2010 Market Probability & 5 Focus Areas

Is it 1931 or 1983? The bulls see the market mimicking 1983, the bears point to 1931. Those in the middle see many similarities with 2004. Barron's Michael Santoli reports. Not that 2010 is likely to disappoint. "We're back to an environment where the fundamentals have to come through," Doll said. "Companies have to deliver the earnings. When it's an earnings-driven market, there are gains but more muted gains."

Indeed, the biggest difference could be that stocks in 2010 are founded on tried-and-true measures -- financial strength, earnings power -- rather than high-octane speculation. That would favor big multinational firms in cyclical and growth industries that stand to benefit from economic improvement, namely technology, energy and industrials.

Technical and historical factors are at work as well. Sam Eisenstadt, former research chairman at Value Line Inc. and a veteran market observer, wrote in a recent MarketWatch commentary that evidence points to an above-average 2010 for stocks.

"After the first nine months of the stock market's rally from recession lows, the average pace of the stock market's advance clearly slowed," he noted. "But, and this is crucial, the market tended nevertheless to continue rising." He pegs the S&P 500 at 1320 by year-end.

MarketWatch commentary. This year the bulls have a good chance to retain the upper hand, though not without setbacks, and investors will have to be more selective. In that light, here are 10 ways to position your portfolio through 2010:

1. Buy stocks with a global footprint
In a slow-growth environment, bigger is better. Big companies have the clout to counter adversity and capitalize on it. "Bigger" in this case also refers to companies of any size with a broad global presence. Global companies have diverse revenues and operations, which both insulates core businesses and fosters innovation and expansion.

U.S. companies in the past decade have been impressive examples of how to operate effectively overseas. Moreover, these companies are exporting their business to fast-growing emerging markets. Almost half of the revenues for companies in the Standard & Poor's 500 stock-index now come from outside of the U.S.
"The demonstrated ability of S&P 500 companies to replicate their business [overseas] and earn attractive margins and returns abroad is the most important development of the decade," wrote David Bianco, Bank of America Merrill Lynch's chief U.S. equity strategist, in a December report.

"The global economy is going to continue to integrate," added Gary Motyl, chief investment officer of Franklin Resources' Templeton Global Equity Group. "Companies that have the best managements, strategies and balance sheets are going to take advantage of this." He said Pfizer Inc., is a good example. "What isn't reflected in the stock price," Motyl said, "is this company's ability to move into the emerging markets."

2. Use stock dividends as a bond substitute
Shares of companies with strong balance sheets and stable earnings growth are not only better-equipped to handle the economy's waves, but their dividend income is a welcome alternative to the uncertainty swirling around bonds.

"Current dividend yields relative to bond yields provide an attractive opportunity for investors," wrote Brian Belski, chief investment strategist at Oppenheimer Asset Management, in a recent research report. "A prolonged period of low bond yields may encourage investors to begin seeking alternative ways to increase income, and high-quality, dividend-paying stocks may be a solution."

Oppenheimer's recommended stocks fitting this bill include Johnson & Johnson, AT&T ( Bill Wright suggest Exxon, VZ, LLY, MO, PFE, VOD and DT at todays prices)

3. Buy larger-cap index funds
Large-cap stocks lagged their small-cap and midcap counterparts in 2009, but many observers say that big firms' time has come.

"Large, blue-chip companies are the last remaining pocket of undervaluation," said Keith Goodard, co-manager of Capital Advisors Growth Fund. "A basket of blue-chip companies with a 3% to 4% dividend is not a bad place to be."

If larger-company U.S. stocks outperform small-caps, then shareholders could do well holding index mutual funds and exchange-traded funds that track plain-vanilla, large-cap benchmarks such as the S&P 500, the Dow Jones Industrial Average .

Many S&P 500 companies, for example, provide global exposure, high-quality earnings, seasoned management and attractive dividends -- attributes that investors could increasingly value as the year unfolds.

"We believe that 2010 will be another positive year for stocks, and we established a 2010 price target of 1,300 for the S&P 500," Oppenheimer's Belski said. That would mean a gain of almost 14% for the index from Friday's close of 1145 -- a standout return for the market.

