The Man of La Mancha Rides Again

by Richard Band | September 28, 2012 11:11 am

The Man of La Mancha Rides Again

Spain is going to rescue us.  Got that?

Stocks wavered in the early going[1] as a dismal report on August durable-goods orders[2] (down 13.2% from July) and a downward revision in estimated Q2 GDP drove buyers to the sidelines.  But then, just as the European business day closed, Spain announced its FY13 budget, with more spending cuts than tax increases.  U.S. stocks surged to close the day solidly in the green (Dow up 72 points).

Why the Spanish news should lift equities on this side of the Atlantic is something of a mystery.  Haven’t thousands of Spaniards been rioting in recent days over proposed budget cuts?  Now that the cuts are officially published, should we expect the protesters to fold their tents and go home?

Perhaps a better reason for today’s advance is purely technical.  Before today, the S&P 500 had declined five sessions in a row, driving various short-term indicators into oversold territory.  Whenever that happens, you typically get some knee-jerk buying from traders seeking to play a quick bounce.

So the bounce is under way, and it may well continue over the next few sessions, taking the market back up to the vicinity of its September 14 intraday high (1474.51 on the S&P 500 index).  However, we’re already observing signs of potential trouble on the horizon.

Insider selling, for example, has accelerated to a fever pitch.  Last week, according to data from Vickers, officers and directors of NYSE- and ASE-listed companies executed a stunning eight sales for every purchase of their own stock.

That’s the highest one-week reading of 2012.  The nearest rival came during the first week of May, just as the market was rolling over into a 10% “correction.”

I’m not ready to predict that another pullback of that magnitude is in the cards.  I do believe, though, you’ll get a chance to buy most of our recommended stocks and mutual funds at lower prices within a few weeks.

As noted in past blogs, we’ll be looking to buy Duke Energy (NYSE:DUK[3]) as a Niche Investment, and Southern Company (NYSE:SO[4]) for the Incredible Dividend Machine.  These are well-managed electric utilities with strong business franchises, but we want to be sure the price we pay allows for an adequate (double-digit) return on our money, including both dividends and capital appreciation.

Meanwhile, if all that zero-yielding cash is driving you bonkers, consider putting some of it to work in a short-term fund like PIMCO 5-Year High-Yield Corporate Bond Index ETF (NYSE:HYS[5]).  HYS features a 5.6% yield, based on the past 12 months’ distributions—spectacular, really, for a fund with an average maturity of just 2.6 years.

What’s the catch?  The PIMCO fund invests in lower-grade bonds, also known as “junk.”  History shows, however, that junk bonds with a short term to maturity have a much lower propensity to default than longer-dated junk.

As long as the economy remains on a fairly even keel (slow growth but no recession), I think HYS will prove to be a very convenient parking place for your cash. For now, we’ll track the fund as a Niche Investment outside the model portfolio.

Endnotes:
  1. wavered in the early going: http://investorplace.com/2012/09/a-rally-led-by-spain-thursdays-ip-market-recap-dfs-mkc-tpx/
  2. dismal report on August durable-goods orders: http://news.investors.com/economy/092712-627288-durables-good-order-plunge-gdp-revised-down.htm
  3. DUK: http://studio-5.financialcontent.com/investplace/quote?Symbol=DUK
  4. SO: http://studio-5.financialcontent.com/investplace/quote?Symbol=SO
  5. HYS: http://studio-5.financialcontent.com/investplace/quote?Symbol=HYS

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