The Rails Just Confirmed The Industrials
Current news events provide several reasons to support a stock market plunge. Each day brings new developments in the ongoing investigation of the Trump campaign’s connections with Russia. The prospects of rising interest rates and their impact on a modestly growing economy present other uncertainties. When and to what extent the U.S, economy may be boosted by implementation of tax cuts and other promises made during this campaign are also unknowns.
Nevertheless, stocks continue their bull run, reaching new highs on the Dow Jones Industrial Average. This stubborn refusal to give ground despite much-publicized worries is in itself a bullish indicator. These worries have been with us for months yet the market hasn’t closed with a 5% decline or more than a year, the longest such streak since 1995 and only the sixth since 1950.
Another bullish indicator comes from the recent upside breakout in the Dow Jones Transportation Average. This is an important technical element in the Dow Theory, a set of rules intended to identify market trends based on the work of Charles Dow over a century ago. At that time, railroads were a vital part of the economy, growing with industrial production or, perhaps, anticipating increasing growth through shipments of raw materials. The question then was “Have the Rails confirmed the Industrials?” (They just did.)
Today’s economy is radically different and the Rail Average is now the Transportation Average. Among its components, railroads, trucking and airlines are all rolling, aided by economic growth and low fuel prices. Only shipping lags, held back by oil tankers slumping. The validity of the Dow Theory comes from its historical discipline aimed at identifying long-term trends, which I maintain should be the goals of all investors.
Sudden events always interrupt market trends and their possibilities may keep some potential investors clinging to supposedly “safe” but typically low-yielding “investments. Certainly, sudden negative developments can create market storms as panicked stock traders rush for the lifeboats crying, “Never mind the women and children! Make way for an investment banker!”
Even Pearl Harbor and the Cuban Missile Crisis caused only minor dips that were soon erased. A much sharper 6% dip shocked investors in 1962 after President Kennedy quarreled with the head of U.S. Steel. This, too, became only a footnote in charts of market growth. As Mr. Buffett points out, “the rear view mirror is always cleaner than the windshield.”
Earnings announcements are beginning to come in, so far with positive results. Double-digit earnings growth is in the cards, led by energy, technological and financial companies. Several banks are reporting on July 14 and I expect further gains to follow for Morgan Stanley (MS-$45), JP Morgan Chase (JPM-$92) and Bank of America (BAC-$24).
Apple (AAPL-$147) reports August 1 and actual results will replace the prevailing nervous chatter about its next iPhone. This is really not so difficult. The newest iPhone will not be perfect but they will sell them by carloads. Meanwhile, they will continue to increase their dividend, currently yielding 1.7%, for years to come. Its stock is up 25% this year, remarkable for the world’s biggest market capitalization, and it could easily triple its dividend based only on its present free cash flow.
Amazon (AMZN-$998), who got its start in 1994, almost twenty years after Apple, hasn’t gotten around to dividends yet, just celebrated its third “Prime Day,” probably reaching somewhere around a record $1 billion in sales. Amazon has become the leader in books, electronics and cloud storage. It is challenging in the grocery and fashion sectors. These are very competitive, but so were the sectors it now dominates. Its success is drawing the attention of regulators, both here and abroad. At some point, antitrust concerns will be raised, probably provoking a stock drop and an attractive opportunity to add to our positions.
Aggressive investors with faith in the survival of the oil industry might place speculative bets on Nordic American Tanker (NAT-$6.45) or Frontline (FRO-$5.90). These operate modern tanker fleets in volatile markets with capable Scandinavian owner/managers who stubbornly keep paying dividends.
Aggressive investors might also consider YY Inc. (YY-$58), a Chinese operator of online platforms that provide very varied social active interactions. Growth is strong, and valuation reasonable.
Tony Crowell manages stock portfolios for individuals and their trust and retirement accounts with CROWELL•ROBERTS Investment Counsel, a registered investment advisor in Laguna Beach since 1995. [email protected] 949.494.1376/800.697.2622