The Turning Point for Defensives?

 | Dec 27, 2013 | 12:41 PM EST
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Is 3.25% on the 10-year the magic number? Is that the number that makes it clear that all of the defensives which yield roughly 3% and change -- Clorox (CLX), Kimberley-Clark (KMB), Procter (PG), Bristol-Myers (BMY) and Merck (MRK) -- lose their luster? Is that were Glaxo (GSK) and Lilly (LLY) get threatened?

So far the untold story about these stocks is how they have held up through repeated analyst downgrades and the relentless decline in bonds. I think the fact that it is a creeping decline has helped these stocks. Plus, they have helped themselves because if you look at the share count you will see that they have taken a lot of money that might have otherwise gone to R&D and bought back stock instead. There is a shortage of quality defensives. Many have been taken over and others have consolidated their sectors to the point where even an underweighted portfolio manager can make a difference in terms of sopping up stock from some of these.

Nevertheless, when you see stocks of companies that have repeatedly disappointed -- Cliffs Natural (CLF), Joy (JOY), Alcoa (AA), Peabody (BTU) and Vale (VALE) -- rally, that means the money has to come from somewhere.

Now, let me just say that these stocks are by no means dangerous. They always seem to pull rabbits out of hats with restructurings and dividend boosts and increased buybacks.

But I think they will be a source of funds for the minerals and the miners and the deepest of cyclicals.

That's the trade I think will occur right into earnings season, as hope always springs eternal for the heavy metals and their like into the beginning of almost every year.

Random Musings: Just like every other acquirer, Textron (TXT) goes nuts on another consolidation. It is the quickest way to make money, as I write in "Get Rich Carefully," which is finally out on the last day of December.

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volatility is quite low here, and we could see some downsides here in the short term. ...



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