In This Issue Black Friday May Suggest A More Optimistic Outlook
Most Insiders Are Not Selling Bear Market History: How We Compare Get Paid While You Wait The Bottom Line This Week
Last week when everyone was stuffing themselves with turkey and other goodies, the urge to consume in abundance spilled over to Wall Street. By the time the market closed on Friday, the Dow and the Nasdaq were up an impressive 9.7% and 10.9% respectively. It was the first five day rally we've seen in over a year.
The enthusiasm for stocks wasn't completely due to holiday cheer. Investors got wind of the fact that Black Friday sales were likely to be better than was first expected. As it turned out, instead of a miniscule 0.9% sales increase, Joe and Sally MidAmerica gave the retail industry a 3% boost. Shoppers were so eager to spend money, they trampled several people who got in their way, one of whom died.
As we are sure you know by now, the enthusiasm didn't survive the weekend. The terrorist attack in Mumbai plus a dismal economic report sent the market down 680 points on Monday. Stocks recovered 442 points on Tuesday and Wednesday but the rebound seems unlikely to last very long.
Black Friday May Suggest A More Optimistic Outlook
The jury is still out regarding the significance of the unexpected spending bounce we saw last Friday. It could have been a one-day shopping spree that won't be repeated. However, the surprise increase could also indicate that Americans aren't as frightened about the future as most economists believe. If so, the economic downturn may not be as severe as the end-of-the-world pundits predict.
Critics argue that the spending boost only occurred because retailers slashed prices for popular merchandise. However, during the tough recession of the early 1980s, deep discounts had little effect on spending.
The bottom line is that consumer spending accounts for two thirds of U.S. economic growth. If the Fed can convince Americans that the outlook for our country isn't as bad as many analysts predict, it won't be.
Most Insiders Are Not Selling
It is also encouraging that most corporate insiders are refusing to sell their shares at today's prices. In
Barron's this week, Michael Santoli reported that company officials "are seeing things as just plain bad" as opposed to seeing them as awful. Although "bad" is a long way from "good", the less grim outlook means that stocks may be priced properly for what is on the way. If so, the market may be closer to a bottom than the super bears are saying.
Alas, Santoli also reported that company insiders are not doing any madcap buying. If that decision also has predictive value, we should not expect a rebound anytime soon.
Bear Market History: How We Compare
In a November 30 article in
Seeking Alpha, Benjamin Taylor of Brick Financial Management http://www.brickfinancial.com/ compared the current bear market to those from the past. Here is a summary of his findings:
As can be seen, the average length of the bear markets studied was 13.9 months, vs 13 months so far this time. The average decline was -31.7% vs -52% now.
Perhaps most importantly, the percent of the previous high that was recovered when the bull returned averaged 90.7%. Because the current bear market is hitting stocks harder than any of the previous nine declines, we should see a correspondingly greater rebound.
Get Paid While You Wait
Whether or not we are close to a bear market bottom, many top quality stocks are already very attractive. We continue to believe you should be nibbling at the best of them in anticipation of their eventual recovery.
Many readers who agree with our strategy are nevertheless concerned about having their money tied up for what could be an extended period while they wait for nirvana. The way to put those concerns to rest is to buy stocks that will pay you to wait for them to perform as expected. If the stocks yield more than you can earn in the fixed income market, so much the better.
Of course, dividends can be cut – and often are during economic downturns. To help insure that your yields won't go down, we think you should stick with companies that supply basic human needs that don't ride the economic cycle.
To that end, we have compiled a list of blue chip defensive stocks that supply affordable food, water, and healthcare products to people throughout the world. Each of them offers a higher yield than is available from most U.S. Treasury bonds. We think the stocks will make rewarding contributions to long-term portfolios.
ConAgra (CAG) is a packaged foods company that sells meals, snacks, and desserts throughout the world. http://finance.yahoo.com/q/bc?s=CGA Brands include Banquet, Chef Boyardee, Egg Beaters, Healthy Choice, LaChoy, Hunts, Marie Callenders, Swiss Miss, VanCamp, and Wesson – to name only a few. The stock is down 50% from its high and currently pays 5.2%. That's a lot to like about ConAgra.
Heinz (HNZ) needs little introduction to most people who are familiar with the company's condiments, soups, sauces, beans, and other staples. http://finance.yahoo.com/q/bc?s=HNZ Although the product line is not exciting, the company's success is another matter. Heinz yields 4.3%.
Hershey (HSY) is best known for its line of chocolate products, but the company also makes many other treats. http://finance.yahoo.com/q/bc?s=HSY At first glance, it might appear that such goodies are extravagances that won't do well when the economy is contracting. However, Hershey's products are affordable treats that lift most people's spirits without picking their pockets. The company is doing well and offers a 3.3% yield.
McCormick & Company (MKC) is a 120 year old American firm that produces spices, herbs, seasonings, sauces, and flavor products to both individual consumers and major food processors. http://finance.yahoo.com/q/bc?s=MKC The company raised its dividend for over 15 consecutive years, which is an excellent track record. McCormick just raised its dividend and currently pays 3.2%.
The York Water Company (YORW) is a 192 year old company that supplies water to nearly 60,000 residential and industrial customers in Pennsylvania. http://finance.yahoo.com/q/bc?s=YORW Because the company got a start when America was still young, it was able to acquire large water resources that are now extremely valuable. Many natural resource experts think water will be in greater demand than oil within a few years. York is doing quite well already. The company raised its dividend recently and currently pays a 4.5% yield.
Eli Lilly (LLY) is a well known pharmaceutical company that sells its products worldwide. http://finance.yahoo.com/q/bc?s=LLY Although drugs are relatively insensitive to economic conditions, the stock was caught up in the broad Wall Street sell off and is down 41% from its recent high. We like the company's long-term prospects and its present 5.5% yield.
Johnson & Johnson (JNJ) needs little discussion because we featured it recently. http://finance.yahoo.com/q/bc?s=JNJ Since then JNJ announced it will buy Mentor, a leader in cosmetic surgery gear, a smart move in our opinion. Johnson & Johnson is on the S&P list of "Dividend Aristocrats" (see our November 6 issue) and currently yields 3.1%.
AT&T (T) doesn't qualify as a defensive stock, but it comes close. http://finance.yahoo.com/q/bc?s=T The company's wireless and long-distance telecom services have become so important to countless people and businesses, we have no doubt that the company will weather the economic storm and surge ahead when it ends. AT&T has gone through many severe economic cycles and helped create many family fortunes. Meanwhile, the company pays a very attractive 5.6% dividend.
The Bottom Line This Week
Jeff Kearns on Bloomberg (
www.bloomberg.com) recently reported that the CBOE Volatility Index –known simply as the VIX- indicates that investors are in for at least seven more months of stomach-churning stock market swings. Although the ride won't be much fun, we are confident that investors who use the drops to buy high quality stocks will make outstanding long-term profits.
The key to success is to stick with multinational blue chips with a long history of surviving economic downturns. You can increase your odds further by selecting companies that pay attractive dividends. Many of the stocks we have been featuring in recent weeks fit the bill and should be considered top candidates for your portfolio.
Copyright 2010 The Association for Investor Awareness, Inc. All Rights Reserved
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12-04-2008 9:52 AM
Research & Editorial Staff