Taking Stock

Tony Crowell
Tony Crowell

Congress Vs. The U.S. Economy

Stocks paused for breath after a strong rally, quietly sliding for a week but remaining well ahead for September. Their big rally followed the Federal Reserve’s decision last week to continue its monthly $85 billion stimulus measures. With that issue deferred, investors are now becoming increasingly nervous about the increasing possibility of a government shutdown and its impact on the economy.

Two ominous deadlines in Washington are rapidly approaching. The government’s new fiscal year begins October 1 and Congress needs to pass stop-gap financing for federal agencies. Beyond that hurdle, the Treasury Secretary recently warned that the Congress must raise the federal debt ceiling by October 17 or risk a very damaging default on federal debt obligations.

It remains to be seen if the obstructionist minority in the Congress will be able to put the interests of the nation ahead of their own political ambitions. A last minute compromise is probable but the impact of the last such spitting match indicates investors should be cautious.

Two years ago, a similar partisan quarrel about raising the debt ceiling produced several weeks of market swings. The wildest was the week of August 7. On Monday, the Dow Industrials lost 635 points. On Tuesday, they rose 430 points. On Wednesday, they lost 520 points. On Thursday, they rose 423 followed by a 126 rise on Friday, ending the week at 11,269.

Those who didn’t surrender then have been rewarded as the Dow has since risen 36% to 15,300 in two years. Today’s catfight will end, hopefully without more lasting damage, but investors might keep some extra cash handy until it does.

I sold Franklin Resources in anticipation of higher interest rates hampering its bond fund sales. I also sold Oceaneering, a fast growing provider of services to offshore oil producers. The company has an excellent earnings record, as reflected in its valuation, but I am becoming a bit skeptical concerning the future of the big energy companies.

Their stocks have been bedrock for investment portfolios and their global positions today are extremely profitable but there are warning signs. The most surprising factor is that global energy demand is probably near a peak. This is not the “peak oil” that was much discussed a few years ago, which was a prediction that energy supply would flatten, but a belief that global demand, not supplies, could decline.

Surprisingly, demand in the richer countries of the world has actually continued to fall since 2005. Increases in demand are coming from developing countries. These are substantial, particularly in China where the number of cars are growing at 7% a year but, concurrently, conservation and other measures are taking effect. For example, China’s automobile fuel standards require 34 miles per gallon by 2015, increasing to 47 mpg by 2020.

Increasing use of diesel and gas vehicles as well as the new waves of electric and hybrid cars are decreasing relative oil consumption and, in some cases, eliminating it. At the same time that technology is finding ways to reduce demand, supply is increasing as “fracking” technology finds ways to release supplies of “unconventional” gas from shale beds. Together with new discoveries of conventional gas, these new ways have increased estimates of world gas supply from 50 to 200 years.

The impacts of these major changes will be gradual but it appears that the curve of energy demand is developing a downward “taper” while the supply curve is coming up. These trends point to toward lower energy prices.

General Electric (GE-$24, 3.2% yield) has a mix of industrial, healthcare and transportation businesses that would benefit from these trends. Earnings this year and for the next few should grow at a steady 9-10% rate. GE continues to be a key position in our portfolios.

Overall, once past the current political problems, corporate earnings will power the market to new highs, probably by yearend if the politicians can get their House in order. I continue to believe a more distant threat to investors is a strong surge in stock prices that would inevitably result in a speculative overshoot. When we reach that stage, we should remember the comment by the winning skipper of Oracle, “Be careful, because you can be a rooster one day and a feather duster the next.”




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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