November 14, 2012

Marc Faber: Prepare for a Massive Market Meltdown

The markets are going to go into meltdown soon, so expect stocks to lose 20 percent of their value, Marc Faber, author of the Gloom, Boom and Doom report told CNBC on Tuesday.

“I don’t think markets are going down because of Greece, I don’t think markets are going down because of the ‘fiscal cliff’ — because there won’t be a ‘fiscal cliff,’ ” Faber told CNBC’s “Squawk Box.” “The market is going down because corporate profits will begin to disappoint, the global economy will hardly grow next year or even contract, and that is the reason why stocks, from the highs of September of 1,470 on the S&P, will drop at least 20 percent, in my view.”

Faber, who is known for his bearish views, cited tech giant Apple [AAPL  548.80    5.97  (+1.1%)   ], a company whose disappointing earnings have caused its stock to fall 20 percent from its September highs and 14 percent in the past month. (more)

Wealthy Dump Assets Amid Worries About Going Over 'Cliff'

For many of the wealthy, 2012 is becoming a good year to sell.

They're worried about the "fiscal cliff," which is when tax cuts expire and spending cuts are set to go into effect at the end of the year.

Fearing an increase in capital gains and dividend taxes, many of the rich are unloading stocks, businesses and homes before the end of the year.

Wealth advisors say that with capital-gains taxes potentially going to 25 percent from 15 percent, and other possible increases in the dividend tax, estate tax and other taxes, many clients are selling now to save millions in taxes.

“Under almost any scenario, it makes sense to take the gains this year,” said Gregory Curtis, chairman and managing director of Greycourt & Co. “Clients aren’t selling willy nilly. But if they can and they have a huge gain, they’re selling now.”

If the Bush-era tax cuts expire, taxes on capital gains would revert back to its previous rate of 20 percent from its current 15 percent.  Another 5 percent may be added from health-care levies and changes in itemized deductions, bringing the rate to 25 percent for many high earners.  (more)

Warning: It's Time to Exit This "Safe" Sector

Income-seeking investors, be warned...

Dividend-paying utility stocks have had a heck of a run. Money has been flowing into this sector for over two years – utilities have even outperformed the S&P 500. Record-low interest rates have made these safe, high-yield stocks a great alternative for investors chasing income... After all, Treasurys and money market funds are earning negative returns (after inflation).

But conditions are falling into place for a major trend reversal. In fact, we could see utility stocks significantly underperform the S&P 500 Index in the years ahead. Let me explain...

Utility companies provide power, water, and natural gas. They have important assets, but grow really slowly. That's because local governments limit their ability to raise prices. In exchange for the high regulations, however, utilities get to dominate their markets. They generate huge cash flow, which is typically used to pay big dividends to their investors.

That safe, stable income has helped the big utility fund (XLU) outperform the S&P 500 by five percentage points (including dividends) in the last two years. That doesn't sound like a wide margin. But it's significant when comparing safe-income-oriented asset classes.


However, I believe this trend is about to reverse.

President Obama based his reelection campaign on raising taxes on the wealthy. He's also been adamant about letting the Bush-era tax cuts expire on January 1, 2013. One of those cuts includes the rate charged on dividends.

Today, the tax rate on dividend income is 15%. If this expires, the tax rate on dividends would jump to 39.6%. That would significantly reduce the rate of return on dividend-paying stocks like utilities.

Democrats and Republicans may come to terms on this issue. They may agree to raise taxes on dividends only slightly. But utility stocks are still a "sell" here...

My colleague Dr. David Eifrig, editor of Retirement Millionaire, recently told DailyWealth readers that the tax hike won't affect most S&P 500 companies. I agree that the stocks in this index should perform well overall going forward. But we're talking about a potential 25% tax hike on dividends. We've never seen anything like this before. And utility stocks are particularly vulnerable because investors own them solely for yield.

These companies are also incredibly overvalued. According to Russ Koesterich, global chief strategist for investment giant BlackRock, utilities historically trade at a 25% discount to the S&P 500. Today, they are trading at a 15% premium. That's based on the S&P 500 trading at 14 times earnings and the utility sector trading at 16 times earnings.

If you are a value investor, or student of investment legend Jeremy Grantham, you'll recall that all asset classes eventually revert to their fair value in time. In other words, we could see a massive pullback in utility stocks if they go back to their long-run average – trading at a discount to the S&P 500.

