This threat of a country defaulting on its debt caused a daylong dive in the stock market before investors assessed this event as a calamity rather than a disaster. The market’s uptrend had looked a little shaky recently but its ability to shake off bad news should make nervous investors reflect on what it might do whenever it gets some good news. A continuing unemployment rate above ten percent clouds the outlook but holiday sales were a little bit stronger than their earlier Scrooge-like projections, a sign that the consumer might be cautiously returning.

Dubai’s problems have an origin in overly ambitious real estate projects such as the Palazzo Versace, which includes such amenities as cold water pipes buried in the sand so that beachgoers may comfortably walk to the water. It is unique among the Emirates in having almost exhausted its oil reserves but its oil rich neighbor, Abu Dhabi, can bail it out and probably will. It somehow seems appropriate that stumbling Dubai has a sister city relationship with Detroit and thriving Abu Dhabi with Houston.

Financial events like the Dubai debt collapse are like earthquakes to Californians. The damage gets contained but real estate values suffer until memories fade of the aftershocks.  The stock market seemed to absorb this one but it remains poised between negative headline news and the less visible forces of economic recovery.

Viewed from a perspective of their price: earnings ratios, the strong advance since last spring is attributable to an investor willingness to tolerate a higher valuation of earnings and to favorable increases in corporate earnings. At this juncture, investors are still burdened with memories of the near-collapse of the global financial system and are still holding trillions in their perceived safety of low yielding money market deposits. The p: e ratio of the S&P 500 is close to its historical average, thus we are unlikely to see significant price increases flowering soon on a higher p: valuations.

Stock price improvement will have to come on the shoulders of improved earnings. That is happening but the pace is slow. Much of the improvement in earnings so far has come from businesses going leaner during the recession with layoffs and deferred capital investments. Overall sales are thus generally flat and stocks will, in all probability, continue their advance in measured steps until increasing sales volumes and decreased unemployment figures signal a return to robust growth.

The pharmaceutical and medical supply sector is priced as if it were expected never to show any growth at all. Seven of my favorites, all solid companies, are trading at a p: e ratio of 15 or less, which is less than the average of the 500 stocks in the S&P 500. These four drug stocks all yield 4% or more: Lilly (LLY-$37), Merck (MRK-$36), Pfizer (PFE-$18) and Bristol-Myers (BMY-$25). The faster growing suppliers are Life Technologies (LIFE-$50), Novo-Nordisk (NV)-$67) and Gilead Sciences (GILD-$46).

I suspect these low valuations may be attributable to investor uncertainties arising from the eleven-month (so far) gestation period of the pending health care bill. These uncertainties will be resolved in the next few weeks, at least for the time being, and we should see a bounce in this group as they report earnings. Stocks usually improve between Thanksgiving and April. Careful buying now should be rewarding.

We’ve been here before, in the Never Never Land where rumor is king and selling is queen. Like a forest fire, the rumor will be contained. There will be some actual damage, probably mostly to lenders in the UK, who seem to have about 72% of the debt impacted. In all probability, things will get worked out although the extent to which the debt may have to be restructured is unknown.

How will this affect our stocks? Probably not at all, although there may be a few days of nervous selling. I’ll be checking overseas markets that open before New York this Monday with the intention of doing some buying soon after the first signs of firmness.

Probable targets will be some of my favorite dividend-paying blue chips like United Technologies, Lilly, Teva, Life Technologies, Intel, FedEx and 3M.

Shoot me an email if you have questions, meanwhile, enjoy the weekend.

Tony Crowell