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Taking Stock

Tony Crowell

End Of The Quarter

Stocks continue to oscillate in a range roughly between 12,000 and 13,000 on the Dow Jones Industrials Average. With news from Europe and political fighting here, stocks are not sticking with short-term trends. After a good first quarter, the market went into a correction in May, reversed briefly to an uptrend, reversed again in June to another correction and then started another uptrend that was once more interrupted by another correction. Stay tuned.

After all that, it might seem as though major changes had taken place but the overall market level is not all that different from January. As we approach the end of the second quarter, the Dow Industrials are off 5% for the quarter but up 3% for the year-to-date. Portfolios based on the stocks recommended here did a shade better although usually not dramatically so. Still, even the unmanaged assets that make up the market averages beat the returns on bonds, gold, commodities and real estate.

The best performance came from stocks in larger companies with sustained growth in both sales and earnings. These are the qualities that I have been emphasizing in these weekly columns. Results varied, influenced by investor moods and earnings surprises.

Apple (AAPL-$569) was the star, up over 40% since the beginning of the year. It peaked 75 points higher before getting caught in overall market weakness and remains a buy. Intel (INTC-$26) and DuPont (DD-$50) were both up 8%. U.S.Bancorp (USB-$31), our only bank stock, gained 16%.

IBM (IBM-$191), up 4%, matched the general market. Among pharmaceutical stocks, Novo-Nordisk (NVO-$141) gained 21% but Bristol-Myers (BMY-$35) was off slightly. Abbott Labs (ABT-$63), which will spinoff its pharmaceutical unit, gained 11%.

Slowing global demand took down oil prices and energy stocks. Exxon (XOM-$83) dipped 2% and ConocoPhillips (COP-$54), which spun off Phillips 66 (PSX-$32), was off 5%.

With the U.S. economy slowing to 2% growth, stocks perceived as vulnerable to cyclical downturns were under pressure. Chicago Bridge & Iron (CBI-$37) and Aflac (AFL-$41) were both off 8%. Deere (DE-$78) and Cummins (CMI-$92) each lost around 1%.

These all remain buys although the cyclical stocks may require more patience. All these stocks pay dividends, which add a cushion, as do the income funds that I have recommended. Franklin Trust (FT-$7) and CBRE Global REIT (IGR-$8), both moved up but still yield over 6%.

My newest recommendation is MFS Income Trust (CMK-$8). Its yield is currently 5.4%, a bit lower, due to its concentration on bonds with shorter maturities. The average maturity is 7 years and its manager, Massachusetts Financial Services, is one of the oldest asset managers in the world.

Nuveen, the leading manager of municipal securities, is even older. For tax-free income, I have used Nuveen CA Opportunity (NCO-$16). This remains a perfectly sound investment but its price has moved up and I using a newer fund, Nuveen CA Muni 3 (NZH-$13), which trades currently at a slightly greater discount and modestly larger yield of 6.23%. Both Nuveen funds hold bonds with longer maturities than the corporate bonds in the MFS fund.

The inevitable increase in interest rates, which the Federal Reserve is now pushing into 2014, will take down the values of long-term bonds. MFS and Nuveen know what they are doing but I don’t think amateurs do when they accept a 2.7% yield on a 30-year Treasury bond because they feel it’s “safe.”

Investors who want the more subtle safety of preserving and growing their capital will do better with Apple and the other stocks mentioned here. Their prices will fluctuate with almost every news event but patience and perspective will win every time.

Tony Crowell manages stock portfolios for individuals and their trust and retirement accounts with CROWELL•ROBERTS Investment Counsel, a registered investment advisor in Laguna Beach since 1993. [email protected] 949.494.1376/

800.697.2622 www.crowellroberts.com

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