4. Stick with technology stocks
Technology funds were the best-performing U.S. sector in 2009, up about 63%, and technology is again the largest S&P 500 component. ( Bill Wright says buy intel on the pull back, even Dell at todays prices)

That's a cautionary note, but the sector's earnings prospects are nonetheless strong. S&P analysts are among those upbeat on tech stocks. "The sector is poised to benefit from a healthier global economy, a notable PC replacement cycle and considerable international exposure," the analysts noted in a recent report.

"They've got robust balance sheets, phenomenal free cash flow, and while the stocks have done well and valuations aren't as cheap, there is room for them to outperform," BlackRock's Doll said of the tech sector. He favors computer software and services companies over hardware and semiconductor firms, namely Microsoft, IBM and Oracle

5. Plug into the energy sector
Energy stocks have been on a tear so far this year. Energy-sector mutual funds are up almost 7% on average, on top of a 46% gain in 2009, according to investment researcher Morningstar Inc. The energy bulls are banking on a continuing global recovery and strong emerging-market demand, and strategists at Bank of America Merrill Lynch are squarely in that camp.

"Energy is our preferred global recovery play" and could be the year's best-performing sector, depending on oil prices, Merrill strategists wrote in a recent research report.

S&P analysts are also bullish, particularly for companies in the integrated oil and gas industry. But it's a tempered call that hinges in part on the global economy making a smooth transition from one that has relied on government stimulus to one that is earnings-driven. S&P's favorite energy stocks include Chevron Corp., Exxon Mobil Corp. and Superior Energy Services Inc.

For more market news and education go to Window To Wall Street®.

Note: Small investors should always first consider the benefits of a professionally managed (or unmanaged index) diversified mutual fund portfolio over owning individual stocks and bonds. All investing can result in losses.

Disclosure: At the time of this blog post I hold positions in the following stocks discussed in this article: Exxon, Lilly, Verizon Wireless, Vodafone and ESV.

USA Revenue Tax Facts

How progressive is your tax structure?

This chart illustrates the progressive structure of the federal income tax system as seen in the average tax rates (center column) computed from tax returns filed in 2007. For example, the top left block indicates that the top 1% of tax returns reported $2.0 trillion in adjusted gross income, which was 22.8% of the total adjusted gross income of $8.8 trillion for the year. The top right block indicates that $451 billion in income taxes was collected from that group, which amounted to 40.4% of the total $1.1 trillion of income taxes for the year.

The progressivity of the income tax system is further demonstrated by the fact that the top 1% paid more income taxes ($451 billion) than the bottom 95% ($438 billion).

I'm not at the top or bottom of the USA Tax food chain. No doubt everyone's view is reflective of where they are on the tax ladder. It is no surprise your view on (FICA taxes) Social Security and Medicare taxes (and health insurance) most often reflect ones age.

Instead of the stereotypical conservative or liberal view, I'd like to examine this from a business or investment prospective.

For example, in investing like business, it pays to diversify. A business built on ten jumbo whale clients is at greater financial risk than one built on ten thousand little tuna's. So, I'd say the USA (like any school district) needs to focus on growing a vibrant middle class tax base. We can't continuously seek to fleece the top ten percent. Now just to show I'm not one dimensional in my thinking, I've continued to lobby against the notion that having a ultra low Zero to 15% capital gains rate will reverse the decline of America. A few Conservatives need medication for their Capital Gains OCD. Some liberals need medication for their tax, spend and giveaway OCD.

The linchpin hinges on America's ability to expand taxpaying middle class jobs again.



The Internal Revenue Service uses percentile categories (Top 1%, 95% – 99%, 90% – 95%, etc.) for purposes of analyzing income tax data. A total of 141,070,972 tax returns were filed by individuals in 2007.

The IRS analyzes tax return statistics to determine various percentages. For example, this table indicates that the top 10% of taxpayers paid $794 billion, which accounted for 71.2% of the total income taxes paid by individuals in 2007.

This shows just how progressive a burden is put on upper income earners. One might even gasp with amazement if one saw the tax revenues collected from homes and sales taxes broken down buy income group too.

It will be interesting to see the results for 2008 and 2009 during the Great Recession.

Taxes, even among those who pay no federal taxes, always generates much heated discussion. It's always easy to look at those earning jumbo sums of money and say they can afford to pay any and all taxes.

