In This Issue:
Banks And Auto Stocks Led The Way Down, And Now Up
Yes, The Rebound Could Be Another Bear Trap
If There Ever Was A Time To Use Stops, It’s Now!
In Many Cities, Real Estate May Be Set To Rise
The Bottom Line
the past month, the stock market staged a strong reversal as the Dow and the
Nasdaq rose 6.9% and 9.1% respectively. As often happens when investment
optimism begins to replace a long period of pessimism, small stocks did better
than their larger cousins.
many blue chips also performed very well. For example, our first three picks
from last month,
JP Morgan Chase
(JPM), Archer Daniels Midland (ADM),
and Ford (F) jumped 21.5%, 5.3%, and
42.3% respectively. Our fourth pick, SPDR
Gold Trust (GLD), dropped 2.4%.
Banks And Auto
Stocks Led The Way Down, And Now Up
sharp jump made by
JP Morgan Chase
was not an isolated event in the battered banking sector. Citigroup (C), Bank of
America (BAC), and Wells Fargo
(WFC) saw equally impressive gains of 19.4%, 40.2%, and 15.3%.
best return of all was made by
International Group (AIG), a company we didn’t recommend because it carries
too much risk. Over the past 30 days, however, many big investors unexpectedly
reversed their outlooks for AIG and the stock jumped from $0.46 to $1.22 - a
We think the banks are still
greatly undervalued and are likely to rebound more from their horrific plunges.
The road back will be volatile because progress will depend largely on the
success of the government’s bailout programs.
Nevertheless, at today’s
ultra-low stock prices the risk/reward ratio appears to justify taking
small positions in Citigroup, Bank of America
and Wells Fargo. Fortunately, a
small investment is all anyone needs to get positions in what could be the
biggest rebound story of our time.
Of the three additional banks
that could become top performers,
is in the worst shape. http://finance.yahoo.com/q/bc?s=C
Bank of America is in somewhat
better condition. http://finance.yahoo.com/q/bc?s=BAC
One or both of them may fail. However, there are strong political as well as
economic reasons for the government not to let that happen. But, if the
bailouts don’t work and Washington ends up nationalizing the banks, the
shareholders will be wiped out.
is a better prospect. The bank will benefit from the possible demise of
Citigroup and/or Bank of America because it would pick up much of their
Even without that boost, Wells Fargo should survive the recession and the
housing plunge, and begin to recover once conditions improve.
AIG must be
considered a rank speculation, which we would normally never mention. http://finance.yahoo.com/q/bc?s=AIG
But at $1.20 or so, we believe AIG’s potential to jump on good news is very
good. If you want to add a little spice to your life, 100 shares of AIG should
do the trick.
In the automotive industry,
we continue to think that
the best chance for a profitable recovery. As with the banks, a small position
appears to make sense at today’s low price.
SPDR Gold Trust
(GLD) continues to look good because it is a hedge against rising inflation and
a declining dollar. Both conditions seem more likely to occur than they did
last month because the Fed just decided to create $300 billion out of thin air
to buy Treasury bonds. We think the make believe money will come back to haunt
us within a few months.
Yes, The Rebound Could Be
Another Bear Trap
Over the past year we warned
that the many rebounds that came along looked like bear traps. In every case we
were right. After a few days or weeks of moving up, the market suddenly
reversed direction and tumbled to new lows. The same thing could happen again
But even if this rally isn’t
the lasting rebound we have all been hoping for, there are some solid reasons
to think it could last longer than its predecessors. If so, the rally could be
profitable even if it ultimately falls apart.
The first reason for optimism
is the market had already fallen 54% when the current upturn began. That’s
about as bad as bear markets get. Even if the bear returns for one more raid on
stocks, he probably won’t have much further to go.
Secondly, fundamentals are
also beginning to reach bear market lows. Many top-quality blue chip stocks now
have P/E ratios under 10, which has often been a turning point in the past.
Since interest rates are on the floor, low P/E stocks that pay good dividends
are especially attractive this time around.
If There Ever Was A Time To
Use Stops, It’s Now!
Because there is no way to
know if the current stock market rebound is another bear trap or the beginning
of a new bull cycle, you may be tempted to stay on the sidelines until the
matter is settled.
