Crowell Roberts Investment Blog

Stocks ended January with the S&P 500 up over 4% since December 31. Not only is this a substantial improvement from the full year of 2011, when it went nowhere, it is also its best January performance since 1997. This could be a favorable omen.

Since 1928, the S&P 500 in January has made a 4% gain 24 times. In 19 of these years, it was up for the full year, with an average gain of 14%. After the most recent 5 times it gained 4% in January, it finished up for the full year with an average gain of 23%.

This history is encouraging; more recent history points to an increasing acceptance of risk by investors. During January, the Dow Jones Industrial Average (DJIA) gained 3%, a point less than the S&P while the NASDAQ average of non-listed stocks was up 8%. This is a reversal of the lineup during 2011. For the full twelve months of 2011, the Dow managed a 5% gain, the S&P was completely flat and the NASDAQ lost 2%.

The DJIA comprises 30 stocks of large companies. The “Industrial” designation is largely historical as its 30 components have little to do with traditional heavy industry. This index is associated with “Blue Chip” stocks and its movements tend to reflect investor demand for more stable companies. The S&P 500 is broader based while the NASDAQ includes smaller issues and is often associated with newer technology stocks.

When the NASDAQ leads the indices and the DJIA is lagging, it is a clear sign that investors are willing to buy less seasoned companies. The unusually strong performance in January is another positive indicator. The panicked fears that spawned frantic selling over the last three years are finally giving way to investors trying to make money rather than just trying to escape losing it.

U.S. markets will continue to suffer aftershocks from financial stresses in Europe. Its Southern tier of countries is painfully making fiscal adjustments. The various bodies that manage Euro Zone policies are belatedly focusing on coordinated rescues. These processes will take time, probably all year, but can be resolved through mutual commitments.

This country will be plagued all year with a Congress that seems determined to claw at short-term partisan political advantages, threatening our economic recovery. Despite these obstacles, the U.S. economy is slowly increasing its rate of recovery, with increasing growth in manufacturing.

With encouraging overall corporate earnings and the Federal Reserve making a remarkable commitment to hold interest rates down until 2014, I believe it’s time to shake out the reefs in our sails. I am adding smaller company stocks while our blue chip stocks help us hold our course. Recently, I recommended Fastenal (FAST-$47), Transdigm (TDG-$106) and Solarwinds (SWI-$33).

These are all off to good starts and I am now also recommending an indirect investment in healthcare through HCP (HCP-$41). HCP is a Real Estate Investment Trust focused on properties serving the healthcare industry, which represents over 17% of the U.S. gross domestic product. HCP manages $19 billion of assets with over 1,000 properties including senior housing, medical offices and hospitals.

HCP recently increased its dividend for the nineteenth straight year. The new rate of $2.00 annually represents a yield over 4%, probably improving over the years. Earnings for 2011 will be announced on February 14 and should be around $2.55, up from $2.23. The market is still skittish and any minor miss might provoke a price dip that I would use to augment initial positions.

Facebook’s filing for a public offering created much excitement. The much-hyped profits will go to existing shareholders cashing in their winnings as well as their investment bankers and a few of their bigger customers. Ordinary investors will not be able to buy shares for months, probably not then at prices low enough for any immediate profits. The company already has 845 million users and its future growth will be slower. I doubt that Facebook will ever be another Apple. If you want an Apple, buy it. (AAPL-$455).

Apple (AAPL-$445) crushed Wall Street analysts’ earnings estimates. It did this the old fashioned way, not through juggling its accounting as many banks do, but through developing and marketing superior products. One hopes that this would subdue those chattering financial commentators who spent much of the quarter whining about competition to Apple’s iPad from competing tablets and of supposed deficiencies in its current iPhone. Apple responded by selling over 37 million iPhones and 15 million iPads during this critical holiday quarter.

I have frequently recommended Apple and it is the largest position in the portfolios I manage. Amazingly, despite the 30-point jump following its report, its stock is selling at only 10 times estimated 2012 earnings, less than the overall ratio of the stocks in the S&P 500. With new models coming this year of both the iPhone and the iPad, its momentum seems almost assured for the next year or so.

As to the long term, I am reminded of one of the many wise sayings of Warren Buffett that his favorite holding period for a stock is “forever.” Those who have tried to trade out and into Apple probably wish they had borne this in mind.

