AIA Advocate for Absolute Returns

How Much Higher Can The Bull Go? - The AIA Advocate Newsletter

2012-04-04T02:38:00Z

In This Issue:

How Much Higher Can The Bull Go?

Predictions About The Economy Are All Over The Map

Several Threats To Growth Are Worrisome

Food And Energy Are Good Bets Now

The Bottom Line

Since our last newsletter in February, the stock market continued to rise. During the first part of the month it looked as if the rally was stalling because stocks remained fairly flat. Then on March 13, the market found its second wind and got back on the escalator. By the time the clock ran out for the period, the Dow and the Nasdaq were up 1.6% and 5.5% respectively.

The latest spurt added to a rally that had already delivered impressive gains. From its beginning on October 3, 2011, the two indices rose 23.9% and 33.6%. The current leg up that began on December 20, accounted for 9.0% and 19.8% of the move.

How Much Higher Can The Bull Go?

The big question now, of course, is how much life does the bull have left? The short answer is, nobody can know for sure. However, stock fundamentals suggest that the market could rise another 10%.

After such a long advance, we think stocks are overdue for a correction. After any run-up, many investors will usually decide to take some of their profits off the table. Once the decline begins, other investors who were thinking about doing the same thing will join the crowd, and the correction will feed on itself.

In addition, if anything happens that makes investors think they were too optimistic about the economy and corporate earnings, stocks will move back down until their prices reflect the revised outlook. Unlike the more sedate move up, a corrective decline can be quite rapid.

Predictions About The Economy Are All Over The Map

Right now, the outlook for the economy and earnings is mixed. Mr. Bernanke at the Fed has been warning that growth may slow down in the coming months. He believes the spurt that we are seeing now is due to companies rebuilding their inventories, and is not the result of a significant increase in consumer spending. The Fed chief is worried enough about the economy that he said he would start another round of monetary easing if it seems necessary.

Many corporations are also flashing caution lights. Earnings have been strong in recent months, but company spokesmen are projecting lower returns as the year progresses. They point to the impact of the recession in Europe, slowing growth in China, and some weakness in the global economy. Higher energy prices are also a concern.

On the other side of the picture we have former U.S. Treasury secretary, Lawrence Summers. In a March 26 op-ed article in the Financial Times, he argued that job growth is now staying ahead of population growth, which means the unemployment rate should ease down. He also noted that consumers are starting to buy the cars and durable goods that they put off during the recession.

In addition, Mr. Summers pointed to strong growth in mobile information technology, social networking, and the domestic oil and natural gas industries. He also believes (as we do) that the housing market seems to be stabilizing.

From our perspective, we think Mr. Summers is more likely than Mr. Bernanke to be correct about the economy. In our travels around the country we are finding an improving mood among most Americans. People are not buying many homes but they are renovating and expanding the houses they already own. Most people are also dressing better, which indicates they must be spending more at the mall than the Fed's numbers (that are always about 3 months behind) indicate. All in all, we think the US economy will do better this year than many people expect.

Several Threats To Growth Are Worrisome

Nevertheless, there are some serious problems in the world that could end the economic upturn.

The biggest threat is higher oil prices. As you may painfully recall, in 2007-2008 when oil rose from about $100 a barrel to $147, it sucked so much money out of the economy that the economic downturn turned into the Great Recession. To be sure, there were other factors that contributed to the severe decline, but expensive energy was the trigger.

Today, oil is already $125 a barrel so it would not take a very big shock to push the price into the danger zone. An attack on Iran would almost certainly do the trick. If Iran retaliates by shutting the Strait of Hormuz where 20% of the world’s oil supply travels, the price could go to $200, and perhaps a lot more.

The sovereign debt crisis in Europe could also spin out of control. If Greece can’t be saved, most analysts think that Portugal, and perhaps Spain, could be next. In that case, the European economy would almost certainly plummet. Since Europe buys about 20% of America's exports, our economy would also suffer a blow.

Fortunately, the Europeans have been building financial firewalls around Greece, so the risk of a domino effect is lower than it was a few months ago.

On the positive side, if the threats to growth can be eliminated, or at least reduced, stock prices will probably shoot up. A diplomatic solution to the Iranian nuclear controversy, or encouraging news about the sovereign crisis in Europe, could easily fuel another strong upturn for the bull.

Food And Energy Are Good Bets Now

Whenever the outlook is uncertain, smart investors look for stocks that can do well even if the economy doesn’t. Two sectors that fit the bill are food and energy.

Bunge Ltd. (BG) looks especially attractive to us. http://finance.yahoo.com/q/bc?s=BG+Basic+Chart The company is a global food processor with a particular emphasis on soybeans, for which the company has become the world’s largest dealer. The company also deals in grains, sugar, bioenergy, and fertilizer. The mix of businesses owned by Bunge is an excellent match for the rising agricultural and energy demands we expect to see over the next few years.

We think the company’s soybean business is especially promising. Soy is a high protein product used to raise meat and poultry for people in developing countries who can afford better diets. Soy is also the main ingredient in many food products that provide protein more directly to the table. In addition, soybeans provide oils for commercial customers in dozens of industries.

Soy oil is also the main ingredient of the most efficient biofuel. In fact, Rudolf Diesel developed his namesake engine in 1893 to run on soy oil that farmers could produce themselves. Bunge is also the third largest producer of fuel-grade ethanol in Brazil. As petroleum products become more expensive, the demand for biofuels should increase significantly.

Not surprisingly, the world’s most populous nations are becoming major soybean users. China now relies on imports for 80% of its soy products and expects to increase its purchases by more than 50% by 2020. India is also starting to use more soy products.

The demand for soybeans is expanding so rapidly, last year Bunge joined forces with SEACOR Holdings (CKH) to construct a large export terminal on the Mississippi River in Illinois. The new terminal will give Bunge low-cost access to the largest soybean customers in the world.

Bunge appears to be a timely acquisition. Rising costs cut into fourth quarter earnings but the company’s profit topped forecasts, and revenue soared on strong grain and other volume. Although the stock is up from its recent lows, we think it has further to go.

Sasol (SSL) also appears very attractive to us now. http://finance.yahoo.com/q/bc?s=SSL+Basic+Chart The company is the world's largest and most advanced producer of synthetic gasoline, diesel, and jet fuel that it produces from low grade coal and natural gas.

Sasol’s natural gas-to-liquids business is especially promising. Because large new shale gas deposits have been made recently, the resource is very cheap. At the same time, oil is becoming more expensive.

At current prices, one unit of energy from natural gas costs 38% less than the same amount of energy from oil. Even with the cost of converting natural gas to a liquid fuel, there is still a big margin for Sasol. Natural gas prices could go up considerably, or oil prices could drop sharply, and Sasol should still see attractive profits.

