Financial commentators seem to view the current strength in the market as a “surprising rally.” This may be because September is the weakest month on a historical basis but is probably more likely due to their having previously been too gloomy. For whatever reason, rallies tend to breed additional strength as investors begin to worry that they might be left behind.
The preexisting worries about the vigor of the economic recovery remain, thus the rally will be under continuing pressure pending further improvement in corporate earnings. Over the past few months, these pressures resulted in the market trading in a band that it was unable to penetrate on the upside. Despite unfounded fears of slipping back into a “double-dip” recession, it is now attempting another rally into higher ground.
With unemployment still at unacceptable high levels and no political consensus toward any further stimulus for creating jobs, the rally may falter but the prospects of improving third quarter earnings may send it toward 11,000 on the Dow. Recent strength has taken the overall market slightly ahead for the year-to-date. Our portfolios are doing better with our income funds acting as excellent placeholders and a few superior stocks like Apple (AAPL-$276) outperforming.
Rather than trying to outguess market action, investors should continue winning tactics. With yields on money market funds almost invisible, I continue to recommend closed-end bond funds. I began recommending these two years ago as prices crashed on everything with the collapse of Lehman Brothers. They have served us well but have not gone unnoticed, as their prices have moved closer to their asset values, narrowing their discounts.
Western Asset Global (GDO-$19) still trades at a 5% discount and yields 8.3% in monthly dividends. The average maturity is 7.7 years and the managers employ modest leverage to enhance returns. ING Global Real Estate (IGR-$7) still offers a 9% discount from asset value and a 7.3% yield.
Annaly Mortgage (NLY-$18) and Chimera (CIM-$4) are leveraged REIT’s that hold mortgage-related securities. They presently are virtually coining money from the spreads between their short-term borrowing costs and their portfolios. The inevitable increase in interest rates will cause their managers to scramble but they have a good record and their yields from variable quarterly dividends compensate for this risk. Annaly’s yield on its last distributions is 15%; more aggressive Chimera is paying 17%.
In stocks, Apple continues to defy skeptics. Its products are superior, a lesson I hope Detroit will recall in its comeback, and its valuation of less than 20 times estimated 2010 earnings remains moderate. I have little doubt it will pass $300 next year, quite possibly this year. It continues to innovate, mentioning recently that it would soon add wireless printing capability to its deservedly popular iPad through a free software upgrade.
Medical stocks are beginning to stir. Pfizer (PFE-$17), which hasn’t gone anywhere for two years, is attracting interest. Analysts forecast $2.20 in earnings for 2010, a 10% increase and a good value. Yield is 4.4%. Bristol-Myers (BMY-$27) yields 4.7% and offers faster growth and a higher valuation.
There are sparks of light in Detroit and the General Motors stock offering will draw attention. Johnson Controls (JCI-$29) supplies automakers with interiors and batteries for hybrids. Its earnings are recovering strongly.
The recent rally may not stick for now. If it doesn’t, it is a useful rehearsal for a more sustained advance, probably in late 2010.