From data to wisdom
One of the consequences of our modern world is living with increasing complexity. The currency fluctuations of the Euro hardly concerned us a few years ago, in fact, the Euro didn’t even exist but now it gets blamed for declines in our stock accounts. It’s been said that there are more bits of information in a single newspaper today than would have impacted the lifetime of a rural peasant in the Middle Ages, stopping work in the field when the church bell rang.
This proliferation of media inputs is accelerating our overloads as providers of data compete for our attention and our wallets. Certainly, the wisdom for successful investing will not be found in reacting to news events like currency fluctuations.
Eliot, who was not always gloomy, having received a posthumous Tony award for the book for the musical “Cats,” later wrote, “Only by acceptance of the past will you alter its meaning. Every moment is a fresh beginning.”
The financial crisis is in the past although its effects linger and the hunt for scapegoats will continue until people lose interest. Investors have a continuing opportunity, an obligation if they are professionals, to take a fresh look at their stocks and the alternatives. There are always uncertainties but the first step is to check the terrain, currently marked by amazingly low interest rates and continuing investor skepticism, both favorable factors for investing in stocks.
One dominant uncertainty is the extent and duration of the recovery in our economy. Beginning with recovery from the Great Depression of the 1930’s, the government has become a steadily larger part of the US economy. Many blame this larger role as the root cause of all problems. Whether this is true or not, and I believe picking it as a scapegoat oversimplifies matters, political opposition to job creation and other economic stimulus is slowing the pace of recovery.
One increasingly respected new indicator is the USA Today/HIS Global Insight Economic Outlook Indicator, which can be found at www.usatoday.com/money/economy/economic-outlook.htm. Its recent monthly update shows strong growth rates in April and May, followed by slower but still solid forecast growth in June through October. Both consumer and business spending are fueling a surge but tight credit, debt levels and persisting unemployment are keeping the economy below highway speeds.
This innovative index is a product of IHS (IHS-$51), a unique economic analysis firm conducting a global consulting business from Boulder, Colorado. Sales are approaching $1 billion, growing at 12% in a challenging economy. Earnings are keeping pace and IHS forecasts $2.87 earnings per share this year, a reasonable P/E of 18.
As this indicates, success comes from the transformation of data collection and management into applied knowledge and its wise applications to markets. Apple (AAPL-$264) is a prime example of such success, BP and Transocean of failure. As stocks, the latter two have probably been battered down to long-range value territory but the question today is how low their prices will go while for Apple, it is how high.
Our complex society rewards technological wisdom. That will not be found in gold, whose long-term record only matches the inflation rate and inflation is not a current worry. Dividend-paying, savvy companies are trading at attractive valuations. Some of the bigger candidates are IBM (IBM-$126), Coca-Cola (KO-$52), 3M (MMM-$79), United Technologies (UTX-$67), GE (GE-$16), DuPont (DD-$36) and Merck (MRK-$34).
The uncontrolled oil spill in the Gulf is brewing a sea of troubles. One consequence will be increased costs for new exploration, an advantage for energy giants like Exxon (XOM-$60). It should close its buy of XTO (XTO-$42), a favorite of mine, later this month.