In This Issue:

It's Time To Start Looking Beyond Current Woes
A Big Cash Horde Is Always Bullish
When It Comes To Rebounds, Too Early Beats Too Late
Eight Blue Chips Many Pros Are Buying
The Bottom Line This Week

There's nothing like the start of a new year to shake investors out of a funk. It happened again a few days ago when the market rallied as the first of January approached. The week the calendar turned over, the Dow and the Nasdaq went up an impressive 6.1% and 6.7% respectively. It was an encouraging end to a dismal year that saw the two indices plunge 33.8% and 40.5% - the third worst performance in recent memory.

Alas, it is far too early to declare an end to the bear market. With manufacturing and home sales dropping to very low levels, it is clear that the economy is still sinking. But as we will discuss later, that doesn't mean that a recovery is off the table for late 2009.

Meanwhile, stocks stumbled during the first three days of this week. By Wednesday afternoon, the market had given up 265 of its hard-won points from the short bout of New Year enthusiasm.

It's Time To Start Looking Beyond Current Woes

Although the market is continuing to be volatile, the uptrend may have longer legs than events this week would suggest. As we reported in a recent issue, investors seem to be losing some of their sensitivity to bad news. Either everyone is so numb that nothing registers anymore, or investors believe the economy is bottoming out and some cautious buying is in order.

We suspect that the latter is the case. The investment press is starting to report that many Wall Street pros with noses for value are starting to launch bottom fishing expeditions. Although nobody is putting everything they have into the market, the amounts being invested are growing steadily.

One of the intrepid investors is Steve Leuthold of the Leuthold Group, a respected institutional research firm in Minneapolis. www.leutholdgroup.com Mr. Leuthold has been a bear for quite some time because he was one of the first analysts to realize the economy was heading for trouble. Recently, however, Mr. Leuthold said, "The stock market is presenting you with one of the great buying opportunities of your lifetime – perhaps the greatest. Stop trying to pick the bottom."

Another good analyst who is starting to pick up bargains is Jim Powell of the Global Changes & Opportunities Report. (www.powellreport.com) In his January newsletter, Mr. Powell wrote, "The CEO's of America's better companies are not jetting around the country in their Gulfstreams asking taxpayers to bail them out. Instead, they are adapting to today's tougher business conditions. Workforces are being slashed, wages are being rolled back, expansion plans are being put on hold, pensions are being cut, and businesses are otherwise becoming lean and mean. Those changes are causing a lot of pain in America, but they are also allowing many companies to earn profits in this damaged economy." Looking particularly good to Mr. Powell are oversold blue chip stocks with global operations.

Not every investment professional is taking long-term positions. Laszlo Birinyi of Birinyi Associates, a money management and research firm in Westport, Conn. is batting for yards rather than touchdown passes. In an interview in the January 5 Barron's, Mr. Birinyi said "We are willing to set up for 10% or 15% gains, especially in a short time period because we've seen the markets reverse so often and so swiftly."

A Big Cash Horde Is Always Bullish

When stocks started to plunge last year, billions of dollars were taken out of the market and were placed in cash accounts. The American Association of Individual Investors estimates that cash now represents 42% of portfolios, an unprecedented amount.

Unfortunately, cash isn't earning good returns anymore – as you are probably painfully aware. The interest rate on 90-day T-Bills is essentially zero. Even 10 year Treasuries are paying only 2.50%. As one retiree said recently, "I went from a comfortable meat and potatoes income to barely getting enough money to buy dog food."

Not surprisingly, investors are more than a little anxious to find a better home for their dollars. When the stock market starts to look attractive again, the flood of money back to Wall Street could give us one of the greatest bull markets in history.

When It Comes To Rebounds, Too Early Beats Too Late

We don't know when the economic tide will turn back up. As we said in recent issues, there is a good chance that we could see some relief towards the end of the year. But even if the market as a whole takes longer to rebound, many individual stocks should start to recover some of the ground they lost during the plunge. In fact, some have already started to rise – as many price charts quickly reveal.

