Are the Europeans finally on their way to solving their bank problems? Stock investors seemed to think so Thursday — the Dow rocketed 183 points for the third big daily gain in a row. Reportedly, EU governments are hammering out a plan to bolster the capital cushion of Europe’s banks and are allowing the lenders to shed “toxic” assets (presumably including Greek government bonds).
At home, investors took comfort, albeit modest, from the latest weekly report on initial claims for jobless insurance. According to the Labor Department, claims rose 6,000 in the week ended Oct. 1 to a seasonally adjusted 401,000.
While a figure around 400,000 still indicates turtle-paced growth in the labor force, it’s certainly better than 440,000 or 450,000, which would suggest an oncoming economic slump. For now, at least, it doesn’t look as if a double-dip recession is imminent.
Is this the Beginning of a Market Rally?
OK, then. What about that Q4 market rally I’ve been predicting? Have we just witnessed the kickoff?
Quite possibly, Tuesday’s intraday low was the final bottom for the “correction” dating back to the April 29 high. However, if the European hopes prove false (again), share prices could slip back just as quickly as they’ve bounced.
So, after the brisk three-day run we’ve had, I’m not inclined to chase most stocks higher.
If you’re itching to buy something, make it a really solid consumer franchise like PepsiCo (NYSE:PEP). PEP currently is trading at 13.2 times estimated year-ahead earnings — essentially the same forward P/E as at the major market bottom in March 2009.
The stock also yields 3.4%. Consider this: During the past five years, Pepsi has boosted its earnings at a compound annual rate of more than 11%. Assuming the company slows the pace to 8% during the next five years (a conservative estimate in my view), you’ll be collecting a 5% yield with PEP, at the current cost, in 2016.
Or would you rather lock yourself into a skimpy 2% with a 10-year Treasury note? Buy PEP at $67 or less.
Bond Market Buy
Over in the bond market, emerging-markets debt offers outstanding value. In recent weeks, as the European crisis has festered, panicky investors have pulled money out of emerging markets, bonds and stocks — even though most developing countries enjoy far sounder economic fundamentals than the creaky nations of old Europe (or even the United States).
The developing world is growing faster than we are, and carrying less debt. Sounds to me like a bondholder’s dream.
Yet the lemmings are selling. It reminds me of the irrational dumping of municipal bonds late last year. We all know how that story ended: The folks who bought (and held on) while the crowd was bailing made out like bandits.
I’m looking for a similar denouement this time. I recommend buying TCW Emerging Markets Income Fund (MUTF:TGINX) at $11.25 or less. Current yield: 7.3%.
