July 16, 2012
Volume 3, Number 9

The Goldman Guide

Bad Reputation

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It is said that a good reputation is more valuable than money. If that is the case I can think of a few organizations and companies that have lost quite a bit of money recently.

Penn State University, its leadership, and its most revered figure, the late Joe Paterno, have had their reputations slammed following the release of an independent report that demonstrated a culture that enabled a pedophile to get his jollies unchecked for over a decade.

The venerable British-based bank Barclays (NYSE—BCS), which traces its roots to 1690, is caught in a major scandal as it appears that the bank attempted to manipulate global interest rates, notably LIBOR, (London Interbank Offered Rate.)

On the other side of the pond, U.S. behemoth J.P. Morgan (NYSE—JPM), has lost more than $4.4 billion (which could approach $9 billion), due to lack of trading oversight in credit swaps where London-based traders made huge bets.

On a smaller scale, failed futures brokerage PFGBest misappropriated customer accounts for over 20 years and has lost $200M in funds.

While the Penn State scandal will not impact the market, the fact that these 3 scandals have not materially impacted the markets individually or collectively, is a positive. A few years ago, they would have. Perhaps investors are desensitized to them, given the low respect they seem to have for all “firms financial.”  This is further evidence that the external noise in the market will not frame performance in the future. That will be led by earnings and economic figures. As it should be.

Welcome to E-Week and Rhetoric

This week brings us the start of earnings season. In our view, the most important firms releasing results are Marriott International (NYSE—MAR) which will give investors a glimpse of consumer    spending in the hospitality arena, and Wells Fargo (NYSE - WFC), which will provide a good barometer in the banking and finance space.

The troubled J.P. Morgan (NYSE—JPM) also reports this week.

Economic reports should once again dominate, until next week’s big earnings reporting crunch. At the end of the week, we will have the weekly jobless claims, followed by the Producer Price Index figures as well as the University of Michigan consumer sentiment survey. 

With a likely choppy week following an abridged one last week, we expect weak volumes and favorable buying opportunities.

A Funny Thing Happened…

As we touched upon last week, the early part of earnings season    began in earnest and despite early losses the market roared back on Friday.  The rally was due in part to decent results, in-line China GDP growth, and lower initial jobless claims.  Interestingly, tech stocks, which have been under selling pressure due to EPS reductions, have likely seen the end of their recent sell-off. We expect the space to continue to be attractive even though chip producers are seeing declines in computer orders.

Speaking of chip manufacturers, Intel (NASDAQ—INTC) is due to     release its results on Tuesday, June 17.  This week should be dubbed E-Week because leaders in tech (INTC) Yahoo (NASDAQ – YHOO), finance like Bank of America (NYSE—BAC) and Citigroup (NYSE –C), consumer products giants Coca-Cola (NYSE—KO) and (Johnson and Johnson (NYSE—JNJ) among many others, report this week.

With these powerhouses releasing results, we will likely know what the rest of earnings season holds for the market, come Friday.

Senate Democrats are seeking to set the top tax rate on dividends at 23.8 percent, almost 20 percentage points lower than the proposal offered by President Barack Obama in his budget.  That detail, along with a top estate tax rate of 45 percent and a one-year patch to     prevent the alternative minimum tax from affecting millions more families, are part of the written version of Senate Democrats’ attempt to extend expiring income tax cuts for one year. The core of the    proposal would extend the George W. Bush-era cuts through 2013 for 98    percent of households while letting them expire on income above $200,000 for individuals and above $250,000 for married couples.

This is likely to pass easily as it is an election year, after all.  Still, it will be interesting to see how dividend stocks trade in the coming months.  If the budget goes through in its current form, dividend stocks will not be the place to be while growth stocks will attract     investors.  This may still be the case in the new version, considering the still-high proposed dividend tax rate.

Market outlook and Stock Pick

We mentioned last week that we have officially turned bullish.  While we tend to be early and ahead of the crowd, we are optimistic that the balance of the summer will not be a repeat of 2011, where the whole budget nonsense and U.S. credit downgrade spawned huge drops. 

Instead we think that the market will move higher on a staged basis and kick ass at the end of the year, post-election.  One thing that makes us even more comfortable happens to be the continued bearishness ion the AAI Investor Sentiment Survey.  As of last week it posted results that revealed investors are 70% bearish or neutral and 30% bullish. Long term trends are typically 61% bearish or neutral and 39% bullish. Given the traditional negative barometer or occasional lagging indicator of this survey, this week could be a pretty good one.  Another sign is that the price of oil has hit our “good target” of $85.  Oil in this price range is like the story of Goldilocks.  It is not too high or low, as it relates to economic growth prospects. It is just right.

Continue to buy stocks exceeding expectations and showing good trends. Don’t bottom fish.  It might not be a bad idea to engage in some intermediate term option strategies as well. Buying November calls on certain indices or on Apple (NASDAQ—AAPL) seem like a good play. 

As we mentioned this past week, we would not chase AMR (OTC—AAMRQ) in an M&A transaction as the debt holders may screw the equity holders.  Supervalu (NYSE—SVU) still looks bad but everyone is so down on it that if they can sell some chains, it can be a big winner. Here again, by taking a flier on January calls, you commit few dollars but can make a huge return if the business development plan is    successful.

If we had to choose one stock to buy that we have introduced recently via our Select Research, it would be Denny’s (NASDAQ—DENN—$4.52).  The chart is solid and it recently hit a new 52-week high, though it came off a bit.  Results are due out on July 31 after the close and we expect them to be good.  Moreover, with the growth phase in which it is engaged abroad, we could see $6.00 by year-end.

Until next week…