As it turns out, Sasol has a hedge against a rise in natural gas prices: the company is buying its own suppliers. Sasol invested $2 billion in two major shale gas fields in Canada, and is investigating similar opportunities elsewhere in the world.

Sasol announced excellent fourth quarter results. Operating profit rose 70% from the same period last year. Despite its success, we think the stock is still very attractive for long-term accounts.

The Bottom Line

There is a lot of uncertainty about which way the economy will go this year. Good arguments exist for both outlooks. However, we think the optimists are more likely to be correct.

Since the amount of economic growth is in question, we think the safest strategy for investors is to emphasize food and energy stocks. Bunge looks very good for its soybean, grain, and biofuels business. Sasol seems to be in the right place at the right time with its synthetic fuel operations.

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...

Bull Markets Always Climb “A Wall Of Worry” - The AIA Advocate Newsletter

2012-02-28T02:24:00Z

In This Issue:

Bull Markets Always Climb “A Wall Of Worry”
But “The Wall” May Be Lower Than It Looks
A Correction Seems Overdue
We Never Get Bored Making Money
Bank Stocks Are Finally Turning Around
The Bottom Line

The stock market rally that began in late December continued through the first three weeks of February. Since our last issue, the Dow and the Nasdaq gained 1.8% and 5.1% respectively.

Measured from December 20, the numbers were an even sweeter 7.1% and 13.2%. From the market’s recent low on October 3, 2011, the two indices are up a heart-warming 21.7% and 26.2% respectively. The added gains pushed stocks into official bull market territory. Of course, there is no guarantee that the happy condition will continue.

Bull Markets Always Climb “A Wall Of Worry”

Despite the strong upturn, many investors remain unconvinced that the bull has actually returned. They point to the many serious problems that could send prices back down. The list includes a barely warm economic recovery, the debt crisis in Europe, soaring energy prices, and a possible war with Iran.

Any one of the threats could give the market back to the bear. But, all major upturns begin while scary problems remain. Investors move back into stocks anyway if they think the problems are getting smaller.

But “The Wall” May Be Lower Than It Looks

For example, the debt crisis in Europe may have been defused by the February 18 agreement to bail out Greece for the second time. The Greek people won’t like wearing hair shirts for several years to bring the country’s deficit down, but that’s better than a meltdown.

A possible war with Iran is a bigger concern. But here too there are signs that a tragedy may be averted. Every country that’s involved, including Iran, seems determined to find a way to negotiate a solution to the nuclear issue. If the peace effort is successful, gasoline prices should come back down by themselves.

As to the lukewarm economic recovery, stronger growth is expected during the second half of the year. In any event, the growth we have now is an adrenalin shot compared to the Great Recession. Most American companies that survived the downturn have become very efficient and will be able to find good profits even in a soft recovery.

As it turns out, the recovery is not soft for many industries. For example, U.S. manufacturers are growing at about twice the speed of the broader economy. Ditto for exporters that are also benefitting from stronger than expected growth in China and other developing countries. Agriculture is also very profitable. In addition, many analysts think housing is finally starting to turn around.

A Correction Seems Overdue

Nevertheless, no big stock market move goes very far without a reversal. Since we had an unusually big upturn over the past few months, stocks seem likely to fall back before they make another big jump.

With a correction on the way, many investors may wish to take some profits off the table. At minimum, we think you should protect your gains with stop-loss orders. Even if you are investing for the long term, as we recommend, there is no reason to suffer near term losses. You will do better if you step aside during a correction and buy back in at lower prices after the scare runs its course. You don’t need to call either the top or the bottom to make this strategy work for you.

It can also be a good idea to sell any weak stocks that were pushed up by the rally. Sometimes the best strategy with mistakes is to cut them short at the best terms you can find, and put the money into stronger stocks.

We Never Get Bored Making Money

Fortunately, finding strong stocks is proving to be quite easy. They stand out because investors pushed them up the most during the rally. Many winners are in our “Select Portfolio For Late 2011 and 2012.” Under the assumption that our readers are happy to stick with stocks that are delivering good gains, we are including the portfolio again with updated numbers.

A Select Portfolio For Late 2011 and 2012

Company

02/21/12

11/18/11

Change

Alcoa (AA)	$10.41	$9.74	6.9%
Deere & Co. (DE)	$84.19	$74.15	13.5%
Caterpillar (CAT)	$115.00	$93.86	22.5%
Coca-Cola (KO)	$68.82	$67.39	2.1%
Colgate Palm. (CL)	$93.37	$88.61	5.4%
Exxon Mobil (XOM)	$86.57	$78.05	10.9%
General Elec. (GE)	$19.41	$15.67	23.9%
Goldman Sachs (GS)	$116.63	$92.00	26.8%
Johnson & John. (JNJ)	$65.04	$63.85	1.9%
Procter & Gamble (PG)	$64.42	$63.24	1.9%
Wal-Mart Stores (WMT)	$60.07	$57.23	5.0%

For An Emphasis On Current Income:

Consolidated Ed. (ED)	$57.86	$58.14	-0.5%
Eli Lilly (LLY)	$38.75	$36.89	5.0%
Kinder Morgan (KMP)	$90.46	$76.57	18.1%

The rally continued to favor industrial stocks. Alcoa, Caterpillar, and General Electric made additional gains from last month. The lone exception was Deere that dropped $2.71.

Our beverage and household product companies also had a good month. Coca-Cola, Colgate Palmolive, Johnson & Johnson, and Procter & Gamble had modest gains. Our sole retailer, Wal-Mart also closed higher than it was in January despite reporting disappointing earnings a few days ago.

Goldman Sachs went up $8.03 for the period. Strong gains were common throughout the banking sector which indicates that investors have finally decided its outlook is improving.

As you may expect when the prospect of capital gains is rising significantly, income stocks look less attractive. Kinder Morgan rose modestly for the month but Consolidated Edison and Eli Lilly lost about a dollar each. With the Fed promising to keep interest rates on the floor through 2014, we think investors will come back to dividend stocks that offer attractive yields.

Bank Stocks Are Finally Turning Around

We mentioned earlier that bull markets almost always start while economic problems still exist. The same is true for industry rallies. That’s the case with the banking sector that has been on the floor since late 2007, and now appears to be recovering.

One of the reasons banks look good is they are sitting on a mountain of cash from the federal bailouts, and they have been looking for opportunities to put it to work. During the recession there was little demand for credit, but that’s beginning to change now that the economy is improving.

Credit card opportunities are also looking a bit brighter. Consumers are using the “fantastic plastic” once again, and card issuers are looking forward to rising profits. Perhaps best of all, consumers in developing nations have also discovered credit cards, which benefits U.S. banks with foreign operations.

Among the banks with improving prospects, we think Citigroup (the holding company for Citibank) looks very attractive for long-term accounts. http://finance.yahoo.com/q/bc?s=C+Basic+Chart It is clear from the stock’s rising price that many investors agree.

