We’ve Found Cracks in the Market’s Armor

Stocks jumped Tuesday morning, supposedly because China’s Q4 GDP growth rate slowed to 8.9%. Slower is better, we’re told, because it means Beijing can ease credit and inflate the great Chinese bubble again.

Exactly how this logic works is a bit hard to fathom. But investors didn’t have much time to fathom it yesterday: The stock market’s burst of strength began to fade shortly before 10 a.m. and continued to tail off until late in the session. The Dow closed 60 points in the green, noticeably stronger in percentage terms than the broader list of stocks.

Beneath the surface, a number of cracks are starting to appear in the market’s armor. For example, banks and other financial stocks had mounted a hopeful rally during the New Year’s first few sessions, but a mediocre earnings report from JPMorgan Chase (NYSE:JPM) on Friday and a somber one from Citigroup (NYSE:C) yesterday sent the financials skidding again.

I still think JPM is unnaturally cheap at just over 7 times estimated 2012 earnings. I’m also delighted that Jamie Dimon’s empire bought back $950 milllion worth of stock in the December quarter — a modest dividend hike seems probable at the March 2012 directors’ meeting.

However, I also recognize that we’re in a touchy period for the global economy and financial system. Accordingly, I’m trimming my buy limit on Morgan — one of the world’s strongest banks and an undoubted survivor — to $37 (from $40 previously).

At current levels, I’m projecting a total return of 15% to 35% in the year ahead for JPM. That’s an abnormally wide spread, reflecting the exceptional degree of uncertainty we’re grappling with.

Another curiosity, and a potential “crack,” has showed up lately in the roster of new highs and lows. Since Jan. 3, despite an upward tilt in the headline indexes, the number of individual Big Board stocks touching new 52-week highs has dropped more than 30%, while the number of new lows has risen.

So there’s plenty of reason for caution amid the Street’s euphoria. I wouldn’t put on any additional shorts or other hedges just yet. However, I would be very sparing with new purchases.

Values Still Look Pretty Good With Gold Mining Shares

The sector has gotten roughed up in the past two sessions as operational problems emerged at several companies — including Hecla Mining (NYSE:HL), a silver producer, and Kinross Gold (NYSE:KGC).

Newmont Mining (NYSE:NEM) also disappointed some of its fans yesterday by projecting somewhat lower copper production in 2012 and higher operating costs than the consensus had expected. Copper, though, accounts for only about 8% of NEM’s sales.

Thus, we’re not talking about an earth-shaking change in the company’s profit outlook. At about 10 times estimated 2012 earnings, Newmont sports limited downside and a potential total return of 25% or more in the next 12 months.

Pay up to $62.80 for NEM.

Article printed from InvestorPlace Media, https://investorplace.com/2012/01/cracks-in-the-markets-armor-jpm-hl-kgc-nem/.

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