Season’s End
Summer earnings season began with a bang on smash hit earnings from Intel and ended with a whimper on a mild disappointment from Cisco. (Ever the non-conformer, Cisco’s quarter ended in July.). The season lasted several weeks and a series of generally good news encouraged the market upward for a nifty two-month rally.
That rally eclipsed the sorry performance in May and brought the averages a bit ahead for the entire year before slipping back as the parade ended. Without more good news to excite investors, I would not be surprised if stocks slipped further back before their starting point for the year until we get well into the fall, a traditional haven for market strength.
The next round of earnings arrives in October, which will probably usher in a year-end rally, taking stocks to overall double-digit returns for the full year. The economy remains stuck in a sluggish recovery with the official unemployment figure almost in double digits. Corporate earnings are doing better than the overall economy as companies as their managers have figured out how to squeeze more profits out of trimmer workforces.
Beginning with the first signs of economic descent three years ago, companies also began to build up their cash reserves to record amounts. The result today from an investor’s point of view is a menu of solidly capitalized industrial and technology stocks trading at quite reasonable valuations. Financial and consumer stocks are still working their way toward stability and some sectors like housing will need another year or two.
Corporate earnings, investor sentiment and interest rates are the three major factors impacting stock prices. Investor sentiment continues to shroud its usual fluctuations between greed and fear in “unusual uncertainty” as noted by the Federal Reserve Chairman. The Fed continues to take steps to flog the recovery onward with its recent actions cementing an environment of continuing record low interest rates until 2012.
That will benefit more aggressive bond funds and mortgage trusts like Franklin Templeton Limited Duration Trust (FTF-$13) and Annaly Mortgage (NLY-$18). Both borrow short-term while investing in longer-term securities to produce investor yields well beyond those available from less innovative investments.
Some of the closed-end bond funds that I have recommended like Credit Suisse Income (CIK-$3) have developed enough other buyers to narrow or even eliminate the discount between their asset values and stock prices that prevailed when first mentioned. FTF still has a 4% discount to go with a 7% yield on its monthly distributions. More critically, the average duration of the bonds it holds is only three years, which will ease the pressure when bond yields start going up again.
Annaly is a sophisticated real estate investment trust concentrating on leveraged portfolios of government mortgage securities, principally FNMA, GNMA, and Freddie Mac mortgage-backs with implicit government guarantees. The result is a variable but high yield, currently over 15%.
The principal risk would be a return to higher interest rates but prevailing Federal Reserve policies combined with investor anxieties make Annaly a remarkable buy. For those who want a bit more, Annaly’s stable includes Chimera Investment (CIM-$4), which invests in mortgage securities a notch less in quality, producing a current yield over 17%,
These and the other high yield funds or REIT’s I have been recommending are excellent placeholders until the market gets its breath back. Irvine-based Broadcom (BRCM-$33) is among the technology companies with soaring earning whose price needs only a little market help.