We are especially happy to see that China just gave Citigroup the okay to become the first western bank to issue credit cards in the country under its own brand. It’s another opportunity for Citigroup to tap the world’s largest consumer market that also happens to be among the fastest growing in the world.

Citigroup is still carrying some bad paper and debt from its past mistakes. Nevertheless,we think the company is well on its way to turning itself around.

All banking stocks are likely to be volatile, including Citigroup. If you wish to participate in the industry’s rebound while keeping your risks at a minimum, we think you should consider taking a diversified position. A good way to do that is with the iShares Dow Jones US Financial Sector Index Fund (IYF) that tracks all the major banks. http://finance.yahoo.com/q/bc?s=IYF+Basic+Chart

The Bottom Line

The economy continued to perk up last month. Few economists believe that a strong recovery is on the way, but compared to the Great Recession the upturn is most welcome. Many companies will be able to squeeze attractive profits from the modest growth, including several of our blue chips.

We also think the banking industry is finally turning around. It won’t happen quickly, and we can expect a rough ride. But we think the worst is over for the sector. We already own Goldman Sachs, and it has been making gains of late. Citigroup also looks very promising. For a diversified banking position, we recommend the iShares Dow Jones US Financial Sector Index Fund.

Until Next Time

Really!!! The Economy is Showing More Signs of Life

2012-01-26T19:01:00Z

In This Issue:

The Economy Is Showing More Signs Of Life

Growth Stocks Should Benefit The Most

The Outlook From Here

It’s Time To Start Nibbling At Housing Stocks

The Bottom Line

The stock market appears to have made up its mind about which way to jump, and the decision is clearly on the bullish side. Since we published our November 2011 letter, the Dow and the Nasdaq gained 13.3% and 14.6% respectively. Those are exceptional two-month returns.

The gains are even sweeter when the market’s performance is measured from its October low. From that dismal level, the S&P 500 is up more than 20%. For the present, at least, the bear is nowhere in sight.

The Economy Is Showing More Signs Of Life

Stocks are doing well because the long-moribund U.S. economy is finally beginning to inch its way off the mortician’s table. Nothing is happening that would lead anyone to think that a full recovery is in the works. However, manufacturing, consumer spending, and home sales in some regions, are ticking up.

Although the economic increases are modest, after three years of recession, the gains are significant. Not only do they mark a reversal from the norm, all three indicators are moving up at the same time.

We must caution readers that it is too soon to break out the party hats and kazoos. Overhanging the U.S. economy and the stock market is the precarious sovereign debt crisis in Europe. Since that part of the world consumes about 20% of America's exports, if it slips into recession the U.S. economy will soon follow.

The same will be true if China’s growth slips much more. A war with Iran, higher oil prices, and other worries could also hurt the economy. But if they don’t occur, we think 2012 could be a better year than seemed likely a few months ago.

Growth Stocks Should Benefit The Most

When an economic improvement begins, the stocks that have the biggest gains are those that can make the most of the tailwind. The group includes many of the large-cap companies that we have been recommending.

The “Select Portfolio For Late 2011 and 2012” tells the tale. Here is the table again showing the performance of the stocks from November 18 to January 23.

Our traditional growth stocks lead the pack: Alcoa, Deere & Company, Caterpillar, and General Electric are all up. So is Goldman Sachs, the mega-bank and investment company that always benefits from improving economic growth.

On the other hand, defensive stocks that hold up when the economy is weak, are lagging. That list includes Colgate Palmolive, Johnson & Johnson, and Procter & Gamble. Two of the three made small gains.

Two of our income stocks, Consolidated Edison and Eli Lilly, also lagged the market. The exception was Kinder Morgan Energy Partners that is benefiting from high energy prices. Ditto for ExxonMobil.

A Select Portfolio For Late 2011 and 2012

Company

01/23/12

11/18/11

Change

Alcoa (AA)	$10.25	$9.74	5.2%
Deere & Co. (DE)	$86.90	$74.15	17.2%
Caterpillar (CAT)	$106.02	$93.86	13.0%
Coca-Cola (KO)	$68.53	$67.39	1.7%
Colgate Palm. (CL)	$88.37	$88.61	-0.3%
Exxon Mobil (XOM)	$87.47	$78.05	12.1%
General Elec. (GE)	$18.83	$15.67	20.2%
Goldman Sachs (GS)	$108.28	$92.00	17.7%
Johnson & John. (JNJ)	$65.00	$63.85	1.8%
Procter & Gamble (PG)	$65.00	$63.24	2.8%
Wal-Mart Stores (WMT)	$60.91	$57.23	6.4%

For An Emphasis On Current Income:

Consolidated Ed. (ED)	$58.62	$58.14	0.8%
Eli Lilly (LLY)	$39.40	$36.89	6.8%
Kinder Morgan (KMP)	$88.04	$76.57	15.0%

The Outlook From Here

We think our growth stocks have further to go. Turnover on the S&P 500 is at its lowest point since 1997, which suggests that most investors have not yet joined the rally. If the gains continue for another week or so, we think many of them will come off the bench and give the upturn an added boost. If not, the rally will probably end.

As long as the economic uptick continues, the defensive stocks should continue to underperform the market. However, we urge investors to hang onto their defensive stalwarts because there is no guarantee that the economy will continue to expand. If the outlook turns dark once again, the defensive sector will regain its luster.

We also think our income stocks should be held. With interest rates remaining on the floor, the high yields these stocks pay make them very attractive no matter what the economy may be doing.

Because of the threats to growth that we mentioned a minute ago, we urge investors to protect all their stocks with stop loss orders. Stops are easy to place and they don’t cost anything unless the market falls far enough for them to be activated. At that time, only normal selling commissions apply.

It’s Time To Start Nibbling At Housing Stocks

After five years of utter despair, the housing sector is also showing some signs of life. As with the broader economy, a full rebound isn’t on the way anytime soon. However, in many regions of the country the sound of hammers can be heard once again, and some prices have started to move back up.

The biggest question we need to ask ourselves is, should we buy housing stocks at such an early stage of the recovery. We think the answer is yes. History strongly suggests that investors who take early bird positions in an upturn are almost always its biggest winners.

With that in mind, here are two housing investments that we think will do particularly well over the next few years:

Lennar (LEN): The changing outlook for housing is starting to show up in the balance sheets of a few successful homebuilders.

We think the best of the lot is Lennar, a company that has been in the black for seven quarters. In the most recent quarter, new orders for homes rose 20% compared to the same period last year. In addition, the company’s order backlog rose almost 38% to $560 million. Those are remarkable achievements in an industry that has been spouting red ink for many years.

One of the reasons that Lennar is doing well is the company has been using the housing downturn to invest in distressed properties. In the most recent quarter the division’s revenues more than doubled to $46.5 million. With property values continuing to remain low in most parts of the U.S., we think the distressed investment business will remain strong for several more years.

