Plainly, last week’s two major events were the mid-term elections and the Fed’s announcement of another quantitative easing (QE2). Both went pretty much as expected. While many negative nabobs think QE2 will not work, I think it will work better than expected. It should be effective at lowering real interest rates, which should improve the fiscal funding metrics. QE2 should also lower people’s propensity to save (read: spend money). The risk is that countries like China may view QE2 as a maneuver designed to get them to revalue their currency upward relative to the U.S. dollar. In fact, last Thursday China, Brazil, and Germany criticized QE2, while a number of Asian central banks announced intentions to defend their currencies. For further color on QE2, please read our economist’s (Dr. Scott Brown) comments attached to this report.
As for the mid-terms, I have argued for months that if the Republicans regained the House, and came close to taking back the Senate, President Obama might just pull a Clinton and move to the “center.” I further evinced if that happens the S&P 500 (SPX/1125.85) would likely cross above 1300 quickly. And last Wednesday a clearly contrite President showed signs of becoming more centrist. Meanwhile, last week’s economic reports continued to come in better than expected with 13 of them above estimates, five weaker, and three on target. The same is true of corporate earnings and revenue reports. More importantly, companies are guiding 4Q10 earnings estimates higher. So again I say, to an underinvested portfolio manager (PM) the current environment is a nightmare! And that, ladies and gentlemen, is why any correction should be short and shallow as underinvested PMs will be forced to buy the “dips” in order to keep up with the Joneses (aka, the Dow Joneses). Indeed, focused on 2010’s year-end, PMs have performance risk, bonus risk, and ultimately job risk by underperforming the major market averages.
Summing the parts, I continue to have a timid trading stance in large part due to my day-count sequence, the overbought nature of most of the indices, and the fact that many of the indexes have spiked above their respective upper Bollinger Bands (rare occurrence). That said, I am not afraid to buy select stocks. Over the past few weeks my preferred strategy has been to buy fundamentally sound companies, with unbroken business models, when they have had a price concession for a one-off reason. On October 14th that’s exactly what happened to NII Holdings (NIHD/$42.73/Strong Buy) when the Televisa deal was called off. On that announcement NIHD shares fell more than seven points in a day and we recommended purchase, as noted in our Investment Strategy report of October 18th. On October 26th a number of announcements caused Lexmark’s shares (LXK/$39.19/Outperform) to collapse 10 points in a day and our analyst recommended purchase in a written comment that same day, as we noted in our verbal strategy commentary that Tuesday. I think such a strategy takes much of the “price risk” out of the investment equation and I continue to invest, and trade, accordingly.
The call for this week: I will be out of the country until November 18th so these will probably be the only strategy comments for awhile. Nevertheless, according to the sagacious Bespoke organization, since April 23rd the best performing sectors have been Telecom Services (+15.6%), Materials (+6.0%), Consumer Staples (+4.3%), and Utilities (+4.1%). Interestingly, the Financials are down by 7.9% from that same date, yet last week the Financials made a strong reversal and registered a massive upside breakout in the charts. While I have not recommended banks in 10 years, if I were to buy one it would be Strong Buy-rated IBERIABANK Corporation (IBKC/$54.22). Please see our analyst Michael Rose’s company comment of October 28, 2010 for more insight. I’ll speak to y’all in a couple weeks.
Copyright (c) Raymond James
