1984, the Market, and Political Radar

Written by GSCR Staff   
Friday, 06 December 2013 08:27

In yesterday’s Market Monitor we used the tagline “Don’t Believe the Economic Hype” citing several instances of contradictory data which refute the supposed economic recovery touted by the U.S. Federal Reserve.  Cleary, policy makers seem out of touch with Main Street, the people they claim to be helping, and spinning reality in a sort of Orwellian Ministry of Truth propaganda machine.  What is clear is that the current $85 billion FOMC program is a big reason for the near 5-year bull run on Wall Street, which, coupled with high corporate profits, leads to positive quarterly financial results, something traders and investors love.  And our argument is that the so-called taper is not going to occur anytime soon.

Corporate profits and income disparity seem to be the topic of the week for the White House in an effort to divert attention to the disaster that is Obamacare.  Yesterday, a MarketWatch article illustrated record high corporate profits as a percentage of GDP at their highest levels since 1Q12. 

http://blogs.marketwatch.com/capitolreport/2013/12/05/what-bubble-corporate-profits-reach-new-record-as-share-of-gdp/

Some sidebar comments make me believe the author does not see the other side of the coin or is drinking the Kool-Aid like some of the policy makers.  Economic growth measured by GDP growth has been anemic for nearly 5 years.  The article cites 3.6% GDP growth for 3Q13 as if this was a hyper-growth astronomical number. (The numbers are actually much worse as you will see in this weekend’s The Goldman Guide.).   

The President made a rally to his base with a speech about income inequality Wednesday calling it “the defining challenge of our time”.  Clearly the President understands that anti-growth policies contribute to a surplus of labor and stagnant wages, and are the real sources of economic equality, not some esoteric platitude like corporate greed.  This is Economics 101.  But something needs to be on the political radar to deflect attention away from Obamacare. 

In keeping with the political radar theme, the 1-year anniversary of the horrible tragedy of the Sandy Hook shooting is coming up.  While there may be some jabs as the day gets closer, we doubt that even the most ardent gun control politicians take another crack at legislation or further regulation.  We highlighted Smith & Wesson Holding Company (NASDAQ – SWHC - $11.98) about a year ago and again in April.  The stock is up over 35% YTD and looks fairly valued based on a quick review of our 3-tiered system for the current market.  There has been a modest accumulation over the last three months with some choppy days here and there as SWHC is up 4% with an average of 1.7 million shares traded per day.  The technical analysis is very bullish related to DMA and put-call ratio.  Finally, the simple valuation is also positive with a forward 12-month P/E of 8 versus the trailing 12-month P/E of 9 based on modest 3% growth forecast in 2014.

We still like the stock in the long run but would not chase it at current levels. However, if fundamentals remain the same and the stock trades closer to $10, we would be all over it.  

Have a great weekend!

Disclosure: Goldman Small Cap Research analysts are neither long nor short these shares but may elect to purchase the stock within the next 48 hours.

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