With first-quarter earnings season at an end, the market's attention has shifted back to what we might call the "great unknowns." How will European governments meet their debt obligations as their economies shrink? How much will political uncertainties in Europe (or, for that matter, the United States) hurt the prospects for stability and growth? Will inflation start to pick up soon? Or will Western economies need another dose of monetary stimulus just to stay where we're at?

Though I'm not in the business of making short-term market calls, let alone having such notions influence my investment strategy, I'm not exactly surprised by the recent slouch in stock prices. Corporate earnings, as we've been reminded yet again, are at very high levels--but revenue growth is sluggish, tracking the sluggishness of the U.S. and European economies. Companies recognize this, so on the whole they're reluctant to hire or add capacity, particularly given that there are a variety of financial asteroids still crossing the economy's orbit. It seems that much of our fortunes will depend on government policy, but governments in the developed world are all but deadlocked.

My approach is to avoid staking a claim to a particular macroeconomic outcome, and instead focus on mitigating risk. I worry about inflation, so I only buy and hold stocks with economic moats--some durable competitive advantages to provide the ability to raise prices at least as fast as the cost of production. (As it happens, the same competitive advantages also help in a deflationary environment.) I also worry about sluggish economic growth, and the toll that could take on broad equity-market returns from here. But I guard against this by insisting on high dividend yields up front: yields high enough that I don't have to get a whole lot of growth in order for my portfolios to perform well.

Based on today's media reports, you'd think the $2 billion belonged to taxpayers--or worse, in the personal passbook savings accounts of the pundit class. Of course, the ten-figure trading loss revealed late Thursday by JPMorgan Chase JPM was neither; it was the bank's own money. It's hard to characterize a loss of this size as a drop in the bucket. But relative to the pretax profit of $7.6 billion reported just for the first quarter of 2012, let alone the bank's $131 billion of tangible common equity, I wouldn't call it more than a splash.

But this kind of news, which whacked JPMorgan's stock price for a loss on Friday of $3.78 a share (9.3%), may well be remembered as a watershed event. By itself, the loss of this trade may total no more than $0.30 a share after taxes. Yet JPMorgan is supposed to be the one giant bank where this stuff doesn't ever happen. The reputation of CEO Jamie Dimon--a reputation found in the stratosphere before the collapse of 2008, and reaching interstellar space afterward--is crashing back to earth. Dimon is only too willing to accept the blame, but it's only been a couple of weeks since he downplayed media reports of a potentially dangerous "whale" of a trading position out of the London office.

This loss has also reignited the debate over banking reform, specifically in the areas of the Volcker Rule (intended to restrict proprietary trading by banks) and the status of financial institutions that are too big to fail ("TBTF" for short). Dimon has been one of the industry's most effective critics of reform efforts; as his reputation suffers, so does the case for looser regulation. After all, if even a brilliant manager can't prevent a loss like this in what has otherwise been a tough but hardly catastrophic trading environment, who can?

There isn't a direct read-through from JPMorgan's troubles to the three bank stocks we hold in the Builder, except where Wells Fargo WFC intersects with TBTF. I have always preferred what is called the 3-6-3 model of banking: Borrow at 3%, lend at 6%, play golf at 3:00. Portions of JPMorgan are engaged in this humdrum business, but it's the racier activities that have the biggest sway over investor returns. Compared to JPMorgan, BB&T BBT, U.S. Bancorp USB and Wells Fargo come right out of the 3-6-3 mold. But while U.S. Bancorp ($341 billion in total assets) and BB&T ($175 billion) are not generally included in the TBTF category, Wells Fargo and its $1.33 trillion asset base almost always are. To the extent that JPMorgan's loss renews the debate and reinvigorates the push to break up the biggest banks, Wells Fargo--whose investment-banking and trading activities are comparatively tiny--could be tarred with the same brush.

I don't see this week's news as a reason to change my view on Wells Fargo, at least not yet. For better or worse, the banks have enormous lobbying power, and even after this fresh round of bad news the industry's status quo is not a bad bet. But I would hold out for at least my Dividend Buy price of $30 before considering buying or adding to positions in Wells Fargo.

As for JPMorgan, I still admire Jamie Dimon. If anyone can run a financial institution this large, complex and opaque, it's him. Being TBTF is a political and economic problem I might otherwise be able to live with, but my issue is that JPMorgan is TCTT--too complicated to trust. That's what we've got here, a trust-me situation. And if I can't be sure I can trust even Jamie Dimon, what's the hope for such complicated institutions when mere mortals are in the corner office?

