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Everything seems a bit crazier than usual in the markets these days. In such a climate, contrarians see opportunity.
There isn't a shortage of drama. The Greek debt crisis has receded a bit, but it remains very much in the news as Athens chokes on tear gas. China's trying to tamp down its pell-mell growth to quell inflation. Libya, Yemen, Syria, Iraq and Afghanistan toss up fearsome flares on a daily basis.
Closer to home, the Federal debt-ceiling debate has gotten nasty a full month before the default D-Day on Aug. 2. Both Democrats and Republicans seem intent on ratcheting up the rhetoric in the coming weeks.
Toss in the end of the Federal Reserve's $600 billion quantitative-easing program, banks still struggling under massive mortgage losses, a moribund job market, falling home prices, state fiscal fights and creeping evidence of an economic slowdown, and it is a wonder that anyone wants to pick up a newspaper or read the stories on their iPad.
When the headline writers are captured by the darkness of the moment, it is a good moment for a deep breath. "It may be time to be a contrarian," says Ed Yardeni, head of Yardeni Research. "If the financial press is losing all hope in the long-term outlook, then maybe the future will be better than expected by the consensus of doubters."
This week would support that view. The Dow Jones Industrial Average has surged 6% from a June 23 low of 11874.
Of course, the raft of bad news Mr. Yardeni references isn't a concoction. And my junior high basketball coach once said, "It's always darkest before it goes completely black." But I think he may have gotten that phrase wrong.
Are there flickers of dawn? Very few. Friday's National ISM manufacturing index for June surprisingly rose. Analysts remain upbeat about second-quarter corporate earnings, but they are a famously rose-colored-glasses bunch. Energy prices are well off their highs, and gasoline prices are dropping. But the decline hasn't been all that sharp, and gasoline prices remain well above year-ago levels.
Given the wild times, taking on risk in a prudent fashion makes the most sense. Last week, we wrote about the many blue-chip stocks sporting strong dividends, which is one such approach. But there are others.
First, with the Dow Jones Industrial Average up more than 29% in the past year and more than 8% year to date, it might be a good time to trim back the winners and put some resources toward some of the laggards. This kind of rebalancing helps book some gains and ensures that you don't chase winners too aggressively.
This year, among the 10 sectors of the Standard & Poor's 500, health care is up more than 13% and energy is up more than 11%, making them the best-performing ones. The S&P 500 itself is up more than 6% this year. With energy prices off their highs, one could make the case the energy sector's gains might be more muted in the second half. The health-care sector is a tougher nut; it has defied expectations despite manifold political efforts, including the Obama administration's health-care program, to try and push down costs.
The laggards include the financial sector, down about 2%, and technology, up about 3%. It might sound dangerous to consider the financials. The hangover from the financial crisis remains fierce and new, tougher regulations and capital requirements will make profits harder to achieve. At the same time, Bank of America's (BAC) huge $8.5 billion settlement in a mortgage-backed securities case this week might indicate that the financials are starting to at least see the other side of the valley.
Technology weakness stems from worries about the economy. Companies fretting about business are slower to invest in technology. But if fears of the "slow patch" fade, technology would certainly move into a leadership position.
A second idea is to focus on companies with big share-repurchase programs. Companies have huge amounts of cash on their balance sheets, and an increasing number have started using that hoard to snap up their own shares.
Focusing on companies with buybacks isn't straight forward. Some companies will announce big buybacks and not do much buying. Also, TrimTabs, a research firm, recently reported that while companies have stepped up repurchases, corporate insiders have been more stingy in doing the same.
Companies report each quarter how many shares they are buying back under their current program. Nike (NKE), for instance, recently reported that it is ahead of schedule on its own $5 billion share-repurchase program. That, and stronger-than-expected revenue growth, helped propel its shares about 12% higher in the last week.
Standard & Poor's says share-repurchase activity among S&P 500 companies rose 63% to $89.8 billion in the first quarter compared with the year earlier period. Buybacks rose only 4% from the fourth quarter. S&P said that buybacks among S&P 500 companies have risen, with 305 of the constituent companies buying their own shares in the first quarter. S&P expects buybacks to keep rising in the second quarter.
Recent major buyback announcements include Campbell Soup (CPB), which announced a $1 billion share buyback plan on June 23. Its shares are up 4% since then. Discover Financial Services (DFS) announced a $1 billion buyback plan on June 15, its shares have risen 13% since then.
Other companies that have recently announced buybacks include Ameriprise Financial (AMP) ($2 billion) and Best Buy (BBY) ($5 billion). Big names in the midst of large buyback plans who have been actively purchasing their shares include Intel (INTC), Exxon Mobil (XOM), IBM (IBM) and Wal-Mart Stores (WMT). In other words, no shortage of companies doing buybacks.
It may be scary out there, but getting into the market when everything is really great is usually too late.
Dave Kansas blogs at The Wall Street Journal's MarketBeat.
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