Taking Stock

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By Tony Crowell
By Tony Crowell

Staying On Course

The seas remain choppy and the winds variable but there are signs the storm is blowing itself out. After a discouraging week, as soon as the markets reopened after Labor Day, stocks came through with a strong, surge that lifted my portfolio stocks 3% in a day. The market gave back half its gains the next day but then resumed its present uptrend.

That new uptrend will remain under various pressures with the most immediate coming from the long-anticipated meeting of the Fed Open Market Committee next week. Pending that particular development, markets are likely to remain as unpredictable as family matters among the Kardashians.

Contrary to some wishful beliefs, the objective of the Federal Reserve is not to support the stock market. Its Congressional mandate incorporated in 1977 legislation is dual: (1) to promote maximum sustainable employment and (2) price stability. The latter is interpreted as low and stable inflation, a goal set to avoid repeating the up-and-down swings in interest rates and persisting inflation of the 1970’s.

When the Financial Crisis of 2007-2008, threatened to turn the resulting Recession into a second Great Depression, the Fed under Chairman Bernanke, a student of the Depression, interpreted its mandate broadly, lowering interest rates to almost zero and initiating a sustained bond-buying program named “Quantitative Easing” (“QE”).

The Fed’s timely actions worked. The Unemployment Rate, which peaked at 10% in early 2009, is now down to 5.1% and the annual inflation rate to 0.2%. It took six years for the 19-nation European Union to follow suit but it is now pressing ahead. The recent abrupt Chinese devaluation took the cards off the table but they have since been shuffled, cut and dealt with new improved valuations that can build winning hands to investors.

The financial media are overflowing now with conflicting babble about the Fed’s next move and whether the market “correction” is over. These topics are certainly interesting but not very valuable, as no one really knows the answers. What we do know is what experience has shown to be the successful tactics in these turbulent times.

They are twofold: (1) Regain perspective and avoid fearful trading. (2) View these periods of heightened uncertainties to prospect for attractive additions. These tactics have made Mr. Warren Buffett wealthy and he has recently reaffirmed his policies of using market dips as buying opportunities.

Goldman Sachs (GS-$187), the multi-faceted investment banking powerhouse, is trading at 1.10 its book value, slightly above the price of its employee stock options. Earnings this year should be in a range of $17-$18 a share on estimates reduced since the market “correction” from above $19. Trading at a P/E of 10-11, slightly above book value, its stock is a bargain.

Its dividend yield is 1.4% with increases for the past three years. Earnings estimates for next year are slightly above $20 a share. Unsurprisingly, it’s been one of Mr. Buffett’s holdings for several years.

Recent buy recommendations are all very much in play, among them CDW (CDW-$40), recommended last week at $39. It provides hardware and software products to integrated IT solutions. Current earnings estimates are for $2.90 this year and $3.24 in 2016. It recently acquired a UK-based IT company and is expanding its international reach although it has zero exposure to Chinese markets.

In troubling times, investors must remember that the stock market is not the economy. That’s obvious but hard to keep in mind when headlines are screaming about bloodbaths in world markets. The recent correction reflected concerns primarily about China, which is not yet terribly important to U.S. companies or exporters but its recent actions added to uncertainties. Its recent stock market crash sent ripples to other markets, dampening what Keynes called “animal spirits.”

As a recent New Yorker article emphasized, unless market plunges become long lasting, the resilient U.S. economy shrugs them off. The 1987 crash took stocks down 22% in one day but corporate investment didn’t even flinch and the effect on consumer spending was short-lived. Keeping perspective helps keep us on course.

 

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 1995. [email protected] 949.494.1376/800.697.2622

www.crowellroberts.com

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