But seeing how dependent America is on so thin a tax base, makes it even harder to reduce our government debt. I'd rather see more people earning more, who in turn will pay more tax. Building on a broader base (with the upper end never having to pay more than 35%) would be more idea for rich, middle-class and poor alike.

I also found this on IRS.gov Tax Stats at a Glance for 2007

It shows a summary of Collections Before Refunds by Type of Return, FY 2007

This table shows 138,893,908 individual income tax returns that collected $1,366,241 million. This means an additional 2,177,064 returns where filed and rebated $266 Billion. If I remember correctly, the budget in 2007 was $2.8 Trillion. This means the individual income tax was only 39.3 percent of the budget. Corporation income tax was only 14 percent. Employment(FICA)taxes were 30 percent.

Since high earners have their social security taxes capped and many say consumers pay corporation taxes as well as sales taxes, some people say taxes are more evenly spread across the population than simply comparing who pays the most federal income taxes. Still I've got to believe the annual real-estate taxes on those multi-million dollar first and second homes plus sales tax on those million dollar yachts, more than make up for any cap on social security tax.

Any thoughts on the current tax system? Should we raise the marginal tax rate up to 39.5% or cap the top federal tax rate at 33% and just have FICA taxes on incomes up to $250,000? Anyone from another country wish to trade tax systems?

Note: In 2007 no earned income above $97,500 paid FICA taxes of 3.5%. Today FICA has gone up to 4.7% on wages up to $106,800.

Is Another Breakout Possible?

Hard to image, but with the VIX at a 30 month low and Oil sticking again at $80 a barrel we could see many commodities related stocks break to new highs before we roll over.

USA stock fundamentals have been improving. Even if the top lines are not expected to grow, profits will, resulting from two years of layoffs and hiring freezes. This market has been like a snowball rolling downhill and picking up momentum as it goes. It just feels like the worst case scenario near term is only a 5% downside risk. But of course, that's for the aggregate market, not individual stocks. Still plenty of 10-20% pull-back risk in individual stocks. At this point in the game I'd beware playing break-outs and look more for quality names in a pull-back (falling wedge patterns)e.g. Exxon. U.S. Steel for example is back at the top of it's range. It's been climbing for two months to reach new 12 month highs. Purhaps the US declaring China is dumping steel and plans a small but important tariff caused US Steel (X) to hit those highs. Long term you know USA steel is in recover but you can also see how easy it was for it to fall back 20% last fall. Note how it dropped 20% even as the market continued to climb.

Keep an eye on those individual stock trendlines and range bands. I've seen to many market tech. newbies only recommending buying individual stocks on breakouts to new highs. At this point in the game thats a very high risk play. Best to buy cyclical stocks only after a falling wedge pullback. I read two Seeking Alpha gurus telling people to by POT after it had a 30-35% run up. POT and gold stocks (GG, ABX) where at the top of their buy list two months ago. Why can't these guys right these articles before the 30-35% run up? As expected the big boys sold into those new breakouts and the stocks just fell back down 20-25% making those recomendations look stupid and sending the sheep to their financial death in a roaing bull market. But you can bet as they hit those imaginary support lines the big boys come into to buy them again. Note how deepwater drillers RIG, DO and ESV had been in a fallen wedge pattern like Steel stock X and Bank stocks C and BAC since early fall. All these stocks began climbing again in December when it was clear oil was not falling below $70.

Now steel stocks like X have hit new highs. I sold my US Steel(X)much to early into this advance. Health care providers like AFAM and AMED hit new highs. Two weeks ago the deepwater drillers began their climb and oil transport tanker FRO is holding close to highs. Now the drybulks shippers like DRYS, GNK and DSX are showing strenght and look set to move backup to their highs from a few months ago.



Over the last three months little money has been made on betting on any 10% move in the index up or down. The market is so stable it's hard to make money with the ususal ETFs. Best to look for turning points and pull backs. One ETF I've continued to make money with in spite of it's issues is Natural Gas play UNG. It fell all last year but on three occassions I made money buying at new low extremes and selling into the bounces that always followed. This year with a recovering economy and winter cold snap I'm betting the institutional buyers will be pushing this into a new upward trend.

