Taking Stock


By Tony Crowell

Double, Double, Toil and Bubble

In October of 1987, I was happily enjoying changing from a law career to the stimulations of being a stockbroker with the market having gained 250% since 1982. Then came the ides of October with stocks continuing to slip until “Black Tuesday,” October 19, when the Dow lost almost 23% in one day, still its all-time record.

During the aftermath, I had ample time to read many market commentaries, which compared these unsettling events to those in the 1929 crash, which required 15 years for recovery. Most commentators predicted a decade of more for market recovery. I recall reading one exception from an old-timer, who had been on the floor during the 1929 crash. He plotted market averages using an old technical analysis tool called “point and figure” that compresses the time element in charting. To his surprise, his charts suggested a much quicker recovery. He had difficulty believing his own charts but wondered if the huge increases in trading volume over the years could enable quicker recoveries.

Well, something did, as stocks recovered in a year and a half and continued on through the 1990’s until that ensuing bull market was interrupted by the 2000-2002 dot.com setbacks. In hindsight, always the easier perspective to assess bubbles, the three-figure P/É ratios then given without worry to almost anything involving the brand new Internet seem absurd.

As the absurdities became evident, the market sold off to bargain levels and then resumed its advance to new highs in 2007. Once again, this time with the bursting of the bubble of inflated home prices and accompanying mortgages, the market lost 54% of its value from its 2007 peak of 14,164 on the DJIA to its low of 6,443 on March 6, 2009.

The broader base S&P 500 bottomed just under 677 in 2009 and it is presently hovering at twice that level. The larger companies represented by the DJIA have lagged the broader market recovery and the Dow still needs about 5% more for a double since the 2009 bottom. It will get there, probably within a few months and I expect another year will see the 14,000 mark once again in range.

I suppose I have become something of an old-timer in the twenty-five years since the 1987 crash, having seen bubbles popped and stock profits then returning. There will doubtlessly again be pockets of excessive exuberance but the hangover from the recent financial crisis has currently restrained investor temperaments, keeping valuations in pace with resurgent corporate earnings.

Emerging economies drew much investor enthusiasm during the initial global recovery. Their growth spurt is inducing monetary restraints while the U.S. is continuing an activist easing policy to encourage job growth. Inflation remains controlled here while shaky currency conditions in Southern Europe and civil unrest in the Middle East also make U.S. markets comparatively attractive.

Big cap stocks continue to be attractive, particularly during unsettling times. Agilent Technologies (A-$44), a new buy, is the world leader in measurement systems for advanced industries. It is producing double-digit earnings growth while offering a reasonable stock price valuation.

Successfully picking stocks requires diligent digging through financial statements rather than chasing fads. Other big caps who satisfy such scrutiny include Aflac (AFL-$59), DuPont (DD-$55), EMC (EMC-$27), GE (GE-$22), IBM (IBM-$164), Int’l Flavors (IFF-$57), 3M (MMM-$93), Oracle (ORCL-$33) and Occidental (OXY-$106). All are up nicely since first recommended, showing the value of toil and trouble, and echoing the chant of Macbeth’s witches, “Double, double toil and trouble; fire burn and caldron bubble.” Watch out for excessively bubbling caldrons.

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. (949)-494-1376/(800)-697-2622; www.crowellroberts.com

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