Apple certainly seems to qualify as a “forever” stock but I am reminded of other stocks that seemed to fit this category like IBM in the 1980’s and Microsoft in 2000. IBM lost two thirds of its value when personal computers invaded its traditional space. It regrouped, gained ten fold in fifteen years and its now a stable, growing member of my portfolios.

Microsoft gained remarkably in the 1980’s and 1990’s, hit a high of $58 in 1999, and is now half that. I have never recommended its stock, as it seems to have become a clumsy giant, illustrating the dangers of complacency. The Navigation Department at Annapolis taught us “Eternal vigilance is the price of good navigation.”

I am sure that Mr. Buffett would agree and his investment success relies upon vigilant monitoring of his positions. These are sometimes sold but successful positions are augmented. This is also my strategy as well as my recommendation for Apple stock. Wall Street is now posting “price targets” for Apple of as much as $650. Such belated forecasts make more for marketing attention than for sensible investing. Pending Apple’s next quarterly reports, general market movements will probably largely govern its price action.

These will continue to be volatile although not necessarily unfavorable. Europe’s monetary and economic issues will continue to have an impact with probably neither resolution or collapse taking place during 2012. These “crises’ will be echoed here, as the federal debt ceiling arguments are due to resume soon.

The margin of safety continues to be the valuations of stocks. Since the financial crisis, most companies have regrouped, resulting in continuing overall increasing earnings. With well-publicized worries spooking investors, the result has been the lowest valuations on U.S. stocks since 1990. The economic recovery has been tepid but nevertheless both stable and positive. Manufacturing has been particularly strong, accounting for the welcome improvement in employment.

Improving conditions encouraged recent recommendations of smaller companies like Fastenal (FAST-$47) and Transdigm (TDG-$102). I am adding Solarwinds (SWI-$31), which has nothing to do with solar power but much to do with information technology (IT) management.

This company, founded in 1999 in Austin, Texas, has grown to almost $200 million sales, which are increasing at a quarterly rate of 31%. It successfully employs a Web-based sales method. Profits are keeping pace and it will report early in February around a dollar a share. That would be over a 25% increase since last year, justifying its price: earnings ratio.

It will probably never become another Apple, whose business success is unique, owing much to the late Steve Jobs. His heritage is also unique, having been fired from the company he founded, then returning to build it into the world’s most valuable company. Not a bad record.

The Chinese New Year approaches, bringing in the Year of the Dragon, said to be a deliverer of good fortune. Stocks are anticipating this, up over four percent in the first three weeks of 2012. That’s over four percent better than they did last year, going nowhere after substantial swings both up and down.

It may be that investors have become accustomed to threats from dragons breathing flames of debt default, European currency collapse and political campaigns, predicting the end of the world. These issues each have their roots in excessive debt levels, solvable problems, given time and rationality.

Investor behavior is often irrational, as seen in exaggerated panic trading in overreaction to these threats. Economic recovery rather than austerity is the solution and there are growing signs that this is underway, particularly in the U.S., despite opposition political efforts to strangle it.

All the sound and fury of 2011 knocked stocks down to quite reasonable valuations. Overall corporate earnings continued to increase while stock prices went nowhere. Investors remain sensitive and the current wave of quarterly earnings reports will impact individual stock movements.

The S&P 500 trades for 13 times earnings, down from 15 a year ago and 19% less than its average since 1960. With interest rates still near record lows, this provides a reassuring margin of safety for investors in stocks. Dividend yields that are considerable higher than fixed rate investments are another plus factor, especially from companies that have developed the habit of regularly increasing them.

Big cap pharmaceutical companies fit this profile nicely. Once growth fund favorites with price: earnings ratios above 30, they fell from favor with increasing costs and uncertainties of new drug developments. Bristol Myers (BMY-$33 weighs in at 16 times earnings with modest growth in sales and earnings in the low single digits. It yields 4% with dividend increases in the past two years.

Novartis (NVS-$58) is trading at only 10 times earnings, possibly due to its European locus. It is based in Switzerland, hardly the home of a weak currency. Growth is above 10%. It also pays 4% and has increased its annual dividend for the last five years. Merck (MRK-$39) also yields 4%. Earnings for 2011 will come in around $3.75, another reasonable P/E of only 10.

