Taking Stock

Tony Crowell

A Long, Warm Summer

Midsummer arrived on schedule as did the first wave of quarterly earnings reports. The summer is hot, the reports lukewarm. First returns show decent results in sales and earnings despite a sluggish economic recovery but the forecasts are guarded. Europe’s uncertainties and its slumping economies are beginning to impact the sales of global companies.

Cummins (CMI-$83) is a leading example. The company lowered its guidance for June quarter sales, to be announced July 30, and also reduced its forecast of a 10% gain in sales for the full year to the same as 2011. Its stock price dropped a dozen points even though the company increased its dividend for the sixth straight year.

Similar worries about Europe and an accompanying slowdown in China will dampen the forecasts of larger manufacturers. These concerns will probably dampen the price action of stocks like Deere (DE-$78), Chicago Bridge (CBI-$36), General Electric (GE-$19) and IBM (IBM-$184). Each of these companies appears headed for record earnings in 2012 but all these much-publicized wailings by the financial media will pressure their stock prices. Summer’s historically lackluster trading should provide opportunities to pick them up at even more attractive prices.

Europe’s problems are continuing. Fortunately, unlike crises in the past, its leaders are working together to shore up the weaker economies. The U.S. is in relatively better shape, as reflected by a stronger dollar and record low interest rates but suffers from fiscal uncertainties that hobble business decisions and scare investors.

These uncertainties stem from the “fiscal cliff” of tax increases and spending cuts scheduled to begin in January. Leaders of both political parties have stated that they do not want these changes to take effect as planned but the two parties have been unable to agree on a plan to avoid them.

With election politics getting hotter than even the weather, it is unlikely that these issues can be resolved before November as the cowards in Congress may pull the high school stunt of playing chicken as they did last year with the debt ceiling. It is quite likely that these issues may get dodged in the manner of the Brooklyn Dodgers, “Wait till next year!”

The Dodgers did finally win the first of six World Series titles and the markets will eventually surpass their prior peaks. With all these overhanging economic and political uncertainties plus energy price fluctuations and an unsettled housing crisis, it looks like a long, hot summer for stocks.

Fortunately, there are soothing measures that will help. Buying Apple (AAPL-$601) before its earnings release on July 24 is one. The medical group is showing quiet strength. Bristol-Myers (BMY-$35), Merck (MRK-$43), and Novo-Nordisk (NVO-$146) all provide solid values with attractive yields.

So does Yum Brands (YUM-$63), which dipped recently on concerns of its KFC sales in China. It delayed its earnings report, causing more worries. The report will appear around July 19, and buying before the news looks timely.

Investors willing to go against the grain and look several months ahead to a European recovery can use the Euro Stoxx 50 SPDR (FEZ-$27). This exchange-traded fund is down from $39 and now yields over 4% from its portfolio of Euro area blue chips.

In the U.S., record low interest rates and subdued inflation provide a sound platform from which to build growing portfolios. Golf often tracks inflation and declining prices for this traditional inflation hedge have pulled down gold mining stocks. Goldcorp (GG-$33), which just touched a 52-week low, now yields 1.6%, more than a 10-year Treasury. Someday, inflation will be back and gold will leave bonds in the dust.

We have been staying ahead of he market with moderate gains so far this year by concentrating on larger companies with rising earnings and dividends. That remains a proven strategy although it will probably test our nerves and patience as we suffer through a long season of economic and political discords. The next quarter will probably be much like the one just ended with stocks making slow progress. Some of the current worries should abate by then, clearing the way for a stronger finish to the year.

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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