Taking Stock

Tony Crowell

Winds of change

A couple of puffs of good news were enough to prompt a gale of buying that sent stocks up 800 points on the Dow in three days. Gales tend to blow out but the market’s ability to make a lot out of a little shows how depressed stock prices had become despite rising earnings. The impact of the good news may taper off soon but a change in momentum is in the air.

Just hours after S&P downgraded 16 of the world’s largest banks, the central banks in the U.S., Europe, Canada, the U.K, Japan and Switzerland together agreed to support the stressed banks of Europe. Concurrently, China reduced the reserve requirement for its banks for the first time in three years, signaling a policy shift intended to boost its economy.

These global efforts echo the united steps taken after the financial crisis of 2008 that prevented a worldwide slump from descending into a Depression. Debt levels remain disturbingly high but, given time and sensible political actions, they can be addressed through economic recovery as well as by improved financial discipline.

Europe will probably need a year to stabilize the strains resulting from trying to unite disparate economies and the Euro may not survive as a common currency, at least in its present form. The Euro Zone could suffer a return to recession; however, it is unlikely that the U.S. will join it.

The U.S. and China will continue their growth, more slowly here, but still enough to make U.S. stock markets a magnet for stock investors, especially nervous holders of European stocks. The environment for stocks is favorable although the market’s volatility is likely to engender further volatility as speculative and fearful investors react to the ups and downs of global financial events.

Buying or selling in reaction to news events seldom works; thoughtful anticipation of developing trends does. Investors have some margin of safety through the relatively low stock valuations that still persist. With the central banks easing monetary policies, interest rates in stronger economies will remain low, boosting corporate earnings and aiding business expansion.

With an election now less than a year away, partisan politics will become shriller and investors will be challenged to distinguish mere theater from substance. Congress will create more problems with shortsighted obstructionism. As Betty Davis said in “All About Eve,” “Fasten your seat belts, it’s going to be a bumpy ride.”

Taking her cue, investors should not try to outguess market swings but should anchor their portfolios in well-capitalized companies who have and can continue to grow their earnings and our dividends in this challenging economy. I am adding a new buy, Proctor & Gamble (PG-$64), with sales up 5% and earnings 8% over the last year in a difficult consumer sector.

Earnings for its fiscal year ending in April 2012 are forecast at $4.25, up the same steady 8%. It is thus selling at 15 times forecast earnings, a quite reasonable ratio for a global leader with $85 billion sales. It’s been through good times and bad and increased its dividend for 57 straight years, currently paying 3.3%.

Its dividends make Proctor & Gamble a nice fit for retirement accounts. Prior recommendation Unilever (UN-$34) yields the same. These stocks are my only current recommendations in the consumer sector. American consumers are a remarkably adaptable species but the overhang from the housing price collapse still leaves sales to them more vulnerable. These two sell consumable products all over the world and are doing well.

So are companies that sell directly to businesses like IBM (IBM-$188) and Intel (INTC-$25). Apple (AAPL-$385) is doing extremely well and will probably post a record quarter early next year. Its stock price often dips between quarterly earning reports as stock analysts have little to do except fret over Apple’s competition.  Apple doesn’t fret, it executes, and I expect its price back above $400 by yearend and breaking $500 in 2012.


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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