Is the Rally for Real?
Another week of cautious progress by stocks is keeping their October rally alive. The market needs another 3% to get into positive territory for all of 2015 and I believe this has an increasing probability of success. Prevailing worries focus on actual news from current earnings reports and familiar fretting about the looming shadow of possible Federal Reserve Bank rate increases.
Fed policy action is certainly significant but Wall Street usually gets it wrong. Since 2009, the futures market for the fed funds interest rate has continuously overestimated the Fed’s intentions, resulting in repeating cycles of anticipating a rate rise and then readjusting as the Fed has continued to stay put. For what it’s worth, this futures market has now pushed the probability of Fed action until March of 2016. Any new data showing a surprising pickup in the economy could still persuade the Fed to raise rates this year.
The U.S. economy is much stronger than its popular reputation, which remains sensitive to persisting fears spawned by the 2008 financial crisis. That brought brutal shocks like the disappearance of Lehman Brothers and leaving deep scars, particularly among the financial and housing sectors, in. The recoveries of those sectors lagged the market and surrendering energy stocks later joined them, however, fresh earnings reports reflect solid growth for many market leaders.
Last week’s column noted strong home sales for the first eight months of the year. This week, the Commerce Department said housing starts jumped in September to an annual rate of 1.2 million, the second highest since 2007, easily beating forecasts. My latest new buy, Lennar (LEN.B-$42) is seeing double-digit increases in orders.
Lennar reported quarterly earnings of $.96, up from $.78 a year ago. Cash or equivalents equal $600 million. Analyst estimates for its fiscal year ending in November now look to $3.37 a share, up from $2.80 a year ago. Sales are $8 billion, growing around 20%. There is a modest 0.4% dividend. Its stock moved up after its recent earnings announcement; the next is scheduled for mid-January.
The financial media continue to inspire various worries among more nervous investors. This results in substantial capital held on the sidelines, a reserve that will pour into the market whenever they perceive flashing green lights. Meanwhile, the tone of the market continues to strengthen as decent earnings reports bump prices up.
Intel (INTC-$34) reported flat results but provided a strong enough forecast to send its stock back above the $30 level that has held since June. Intel dominates its sector with over $55 billion in sales of which it invests 20% in R&D. It yields almost 3% with its next ex-dividend date on November 4.
Like Intel, General Electric (GE-$29), is going through a major shift in product emphasis. Its core earnings, without GE Capital, rose 16% to 29 cents, beating by 3 cents. Sales dropped 23% to $28 billion on oil and gas weakness, but aviation and transportation were strong. This stock has tried the patience of its investors, as it hasn’t seen $30 since 2008. I expect its stock to break and hold the $30 level before its next earnings announcement in January.
Other quality stocks reacted nicely to earnings reports, including Visa (V-$76), which increased its dividend, BlackRock (BLK-$334), Boeing (BA-$146), and Verizon (VZ-$45). Retail sales reports indicate solid earnings lie ahead for Costco (COST-$157), Simon Property Group (SPG-$204) and TJX (TJX-$73).
In the luxury sector, Ferrari (RACE-$56) roared into the headlines. Its IPO represents only 10% of the 90% ownership of parent Fiat Chrysler (FCAU-$15), which intends to spin off its other Ferrari shares. Any of the other stocks in this entire column is a sounder buy but those who lust for Ferrari stock can back in through buying Fiat Chrysler, anticipating a spinoff of somewhere around a tenth of a Ferrari share for each FCAU share. Fiat Chrysler is already trading at a heady valuation on hopes it can pull off a merger with someone like GM. In comparison, even stock in Tesla (TSLA-$212) seems less racy.
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