All three of these produced returns, including dividends, well ahead of the general market last year. Should investor confidence continue to build, more cyclical stocks like industrials may be favored and these steady drug stocks may lag. They should be held and additional buys will be particularly favorable when made on the usual emotional overreactions to transient headline news.

Last week, I discussed Transdigm (TDG-$98) as an excellent example of a growing industrial company. It makes engine sensors, overhead bin latches and lighting systems for the world’s airliners. About 75% of its sales come from components for which it is the sole supplier. Sales were up 54% in the latest quarter. Its P/E is 18 but growth is faster.

Fastenal (FAST-$45) is a new buy recommendation. This Minnesota-based company makes, distributes and sells every conceivable type of bolt, nut, screw and related construction material. It has 2,500 retail locations in the U.S. and a dozen other countries. Sales are $2.8 billion, growing at 21%, with earnings are growing even faster, headed for $1.40-$1.43 per share for 2012.

That’s a P/E of 32, but its growth justifies that valuation. Yield is 2% with increases for two years. Unlike the overpaid officers of the financial institutions that have caused so much trouble, Fastenal’s CEO started with a part-time warehouse job and worked his way up.

Solid values lead to solid results that do wonders to slay dragons that hamper investor returns. Two other portfolio companies, IBM (IBM-$180) and Intel (INTC-$25), just reported their quarterly results as I write. They beat estimates and their stocks are up, as I believe our portfolios will be in this New Year.

Stocks continue a stealth rally, quietly moving to their best levels in five months. The market has recently been untroubled by bad news from Europe, even receiving some sparks of good news like another small downtick in the unemployment rate. Quarterly earnings season kicked off with a few decent reports while trading volume increased, an encouraging sign of buying by the big institutions.

Fresh pension funding usually adds liquidity in January, and new funds seem to be going into stocks rather than bonds, which outperformed stocks in 2011. It was not difficult to outperform stocks during the year, as stock returns were flat. Investors were fearful and favored defensive stocks like McDonalds, which was the best performer among the 30 stocks in the Dow Jones Industrial Average. (Bank of America was the worst.)

Investors tend to favor whatever worked in the recent past. There is some logic to this as stocks often continue their momentum but investors should attempt to distinguish between stocks that have performed above average because of fads or emotions and those that will benefit from changing business conditions.

Stocks like McDonalds and Proctor & Gamble often outperform in anxiety-ridden markets like 2011 but are then outshone by more cyclical or faster growing companies as investors regain confidence. There is nothing wrong with holding blue chip stalwarts like these even though their growth is slower and their valuations higher than more volatile stocks. With the Euro Zone possibly sliding into recession and the U.S. showing early signs of an economic pickup, investors should consider selective additions of domestic stocks in faster growing companies, accepting their accompanying greater volatility.

TransDigm (TDG-$98) is a Cleveland-based manufacturer of highly engineered components for airliners and military aircraft. Sales are $1.2 billion, growing recently at over 40%. Earnings growth is strong, although variable, with recent and forecast quarterly increases of 20%-30%. Earnings per share for its current fiscal year are forecast at $5.30, up 24%, with a resulting forward price: earnings ratio of 18.

The company has grown through acquisitions, resulting in substantial debt, a concern but also an advantage in today’s low interest rate climate, provided it can continue its growth. TransDigm is well positioned, as its market comprises almost all aircraft in service, of which 95% of its sales are of proprietary products for which it owns the design. Additionally, it is the sole source supplier for 80% of its sales.

Stocks in cyclical companies like manufacturers should be balanced with the income funds that I have been recommending for years. Some like Alliance Bernstein Global (AWF-$14) and Credit Suisse (CIK-$4) have gained other fans, whose buying has pushed their market values above their net asset values. Their dividends remain quite attractive and they should be held while new purchases should be directed to those still selling at discounts.

Franklin Trust (FT-$7), an old favorite, still trades at a 7% discount and pays 7% despite an 11% price gain in 2011. This idiosyncratic bond fund combines mild leverage with 30% holdings in utility stocks. Wells Fargo Multi-Sector (ERC-$15) offers an 8% discount and an 8% yield. Nuveen Multi-Currency Short-Term, a best buy, is selling at a 12% discount and yields 10%.

Beyond bond funds, CBRE Global Real Estate Income (IGR-$7) has a 13% discount and pays 7.5%. Eaton Vance Enhanced Income (EOI-$10) has a whopping 14% discount and yields over 10%. It holds big cap stocks and sells call options against them, an income strategy that works, but should be left to pros and not tried at home.