Lennar also made good use of the few regions where real estate remained in relatively good shape. Two such areas were Portland and Seattle where the company purchased 650 lots late last year.

We think this well managed company will reward investors. The small dividend it pays should add to its appeal.

Equity Residential Properties (EQR): The rental property business is also doing very well. Houses are still too expensive for millions of Americans who have no alternative except to rent. Foreclosures are also increasing the number of renters. In addition, the children of baby boomers are continuing to move away from home and need places to live.

At the same time, the supply of rental housing is tightening. Monthly starts of multifamily properties has yet to keep up with demand. As a result, rents are rising in most cities.

We think Equity Residential Properties should benefit from today’s housing trends. The REIT owns 421 developments in 15 states. In total, the trust owns 119,743 individual units.

The company also looks good because it focuses on higher growth markets where rents are near the top of the scale, and vacancies are near the bottom. Properties include such landmarks as Trump Place in NYC, Harbor Steps in Seattle, City Pointe in Los Angeles, and West End in Boston – to name only a few.

In addition to the capital gains we expect to see from Equity Residential, the REIT pays an attractive 4.10% dividend.

The Bottom Line

The economy started to show some signs of life late last year and the stock market was quick to respond. Although we doubt that the upturn marks the start of a new bull market, the rally may last another few weeks. Investors who participate in the bounce, but who are smart enough not to think it will last forever, should do very well. To help prevent being caught by a sudden end to the party, we urge readers to put stop loss orders on all their purchases.

Looking best of all are the classic growth stocks that benefit from increasing economic activity. Alcoa, Deere, Caterpillar, and General Electric all look good to us, as does Goldman Sachs.

We also like the long term outlook for the housing industry that appears to be in the very early stages of a recovery. Lennar and Equity Residential Properties should make good use of the welcome change in one of America's largest sectors.

Until Next Time

Long Term Investors Can Profit From Today’s Lower Prices

2011-11-23T05:14:00Z

In This Issue:

Europe’s Debt Crisis Tops A Long List Of Worries
Long Term Investors Can Profit From Today’s Lower Prices
Smart Investors Play Both Ends Of America's Income Divide
The Bottom Line

The stock market remained volatile over the past month as investors struggled to determine the direction of several troubling world events. The biggest price swings occurred from November 9 to November 11 when the market dropped 389.2 points and then rose 372.8 points on the changing outlook. The downward trend for the three days reflected the market’s performance over the full month that left the Dow and the Nasdaq off 2.7% and 4.8% respectively.

Europe’s Debt Crisis Tops A Long List Of Worries

The biggest concern among investors is the sovereign debt crisis in Europe that appears to be spreading from Greece to Italy, and perhaps wider. A default by Greece was never a major threat to the European Union because that country only accounts for 2% of the region’s economy. Italy, however, is 12.7% of Europe’s economy. If Italy stumbles it would almost certainly trigger a European recession. Some analysts think the crisis could spread to several other countries in the region and bring down the European Union.

Europe’s biggest problem isn’t just the prospect of defaults by the countries with debt problems. Instead, the shaky finances are scaring off bond investors that fund every country’s operations. Interest rates have climbed to nearly 7% for Italy and Spain, a level that is barely affordable. France, the Netherlands, and Austrian rates are also creeping up. By contrast, the U.S. government is paying only about 2% on its 10-year Treasury bonds.

To bring yields down, the European Central Bank has been making massive purchases of unpopular country bonds. Many analysts think the ECB can control the interest rate problem with additional purchases. However, it is difficult to get all 17 countries in the EU to agree about how to proceed. They don’t all speak the same language, and often don’t trust each other.

We think the odds favor an eventual resolution of Europe’s sovereign debt problems. The alternative of breaking up the EU and discarding the euro currency is simply too terrible to permit. As the battle continues, we can expect stock markets everywhere to remain volatile. We wish it were otherwise, but that’s the price of living in today’s unstable world.

Long Term Investors Can Profit From Today’s Lower Prices

Fortunately, the world’s largest, most successful companies have a long history of weathering crises that can be devastating for smaller firms. The best of the multinational giants have been around for over a century (see dates in the table), and have well-established markets. Companies that make basic products that people need in good times and bad, often continue to grow during economic storms. Others hang on until the turmoil is over and then rebound.

To see how likely it is that a company, and its stock, will do well during a difficult period you need to look at its track record. We did that with the companies we recommended at this time last year. Here’s the complete list along with their 12 month performance data (less dividends) from November 22, 2010 to November 18, 2011:

A Select Portfolio For Late 2011 and 2012

Company

11/22/10

11/18/11

Change

Alcoa (AA)	$13.29	$9.74	-26.7%
Deere & Co. (DE)	$77.25	$74.15	-4.0%
Caterpillar (CAT)	$84.00	$93.86	11.3%
Coca-Cola (KO)	$64.27	$67.39	4.9%
Colgate Palm. (CL)	$78.39	$88.61	13.0%
Exxon Mobil (XOM)	$70.19	$78.05	11.2%
General Elec. (GE)	$16.03	$15.67	-2.2%
Goldman Sachs (GS)	$161.05	$92.00	-42.9%
Johnson & John. (JNJ)	$63.62	$63.85	0.4%
Procter & Gamble (PG)	$63.56	$63.24	-0.5%
Wal-Mart Stores (WMT)	$54.38	$57.23	5.2%

For An Emphasis On Current Income:

Consolidated Ed. (ED)	$40.39	$58.14	43.9%
Eli Lilly (LLY)	$35.31	$36.89	4.5%
Kinder Morgan (KMP)	$53.66	$76.57	42.7%

Overall Average From Last November 22			13.5%
Dow 30 Blue Chips During The Same Period			5.5%

As can be readily seen, our income stocks were top performers over the past year. That’s not surprising since the dividends they pay are much more attractive than the puny yields available from bonds. Since the Fed has pledged to keep interest rates very low again next year, we think Consolidated Edison and Kinder Morgan Energy Partners will continue to perform well.

Our other income stock, Eli Lilly, didn’t come close to ED and KMP in the capital gains department. However, the pharmaceutical giant has a 5.3% yield that is more than twice what Uncle Sam pays on its 10-year bonds.

Food, energy and basic product stocks also did well over the past 12 months. Coca-Cola, Colgate Palmolive, ExxonMobil, Johnson & Johnson, and Wal-Mart were up, although modestly. The sole decliner was Procter & Gamble that went down less than 1%.

Our growth stocks did poorly during the period due to the weak economy. Alcoa, Deere, and General Electric lost ground. One surprising exception was Caterpillar. CAT is bucking the economic trend because it does a lot of business in developing countries that are investing heavily in infrastructure. If the U.S. economy gains ground in 2010, our other two growth stocks should also see modest gains.

