Is The Economy Finally Turning Around?
Companies With Cheap Eats Are Doing Well
China's Economy Is Still Hot (Compared With Everybody Else)
Energy Investments Are Looking Good Again
The Bottom Line This Week

The stock market rally that started on March 9 is proving to have longer legs than even the most optimistic investors dared hope. Through the end of May, the S&P 500 was up 30 percent even though the economy was continuing to decline.

Over the past month, however, the market's performance suggests that the rally may be getting short of breath. Since our last newsletter, the Dow gained an unremarkable 1.1% and the Nasdaq barely rose 0.7%. It remains to be seen if stocks will get a second wind and run for another few laps, of if a correction is on the way.

If history is any guide, the market's next move is more likely to be down than up. Not only is a 30% gain without a break unusual, summers are often slow on Wall Street. To be sure, rallies sometimes come along during the three month period but large surges don't usually arrive until after Labor Day. Shrinks think it has something to do with humans having an innate urge to stock up (pun intended) when cooler days remind them that winter is on the way.

Is The Economy Finally Turning Around?

The biggest stock market engine of all, of course, is the economy which has not been winning any medals of late. In fact, nearly all the leading indicators are still slipping. Housing prices, for example, dropped 19% in the first quarter, and jobs are continuing to disappear. There is a long and dismal list of negatives.

On the other hand, most indices are sliding less quickly than they did a few weeks ago. Optimists see the not-so-bad numbers as proof that the recession is finally coming to an end.

We are inclined to agree with the optimists, but we think a recovery will probably be more modest than they expect. A few problems are headed our way that will probably keep the rebound party from getting too lively.

The first hurdle is a commercial real estate crunch that seems likely to hit later this year. In several cities, a few skyscrapers that were once humming with activity have lost so many tenants their owners can't make the payments. As is true when Ma and Pa Kettle get behind a few months, the former high rollers are also getting the boot. There is so much vacant commercial space available, this market won't turn around anytime soon.

Many once bustling shopping malls are also in trouble. When Joe and Sally MidAmerica got their pink slips, they had a revelation: spend less money. What a concept. The result is lean times for retailers – especially those that sell overpriced glitter goods instead of affordable necessities. One bright spot is consumer confidence is rising.

Manufacturing is in no better shape than retailing. There is a connection between the two that people learn in economics classes at Harvard: if nobody buys stuff, nobody needs to replace it.

However, manufacturing should begin to pick up a bit this fall. The dollar has been dropping in value over the past few weeks which will make U.S. products more competitive overseas. The technology sector is already seeing an increase in foreign orders.

Speaking of Joe and Sally, many recent homebuyers who have been keeping their lenders happy may not be able to do so much longer. The people who are in trouble took out option mortgages that allowed them to pay whatever their incomes could afford for the first few years. The flexible terms were like winning a lottery for home buyers of modest means who realized they could live in a McMansion on a single-wide income.

Now the mortgage grace periods are running out and the option mortgage crowd will need to pay full freight each month. Many of them won't be able to do it, which will put more pressure on the housing industry.

All in all, there don't appear to be any big engines of growth that will do much more than lift the economy off the floor this year. Nevertheless, even modest growth will beat the sinking numbers we have now.

The bottom line is, there is reason for cautious optimism, but celebrate with domestic bubbly.

Companies With Cheap Eats Are Doing Well

Every problem creates opportunities for companies that happen to be in the right business. In the current situation, companies that supply necessities for the least amount of money are in the catbird's seat. Since the economy is likely to remain slow for quite some time, the winning suppliers should continue to prosper.

Leading the list of companies with the right stuff are those that provide inexpensive foods to the countless people who need to watch their pennies.

The fortunate suppliers are led by ConAgra Foods (CAG) that supplies a cornucopia of packaged foods throughout the U.S. http://finance.yahoo.com/q/bc?s=CAG The company's brands include Chef Boyardee, Egg Beaters, Healthy Choice, Hebrew National (great hot dogs), Hunts, Peter Pan, Rosarita, Van Camps, Marie Callenders, Parkay, Wesson, and a host of others. ConAgra also produces many private label foods for large retailers.

ConAgra's stock is beginning to move up as investors see how well it is doing in today's difficult economy. However, the yield is still an attractive 4.1% which indicates the stock is still attractive.

One step down the price ladder – which is an advantage now - is Hormel Foods (HRL). http://finance.yahoo.com/q/bc?s=HRL The company is profiting from booming sales of Spam, Hormel Chili, Dinty Moore Beef Stew, and several shelf-stable microwave foods. To capitalize on its good fortune, the company just converted a new processing plant to turn out the low-cost foods that are in highest demand. Profits rose 4% in the first quarter, which is remarkable in a weak economy with high unemployment.

