Taking Stock

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Tony Crowell
Tony Crowell

Searching For Perspective

The Dow Industrial Average began the week by dropping 1,175 points in a single day that financial media labeled a “market meltdown.” Well, it wasn’t, nor does it indicate any change in our strategy of holding larger, growing companies in growing sectors. The significant change was the end of a remarkably sustained period of low volatility in global stock markets.

The recent one-day drop took the Dow Industrial Average down 4.6 percent, not an insignificant dip, but there were several steeper percentage declines during the financial crisis, not to forget the October 1987 508-point drop in the Dow; that took the Industrial Average down 22.6 percent, still the record for a single day.

Studies of investor behavior after the 1987 crash revealed almost no correlation between decisions to sell and any economic news. Investors sold because they succumbed to herd behavior, selling in order to conform to the others. There were also no particularly adverse economic or business developments over the last few trading days, thus it is probable that all this fuss stemmed from similar fearful behavior.

Market change is inherent in market behavior and participants need to keep their perceptions in tune. A 1,000-point decline in the Dow has been increasingly probable as its levels began steadily climbing well above 20,000 over the past year. Remarkably, the market did not decline by more than 2 percent on a single trading day in all of 1987. That’s, well, weird. There were five such days in 2016, six in 2015, four in 2014 and 2011 saw 21 trading days with the S&P falling by more than 2%.

Calling the recent drop a “meltdown” is an overreaction and investors will do better by trying not to surrender their investment decisions to such emotional labeling. Frequently, when investors become pessimistic, stock prices fall and so do bond yields as investors sell stocks and buy bonds for their apparent stability. Not so this time as yields on 10-year Treasuries rose above 2.8%, their highest level in four years. This seems related to investor concerns that optimistic earnings outlooks will lead to higher wages, pressuring profits and to higher inflation, causing the Fed to raise rates sooner than expected. Well, maybe, but wage growth has lagged for years while the Fed has been pushing for slightly higher inflation rates. Improvement in these factors is welcomed. With the Dow over 24,000, investors should be recalibrating their sights toward percentages rather than simply counting 1,000-point changes.

Even the pending takeover attempt of Qualcomm (QCOM-$65) by Broadcom (AVGO-$241) was ruffled briefly by media hysteria. When I recommended buying Qualcomm last November. I wrote that I believed Qualcomm would reject the takeover attempt and that Broadcom would then sweeten its bid. Both these events followed as predicted, as Broadcom this week increased its offer from $70 in cash and stock to a “best and final” offer of $82, with $60 in cash and the remainder in Broadcom stock.

Qualcomm stock actually declined on this raised bid, an unusual reaction attributable to the coincident market sell-off and to reports that Apple might switch suppliers from Qualcomm to Intel for future Phones. Qualcomm stock rallied three points on Tuesday as clamors of market meltdowns dissipated.

Broadcom further strengthened its new offer with a commitment to pay a sizeable break-up fee in the event that Qualcomm agrees to a deal that is ultimately rejected by regulatory authorities. Qualcomm’s quarterly dividend of $.57 will be paid to shareholders on all positions established by February 27.

Qualcomm’s stockholders meeting is scheduled for March 6 and it is currently trying to fend off being taken over through a public relations campaign claiming that the takeover bid “dramatically undervalues the company,” the usual argument that is particularly ridiculous as its stock hasn’t been near the $82 Broadcom bid for years.

My clients are receiving solicitations via mail, phone and e-mail to vote for the company slate at the margin meeting. I intend to vote their shares and recommend that all other Qualcomm shareholders also vote for the Broadcom proposals that reject the existing Directors and make way for Broadcom to proceed with the takeover. The $82 stated value is a full 50% increase over the target’s price last November when Broadcom made its initial offer. Qualcomm’s management had by then managed only a pitiful 8% stock price gain over the preceding five years. The stakes are high and the odds are clear.

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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