Focusing on Dividends

 | Sep 16, 2011 | 8:08 AM EDT
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Last month, I heard anecdotes from mid-level people at various U.S. companies about business plunging in July, then rebounding strongly in August. Simultaneously, I am extremely bearish on the outlook for the PIIGS (Portugal, Italy, Ireland, Greece and Spain), accepting that most of these countries will by necessity default -- the only question is when. These two views led me to conclude that the U.S. market was likely to experience violent spasms as the Greek tragedy unfolds, but with a net drift up over the summer and early fall. I have certainly been right about the violent spasms, and the incremental data points on the U.S. economy point to a struggle, no doubt, but not yet a collapse.

Recent data point to resiliency in the actions of U.S. consumers, even if their sentiments are quite dour. The U.S. Census Bureau released the August retail sales estimate, which was unchanged from July and indicated that consumers are at least still showing up at the stores. (July sales were up 0.3% vs. June, so the summer showed no slowing in sales despite all the sturm und drang.) Supporting this result was commentary from the CEO of Capital One (COF), who on Sept. 14 noted that no weakness is showing up in COF's results either. Credit usage and spending are seeing "sustained strength." Similarly, the CEO of American Express (AXP) also noted that same day that spending trends were stable to up, and that AXP's delinquent accounts were declining modestly. Not surprisingly, American Express is seeing softness in Europe, but U.S. spending looks OK.

Now, before we get too excited, I must point out the qualifiers. The Census Bureau's spending is unadjusted for inflation, which is running at a vigorous clip. So "real" spending probably did decline a bit. Incomes are stable, so consumers are still spending what they make, but getting less for their money. Also, gasoline spending has surged 20%, year over year, due to higher prices, so the regular fill-up is also impinging on what consumers can take home from Wal-Mart (WMT). Wal-Mart management regularly agrees on that point.

I am as worried about a double-dip as the next guy, and I am most certainly bearish on the euro's outlook. Nonetheless, I often note that the stock market is a real-time barometer of current business conditions, and I am not hearing enough anecdotes about weakness other than in housing.

Next week, we'll look again at earnings estimates, to see which direction they are headed, since that is another high frequency, real-time data input. In the interim, and for a very short time frame, I continue to look for a net drift to the upside -- very modest -- with violent euro-induced swings along the way. More importantly, I continue to emphasize income plays over capital gains plays, and to capture dividends to produce a solid income stream as my main source of return.

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we like this chart here, it appears ready to move higher. BOUGHT BZUN OCT 35 CALL AT 3.40
Large-cap, high-quality McKesson (MCK) is too cheap now, at $147.51 or so. The stock hit $243.60 more than 2.5...



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