Crowell Roberts Investment Blog

September should offer some relief from the market’s guns of August, the worst August in 10 years. The S&P 500 index lost 6% and unusual volatility seemed to scare investors even more. In one four-day stretch, the Dow Jones Industrial Average swung over four hundred points on each day, a first for the 115 year-old index. The new month brought no instant relief as it sold off another 253 points, leaving it slightly down for 2011.

This month has been historically weak for stocks as they await quarterly earnings and the prospects for the closing and forthcoming years. With fearful investors quick to sell at a hint of trouble, stocks will have to fight their way back. That would be easier if Washington could provide economic stimulus. Unfortunately, that proven policy remedy for recession seems lost in panicked partisan screaming about the “deficit.”

If fiscal deficits were a present economic threat, then buyers of U.S. Government bonds would be demanding higher rates. In reality, demand for Treasuries is so strong that the current yield on 10-year notes is an amazingly low 2%.

The deficit will diminish with tax revenues that will grow whenever the economic recovery gets some momentum. That pace remains discouragingly slow with the most recent failures in Congressional competence aggravated by cries for more austerity. Such shortsighted fear mongering only raises the probabilities of sliding back into recession.

Chairman Bernanke has guided the Federal Reserve away from the policies that aggravated the 1929-1930 collapse. Further stimulus is needed to avoid repeating the financial relapse that threatened recovery in 1937-38, when the Roosevelt administration became prematurely concerned with the “deficit.” One area that needs attention is the nation’s decaying infrastructure. Another comes with the transition of the men and women of our armed services as our overseas wars wind down.

These are major challenges but this country has survived worse. A sense of unity would help but the 2012 elections make this a distant hope. Investors should realize that partisan predictions of economic collapse are exaggerated. Fearful selling continues to drive stock prices down, creating valuations that discount Armageddon.

For example, Aflac (AFL-$35), a substantial health and accident insurer with over $20 billion sales and steadily rising earnings is down from a high of $59 because of fear of possible defaults in its investments. Based in Columbus, Georgia, the company seems to have once succumbed to Yankee bond salesman as 6% of its total investments in 2008 were in Southern Euro countries. It has cut this in half, eliminating its Greek bonds and reducing its positions in Ireland and Portugal.

There is no Euro currency exposure here as the bonds were issued in yen, correlating with Aflac’s operations in Japan, from where it derives over half its sales. Aflac uses ducks in its advertising here; it might use cranes in Japan. Earnings will be around $6.30 a share for 2011, up from $5.53, and the company forecasts at least $6.55 in 2012. The current dividend yield is 3.4%.

This is an interesting contrast to a treasury bond or almost any bond, for that matter. Aflac has increased its dividend for 28 straight years. Its stock price will fluctuate, certainly, but it would be almost impossible for an investor today to receive more cash in bond interest than from Aflac dividends.

With so much fear and so little confidence around, investors must tread carefully. Bargain hunting should be confined to growing blue chips like Chevron (CVX-$96), DuPont (DD-$47), IBM (IBM-$167) and McDonald’s (MCD-$89), all yielding 2% or more.

Most banks will be unrewarding gambles. With continuing news of mortgage losses, Bank of America may not survive. I would also avoid any of the 16 other financial institutions named in the government lawsuit for mortgage fraud in the recent go-go years.

US Bancorp (USB-$22), which was not named, is a growing Minnesota-based super regional that will survive. It is growing earnings at over 20% quarterly but is valued as if it were one of the guilty parties. Another attractive stock, SVB Fin’l (SVB-$43) owns Silicon Valley Bank and has offices in China, India, Israel and the U.K.

Overall, fear fills the headlines but thoughtful investments will be rewarding. “Our doubts are traitors, and make us lose the good we oft might win, by fearing to attempt.” Measure for Measure, I, iv.

The stock market today reminds me of what it must be like to marry for money. The numbers are tempting but the tension is terrible. Fear stems from the current four horsemen of the Apocalypse: unemployment, housing, European economic strains and U.S. debt levels. All four of these had their roots in the 2007-2008 financial crisis. All would be aided by a political effort unified toward recovery rather than to pimping for votes.