Those who hoped that 2012 would bring an end to uncertainty and volatility in the stock market will be disappointed. Those who accept these factors and take advantage of them will be rewarded.

Stocks came out swinging at the opening bell of 2012. For a brief period, the market was not burdened with bad news from the bankers of Europe or the political candidates of America. As the holiday glow fades, we can expect the battering to resume as the bankers and politicians return to their daily grinding.

Anxieties overrode facts during 2011, pushing stock valuations into the bargain basement. Fourth quarter earnings reports will begin arriving in a couple of weeks and they will set the tone for the next month or so. Corporate earnings began a strong recovery after the financial crisis, reaching record overall levels last year.

Stock analysts recently became nervous with this persisting streak of improving results and took their forecasts down a few notches. Some shortfalls are thus already anticipated by market action and I expect that the actual results will encourage a firmer tone to stock prices.

News from Europe will continue to be discouraging as its financial leaders seem to have adopted policies of somehow muddling through from crisis to crisis. Their problems are becoming old news in American markets and forthcoming maneuvers from the various banks and agencies of the European Union will probably produce fewer shocks to our stock markets.

Fiscal strains within the EU may cause it to slide into recession. As a unit, it is the largest economy in the world and we share some of its problems. The U.S. is not sliding back into recession despite gloomy predictions and obstructionist political tactics. Leading economic indicators show our economy continuing weak growth, possibly boosted by recovering consumer spending and multifamily housing.

Japan’s economy will resume slow growth as it rebuilds while China and the rest of Asia continue to lead the global recovery. U.S. stock markets will remain volatile as political maneuvers grab the headlines. Investors may find some comfort in the history of stocks during Presidential election years. The average return in these years since 1926 has been 11%.

Growing economies demand energy and seemingly inevitable problems with energy supplies also boost prices. Valuations are low, dividends are rising for this essential sector and I recommend taking advantage of current values like Royal Dutch Shell RDS.A-$73. This aristocrat, founded in 1890, is the second-largest energy company, lagging Exxon by a small margin. It is growing faster, with sales at $455 billion of which 48% come from cleaner natural gas.

Earnings are keeping pace and will be around $8.40 a share for 2011, a remarkably low price: earnings ratio of 8.7. (Exxon’s ratio is 10.) Earnings growth is slowing but should still exceed $9.00 a share for 2012. Its dividend yield is an attractive 4.5%. The company operates in 90 countries and has a long history of success despite world wars and other disruptions.

Stock portfolios anchored with solid companies like Shell can afford a bit of spice from smaller companies. A sound record with good prospects is essential as with Spectrum Pharmaceuticals (SPPI-$14). Locally based in Irvine, this young biotech focuses on two oncological drugs that are already in commercial use. As a result, it differs from most companies in its sector by actually having earnings.

Earnings per share will be about a dollar for 2011, a nice contrast to the loss of a dollar in 2010. Future earnings growth will depend on the company’s success in bringing its drugs in late stage development to commercial-stage. It has $150 million cash and almost no debt so its prospects appear excellent.

So do the prospects of other growing companies, particularly the larger ones that can post higher dividends on the scoreboard. Manufacturing in America has quietly become a bright spot with two straight years of job growth after a dozen years of job losses in manufacturing. This helps balance reduced employment in service industries and government.

China dominates exports of inexpensive goods but the U.S. contends with Germany for leadership in machinery, chemicals and transportation equipment. Our export manufacturing industry remains vulnerable to weakness in Europe and to short sighted politicians who grub for votes by pimping for protectionist trade policies that threaten trade wars. Nevertheless, earnings within this sector should exceed forecasts.

Exporters in our portfolios include DuPont (DD-$47), General Electric (GE-$18), Intel (INTC-$25), 3M (MMM-$83), Robbins & Myers (RBN-$50) and Sigma-Aldrich (SIAL-$63). I expect a better year for all of these and, for that matter, for the stock market.

Stock columns at this time traditionally try to forecast the year ahead. Currently, the only certainty is that there will be continued uncertainty and accompanying volatility. That is more of a useful forecast than it might sound. Investors will do better if they accept that stocks will be buffeted by winds from every direction, use market dips to add to positions in quality stocks and avoid giving in to the Sirens who entice emotional selling, often near market bottoms.

