Irrational Market?
The latest round of earnings reports are taking stock prices
lower. 2Q earnings started off good with a glowing report from Intel
(Nasdaq:INTC), but have taken a turn for the worst.
The issue is revenues. IBM (NYSE:IBM), Texas Instruments (NYSE:TXI)
and Goldman Sachs (NYSE:GS) all came in a little light on revenues. Companies
are meeting or exceeding earnings estimates, overall S&P 500 earnings
have been 17% above expectations, according to Bloomberg.
But revenues have beaten expectations by only 3.5% so far,
and some big names like IBM have come in below revenue
estimates.
That's starting the refrain we heard during 1Q earnings,
that are benefiting from cost-cutting measures and the economic recovery is
not supporting higher revenues.
What'sparticularly
head-scratching, though, is that companies are priced for weak earnings. The
early rally July rally notwithstanding, stocks have sold off since May and
valuations for many companies are very low.
IBM, for instance, has a trailing P/E of 12 and a
forward P/E of 10. If IBM's forward guidance was weak, then
it would make sense for the company to trade with a low valuation to reflect
the uncertain future.
But IBM's forward guidance is in line
with expectations. And while that might not be enough to have investors
jumping for joy, it doesn't seem like it should send them running for the
exits, either.
Last week's
Michigan sentiment review sticks out in
my mind. If you don't recall, the sentiment review, which seeks to measure
consumer confidence, came in much weaker than expected, suggesting consumers
had grown much more pessimistic about the future than they had been in April
and May.
That reports came out last Thursday and it abruptly ended
the rally we had been enjoying.
It now seems like investors are echoing the pessimism
the Michigan sentiment review revealed.
It's never a good
idea tell the stock market that it's acting irrationally. If stock prices are
going lower, don't fight the trend. We might say that stocks prices shouldn't
be falling, that things really aren't that bad, but buying stocks on the
belief that the market is acting irrationally is a good way to lose money.
Always remember: the stock market can stay irrational longer
than you can stay solvent.
That little gem is usually used to describe the action as
stock prices run higher and get overvalued, but it applies equally well to
stock market declines.
In times like these, the thing to do is make a list of the
stocks you'd like to own, and then wait for them to hit attractive prices,
and wait for the stock market to show signs of stability.
Housing starts for
June came in below expectations this morning. That's a bit of an oxymoron: I
wasn't aware that anyone had any expectations for the housing market these
days.
One silver lining: building permits rose 2.1% in June.
Did you see that
copper prices are rising for the second day in a row? This is a reaction
to China's apparent success
in getting inflation under control.
We've discussed how China tightened loan and reserve
requirements in an effort to slow down its booming construction sector and
slow price gains.
China's measures seem to have worked, and
now investors are anticipating increased demand from China as it removes restrictions.
This is very important news, because, like it or not,
China is the primary driver of growth for
the global economy. And if there's anything that can help the
U.S. economy and reverse the weak
consumer sentiment, it's demand from China.
Maguire Office Trust (NYSE:MPG)
has fallen back to the $2.65 level, where I recently
recommended it to Daily Profit readers. As I said then,
Maguire has strong support around $2.50.
Odds are quite good that you'll make money buying the stock
at $2.50. I've recommended it a few times at that level, and Daily
Profit readers have made money every time.
You'll notice today that Maguire is down only slightly while
the S&P 500 is down more than 1%. That's because investors are buying
Maguire and other commercial real estate stocks on weakness.
Commercial real estate stocks are the least of the beaten
down sectors. The recovery for commercial real estate stocks has been
virtually non-existent since the financial crisis, even though prices for
office buildings and shopping malls have rebounded nicely.
Eventually, commercial real estate stocks will follow
commercial real estate prices. And that will mean triple-digit gains for some
of these stocks.
TradeMaster Jason Cimpl
recently released a Special Opportunity Report on his top
commercial real estate stocks. Now is the time to buy these stocks, as they
approach support levels. You can learn more about which stocks could post
triple-digit gains
HERE.
As always, thanks
for all of your comments, and please keep them coming:dailyprofit@wyattresearch.com
