Is this rally for real?
Stocks challenged the prophets of doom with a five percent bounce to start the third quarter. That cut in half the loss for the first two quarters, strengthening my forecast that the full year will see a gain of at least ten percent. As this pickup came with the first earnings reports for the second quarter, it emphasizes the forthcoming impact of these reports.
Comparisons will be easy with the second quarter of 2009, when the financial crisis was still in full flower. Headline comparisons over the next few weeks will show 2010 second quarter earnings at least 20% higher than last year. That will probably spark buying interest although more refined direction will come from reading the finer print in company comments on demand for products and forecasts for the rest of 2010.
The economy continues to be troubled by an irregular recovery with persisting troubling high unemployment contrasting with robust earnings in some sectors like technology. The risks of “double-dip” backsliding into another recession are trifling despite fear mongers still getting media attention. More significant is the continuing pattern of many of those secure in sheltered sectors like Wall Street doing quite well while other Americans struggle daily in the housing, construction and retail sales sectors.
The resulting disparities spill over into increasing political discord and continuing uncertainties that overhang stock prices. For those fortunate enough to have both jobs and funds for investment, the results for stocks create attractive opportunities. Interest rates and inflation are remarkably low, earnings are improving and seasonal factors are favorable. The selling wave that plagued the markets in recent months will need a few more weeks to exhaust itself but the autumn should see a surge.
News in the investment world has a nearly hypnotic quality in its immediate impact. Investors should always try to keep a perspective between temporary events and those indicating more fundamental changes. This is something like the difference between weather and climate.
I sold our positions in GlaxoSmithKline as the controversy concerning tests of its leading diabetes drug reflected a cavalier attitude toward the longevity of the subjects. AstraZeneca (AZN-$49) is a more attractive large UK-based drug company with a nice dividend yield and steady earnings growth. Diabetes is reaching epidemic proportions with changing global diets and Novo-Nordisk (NVO-$85) is the innovative leader in its treatment.
BP is another company whose character defects were revealed by the short cuts it took leading to the recent oil spill disaster. While I hope it will be successful with its current efforts to arrest the continuing damage, I believe there is a substantial probability that its ultimate liabilities will exceed its current value. With so many more attractive investment options like Exxon (XOM-$59) available, I suggest holders take advantage of current hopes to exit the position.
In contrast, the problems of Apple (AAPL-$250) with its latest iPhone are a passing technical glitch and not a fundamental character flaw. Sales of its iPad are exceeding expectations and this slight slip presents a chance to add to positions. My price target for next year is $350.
“The future’s not ours to see” as Doris Day sang so memorably but the actions to take are clearer. For the doubtful, Credit Suisse Income Fund (CIK-$3) is paying 9% in monthly dividends.