Just like the market, isn’t it? The market decided to take the low road, as I cautioned it might on Thursday. After a mixed outing Wednesday, the Dow plummeted 420 points yesterday to finish — again — below 11,000.
As usual on a bad market day, there were some aggravating factors: rumors of liquidity problems at a large European bank; a weak report on July existing-home sales; and, most troubling, a steep drop in the August Philadelphia Fed survey of manufacturing in the Middle Atlantic states.
The Philly Fed number, as one of the timeliest economic releases each month, often gives an early peek at manufacturing trends nationwide. At -30.7, the Philly is pointing well below the line (zero) that marks the divide between expansion and contraction.
So it seems we’re in for an extended period of base building before the stock market fully reflects the increased risks in the economic outlook. I still think the United States will avoid an officially defined recession, for the next few quarters, anyway. But it may take until late September or sometime in October for Wall Street to work through the worst of its fears.
Along the way, the headline indexes will likely break through their Aug. 8 closing lows, at least for a couple of sessions. The S&P 500 was only about 2% above that level yesterday.
How should you handle it? Hedging is expensive at the moment, so I wouldn’t try put options or inverse ETFs until the market gives us more of a relief rally than we’ve gotten so far.
Instead, I recommend putting your spare cash to work slowly and steadily, picking up individual stocks (quality names, of course) as they hit “air pockets.” Spare cash? Yes, you should have a little, if you’ve sold some of your long bonds lately, as I’ve recommended. And if, like me, you’ve got a constant flow of dividends and interest rolling in, you’ll have a few extra nickels to invest.
One air pocket that opened yesterday caught Accenture (NYSE:ACN) in the downdraft. No specific news that I could trace, but an analyst at Credit Suisse made bearish comments about rival IBM (NYSE:IBM). In the current emotionally charged atmosphere, that’s all it takes to set off a wave of sympathetic selling in other stocks within the same industry.
At less than 13 times estimated year-ahead profits, the stock hardly looks overpriced for one of the world’s premier IT consulting and outsourcing franchises. Scale into the stock, if you don’t own it already, up to a limit of $53 (for now). From here, I project a total return, including dividends and price gain, of 20% to 30% in the coming year.
Invesco Mortgage Capital (NYSE:IVR), one of my aggressive plays for income, also hit a notable air pocket today. In IVR’s case, the drop is somewhat more understandable: The REIT priced a secondary offering of 20 million shares of new stock.
Frankly, I wish IVR had waited for the equity market to calm down before announcing an offering. But I suspect management has spotted some exceptional opportunities to buy mortgages on the cheap and wants to act fast.
IVR is definitely for risk takers — not for widows and orphans. But if you can stand the heat (I can; I own IVR), the 22% yield at yesterday’s closing price looks mighty tempting. Pay up to $20.