With only a day of trading left, the S&P 500 is headed for an anticlimactic close about where it began 2011. The “Santa Claus” rally made a weak appearance, leaving that indicator of next year’s opening momentum confused, at best. While stock prices were going nowhere in 2011, corporate earnings continued to do nicely, rising to record overall figures. The result is that stocks are trading at an average of only 13 times earnings, near historical bottoms.

The economy began 2011 with greater optimism than we have now even though economic growth has continued and a further 2-3% rate is seen for the next few months. Unemployment finally notched down to 8.6%, not good, but still the best figure in three years. Much of the gloom came from outside events: the impact of the Arab Spring on oil supplies, interruptions to supply chains from disasters in Japan, partisan political stalemates and the debt crises in Europe.

Political quarreling was recently recessed, not addressed, and we can expect more wrangling on raising the debt ceiling, tax rates, extension of eased payroll taxes and budget cuts. Embarrassing and ineffectual blunders by Congress will not help confidence and this sorry performance is likely to continue all year.

Europe has also not solved its fundamental problems but shoved them into the New Year. Our stock markets actually look quite promising compared to Europe’s but complex financial stresses in the Euro Zone will rattle our markets with periodic scares of bank failures.

Bearing in mind the combination of reasonable stock values and continuing growth in corporate earnings, stocks in larger companies with rising earnings and dividends still look good. The background music is provided by the Federal Reserve, which pledged and is quite capable of keeping interest rates low until 2013.

Favored blue chips include IBM (IBM-$185), Chevron (CVX-$105), Bristol-Myers (BMY-$35), Merck (MRK-$37), Exxon (XOM-$85) and new recommendation Royal Dutch Shell (RDS.A-$73). In the still troubled financial sector, U.S. Bancorp (USB-$27) continues to stay the course. Each one of these stocks provides a 2% yield, or more, reassuring in uncertain times.

One of the more certain global trends is increased demand for energy. New sources of supply like the oil shale recoveries in this country are encouraging but supply continues to lag demand. Royal Dutch is a solid performer with a 4.7% yield backed by five straight years of dividend increases. Its price: earnings ratio is a remarkably low seven. With its primary base in the Netherlands, its stock price is subject to nervous selling on Euro currency anxieties but the company has weathered two world wars as it moved to its $455 billion in sales.

Portfolios anchored with large blue chip stocks can always use a little spice like a fast growing biotechnology stock. Spectrum Pharm. (SPPI-$15) recently almost doubled its sales to a respectable $174 million. The Irvine-based company has reached the commercial stage for two oncology drugs and has several more in development. Unusually for a biotech, it even has respectable earnings, with nearly a dollar a share within grasp for 2011.

A disappointing year has been favorable for our bond funds with their attractive income yields. Some, like Alliance Worldwide and Credit Suisse have even climbed in market price above their asset values so those still trading at a discount should be favored. These include Franklin Trust (FT-$6), CBRE Global Real Estate (IGR-$7) and Wells Fargo Multi-sector (ERC-$15). These are yielding 7%-8%, distributed monthly.

The forecast is for cloudy skies and gusty winds, clearing later in the year. Take your umbrella.

Santa Claus seems to be still trying to figure out if the stock market has been naughty or nice. I think most investors would vote for “naughty” after experiencing the market swings of 2011. After all this volatility, it is down three percent for the year so far. It gained nine percent in 2010 and twenty-three percent in 2009, taking it back to the levels that it began the nasty year of 2008.

Investors are currently plagued by the major uncertainties coming from Europe. Stocks fly up and dive down on news and rumors of the latest news from Europe. This is unusually irrational, as the process to build closer fiscal and economic links will take months, maybe years. German Chancellor Angela Merkel, who ought to know, likened the process to a marathon with the runners having just started.

In this country, our economic recovery continues at a fragile two percent pace. Europe may slip back into a recession that will impact our exporting companies while leaving our stock and bond markets relatively strong. World bond markets are pushing reluctant European countries into difficult political compromises. Here, there are few signs of political compromise as partisan politics threatens our economic recovery.

All these issues will get resolved but they will present substantial uncertainties for quite some time. Investors should try to avoid reacting to headline news of the latest developments in all these issues and anticipate a year of uncertainties and, yes, continued volatile markets.

