What's Hot, What's Not; Still, TINA

The real man smiles in trouble, gathers strength from distress, and grows brave by reflection. - - Thomas Paine Now that almost 90% of the companies within the market have reported second quarter earnings, I think we can safely reflect back on the quarter that was and make some investable observations. First, as almost always, earnings were slightly better than projected when the quarter ended in June. Profits only declined across the S&P 500 by 3.5% year over year, a bit less than the 5.3% consensus expected. Large stock buybacks continue to help on that front. Regardless, the market remains firmly locked in a profit recession. Financials jumped 1.9% and into positive territory for the year on Friday, on hopes that the second strong monthly jobs report in a row will trigger a rise in interest rate yields. This would be a major positive for net interest margins at banks and improve the returns on bond portfolios at insurers. However, one thing we have learned over the past seven years is to wait to see an actual rise in rates, as the market has been left mostly with false hopes on that front. I am definitely in a wait-and-see mode myself and remain underweight the financials. Growth is next to impossible to find. In addition, many of major banks will be impacted by Brexit if and when that occurs. Finally, it is looking more and more likely that Mrs. Clinton will be the 45th president come November. Hard to see an easing of financial regulation, given the Sanders/Warren wing driving the party at the moment. It is also pretty obvious the pain in the energy sector will continue despite some amazing efforts to cut costs. This is especially true given oil has slipped from over $50 a barrel near the quarter's end to just over $40 a barrel now. I am still amazed that Exxon Mobil trades near its levels of two years ago when oil was north of $100. However, that is more a function of investors chasing yield than prospects for the company. I remain heavily underweight energy in my portfolio. The major biotech firms reported much better results pretty much across the board this quarter in general. As a result, biotech is up some 18% so far in the second half of 2016 after declining 24% in the first half of the year. We may need a significant uptick in M&A activity for a substantial next leg of the rally. However, the sector is one of few that can produce both revenue and earnings growth right now despite the dismal worldwide economic backdrop. It remains an overweight in my portfolio. We got some very good earnings reports from some of the smaller home builders like Taylor Morrison this quarter. Some domestically focused industrials, construction and infrastructure plays like MasTec also did very well. With global economic activity at 2009 levels and with our economy projected to produce 3% GDP growth in the third quarter after three quarters averaging 1% growth, these areas of the market remain investable. This is especially true as the housing market should continue to see years of growth, given historically low mortgage rates, be supported by a solid jobs market and a decade of below-average housing starts. Despite the drop in overall earnings, the stock market continues to move up and now sells at around 19x forward earnings. Certainly not cheap, but for the moment it remains a TINA (There is no alternative) market.

What's Hot, What's Not; Still, TINA

I'd stay away from banks, but I like home builders.

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