New Highs, Old Principles
Stocks powered to new highs on both the Dow Jones Industrial Average and the S&P 500. Only a week ago, I commented that the basics supported further market advances to 16,000 on the DJIA and 1,700 on the S&P. The S&P then closed at 1707 a week later with the DJIA only 2.4% short of 16,000.
Thursday’s surge was attributed to strong reports of increasing factory activity in the U.S., Europe and Asia. An important labor report will follow, possibly encouraging the market to pause for breath. It is refreshing to see stocks react to basic economic news rather than to the auguries of future Federal Reserve monetary policies.
Short-term investors tend to chase whatever is the prevailing popular indicator. The most recent market activity suggests that they might be returning to basics. After all, none of the Fed’s comments on “tapering” its bond buying program even suggested softening its other program of inducing super low short-term interest rates.
Longer-term rates are already creeping up as investors anticipate a more robust economic recovery accompanied by moderate inflation. The Fed described the current recovery as “modest,” a small semantic change from the previous “moderate” thus their policies seem likely to continue well into the fall and possibly into 2014.
Corporate earnings reports are encouraging. Over half the companies in the S&P 500 have now reported second quarter earnings with 72% exceeding estimates for earnings and 52% for revenues. Better results are particularly noted in the financial, energy and industrial sectors. A low interest rate environment is favorable for these sectors and I continue to expect a significant pickup this fall in industrial activity.
Anticipating this trend, I recommended and repeat my buy recommendations for a basket of industrials with earnings already rising. These include Chicago Bridge & Iron (CBI-$60), Cummings (CI-$77), Crane Co. (CR-$62), Eastman Chemical (EMN-$82), General Dynamics (GD-$86), Generac (GNRC-$43), Masco (MAS-$20), Oceaneering (OII-$83) TransDigm (TDG-$148) and Whirlpool (WHR-$136).
Each of these is either making or trading close to a new high. Home prices continue to increase at the fastest rate since 2006. Both mortgage costs and inventory are at low levels. The housing sector has growing momentum, which will bring a particular boost to Generac, Masco and Whirlpool.
Precision Castparts (PCP-$224), a new buy recommendation, is an Oregon-based company that makes metal components and products. It is a supplier for the Boeing 737 and 787. Its latest quarterly earnings were up 22% with sales up 20% but these results fell short of Wall Street “expectations” and the stock price dipped 10%.
The shortfall came from inventory buildups at both Boeing and Airbus. These are inherent in the complicated process of getting new airliners up in the skies and the recent price dip is a good opportunity to establish positions. It’s selling around 20 times revised forecast earnings.
One indicator of market strength is Facebook, which bombed when it went public in May of 2012. If finally made friends with enough new buyers to exceed its IPO price.
August is often a fickle month for the stock market. Many traders go on vacation and those remaining cannot find emotional support from their therapists, who usually cannot be found in August. Volume tends to dry up, sometimes exaggerating market reactions to events. Investors should remember that the market is always fickle (La Borsa è mobile). On any given day in the stock market, the odds on any stock are virtually a 50/50 proposition. The longer the holding periods, the more certain are the returns. Long-term relationships are the best.
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 1993. [email protected] 949.494.1376/