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Taking Stock

Tony Crowell

Tony Crowell

Eyes on the Prize

Two weeks after a small-minded sect of politicians drove the United States to the brink of default, its stock market hit record levels. This rebound reflects its continued leadership as the world’s largest economy and also on the country’s ability to produce and attract brainpower. Beyond economics, it is the world’s Nobel superpower.

The Nobel Prize has been awarded 853 times with 350 to Laureates resident in this country. This year, nine were awarded here, the same total that China with 1.3 billion people has produced in its entire history. Of China’s nine winners, today seven live abroad, including three in the U.S., and one is in a Chinese prison.

Freedom, among other qualities, is a competitive advantage. So is our traditional immigration culture that has welcomed winners from the U.K., India and Europe, particularly among those fleeing repression. The U.S. university system leads the world. It is largely private, enjoys academic freedom is richly endowed in many cases and also receives additional stimulus through federal funding for research. Its culture is enriched by respect for individual achievement, innovation and acceptance of contrary opinions.

A tough of this against the grain thinking is always useful in stock market investing. This becomes acutely necessary when investor emotions swing to extremes. Some investor optimism is developing and several factors provide bases for further stock market advances. As exuberance develops, it is always necessary to guard against complacency bred by market gains.

This business may sometimes look as easy as Willie Mays catching a fly ball or Tiger Woods sinking a putt. Their graceful skills were developed through talent, practice, successful experience and a cool head, qualities essential in both sports and stocks. Whenever successful stock picking looks easy, investors should be especially careful.

The principal headwinds are a resumption of the fight over the “debt ceiling” and the eventual “taper” of the Federal Reserve’s eased interest rate policies. Both have been deferred to January although a mere suggestion that the Fed could act sooner was enough to interrupt the market’s uptrend as we ended the month.

With most companies having reported, third quarter earnings were upbeat with 70% beating estimates. This is partly attributable to estimates being lowered after cautious forecasts accompanied the June quarter reports. December quarterly earnings estimates are running 8-9% above last year, probably another relatively easy target. Stock prices are trading in their midrange of historic multiples of earnings and continuing earnings increases will give stocks room to run.

Third quarter winning sectors were Technology and Healthcare. Consumer stocks continue to lag the market and the impact of recent fiscal scares on holiday shopping is still unknown.  Oil prices are flat for this year and bond prices remain weak in anticipation of inevitable interest rate increases. Gold seems hopeless. Industrial stocks like Cummings (CMI-$127) and Eastman Chemical (EMN-$79) flinched on fourth quarter uncertainties but are still buys. So is General Electric (GE-$26), which is developing a nice uptrend.

Apple (AAPL-$524) has enough new products for a solid season and will probably hit $550 by yearend. Google (GOOG-$1036) is growing earnings with remarkable consistency and, like Apple, dominates its subsector. Both Bristol-Myers (BMY-$52 and Pfizer (PFE-$30) are raising forecasts.

Among consumer staples, Nestlé (NSRGY-$72) has excellent opportunities among faster growing emerging markets. With sales over $100 billion, it has been said that it is run like a Swiss bank that happens to be in the food business. Nestlé stock yields 3% from dividends increased for 15 straight years.

Following winds should keep our stocks on course through the rest of the year. January may turn sour with renewed threats of fiscal issues and the beginning of the “taper” in Fed policy. There will doubtlessly also be tax-oriented selling from investors deferring capital gain taxes until next year. Investors should stick with the quality and avoid chasing stocks in the news. Cool heads do even better when others lose their bearings and new highs in the averages may bring a return to “irrational exuberance.”

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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