The biggest turkey in the portfolio was Goldman Sachs that declined along with the entire banking sector. We think the drop has been magnified by the Occupy Wall Street movement that is demanding blood from financial service companies. However, we continue to think the big banks will survive and recover in the coming years. If we are correct, GS could be the best long-term performer in the group.

Smart Investors Play Both Ends Of America's Income Divide

It’s no secret that the American middle class is shrinking. Large-scale layoffs, slow job growth, wage stagnation, and plunging home values have taken a heavy toll on the spending power of millions of consumers.

At the same time, the ranks of both low income people and the most affluent have grown significantly. As a result, many companies that cater to their needs are seeing good growth despite the slow economy. Two such stocks look especially attractive to us.

Family Dollar Stores (FDO) has 7,000 retail operations in 45 states. The stores are very popular with several million consumers of modest means because they carry heavily discounted products that most people need on a daily basis. The list includes cleaning supplies, toiletries, clothing, shoes, school supplies, cosmetics, and many other items that customers use up and must buy again. It’s a smart business model.

When the recession began, FDO wisely added grocery items to its product line. As with the other merchandise it sells, the company emphasizes basic white bread items including Campbell’s Soup, Kraft foods, low-cost packaged meals, and the like. Customers who use food stamps are welcomed.

Family Dollar Stores is benefiting from the “shopping down” trend that always occurs during economic squeezes. Many affluent consumers go from stores such as Nordstrom’s and Bloomingdales to J.C. Penney and Sears. Much of the Penney and Sears crowd migrates to Wal-Mart and Target. Many members of the latter group find their way to super-deep discounters like Family Dollar Stores.

We first recommended Family Dollar Stores in September 2010 when it was selling for $43.40. By November 18 of this year it was up to $57.57, a 32.6% gain. We think higher returns are on the way.

Tiffany & Company (TIF) is at the other end of the retail spectrum, and it is also doing well. This 174 year old company is best known for its fine jewelry, but it also designs and produces sterling silver goods, watches, china, crystal, fragrances, leather goods, and several other products that are popular with affluent people.

Tiffany has also been smart to target successful people who fall short of being full-fledged members of the upper class. Many of the company’s most beautiful items sell for only a few hundred dollars. The “near rich” are a fast-growing market for Tiffany’s.

Tiffany operates 233 stores and boutiques worldwide. Because of the company’s reputation for producing high quality items, many customers are also comfortable ordering from Tiffany’s catalog and website. All in all, Tiffany appears to have a bright future.

The Bottom Line

Stocks turned down over the past month, but not severely. We think the modest decline in the face of such disturbing news indicates that stocks have a lot of underlying support. Much of the buying is undoubtedly coming from European investors who are moving money from their troubled countries to relatively safer U.S. markets.

Looking especially good at this time are large companies that supply food, energy, and other basics to customers around the world. Stocks that pay reliable dividends are also in the catbird’s seat for growth in this low interest rate environment.

Additionally, we think the slow U.S. economy plus long-term demographic trends favor companies that cater to low income and high income markets. Accordingly, Family Dollar Stores and Tiffany & Company appear to be heading for a good 2012.

All of us at The Association for Investor Awareness
wish you and your family a very Happy Thanksgiving!

Until Next Month

Confidence Will Be The Key To Growth

2011-10-27T05:36:00Z

In This Issue:

Earnings Are Up For Many Companies

The Economic Outlook Is A Bit Brighter

Confidence Will Be The Key To Growth

The Search For Income Is Becoming More Difficult

Dozens Of Blue Chip Stocks Pay More Than Bonds

Yield On Cost: A Payoff Worth Waiting For

In Many Areas Rental Housing Is Attractive

The Bottom Line

The stock market continued its wild ride in October but without as many extreme moves as a month ago. More importantly, the bulls put in a stronger overall performance than the bears. As a result, the Dow and the Nasdaq are up this month 6.4% and 6.8% respectively. The good performance was a welcome change from earlier disappointments.

Earnings Are Up For Many Companies

The mood among investors is becoming a bit more optimistic thanks largely to encouraging third quarter corporate earnings reports. McDonalds (MCD) had a 9% increase for the period. Chipotle Mexican Grill (CMG) left Big Macs in the dust with a 25% jump. Earnings rose an impressive 18% at General Electric (GE). Microsoft (MSFT) scored a 6% increase. The list of winners is impressive, and good numbers are still coming in.

The biggest gainers were the multinational blue chip companies that are tied to the global economy, which is much stronger than in the U.S. We think the positive earnings trend will continue, especially for companies with significant operations in Asia.

Investors are also pleased to hear that Washington is discussing ways to entice U.S. corporations to bring more of their foreign earnings home. As it is now, many successful blue chips are leaving most of their profits offshore to avoid onerous U.S. taxes. Either a one-time tax break or something more permanent for repatriated earnings would be good for the economy and good for investors. We think there is an excellent chance it will happen.

The Economic Outlook Is A Bit Brighter

The moribund U.S. economy is also beginning to show a few tepid signs of life. Unemployment numbers improved a smidgeon earlier this month and there was a small increase in factory activity. Consumers are also spending a bit more money on retail goods. The improving numbers are still weak, but they are moving in the right direction for the first time in months.

Several U.S. companies have also said they expect to see a modest economic increase. The predictions by FedEx (FDX) and Caterpillar (CAT) are especially important because both companies are very sensitive to changes in growth.

What we notice while going about our daily activities may tell us more about the economy than government statistics and corporate projections. The mood in the community seems to be a bit brighter than it was a few months ago. The smile “index” is up, people have clearly been buying some new clothes, store checkout lines seem longer, roads are a little more congested, and so on. These observations don’t reflect the poll results that show a declining consumer outlook.

The most important measure of the economy will be the amount of money people spend during the holiday season. If sales are up from last year, we think growth in 2012 will be in the 2% area instead of the anemic 1% we have today.

Confidence Will Be The Key To Growth

The biggest factor currently holding growth down isn’t an economic or monetary deficiency, it’s a lack of confidence in the future.

Despite the slow economy and high unemployment, most consumers have discretionary money they can spend. Corporations have more cash than they have had in decades. Banks have ample funds to lend. However, few people will write big checks or take out loans because they aren’t willing to take chances during these uncertain times.

But confidence builds upon itself. If the holiday season turns out well, we think people and businesses will feel more optimistic about the New Year. If so, it should prove to be a self-fulfilling prophesy.

The bottom line is, the economy may do better going forward than is generally expected. That’s assuming the European default crisis can be controlled. If not, all bets are off.

The Search For Income Is Becoming More Difficult

Millions of Americans rely upon bonds to supply the income they need. Unfortunately, the Fed’s decision to encourage economic growth by lowering interest rates has made good returns from fixed income investments hard to find. Ten year Treasury bonds are now only paying about 2%. That’s creating serious problems for many people, especially those who are retired.