Our old favorites, Colgate Palmolive (CL) http://finance.yahoo.com/q/bc?s=CL and Procter & Gamble (PG) http://finance.yahoo.com/q/bc?s=PG are also doing well. Both companies provide health, beauty, and homecare products worldwide. The companies are benefiting from the stronger economies that exist in many of its markets.

Colgate Palmolive and Procter & Gamble make a good pair for investors. Although their product lines overlap, Colgate has more low-priced basics that are ideally suited for current economic conditions. Procter & Gamble leans a bit towards higher end products that should have greater appeal as the economic siege lifts later this year.

The five investments we recommended last month are continuing to March forward. Their prices may drop back a bit before they resume course, but long term investors should hold on to them. Here's the scorecard:

China's Economy Is Still Hot (Compared With Everybody Else)

One country that is bucking the global economic recession is China. Although growth has fallen from its recent double digit highs, the country is still chugging along at a respectable 6.1% rate. That's higher than many experts expected since China's export business is linked to the economic health of its customers.

It turns out that the experts were so focused on exports, they underestimated the rapid growth of China's internal market. With at least 1.2 billion people, China can consume much of what it produces itself. That's especially true since the Chinese people have more money to spend than ever before, and they want to live large.

We are particularly bullish on the long-term prospects for China Mobile (CHL). http://finance.yahoo.com/q/pr?s=CHL Cellular service may seem like a luxury that people will drop during an economic slowdown. But that's not the case in China where mobile services are more important than in most countries. In much of China, landline telecom links are frequently of poor quality, and are often not available at all. Consequently, much of the population relies on cellular-based communication and Internet services.

China Mobile now has a staggering 457 million subscribers. That's about 150 million more people than the entire population of the U.S. Nevertheless, the company has yet to capture as much as half of its potential market share.

There's another indication of the continuing economic boom in China...and we're talking about the boom in domestic Chinese travel and tourism that we have observed.

As China transitions from poverty to affluence, an increasing number of the Chinese population are actively looking to enjoy their new-found middle-class status.

And one of the ways they are spending their money is on travel – taking vacations and seeing more of their vast country as well as traveling more on business.

The Great Wall of China remains one of the most popular tourist destinations in the world. Meanwhile, the number of people visiting Taiwan from mainland China has nearly doubled during the past 24 months ... and China's domestic tourism industry has grown 22.6% annually for the past 5 years.

We're certainly bullish on the Chinese travel and tourism market ... and in particular, on one of China's fastest-growing travel services companies... Universal Travel Group.

Universal Travel Group has been trading on the Bulletin Board, but starting Thursday, May 28, it will be trading on the NYSE Amex under the symbol "UTA."

Universal Travel specializes in online and customer representative services. The Company offers packaged tours, air ticketing, hotel reservation and air cargo agency services. They racked up some great numbers from 2005 through 2008: 202% Compound Annual Growth Rate (CAGR) ... they have no long-term debt ... $16.2 million in cash ... $30.2 million in working capital... and earnings of $14.5 million for the full year ending 12/31/08.

By our calculations, they have earned $1.20 ttm, and at a closing price of $7.00 on 5/27/09, they are trading under a 6 P/E multiple. Comparable industry multiples range from 22 to 28...so Universal Travel has a lot of upward potential. Go to http://cnutg.ir.stockpr.com/ for more details.

Energy Investments Are Looking Good Again

The last time we filled up our gas tanks we noticed that our local service station didn't get the word that a recession is in progress. Instead of lowering prices, they went up about 25%. Most energy insiders think the uptrend will continue, especially if the economy improves.

We think the best way to profit from the rebound is with ExxonMobil (XOM), the world's largest energy supplier. http://finance.yahoo.com/q/bc?s=XOM The company produces both oil and natural gas, much of which it turns into petrochemicals, fertilizers, plastics, and other products. ExxonMobil also has interests in electrical plants that are fueled with XOM's energy.

Despite ExxonMobil's leading position in its industry, the stock still carries a low P/E of 9.5. That looks very attractive to us.

The Bottom Line This Week

The economic outlook continues to improve fractionally, which has been fueling the stock market rally. At this point, however, stocks may have gotten ahead of themselves since the economic rebound is unlikely to be strong. As a result, a correction is probably on the way.

Nevertheless, many stocks should do well longer term because they can squeeze profits from a slow economy. Among the fortunate few are ConAgra Foods, Hormel Foods, Colgate Palmolive, and Procter & Gamble. Due to their unique market niches, China Mobile, Universal Travel Group and ExxonMobil should also have prosperous futures.