This is Tom McIntyre with another client only update as of

Monday morning the 25th of October 2010

The stock market rally, which few people believe in, continued last week and so far this morning. The combination of stellar corporate profits, generational low interest rates, a more favorable political environment for investors and the prospect for money printing from the Fed have proven the skeptics wrong.

 

As the charts above illustrate last week saw the Dow Jones Industrial Average (except for the banks) and the NASDAQ Composite continue to advance with gains of .63% and .43% respectively.

The Markets & Economy

The loathsome economy, which everyone is disappointed in, continues to throw off some outstanding corporate profit reports. As we have mentioned numerous times over the past few years, profits are what the stock market is all about. While the pundits and politicians talk endlessly about jobs and how to create them (like they would have a clue,) the market is looking forward most importantly to profit growth.

In that sense the lower dollar, strength in emerging markets and strong expense control are reaping huge rewards for global companies who lead their industries - many of which we own on your behalf.

These firms continue to do well in a slow growth economy and now with the wind of change about to hit Washington DC, the hope is that the worst may be over for government intervention in the private sector. Do not underestimate the importance that the market attaches to the results of next week’s mid-term elections.

Overall, the global economy still has many problems to overcome. The lack of job creation mentioned above being the most crucial, but also the size of government and the size and direction of the various government deficits.

Over in France, that country is engaging in a national strike merely because of the plan to increase the retirement age to 62. This county is a prime example of what happens when the entitlement society grows too big and can no longer be supported by the private sector where all wealth is created. Let’s hope that day never arrives here in the United States.

Here in this country, the economic problems of the day whether they be entitlement reform, tax policy or regulations of all kinds have been on hold until the mid-term results are known. Next year should bring quite a few changes and the market is anticipating them.

At the same time our Federal Reserve Board is functioning and is concerned about the slow growing economy and its outlook. As mentioned in previous updates, this body has indicated that at its next meeting (the day after the election) it will announce another round of “quantitative easing”. This is money printing at its most basic form, which has as its intent the goal of raising all asset prices - the easiest of which are stock prices. This in very large measure explains the strength of the stock market rally.

All in all, the combination of quantitative easing, strong profits and a political change have all come together to bring about this rally which few people believed in last summer.

What to Expect This Week

A continued focus on the economy with a view towards Friday’s GDP report for the September quarter will lurk in the background all week long. This is expected to show an anemic 2.5% growth rate which is not vigorous enough to lower the unemployment rate.

This is confirmed by last week’s reading from the Economic Cycle Research Institute (see chart below), which shows stability but hardly any upward momentum. A double dip is not likely, but neither is job creation. Hence the mood of the country is what it is.

Corporate earnings will also continue to unfold but as the week draws to a close the impending election and announcement from the Fed just might serve to put many investors on hold until the results are in.

 

 

                                                                              SYMBOL:  EMC

 

EMC reported better than expected third quarter earnings results and raised earnings guidance for the rest of the year.  The Company earned $0.30 per share, as revenues rose by 20 percent year over year to $4.21 billion.  Management raised its earnings guidance for this year by $0.05 per share to $1.25, and stated revenues would be higher than consensus estimates.

The strength during the quarter was broad-based as sales rose by more than 20 percent in the United States, Asia, and Latin America.  CEO Joe Tucci stated that the recovery will likely be slow, but said there is a growing enthusiasm for the Company’s cloud computing products.  We expect the cloud computing market will be the next large growth story in technology, and EMC is a market leader in the sector.

We believe that EMC is undervalued at these levels, and others seem to agree, as there have been some rumors of a possible takeover of the Company.  EMC own 80 percent of VMWare, which operates in one of the hottest growth areas of technology.  Also the Company has a strong backlog of business and several new product launches are expected early next year.

EMC is the cheapest mega-cap technology stock that we follow, which makes little sense given its superior growth rates.  We were surprised by the muted response to this solid earnings report, but look for the stock to trade to the mid-20’s in the near team.  We believe that management is committed to enhancing shareholder value and believe the stock price should reach $30 within the next 12 months.

 Three-month Chart

                                                                                           SYMBOL:  BA

Boeing reported better than expected third quarter earnings results and management raised its earnings and revenue guidance for the remainder of this year.  The Company earned $1.12 per share, which was six cents better than consensus estimates.  Management now expects to earn between $3.80 to $4.00 per share - up from previous estimates of $3.50 to $3.80. 

The commercial airplane business was significantly stronger this quarter, which more than offset any weakness in defense spending.  The commercial airlines division experienced 11 percent revenue growth and the Company’s backlog rose to $321 billion.  Management sees this trend continuing as airlines are starting to take deliveries of new planes for the first time in nearly two years.  We believe that the major airlines need to accelerate their spending plans to replace fleets that are aging.

Management also stated that the 787 Dreamliner is still on track to be delivered by the first quarter of next year.  This will be a major event for the Company, and Boeing believes they are in the final stages of test flights.  We believe that Boeing has a much more interesting product portfolio than its main competitor, Airbus, and will take market share over the next three years.

Boeing has been one of the best performing stocks in the Dow Industrials, and we believe the Company will remain a market leader.  The Company is still conservatively valued at these levels and the business environment should continue to improve for the commercial airline division.  We believe that shares of Boeing will reach $85 within the next 12 months.

Three-Month Chart

                                                                                             SYMBOL:  R

Ryder Systems reported better than expected third quarter earnings results and management believes better economic conditions will lead to higher fourth quarter results.  The Company earned $0.74 per share, which was 62 percent higher than last year.  Management also raised its guidance for the remainder of this year and now expects to earn between $2.15 to $2.20 per share.

On the conference call with investors, CEO Greg Swienton stated that business trending continued to strengthen during the quarter.  Pricing trends were also much better than the past two years, and the Company believes this is sustainable.  This management team is very conservative; although this was the most bullish call we have heard from this team since we became investors.

Ryder is a great barometer of domestic economic activity and we are encouraged by the strength of this report.  With business strengthening each month, we believe this is not only a good sign for Ryder shareholders, but also the market as a whole.  Shares of Ryder previously traded in the 70’s before this crisis and we believe they will trade there again over the next two years.

 Three-Month Chart

 

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www.mcintyreinvestments.net