To put the low interest rates into practical terms, consider someone with $1 million in fixed income securities. When interest rates were 5%, the annual return on a million dollars was $50,000. That was enough for a retired couple to enjoy a frugal but comfortable life, especially if their home was paid off.

At 2%, however, the return on a million dollars is only $20,000. That’s barely $5,000 above the official poverty level for two people. Who would have ever guessed that a couple with a million dollars would have a hard time getting by in America?

Dozens Of Blue Chip Stocks Pay More Than Bonds

But all is not hopeless on the income front. We wish to remind readers that people in need of income should consider buying blue chip stocks that pay regular dividends. Many excellent companies have yields in the 4% to 5% range, and some are higher. In addition, the blue chips offer excellent prospects for long-term capital gains.

Several world-class blue chip dividend stocks we have been recommending in recent months have attractive yields, and good long term track records for paying them. Here are a few that look particularly good to us:

Company	Oct 25 Price	Percent Change	LINK
Abbott Labs (ABT)	$52.99	3.60%	http://finance.yahoo.com/q/bc?s=ABT
Consolidated Ed (ED)	$58.18	4.00%	http://finance.yahoo.com/q/bc?s=ED
Eli Lilly (LLY)	$37.42	5.10%	http://finance.yahoo.com/q/bc?s=LLY
General Electric (GE)	$16.22	3.70%	http://finance.yahoo.com/q/bc?s=GE
General Mills (GIS)	$38.82	3.10%	http://finance.yahoo.com/q/bc?s=GIS
H.J. Heinz (HNZ)	$52.65	3.60%	http://finance.yahoo.com/q/bc?s=HNZ
Johnson & Johnson (JNJ)	$63.69	3.60%	http://finance.yahoo.com/q/bc?s=JNJ
Kraft Foods (KFT)	$34.93	3.30%	http://finance.yahoo.com/q/bc?s=KFT
McDonalds (MCD)	$91.77	3.00%	http://finance.yahoo.com/q/bc?s=MCD
Merck (MRK)	$32.91	4.60%	http://finance.yahoo.com/q/bc?s=MRK
Pfizer (PFE)	$18.87	4.20%	http://finance.yahoo.com/q/bc?s=PFE
Procter & Gamble (PG)	$64.61	3.20%	http://finance.yahoo.com/q/bc?s=PG

Yield On Cost: A Payoff Worth Waiting For

The leading blue chip stocks are rarely as cheap as they are now. In more normal times, institutional investors bid the prices of top stocks up to levels that make them unattractive. So, why are the biggest investors willing to pay so much?

The reason is, good companies usually increase their dividends over time which raises the effective return for investors who bought the stock earlier.

For example, if you buy a $50 stock that pays a 2% dividend, you will get an annual check for $1. That’s not much to be excited about. But if over the course of a few years the stock rises to $100, and the company keeps the yield at 2%, you will get a check for $2. But since you only paid $50 for the stock, your effective yield (sometimes called “yield on cost”) will be 4%. If the stock reaches $200 and the yield is still 2%, the effective yield for you will be 8%. No bond will deliver such a nice kicker over time.

In Many Areas, Rental Housing Is Attractive

Rental Housing has been a reliable long-term investment for thousands of years. The Roman commentator, Pliny the Younger, wrote about his profitable income properties in several letters to his friends.

Today, rentals look good in many areas because buying a home is not possible for many people. They either don’t have the higher down payment the banks require or they lack the sterling credit scores that lenders want to see. Other people are waiting to buy until house prices stop falling. There are also many former homeowners who had their properties foreclosed.

Whatever the reason may be, more people are looking for apartments and rental homes now than we’ve seen in several years. As a result, there is a shortage of available units in many cities. It’s a landlord’s market and rents are high.

Since house prices have fallen so far, and mortgage rates are at 50 year lows, rental housing will often “pencil out.” That means the rents they generate will cover the mortgage payments, taxes and maintenance costs – plus provide a positive cash flow for the owner. All in all, this appears to be an excellent time to get into the rental housing market.

The Bottom Line

October was another volatile month for stocks, but the swings were less violent than they were in August and September. It is also encouraging that the market ended the month on a positive note and, for the present at least, is in positive territory for the year.

It is too soon to know for sure, but the economy may be improving a little. If so, today’s bargains in blue chip stocks won’t last much longer. With interest rates as low as they are now, stocks that pay good dividends look especially attractive.

In many cities rental housing can also pay a nice return. If you are willing to be a landlord for a few years, we think a recovering real estate market will make the investment well worthwhile.

Until Next Time

The Stock Market’s Bark Was Worse Than Its Bite – The AIA Advocate Newsletter

2011-09-29T15:20:00Z

In This Issue:

The Stock Market’s Bark Was Worse Than Its Bite

More Volatility Seems Likely

The Fed Finally Acted, Sort Of

Should Investors Stay Away Until The Market Quiets Down?

Multinational Stocks Are Resisting The Downtrend

The Bottom Line

Wall Street’s expensive roller coaster ride continued without a break in September. Since our last issue, the Dow closed up or down, 250 points on seven days, which was about 25% of the time. During the same period, the Nasdaq had seven days that were plus or minus 50 points. In between the biggest moves, both indices gyrated back and forth more than enough to keep investors nervous.

The Stock Market’s Bark Was Worse Than Its Bite

But, there’s more to the story. When the month-long period started on 8/25, the Dow stood at 11,149.8. Yesterday it closed at 11,010.9; a loss of 138.9 points, or -1.3%. The Nasdaq started at 2419.3 and ended at 2491.6, which was a gain of 72.3 points, or 3.0%.

So, for all the hand wringing, gnashing of teeth, and Valium popping, the market damaged our nerves a lot more than our wallets.

More Volatility Seems Likely

We think the stock market’s big swings are likely to continue, at least through the end of the year. That’s because the news that’s pushing stocks around is making equally big moves in both directions.

Take the Greek debt crisis, for example. One day we will learn that a default seems unavoidable. That’s a big deal because it would almost certainly trigger a European recession. Since Europe buys about 20% of America's exports, the recession would quickly leap to our side of the pond. So, any real sign of a default in Greece sends stock prices into a tailspin.

Then a day or two later, European leaders will get together and propose a bailout for Greece. Relieved investors push stocks back up again.

The U.S. Congress is not about to take a back seat to the Greeks when it comes to brinkmanship. No sir. The game of chicken that our elected dingbats play with each other over every budget proposal is an even bigger show. Congress out did itself with the debt ceiling fiasco.

As with the Greek crisis, after all the arguments and posturing for the media are over, the problems are just pushed down the road a few months. Of course, stock prices always reflect the changing prospects of every event.

Likewise, each time Fed chairman Ben Bernanke says something about the economy, investors try to decide if he is likely to launch another stimulus plan. If the consensus is yes, stocks soar. If it’s no, they sink. And the circus goes on.

