Obviously, that forecast foots with my belief that we remain in a “profits recovery” whereby profits soar, leading to an inventory rebuild that drives a capital expenditure cycle. Then, and only then, companies begin hiring, which fosters a pickup in consumption. Ergo, with surging profits bringing the SPX’s earning’s yield to 8.5% ($95 ÷1110), I keep chanting, “I think it is a mistake to get too bearish here.” Verily, if we were on the verge of a big decline it seems rather odd that many of the world’s stock markets are strengthening with some of them actually trading to new recovery highs. If past is prelude, such action suggests the weaker markets should soon follow. And, that’s what our stock market has done over the last two weeks, causing the SPX to break above its recent reaction high of 1105. My sense is we’ll see more near-term upside with the SPX then stalling around 1115 – 1120, attempting to pull back without much traction, and then re-rallying. Eventually, I think we will break out above the August recovery high (1130).
If correct, my preferred strategy is to buy Putnam’s Diversified Income Fund (PDINX/$8.07) and buy an equal dollar amount of some equity income fund populated with blue chip, dividend-paying stocks. Raymond James Asset Management Services has numerous Separately Managed Accounts (SMA), as well as a Unified Managed Account (UMA), that accomplish this. However, if you want to stay within the Putnam family of funds you might consider Putnam’s Equity Income Fund (PEYAX/$13.43). While it may not yield as much as others, Bart Geer has been the portfolio manager for over a decade and for the past three-, five-, and 10-year periods has handily beaten his benchmark (Russell 1000 Value Index). It’s worth noting that such a 50/50 asset allocation (fixed income/stocks) has never produced a five-year negative return in the last 60 years. Additionally, in an attempt to add alpha to the aforementioned portfolio, I like the strategy of layering in some individual stocks. Since the equity income fund covers the blue chip sectors, I would use prudently selected special situations.
Because I continue to favor technology, in past missives I have mentioned numerous tech names. To be sure, technology stocks are cheap, trading at their lowest levels relative to the SPX in almost two decades (1.0x the S&P 500). This has happened despite cashed-up balance sheets and good returns on invested capital. Moreover, there could be a paradigm shift afoot. Take Intel’s (INTC/$17.97/Outperform) recent agreement to buy Infineon’s Wireless Solutions Business (WLS), a leading provider of cellular platforms. Obviously, with the smartphone markets growing five times faster than the PC market Intel is hedging its “bets.” Two names from our universe benefitting from this smartphone surge are American Tower (AMT/$49.07/Strong Buy) and Crown Castle (CCI/$42.40/Strong Buy). Or, consider the recent bidding war for cloud computing company 3Par (PAR/$32.92). Cloud computing threatens to shake the hardware and software businesses to their very roots. While there are many stocks in our universe that play to cloud computing, this morning I offer CA Technologies (CA/$19.78/Strong Buy) for your consideration (see our analyst’s update).
