A Time for Caution

 | Mar 03, 2014 | 10:00 AM EST
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"Distrust and caution are the parents of security." -- Benjamin Franklin

It appears like the trading week is going to get off to a rocky start today. The source of the turmoil is, once again, the explosive situation in Ukraine. As I have noted numerous times on Columnist Conversations, investors have not heard the last from Ukraine.

Unfortunately, the aggressive and predictable response from Russia over the weekend has caught the administration and the leadership of the European Union fairly flat-footed. Judging from the action, the market was not fully prepared for these events either.

Predictably, oil futures are getting a nice bump in early-morning trading with Brent prices rising more than WTI. This might give refiners a bit of a boost as it will expand the crack spread, at least for a day. In addition, gold and silver are showing strength and silver and gold mining stocks should outperform in trading Monday.

Emerging markets are in for a rough day and the Russian stock exchange is off more than 8% as I am writing this piece. I think at some point in 2014, emerging markets will provide one the best long-term buying opportunities of the year. They currently sell for an approximate one-third discount to our market and they look like they are about to get cheaper. I am going to keep an eye on the movement in emerging markets this week, but we are not quite to a buy trigger yet.

One of the biggest predictable responses to emerging-market volatility is the flight to quality. The 10-year Treasury yield has fallen now to 2.6% from 3% to start the New Year. This has confounded the consensus, which called for long-term rates to rise this year as the Federal Reserve began its long-awaited taper.

This has resulted in the low-beta, high-yield sectors of the market in being some of the best-performing areas of the market after significantly underperforming during the huge equity rally the market provided in 2013.

I believe this outperformance continues as investors seek safety and yield in response to outside turmoil. I also think the economy is given mixed readings right now and we made indeed be decelerating from the 3%-plus rate of GDP seen in the last half of 2013.

I will be adding to these types of plays on market pullbacks. A good example of this type of equity is Verizon (VZ). The shares yield 4.5% and sell for less than 12.5x this year's expected earnings. Driven by acquisition of the 45% of Verizon Wireless it did not already own from Vodafone (VOD), earnings should rise 15% this year and 10% in 2015.

The real estate investment trust (REIT) sector should also continue to outperform the overall market as it has so far in 2014. Whitestone REIT (WSR) is just one of many in the space I will allocate more funds to in any market selloff.

This REIT owns, operates and redevelops community centered properties.  The vast majority of its portfolio is spread across fast-growing Texas and Arizona. Whitestone got a nice upgrade to Outperform at JMP Securities last week. The shares yield just below 8% on an annual basis and pay a monthly dividend. Funds from Operations (FFO) should improve 20% this year and the REIT is priced at a reasonable 13x this year's expected FFO, given its yield.

Neither of these stocks is going to tickle the fancy of aggressive growth investors. But in the current market environment, it pays to be cautious.

Columnist Conversations

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