The Fed Finally Acted, Sort Of

Speaking of the Fed, the agency launched two new programs during its September 21 meeting. The very next day, the Dow plummeted 391 points. Investors were clearly not happy with the Fed’s lackluster effort to help the economy.

The biggest problem was with Mr. Bernanke’s new Operation Twist. The name refers to the Fed’s decision to sell short term bonds and buy long term bonds to twist the interest rates around. The goal is to lower long-term rates so that mortgage costs will go down, house sales will go up, and all will be right with the world. Lower rates are also intended to make business loans more attractive.

The problem with the Fed’s strategy is that interest rates are already on the floor. People aren’t buying houses because mortgages are too expensive. It’s because they don’t have the necessary 20% down payment or sterling credit scores. Others don’t have a job so not even a zero percent mortgage rate would help them. Many prospective buyers are also holding out hoping to see lower house prices.

Likewise, businesses aren’t borrowing money to expand because there is no need to do so, not because they can’t afford a loan. Consumer spending is so low, most businesses are happy just to keep their doors open.

Mr. Bernanke also decided to make king-sized loans to European banks that are in trouble. The move isn’t as generous as it may first appear. The money is to be used by the banks to service loans to U.S. creditors who must be paid in dollars. In other words, the money will come back. At least that’s the plan. This program also has little potential to reinvigorate the U.S. economy.

However, the Fed hinted that it would act again if necessary. If the economy slips much further towards a recession, a real stimulus program is likely to be forthcoming. We think stocks will rally at the first hint that the Fed is about to give the economy a real booster shot.

Should Investors Stay Away Until The Market Quiets Down?

We would not blame anyone for wanting to retreat to the sidelines until the stock market see-saw quiets down. Unfortunately, that isn’t likely to happen anytime soon. There are too many big, unresolved issues that could go either way. Some of them could take years to work out.

To make matters worse, there aren’t many good alternative places to put investment money. Bond yields are terrible. Even a 10-year Treasury only pays about 2%. You would need a microscope to measure the returns from T-bills. Money market funds are completely beneath the radar.

Holding cash in any fixed income account has another problem: losses to inflation. Prices started climbing at a 3.6% annual rate during the second quarter, although we think they recently dropped back as food and fuel costs moderated. Nevertheless, the value of cash is likely to fall due to inflation in the coming months.

An even worse situation exists with precious metals. They took a body slam during the stock scare. Real estate is doing so poorly we don’t even want to think about it. Most commodities are also declining due to the weakening economy.

Stocks are the only big investments that offer good returns. The price of owning them is to endure a wild ride. However, we think the long term profits will make hanging on worth your while.

The most promising stocks are the big multinationals that are doing well in the global economy. They are also doing the best of all in the stock market. Because their earnings are global, adverse events in one region don’t have the potential to do as much damage as they do to single-country stocks.

Multinational Stocks Are Resisting The Downtrend

The case for the big multinationals is easily made by looking at their recent performance. We took the list we published last month and compared their prices at the time with where they are now. All but four of the 14 stocks managed to rise during that difficult period.

Company	Aug 23 PRICE	Sep 27 Price	Percent Change	LINK
Abbott Labs (ABT)	$50.51	$51.20	1.37%	http://finance.yahoo.com/q/bc?s=ABT
Coca-Cola (KO)	$69.06	$69.57	0.74%	http://finance.yahoo.com/q/bc?s=KO
Colgate Palmolive (CL)	$87.01	$91.07	4.67%	http://finance.yahoo.com/q/bc?s=CL
Consolidated Ed (ED)	$55.38	$56.60	2.20%	http://finance.yahoo.com/q/bc?s=ED
Deere (DE)	$72.66	$69.48	-2.40%	http://finance.yahoo.com/q/bc?s=DE
ExxonMobil (XOM)	$73.66	$72.91	-4.38%	http://finance.yahoo.com/q/bc?s=XOM
General Electric (GE)	$15.54	$15.76	1.42%	http://finance.yahoo.com/q/bc?s=GE
General Mills (GIS)	$36.75	$39.45	7.35%	http://finance.yahoo.com/q/bc?s=GIS
H.J. Heinz (HNZ)	$51.44	$51.67	0.45%	http://finance.yahoo.com/q/bc?s=HNZ
Johnson & Johnson (JNJ)	$64.97	$63.82	-1.77%	http://finance.yahoo.com/q/bc?s=JNJ
Kraft Foods (KFT)	$34.09	$34.93	2.46%	http://finance.yahoo.com/q/bc?s=KFT
McDonalds (MCD)	$89.53	$89.74	0.23%	http://finance.yahoo.com/q/bc?s=MCD
Procter & Gamble (PG)	$63.02	$63.26	0.38%	http://finance.yahoo.com/q/bc?s=PG
Wal-Mart (WMT)	$53.21	$52.03	-2.22%	http://finance.yahoo.com/q/bc?s=WMT

We think the companies that showed the greatest strength during the market scare are likely to do the best going forward. The top three are General Mills, Colgate Palmolive, and Kraft Foods. Investors who are primarily interested in income should do well with Consolidated Edison.

The Bottom Line

September was another volatile month for stocks. When the dust settled, however, the Dow was down slightly and the Nasdaq were actually up a bit. How long this state of affairs will last depends on the resolution of the debt crisis in Europe, the slow U.S. economy, and other big problems that have investors worried.

If the U.S. economy slips closer to recession we may actually have a modest stock rally. That’s because the Fed will probably step in with a real stimulus package that will have some meat on its bones.

In the absence of overriding bad news, we think many multinational stocks will continue to do well. Most of them are still finding good profits in the global economy that is stronger than in either Europe or the U.S. Among the stocks we have been following most closely in recent months, General Mills, Colgate Palmolive, Kraft Foods, and Consolidated Edison have been showing the most resistance to market weakness.

Until Next Time

Many Excellent Stocks Are Oversold – The AIA Advocate Newsletter

2011-08-25T19:54:00Z

In This Issue:

The Economy, The Economy, The Economy
The Poor Numbers Don’t Fit What We See
There Is No Shortage Of Cash
Confidence Is Everything
All Eyes Are On The Fed
Inflation Is Baaaaaack
Many Excellent Stocks Are Oversold
The Bottom Line This Month

In our last issue we wrote that stocks were “primed for a big move” depending on how well, or badly, American and European politicians handled their economic emergencies. Judging from the stock market plunges on both sides of the Atlantic, investors gave their leaders big red “Fs” in problem solving. Maybe we all need better officials.

From when the market plunge began on July 21 to its low point on August 10, the Dow and the Nasdaq dropped 14.7% and 15.4% respectively. Two indices then bounced back a bit and now stand 10.0% and 12.3% below their July peaks. The decline qualifies as a correction, but it stopped short of being a bear market. Of course, there is still time for the bruin to show up.