As to the broader market, prices typically begin to recover from a steep downturn from six to nine months before economic growth resumes. That means investors must have the fortitude to buy what they want while the economy is still on the ropes.

It is also typical for new bull markets to deliver most of their gains within a few months –or sometimes weeks- after getting underway. That's another reason that investors should be positioned before a rebound begins.

Eight Blue Chips Many Pros Are Buying

We are not inclined to report what stocks other analysts are recommending, no matter how well known they may be. However, we make exceptions when the luminaries share our foresight, clarity of thinking, and brilliant analysis. Here then –in no particular order- are eight stocks that many pros have been buying, and a few reasons why they are attractive.

Johnson & Johnson (JNJ), an old favorite of ours, is up a bit in price but it still looks attractive with a 13.8% P/E and a 3% yield. http://finance.yahoo.com/q/pr?s=JNJ Earnings will be lower than usual this year but this global supplier of healthcare products has great long-term prospects. JNJ is a Dividend Aristocrat that has increased its payout in each of the past 25 years.

Kinder Morgan Energy Partners (KMP), another of our selections, is an energy storage and pipeline master limited partnership (MLP) that yields a whopping 8.6%. http://finance.yahoo.com/q/pr?s=KMP The issue is down with energy prices, but that appears to be a mistake. The volume of fuels being transported is remaining high.

Consolidated Edison (ED) is a major utility that operates in New York, New Jersey, and eastern Pennsylvania. http://finance.yahoo.com/q/pr?s=ED Since the company's customers have a good history of paying their bills in good times and bad, the yield seems secure. The company's location in normally high-growth areas means it should see more business when the economy begins to recover. This Dividend Aristocrat currently yields 6%.

Deere< (DE) is a well-known maker of farm equipment that does business worldwide. http://finance.yahoo.com/q/pr?s=DE What is less known about Deere is it also makes construction equipment that should be in demand as President-elect Obama's infrastructure projects go into gear. The yield is a modest 2.7% but the prospect for excellent capital gains makes Deere very attractive.

Transocean (RIG) is a world-class deep ocean drilling company whose shares dropped steeply as energy prices tumbled. http://finance.yahoo.com/q/pr?s=RIG However, energy prices are only down because global economic growth has declined. When it recovers, energy will shoot back up again. In fact, oil is already starting to rise. As with Deere, Transocean is primarily a capital gains play.

VF Corporation (VFC) is an anomaly in the clothing industry because its higher end outdoor products held up well as the recession set in. http://finance.yahoo.com/q/pr?s=VFC Although investors are starting to notice that they oversold this stock, the P/E is still just 9.9. The yield is 4.1%. The company also has a top management team that has accumulated $600 million in cash, some of which it may spend on acquisitions this year.

United Parcel Service (UPS) also saw its business hold up well when the recession set in. That's partly because Internet sales remained healthy and UPS is the web's biggest product delivery company. http://finance.yahoo.com/q/pr?s=UPS Of course, UPS is also a good play on the broad economy which is probably why Warren Buffett took a position in the stock. Meanwhile, the yield is a competitive 3.2%.

General Electric (GE) is a somewhat more aggressive play than the previous stocks because the company is suffering both from the economic slowdown and the credit crunch. http://finance.yahoo.com/q/pr?s=GE Still, most value analysts think the stock is oversold for its long-term growth potential. GE is selling for just 8.3 times earnings. The stock yields 7.3%

The Bottom Line This Week

We continue to think the economy will remain weak for the first two or three quarters of the year and then slowly start to move back up. Once there are tangible signs that the outlook is improving, the stock market should start to recover from today's abysmal levels. To catch the move, you must take positions while the recession is still in place and most investors remain glued to the bench.

Some noted investors are already starting to take positions in high quality companies that should benefit greatly from an economic recovery. This week we listed eight such stocks that seem particularly likely to increase in value over the next several years.