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Taking Stock

Tony Crowell

Home On The Range

Stocks continue to oscillate in what Wall Street likes to call a “trading range.” With all the nerve- wracking news from Europe and unsettled political quarrelling here, it is no wonder that investors do not feel at home on this range. As usual, the public mood exaggerates stock market conditions. Things are never as bad as the public fears nor, however, will they be as good as the public hopes whenever it gets greedy again.

The market seems to have found a rough equilibrium between prevailing worries and tempting valuations of stocks with rising earnings in a very low interest environment. Summer tends to be a static period for stocks. Trading eases, particularly in August when the psychiatrists who sooth Wall Street traders all seem go on vacation at the same time. My guess is that we will see one of these ‘trading ranges” until September with the Dow Jones Industrials oscillating between 12,000 and 13,000.

This could easily change with major developments here or abroad. One persisting problem is the widespread conviction that cuts in spending are needed. Poor Greece has had austerity forced on it even though it has been in recession for five years. Non-politicized economists are in almost unanimous agreement that stimulus spending is needed to jump-start an economy out of recession.

That’s hard to advocate in a bitter political campaign. The real trick, often overlooked, is to reduce deficits when times are good. It can be done and was last seen during the presidency of Bill Clinton when the U.S. government ran surpluses in 1998, 1999, 2000 and 2001.

Government spending to ease dips while also reducing deficits during better times seems very difficult to implement. It must be against human nature like the advice to buy stocks during moods of irrational pessimism and to sell them during irrational exuberance. Even that famous Keynesian Franklin Roosevelt tried balancing the budget in 1937, which pushed the country back into recession.

The economic recovery then did not get full traction until the buildup to WWII, the mother of all stimulus spending programs.

Among other things, the war left a housing shortage in the U.S., which led to a housing boom lasting over fifty years. This finally expired in a last wave of irrational exuberance. There are some signs of mild recovery, particularly in apartments, but I feel the occasional enthusiasms for stocks of homebuilders are very premature.

DuPont (DD-$49 and Valspar (VAL-$48) experienced pressure of their sales of coatings but have weathered this and are now increasing sales for industrial uses. DuPont has continued to emphasize development of its “agricultural and nutritional” segment, which is now its largest. Emerging markets have growing middle classes, accelerating global demand for agricultural products like advanced seeds and associated chemicals.

Besides DuPont, that’s increasing business for Swiss-based Syngenta (SYT-$65, 2.2% yield) and Newport Beach-based American Vanguard (AVD-$26). Deere (DE-$74), the world leader in agricultural equipment, is an obvious choice. Amid market fears, its stock price has wobbled and is now in its own trading range between $60 and $90. Yield is 2.5% on dividends that have doubled in five years. Its price: earnings ratio is only nine.

Oil prices are down, good for consumers but challenging for oil producers. The stock price of ConocoPhillips (COP-$54) is finally stabilizing after its spin-off of its downstream business in Phillips 66 (PSX-$33). Both are very reasonably priced and are excellent dividend stocks. So is Exxon Mobil (XOM-$81). Royal Dutch Shell (RDS.A-$65) is the bargain in this bunch. Sales are $480 billion yet its market cap is half that. Yield is over 5% and its 2012 earnings per share will be about the same as Exxon’s, yet its stock is 20% less, probably due to investors fearing Europe will disappear. It won’t. Stay tuned, have patience.

Tony Crowell manages stock portfolios for individuals and their trust and retirement accounts with CROWELL•ROBERTS Investment Counsel, a registered investment advisor in Laguna Beach since 1993. [email protected] 949.494.1376/

800.697.2622 www.crowellroberts.com

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