It Should All Be Over Within a Month - The AIA Advocate Newsletter

In This Issue:

Stocks Are Primed For A Big Move

It Should All Be Over Within A Month

Your Best Strategy Now

Top Stocks To Buy If The Market Knocks Them Down

The Bottom Line This Month


Sometimes Mother Market is impossible to second guess. With the Greek default crisis peaking and the U.S. debt limit deadline fast approaching, one would expect stocks to be plummeting as they follow the formula, Crisis + Crisis = Crash.

Instead, stocks are largely shrugging off the problems that scarcely deserve consideration – at least so far. From our last newsletter on June 30 to July 27, the Dow and the Nasdaq declined a modest 0.9% and 0.3% respectively.

Stocks Are Primed For A Big Move

That’s not to say that Wall Street is ignoring the threats. Trading volume is at the lowest level it has been in three years. That suggests to us that most investors are taking a time-out until the U.S. and European problems are resolved.

If the two economic threats are defused, an eye-popping relief rally is likely. But if Greece defaults and Uncle Sugar stops paying his bills, we could see a race to the exits. There may not be much middle ground.

It Should All Be Over Within A Month

We’ve consulted our crystal ball to see which way the scale is likely to tip, but there is no clear near-term view. However, when we look out a month or so we see a resolution to the debt and default crisis, even if they blow up shorter term.

We think the longer range view is positive because the world will never tolerate more than a brief credit emergency. So far, investors, bankers, fund managers, and businesses everywhere have allowed their political leaders to dance around the economic problems because everybody figured the officials would not actually let the deadlines pass. But if the politicians don’t come through with solutions before the clock runs out, voters will take them to the woodshed where the reality of their short political futures will be explained. At that point, ways to fix the problems will appear as if by magic and will be implemented with lightning speed.

The bottom line is, whatever scary gyrations stock prices may take over the next few weeks, we think they will be back on an upwards path by the fall.

Your Best Strategy Now

If we are correct that the long range view for stocks is positive, it follows that you should hang onto your best companies through any near-term turmoil. In fact, we think you should use any short-term plunge to buy more of the top quality stocks we have been recommending.

If you intend to use a market drop to increase your positions, we think you should do so soon after it begins. Because a crisis is likely to be resolved fairly quickly, we doubt that prices will stay down very long.

Ordinarily, when a market plunge is possible we recommend protecting your positions with stop loss orders. In this case, however, we doubt that stops will be effective. As we saw during the infamous “Flash Crash” in May 2010, in a short-lived market emergency, the price of a stock may fall below your stop level before the automatic sale system can take you out. In that case, you will get a lower price than you expected. To add insult to injury, you will also miss the rebound.

Top Stocks To Buy If The Market Knocks Them Down

Here are a few blue chip stocks we think would be particularly attractive if their prices are driven down. The numbers we use are from March 10, 2009 to July 27, 2011.

Industrials:

Alcoa (AA) had a spectacular rebound when the Great Recession ended. http://finance.yahoo.com/q/bc?s=AA When the economy turned up again, the world had an insatiable appetitive for aluminum. As a result, Alcoa soared from $6.00 to $14.93, a 148.8% gain.

We still like Alcoa, but it is no longer cheap. We think it would be attractive again if the market pushes the price below $12.00.

Deere (DE) is in the same position as Alcoa. http://finance.yahoo.com/q/bc?s=DE The company is best known for tractors but it also produces heavy construction equipment that is sold throughout the world. Both product lines soared when the recovery got underway. The stock went from $26.41 to $79.42, a 200.7% gain. Deere at $69 would look very good to us.

Ford Motor Company (F) was slammed during the recession that did so much damage to the U.S. auto industry that it looked as if it might not survive. http://finance.yahoo.com/q/bc?s=F But Ford tightened its belt and made it through the storm. Incredibly, the company did so without asking Uncle Sam for a bailout.