On the sunnier side of the street, interest rates remain at remarkably low levels, inflation is modest and the economic recovery is still inching ahead despite various resistances. Stocks are showing some signs of breaking out of their month-long slump. Their valuations are reasonable enough to support further gains even though we are probably weeks away from any sustained rebirth of confidence.

The period just ahead will probably thus continue to feature unsettling swings in the market. It should be quite rewarding for coolheaded investors who ignore the screaming ninnies on television and pick up higher yielding blue chip stocks while they are on sale.

For those who don’t own Apple (AAPL-$385), this is your time. No dividend there but rising dividends come with McDonald’s (MCD-$90), Chevron (CVX-$98) Bristol-Myers (BMY-$29) and DuPont (DD-$47). IBM (IBM-$172) and Accenture (ACN-$53) offer 2% initial yields and robust sales. Annaly (NLY-$18) is paying over 12% from leveraged mortgage investments, a good investment with today’s low short-term rates.

Today’s investment climate of low rates and high anxieties is excellent for many closed end funds. These differ from more widely known “mutual funds” in that closed end funds employ fixed capital amounts rather than depending on their sales forces to induce additional purchases. Their advantage is that they avoid the timing problems of mutual fund managers brought on by their investors’ practice of adding funds near market tops and withdrawing near market lows.

Their disadvantage is that they trade at market prices that vary from their net asset value, often at a discount. This is fine for buyers, who can get a small slice of a pool of securities at a discount, but who must remember that the discount will probably still be around when the holder considers selling. They are thus unsuitable for in and out trading, as are all sensible investments.

During the financial crisis, discounts widened to over 20% as leveraged “investors” were forced to sell anything they could. Despite recent market swings, a solid bond fund like Western Asset Global Corporate (GDO-$18) is trading at a 6% discount and yielding 8.5% in monthly dividends. Similar bond funds we hold include Alliance Global High Income (AWF-$14), Credit Suisse Income (CIK-$3), Wells Fargo Multi (ERC-$15), Franklin Trust (FT-$6), Franklin Limited Term (FTF-$13) and Nuveen Multi-Currency (JGT-$14).

All these are particularly useful for non-taxable retirement accounts. Nuveen CA (NCO-$13) offers a 7% yield in monthly tax-free distributions for taxable accounts. Nuveen, a respected provider of municipal securities, maintains a useful web site at www.cefconnect.com/ that summarizes closed end funds.

The creative marketing minds of Wall Street invent funds, particularly mutual funds and the newly popular Exchange Traded Funds, to meet every conceivable new whim of investor interest. Closed end funds escape much of the associated hype as they are not subject to remarketing efforts but a useful variety still exists.

One old favorite, Clarion Global Real Estate (IGR-$7) invests in global Real Estate Investment Trusts. As the prices of these REIT’s already reflect their well-known problems and IGR is trading at a 12% discount, this double markdown produces a 7.5% yield with prospects of capital gain.

Finally, two new funds use option strategies in connection with portfolios of blue chip stocks with high current income as the primary objective. ING Emerging Market Dividend (IHD-$15) and EV Enhanced Equity Income (EOI-$10) are beginning operations with 10% discounts and 10% yields. These will vary but their newness combined with current investor skepticism indicates that they are very well priced at this time.

It’s still the same old story, a fight between fear and greed. After the sound and fury of recent market swings, stocks seem to be stabilizing around nine percent below the levels at which they began the year. Disappointing, yes, but hardly the disaster some predicted during the Congressional debt deadlock and the rating downgrade on U.S. Treasury bonds. Investors who decided to jump into cash may be wondering how to get back in the game.

Stocks are still in a major uptrend, up 68% since their 2009 low. Their recent decline put them in a technical “correction,” a signal to tread carefully. The recent market swings coupled with the aggravations of the financial media have left many investors quite rattled. Such periods of high anxiety have proven to be rewarding for bargain hunters.

Three cross checks for buying are interest rates, stock valuation levels and prospective earnings growth. The first, interest rates, could hardly be more favorable with the Federal Reserve having pledged to keep short-term rates almost at zero until 2013. This makes a sweet spot for companies like Annaly Capital (NLY-$18), which borrows short-term to invest in higher yielding long-term securities. Its yield will vary but is currently 14%.

