The stock market continues to be as irrational as an unhappy teenager. Corporate profits are at an all time high at levels that would support a Dow Jones Industrial Average three thousand points higher, were investors not so spooked by debt levels here and in Europe. Meanwhile, unemployment remains painfully high, as companies increase “productivity” by getting more output from their present employees. This recalls the definition by Ambrose Bierce, “Corporation: An ingenious device for obtaining profit without individual responsibility.”
The public mood has become so disenchanted that one financial publication thought it necessary to post a large headline after the failure of Congress’s special deficit-reducing committee, “No change in U.S. credit rating.” It is embarrassing to have it considered newsworthy that our credit wasn’t further reduced but worth noting that the downgrade this summer has not deferred nervous investors from buying government securities so vigorously that yields have almost disappeared in some cases. The 10-year “Treasury Inflation Protection” securities, for example, yield less than 0.01 percent.
In the midst of trillion dollar deficits, the bankruptcy of futures broker MF Global seems almost minor. At last report, this company, whose web site still brags about its “well-timed market insights,” had lost or mislaid, “more than $1.2 billion.” This seems careless at the very least and brings to mind the observation attributed to the late Senator Everett Dirksen, “A billion here, a billion there and pretty soon you’re talking about real money.”
Failure to heed this admonition has already brought eight changes of government in troubled Euro Zone countries. Whether deficits will also cause a change in the U.S. government has become the dominant issue in our national politics. The resulting uncertainties, unfortunately aggravated by partisan politics, will probably impact financial markets until next November. It could easily also take a year to reestablish fiscal stability in Europe.
Investors thus face a year of uncertain markets, very low interest rates, continuing but slow economic growth and quite reasonable valuations on many stocks. The housing market remains a drag and my local hardware store is briskly selling St. Joseph statue home sale kits, hardly a promising indicator.
Despite all the discouraging words, investors who stick to stocks in companies that can grow in this challenging environment will do well. The most certain beneficiary of holiday shopping will be Apple (AAPL-$368), whose popular products head many wish lists. Its earnings will continue to be strong as increased business sales offset possible consumer slowdowns in Europe.
Apple pays no dividend yet and can be paired with a stock like ING Global Real Estate (IGR-$7), a closed end fund that I began buying in 2008. It provides a most attractive yield, currently 8%. IGR invests in global REIT’s with half its assets in the U.S., another quarter in Canada and Australia and only 12% in Europe and the U.K. It currently trades at a 15% discount from net asset value, near its 52-week peak, enhancing its attractiveness for new buys. IGR is a better hedge against inflation than 10-year TIPS.
For investment returns, the established drug companies are not as exciting as social media stocks, the latest market fad, but will be more soothing and probably more rewarding. Bristol-Myers (BMY-$30), Novartis (NVS-$53) and Merck (MRK-$33) all yield around 4%, are reasonably priced and showing moderate growth. Novo-Nordisk (NVO-$108) yields less but is growing faster with its leadership in diabetes treatment.
Market volatility can be profitable as it adds trading volume for CBOE (CBOE-$25), the marketplace for options, including options on volatility. Its earnings for 2011 will be around $1.59 a share, up 50%. Its price is 16 times earnings with a 2% yield, quite reasonable for its growth pattern.
There are many well-publicized worries but there is also much for which to be thankful at this season. This country is the world’s largest economy, protected by the finest armed forces. Almost all of them will be home by Christmas and I hope they will receive a richly deserved welcoming transition despite a difficult job environment. Happy Thanksgiving.
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/