In This Issue:
Signs Of A Better Economy? (Or At Least Not As Bad?)
Stocks For A Weak Recovery
The Bottom Line This Week
month investors received another booster shot from Wall Street as the Dow and
the Nasdaq rose an additional 1.2% and 5.5% respectively. The gains left stocks
up 26% from the rally's jumping off point. With any luck, and a few encouraging
numbers from the economy, the rally could continue for another few weeks.
anyone think the bear is finished, however, we must remind you that the market
never moves in a straight line very long. Even if this is the start of a new
bull market, we must expect to get some nasty shocks along the way. After such
a strong rally, the first correction may be close at hand.
Signs Of A
Better Economy? (Or At Least Not As Bad?)
are all over the map when it comes to predicting the future of the economy.
Some see improvements, others think the most we have is a slower decline. A few
super bears believe the worst hits are still to come, and they are fastening
their safety belts.
the economic outlook is the most important issue that investors must deal with
right now, we will review the three main arguments for each outlook. Of course,
we will finish up by giving you our own sterling opinion.
1) The Economy Is Improving:
strongest indication that economic relief is on the way is the rising stock
market. Although many investors are not particularly well informed about
economic matters, it's just the opposite with big spenders – and they are
buying stocks. Since the market tends to look ahead from six to nine months,
economic relief is probably about that far away.
are also showing greater confidence in the future by traipsing off to the mall
a little more often than they did a few months ago. Since consumers are two
thirds of the economy, their improving outlook can be a self-fulfilling
prophesy. Spending is still very low, but at least the trend appears to be
spending is also on the floor, and it will probably remain there for several
months. But with consumers beginning to buy goods again, businesses will need
to replace them. Inventories are already low for many products. As with
consumers, however, a business turnaround is likely to be modest.
remains weak in most markets, but there are signs of life in others. That's not
surprising since home affordability, an established measure of housing trends,
is higher than it has been in over five years. Many hopeful homebuyers know
that prices could go lower, but they also know they might start to go back up
again. As a result, many people who can afford to buy at today's prices are
deciding to take the plunge. Lower interest rates are another incentive to buy.
for every type of loan is still tight but the situation isn't as bad as the
news stories might have you believe. Throughout America, hundreds of regional
banks that didn't follow the subprime path to ruin have money for worthy
clients. Lending standards are higher than they were during the boom, but
that's a good thing. Only an idiot would want to go back to the loosey goosey
standards that brought ruin to our country. The bottom line is, people with
good credit histories and a respectable down payment can get mortgages. The
same is true for business loans, new car financing, and so on.
prices are remaining low, which is probably doing more for the economy than
Washington's bailout program. The drop from almost $150 a barrel to under $50
had the same impact as a huge tax cut. Natural gas prices are also on the
the bailouts are helping to stimulate several industries, not just banking.
Although we are very concerned about the colossal size of the federal debt, the
money is a plus right now.
2) No It Isn't:
believe the economy is not improving at all, it is just not dropping as
quickly. Although the slowdown may be a technical victory, the bears say there
is no way to make "less bad" look like "good."
also say that the downward trend could continue and take the economy to the
same low place it would have reached at the faster pace. This is known as the
"we're dead either way" argument.
analysts say that even if the economy stops dropping, that doesn't mean a
rebound is anywhere in sight. They point to the Great Depression when growth
remained at very low levels for several years. During that time the
unemployment rate hit 24% and businesses continued to fail.
3) A Disaster Is On The Way:
toughest crowd are analysts who are certain that a full-blown depression is
coming. They call the new calamity the "Greater Depression" to distinguish it
from the not-so-bad Great Depression. Arsenic anyone?
Armageddon crowd believes that the bailout program won't save the banks because
they have been too badly damaged to recover. Instead, the depressionists say,
the stimulus money will just put off the inevitable for a few months, and make
the collapse all the worse.
super bears also say the huge federal giveaways are putting so much money into
the economy that a period of high inflation –and perhaps hyperinflation-
is unavoidable. Therefore, the argument goes, even if the economy starts to
pick itself up off the floor, inflation will slam it back down again. The
result would be super stagflation, a situation where unemployment remains high
at the same time prices soar. It's not a pleasant prospect.
long-time readers know, we place much more faith on what we actually see
happening in the world than what statistics and ivory tower number crunchers
say. It's a practice that has kept us in the chips on many occasions when most
investors were selling.
example, we remained bullish on energy efficient industries when oil prices
were soaring and most analysts thought modern life was ending. We were of the
opinion that railroads, inland shipping companies and other fuel misers would
actually benefit from more expensive energy because it would hurt the
competition. It turned out that we were right, and our recommendations did
course, past performance does not guarantee future results, and all that. But
for what it is worth, we think the first economic outlook is correct, and the
economy is more likely to continue to claw its way out of the hole than it is
to begin sinking again. Although a typical recovery seems unlikely, growth
should be above the zero mark by the end of the year or by early 2010. If we
are correct, many top-quality stocks remain oversold.
Stocks For A Weak Recovery
We hate to repeat
ourselves in this newsletter, but on the other hand we never get tired of
making money. As a result, we are continuing to recommend the boring multinational
stocks that have been doing so well of late. We think their biggest moves are
yet to come.
If you only want
to make a single blue chip investment, an excellent choice would be the iShares Dow
Jones Select Dividend Index (DVY),
one of our favorite EFTs. http://finance.yahoo.com/q/bc?s=DVY
The index has been performing very well of late. On March 9, DVY closed at
$25.91. By April 28, the fund was up to $34.98, a 35% gain. We take back what
we said about boring stocks.
We think investors who prefer
to buy individual issues should look at three growth companies that should be
The first of the three is Alcoa (AA), the giant aluminum
Demand for the lightweight metal dropped sharply when the economy fell out of
bed and industrial production hit the floor. But even with a small increase in
the economy, demand for aluminum should jump smartly.
(DE) is another probable winner in an improving economy. http://finance.yahoo.com/q/bc?s=DE
The biggest potential for Deere isn't its farm machinery, although sales should
improve this year. Instead, demand for the company's construction equipment
should begin to rebound as President Obama's infrastructure programs ramp up.
General Electric (GE) http://finance.yahoo.com/q?s=ge
should do well as the company continues to get its troubled financial unit back
on track. GE's worldwide sales of everything from locomotives to jet engines
should also increase. We think this global powerhouse will be a very big
long-term winner. A few years from now many investors will wonder how they
could have ever thought that GE might not make it through the recession.
Last month we wrote that Ford http://finance.yahoo.com/q?s=F has an
excellent "chance for a profitable recovery" and "a small position appears to
make sense at today's low price."
That proved to be something
of an understatement. When that issue was sent out on March 26, Ford was $2.94.
Today Ford closed at $5.45, an 85.4% gain. The worse things get for GM and
Chrysler, the better the outlook will be for Ford, the only one of the formerly
"big three" automakers that didn't need a bailout. Henry would be pleased.
Line This Week
outlook is improving by inches, but we are a long way from being out of danger.
It would not take a very big shock to send the economy and the stock market
down again. As a result, we think the best strategy for investors is to use the
positive trend we have now and buy blue chip stocks with good outlooks –
but protect all your positions with stop-loss orders.
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.
04-30-2009 9:20 AM
Research & Editorial Staff