Taking Stock


Santa Claus Is Coming To Town

Tony Crowell
Tony Crowell

After months of speculation, the Federal Reserve finally announced that it would begin reducing its money-easing program of buying bonds. Rather than any abrupt termination of these popular activities, it will modestly taper its monthly purchases from $85 billion to $75 billion. This was outgoing Chairman Bernanke’s exit speech after a demanding eight years during which his beard has turned white. Wall Street must have thought he now looks like Santa Claus as the market greeted the news with a 200-point pop.

Initially, stocks and bonds fell on the news, and then woke up with the Fed’s comments that its long-anticipated move did not represent a tightening of monetary policy. It cemented these comments with an extension of the amount of time it plans to wait before raising short-term interest rates, previously pegged to the unemployment rate falling to 6.5%. The bank said now that it would wait until “well past the time that the unemployment rate declines before 6.5%.”

That translates to a commitment to keep short-term rates at their present near-zero levels through 2014, probably through 2015 and maybe well into 2016. Long-term rates will drift upward with the key 10-year Treasury rate rising from today’s 2.9%, probably somewhere around 4% with mortgage rates keeping pace.

These rates are not at levels that will stifle the economic recovery. That got an unexpected boost from Congress, where old-fashioned bipartisan negotiations resulted in budget compromises that are moving toward a final vote shortly in the Senate. These efforts appear to have spared the nation another of those High Noon shootouts in Congress that killed confidence and created damaging uncertainties for business.

After the news settled, buyers had pushed both the Dow Jones Industrial Average and the S&P 500 to new all-time highs. Momentum and a traditional “Santa Claus” rally are likely to prod stocks into further new highs as we enter January. At some point, they will pause and possibly “correct” and their further gains will correspond with corporate earnings growth, rather than fluttering with interest rate changes.

The increased rate stability to follow the Fed’s new announcement will benefit the financial sector, particularly those institutions tied to the housing sector. U.S. Bancorp (USB-$40) and Wells Fargo (WFC-$45) have large mortgage portfolios that changing business conditions should convert from potential liabilities to income-generating assets. Both banks have excellent reputations, yield over 2% and are currently trading at valuations that anticipate only modest increases in 2014 earnings.

Within the financial sector, I have emphasized BlackRock (BLK-$308) and Blackstone (BX-$30), both of which are near new highs. They each manage huge sums of diversified assets and have produced strong results yet are still trading at moderate valuations. Blackstone gained particular distinction recently by raising $2.3 billion for Hilton, a record IPO for a hotel company. Its management is aggressive its yield over 3% and improving financial conditions make it stand out.

This has been a good year for stocks and I expect another one, particularly for substantial but still agile companies. Qualifiers include Amgen (AMGN-$112), Apple (AAPL-$545), Chicago Bridge (CBI-$80), Deere (DE-$89), Dow (DOW-$43), Ecolab (ECL-$103), General Electric (GE-$27), Prudential (PRU-$90) and Visa (V-$217).

Any of these would be an improvement for those investors who equate income with yield and overreach for higher yields in leveraged REIT’s or junk bonds. The Fed’s actions pushing down yields have pushed up the prices of high-yielding securities, creating vulnerabilities for yield seekers. They would be better off with growth stocks, selling off some as they go up, if needed for income.

Apparently through fear or ignorance, Americans have over $10 trillion in “cash” parked in bank accounts, money market funds and deposits in retirement accounts. Most of these deposits are inactive and are being held as “cash” either because the owners think this is “safe” or because they haven’t even thought about alternatives. If there are no real immediate needs, these then are long-term holdings and should be invested appropriately. Again, the stocks named above will be more rewarding while still providing a reasonable margin of safety. Thoughtful investing works.

Our Federal Reserve and the other central banks of the world have crunched interest rates almost to zero to help economic recoveries and stimulate investors to take more risks. Over any reasonable period of time, the returns on quality stocks routinely overpower returns on cash. These returns will probably get an extra boost over the next couple of weeks as market analysts are forecasting that Santa Claus is coming to town. “You better watch out!”

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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