After The Great Mistake
Two weeks after the vote in Britain to leave the European Union, global financial markets remain confused. In the U.K., tensions persist, particularly as the U.K. seems now to consist only of the United Kingdom of England and Wales with Scotland and Northern Ireland considering reorientations.
Some effects are local like the impact on London’s property prices, which has already caused six U.K.-based real estate investment funds to suspend redemptions. The pound dropped from $1.50 just before the vote to levels below $1.30, bringing continuing ripples to some commodity prices.
Other effects are less direct like the probable impact on policies of our Federal Reserve. The Fed announced yesterday that it did not raise rates in June because a weak May employment report and other disappointing data indicate that economic growth is still sluggish.
With the British “Exit” vote now factored in, financial markets assume that the Fed will not again raise rates until 2017. The yield on the benchmark Treasury 10-year bond is now below 1.4%, the lowest level in its history. With the prospect of rate increases off the table for now, I am parking some reserve funds in closed-end bond funds.
Currently, I am using Wells Fargo Multi-Sector ERC-$12.60) and Eaton Vance Limited Duration (EVV-$13.35). Both are trading at 10% discounts from their asset values while yielding around 9% paid in monthly distributions. The ERC portfolio has an average duration of 5 years and EVV’s portfolio 3.2 years.
Troubled times always bring fresh capital into bond markets, particularly the safe haven of U.S Treasuries. Despite unsettling news from several quarters, stock markets have held their ground, with U.S. blue chips in front. Troubles abroad struck only a glancing blow here, as U.S. exports to the U.K. are less than 0.7% of U.S. GDP. Mohamed El-Erian, the respected economic commentator at Allianz, said that global uncertainties brought on by “Brexit” provide another headwind but are “not strong enough to derail the U.S. economy, whose domestic drivers of growth remain solid, albeit not spectacular.”
This is not a time to fish for speculative bargains, in fact, I doubt if there is ever such a time, and I continue to recommend well-financed companies with proven growth and sound prospects for further success. Weaknesses abroad raise concerns with overseas sales and I sold our positions in both Boeing and Nike. Defense companies are climbing and I added to positions in both Huntington Ingalls (HII-$170) and Northrop Grumman (NOC-$220).
Danaher (DHR-$80) completed its spinoff of Fortive (FTV) with shareholders receiving one share of FTV for each DHR share held. Spinoffs in the industrial sector are often beneficial to shareholders and Fortive’s technology lines include transportation, automation and instrumentation, which currently provide over $6 billion in revenues. Danaher focus is on health care, environmental and other industrial technologies with 2016 revenues estimated up 7% at $22 billion.
General Electric (GE-$31) has made substantial progress in shedding its financial sectors, returning to its traditional industrial strengths. Earnings for 2016 will be around $1.50 per share, up from $1.31, excellent growth from a company with over $120 billion sales. Dividend yield is 2.90 %, with increases for the past five years.
Honeywell (HON-$115) reports earnings in two weeks, which should draw favorable attention. Yield is 2.00% with increases for five years.
The medical and biomedical sectors develop new drugs that can transcend political uncertainties. Celgene (CELG-$104) and Gilead (GILD-$85) are showing strong growth while still selling at moderate valuations. AbbVie reports earnings around July 29 and is also a strong buy. I get many inquiries about Apple (AAPL-$95), which will probably not be able to resume investor popularity until new product announcements this fall.
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 1995. [email protected]/949.494.1376/800.697.2622/www.crowellroberts.com