The market staged a significant reversal on Wednesday. The Dow Jones Industrial Average (DJIA) was down more than 100 points early in the trading day and then managed an impressive rally that had the index close up more than 100 points. The other major indices followed suit. The catalysts for the turnaround were declarations from both Speaker Boehner and President Obama that they hoped each side could reach a deal successfully by Christmas. Although I am of a slightly different political persuasion than Jim Cramer, I agree with his assessment that we are going off the fiscal cliff and we should prepare accordingly.
Although the Republicans have stated they are open to raising tax revenues through closing, modifying and capping deductions, they are not open to raising any tax rates. Doing so without substantial cuts in spending and some entitlement reform would be political suicide in many Republican leaning congressional districts. President Obama has said he is open to a deal that is "fair and balanced," but he has put no real spending cuts on the table. Moreover, the Democratic Senatorial leadership (Durbin and Reid) have basically taken any kind of entitlement reform (which drives more than 60% of the federal budget) off the table. Both sides are spending more time courting public opinion rather that meeting behind closed doors to come up with workable solution.
At some point over the next few weeks, I believe investors will come to realize that no deal will be forthcoming by the end of the year and the market will drop between 5% and 15%. Ordinarily, I would be increasing my short positions now because I believe this will be a short-lived rally. However, this is an extraordinary volatile situation where any happy talk from the politicians could drive the market hundreds of points higher and catch me leaning the wrong way. So, instead, I am making a shopping list of stocks I want to pick up, and adding to existing positions (with roughly 30% of my portfolio currently sitting in cash). I am particularly focused on high-dividend stocks as I believe this will become one the prime areas that will be dumped hard in any sort of market selloff.
Should the predicted pullback materialize, I will be looking to add to my existing positions in these two cheap dividend stocks in my portfolio. Both yield 3% or better, are extremely cheap and have excess net cash on their balance sheet.
Microsoft (MSFT): The stock currently trades at just over $27 a share. I would love to add to my current position if the shares ever move below at a $25 handle. Trading at just over 8x forward earnings, the stock is cheap and pays a 3.4% dividend; plus, the company has more than $50 billion in net cash on its balance sheet. It has a solid five-year projected PEG (1.04) for a 3%-plus yielder, as well as some recent significant product launches that should fuel an 8% revenue gain in fiscal 2013. I also believe that it has a decent potential for announcing a special dividend in the next few weeks.
Corning (GLW): The stock just popped above $12 a share after management provided a strong outlook at a recent technology conference. I would love to add to my existing position if the stock sinks back down to $11. Corning provides a 3% yield, sells at 9x forward earnings and has around $2 a share in net cash on its balance sheet.