2 Defensive Names with Chinks in Their Armor

Overseas economic woes may take chunk out of these blue chips

   

The market’s sharp decline to the 200-day average of the S&P 500 reflected an increase in odds of a tax hike and the end of special treatment for capital gains, a renewed sense that the country is running full-tilt toward the fiscal cliff without brakes and a sense that the president might be perceived as more anti-business in a second term.

Additionally, there was a reassessment of the damage that Superstorm Sandy wreaked on the Eastern Seaboard, and it never helps when there are fresh reminders that the eurozone debt crisis has not gone away.

All of these issues are considered hurtful to earnings of large companies, even the more defensively oriented ones like Procter & Gamble (NYSE:PG) and Coca-Cola (NYSE:KO), due to their high exposure to overseas economic weakness. This could be a serious impediment to strong holiday sales, as the key gift-giving season is just around the corner and will be make-or-break for many retailers in the context of making their fiscal year numbers.

The good news is that going into Sandy and the election, the U.S. economy was actually perking up, led by the well-chronicled housing construction recovery. Citigroup’s (NYSE:C) economic surprise index, which shows a ratio of positive to negative surprises, rose to a new multi-month high. The key to that has been lower gasoline prices (back under $3.50 per gallon on average) and a big improvement in consumer sentiment, probably due to improved job outlooks.

And finally, we can never forget about the positive effects of easing monetary policy from the central banks. ISI Group reports that last week brought the total number of easing moves in the past 14 months to 296, including our very own QE3 (quantitative easing, part 3). In the same vein, the odds are now higher that Fed Chairman Ben Bernanke would be replaced, upon his nearing retirement, with Janet Yellen, a protégé who would be expected to continue his approach.

Speaking of easing and China, ISI analysts point out that the Middle Kingdom has made 63 stimulative policy initiatives in the past year. Few are significant by themselves, but they add up and over time they are likely to make a difference. In the past few weeks alone, the drumbeat of positive reports is striking. They include exports, industrial production, retail sales, manufacturing, services, bank loans, M2 money supply, rail freight, leading economic indicators and consumer confidence.

While it’s undeniable that the world is beset with many problems, including the eurozone recession, the slow rebound off the bottom in China, weak earnings in the United States and the fiscal cliff, we have seen repeatedly in history that as long as credit markets are strong and central banks are easing, the downside is limited.

I suspect that most of the damage on the downside for the major U.S. indices has been seen now with the dip under the 200-day average for the S&P 500, and now we will get to see if bulls have enough motivation and ammo to do some bargain hunting.

And speaking of bargain hunting, at Trader’s Advantage, in addition to a few stock holdings, I’ve been increasing my options positions because one of the advantages of options is the cheaper price relative to stock shares.

Right now, we’re long Priceline (NASDAQ:PCLN) calls. PCLN stock is around $630 for a single share, and a mind-blowing $630,000 for 100 shares. Our call cost us just $2,250 to control 100 shares of PCLN while setting us up to gain some significant upside. That’s why I prefer to mix both options and stocks into my wealth generation strategies in Trader’s Advantage – if you’re not mixing trading strategies or are simply stuck on the blue chip defensive stocks, you’re missing out.


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