Uncertainties abound: so do opportunities

Tony Crowell — Wed, 29 Apr 2009 00:38:10 +0000

The streak of up weeks ended at six, even though stocks made a brave attempt to make it seven. Even so, these rallies broke through the shell of fear that has cloaked all attempts to return to normalcy in the market. Market psychology has definitely improved. It may yet be tried again by a test of the March market lows but the panic of last year has been replaced by the uncertainties of this one.
Uncertainties always exist; their perception just becomes more acute after crises have hit. Their lingering impact is seen in the trillions of dollars now nervously committed to almost zero interest money market funds by “investors” belatedly trying to avoid any possible loss.
They should take advantage of the higher yields that these uncertainties have given such as in Global Yield Fund (GIM-$8), a closed-end fund currently yielding 6.3% in monthly dividends. Its primary holdings are bonds issued or guaranteed by creditworthy governments like Sweden, France, the Euro group and Indonesia.
Municipal bonds also offer unusually high yields. Closed end funds like Nuveen California Opportunity (NCO-$11) are paying over 6% tax free while their persisting discounts from net asset value provides a measure of safety. Corporate bond funds like Western High Income (HIO-$4.50, 13% yield) are also attractive. Their prices will continue to fluctuate in our nervous markets but reinvesting their monthly dividends helps smooth out the bounces.
The economy still needs some upward bounces. The current recession is in its seventeenth month, the longest downturn since the 1930’s. As always, it is particularly painful on those with jobs in vulnerable sectors. The unemployment rate is up to 8.5% and heading higher. It will probably crest in double digits although the first impact of stimulus spending will show up this summer.
Under these conditions, it may seem remarkable to forecast any strength at all in the stock market but it has historically begun its recovery several months before employment begins to turn. One favorable basis is simply valuation. Although not quite the bargains they were a few months ago, the market is still offering many stocks in blue chip companies at valuations not seen in many years.
Nervous rumors about “stress tests” for banks faded when these revealed no huge surprises. The latest global flu pandemic rattled markets without too much damage. Travel and retail sectors may be damaged but no one expected much now of them anyway.
Current real financial news centers on earnings. Over a third of the S&P 500 will have reported by the end of April with overall expectations of a negative 35% growth rate. Analysts have been lowering forecasts for weeks, mostly on guesswork. Results are thus likely to produce a few positive surprises amid a muddled pile of cautious forecasts.
Technology stocks are likely to show some sparks. I continue to recommend Intel (INTC-$15) and Cisco (CSCO-$19). I am adding a smaller Silicon Valley company, Applied Signal Technology (APSG-$20). It develops products for advanced intelligence and security, with results that fit the pattern of a traditional growth stock. It has negligible debt, rising sales and earnings forecast to hit $.90, up 43%, for 2009. Almost all sales are to governments.
For income-oriented investors, I am adding TC Pipelines (TCLP-$31). Partially owned by TransCanada, a Calgary-based natural gas developer and pipeline operator, it transports natural gas in the northern states. The current yield is 8.9%. Earnings per share are forecast at a flat $2.40 range for he next couple of years but debt is manageable, cash flow strong and an increase in gas prices could bring an even higher yield.
Our healthcare stocks have done little lately, probably because greater confidence has led to their being forsaken by investors looking for speedier horses to ride. Their steadier finances make them keepers, particularly Life Sciences (LIFE-$32), Gilead (GILD-$48), and Novo-Nordisk (NVO-$47), Cerner (CERN-$47), a leader in medical records automation, is also a promising growth stock leader. Uncertainties are certainly with us but so are profitable opportunities.

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; tony@crowellroberts.com.

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Uncertainties abound: so do opportunities