Valuations are also attractive. Falling stock prices and rising dividends have brought the yield on stocks in the S&P 500 above the bond yield on 10-year Treasuries for the first time in almost 40 years. The price to earnings ratio (“P/E”) of the S&P 500, using estimated earnings for 2011, is around 12-13, at the low range of historic ratios.

Earnings growth as related to the strength of the economic recovery is less clearly defined. Our economy is largely consumer based and the American consumer has taken dual hits from the housing collapse and continuing high unemployment. Partisan quarreling in Congress and among Presidential candidates continues to fail to show a unified purpose toward restoring vigorous economic growth.

Consumer confidence is understandably weak but other indicators such as export orders, oil prices and increasing business spending all point to a continuing economic recovery, not a second recession, as some fear mongers seem almost to advocate. Under far worse economic conditions, President Roosevelt accurately said, “the only thing we have to fear is fear itself.”

In stocks, I am confident that this period will soon be remembered as a remarkable buying opportunity for stocks in large, growing companies. McDonald’s (MCD-$86), the quintessential American company, is trading at 15 times 2011 earnings while yielding 2.8% from dividends increased annually for 34 years. Yum Brands (YUM-$49), with KFC, Pizza Hut and other lines, is stronger in China but I prefer McDonald’s more focused management.

For similar reasons, I recommend Coca-Cola (KO-$67) over Pepsi (PEP-$63), which seems to have given up trying to catch Coke, becoming the world’s largest seller of snack foods. Pepsi is probably helping the growth of Novo-Nordisk (NVO-$106), my largest position in healthcare. It is the world leader in diabetes care.

Another consumer products company, Unilever (UN-$33), which I recommended last week, has ignored the recent sell-off, possibly because of its remarkable global market penetration. Its 3.6% dividend will help market jitters. So will the 1.8% dividend from IBM (IBM-$162), at an unusually attractive valuation on prevalent market dips. Sales are headed for another record with its P/E only 11 on 2011 earnings and another year ahead of dividend increases.

These strong fundamental strengths will help build stock portfolios during market storms. As Sam (Dooley Wilson) sang in “Casablanca,” “The fundamental things apply/As time goes by . . .”

The stock market sent a vote of no confidence in the government or in the economy, losing 15% in two weeks. The economy continues to make slow improvement; our government does not. Its fiasco in allowing an artificial debt ceiling to become an international financial crisis was avoidable and inexcusable. The country was held hostage by a self-centered pack of partisan peacocks.

This self-inflicted wound was followed by the loss of the country’s AAA credit rating. This had been its initial rating made in 1917 soon after establishment of Moody’s, the first credit rating agency. By coincidence, 1917 was also when Congress passed the original debt ceiling legislation in connection with funding the U.S. entry into World War I.

War is an expensive undertaking, particularly with modern technology. Over half of total federal spending goes for war, when the amounts are included for veteran’s benefits and medical costs for past wars, as well as the current defense budget and the supplemental amounts for the conflicts in Iraq and Afghanistan.

The Constitution gives Congress the power to declare war but the last declaration of war by Congress was in 1941. Since then, it has proven much easier to get into wars than to figure out how to pay for them. Some more effective restraints than the present War Powers Act seem appropriate. The brave men and women of our volunteer armed forces shoulder the human costs of our wars and revival of the draft might increase the sharing of their burden among the moneyed class.

Only partisan quarreling prevented a rational solution to our nation’s balance sheet issues. Besides spending almost as much on defense as the combined total of the rest of the world, the U.S. spends much more than any other developed country on medical care. It also has the lowest tax rates. These last two areas alone provide enough potential savings if approached rationally to have prevented the debt ceiling mess.

With the recent tax cuts due to expire next year, taxes will almost certainly be the next subject of Congressional debate. Its recent performance suggests that Standard & Poors may not be off base in its downgrade if it focused with the traditional banker’s emphasis on the “character” of a borrower. Despite now having only an “AA+” credit rating, U.S. government bonds are so highly sought after by nervous investors that recent frantic buying drove Treasury yields to record low rates. I suspect the S&P raters may be looking at the U.S. government as an old fashioned banker might assess the credit risks of the richest family in town after learning they had developed assorted drug addictions.

