The Best Strategy For Investors - The AIA Advocate Newsletter

In This Issue:

All Eyes Are On The Fed

Ben Bernanke’s Dilemma

The Best Strategy For Investors

Energy Still Looks Like A Long Term Slam Dunk

Technology Stocks Are Bouncing Back

The Bottom Line This Month

Over the past month, the stock market shrugged off some of the most troubling news we’ve seen in years. We had increasing political turmoil in the Middle East and North Africa. At the same time the Japan nuclear emergency worsened. To cap it all off, Standard & Poor’s cut Uncle Sam’s credit outlook from “stable” to “negative”.

Meanwhile, Congress is deadlocked on raising the federal debt ceiling, a task that must be done by July. Coming up even sooner is the end of the Fed’s QE2 stimulus program – as we will discuss next.

All in all, there has been a lot for investors to worry about. Nevertheless, the Dow and the Nasdaq managed to rise a healthy 2.6% and 3.4% respectively for the month.

All Eyes Are On The Fed

In our last issue we wrote that the economy and the stock market are being fueled by the billions of stimulus dollars the Fed has been spending to chase the Great Recession away. The Fed’s decision to keep interest rates very low is also a plus for growth.

The Fed’s current program to boost the economy is Quantitative Easing 2, or simply QE2. The plan is scheduled to expire in June, an event that many analysts think will be like taking the punch bowl away from a party just when it is starting to pick up. The most pessimistic among them think the economy will fall back into recession, unemployment will start to creep up again, and the bull market in stocks will end.

Other analysts dismiss the dire scenario as unthinkable. They believe that no matter what Fed chairman Bernanke is saying now about pulling the plug on QE2, if the economy is weakening when June arrives he will extend the program for several more months.

However, keeping QE2 in place would cause problems that are just as troublesome as those we can expect if the program is allowed to expire.

Ben Bernanke’s Dilemma

The dilemma that Fed chairman Bernanke faces is QE2 is running up the federal debt, which is already beyond alarming. The additional stimulus money is also pushing the value of the dollar down, which is fueling inflation and is upsetting our trading partners. Those problems, in turn, are reducing the appeal of Treasury bonds that Washington needs to sell every month to service its obligations.

Because QE2 seems to be more of a liability than an asset now, we think Mr. Bernanke will carry out his plan to nail the coffin shut on the long quantitative easing program. Any nudges to the economy from then on is likely to be done by raising interest rates, which we don’t expect until much later in the year.

The Best Strategy For Investors

Since the end of QE2 is a potential threat to the stock market, we think the only prudent course of action is to prepare for a correction. That’s especially true since a fallback seems overdue no matter what the Fed does two months from now.

For many investors the best strategy will be to take some profits off the table. That’s especially true for anyone who is likely to need their cash within a year or so. After such a bountiful bull market, protecting your gains seems a better plan than reaching for more and risking a loss.

We think any stocks you intend to keep should be protected with stop loss orders. Dr. Steve Sjuggerud at Daily Wealth (www.dailywealth.com) recently reported that Stansberry & Associates commissioned a study to see how trailing stops would have affected the performance of his stock portfolio.

The study found that trailing stops set 16% below the purchase prices of his stocks increased portfolio performance. That was also true for stops set as far as 34% below their starting points. Even with such a wide range of stop-loss protection, the returns increased.

We continue to recommend trailing stops that are set 25% below their current levels. That’s tight enough to protect against a major downturn, but wide enough to avoid being triggered by the larger than usual price swings that often occur in the market today.

Energy Still Looks Like A Long Term Slam Dunk

At this point we don’t think there is any question that the era of cheap energy is over. Unless the space aliens drop by with a miracle generator, there appears to be nothing to stop the long term rise of fossil fuel prices. That’s especially true now that nuclear power is in the doghouse.

In addition to the energy stocks we recommended in our last issue, we also think PetroChina (PTR) looks very attractive:

PetroChina supplies two thirds of China's energy. http://finance.yahoo.com/q/pr?s=PTR. From its modest roots dating to the communist revolution, the company has become a major oil and natural gas producer with a worldwide reach. The company is profitable and boasts an attractive 12.9 P/E, vs 16.1 for the S&P 500.

PetroChina is a vertically integrated firm that does everything from finding energy to extracting, transporting, refining and selling it to customers both large and small. The company is the most profitable of its type in Asia, and also outshines many Western rivals.

Although there is little opportunity for finding additional petroleum within China, the company is obtaining it elsewhere. China has a $200 billion deal with Iran to acquire much of that country's oil over an extended period. More recently - and right under our noses - China signed similar agreements with Canada to buy as much as half of that country's energy exports within ten years. China also negotiated a new energy deal with Nigeria, its sixth such move in Africa.

PetroChina will benefit from the prodigious growth of China's economy. With over a billion people to serve, China also has the world's largest internal market. We think the Chinese juggernaut will keep PetroChina on a roll for as far ahead as anyone can see.

Technology Stocks Are Bouncing Back

Last week Intel (INTC) and IBM (IBM) reported much stronger than expected earnings. The two leading tech firms said that businesses throughout the world have finally decided it’s time to upgrade their office and production equipment. Typically, a new tech adoption cycle lasts about 18 months, so the suppliers should have a nice run of rising profits.

At the same time, many new tech companies are being formed. The start-ups are reviving the venture capital business that is once again investing hundreds of millions of dollars to bring new ideas to the market.

All the new activity in technology signals that a turnaround is in progress for the long-suffering sector. Fortunately, there is nothing on the horizon that resembles the late dot-com boom that became a disaster.

Technology companies are in an even better position this time around thanks to the cheap dollar. For foreign buyers, the best technology in the world is now less expensive than it has been in many years.

Because semiconductors are at the heart of countless tech products, we continue to think Intel (INTC) should be in most long-term portfolios. http://finance.yahoo.com/q/pr?s=INTC The company is best known for its central processors which power most of the world's personal computers. Intel also supplies logic chips for a wide variety of applications ranging from cellular telephones to the space shuttle. Increasingly, the company is becoming a leading supplier of communication processors. Intel rightly bills itself, "The preeminent building block supplier to the worldwide digital industry."

Also looking very attractive is Taiwan Semiconductor (TSM), the world's largest dedicated chip foundry. http://finance.yahoo.com/q/pr?s=TSM The company produces chips designed by clients that include many of the world’s largest corporations. The firm is prospering because it offers advanced wafer production and exceptional manufacturing efficiencies at low costs. The company is also able to create large quantities of advanced chips very quickly.

The Bottom Line This Month

The stock market is having an extraordinary run, and a correction seems overdue. The trigger could be the end of the Fed’s QE2 stimulus program in June.

Meanwhile, many U.S. companies are having a very good year. Multinational tech companies are leading the pack. Intel and Taiwan Semiconductor look especially promising for several years of rising profits.

The same should be true for PetroChina that is emerging as one of the world’s leading energy companies with operations in several continents. We think the company has a very bright future.

Until Next Month

The AIA "Advocate For Absolute Returns", a 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 time...


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Posted 04-28-2011 12:59 PM by Research & Editorial Staff