In a steady eddie stable market the money has beem made in selling cyclical stocks reaching new highs and buying those stocks on major sector(falling wedge)pull backs.

One need only look at the charts of Steel stock X or Oil driller RIG and ESV along with refiners to see examples. At this point I'm selling airline CAL which recently hit new highs to buy Exxon (XOM) and more drybulk shipping. I loaded the boat on the dog with fleas stock Citi (C) along with a little BAC and GE on this most recent pull back. No need to sell them until they return to their old highs of last year. No need to worry about any panic sell-off in the first quarter like last year with bank stocks.

Health care and big pharma stocks like PFE (3.5% yield) and LLY (5.5%) paying high stable dividends are safe value plays. Lots of telecom dividend plays, with VZ yielding 5.5% and VOD with 5.5%. Korean play SKM and China Mobile paying 3.5% in a strong growth markets have fallen back from last summers highs. I recently picked up both shares alone with steady eddie MO. With USA money market funds paying less than 1/2% any steady eddie 3.5% or higher dividend play is a safe bet in this market.

The eBook Play

Happy New Year! Wishing you all a fantastic happy new year. May good fortune shine it's light on you.

The future is now. Finally we're starting to get serious about digitizing text books. But don't think you'll save hundreds annually by getting all your college text books free throught Bit Torrents. Or am I wrong? Have you already figured out how to get the most current digital versions or just the old versions? Either way I'd image there are problems utilizing them. Students who like digital everything, say they still prefer the printed book at this point. So, it looks like there is lots of product, price and place details to work out. Nothing new, that was true with the cellphone, mp3 players and laptops too.

You know the management teams of printed textbooks don't want to lose their cash cows. You know the thousands of university college bookstores don't want to lose their on campus monopolies'. Each will want a cut of the pie.

Still, you guessed correct...Amazon's Kindle has companies like Sony and Apple scrambling to create a similiar product to sell to you. Early adapters always pay preme prices for the newest must have gadget. These things will are selling for as much as a new mid-level budget PC's or high end notebooks. How many gadgets can we carry at one time? Can Kindle's do text books too? Not at tech issue. It's your basic open source system vs closed code system issues.



On the day after Christmas, Amazon said the Kindle was the most-purchased gift in its history and sales of its electronic books surpassed physical book sales on the holiday itself. Amazon Kindle is a software and hardware platform developed by Amazon.com subsidiary Lab126 for rendering and displaying e-books and other digital media

Now Coursesmart, a joint venture of five textbook publishers, shows how students might use tablet-based textbooks. It is based on their own renderings, not specific applications being developed with Apple. Yes, I said Apple. No suprize Steve Jobs is returning to his special niche with Schools. In the 80's it was a wedding business strategy to give the schools Apple computer at large discounted prices. A loss leader, to capture their hearts and mind for future sales. But by the late 90's many parents wanted their kids to be learning on PC's for the business world which helped Dell and Gateway grow within the school system. And what about Dell? Surely, after watching the Kindle success explode they have been working on a Kindle knock-off? Right?



Now at this point in the game is there an investment play? Clearly in 2009 the play most related to this subject was Amazon and Apple. No Apple's not even announced a Kindle killer. But most Apple investors are holding onto thinking this stock is going higher based upon iPhone China sales alone. At these levels, I can't own either stock but the mighty Jim Cramer says don't sell, he perdicts both will go higher. No question American consumers are hooked on using Amazon and Apple products has become an American status symbol.

Can we see people buying two ebook readers? One for Standard Print Books and one for School Text Books? Gadget lovers yes, but the vast major of budget minded people will want to find just one device that can due multiply funtions. In 2005 the concept of a tablet laptops was gaining momentum -it faded fast. By 2007 the selection, power and price points on laptops under $1,000 was motivating record levels of buyers. In 2009 regardless of the greatest American recession notebooks where flying off the shelf's at $399 price points.

Given there's nothing extremely unique behind any of these technologies, can anyone see one primary light-weight high-powered device that does it all. Assuming we'll always want a very small mobile phone, I'm referring to the possibility of the Tablet PC/Laptop returning to the lime-light. I'm wondering if a Tablet PC as light as Apple Laptop Air and with a phone like slide out or flip up key board can do it all? What do you think? Does anyone have any micro-cap plays related to the future of ebooks?