With the stock market souring rapidly, I bought ProShares Ultra Short (SDS-$25), a hedging fund structured to rise when the market dips. I also added to Goldcorp (GG-$50), which remains reasonably valued amid all this turmoil. Unfortunately, the turmoil has damaged not only investor confidence but also consumer confidence, which may slow down our economic recovery.

Any stimulus spending seems to be a political impossibility, thus the economy will have to continue its recovery on its own with growth this fall increasing only slightly. With the economy in slow recovery while the Congress is in rehab, stock selection must emphasize large cap companies with solid growth and dividend prospects.

Unilever (UN or UL-$31) fits nicely. Sales are $65 billion in 180 countries, with an increasing share in emerging economies. It yields 4% and trades at only 12 times earnings with earnings growth approaching 10% from growing sales to newer markets.

The Federal Reserve guaranteed low interest rates until 2013. This makes higher yielding dividend stocks and bond funds even more attractive. One beneficiary is Annaly Capital (NLY-$18), a REIT currently yielding 14%. Annaly borrows short-term to finance long-term mortgage holdings. The obvious risk is a spike in short-term rates, which the Fed has ruled out for now.

Our stocks have weathered this gale in good shape with our emphasis on large cap stocks while steering clear of banks and the housing sector. I expect this strategy to provide us with good returns for all of 2011 after this storm blows out.

Our political system stretched but did not snap. The consequences of the recent debt ceiling legislation are probably not as disastrous as some predict; predictions made in the heat of the moment” usually exceed consequences. The real damage is to public confidence. With economic recovery still fragile, shoppers seem reluctant to shop, companies to hire and investors to exercise patience.

The interchange of politics with the free flowing American economy seldom works well. As Will Rogers said, “The country has come to feel the same when Congress is in session as when the baby gets hold of a hammer.” Fortunately, Congress is beginning its summer recess, as is the stock market, a good time for investors to assess their prospects.

These might seem gloomy after the market came close to dropping for ten straight days, however, such slumps always end unless they are forerunners of an economic collapse. Despite the anxieties brought on by Congress’s belated attempts to pay the bills for two wars, more objective indicators show the economy continuing to make progress. Auto sales, business investment and exports are all up and lower oil prices will help consumers. There are even some signs of improvement in multi-family housing although the single-family sector continues to drag.

In the stock market, recent selling took the market down 10%, eliminating its 2011 gains. It’s still up 80% from its 2009 lows, probably a reason while high-end retailers like Tiffany (TIF-$68), a stock buy, are doing quite well. While Europe struggles with the inherent conflicts of the Euro, China fiddles with its numbers and Japan recovers from natural disasters, the U.S. economy and its stock market do not look so bad.

Corporate earnings were overlooked in the recent self-inflicted debt crisis. Reports have been generally favorable with most surprises to the upside. The result is an even more favorably priced menu of attractive stocks in growing companies. The Federal Reserve is patiently continuing its boosting of economic recovery through amazingly low interest rates.

This is an environment that will be rewarding for stock investors, particularly for those in companies with rising earnings and increasing dividends. Accenture (ACN-$58), a new recommendation, qualifies nicely. This is a substantial ($26 billion sales) business consulting, information technology and outsourcing company. Sales and earnings are growing at rates over 20% but its stock price is a moderate valuation of 17 times 2011 forecast earnings.

Accenture offers a 1.6% yield from dividends, which it has raised for five straight years. This gives it a slight edge over Cognizant Technology, an IT consulting firm, that just reported strong new orders but pays no dividend. IBM (IBM-$171) is growing at about half Accenture’s pace, has an even better dividend record and its size ($105 billion sales) makes it a more stable selection. (It is among our ten largest holdings along with Apple (AAPL-$377), DuPont (DD-$47) and Novo-Nordisk (NVO-$111), all continuing buys.)

ING Emerging Market High Dividend (ING-$17) is a new closed end fund and a new recommendation. The indicated initial yield is around 9% from non-US stocks. Buys should be made under $17, at an attractive discount from net asset value.

In energy, perpetually both in demand and volatile in price, Chevron (CVX-$97) is a remarkable value. One of the world’s largest companies ($217 billion sales), it is selling at a P/E of eight with a 3% yield and almost 20 years of increasing dividends.

