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Taking Stock

Tony Crowell

Tony Crowell

Syria And Stocks

The prospects of military action brought on by events in Syria sobered the stock market. Beyond the human costs inherent in any military action, troubles in the Middle East usually bring higher energy prices. Similar events in the past seem to have conditioned investors, whose reactions this time were not as overdone as those recently triggered by the prospects of the inevitable increases in today’s historically low interest rates.

Wall Street tries to look for short-term indicators as if stocks moved like the figurines on old-fashioned barometers, where the appearance of the female figure promised good weather and the male the opposite. Prospective Federal Reserve action has acted as a barometer this summer, even to the extent that good economic news triggered market pullbacks on fears that this would hasten Fed actions.

The tapering of Federal Reserve buying of bonds could occur as early as September although the uncertainties arising from the Syrian conflicts could postpone the “taper.” In any case, the Fed is not going to immediately reduce its monthly bond buying from $85 billion to zero. The bond market has already taken a substantial hit as interest rates have already moved up around one percent on 10-year bonds, even without the Fed slowing its program, much less stopping it.

Fed action is probably already fully anticipated by the market. Military action in Syria is the current concern. If this takes place and is relatively short-lived such as missile attacks on air bases, stocks might move up in relief. A prolonged, messy intervention would be quite another matter.

Higher energy prices are already appearing and accelerated conflict would send them higher. Fortunately for this country, its development of vast shale gas and oil reserves will act as a buffer. Europe is not so fortunate and its nascent economic recovery may slow.

These events illustrate the value of energy stocks in investor portfolios. Chevron (CVX-$120) offers financial strength together with aggressive acquisitions of shale deposits. Earnings are flat but its 3.1% yield on dividends increased for 19 straight years is most attractive. ConocoPhillips (COP-$66) pays 4.1% and is overlooked by many investors.

Oil refiners Calumet (CLMT-$30) and CVR (CVRR-$27) are currently income plays with yields of 8% or more. Their short-term earnings largely depend on the “spread” between domestic and North Sea oil. This spread narrowed recently but will probably broaden amid Middle East tensions.

Chicago Bridge & Iron (CBI-$60) is a direct beneficiary of oil and gas development with its substantial energy infrastructure capabilities. Growth in both sales and earnings is very strong. It remains a strong buy.

Stocks in the advanced medical sector are moving ahead of the market. Amgen (AMGN-$108, Celgene (CELG-$142) and Cooper (COO-$1310) reported good results and remain buys. Illumina (ILMN-$77) is showing strong sales growth and is a more speculative buy with its higher valuation. Advanced biotech companies are attracting acquisitions and Illumina’s advanced gene sequencing platforms make it a good buyout candidate.

Among smaller companies, Anika Therapeutics (ANIK-$23) and Vascular Solutions (VASC-$16) hold promise. Anika provides a variety of healing products based on hyaluronic acid, a natural polymer found in the body. Vascular provides varied solutions for interventional cardiologists and radiologists. Both companies are expanding globally and are trading at around 25 times earnings, low for growing providers of advanced medical technologies.

Overall, stocks have made it through an irregular summer, losing about 2% on the Dow since May despite making it making an all time high on July 11. The tragic situation in Syria, possible changes in Fed policies and pressure on energy prices point to a volatile September. The greatest threat lies in Washington where the U.S. government’s spending authority will lapse on October 1, soon to be followed by again hitting its debt ceiling. Legislative relief is currently bogged down in pointless posturing. These self-inflicted needless “crises” could damage the economic recovery and investors should proceed cautiously in the hope that the nation’s interests will encourage rational solutions.

 

 

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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