When the Great Recession ended, Ford bounced back strongly. Investors soon pushed its stock from $1.85 to $12.37, a spectacular 568.6% gain. Although we think Ford has an even brighter future on the way, the stock now looks too rich to be attractive. If a market panic should push the price down to $10 or so, we would be quick to push the “buy” button.

General Electric (GE) was hammered by the Great Recession. Because GE had a large financial services business the company was also whacked by the credit crisis. http://finance.yahoo.com/q/bc?s=GE When those problems ended, GE’s worldwide business soared, especially sales of big ticket energy equipment to China. The stock went from $8.32 to today’s $18.11, a 117.7% gain. We think a lot more is on the way from GE, but we would like the price a lot better if it were $14 or below.

Financial Services:

We continue to believe that the big banks are very good long term investments. Although they have a black eye from the trouble they caused the world, their central role in the global economy is unchanged. Within two or three years, we think the banks will be much higher priced than they are now.

Citigroup (C) looks especially promising for the long term. http://finance.yahoo.com/q/bc?s=C The company helped lead the banking industry into the basement when the boom times ended and the Great Recession began. Now the company is rebuilding itself by stressing its traditional strengths in the global economy.

Citigroup is off to a good start. When we first recommended the stock it was $14.50 (adjusted for a 1-for-10 reverse split). Citigroup now sells for $38.27, a 163.9% gain. Quite a bit more seems likely, but the stock should be in the $28 - $30 area to make us want to be buyers again.

Wells Fargo (WFC) also took a big hit during the Great Recession, primarily because its mortgage business was devastated by the housing bust. http://finance.yahoo.com/q/bc?s=WFC Now the worst of the housing problems appear to be over and the company is attracting new business in other areas. Accordingly, the stock went from $11.59 to $28.58, a 146.6% gain.

We think greater returns are on the way because the housing industry seems more likely to rebound over the next few years than it is to go lower. As a result, we would buy this stock if its price should drop to the low $20 area.

Energy:

It’s no secret that we think the energy industry is a slam dunk for long term profits. Although oil and gas prices can slide for short periods, over the longer term the world’s appetite for energy will push them back up. China alone can keep the energy industry on Easy Street for as far ahead as any of us can see.

ExxonMobil (XOM) remains our top energy recommendation. http://finance.yahoo.com/q/bc?s=XOM&t=1y. Not only is the company the most profitable in its industry, it also has lots of cash and only modest debt. Nevertheless, Exxon only climbed 30.7% during the recovery, from $63.76 to $83.31.

With its low P/E of 12, we think Exxon is attractive just where it is. But if a market panic should put the stock back down to $56 or less, we would be especially eager to buy it.

EnCana (ECA) is a leading Canadian natural gas company we also recommended in the past. http://finance.yahoo.com/q/bc?s=ECA+Basic+Chart Although EnCana has done well since the recession ended, investors are nervous that the large amount of shale gas that has been discovered will keep prices low for years. Accordingly, after rising 55.7%, from $19.07 to $29.70, EnCana’s price has stalled.

However, the outlook for EnCana is improving now that nuclear power is back in the doghouse throughout much of the world. Additionally, many homes and businesses are now switching from oil to less expensive natural gas. As a result, we would love to have a chance to buy EnCana for $23 or less.

The Bottom Line

Stocks have held up well during this countdown period for the U.S. debt ceiling and the Greek default crisis. The low trading volume shows that most investors are waiting for the way ahead to become less foggy before they either buy or sell more stocks. We think the result will either be a relief rally or a sharp drop depending on how government officials handle the problems.

Longer term, we are confident that the two big financial threats will be fixed no matter what may happen over the next few weeks. Consequently, we advise investors to hold onto their multinational stocks even if the market plunges near term. An even smarter move would be to use the decline to buy more of the top quality blue chips that we have been recommending.

Until Next Time

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 07-28-2011 5:03 PM by Research & Editorial Staff