A New York judge once said that no one’s property is safe while Congress is in session. Investors can now take a deep breath and begin carefully shopping for stocks.

Investors today are battered with headline news of breaking events. The natural response is to react to these bulletins by buying or selling something, a reaction that is quite often completely wrong. One of the hundreds of old Wall Street sayings is “Don’t sell on news of a strike.” This was coined in the days when both labor unions and automakers were major forces in our economy.

In those days, a strike by the United Auto Workers against General Motors, for example, would have severely impacted the entire economy. Such high stakes meant that it would have happened only after several months of negotiations and its impact would have been assessed and already reflected in the stock prices of GM and its suppliers. Investors were sometimes puzzled when news of a strike and the removal of this pending uncertainty actually caused a move up in their stock prices.

The dominant present uncertainty is the unsettled debt ceiling legislation. This obsolete law originated with Liberty Bond sales to finance U.S. participation in World War I and was originally intended to give the Treasury flexibility to issue additional bonds without having to go back to Congress. It became a subject of partisan debate through the years although never so much as now.

Despite its use primarily as a debating tool, Congress has managed to raise or extend it 78 times since 1960. Wall Street has assumed that it will probably do so again and failure to do could trigger a nasty sell-off. The immediate consequences would be higher interest rates at the next Treasury bond auction and brakes being applied to the fragile economic recovery. The longer term consequences were noted a generation ago, when President Reagan, urging Congress to increase the debt limit, wrote, “The full consequences of a default-or even the serious prospect of default-by the United States are impossible to predict and awesome to contemplate.”

Short-term, a recent precedent is the 775-point drop in the Dow in 2008 after the initial failure by Congress to approve the TARP plan to bail out the banks. The politicians quickly adjusted to this market reaction and bailed out the banks while investors absorbed this news and went on to anticipate the next crisis.

The trick is to assess and anticipate probable events rather than to react to what has already happened. This default, even if avoided by a last ditch maneuver, will require the Treasury to pay higher rates to continue the necessary financing of running the world’s largest government. Winding down two wars will reduce expenditures. Economic recovery, if not derailed, will bring greater tax revenues but interest rates will probably be kicked up somewhat before their time.

Fortunately, world finance is highly competitive. European bonds are also suffering from self-inflicted wounds, thus Treasuries should not suffer excessively after this needless march of folly. The inevitable retreat from today’s record low interest rates will be accelerated, thus rate risks of long-term bonds are now more acute.

Most stocks today are buoyed by favorable earnings reports and moderate valuations. A short-term stock market break is likely should the Treasury slide into a blatant default on its obligations, as this would trigger massive unwinding of staggering sums of intricate credit default swaps among the world’s banks. Such a default would not directly affect the operations of a debtless company like Apple (AAPL-$392) but leveraged swap holders might be forced to sell stocks in great companies in order to meet margin requirements.

Readers probably have not been overleveraging themselves with such gambles but I regret that resolution of this uncertainty may take longer than it appeared only a few days ago. Stocks have already slipped over 400 points on the Dow Industrials as the news became increasingly negative. An increase or even an extension would ease prevailing fears, probably triggering a substantial rally. Pending some sort of resolution, patience is appropriate.

I am confident a good buying opportunity for stocks lies ahead, less confident as to its timing. Shopping lists should feature global companies with strong balance sheets and rising earnings. Three of my picks are based in Switzerland, a plus factor when other economies wobble. These are Novartis (NVS-$61), Syngenta (SYT-$63) and Weatherford (WFT-$22), in health care, agriculture and oil services.

The stock market always discounts uncertainties, providing opportunities for those ready. Today’s political snarl is unusual but investors may find comfort in Winston Churchill’s words, “You can always count on Americans to do the right thing-after they’ve tried everything else.”

“Don’t worry, my government will pay for the damage.” The Defense Department always included this essential phrase in its foreign language phrase books. These were originally created before the landings in Normandy and later expanded from calming a French farmer for the loss of his barn to use in other parts of the world from Korea and Vietnam to the Balkans and the Middle East.

As the world’s surviving superpower after World War II, America undertook a generous assistance program beginning with the Marshall Plan that sparked rebuilding in Europe and Japan. Its aid was amply repaid through trade with resurgent nations. It broadened its ambitions into nation building as perceptions of its vital interests expanded into opposing Communism, protection of overseas energy supplies and retaliation for terrorist attacks.

