August Opens with a Bang, But Still Not Too Late for Income Investors

Once again, the bears have been declawed! Yet again! As we go to print, the market has retraced its highest levels since October 2008. As both buyers and sellers argue whether we deserve to be here, even those in the contrarian camp are capitulating and committing money to this market rally. They’ve missed this move off the lows, the “sell all rallies” strategies left them as cannon fodder for the stampeding herd. Many hedge fund managers after their “black box” quantitative models broke down in 2008 and underperformed thus far 2009, are coming to grips with the old adage, “you don’t fight the Fed”. Meaning, when the Federal Reserve is priming the pump, easing rates those monies will eventually find its way into the economy and markets. Only this time, the impact has been magnified by the extraordinary steps and programs the Federal Reserve has implemented along with quantitative easing. Bring in the Treasury teaming up with the Federal Reserve, and well, you have a 50% rally of the lows I guess? Is this move substantiated? Let’s look at a few metrics.

Remember the ACDC song TNT (for those that are old enough to remember ACDC) well today it’s P-M-I is DYNOMITE! That’s what I’m talkin’ bout! Growth in China, announced overnight and reflected in the Purchasing Managers Index (PMI) came in at 52.8 driven largely by domestic demand. That’s 3 months in a row reflecting an expansion in the domestic economy. The China stimulus program is gaining traction. Even as their exports sputtered, domestic orders picked up the slack.

Back on our shores we had had a much bigger than forecast jump in the Institute for Supply Management (ISM) PMI, which was forecast to come in at 46.5 leaped to 48.9. A few whiskers below that all important 50 level. A reading above 50 is reflective of an expanding economy. Buried within this report were some more nuggets for optimists, indicators which are more predictive of future expansion or contraction, such as new orders, which leapfrogged over 50 to 55.3. The employment index bounded 4.9 points month over month. Which by the way would point to good news coming in Friday’s non-farm numbers, (which is a lagging economic index)?

Lastly on the PMI, of the 18 manufacturing sectors reporting, 6 have returned to growth or expansion mode. I’ve mentioned in the past the trend developing in the Leading Economic Indicator (LEI), 3 months in a row of growth. This is one index to keep a close eye on. This Friday, while the overall rate of unemployment may inch higher, I’ll be closely following two components buried within the report. Hourly Earnings and The workweek. Those two are leading indicators worth watching. We know job losses continued simply by watching the weekly announced Unemployment Claims numbers. However, by watching the workweek, and perhaps seeing an extension of the workweek, think overtime, would give hope that once the existing workforce is stretched enough, head count additions can’t be far behind.

Good news from the auto industry. Yeah! I typed it and even I had to go back and re-read that one! Cash for Clunkers program has inspired new car buyers to get off the couch and into the dealership showrooms. As we speak Congress is in the hunt for funding to expand the program from $1 billion, which is already tapped out, to $3 billion. Ford (F) reported today auto sales increased 2.3% the first year over year gain in two years. While Chrysler, yes they’re still around, can’t make the same claim, they did report workers are back on the assembly line and working overtime. Wow! Who’d a thunk it? Now contrarians will pose the following argument, although I’ve seen nothing documented to support it. “The Cash For Clunkers has only borrowed car purchases from the future and once the funding is exhausted, car sales will slump back to prior levels.” Meaning, automobile buyers that may have normally purchased a vehicle in September to January, in order to take advantage of the potentially $4,500.00 break, simply moved up their purchase date. I believe you could argue the following, buyers, knowing this incentive was on the horizon, put off purchases until recently to take advantage of the voucher program. It is widely accepted we may not get back to the 17 million annual automobile run rates anytime soon, however the current 8.5-9 million run rate is insufficient as well. Now, we have a case of the pendulum having swung to both extremes. Over the next year or so we’ll find out where the supply/demand equation actually levels out.

There is mounting evidence the worst of the recession is behind us and perhaps has indeed ended. But it is early. The sages of Wall Street are realizing they got it wrong, in a big way. As the data reflect an improving economy, and the current earnings season is coming in much better than anticipated, many analysts are scrambling to update their models and projections. Two of note. Goldman Sachs, supposedly the best and brightest by some raised the target for the S&P 500 from 940 to 1060. Their prior analysis saw earnings estimates for 2009 at $40.00 share for 2009, and $63.00 share for 2010. Those have been bumped up to $52.00 and $75.00. Huge bumps, but certainly not the highest estimates. Over the weekend a well respected analyst picked up on what I’ve been telling clients, that due to massive head count reductions, streamlined inventories and trimmed back capital spending, in anticipation of the next great depression and coupled with productivity gains, have, “spring boarded earnings to catapult higher, even without a strong resumption of growth.”.

While the market has rallied 50% off the March lows, keep in mind at that time the market seemed to be pricing the US economy and corporations for liquidation. That is off the table, along with the fear factor that that presided over that period. In other words, it was the effects, of a number of factors I won’t go into again, of a perfect storm that pushed us to levels we never should have seen. I would also remind contrarians and short sellers that make the argument we’ve rallied too far, to take a step back and see how far from 2007 prices we’ve fallen, even at today’s lofty levels For the time being I’m staying with my target range of 1050-1100 but I’ll be monitoring conference calls and economic releases closely for any changes .

Now for Income Investors, a not so little company called Inergy, symbol NRGY. Inergy is a Limited Partnership operating in the energy sector. Inergy focuses on the fragmented Propane distribution, sale and storage along with natural gas and liquified natural gas in the US and Canada. They have a "growth through acquisition" strategy" thus far very successfully executed. The company continues to purchase small local propane distributors in this highly fragmented industry, keeping the local brand names in most cases. One important criteria for any acquisition is it must be immediately accretive to earnings. Lastly, once all of their current projects are completed Inergy will have an estimated 53 billion cubic feet of natural gas storage capacity. At current levels, this Limited Partnership yields a still healthy 8.8%, with a history of increasing dividend payouts.

