Talking Stock

Tony Crowell

Living With Uncertainty

Stock columns at this time traditionally try to forecast the year ahead. Currently, the only certainty is that there will be continued uncertainty and accompanying volatility. That is more of a useful forecast than it might sound. Investors will do better if they accept that stocks will be buffeted by winds from every direction, use market dips to add to positions in quality stocks and avoid giving in to the Sirens who entice emotional selling, often near market bottoms.

With only a few hours of trading left, the S&P 500 is headed for an anticlimactic close about where it began 2011. The “Santa Claus” rally made a weak appearance, leaving this indicator of next year’s opening momentum confused, at best. While stock prices were going nowhere in 2011, corporate earnings continued to do nicely, rising to record overall figures. The result is that stocks are trading at an average of only 13 times earnings, near historical bottoms.

The economy began 2011 with greater optimism than we have now even though economic growth has continued and a further 2-3% rate is seen for the next few months. Unemployment finally notched down to 8.6%, not good, but still the best figure in three years. Much of the gloom came from outside events: the impact of the Arab Spring on oil supplies, interruptions to supply chains from disasters in Japan, partisan political stalemates and the debt crises in Europe.

Political quarreling was recessed, not addressed, and we can expect more wrangling on raising the debt ceiling, tax rates, extension of eased payroll taxes and budget cuts. Embarrassing and ineffectual blunders by Congress will not help confidence and this sorry performance is likely to continue all year.

Europe has also not solved its fundamental problems but shoved them into the New Year. Our stock markets actually look quite promising compared to Europe but its complex financial stresses will rattle our markets through periodic scares of bank failures.

Bearing in mind the combination of reasonable stock values and continuing growth in corporate earnings, stocks in larger companies with rising earnings and dividends still look good. The background music is provided by the Federal Reserve, pledged and capable of keeping interest rates low until 2013.

Favored blue chips include IBM (IBM-$185), Chevron (CVX-$105), Bristol-Myers (BMY-$35), Merck (MRK-$37), Exxon (XOM-$85) and new recommendation Royal Dutch Shell (RDS.A-$73). In the still troubled financial sector, U.S. Bancorp (USB-$27) continues to stay the course. Each one of these stocks provides a 2% yield, or more, reassuring in uncertain times.

One of the more certain global trends is increased demand for energy. New sources of supply like the oil shale recoveries in this country are encouraging but supply continues to lag demand. Royal Dutch is a solid performer with a 4.7% yield backed by five straight years of dividend increases. Its price: earnings ratio is a remarkably low seven. With its base in the Netherlands, its stock price is subject to nervous selling on Euro currency anxieties but the company has weathered two world wars as it moved to its $455 billion in sales.

Portfolios anchored with large blue chip stocks can always use a little spice like a fast growing biotech stock. Spectrum Pharmaceuticals (SPPI-$15) recently almost doubled its sales to a respectable $174 million. The Irvine-based company has reached the commercial stage for two oncology drugs and has several more in development. Unusually for a biotech, it even has earnings, with nearly a dollar a share within grasp for 2011.

A disappointing year has been favorable for our bond funds with their attractive income yields. Some, like Alliance Worldwide and Credit Suisse have even climbed in market price above their asset values and those still trading at a discount should be favored. These include Franklin Trust (FT-$6), CBRE Global Real Estate (IGR-$7) and Wells Fargo Multi-sector (ERC-$15). These are yielding 7%-8%, distributed monthly.

The forecast is for cloudy skies and gusty winds, clearing later in the year. Take your umbrella.


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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