This combination of idealism and self-interest led to a dominance that peaked twenty to thirty years ago as the bipolar Cold War world shifted to a unipolar world order. While still the world’s leading economic and military power, the inevitable rise of other countries, many with greater growth rates than ours, demands a realistic adjustment to the present in order to enjoy a more prosperous future.

The current debt ceiling hysteria is a result of trying to stretch our position to accommodate two overseas wars while reducing taxes. These would have been easier to cover earlier in the post-WWII period or if the financial crisis had conveniently not happened. Sadly, their bills must now be paid.

One bloated area is the Defense Department budget. As a Vietnam combat veteran, I yield to no one in my commitment to supporting the men and women in the armed forces but I doubt that we need military expenditures almost equal to the combined total of every other country in the world. President Eisenhower warned us of the dangers of the “military-industrial complex,” saying “we must learn to compose difficulties not with arms, but with intellect and decent purpose.”

America still has the leading companies, a dynamic and open society, the leading universities and even, despite all the current fuss, the world’s best credit. As CNN’s Fareed Zakaria writes in The Post-American World, the world’s tallest building is in Dubai, the largest oil refinery in India, the richest man Mexican, the number one casino in Macao, the biggest Ferris wheel is in Singapore and of the ten largest shopping malls in the world, only one is in the U.S. Even India’s “Bollywood” outdoes Hollywood in movies made and tickets sold.

Zakaria warns that America is slipping in education, building a competitive workforce and investing in new energy and digital infrastructure. While our politicians pander for votes by attacking government involvement in the economy, the Chinese government is promoting almost all its industries while the South Korean and German governments are vigorously pumping up their manufacturing sectors.

Germany, an example for the thoughtful, is a high-tax, high regulation economy that exports more than America does with a quarter of its workforce. Its government ensures funding for technical training and research. It also more generously funds foreign aid and support for culture.

Fortunately, the American spirit of innovation flourishes and successful investors will insure it is reflected in their stocks. My largest position, Apple (AAPL-$387), has just passed PetroChina to become the second most valuable company in the world by market cap. I expect it to overtake Exxon Mobil for the top spot within a year or two. It remains a reasonably valued buy on its surging earnings.

Current tensions from fiscal dysfunctions in our political system have strained investor nerves to the point where some of my clients wanted to sell out. I can understand their feelings but I am confident that the current economic recovery will survive. Aided by the policies of the Federal Reserve and the agile management of companies in the tech, biotech and manufacturing sectors, I am still expecting double-digit stock market returns for 2011.

Unsettling news makes it difficult to avoid wanting to leave the field but the reasonable valuations in the stock market today provide a margin of safety. It will probably be even more difficult in a year or two, after the market really gets going again, to resist the contrary temptations to push through to the crowd to the bar and order doubles. Then, not now, will be the time for reaping stock market profits.

During my years in the Navy, I used several foreign language pocket phrase books provided by the Defense Department. Originally produced by the War Department for use after the landings in Normandy, later editions in many doubtlessly unforeseen languages accompanied our forces all over the world.

The formats were almost identical. Each began with the appropriate translation for inquiring about the directions to (never from) the capital city. After questions about finding food and beer, every version contained my favorite, “Do not become alarmed. The American government will pay for the damage.”

This summation of much of our foreign policy history also applies to the current controversy about the government’s dealing with the federal debt ceiling. It would be a heedless and stupid blunder for our elected officials to incur the costs that a default would bring from higher interest costs. The U.S. is still the world’s largest economy, free of the constraints that strangle fiscal policies in Greece and Italy, and need not sabotage its own fiscal interests.

Today’s federal deficit should hardly be a surprise as it is the inevitable product of conducting two wars with today’s expensive equipment while cutting taxes. All three of these actions received majority popular support at the time so nothing is gained today by quarreling about past responsibility. There are many differences between public and private fiscal management but Congress currently sounds like a bitter family arguing over who was the biggest offender on the credit card bills.