In fact, we are already seeing the early stages of this trend. Even before Wednesday's huge pullback, the utility sector (XLU) crashed through its 200-day moving average (DMA). This is a widely used technical indicator to gauge the general long-term trend of an asset. Since XLU broke below its 200-DMA, it means shares will likely continue heading lower.

To be clear, I am not saying to sell all dividend stocks. I recently gave you two examples (here and here) of dividend payers with huge growth potential. As I said earlier, utility stocks grow slowly. Most investors buy these stocks solely because of their yield.

If you don't own shares of utility stocks, I don't recommend buying on this pullback. If you do own shares, I recommend lightening up your positions heading into January 1. If the tax break on dividends expires, we could see an even bigger pullback in this overvalued sector.

Grain Prices Continuing to See Selling Pressure

Continued weakness in the grain complex is helping to keep pressure on the Continuous Commodity Index or CCI. There looks to be a change of ownership occuring in this complex with hedge funds bailing out of a sizeable long position and commercial interests obtaining long side hedge coverage.

We have this selling occurring not only in the grains, but also in the metals and the energy sector and some of the softs. This is providing some headwinds to the precious metals complex even with the equity market bulls trying their best to jam prices higher and prevent a further technically related sell off from deepening.

Armstrong World Industries, Inc. (NYSE: AWI)

Armstrong World Industries, Inc. engages in the design, manufacture, and sale of flooring products and ceiling systems in the Americas, Europe, and the Pacific Rim. The company's Building Products segment produces suspended mineral fibers, soft fibers, and metal ceiling systems for use in commercial, institutional, and residential settings. This segment sells its commercial ceiling materials and accessories to ceiling system contractors and resale distributors. Armstrong World Industries' Resilient Flooring segment produces vinyl sheets, vinyl tiles, and linoleum flooring, as well as sources and sells laminate flooring products, adhesives, installation and maintenance materials, and accessories for homes, and commercial and institutional buildings. The company's Wood Flooring segment offers pre-finished solid and engineered wood floors, and related accessories for use in new residential construction and renovation with various commercial applications in stores, restaurants, and offices. This segment sells its products to independent wholesale flooring distributors and large home centers. Armstrong World Industries' Cabinets segment offers kitchen and bathroom cabinetry, and related products used in the residential new construction and renovation markets. This segment also provides design, fabrication, and installation services to single and multi-family homebuilders, remodelers, and consumers.

To analyze Armstrong's stock for potential trading opportunities, please take a look at the 1-year chart of AWI (Armstrong World Industries, Inc.) below with my added notations:
1-year chart of AWI (Armstrong World Industries, Inc.)
If you look at AWI you will see that the $50 level (navy) was a major resistance from March up until just last month. After moving sideways during most of that time, the stock finally broke through that $50 resistance at the end of October. Last week AWI stalled at $55 and has now pulled back down to the $50 level.

Market Outlook: Indicators Say Mini-Crash Could Continue

News from Europe took a turn for the worse last week, and the stock market responded by declining. While the sell-off started after traders saw the election results, this move was probably a reaction to the fact that the global economy is weakening and there is no quick fix to the problems. Market prices may need to correct for slower growth, and we may have seen the start of a significant downtrend.

Traders React to a Worsening Economic Situation

This week, traders learned:

-- The Congressional Budget Office (CBO) believes that U.S. GDP will decline 0.5% next year and unemployment could rise to 9.1% if the fiscal cliff is not avoided. If the cliff is avoided, CBO forecasts growth of 1.7%. When the best case is slow growth and the worst case is a recession, traders have little to cheer.

-- Germany's Economy Ministry warned of a "noticeably weaker economic dynamic." The Organization for Economic Cooperation and Development had previously forecast a recession for Germany starting this year.

-- France is already in a recession, according to the country's central bank. This threatens to make Germany's potential recession deeper since France is a major consumer of German exports.

-- Greece might run out of money to pay its bills within a week and is in a depression with its economy contracting about 25% during the past five years. (more)

Chart of the Day - Cooper Tire & Rubber Company (CTB)

The "Chart of the Day" is Cooper Tire & Rubber Company (CTB), which showed up on Monday's Barchart "52-Week High." Cooper Tire on Monday posted a new 16-month high of $24.43 and closed +2.92%. TrendSpotter has been long since Nov 5 at $22.88. In recent news on the stock, Morgan Stanley on Nov 7 reiterated its Overweight rating on Cooper Tire and raised its target to $30 from $22. Cooper Tire on Nov 2 reported Q3 EPS at $1.17, far above the consensus of $0.86. Cooper Tire, with a market cap of $1.5 billion, specializes in the manufacture and marketing of automotive products.