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Taking Stock

No News May be Good News

Recent news events in Japan, the Middle East and Portugal pounded the stock market, yet the overall dip was only around five percent. With major uncertainties still prevailing, stocks seem stabilized. Still 2% off their 2011 highs, they are ahead 4% for the year, a creditable showing considering the dramatic and tragic news from much of the world.

This performance illustrates two things. First, there are substantial underlying buying forces pushing stock prices up. Second, this firmness in the face of adverse news illustrates how stock market fluctuations are much less related to news developments than breathless commentators on news programs would have us believe.

Very few of the biggest single day fluctuations in the stock market were news related. The biggest ever percentage change, down 22.6% on October 19, 1987, was not prompted by any particular news. Of the ten biggest fluctuations, only one was accompanied by news, a 15% bounce in 1931 when President Hoover proposed a bank bailout bill, hardly a seismic event.

The assassination of President Kennedy prompted a 3% drop before the markets were closed. They reopened with a 4.5% gain. After the 9/11 attacks stocks reopened with a 7% loss. This curiously, was the same loss that occurred when World War I began while the beginning of World War II in 1939 saw a 7% gain.

Investors should focus on major economic trends and stock valuations rather than reacting to news events. This is particularly true of news headlines of some event like a strike or lawsuit affecting a particular company, as it is likely that this event has been anticipated among financial professionals for months. Its impact is probably already baked into its stock price. Action taken in hasty reaction to news is usually wrong.

Some of the reactions to the tragedies in Japan illustrate this. The Japanese economy has been wounded but it will recover. I continue to feel that the heroic examples of the Fukushima 50 may become a new samurai myth that will energize this recovery.

I are reaffirming my prior buy recommendation on Kubota (KUB-$51, although its price has moved up several points since my last column. Hitachi (HIT-$53) seems to have bottomed. It is trading at only 7 times earnings and recent sales reports showed 5% overall growth. The company has over $100 billion sales, including nuclear reactors in a venture with GE (GE-$20). GE backed off amid the nuclear hysteria and remains a buy, helped by a 3% yield.

The recent news eclipsed our passing through the Ides of March, heralding this quarter’s round of new earnings reports. These begin in a few weeks and should provide some additional sparks through favorable comparisons to this period in 2010, when the recovery was still taking baby steps.

Oracle (ORCL-$33), which has a fiscal year ending in May, gave an encouraging signal for the technology group with its new report for its February quarter. Earnings increased 78% to $.41 a share and the company forecast both sales and earnings for its full fiscal year to exceed old estimates.

These results reflect increased business spending on technology. Oracle’s acquisition of Sun Microsystems, which closed in January, adds balancing hardware sales to its software lines. The P/E ratio is only 15, there is a modest yield and it remains a buy.

Danaher (DHR-$51) is a very successful advanced technological conglomerate. Among many lines, it makes instruments for analyzing or controlling water and related environmental issues, medical technology, industrial machinery and tools. Its next earnings report on April 21 should show continued earnings growth around 15%.

The overall market is reacting favorably to steady growers like Danaher. Earnings growth, not news events, is the path to profits.

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. (949)-494-1376/(800)-697-2622; www.crowellroberts.com

 

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