With emotions running full tilt, irrational price behavior occurs. Accenture (ACN-$54), the largest management consulting company reported quarterly sales and earnings that beat forecasts. The stock lost four percent, apparently due to the company’s comment that European sales might weaken, hardly a surprise.

Progress Energy (PGN-$53) announced that its pending merger with Duke Power had encountered regulatory problems and would be delayed for at least three months. Its stock went up briefly, heaven knows why, and I sold our positions at a modest profit before the price began to sag.

These are troubling times but a ship can maintain her course despite choppy seas, provided she properly trims her sails. The saving graces are the remarkably low valuations on stocks in this fear-driven market and the commitment by the Federal Reserve to keep interest rates low until 2013.

An improvement in the unemployment statistics went almost unnoticed amid the cries of doom. These cries make business reluctant to invest and cyclical stocks like DuPont (DD-$44) will experience interim price pressures. Retail sales figures for this holiday season will provide guidance on trends in consumer spending. Despite all these uncertainties, Apple (AAPL-$380) looks headed for a record quarter.

Portfolios should be trimmed to emphasize large, quality stocks like IBM (IBM-$187), Chevron (CVX-$99), Bristol-Myers (BMY-$34), Merck (MRK-$36) and Exxon (XOM-$80). In the still troubled financial sector, U.S. Bancorp (USB-$26) continues to stay the course. Each one of these stocks provides a 2% yield, or more, a comfort as we keep our course.

A word of warning to those who may be solicited for higher yielding investments. The SEC has reported a record number of securities frauds, evidently spawned by the volatility of conventional securities. These are typically targeted to older investors (because they often have more money), usually featuring promissory notes, stock not registered with the SEC, gold or other precious metals and oil wells.

I’m skipping my column next week. When I resume, we will know whether we got the year-end “Santa Claus” rally. I hope Santa will be good to all my readers.

Unemployment finally moved down a notch from 9% to 8.6%, mixed progress is taking place with Europe’s financial problems and stocks continue to bounce up and down. They always have but this year seems to have been particularly hard on investor nerves, probably because much of the fluctuating took place within a cloud of bitter political wrangling.

After all this sound and fury, the Standard & Poor’s 500 stock index is down around one percent. Fortunately, some of the more consistently reliable guideposts to the stock market indicate a higher market as we move toward another New Year.

The “Presidential Election Cycle” has been a reliable market indicator for over seventy years. This augers a higher market in the year before a presidential election and last failed in 1939, when the market lost one tenth of one percent, a sturdy performance considering the other events of that year. Unlike many market superstitions, there may be some basis to this as one suspects that every incumbent President is using all possible tools to boost his party’s chances for the following November.

Going into this year, the annual gain for this third year was a robust 20 percent. The next best year was the election year, itself, with a return of 8 percent. Investors can also hope for the “Santa Claus” rally, usually defined as the last five trading days of every year plus the first two of the next. It has produced a return of almost 2% for fifty years, but is probably more useful as an indicator of the investment outlook for the coming year. Santa skipped Wall Street in both 1999-2000 and 2007-2008, foretelling two nasty market years.

The Euro Zone still threatens like the Ghost of Christmas Future. The European Union is complex and large; in fact, the EU is the world’s largest economy. Its stresses are apparent and their solution uncertain but the mutual benefits of union provide a compelling case that resolution, even if temporary, lies ahead. The dollar outpaced the Euro recently although a potential U.S. default drove it down 15% earlier this year. Dollar and Euro exchange rates are now about where they started, somewhat like stocks despite similar volatile market swings.

The storm clouds over Europe have caused many investors to shy away from stocks with any associations to the Old World. ING Global Real Estate Income (IGR-$7), whose holdings are primarily in the U.S., Canada and Australia, has slipped to a 15% discount from net asset value and yields 8%.

Wells Fargo Multi-Sector (ERC-$15) also yields 8%, paid monthly. The average duration of its holdings is 7 years, good protection against the inevitable bursting of the long-term bond bubble. The buying frenzy for the apparent security of government bonds seems to have blinded many holders to the inevitable damage to longer-term bond prices whenever interest rates go up.

