We’ve Found Cracks in the Market’s Armor

Stocks jumped Tuesday morning, supposedly because Chinas Q4 GDP growth rate
slowed to 8.9%. Slower is better, were 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 didnt have much time to fathom it
yesterday: The stock markets 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 markets armor. For example, banks and other financial stocks had mounted
a hopeful rally during the New Years 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. Im also
delighted that Jamie Dimons 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 were in a touchy period for
the global economy and financial system. Accordingly, Im trimming my buy limit
on Morgan one of the worlds strongest banks and an undoubted survivor to $37
(from $40 previously). At current levels, Im projecting a total return of 15% to
35% in the year ahead for JPM. Thats an abnormally wide spread, reflecting the
exceptional degree of uncertainty were 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 theres plenty of reason for caution amid the
Streets euphoria. I wouldnt 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
NEMs sales. Thus, were not talking about an earth-shaking change in the companys
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.