The US mess
Now let's move to the United States and its fiscal cliff.
I can quickly recap the worry here. The expiration of the Bush tax cuts (and some stimulus package tax cuts), plus the automatic spending cuts set to go into effect in 2013, would be enough, most economists fear, to send the country back into recession. Some grand bargain involving tax increases, reforms to the tax code and spending cuts is needed to head off this disaster.
My fiscal cliff timeline: First up, worry, worry and more worry that the two parties will take us over the cliff. I think that's what we're seeing now.
Second, we'll see a shift to a totally deceptive picture of the two parties acting like responsible adults and working on some kind of consensus solution. We'll watch as the president convenes meetings with business leaders and holds conferences that bring together the leaders of both parties. That may even take us as far as a draft proposal for avoiding the fiscal cliff sometime during the postelection, pre-inauguration lame-duck session of Congress. I think this stage could well begin Friday, when President Barack Obama is scheduled to meet with congressional leaders.
Third step, that optimism gets trashed when House Speaker John Boehner, R-Ohio, confronts his own party caucus, then announces that he doesn't have the votes to pass anything like that consensus solution.
Step four, I think the market swings to an extreme of pessimism as investors listen to politicians in Washington talk about the impossibility of a solution or the need to take the country off a fiscal cliff in January in order to force a deal. The bottom in this swing comes as some politicians say they don't think the crisis is nearly as bad as everyone says and that going off the fiscal cliff is no big deal.
The question in this timeline is how long the first wave of optimism will last. I think it has a good shot to run through most of second half of November, as the president barnstorms around the country and Republican leaders in Washington try to sound like the reach-across-the-aisle compromisers that many think the election demonstrated that voters want.
But as we get nearer the end of the year with no deal, I think journalists will start to remind us that Congress doesn't ordinarily work very far into December. And the swing from optimism to pessimism will be heightened by any talk that going off a fiscal cliff would be a good thing, or at least not so bad. The only thing the markets will have going for them during this period is that pretty much everyone who wanted to sell to avoid potentially higher tax rates in 2013 will have sold.
China, the joy of a successful transition
It's all over, and there was never any shouting. Today China announced the seven leaders that will make up the Standing Committee of the Politburo, the highest level of the collective leadership of China. All the suspense is gone -- although overseas experts will spend months trying to figure out which "retired" leaders are pulling the strings.
But China can go back to business as usual. The immediate tasks are implementing policies that will accelerate China's economic growth from a 7.4% rate in the third quarter and finding a balance among policies that address real desires -- for access to clean air and water and for a more balanced legal system, to name just two demands that have fueled demonstrations recently -- with the Communists Party's insistence that it remain the sole source of power in China.
My for China: It looks as if the new leaders are inheriting an accelerating economy, just as the outgoing government hoped. Growth started to pick up in September, and recent statistics are compatible with an increase in growth to 8% in the fourth quarter and to an even faster rate at the beginning of 2013.
The big challenge in constructing a timeline for China is figuring out when investors will start to believe that growth has reliably picked up. Investors outside China seem inclined at this point to ignore the signs. I think it will take the January release of actual fourth-quarter GDP growth numbers showing the acceleration to create a significant number of new believers.
Sigh of relief ahead?
Is that enough volatility in that for you? It's going to be a bumpy ride, no doubt about it.
The only good news I can offer is that if the United States can avoid the fiscal cliff -- and I think we will, even if the decisions aren't made until January -- then we're looking at a first quarter of 2013 that builds on accelerating growth in China and a huge sigh of relief (and some positive growth) in the United States. If that projection is reasonably accurate, I'd sure like to have picked up bargains on volatility in the fourth quarter.
What, looking backward from the first quarter of 2013, would I like to have purchased during the big volatility of the fourth quarter of 2012?
● Stocks that almost never go down -- if they crack under the pressure of end-of-the-year volatility. I've already mentioned Middleby. Other stocks that fit this category include Precision Castparts (PCP), Nestlé (NSRGY) and Yamana Gold (AUY), all three members of my Jubak's Picks portfolio; ASML (ASML); Svenska Handelsbanken (SVNLF); Paddy Power (PDYPF); and Kroton Educacional (which trades as KROT11.BZ in São Paulo.)
● Stocks that crashed by 20% or more on the volatility -- though the crash has to be unjustified by individual company fundamentals, of course. Some candidates here (already down 20% or potentially headed in that direction) are Apple (AAPL), Latam Airlines Group -- until recently Lan Airlines -- (LFL), Yara International (YARIY), Randgold Resources (GOLD), Broadcom (BRCM), and Cheniere Energy (LNG).
● Stocks that will outperform in 2013, even if they don't drop 20% in the fourth quarter of 2012. My candidates here include stocks among U.S. homebuilders such as Lennar (LEN) and PulteGroup (PHM); Chinese consumer stocks such as Home Inns & Hotels Management (HMIN) or Café de Coral (CFCGF); energy infrastructure stocks such as Schlumberger (SLB), Jubak's Picks member Seadrill (SDRL), Keppel (KPELY) and Ensco (ESV); and emerging market stocks such as CorpBanca (BCA), Industrias Bachoco (IBA) and Arcos Dorados (ARCO).
And, looking backward, what would I have sold? Stocks in sectors where supply is just too great and demand is recovering just too slowly for gains in the first half of 2013. Examples would include Corning (GLW), EMC (EMC), Potash of Saskatchewan (POT) and current Jubak's Picks member Polypore International (PPO). Or stocks that had a good run in 2012 but now don't have a catalyst for moving markedly higher in 2013. Examples would include Novozymes (NVZMY) and Baidu (BIDU).
These lists will all change with the volatility I expect through the end of the year. They're not meant to be definitive, but rather examples of where to look for buys and sells. I'm not sure that the end-of-the-year period is going to produce a big net move one way or the other. But I am convinced that volatility will make it very interesting.
Updates to Jubak's Picks
These recent blog posts contain updates to the stocks in Jubak's market-beating portfolios:
- Why McDonald's will top $100 again
- Western Gas is too expensive
- China's growth picks up
- Why Yamana shares are soaring
- Signs of trouble for Apple?
- Why Costco shares could hit $110
- Freeport-McMoRan's solid quarter
At the time of publication, Jim Jubak did not own or control shares of any company mentioned in this column in his personal portfolio. The mutual fund he manages, Jubak Global Equity Fund (JUBAX), may or may not now own positions in any stock mentioned in this column. The fund owned shares of Apple, Arcos Dorados, Broadcom, Corpbanca, Corning, EMC, Ensco, Home Inns & Hotels Management, Industrias Bachoco, Keppel, Kroton Educacional, Latam Airlines, Lennar, Paddy Power, Precision Castparts, PulteGroup, Randgold Resources, Seadrill, Svenska Handelsbanken and Yamana Gold as of the end of September. Find a full list of the stocks in the fund as of the end of September here.
Jim Jubak's column has run on MSN Money since 1997. He is the author of the book "The Jubak Picks," based on his market-beating Jubak's Picks portfolio; the writer of the Jubak's Picks blog; and the senior markets editor at MoneyShow.com. Get a free 60-day trial subscription to JAM, his premium investment letter, by using this code: MSN60 when you register at the Jubak Asset Management website.
Click here to find Jubak's most recent articles, blog posts and stock picks.
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