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The Nature Of Markets

Tony Crowell

Earnings reports are supporting further stock market gains. The market flinched for a day on a headline that Standard & Poor’s was concerned at the levels of government debt. Well, we all should be and the market bounced back the next day after investors remembered that this was hardly surprising news. Economic recovery with accompanying higher tax revenues is the best cure for deficits and Federal Reserve monetary policies are taking hold.

These policies are still keeping interest rates near record low levels although higher rates lie ahead, perhaps later this year or in 2012. That will torpedo the bond market and the stock market remains the best game in town.

Games demand fair rules and openness or “transparency” is lacking in much of the fashionable developing markets. It is hardly surprising news that emerging markets have higher growth rates nor that China will pass the U.S. to become the world’s largest economic power within the next decade or so. This assumes that its repressive government will be able to keep the lid on civil dissent.

China is the largest of the emerging “BRICS” group, recently augmented with South Africa, the smallest. Brazil seems most promising for investors even though its government can throw its weight around. I sold our positions in steel producer Vale after the government induced a change in its respected CEO, apparently to encourage investment in more labor-intensive sectors. I am initiating buys in Vivo (VIV-$42), a leading Sao Paulo-based wireless company unburdened with landline requirements.

The greater growth rates in emerging markets have not gone unnoticed by investors. With other issues such as transparency a concern, my favorite stock among this bloc is Cognizant Technologies (CTSH-$82), a business software and services provider with almost $5 billion sales growing at over a 30% rate. Operations are primarily in India but it is based in New Jersey, where it began as a Dun and Bradstreet subsidiary.

Many large cap stocks in North American and Europe combine attractive growth with appealing valuations and strong balance sheets. In the recovering health care sector, Basel-based Novartis (NVS-$58) is a new buy. Founded in 1895, it offers a solid Swiss balance sheet with sales approaching $60 billion, up 16% in the recent quarter. Earnings for 2011 will be around $5.32, up modestly. A 4% yield is also attractive.

Yields on cash investments remain unattractive at rates that call for micrometers to measure. Grasping for higher yields by accepting longer maturities is foolish in view of prospective loss of principal whenever interest rates bump up. Carefully selected dividend-paying companies like Novartis are timely. Others include past recommendations Autoliv (ALV-$78), Bunge (BG-$73), Brookfield (BIP-$23), Bristol-Myers (BMY-$28), DuPont (DD-$55), Franklin Electric (FELE-$44), GE (GE-$20), IBM (IBM-$168), Int’l Flavors (IFF-$63), 3M MMM-$94), Novo-Nordisk (NVO-$132), Sigma-Aldrich (SIAL-$67), Syngenta (SYT-$71) and Exxon (XOM-$86) for starters.

With many more players and so much information available, markets are likely to remain volatile indefinitely. Price fluctuations scare away many investors, probably from personal issues with control. Psychotherapy is widely available and better investment returns will help. Gladstone Capital (GAIN-$8), another new business development company buy, pays 7% from newly increased monthly dividends.

Markets fluctuate; it is their nature. Attractive opportunities are available in a fair game with favorable odds for investors who stick with quality and keep their perspective.

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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