What The Market Wants: A Solution, Any Solution

It is fairly clear that what the market wants is a solution, or more likely, an entire truckload of solutions, to the issues that have polarized the globe. I hope you’ve noticed that the market passionately hates uncertainty!  The market’s behavior over the last few weeks speaks to this attitude.

Bernanke says he has more solutions for our struggling economy, but last week, he didn’t tell us what they are or when he will implement them.

The European solutions are many and varied (an FDIC type banking solution, a Eurozone common bond guarantee, a bailout of Spanish banks, or a Greek government that acts as a government); we remain hopeful for progress at this week’s European Summit.

The market wants an answer to China’s fuzzy growth. Is it slowing more than we thought?  Are regional Chinese utilities that report continued growth pulling the coal over our eyes in light of their giant hoards? Did they really sell lots of electricity or didn’t they?

How about the Middle East? Has Egypt’s election solved anything in Egypt?  Will Syria self-destruct?  Will Israel bomb Iran or will rationality prevail?   What will happen in Pakistan, Afghanistan and India?

How about the Americas? Will Brazil continue to slow?  Will Mexico continue to grow?  And if so, will the drug cartels or the economy drive growth?

All of these problems have proposed solutions. The problem is nobody wants to agree on one. For examples, check out last week’s G20 and FOMC meetings, and this week’s European summit. Will any of them agree on steps to take now?

We don’t need to solve all the problems immediately, nor could we. But surely we can make more tangible progress on a couple. And if we can, the market is ready.

Stock valuations are quickly approaching the exceptional levels that were available in March of 2009. If you didn’t know any better, you’d think some of the good stocks had been left for dead on the side of the road. Seagate Technology (STX) is selling at less than three times downwardly-adjusted forward earnings, for a 36%, 5-year EPS growth rate. I could go on and on. The point is that there are no reasonable alternatives to equities. Ten-year Treasuries are approaching 1.5%; Bond prices could drop like a rock if interest rates rise, which they surely will in the next few years; Gold is historically overvalued, and real estate could be beginning to turn, but who wants to bet on that?

Corporations, on the other hand, have unprecedented levels of cash right now, and those levels are growing. With increasing cash flows, solid earnings, and powerful technologies, where, besides equities, would you want to be?

Find them (see below for hints) and buy them, and then hedge them with European-based ETFs, or weak stocks. There is no shortage of overpriced weak banks or overvalued technology companies. Sabrient’s subsidiary, Gradient Analytics, initiated coverage on Wells Fargo Co (WFC) last week, because it continues to compare unfavorably to its peers.

4 Stock Ideas for this Market

This week’s stocks were pulled from a GARP search, generally emphasizing growing earnings for the next quarter:

U.S. Airways Group, Inc. (LCC)—Industrials
Energy XXI (Bermuda) Limited (EXXI) — Energy
Dana Holding Co. (DAN)—Cyclical Consumer
United Therapeutics Corp. (UTHR)—Healthcare

Full disclosure: The author does not hold positions in any of the stocks mentioned in this article.