Weekly Commentary & Outlook
McIntyre, Freedman & Flynn
By Tom McIntyre
October 3, 2011
Stocks were mixed last week as global growth concerns trumped the continuing mix of ok economic reports and on-balance good corporate news at least in terms of dividends and so on.
As the charts above illustrate, the Dow Jones Industrial Average gained 1.3% last week while the growth centered NASDAQ Composite fell by 2.7% as concerns about a
double-dip recession moved further onto the front burner.
The Markets & Economy
The data released last week and this morning does not support the view that our nation will slip into another recession (if it happens it would just confirm we never exited the one from 2008). This morning’s releases on August construction spending and the national ISM manufacturing data for September continue to show that despite the scary headlines, the economy is not falling off a cliff. Neither, of course, is it any kind of indication of strong growth.
In other words, our economy has been on a subpar path for several years now and it is not about to change. The new factors to consider primarily center around the sovereign debt concerns in Europe, and the confusing policy moves being pursued as our government leaders head into an election season. (Yes, it will be some fourteen months long.)
Clearly, Washington DC, given its stalemate of divided government, will not enact anything resembling a set of growth initiatives. Instead, the discussion has turned to raising taxes by the trillions in yet another effort to redistribute rather than grow our way out of this horrible mess.
Do not fear however, Warren Buffett has surfaced once again to say that he does not know what is involved in the so-called “Buffet Rule” plan being offered by President Obama. To which I ask, how stupid does this man think we are? The plan has his name on it and the President is using his reputation to sell it. Now this 81-year-old multi-billionaire says he may not agree with it once he finds out what is in it.
All of this is simply to point out the absolute uselessness coming from Washington DC, and the European leaders are just as bad. More European summit meetings are scheduled and more deadlines will come and go. At the end, Greece will default and somehow be allowed to stay in the Euro zone and debts will be papered over. There is no other way out.
This then leaves our Federal Reserve Board to act. I believe they are very reluctant, but will choose to initiate, along with their central bank friends from around the world, a truly massive program to allow the banking system to absorb the losses that will occur as individual countries restructure. This will mark the end of the deflationary threat and prove to be a boost for equities and harmful to long-term bonds.
What to Expect This Week
It is too early in the month for earnings reports but this morning’s ISM number was encouraging, and the market has turned higher as of the moment.
In addition, on Friday we will get the employment data for September. It will be impacted by the return of the Verizon workers, but overall the number will be lousy - but not in an unexpected sense. Most likely it will indicate a very slow growing economy with earnings still ok.
Also this week the European Central Bank (ECB) and the Bank of England hold policy meetings on Thursday. I think it is very possible that the ECB reverses its horrible decisions of last summer of hiking interest rates. This would help support the restructuring discussed earlier. The Bank of England for its part is ready to embark on another round of quantitative easing. These moves if not offset by the Fed moves along the same line and will continue to push the dollar higher, which at this point is not what our central planners in Washington DC prefer. This means they just might get involved in the action despite their next formal meeting not scheduled until early November.
Finally, the Economic Cycle Research Institute last Friday changed their outlook for the US economy and is now in the recession camp. One look at their weekly data (see chart next page) gives a glimpse of what their longer-term indicators might be suggesting.
These people are good and not caught up in the political issues of the day. Their change in view will cause us to look at subsequent rallies in the stock market as opportunities to reposition. It does not change my view that in a zero interest rate world, the best asset class is defensive, and high paying dividend companies with a history of hiking those dividends in good times and bad.
With the market having its worst quarter in years we believe the energy sector is among the most undervalued sector in the market.¬† We believe there is opportunity to make money in all of the sub-sectors, whether it is the drillers, natural gas stocks or the large oil conglomerates.¬† If you look at the price of many of these stocks, they are trading at levels where oil was trading at $50 a barrel, not the current price of more than $77.
We think the weakness in this sector is unwarranted, and expect earnings for the next several quarters will exceed expectations.¬† Our strategy for investing in the best-of-breed energy stocks will be rewarded, as all of our energy stocks have strong balance sheets and solid growth opportunities.¬† We also would not be surprised if consolidation begins in the industry and plenty of mergers make a lot of sense at these levels.
With so many names in the energy sector trading near 52-week lows, we believe the buying opportunities are all over the place.¬† Our top picks in the sector remain Suncor(SU), Southwestern Energy(SWN), Pioneer Drilling(PDC) and Enterprise Products(EPD).¬† We believe that all of their shares will trade at least 20 percent higher a year from now.¬† While we are surprised by the current valuations, we do not believe valuations are at a sustainable level.
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