Taking Stock

Tony Crowell

A World of Uncertainties

Unemployment finally moved down a notch from 9% to 8.6%, mixed progress is taking place with Europe’s financial problems and stocks continue to bounce up and down. They always have but this year seems to have been particularly hard on investor nerves, probably because much of the fluctuating took place within a cloud of bitter political wrangling.

After all this sound and fury, the Standard & Poor’s 500 stock index is down around one percent. Fortunately, some of the more consistently reliable guideposts to the stock market indicate a higher market as we move toward another New Year.

The “Presidential Election Cycle” has been a reliable market indicator for over seventy years. This augers a higher market in the year before a presidential election and last failed in 1939, when the market lost one tenth of one percent, a sturdy performance considering the other events of that year. Unlike many market superstitions, there may be some basis to this as one suspects that every incumbent President is using all possible tools to boost his party’s chances for the following November.

Going into this year, the annual gain for this third year was a robust 20 percent. The next best year was the election year, itself, with a return of 8 percent. Investors can also hope for the “Santa Claus” rally, usually defined as the last five trading days of every year plus the first two of the next. It has produced a return of almost 2% for fifty years, but is probably more useful as an indicator of the investment outlook for the coming year. Santa skipped Wall Street in both 1999-2000 and 2007-2008, foretelling two nasty market years.

The Euro Zone still threatens like the Ghost of Christmas Future. The European Union is complex and large; in fact, the EU is the world’s largest economy. Its stresses are apparent and their solution uncertain but the mutual benefits of union provide a compelling case that resolution, even if temporary, lies ahead. The dollar outpaced the Euro recently although a potential U.S. default drove it down 15% earlier this year. Dollar and Euro exchange rates are now about where they started, somewhat like stocks despite similar volatile market swings.

The storm clouds over Europe have caused many investors to shy away from stocks with any associations to the Old World. ING Global Real Estate Income (IGR-$7), whose holdings are primarily in the U.S., Canada and Australia, has slipped to a 15% discount from net asset value and yields 8%.

Wells Fargo Multi-Sector (ERC-$15) also yields 8%, paid monthly. The average duration of its holdings is 7 years, good protection against the inevitable bursting of the long-term bond bubble. The buying frenzy for the apparent security of government bonds seems to have blinded many holders to the inevitable damage to longer-term bond prices whenever interest rates go up.

That will probably not be for at least a year as the Federal Reserve continues its efforts to keep a weak recovery pointed the right way. Businesses are understandably reluctant to expand amid prevailing layers of uncertainty. Much effort is spent on finding scapegoats but the main cause continues to be dealing with the huge debts, here and abroad, run up during the fat years by consumers, homeowners, banks and governments. These were all done with the consent of the governed, thus reminding me of the line from the old comic strip “Pogo,” “We have met the enemy and he is us.”

All these uncertainties continue to breed remarkable valuations among stocks in growing companies. The uncertainties will persist for, well, for an uncertain period, and investors may have to exercise even more patience than usual, particularly for stocks that have a European accent.

Chicago Bridge & Iron (CBI-$39), a hybrid with dual headquarters in the Netherlands and Texas, is an undervalued new buy. Its construction business features Liquid Natural Gas facilities and other large petrochemical complexes, storage tanks and technologically advanced energy plants. Recent new awards in Australia, the Middle East and Japan totaled $3.8 billion, a quarterly record and backlog rose to $9 billion, also a company record. Debt is modest and there is a 0.5% dividend. Earnings will be around $2.50 a share for 2011, up 22%, with a similar increase forecast for next year.  The company has been in business for 122 years and another year or two will be rewarding for its investors.


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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