For the DividendInvestor portfolios, four more quarterly earnings reports rolled in this week. None were terribly encouraging on a short-term basis, but none proved particularly eventful either. Sysco's SYY revenues continue to grow thanks primarily to food inflation, but margins are still suffering. Health Care REIT HCN took its full-year financial outlook down slightly, and part of this comes from the anticipation of higher-than-originally-expected asset sales. Westar Energy WR was hurt (like many utilities) by the unseasonably warm weather in the March quarter, but there's no change to our long-term view of this business. And while Energy Transfer Equity ETE released messy results amid a shuffle of acquisitions and divestitures, the details showed cash-flow growth in the company's core assets going forward. The last of this season's earnings reports, National Grid NGG, is scheduled for next Thursday, and should be accompanied by another nice dividend increase.

Those reports aside, the only other news of note this week regards Abbott Laboratories ABT. First, the company agreed to fines totaling $1.6 billion stemming from marketing practices for the epilepsy drug Depakote. This is certainly a costly and embarrassing development, but in the industry today, it's not a rare one. Since Abbott has already taken accounting reserves for the matter, and I'm willing to presume that management will learn the lesson and tighten its controls, this isn't enough to change my view of the stock.

Second, and arguably more importantly, an FDA panel voted to approve a new Pfizer PFE drug to treat rheumatoid arthritis. If final approval is received, this drug will enter a market that has been very good for Humira, Abbott's leading product. This news knocked Abbott's share price a bit on Wednesday, but it quickly rebounded. This is consistent with our view that while Pfizer's new drug should be a winner, the market for these therapies is growing fast enough to absorb a new entrant without sending Humira revenues into outright decline; in fact, we expect both drugs to generate good growth in the years ahead. I still like Abbott-- though I'd like it a lot better if the company wasn't planning to split in two later this year--and I consider the stock a buy at $60 or less.

Best regards,

Josh Peters, CFA
Director of Equity-Income Strategy
Editor, Morningstar DividendInvestor

Disclosure: I own the following stocks in my personal portfolio: AEP, APU, CLX, CVX, GE, GPC, KMI, KMR, MMP, NGG, O, RDS.B, SYY, WFC.

News and Research for Builder and Harvest Portfolio Holdings

Abbott Laboratories ABT
Analyst Note 05-09-2012 | Damien Conover, CFA

An FDA panel voted to support the approval of Pfizer's PFE tofacitinib for rheumatoid arthritis, or RA, patients, and the FDA will likely make a final decision by August. While we had largely expected a positive vote, we are increasing our probability of tofacitinib's approval to 90% up from 65% based on the favorable panel review. However, we don't expect any changes to our fair value estimate of $27 per share for Pfizer based on the increased likelihood of tofacitinib's approval, as the higher expected sales don't move the needle on our valuation for Pfizer. Overall, we continue to believe Pfizer is undervalued based on underappreciated pipeline drugs and the ability to cut costs ahead of expectations.

While the FDA panel supported the approval of tofacitinib, the exact patient population that could use the drug remains unclear. The panel voted 8 to 2 in favor of approval of the drug, but we believe the entire panel would have voted favorably if the patient population were confined to RA patients who failed two DMARDs including one TNF inhibitor. Further, we believe several panelists who voted for approval would prefer to limit the drug use until after failure of DMARDs including one TNF inhibitor. We expect the FDA will approve tofacitinib in this more defined patient population due to the FDA's risk-averse nature, limited clinical data in terms of duration of tofacitinib use, mixed data on bone efficacy, and some safety concerns over infections and cancer. However, this patient population is still very large given that close 30% of patients on TNF inhibitors don't achieve an ACR20 response rate (low end of efficacy). With the TNF inhibitor market over $12 billion, a significant market exists for drugs that target TNF inhibitor failures. We believe tofacitinib will easily develop into a blockbuster in this market. From a competitor standpoint, we believe the currently marketed TNF inhibitors, including Abbott's Humira, Merck's MRK/JNJ's JNJ Remicade, and Amgen's AMGN Enbrel, will largely maintain market share. However, if tofacitinib's safety and efficacy data holds up over the next two years, we expect the drug will move into usage before TNF inhibitors. By that time, many TNF inhibitors will be facing bigger generic threats (albeit generic biologics, which carry less concern than traditional generics).