Disclosure: I may currently own or in the future will purchase NRGY for myself or clients. Please do your own due diligence before making any investment decision.

Comments

[waldipup:]

Thanks , but I think I wont buy someone else's shares near the 3 year high range for the 8% yield.

Aug 03 03:25 PM

[James Byrne:]

The current evolving recovery story leaves many good companies and their share prices on the cusp of breakout. With the Feds current attempt to force money our of safe havens, with 0-.25% policy for an extended period of time. I believe yield hungry investors will return to higher yielding vehicles, among the many, Limited Partnerships that come tax advantaged as well. Also not mentioned, NRGY has projects in progress due for completion in 2010 that should add meaningfully to the bottom line. Adding to earnings as well as the possibility of increased payouts. That's not taking into account any further acquisitions which, if history is any precursor, should have the same impact. The recovery underway is uncovering many opportunities as well as identifying who the winners and losers will be. I believe NRGY will be one for the win column. Best of luck .

Aug 03 06:29 PM

[conceptwizard:]

This is a suckers rally perpetuated by cash injections from the FED funneled through the PPT using High Frequency trading. Trading has all been low volume and 70% done by the HFT computers installed right in the NYSE exchange. The rally is based on market manipulation.
How can Goldman project a 75$ target when the earnings are based on overhead reduction by layoffs instead of increased sales. They are setting up the market so they can build short positions when the market corrects. They were doing the same thing with the financial stocks when these companies were trying to recapitalize. Mere sheep controlled by ruthless, greedy. unethical manipulators, there is no fair play for the retail investor anymore and everyone including th congress knows it now. So if you want to turn a deaf ear and blind eye by all means "Go for it".

Aug 03 09:20 PM

[James Byrne:]

I'll have to disagree with the "sucker rally" term. Earnings are real. Market valuations are reasonable. What we will need to see at some point, and sooner rather than later, is top line growth. What we are currently witnessing, is an economy in transition. From one exiting a virtual free fall contraction, to one of stabilization. This phase of the recovery will result in a jobless one. One positive result of stabilizing the economy, should be a calming effect and positive response in consumer confidence. Domestic job creation will eventually come, but perhaps not meaningfully until mid 2010. However, as I've wrote about in previous posts, the US consumer is no longer the lone driving force in today's global economy. It won't be easy getting out of this mess we've created, but we will, and investors sitting in cash will have endured the pain on the downside and missed a chance to recoup a good portion of those losses. Worse yet, once inflation starts to rear its' ugly head, the negative real returns for those who sit parked in money market funds will feel the other side of that double edge sword cutting into their retirement savings. Good luck with your views and all your investments.

Aug 04 09:58 AM

[ebworthen:]

Your tone reminds me of someone excited about the speed of the car racing down the mountain even though the breaks are out and lug nuts vibrating off of the wheels.

Honestly, how can you ignore the negative fundamentals outside of the run up in market numbers?

Inventories and manufacturing were slashed when things collapsed last fall. An uptick at this point after trillions in deficit spending is not unexpected and not a sign that everything is better.

Slashing jobs to improve earnings means more loan defaults and less spending.

Certainly, the banks and corporations can make themselves look good this way and gin up the market; but does that mean the economy, you know, the PEOPLE who are the draft horses that pull the shiny wagon that the banks and companies have polished up all nice and decorated with gold teeth from retirees, does this mean the economy is recovering?

I'm fairly certain that a large number of the people jumping off buildings in 1932 were some of the same ones singing "happy days are here again" in Summer of 1930.

I would be much more cautious, unless of course, I was trying to sell something.

Aug 04 10:43 AM

[ebworthen:]

brakes are out

brakes are out

but it's a fun ride so far


On Aug 04 10:43 AM ebworthen wrote:

> Your tone reminds me of someone excited about the speed of the car
> racing down the mountain even though the breaks are out and lug nuts
> vibrating off of the wheels.
>
> Honestly, how can you ignore the negative fundamentals outside of
> the run up in market numbers?
>
> Inventories and manufacturing were slashed when things collapsed
> last fall. An uptick at this point after trillions in deficit spending
> is not unexpected and not a sign that everything is better.
>
> Slashing jobs to improve earnings means more loan defaults and less
> spending.
>
> Certainly, the banks and corporations can make themselves look good
> this way and gin up the market; but does that mean the economy, you
> know, the PEOPLE who are the draft horses that pull the shiny wagon
> that the banks and companies have polished up all nice and decorated
> with gold teeth from retirees, does this mean the economy is recovering?
>
>
> I'm fairly certain that a large number of the people jumping off
> buildings in 1932 were some of the same ones singing "happy days
> are here again" in Summer of 1930.
>
> I would be much more cautious, unless of course, I was trying to
> sell something.

Aug 04 10:44 AM

[James Byrne:]

Caterpillar made the point I was getting at just the other day. That we are seeing early signs of progress in the economic recovery. Since companies have cut headcount, slashed inventories and capital expenditures when the recovery does come, earnings have the potential to increase exponentially. The CEO,summarize, stated, we've made progress and have further to go. Should the recovery take hold, for 2012 he looks for earnings in the $8-$10 share range, from the $2.50 expected this year.
Again, I agree it is early in this recovery, and I'm quite confident we'll see some setbacks along the way, but I'm optimistic we'll get out of this sooner than most have anticipated.
Good luck on your investing.

Aug 05 11:35 AM