Beginning in the Johnson Administration, spending grew for the Vietnam War as well as domestic programs. The legacy was an extended period of inflation. The possibility that current fiscal strains will bring a similar rerun is a background risk that could be very damaging to returns on longer-term bonds. The Federal Reserve has repeatedly noted its awareness of this risk although its present emphasis is rightly on its statutory duty to promote employment through eased monetary policies.

These are working, albeit slowly, with the housing sector continuing to be dead weight. The real scapegoat for the painfully slow recovery is the severity of the housing market collapse, already down more from its 2007 peak than the 31% peak to trough fall during the Great Depression. Creation in the 1930’s of the FHA and other successful combinations of public and private funding such as the Tennessee Valley Authority aided recovery. Similar efforts to address today’s problems including infrastructure and energy production may lie ahead after we work past today’s headline crises.

Unlike housing, business sectors like advanced manufacturing that demand innovation and competitive export strengths are doing quite well. Their June quarter earnings reports are likely to reflect this progress, making buys timely now. Big caps include 3M (MMM-$96), IBM (IBM-$174), DuPont (DD-$55), Intel (INTC-$22), Int’l Flavors and Fragrances (IFF-$64) and EMC (EMC-$27). Attractive smaller companies include Sigma-Aldrich (SIAL-$74) and Rockwell Automation (ROK-$84).

The stock market continues to behave rather well in the face of discouraging current news. This indicates underlying buying strength and smaller companies should see increasingly favorable stock price action. FEI (FEIC-$37), an advanced microscope maker, combines rapidly growing sales and earnings with a reasonable valuation. Safeguard Scientifics (SFE-$18) has an outstanding record from venture investments among smaller companies in life sciences and technology. Owning it provides immediate diversification into a select small cap portfolio.

Accretive Health (AH-$28) is a new management services company for hospitals and other health care providers. Its valuation is high but so is its growth with sales sprouting well over 30% quarterly with earnings growing even faster. The company has a high-powered Board that should provide additional momentum.

I continue to believe this debt ceiling crisis will pass without fiscal suicide attempts. As before, the government (meaning us) will pay for the damage. Economic recovery with accompanying greater tax receipts will mitigate the damages although the long-term costs may be the return of inflation.

Stocks greeted July with fireworks that burst through a fog of negativity. Their five percent gain was their best week in two years. That should help investors to approach the market with more rational analysis rather than giving in to emotions. This advice is easier given than practiced, even for the pros, but it might help to recall this recent skyrocket week when the next 100-point sell-off sparks feelings of panic.

I have little doubt such sell-offs will reappear before the summer is over. For one thing, triple-digit days are more frequent now than twenty years ago when the Dow Jones Average was 2,700 and a 100-point was almost 4%. With the Dow once again nearing 13,000, it‘s not even 1%.

These swings provide an excuse for some to avoid the market, claiming, “It’s just too volatile.” These are often the same people who chose the less publicized price fluctuations in real estate, perhaps just in time to buy condos in Florida. Three-digit moves in the market are now hardly newsworthy. As recent market action demonstrated, they can also be quite rewarding.

While rising tides may lift all boats, soundly fitted and smartly navigated boats leave the pack behind. Rather than passive conformity to market movements, I advocate continuing tuning of portfolios to anticipate economic changes and company developments. New job and retail sales reports provided appreciable good news but these linked sectors must still beat against the current.

Consumer stocks, particularly those dependent on discretionary spending, should be avoided, probably until the housing market shows signs of bottoming. Loans on housing remain a tender topic. Borrowers are less able than lenders to conceal dubious home loans on their balance sheets and bank stocks should be shunned on the probability that they still haven’t confessed all their sins.

Energy companies are pursuing their usual path, attracting unfavorable attention to their environmental, lobbying and managerial misdeeds, while continuing solid earnings growth. Small wonder, as I wrote a week ago, noting that increasing demand the world over keeps lifting the prices of their products. I recommended energy service stocks Core Labs (CLB-$116), Carbo Ceramics (CRR-$167) and Weatherford (WFT-$19). These are current prices as all three are up, along with most other stocks, and they are all still buys.

Lost in the miasma of negative thinking were increasing sales by American manufacturers. Federal Reserve policies that increased the value of overseas currencies against the dollar provided support, adding jobs in this basic sector. (This is the so-called “weak dollar” that spawns much ignorant political rhetoric.) June earnings reports begin arriving in a week and smart buys now should be well timed.