General Electric GE
Analyst Note 05-08-2012 | Daniel Holland

General Electric announced that it purchased a 15% stake in Shanghai-listed China XD Electric for $535 million, in addition to forming a joint venture with China XD. GE retains a 41% stake in the joint venture, which should give GE's grid automation access to the fast-growing Chinese market. Additionally, China XD will use GE's global distribution arm to market its products outside of the country. On the face of it, we think this deal makes up for GE's unsuccessful bid for Areva's transmission and distribution and still gives GE access to T&D end-markets at a lower price point. To that end, GE now can credibly compete against ABB ABB, Siemens SI, and Alstom ALO in the power infrastructure markets on a global basis. While China infrastructure spending has moderated considerably over the past year, we think power infrastructure remains attractive given that the need for electricity and energy management continues to grow with the modernization of the region. Given the size of this deal relative to GE's overall portfolio we do not see this having a material impact on our fair value estimate and our long-term thesis remains intact.

Sysco Corporation SYY
Analyst Note 05-07-2012 | Erin Lash, CFA

From our perspective, Sysco's third-quarter results support our take that the leading North American food-service distributor should be well positioned when there is a more consistent, positive cadence to restaurant sales. Although we expect sales volume to remain lumpy in the near term, we believe Sysco's expansive distribution network will enable the firm to remain the dominant player, generating strong cash flows and outsize returns for shareholders over the longer term. In addition, we think the firm will continue building out its geographic footprint as well as its product portfolio by pursuing small bolt-on acquisitions. In our opinion, appropriately priced acquisitions would be a prudent use of capital, as about 70% of the market remains highly fragmented. Results through the first nine months of fiscal 2012 are tracking in line with our outlook, and as a result, our $36 fair value estimate remains in place. At just 13 times our fiscal 2013 earnings per share estimate, the shares are slightly undervalued. In our view, the market's concerns regarding sluggish restaurant traffic and food cost inflation are overdone and are unjustly weighing on Sysco's shares.

Excluding foreign currency movements and acquisitions, third-quarter sales increased 7.1%, (on top of 7.9% growth in the year-ago quarter) primarily because of 5.5% food cost inflation. While food cost inflation declined from 6.3% in the second quarter, this level of inflation is still significant, particularly the double-digit inflation the firm is realizing in the poultry and meat categories. A modest level of food inflation (2%-3%) is ideal for Sysco, but high levels of food costs could pressure the firm and its customers--as it is now. That said, the fact that case volume growth continued in the third quarter (up 2.3% excluding acquisitions after increasing 2.8% in the prior sequential quarter) is encouraging. We look forward to hearing management's thoughts regarding the sustainability of this growth during the conference call.

Higher payroll expenses took a toll on profitability, as the gross margin contracted 80 basis points to 17.8% while the adjusted operating margin fell 30 basis points to 4.6%. In our view, the firm's constant focus on improving its cost structure will enable Sysco to offset volatile input costs. By fiscal 2015, we forecast operating margins of 5.2% (about 10 basis points above the firm's average operating margin over the past three years). Next week we will attend Sysco’s analyst day and hope to garner more details surrounding the firm's business transformation efforts, including the benefits that management believes could be realized as a result of this rollout.

Westar Energy WR
Analyst Note 05-10-2012 | Travis Miller

Westar Energy turned in a rough start to 2012, with first-quarter EPS falling to $0.21 from $0.27 in the year-ago quarter. Unusually warm winter weather depressed electric heating demand, resulting in about $0.04 per share of the year-over-year earnings drop. Retail use was down 5.8% in the quarter with heating degree days down 32% from last year and 25% from the 20-year average for the quarter. In addition, we estimate higher unrecovered operating costs mostly due to an unplanned outage at the Wolf Creek nuclear plant resulted in about $0.04 per share of lower year-over-year earnings.

Despite these headwinds, management reaffirmed its $1.85-2.00 EPS guidance and we are reaffirming our $29 fair value estimate. We previously expected Westar would earn at the middle of management's guidance range; however, we plan to cut our earnings estimate slightly to reflect the unfavorable first-quarter weather and higher-than-expected operating costs. We now expect Westar will come in toward the bottom of that range for the full year, assuming normal weather for the final three quarters.

Going into the second quarter, we'll be watching for a hefty earnings jump after its $50 million annualized rate increase went into effect in May 2012. Of that increase, we expect it should add about $0.23 per share on an annual basis, or about $0.18 per share to full-year 2012 earnings before considering additional increases in operating costs and assuming normal usage. A bright spot in the quarter was a 1.8% increase in industrial usage, which is about 30% of Westar's system demand. Industrial demand has grown in four of the last five quarters.