But if you take the safest
position and this rally turns out to be the real deal, you will miss out on its
biggest gains. That’s because anywhere from 30% to 50% of a bull market’s
returns often occur before most investors realize the turn has finally come.
Fortunately, you can buy
stocks with reasonable safety if you place stop loss orders on everything you
pick. If the stocks go up as expected, you can raise your stops as you go
along. That way if the bear comes back, you will be taken out before much
damage can be done.
Remember, stops are very easy
to place. To use TD Ameritrade as an example, right after you buy a stock you
would enter a sell order at the price you would want to be taken out. When you
see “Order Type”, simply click “Stop Market” and enter the appropriate number.
Since stops cost nothing until they are executed (which might never happen),
they are the cheapest insurance you can buy.
There are only two downsides
with stop loss orders that you should know about. First, if the market makes a
big down move and then bounces back, you may be sold out when you would have
been better off hanging on. Secondly, if the market drops very rapidly and hits
your stop, by the time the order is executed the price may have dropped below
your sell point. Alas, not much on Wall Street carries a 100% guarantee.
In Many Cities, Real Estate
May Be Set To Rise
All the activity in the stock
market of late is masking some improving numbers in the housing market.
Although the real estate outlook overall is still poor, in some areas prices
rental residential properties have fallen so far that for the first
time in nearly 20 years they can “pencil out.” That is to say, the rents they
generate can cover the mortgage payments, taxes and maintenance costs –
plus provide a positive cash flow to the buyer.
The tax breaks that go with
real estate investments —and the potential for long-term appreciation
from today’s depressed levels— make real estate even more attractive. In
addition, the collapse of the late great housing boom is pushing many new
people into the rental market.
As with the stock market, it
may be a decade or more before residential real estate gets back to where it
was during the boom. But you won’t need a full recovery to make excellent
profits. Thanks to the leverage in most real estate investments, only a partial
rebound could still double your money.
For example, if you buy a
$300,000 duplex with a 20% down payment, the deal will cost you $60,000. Your
duplex would only need to appreciate to $360,000 for you to double your money.
Meanwhile, the renters will pay the bills.
One way to enter the rental
residential real estate market is with experienced partners. In most
communities there are groups of people who have been buying properties together
for many years. With more attractive deals becoming available, and with credit
now very tight, many partnerships should be happy to accept new members. Your
attorney, or a seasoned real estate broker, should be able to make the
have been through the mill during the past year. However, we think the
disheartening losses paved the way for a dramatic rebound. The upturn may be
starting now, or it may not come until later – but it’s on the way. To
make the most of it, you will need to put money in the market while most
investors are too nervous to leave the sidelines.
safest bets are the blue chip stocks we have been recommending for months. More
aggressive investors should also consider some of the oversold banking stocks
that have been performing well of late. Although the risks are high with the
banks, we think the potential rewards are even higher. You can stack the odds
further in your favor by using stop loss orders religiously.
rental real estate is also starting to look good in many markets. Ignore the
naysayers who suggest that there is no money to be made because it may be ten
or fifteen years before prices return to their 2006/2007 highs. As we explained
in our discussion, you don’t need a big rebound to make a good real estate
investment pay off handsomely.
Copyright 2010 The Association for Investor Awareness, Inc. All Rights Reserved
All material presented herein is believed to be reliable but we cannot attest to its accuracy. Investment recommendations may change and readers are urged to check with their investment counselors before making any investment decisions.
Opinions expressed in these reports may change without prior notice. The Association for Investor Awareness, Inc. (AIA) and respective staffs and associates may or may not have investments in any companies, stocks or funds cited herein, may or may not have long or short positions and/or options and warrants relating thereto and may purchase and/or sell these securities or options at any time in the open market or otherwise without further notice. AIA, its Officers, Directors, Employees and Affiliates may receive compensation for the dissemination of this information.
Communications from AIA are intended solely for informational purposes. Statements made by various contributors do not necessarily reflect the opinions of AIA and should not be construed as an endorsement either expressed or implied. AIA is not responsible for typographic errors or other inaccuracies in the content. We believe the information contained herein to be accurate and reliable. However, errors may occasionally occur. Therefore, all information and materials are provided "AS IS" without any warranty of any kind. Past results are not necessarily indicative of future performance.
03-26-2009 8:45 AM
Research & Editorial Staff