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Taking Stock

Tony Crowell

Tony Crowell

Keeping Perspective

As predicted last week, stocks easily summoned enough buyers to push the Dow Average through 16,000 and the S&P past 1800. This prompted the usual media attention given to round numbers. After the Federal Reserve released its latest report, the market sold off slightly on its newest mention of the prospective inevitable “taper” toward higher interest rates.

The Fed said that it anticipated cutting back on its $85 billion monthly bond-buying program “in coming months.” It reiterated its goals of keeping short-term rates low while working toward its targets of getting below a 6.5% jobless rate while maintaining an inflation rate below 2.5%. There is nothing really new here but Wall Street is always seeking or promoting short-term indicators.

Investors separate themselves from speculators if they are able to maintain a long-range view in a short-term market. This is not easy in the midst of continuing showers of all manner of investment advice from stockbrokers, the media and newsletter vendors, much of which is contradictory. Their buy and sell recommendations are often keyed to breaking news events; institutional traders anticipate these at an early stage. Non-professionals are often at a disadvantage, reacting to events already incorporated into stock prices.

Wall Street compensates traders on extreme short-range performance. Non-professionals can do quite well with long-range perspective. It is well known, for example, that continuing development of shale deposits through fracking will greatly increase U.S. energy supplies. This will probably keep a lid on oil and gas prices, slowing earnings growth of energy producers but boosting the results of energy consumers like chemical companies.

Dow Chemical (DOW-$39), Eastman Chemical (EMN-$76) and DuPont (DD-$61) will benefit. Cheniere (LNG-$39) has the leading position in building the first liquefied natural gas export plant. No earnings yet but it just got $2 billion from Blackstone (BX-$26), a large asset manager and continuing buy recommendation. Chicago Bridge & Iron (CBI-$76), another buy recommendation, builds big projects like LNG terminals.

Technology always spawns much Wall Street chatter. One long-range trend is global growth of smartphones and tablets. Intel (INTC-$25) concentrated on desktop computers and lagged in mobile devices, slowing recent growth. This is a substantial company ($52 billion sales) with leading research capabilities. Intel is refocusing, quadrupling tablet chip volume and expanding contract manufacturing. Earnings growth is negative for 2013, unusual for this sector pioneer, but resumed this quarter. Valuation is reasonable and it yields 3.6% with dividend increases for nine years.

In smartphones and other mobile devices, ARM Holdings (ARMH-$47) is a leader. It is also a buy recommendation although its growth has led it to an earnings valuation over five times that of Intel. Qualcomm (QCOM-$71), another buy, through its development of CDMA, holds a leading position in many digital communications areas. Its growth slowed this year but earnings forecasts look to around 10% increases for the next two years. The company recently announced its intentions to return more of its strong cash flow to its investors.

Low interest rates continue to provide substantial benefits to almost all companies, among the reasons that corporate earnings are at record levels. As all the fuss over forthcoming Fed action should demonstrate, it is not a question when interest rates will begin to climb, not if they will. Nevertheless, some amateurs seeking a misleading feeling of “security” are buying products like 5-year Treasury bonds or insured certificates of deposit yielding around 1.35%.

These may seem like conservative investments but a one-point increase in Treasury bond rates next year would reduce their current value of by almost 5%. For the time being, investors should seek short durations. The Franklin Limited Duration Fund (FTF-$12) holds shorter-term issues and yields over 6%. Its price will fluctuate but it is better suited to this transitional period than groping for fixed-rates. Volatility is likely to increase as we approach yearend but we should have a decent close to a good year. Perspective will always be needed.

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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