Prior recommendations include DuPont (DD-$56), EMC (EMC-$28), FEI (FEIC-$40), Franklin Electric (FELE-$50), Intel (INTC-$23), Int’l Flavors (IFF-$65), Rockwell Automation (ROK-$89), Rofin-Sinar (RSTI-$35) and Sigma-Aldrich (SIAL-$76). All are buys, as is Apple (AAPL-$357), a manufacturer in a class of one.

I am adding Altera (ALTR-$48), an archetypical Silicon Valley maker of advanced semiconductors. Sales are $2 billion, growing steadily at 11% for the last five years with earnings growing at 22%. Analysts forecast $.64 for the June quarter, up 10%. This moderating but steady growth has reduced its valuation to a modest 18 times forward earnings. With a 0.5% yield from dividends raised for three straight years, Altera is a model for its peers.

Summer brings reduced trading volume, sometimes exaggerating price fluctuations. With some fears abated, I think nimble investors may trade with greater ease. They should keep a weather eye on the new earnings reports, particularly on company comments on the outlook for the rest of 2011. These fresh breezes are favoring stocks.

Stocks said farewell to June after a 2% loss, leaving the market flat for the quarter but still ahead 2% for the first six months of 2011. The month closed out the first half with four straight solid up days, the best run in six months. That lifted spirits but stock investors still welcomed July like vacation bound schoolchildren chanting “No more sell-offs, no more crooks, no more brokers’ puzzled looks.”

Report cards are coming soon with the earnings reports for the quarter ending in June. Slipping stock prices pressured many analysts into lowering some forecasts but we can still anticipate overall gains. With the economic recovery still wobbly, attention must be paid to company forecasts for the second half of the year. These usually show tempered optimism, an attitude that will probably be adopted by investors.

Meanwhile, currency issues in the Euro zone will continue to plague the world’s central banks. Some recent stock market strength was attributed to a temporary solution to fiscal problems in Greece. Those who follow stock market forecasters might consider that none of them predicted that the American stock market would go up hundreds of points because the Greek Parliament passed an austerity measure.

Trying to forecast short-term market movements attracts attention to the commentators (and their sponsors) as does forecasting the weather, although with less accuracy. Their reporting of past price movements is more accurate but less useful as it tends to agitate investors into reacting to news rather than anticipating trends.

Energy prices are an example. Their fluctuations make easy news stories, aggravating moves in related stock prices. Investors should leave short-term trading to the pros, allowing longer-term energy price increases to provide a useful base to oil and gas stocks.

I am certainly not hoping for higher energy prices, recognizing the headwinds they present to most consumers. I personally support conservation and alternative energy efforts but reality requires that I recognize persisting upward pressure on oil and gas prices. As an investment advisor, I continue to carry a 10-15% position in client stock portfolios in quality oil, gas and energy service stocks.

Several factors support longer-range upward price moves in their products. The strongest is probably the increasing growth of emerging economies. Expanding household incomes produce accelerating demand that quickly moves beyond basic needs to autos, entertainment and the other energy-consuming trappings of modern life.

Inflation and moves by central banks to ease currencies to promote jobs push up prices of commodities like oil. Geopolitical events like this year’s Arab Spring often reduce readily available supplies. Exploration efforts sometimes yield new fields but extraction from existing reservoirs seems inexorably more difficult and certainly more expensive.

Technological breakthroughs may ease supply pressures but these are rare. New developments like shale extraction hold promise but raise environmental, cost and safety issues, as do other once heralded alternatives like biofuels. Nuclear energy is going through one of its periodic setbacks and most other alternatives now need some form of government subsidy or favoritism.

All these factors are particularly supportive of sales growth for technologically savvy energy service companies. I continue to recommend Core Labs (CLB-$111), which provides global services in analyzing oil and gas reservoirs and enhancing additional extraction from them.

Carbo Ceramics (CRR-$162) makes ceramic propellants used worldwide for hydraulic fracturing (“fracking”). Weatherford (WFT-$18) is a larger, Swiss-based company that provides a variety of equipment and services for oil and gas production. These two are new buys. I expect their new earnings report cards will show all three at the top of their class.