The Day Ahead: Shush, and Deal With It

 | Nov 27, 2012 | 8:00 AM EST
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Before I get to it today, let's look at an investor word bank:

  • Uncertainty
  • Grand Bargain
  • Santa Claus Rally
  • Fiscal Cliff
  • Debt Debate
  • Oversold
  • Overbought
  • Headwinds
  • Tailwinds
  • Underlying Fundamentals: Weak or Strong?

Breathe deeply. Do all the above words in the bank sound oddly familiar? They should, because we investors and equity handicappers have been tortured by them for a while now. The stone-cold truth is that none of this incessant jargon is new, and time is not on our side.

But it's important to stress that something like uncertainty is stitched into the fibers of investing. It's what drives the profit motive. One person says the world will stink as a result of uncertainty, and responds by shorting a stock. The other may assume the counter side of the trade. The fiscal cliff could be resolved tomorrow via a photo-friendly news conference, and uncertainty would still persist on the severity of the consumer spending and capital-investment retrenchments in the first half of 2013. Meanwhile, in a world where capped growth is the norm, the view on whether stocks are oversold or overbought could change from day to day.

I am here to plant a flag in the ground. Quiet your mind. In order to succeed, you must deal with the host of variables or risks that are being eaten alive by the smart money behind the scenes.  You don't know how to "deal with it" as it pertains to unforeseen risks and nonsense, both real and imaginary? I could be of help here, and below are brief examples of certainties. Find a certainty, given the impending environment, and plan accordingly. It can be done -- and, frankly, it must be.

Certainty: The Persistently Poor

Some 15% of Americans live below the poverty line, and more than one-third live in America's suburbs. Look in the mirror and ask: Will this dynamic become worse or better with the arrival of fiscal cliff in the first half of 2013? The common-sense answer is that it will worsen with any conclusion to the fiscal cliff, so we must sidestep the uncertainty gibberish that's designed to scare you half to death. That is, we must sell stocks to the smart money and start building positions in Dollar General (DG). Or we should be aware that consumer staples are largely under-owned by institutions, and that the cliff's effect will bring about a renewal of eating at home. In other words, plan to be surprised by the impact of the missing-in-action payroll tax deduction on weekly discretional budgets. (Still, the consumer discretionary sector still gets the love.)

Certainty: A Bunch of Down Arrows

If you're interested in earning a return, you will be forced to invest into downward adjustments to global gross domestic product growth, plus the high probability that the earnings cycle won't trough until mid-2013. So this essentially reduces you to these options. One, you could wager on low-multiple stocks that reflect negative macro or micro adjustments. Two, you could pay up to own a high-quality issue.

I am feeling seasonally nostalgic about my days of an equity-research grunt, and given my belief that companies are grossly underinvested in capital equipment to support future earnings growth, I'd be interested in Caterpillar (CAT) on the long side. This stock is as good as a benchmark for similar "capital-expenditure plays." Note the stock trades at a 50% discount to its historical price-to-earnings multiple, and offers a way to walk into a second-half-2013 capex investment cycle supported by higher commodities prices -- which, in turn, should be supported by an economy past its inflection point.

By the Way

Midway through Monday's session I pondered if last week's gains were completely irrelevant -- a fluke, if you will, fueled by technical ad political circumstances. I have as many reservations as the next fella on suggesting to load up on risk. However, I am encouraged by the clues the market continues to present to cement the bull case.

● Key transport names -- including CSX (CSX), FedEx (FDX) and UPS (UPS) -- are not experiencing panic-selling. That implies price climbs in economically sensitive, intertwined sectors have not necessarily been substantially misguided.

● The Russell 2000 Index continues to be one of the strongest-acting of the major indices. It led last week, as well.

● Even with four days of fear trying to pummel renewed investor psyche, the market closed well off the session lows Monday.

● Underlying breadth continues to be strong, in my view.

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