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Navigate QE2 Volatility With Freeport, Exxon

BOSTON ( TheStreet) -- Freeport-McMoRan (FCX - Get Report), Exxon Mobil (XOM - Get Report) and 3M (MMM - Get Report) are among stocks that would weather the volatility of additional quantitative easing, says Paul Nolte, a managing director at Dearborn Partners.

In minutes released yesterday from its last interest-rate policy meeting, the Federal Reserve all but cleared the way for another round of so-called quantitative easing -- purchasing government bonds and securities to stimulate the economy -- although members of the Federal Open Market Committee differed in opinions on the timing of any move.

Quantitative easing is designed to indirectly pump money into equities and the economy. By boosting reserves of banks and other financial institutions, the Fed would create a wealth effect, sparking a stock-market rally.
Paul Nolte
Paul Nolte, managing director with Dearborn Partners.

But some fund managers are sounding caution on a QE2 rally, as the second round of quantitavtive easing is informally known.

Dearborn Partners' Nolte says the Fed is walking a tightrope with QE2, arguing that the U.S. is "essentially monetizing our debt" and that money will find its way into the financial markets and various assets, but not into the economy as intended.

"If things continue to go poorly in the economy, the Fed is then pressured to do more on QE," Nolte says. "If the economy picks up and we see unemployment fall below 8% and we get job growth, that will be bad because the Fed will pull back and the money flow will dry up. Gold will fall, equity markets will fall, and interest rates will go higher."

This type of market uncertainty requires a long-term strategy, Nolte says.

"You want to buy high quality in this environment because if things do go bad, these types of companies will continue to perform well even in a poor environment," Nolte says. "Plus you get the added bonus of a decent dividend in many cases. Global exposure is also what you want, whether the company is domiciled in the U.S. or elsewhere."

In the short term, the monetary easing will have a "deleterious impact" on the dollar, Nolte says. A lower dollar will push up commodity prices, such as gold, corn and wheat. A weaker dollar would boost equities and extend the rally in bonds. That can be a risk to this type of strategy due to the defensive characteristics of the stock picks.

Nolte says stocks like Exxon and 3M "only provide a hedge in the fact that you're looking at industry leaders. Like we saw in 2008, these stocks will decline less than the overall market. They won't recover as fast, but you won't have the big downside, either."

The strategy has worked well for Nolte and Dearborn Partners, which has about $2 billion in assets under management. Much of that is devoted to institutional all-equity portfolios. The firm uses the S&P 500 as its benchmark and, while it is trailing over the past 12 month, it has beaten that benchmark over two to five years.

"We're tilted toward economic growth," Nolte says. "If you look at our portfolios, we're overweight the industrial names and to a certain extent with basic materials. We're underweight some of the more defensive names, like consumer stocks and health care."

Even if QE2 sparks a rally in equities, Nolte says investors may be better off finding a safe haven in the following five stocks, which are owned by portfolios managed by Dearborn Partners.
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