Week of 09/04/2008

In This Issue:

Growth Is Stronger Than Expected
But A Slowdown May Be On The Way
"The Economy" May No Longer Have Much Meaning
There is Always Something That's Doing Well
Hurricanes And Floods Won't Stop These Carriers
Lower Interest Rates Seem Likely
The Bottom Line This Week

Last week investors proved once again that they are more resilient to bad news than we might expect. Although the Dow and the Nasdaq declined 0.3% and 1.5% respectively, those were mild reactions to the potential damage Hurricane Gustav could have done to America's energy infrastructure. If only one Gulf Coast refinery or oil rig had been knocked out, gas prices would have shot back up – and inflation would have quickly followed.

It turned out that we dodged the bullet this time around, but Hurricane Hanna is coming up fast. Judging from the flat market we are having so far this week, the new storm is also of little concern on Wall Street.

Growth Is Stronger Than Expected

On the positive side of the picture, the latest report about economic growth showed an unexpected 3.3% second quarter gain due largely to rising exports. We had to smile when the number was released because we have been taking some heat for saying repeatedly that the economy could manage to avoid a recession.

If we were men with better manners we would have said nothing to our critics about being right. But we make no claim to being better men, just better analysts. So we gleefully called a few colleagues and asked them if they might like to order some takeout crow.

But A Slowdown May Be On The Way

Of course, the economy might still slip into negative territory before the year is over. Some of the worst problems in the financial service and housing industries have yet to filter all the way through the economy. In addition, Joe and Sally MidAmerica might further restrict their spending. So, we aren't out of the woods quite yet.

Nevertheless, the prospects are improving that we will see stronger growth in 2009. Although a classic rebound seems unlikely, most people should have jobs, well-managed businesses should find profits, efficient manufacturers should have orders, and so on. John Mauldin of "Outside The Box" said it best when he called it "a muddle through economy." Compared to the alternative, we'll take it.

"The Economy" May No Longer Have Much Meaning

Nearly everybody talks about "the economy." However, the term is the average of many sectors that can differ widely in their performance.

The agriculture and oil industries, for example, couldn't find an economic problem with a magnifying glass. Although the froth is off their growth, it remains very high. In a quickening world where more food and energy are needed every month, we think the industries that supply them are in the catbird's seat for growth.

Doing nearly as well are the multinational blue chips that are supplying an increasingly affluent world with the products it wants. The global economy is now cooling off a bit, but the multinationals should still have a very good year.

On the other hand, banks and homebuilders are in a deep slump that will probably run through 2009. Some members of both groups won't survive long enough to see their industries recover.

There Is Always Something That's Doing Well

The bottom line is that it is easier for investors to make money in today's world than it was during previous cycles that tended to be more uniform. If you stay in the right sectors, a storm in the broader economy should not prevent you from making money.

On the contrary, lower average growth rates have a corresponding impact on the broader stock market, including industries that are doing much better than the norm. Knowledgeable investors can use the market's inefficiency to load up on oversold stocks that are likely to pay top rewards longer term.

Hurricanes And Floods Won't Stop These Carriers

Speaking of storms and opportunities, the summer floods in the Midwest pushed Kirby Corporation (KEX, NYSE) into bargain territory. http://finance.yahoo.com/q/bc?s=KEX Hurricane Gustav pushed the inland waterway company even lower, and it appears to be considerably oversold.

Kirby is America's largest river transportation company. With nearly 900 barges and 235 tugboats, Kirby moves goods of every type on the Mississippi, Ohio, and Illinois rivers. In addition, the company plies our Gulf intercoastal waterway. The company serves the needs of dozens of industries including agriculture, petroleum, chemicals, and heavy machinery.   

Kirby is currently very attractive because investors are worried about the condition of the lower Mississippi River system following all the storms. However, river transportation is so critical to our nation's economic health, the government has been pulling out all the stops to put it back in service. By the end of the year, our inland marine network should be operating normally.

We have already done very well with Kirby, a stock we first recommended in our November 10, 2005 newsletter. At the time, Kirby was $26.73 (split adjusted). By mid-May 2008, the stock reached $60, a 124% gain.

Now Kirby is $45.79. With Hurricane Hanna following on the heels of Gustav, the price may drop a bit more. But by this time next year, we think Kirby will be back up again.

We also like the outlook for our railroads, an industry that benefits as expensive energy makes trucking less competitive. Although oil prices are down sharply from their recent highs, and they may go lower, we think the era of cheap oil is gone forever.

The bottom line is that Burlington Northern Santa Fe should have a very bright future. http://finance.yahoo.com/q/bc?s=BNI The energy-efficient railroad operates 32,000 miles of track in 28 states and two Canadian provinces. The company also serves customers in Mexico through its connections with KCS Mexico and Ferrocarril Mexicano.

One of Burlington Northern's most profitable businesses is intermodal transport that connects different types of delivery systems in a seamless network. When containers arrive by ship they are off-loaded directly to waiting railroad flatcars. The containers are then moved inland where they are put on trucks for local delivery. Thanks to a global economy that is continuing to expand, intermodal transport is a big business.

We first recommended Burlington Northern on February 24, 2005 when it was $47.25 (split adjusted). In June of this year, BNI was up 52%, to $109.72. Even with the oil price decline, BNI still sells for $107.40. Such strength should lead to higher prices in the coming months.

Lower Interest Rates Seem Likely

In the great debate about which way interest rates are heading, analysts are parsing every statement Fed chairman Bernanke makes for clues to his thinking. What we are hearing is a marked decline in the chairman's concern about inflation. That, in turn, is reducing the chance that he will raise interest rates later this year.

At the same time, there are increasing worries about the deflationary forces that are at work in the economy. As we said earlier, growth is okay overall, but that's certainly not the case with housing and financial services. To help those sectors from falling even further, the Fed seems likely to lower interest rates within a few months. Lower oil and commodity prices are making it easier for the Fed to act.

We think the prospect for lower rates is strong enough that investors should plan for them. One action that seems prudent is to lock in today's rates by extending the maturities of your fixed income investments to a year or two. As poor as returns are today, they will be worse if the Fed shaves off another half a point.  

The changing interest rate outlook in the U.S. makes the T. Rowe Price International Bond Fund (RPIBX) even more attractive than when we recommended it last month. http://finance.yahoo.com/q/pr?s=RPIBX The no-load fund seeks to provide high current income and capital appreciation by investing in bonds from France, Japan, the United Kingdom, Austria, and similar advanced countries. That sounds like a winning strategy to us.

The Bottom Line This Week

So far, the U.S. economy has been holding up better than most analysts expected. Nevertheless, there is considerable potential for trouble due to the extreme weakness in housing and financial services. To help fight the problem, we think the Fed is likely to lower interest rates fairly soon. If so, it will increase the appeal of the T. Rowe Price International Bond Fund.

In addition, we are expecting Kirby Corporation to rebound as storm damage to the Mississippi river system is repaired. Our other fuel efficient transporter, Burlington Northern Santa Fe, also looks good as global trade and expensive energy continue to benefit the company.

Until Next Week

The AIA "Advocate For Absolute Returns", a weekly publication of The Association for Investor Awareness, Inc., tracks market trends, industry news, the SEC, global trade and finance and Washington developments for you because they affect your investments. But who doesn't? Many sources report these issues as abstract facts. We feel that's not enough. The AIA Advocate's job is to warn you of what's important and how these developments translate to ground-level forces and threats that directly affect your wealth as well as your current investment opportunities. Not just information, but information you can use. Until next Thursday...


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Posted 09-04-2008 12:26 PM by Research & Editorial Staff
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