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Taking Stock

Tony Crowell

The Cliffhanger

The “fiscal cliff” quickly replaced the Presidential election as the prime worry of Wall Street and its media slaves. Those who attribute recent market weakness to the reelection of the President might consider market history. The 2.4% loss in the Dow Jones Industrial Average this Election Day was the fifth worst since 1900. The other four also followed wins by Democrats, President Roosevelt in 1932 and 1940, President Truman in 1948 and President Obama in 2008, all of which saw substantial market rises in their Administrations.

Despite continuing drops over the last ten days, the Dow Jones Average is still up 60% since President Obama was inaugurated in 2009. When contrasted with its 20% drop during the full two terms of his predecessor, this may provide a dose of realism to those disappointed by his reelection. The economy continues to recover and the real focus now should be on the Congress and the possibility that further blunders on its part could push the economy back to recession.

This dreaded “fiscal cliff” was a metaphor used by none other than Fed Chairman Bernanke who tried to warn Congress in testimony earlier this year that unleashing a massive round of spending cuts and tax increases on January 1, 2013 would do severe damage to employment and our recovering economy. With pending elections forcing the Congress to advocate ridiculously unrealistic economic policies, they did nothing.

Fortunately, unlike last year’s infamous “debt ceiling” drama that threatened an abrupt partial government shutdown, nothing too severe happens on January 2. The economy will begin to slow and unemployment to rise if all these automatic spending cuts and tax increases drag on for weeks.

The danger is apparent and there are a few encouraging signs that a dialogue may develop. Although advertised as a fiscal crisis, this is really a political crisis. It will probably be resolved, perhaps through a “grand bargain” but more likely through compromises. Even the “debt ceiling,” that provided an exercise in political gamesmanship last year is on the schedule for 2013 so the markets will suffer a political overhang while the cliff is eroded.

Fortunately, the Federal Reserve policies of maintaining liquidity and low interest rates provide a solid foundation for business growth. The saving grace for stock investors is that assorted sources of anxieties ranging from unsettled fiscal issues to similar problems in the Euro Zone are no secrets to Wall Street. Corporate earnings overall continue to climb while the market stumbles around, trying to find firm ground.

The results are very reasonable valuations for most stocks. Already, Intel (INTC-$20), General Electric (GE-$20), IBM (IBM-$185) and other big cap stocks are beginning to show modest gains on down days for the overall market. Their growth may not be as fast smaller market darlings but these two are bottoming out at low valuations while paying 2% to 4% in increasing dividends.

They will have company. Earnings reports for the recent September quarter fell short of many forecasts. This prompted both companies and stock analysts to lower their projections for the current quarter and into 2013. Consequently, not only are valuations low but reigning pessimism has pulled down expectations, a combination that usually provides nice gains.

The consumer and banking stock sectors are particularly attractively priced. American consumers reliably spend freely in the fourth-quarter holiday season and early sales reports are encouraging. That’s good news for investors in Nordstrom (JWN-$54), TJX (TJX-$42), Costco  (COST-$95) and Simon Property Group (SPG-$147).

Larger banks will make headlines as their earnings recover. Wells Fargo (WFC-$31) is bouncing back nicely although I still prefer the steadier performance of regional banks, particularly US Bank (USB-$31). The developing housing recovery will give financial stocks a boost. Lowes (LOW-$31) and Home Depot (HD-$61) will also benefit. Masco (MAS-$14), the large manufacturer of all sorts of brand name products for homes is making money again after a nasty losing streak and is worth a look. Overall, these are testing times for investors but careful picking at current prices will be quite rewarding.

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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