Association for Investor Awareness - Week of 07/30/2009

In This Issue:

Stocks Got A Second Wind In July
But, How Long Will It Last?
Technology Appears To Be Turning Around
Blue Chips Top The Best Sellers Chart
The Economy Looks Better, But Not Great
Asia's Growth Is Much Stronger
A Single Stock Covers China And Its Neighbors
The Bottom Line This Week

As everyone knows all too well, the government has been working overtime to send billions of dollars in bailout money to banks. That's only fair since the poor banks depleted their resources taking such good care of us. And they say there are no more American heroes.

In any event, some of that money found its way to the stock market where it triggered the nice rally that has been warming our hearts and wallets for several months.

Stocks Got A Second Wind In July

Whatever the reason for the rally may be, after stocks hit their nadir on March 9, prices climbed an impressive 38.5%. The gains put all the major averages into positive territory for the year, an accomplishment that no one would have imagined possible a few months ago.

The big question now is, should we put away the party hats, or does the rally have further to go?

But, How Long Will It Last?

The best way to answer the question is to look at valuations. After the recent run-up, most high quality stocks are trading at about 15 times estimated earnings. That's between three and five points higher (depending on the stock) than the bear market lows. It's clear that the market is no longer in the bargain basement.

But 15 times earnings is also between three and five points below typical market tops. That means stocks could have further to run, particularly if investors look beyond 2010 for company earnings. Economic growth by then should be strong enough for efficient companies to increase their profits significantly.

Another way to answer the question is to look at the performance of individual sectors. Since consumers are counting every penny, the retail industry hasn't been doing well – and probably won't for quite some time.

Technology Appears To Be Turning Around

On the other hand, many technology companies have been making good gains, especially those that do a lot of business in countries with strong economies. We think tech could keep going quite a bit longer even if the broader market begins to sag.

Happily, many of the best-performing tech stocks were recommended in this newsletter. The list includes Apple (AAPL) Intel (INTC), IBM (IBM), Cisco Systems (CSCO), and Oracle (ORCL) – to name only a few.

Besides having robust sales, technology companies also look good because they are not burdened by debt or underfunded pension plans. Neither are they facing the blizzard of new regulations that Washington has coming down the pike for many former highflying companies.

Within the technology sector, however, investors are being very picky. Microsoft, for example, is currently out of favor. The company just reported its first ever fall in sales on an annual basis. Likewise, Dell drove many investors away when it warned that the public's preference for cheaper laptops is having an impact on its profit margins.

Blue Chips Top The Best Sellers Chart

In addition to several of our tech recommendations, many of our other stocks have also been doing well. The rally even gave an 8.2% boost to the picks from our June newsletter. Here are the numbers:

The point isn't that a group of our stocks did well. It's been known to happen. The important message is that blue chips are what investors have in their sights.

That's exactly what we would expect in a damaged economy where a recovery can only be low and slow. Tough conditions always favor large companies that are well established in their markets. The big boys can dig in and eke out profits when growth isn't strong enough to support smaller firms.

Most blue chips are also in the catbird's seat to make full use of faster-growing foreign opportunities. The big multinationals are everywhere. They almost always have at least one market that is hot. Today, the sizzler is China. India is cooler, but only by comparison to its bigger neighbor. India's 4% growth is a skyrocket compared with most countries.

There is another reason that blue chip stocks are doing well. The inflation cycle, that nearly everyone is expecting, has yet to arrive. Instead, deflation is still hammering the economy. Everywhere we look we see it at work. Job losses, wage reductions, rising foreclosures and bankruptcies, and sinking asset values fit the pattern chapter and verse. In addition, deflation has so much momentum, it may persist into 2010.

In a deflation, of course, cash is king. That makes dividends much more valuable than they are in rosier times. Most dividend stocks are blue chips. That's pretty much the end of the story.

The Economy Looks Better, But Not Great

Many investors attribute the stock rally to a positive change in the economy. However, about the most that can be said about it is the recession is weakening. Perhaps it has even hit bottom.

However, slowing down is a far cry from saying that a recovery is about to begin. Considering the amount of damage that's been done, it's likely to be quite awhile before growth can return to anything that resembles normal.

The biggest obstacle to a rebound is most consumers are no longer able to shop until they drop. Since consumer spending makes up 70% of the GDP, the slowdown is having a big impact. Until America's cash registers start playing tunes again, the economy won't do much better than limp along.

Unfortunately, Joe and Sally won't be back to the malls and auto dealers anytime soon. Not only are people being hammered by the recession, most of them are still mired in debt from their last big bash. The hangover won't go away for at least a year, and probably two.

Housing is also unable to make its normal contribution to growth. Although home prices have been inching up in some areas, it's too early to call a turn in the market. As with the recession, housing may be bottoming, but that doesn't mean a rebound is close at hand.

Asia's Growth Is Much Stronger

The economic outlook is far brighter in many foreign countries, especially those in Asia. The Chinese are leading the pack once again with an impressive 8% growth rate. The strength surprised many analysts because the weak American economy greatly reduced the demand for China's exports.

However, with 1.2 billion people, China has the world's largest domestic market. In addition, the country is like a young married couple that is just starting out – they need virtually everything. Filling the demand could keep China's economy in high gear for years.

The majority of China's neighbors are also doing well, and for the same reasons. India, for example, has a billion people that are starting to improve their lives. Taken together, the remaining Asian countries have another billion consumers.

The bottom line is, investors who are looking for excellent gains should include Asian stocks and funds in their portfolios. Of the group, China currently looks the most attractive.

A Single Stock Covers China And Its Neighbors

We continue to like the long-term outlook for China Mobile (CHL). The company offers every wireless service imaginable – including voice, text, long distance, music downloads, video, caller ID, and conference calls – to name only the most common.

China Mobile also does business in other parts of Asia. The company has 451 million customers, which boggles the mind. That number is 151 million higher than the entire population of the U.S.

Nevertheless, the mobile market in Asia is nowhere near saturated. China Mobile has a good record for growth, and it is currently paying an attractive 3.4% dividend. What's not to like?

The Bottom Line This Week

The stock rally is lasting longer than we expected, not that we are complaining. After such big gains we think it's time to become more cautious. If you have nice profits, it's probably a good idea to take some of them off the table. Please protect your remaining portfolio with stop-loss orders.

Going forward, we think the majority of Wall Street's winners will be blue chips with large foreign businesses. Technology stocks look particularly good. So do leading Asian companies such as China Mobile.

One investment we would avoid at this point is a broad market fund. From this point forward, you should do better if you trade your shotgun for a rifle.

Until Next Week

The AIA "Advocate For Absolute Returns", a weekly publication of The Association for Investor Awareness, Inc., tracks market trends, industry news, the SEC, global trade and finance and Washington developments for you because they affect your investments. But who doesn't? Many sources report these issues as abstract facts. We feel that's not enough. The AIA Advocate's job is to warn you of what's important and how these developments translate to ground-level forces and threats that directly affect your wealth as well as your current investment opportunities. Not just information, but information you can use. Until next Thursday...


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Posted 07-30-2009 11:10 AM by Research & Editorial Staff