That Was Not an 'All-Clear'

The market staged a massive rally Wednesday afternoon after minutes were released from the last Federal Open Market Committee (FOMC) meeting. Those comments showed that the Federal Reserve is more dovish than what investors had previously believed, and they suggested hikes on interest rates for U.S. Treasury bonds will probably happen later than the market has expected. On the heels of this, U.S. equities had one of their best days of the year, erasing deep declines from Tuesday's market action. As for myself, I have a few comments and observations around the market's reaction and where I believe equities will go from here. First, this was not an all-clear for investors to pile back into stocks willy-nilly. I personally find it disconcerting that, more than five years after the recession officially ended, the market's direction remains so dependent on every action or perceived action from the Federal Reserve. Moreover, these comments have not lessened my concerns about Europe or the stronger dollar -- worries that I have outlined many times in these columns recently. Keep in mind that the Fed cut its growth outlook due to the higher dollar as a number of committee participants expressed concern about global weakness. Meanwhile 10-year treasury yields have sunk back down under 2.3%, as the Fed's words are providing a nice headwind for rates to move higher in the near future. It is hard to foresee rates again moving to 3%, as they did at the end of last year, for quite some time. That should improve the sentiment around some high-dividend-yield sectors. I particularly believe this will help the real estate investment trusts (REITs), which performed so well in the first part of the year as rates declined from that 3% level. My favorite part of the REIT space right now is lodging. Demand for rooms continues to grow faster than supply, and that's resulting in better occupancy levels and higher average daily room rates. My favorite play in this area remains Chatham Lodging Trust (CLDT), which has many attractive features, as I've recently written. I picked up a few more shares of the name early in Wednesday's session. Also worth a look, I believe, are some of the construction-and-manufacturing plays that have been punished of late. I added positions in two of these yesterday before the big rally: commercial-construction firm Tutor Perini (TPC) and railcar maker Trinity Industries (TRN). Tutor and Trinity have several things in common that make each of them actionable and attractive investments on an incremental basis as the market gets through this latest bout of volatility. First, both have little to no exposure to Europe. Second, they each have a huge order backlog that will take years to work through even if they get no demand. Third, both of these stocks have been unduly sold off. Trinity has declined 20% over the past three weeks in an overreaction to news that railroad-company lobbyists are seeking a period of seven years to meet improved safety standards for oil tank cars, instead of the three years originally proposed. At best, in my opinion, they may get a delay to five years -- and, in any case, this does not matter to immediate orders one way or another. Tank-car manufacturers can't keep up with demand just from the expanding volume of domestic oil being carried via rail. The stock of Tutor Perini has also sank some 20% recently in the sector's general selloff. This company, which has market capitalization of $1.3 billion, has a massive $8 billion order backlog. Of this, almost half comes from local, state and federal-government agencies. Finally, both of these stocks are cheap compared with the overall market's valuation -- and in light of these companies' growth prospects. Trinity goes for just over 9x this year's average analyst profit estimate, and Tutor sells for just over 8x next year's forecast. In summary, minutes from the Federal Reserve change nothing about my market outlook, and they have not mollified my major concerns about equities right now. I will continue to use an established solid allocation to cash within my portfolio in order to add incrementally to the types of positions outlined above on any further dips in the market.

That Was Not an 'All-Clear'

The Fed minutes have not changed my outlook -- and one of my favorite areas remains REITs.

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