Taking Stock

The Reality And The Noise

After stumbling earlier this fall, the stock market resumed its uptrend. The aftermath of the elections spurred rumors that stocks were entering a bear market and the economy a recession. These were exaggerated as stocks are now down only 2% this quarter, well within the range of normal fluctuations, while the economy continues its slow but steadily recovering growth.

Current anxieties scaring investors have switched from the recent election to the forthcoming “fiscal cliff.” There is little doubt that stocks face increased rates on both dividends and capital gains upon sale. The extent of these increases as well as higher rates on top earners and decreased tax breaks remains unknown; investors are overreacting to these latest uncertainties.

One certainty is that the investment media will bombard us with excessive tax advice. I believe that investment decisions should rarely be dominated by tax considerations. Shaping decisions such as taking a loss on an unlucky buy before it goes long-term makes sense. Avoiding strong stocks because their dividends will be taxed at higher rates does not. Selling a profitable position and paying a tax now in order to avoid paying a higher tax upon sale in the indefinite future makes no sense at all.

Mr. Buffett has commented that his favorite holding period is “forever.” Following this principle on superior stocks like Apple defers any capital gain tax. This melding of investment and tax advantages blends with my own observations that better returns, whether taxed or not, are obtained through cutting investment losses and letting the profits run.

The prospect of higher taxes on dividends is prompting “special dividends” such as Costco’s recent announcement of a $7.00 dividend for December. “Special dividends” are popular with investors and Costco popped five points on this announcement. Such payments do nothing except shift cash from company treasuries to shareholders and studies show no advantage to subsequent stock price movements. The company is very well managed and its insiders, who own millions of shares, will benefit from reduced rates this year but I found this price pop useful in exiting our positions.

Retail sales were strong as we enter the vital holiday season although higher end stores like Tiffany were weak. TKX (TJX-$44) and Simon Property Group (SPG-$151) are doing well and a solid shopping season should take them to new highs.

Overall, stocks continue to hold up quite well despite much-publicized prevailing worries. They have rallied above the closely watched round number levels of 13,000 on the Dow and 1,400 on the S&P averages. Strength comes from continuing low interest rates, restrained inflation and moderately increasing corporate earnings. These three factors are likely to continue well into 2013, probably driving the stock averages above 14,000 and 1,500.

Industrial stocks are coming up and I expect DuPont (DD-$43), General Electric (GE-$21) and Cummings (CMI-$100) to pick up their pace. I am adding Deere (DE-$85), the worldwide leader in agricultural machinery. Despite a weak global recovery, it is increasing sales at a 12% rate, now in excess of $36 billion. Earnings for fiscal (October) 2013 are currently estimated at $8.30, up 9%, a price: earnings ratio below 10.

Deere has been an outstanding long-term investment, an example of the virtues of holding onto winners. For the last ten years, it provided its holders a 230% return, dwarfing the 50% return of the S&P. Increasing global growth will produce continuing demand for its products, possibly increased through revised development of newer farm lands in response to global warming.

The current wrangling over tax rates echoes the legislative struggle in the excellent new movie Lincoln. That conflict was on the Thirteenth Amendment, a much more important struggle over ending slavery rather than taxes. The Amendment passed as will our current fiscal quarrel. It is a blessing that the Lincoln Administration was not plagued with the unending clamoring of today’s powerful media.

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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