Financial Information

This Thanksgiving finds stock investors with almost a painfully lean harvest to put on the table. Before Friday's rally in the last hour, the S&P 500 average was trading at levels last seen in 1997. Even with that rally, the market still continued its sour November streak with three straight down weeks, leaving the S&P down over 17% for the month so far and 45% for the year. These are serious declines but I feel there are reasons to expect that both the end of this month and this year will see some improvement to these figures.

The stock market invariably starts moving up before the economy begins coming out of a recession. It often also starts moving up a bit early and has to retreat to give the economy some more time for recovery. There are no signs of any economic recovery yet and it is quite likely that the economy will get worse before it gets better.

The current quarter is going to produce a slate of dreadful earnings reports early next year. By then, the new aAdministration will have taken over and current indications of the scope of its proposed stimulus legislation suggest that steps by the new Congress may allay many of the fears of investors that continue to put a shroud over the market.

These fears have not only driven stock prices down along with oil, metals and other commodity prices but have driven corporate and municipal bond yields up to record levels. The Treasury Department's blurred signals on a backup market for troubled assets provoked more hasty selling by leveraged holders of bonds, sending an index of the yield of speculative-grade bonds to over 21%, eclipsing a record set in 1990 when interest rates were much higher.

These bonds together with almost all stock sectors began to rally Friday coincidentally with the announcement of the appointment of Treasury Secretary-Designate Geithner. The broad rally that began then continued into Monday, a strong sign of both the underlying liquidity and the oversold levels to which fear-driven panicked selling has driven the markets.

The extent of the damage suffered by the economy is still an open question and further unsettling news over the coming months may drive stocks down for another test of their recent lows. With unprecedented global government steps, both underway and projected, the current deflationary stagnation is almost certain to be replaced by a return to the familiar problems of inflation. This means further gains, probably later next year, for energy stocks like XTO (XTO-$34 on 11/24), Transocean (RIG-$63), Petrobras (PBR-$20), metals like Rio de Vale (RIO-$11), Rio Tinto (RTP-$147) and Freeport McMoRan Copper & Gold (FCX-$22). Barrick Gold (ABX-$28) is also moving up as gold resumes its traditional status as an inflation hedges.

Short-term, the severely beaten down financial stocks at last seem to be coming up for air. Those surviving the last few weeks all benefited from the government proposal to bailout Citigroup (C- $6). Citigroup is a speculative buy with prospects for stock price improvement probably hinging on sales of some of its many parts.

Former portfolio member Bank of America (BAC-$14) returns to the fold marked down over 30% from our sale last month with some progress on working off its troubled Countrywide assets in a difficult environment. Buying Merrill Lynch (MER-$11) provides a merger arbitrage opportunity to get B of A stock at a 10% spread.

JPMorgan Chase (JPM-$27) is another reentry vehicle into the banking sector. Besides a 6% yield, it offers a nostalgic opportunity to revisit divisions that now own the assets of the late departed Bear Sterns and Washington Mutual.

In other sectors, Intel (INTC-$13) has already seen a price decline in response to its forecast of an earnings decline to around $.95 next year. Selling at half its recent high, along with many other stocks, it pays a 4% dividend for holders waiting for the resumption of demand for semiconductors. Pfizer (PFE-$16) sees only single-digit growth ahead but yields 8%.

Fearful investors can always buy one-year Treasury bonds and get 1%. Those with a better perspective on Thanksgiving blessings can be grateful for a resilient economy while giving thought to those less fortunate in these trying times.

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. Tony may be reached at (949) 494-1376; aic@cox.net.