Taking Stock

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Tony Crowell
Tony Crowell
The Bipolar Stock Market

 Stocks fluctuate in the short-term largely in response to psychological or emotional reactions to events affecting companies or the economy. Lately, nervous investors and traders have overdone this, driving the stock market into a bipolar disorder. This is characterized “by periods of elevated mood and periods of depression” that roughly correspond with the market’s recent volatility.

The horrific events in Paris show the fragility of our society that we so often take for granted. The aftermath testifies to human strength and resolve as Parisians returned to their cafés and investors to the stock markets, which have consistently recovered after all the terrorist attacks that have plagued the twenty-first century.

The Federal Reserve mentioned global stress as a reason to leave interest rates alone at its September Open Market Committee meeting. The attacks prompted safe-haven buying of dollars and its continuing strength argues against a rate hike. The strong October employment report raised expectations for an increase next month, which is still the expectation. Uncertainties prevail and some clues will come with reports of retail sales over the holiday season.

Stocks in the retail sector have struggled recently as Macy’s reported disappointing results. In contrast, buy recommendations TJX (TJX-$68) and Costco (COST-$162) are ringing up strong sales. Deloitte now forecasts that lower gas prices, higher home values and an improving labor market will support substantial increased retail sales for the holiday season, which formally begins with the publication of this column.

Online sales will continue to grab market share from brick-and-mortar retailers. Three years ago, sales of Wal-Mart were 16 times those of Amazon (AMZN-$669). Wal-Mart still leads but its sales are now 4 times that of Amazon, which also has 3 times the sales per employee. In 1997, Wal-Mart took the place of Woolworth in the Dow Jones industrial average. I expect Amazon will take its place by 2020 and I am adding it as a buy recommendation.

Its stock has doubled this year, taking into the world’s 10 largest companies by stock value. Part of its success comes from Amazon Web Services (A.W.S.), which rents enormous amounts of cloud-based server space to other companies. Deutsche Bank estimates that A.W.S. alone is worth $160 billion.

More importantly, after years of investors giving Mr. Bezos leave to spend billions building an enormous distribution infrastructure, it is now making money by selling stuff. It has over 100 warehouses with more on the way and over 50 million Prime subscribers (at $99), up from 30 million a year ago.

Would-be competitors like Jet.com are Lilliputian. In China, Alibaba (BABA-$78) dominates online sales, however, it operates primarily by connecting buyers and sellers. Alibaba’s valuation, like most companies, is more moderate than Amazon’s and it is also a buy for the more aggressive. There is little prospect for a dividend from Amazon but its patience in building a unique company over the past two decades puts it in a class ahead of those tied to quarterly earnings.

The low oil prices that are boosting consumers’ buying power, look here to stay for an extended period. From the days of John Rockefeller’s Standard Oil to the founding of OPEC, the oil market has usually been constrained by cartels, which exerted various price controls. Increasing production from American shale oil accompanied with less energy-intensive economic growth are shaping the trajectory of prices toward “peak demand” rather that “peak supply.” Oil stocks are no longer safe, dividend-rich bulwarks of stock portfolios.

Safety is an elusive goal. World tensions and election campaigns will increase demands for defense spending. Northrop Grumman (NOC-$187) has rising earnings, a reasonable valuation and a 1.7% yield with 11 years of increases.

As the Thanksgiving holiday approaches, we should consider extending our gratitude to refugees and to those who struggle like Adel Termos. He was walking with his young daughter the day before the Paris attacks in an open-air market in Beirut. A suicide bomber detonated his explosives. Amid the resulting chaos, Termos saw a second bomber preparing to blow himself up and quickly decided to tackle him, smothering him with his body. The bomb went off, killing Termos, but many were saved, including his daughter. He was a Muslim.

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 1995. [email protected] 949.494.1376/800.697.2622


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