Irrational Pessimism

Tony Crowell

After a miserable month of May for the stock market, stocks managed to firm up for a small streak of three straight up days. The overall situation in the Euro Zone has not improved but there are scattered signs that the self-interests of the largest nations will divert them from the unsuccessful austerity budgets they forced on the smaller countries. Greece looks like a charity case but Spain, the fourth largest member, is meeting some success in pressuring the richer countries to ease their demands.

In this country, the forthcoming “fiscal cliff” remains the same problem as it has for years. Partisan charges and countercharges from the political elections continue to rattle investor nerves. With all this angst, it might seem remarkable that stocks managed any rally at all.

The margin of safety is the moderate valuations for most stocks, the remarkably low levels of interest rates and inflation and a weak but continuing economic recovery. This doesn’t mean that stocks cannot go lower in their perverse fashion but it does suggest that current buying comes from savvy investors able to avoid irrational pessimism.

With the yield on a five-year Treasury bond less than one percent, quality stocks like IBM (IBM-$194) are yielding more than two percent. We buy growth stocks on their projected growth rate but a solid record of increasing dividends as IBM has for sixteen straight years is a nice sweetener.

TJX (TJX-$42) and Sigma-Aldrich (SIAL continue to be among the best of breeds in this pure bred class. So is USB (USB-$30), the strongest performer among regional banks. All three companies are on course for record sales and earnings in 2012.

Valspar (VAL-$48) is a new recommendation in the industrial sector. It has been producing paints and coatings since 1820, when two businessmen in Cambridge, Massachusetts began the first commercial production of varnishes in this country. Global sales now exceed $4 billion, growing at over 20% annually. Earnings stumbled with the economic slowdown but Valspar has adjusted. It forecasts earnings of $3.25, up 22%, for 2012. Its stock yields 1.6%, with dividend increases for 33 consecutive years.

One of the good news stories that was supposed to boost spirits on Wall Street was the much-hyped IPO of Facebook (FB-$26), which did not work out as planned. Facebook reminds me of a teenager who is very popular in high school but fades away as other graduates go on to things other than dating.

Disappointing news and overly dramatized news stories dampen investor spirits. The resulting pessimism is as irrational at the “Irrational Exuberance” that accompanied the bubble of the 1990’s. Investors trying very hard not to lose money are as unfortunate as a person bringing that strategy to a poker table. Winning should be the goal.

A recent Gallup poll reflects this in the choices for long-term investment by American investors. The largest bunch, 28%, favored gold, which hasn’t returned anything for many months. The next group of 20% liked real estate, which seems to represent more hope than reality for non-professional investors. Another 19% selected bank savings accounts. Finally, another 19% picked stocks.

Well, human nature is a funny thing. Last month, I had a vacation in Turkey, a beautiful country with a proud and vigorous people. It seemed everywhere we went, there were new houses and condos springing up. I hadn’t seen such new construction for a while and asked our guides about this. The uniform answer was that Turkish banks were offering loans for new homes on such favorable terms that it would be foolish to pass up the chance. This has a familiar ring.

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/


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