Think Defensively in a Chutes and Ladders Economy

It could have been worse and for a while Thursday, it was. At one point in
mid-afternoon, the Dow was off 229 points. However, in the last half-hour of
trade, stocks bounced back a bit as investors clung to the hope that somehow the
U.S. economy can skirt recession in 2012, even if Europe slides into an abyss.
Today, the market continues to waffle a sight all too familiar given recent
volatility. It would seem as if hope and fear are the two major factors driving
the market as of late. Truth be told, that same hope has propped up a bunch of
markets recently, not just stocks. Just look at the oil price. Until Thursday,
crude was climbing relentlessly, crossing $100 a barrel Wednesday. It reminds me
of May 2008, when oil traders were jubilating over $147 a barrel and salivating
at the prospect of $200 (promised in a famous Goldman Sachs forecast). The
economy was already in trouble then. Within four months, the financial crisis
exploded to dimensions unprecedented since the Great Depression. By February
2009, West Texas Intermediate was changing hands at $34. Im not saying were
looking at a replay of those events now. However, it seems clear to me that too
many U.S. investors are naively ignoring the storm on the other side the
Atlantic. On Thursday, yields on both Italian and Spanish 10-year bonds traded,
for a time, above 7%. Although they are now below this major threshold, in a
world where the United States and Germany are paying just 2% on similar
maturities, a 7% yield is still shocking for one major European sovereign, let
alone two. And France might not be far behind! I continue to believe that the
current relief rally for stocks, which began Oct. 4, will carry into December,
lifting the S&P 500 Index as high as 1,300 or slightly above. Given the looming
risks, its imperative these days to think defense first when making your
investment moves. That doesnt mean you have to avoid stocks entirely. But you
should confine your new purchases to stocks that offer strong defensive
characteristics such as a generous (and preferably increasing) dividend. One to
consider right now: Baxter International (NYSE: BAX ). On Tuesday, the
Chicago-based medical supplier raised its dividend 8% a nice, solid number
reflecting strong confidence by management in the companys 2012 earnings
outlook. Besides throwing off $534 million of cash dividends, BAX has bought
back $1.41 billion worth of stock year to date (through Sept. 30). Indeed, I
expect dividends and buybacks to take up essentially all of Baxters free cash
flow in 2011. This is an outfit that believes in sharing the wealth with its
owners!