That will probably not be for at least a year as the Federal Reserve continues its efforts to keep a weak recovery pointed the right way. Businesses are understandably reluctant to expand amid prevailing layers of uncertainty. Much effort is spent on finding scapegoats but the main cause continues to be dealing with the huge debts, here and abroad, run up during the fat years by consumers, homeowners, banks and governments. These were all done with the consent of the governed, thus reminding me of the line from the old comic strip “Pogo,” “We have met the enemy and he is us.”

All these uncertainties continue to breed remarkable valuations among stocks in growing companies. The uncertainties will persist for, well, for an uncertain period, and investors may have to exercise even more patience than usual, particularly for stocks that have a European accent.

Chicago Bridge & Iron (CBI-$39), a hybrid with dual headquarters in the Netherlands and Texas, is an undervalued new buy. Its construction business features Liquid Natural Gas facilities and other large petrochemical complexes, storage tanks and technologically advanced energy plants. Recent new awards in Australia, the Middle East and Japan totaled $3.8 billion, a quarterly record and backlog rose to $9 billion, also a company record. Debt is modest and there is a 0.5% dividend. Earnings will be around $2.50 a share for 2011, up 22%, with a similar increase forecast for next year.  The company has been in business for 122 years and another year or two will be rewarding for its investors.

A couple of puffs of good news were enough to prompt a gale of buying that sent stocks up 800 points on the Dow in three days. Gales tend to blow out but the market’s ability to make a lot out of a little shows how depressed stock prices had become despite rising earnings. The impact of the good news may taper off soon but a change in momentum is in the air.

Just hours after S&P downgraded 16 of the world’s largest banks, the central banks in the U.S., Europe, Canada, the U.K, Japan and Switzerland together agreed to support the stressed banks of Europe. Concurrently, China reduced the reserve requirement for its banks for the first time in three years, signaling a policy shift intended to boost its economy.

These global efforts echo the united steps taken after the financial crisis of 2008 that prevented a worldwide slump from descending into a Depression. Debt levels remain disturbingly high but, given time and sensible political actions, they can be addressed through economic recovery as well as by improved financial discipline.

Europe will probably need a year to stabilize the strains resulting from trying to unite disparate economies and the Euro may not survive as a common currency, at least in its present form. The Euro Zone could suffer a return to recession; however, it is unlikely that the U.S. will join it.

The U.S. and China will continue their growth, more slowly here, but still enough to make U.S. stock markets a magnet for stock investors, especially nervous holders of European stocks. The environment for stocks is favorable although the market’s volatility is likely to engender further volatility as speculative and fearful investors react to the ups and downs of global financial events.

Buying or selling in reaction to news events seldom works; thoughtful anticipation of developing trends does. Investors have some margin of safety through the relatively low stock valuations that still persist. With the central banks easing monetary policies, interest rates in stronger economies will remain low, boosting corporate earnings and aiding business expansion.

With an election now less than a year away, partisan politics will become shriller and investors will be challenged to distinguish mere theater from substance. Congress will create more problems with shortsighted obstructionism. As Betty Davis said in “All About Eve,” “Fasten your seat belts, it’s going to be a bumpy ride.”

Taking her cue, investors should not try to outguess market swings but should anchor their portfolios in well-capitalized companies who have and can continue to grow their earnings and our dividends in this challenging economy. I am adding a new buy, Proctor & Gamble (PG-$64), with sales up 5% and earnings 8% over the last year in a difficult consumer sector.

Earnings for its fiscal year ending in April 2012 are forecast at $4.25, up the same steady 8%. It is thus selling at 15 times forecast earnings, a quite reasonable ratio for a global leader with $85 billion sales. It’s been through good times and bad and increased its dividend for 57 straight years, currently paying 3.3%.

Its dividends make Proctor & Gamble a nice fit for retirement accounts. Prior recommendation Unilever (UN-$34) yields the same. These stocks are my only current recommendations in the consumer sector. American consumers are a remarkably adaptable species but the overhang from the housing price collapse still leaves sales to them more vulnerable. These two sell consumable products all over the world and are doing well.

So are companies that sell directly to businesses like IBM (IBM-$188) and Intel (INTC-$25). Apple (AAPL-$385) is doing extremely well and will probably post a record quarter early next year. Its stock price often dips between quarterly earning reports as stock analysts have little to do except fret over Apple’s competition.  Apple doesn’t fret, it executes, and I expect its price back above $400 by yearend and breaking $500 in 2012.

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.