Taking Stock

Tony Crowell

The Guns Of August: The Fears Of September

September should offer some relief from the market’s guns of August, the worst August in 10 years. The S&P 500 index lost 6% and unusual volatility seemed to scare investors even more. In one four-day stretch, the Dow Jones Industrial Average swung over four hundred points on each day, a first for the 115 year-old index. The new month brought no instant relief as it sold off another 253 points, leaving it slightly down for 2011.

This month has been historically weak for stocks as they await quarterly earnings and the prospects for the closing and forthcoming years. With fearful investors quick to sell at a hint of trouble, stocks will have to fight their way back. That would be easier if Washington could provide economic stimulus. Unfortunately, that proven policy remedy for recession seems lost in panicked partisan screaming about the “deficit.”

If fiscal deficits were a present economic threat, then buyers of U.S. Government bonds would be demanding higher rates. In reality, demand for Treasuries is so strong that the current yield on 10-year notes is an amazingly low 2%.

The deficit will diminish with tax revenues that will grow whenever the economic recovery gets some momentum. That pace remains discouragingly slow with the most recent failures in Congressional competence aggravated by cries for more austerity. Such shortsighted fear mongering only raises the probabilities of sliding back into recession.

Chairman Bernanke has guided the Federal Reserve away from the policies that aggravated the 1929-1930 collapse. Further stimulus is needed to avoid repeating the financial relapse that threatened recovery in 1937-38, when the Roosevelt administration became prematurely concerned with the “deficit.” One area that needs attention is the nation’s decaying infrastructure. Another comes with the transition of the men and women of our armed services as our overseas wars wind down.

These are major challenges but this country has survived worse. A sense of unity would help but the 2012 elections make this a distant hope. Investors should realize that partisan predictions of economic collapse are exaggerated. Fearful selling continues to drive stock prices down, creating valuations that discount Armageddon.

For example, Aflac (AFL-$35), a substantial health and accident insurer with over $20 billion sales and steadily rising earnings is down from a high of $59 because of fear of possible defaults in its investments. Based in Columbus, Georgia, the company seems to have once succumbed to Yankee bond salesman as 6% of its total investments in 2008 were in Southern Euro countries. It has cut this in half, eliminating its Greek bonds and reducing its positions in Ireland and Portugal.

There is no Euro currency exposure here as the bonds were issued in yen, correlating with Aflac’s operations in Japan, from where it derives over half its sales. Aflac uses ducks in its advertising here; it might use cranes in Japan. Earnings will be around $6.30 a share for 2011, up from $5.53, and the company forecasts at least $6.55 in 2012. The current dividend yield is 3.4%.

This is an interesting contrast to a treasury bond or almost any bond, for that matter. Aflac has increased its dividend for 28 straight years. Its stock price will fluctuate, certainly, but it would be almost impossible for an investor today to receive more cash in bond interest than from Aflac dividends.

With so much fear and so little confidence around, investors must tread carefully. Bargain hunting should be confined to growing blue chips like Chevron (CVX-$96), DuPont (DD-$47), IBM (IBM-$167) and McDonald’s (MCD-$89), all yielding 2% or more.

Most banks will be unrewarding gambles. With continuing news of mortgage losses, Bank of America may not survive. I would also avoid any of the 16 other financial institutions named in the government lawsuit for mortgage fraud in the recent go-go years.

US Bancorp (USB-$22), which was not named, is a growing Minnesota-based super regional that will survive. It is growing earnings at over 20% quarterly but is valued as if it were one of the guilty parties. Another attractive stock, SVB Fin’l (SVB-$43) owns Silicon Valley Bank and has offices in China, India, Israel and the U.K.

Overall, fear fills the headlines but thoughtful investments will be rewarding. “Our doubts are traitors, and make us lose the good we oft might win, by fearing to attempt.” Measure for Measure, I, iv.



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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  1. […] Taking Stock Its stock price will fluctuate, certainly, but it would be almost impossible for an investor today to receive more cash in bond interest than from Aflac dividends. With so much fear and so little confidence around, investors must tread carefully. … Read more on Laguna Beach Independent […]


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