The Economy, The Economy, The Economy

What has investors concerned the most are the revised economic numbers from the first two quarters of 2011. Instead of the puny 1.8% growth that was first reported, the GDP may have only increased a miniscule 1%, or even a little less.

The slide is all the more worrisome because it happened while Washington’s head economic alchemist, Ben Bernanke, was happily stimulating growth with his QE2 program. But if growth was only 1% during QE2, what level will we have now that it’s over? On Tuesday, the Wall Street Journal reported that we might see only 1% during the second half as well.

With growth so close to the zero line, it would not take much of a shock to push the economy into another recession. Pessimists believe it may have already started.

The Poor Numbers Don’t Fit What We See

We have not been to every part of America, but in the cities we visited this summer the economy was doing quite a bit better than the official numbers suggest. Granted, we didn’t find any evidence of a boom anywhere. Neither did we hear a chorus of pounding hammers announce that the housing industry is reviving.

However, the roads we traveled had many new cars, everybody seemed to be well dressed, and the mood was cautious but not depressed. We know it was just a thumb in the wind type of measure, but nothing we found made us think the economy is on the ropes.

There Is No Shortage Of Cash

Besides what we saw while traveling around the country, there are other reasons to think the economic outlook isn’t as bad as the GDP data suggest.

In the first place, we are not having the credit crunch that almost always precedes a recession. Banks have plenty of money and they are willing to lend it to worthy borrowers. But people and businesses are so nervous about the future, they don’t want to take any risks right now. So the bank’s ocean of money is just gathering dust in their vaults.

Corporations also have oodles of cash. The blue chips especially have been raking in the profits from the global economy, and they have been packing the money away. Like everybody else, most companies are too nervous about the future to spend much of their loot to expand operations or update their equipment.

Consumers aren’t anywhere near as flush as big businesses, but neither are they as hard pressed as many analysts believe. Joe and Sally MidAmerica are also worried about the future, so they are just as tightfisted as everybody else.

Confidence Is Everything

We think the lack of confidence in the future is doing more to hold the economy back than any financial limitation. That’s not surprising given all the bad news that everyone is being subjected to on a daily basis.

The debt ceiling fiasco did the most to dampen the public’s outlook. Besides being disgusted at their politicians' behavior, the public now doubts that the government will be able to do anything about the budget, Social Security, Medicare, and other serious problems our country faces. That’s not a situation that makes people feel comfortable enough to reach for their checkbooks.

Fortunately, optimism has always been part of the American culture. It would not take very much good news to turn the public mood around. So far, that news seems elusive, but when it arrives we think the economy and the stock market will make big jumps.

All Eyes Are On The Fed

One possible source of increasing optimism may come on Friday when Fed Chairman Bernanke makes his annual speech to America during the agency’s symposium at Jackson Hole, Wyoming. Many analysts expect the chairman will announce another stimulus program, just as he did last year when QE2 was introduced. The anticipation of a Fed boost pushed stocks up 3% on Tuesday.

But, as we indicated a minute ago, QE2 didn’t accomplish much. In addition, the Fed doesn’t have the resources available it had in the past. Nevertheless, hope springs eternal that Mr. Bernanke will find something that will give investors cheer. If he doesn’t, we think stocks may give the 3% back, and then some.

Inflation Is Baaaaaaack

Despite all the money the Fed created to stimulate the economy over the past three years, inflation has remained low. Now the grace period may be coming to an end.

After remaining under 2% for the past two years, inflation just jumped to what corresponds to a 3.5% annual rate. The actual increase for the typical American family will be higher because the Fed removed food and energy prices in its calculations. If the grand pooh bahs in Washington would get out of their limos and do some shopping for themselves, perhaps they would put some reality back into their inflation formula.

The biggest price hikes are being found in the supermarket. Drought in some parts of the world, and floods in other parts, have pushed corn and wheat prices up. Since both crops are used to fatten livestock, and are used in many other food products, the price hikes are rippling throughout the economy.

The need to hold the line on inflation is another reason the Fed must act cautiously. Any stimulus program that causes prices to rise further may do more harm than good.

Many Excellent Stocks Are Oversold

Speaking of stocks dropping lower, many of the finest multinational companies are cheaper than they have been in many years. We think investors who have the courage to buy the top companies that others are selling will enjoy excellent returns down the road.

The secret to success is to buy companies that have a long history of bouncing back from difficult conditions. That’s true of almost all the blue chips that make products that nearly everyone uses. Energy, food, healthcare, and consumer staples all sell well even when the economy is slow.

This time around the economic cycle, the outlook for the blue chips is even better than in the past. Most companies in the Dow earn about half their profits outside the U.S. where growth is stronger than it is at home. That’s one of biggest reasons most large companies have fat cash reserves.

You can stack the odds further in your favor if you choose companies that have a history of regularly sharing their loot with their stockholders. Since what a company is worth is ultimately based on the returns it generates, investors will eventually price its stock appropriately. It may not happen until today’s scare melts away, but fundamentals always win in the end.

Stocks that pay attractive dividends look especially sweet right now because the returns on cash are abysmal. Short-term T-bills are essentially paying 0.0%. Even 10-year Treasuries are only paying about 2.0%. With inflation running about 3.5%, today’s fixed income securities can only offer investors a guaranteed loss.

Stocks that fit the criteria include:

Company	PRICE	P/E	YIELD	LINK
Abbott Labs (ABT)	$50.51	15.4	3.90%	http://finance.yahoo.com/q/bc?s=ABT
Coca-Cola (KO)	$69.06	12.9	2.80%	http://finance.yahoo.com/q/bc?s=KO
Colgate Palmolive (CL)	$87.01	17.8	2.70%	http://finance.yahoo.com/q/bc?s=CL
Consolidated Ed (ED)	$55.38	15.2	4.40%	http://finance.yahoo.com/q/bc?s=ED
Deere (DE)	$72.66	12	2.40%	http://finance.yahoo.com/q/bc?s=DE
ExxonMobil (XOM)	$73.66	9.7	2.70%	http://finance.yahoo.com/q/bc?s=XOM
General Electric (GE)	$15.54	12.2	4.00%	http://finance.yahoo.com/q/bc?s=GE
General Mills (GIS)	$36.75	13.6	3.40%	http://finance.yahoo.com/q/bc?s=GIS
H.J. Heinz (HNZ)	$51.44	16.8	3.70%	http://finance.yahoo.com/q/bc?s=HNZ
Johnson & Johnson (JNJ)	$64.97	15.5	3.60%	http://finance.yahoo.com/q/bc?s=JNJ
Kraft Foods (KFT)	$34.09	18.1	3.59%	http://finance.yahoo.com/q/bc?s=KFT
McDonalds (MCD)	$89.53	18.1	2.80%	http://finance.yahoo.com/q/bc?s=MCD
Procter & Gamble (PG)	$63.02	16	3.40%	http://finance.yahoo.com/q/bc?s=PG
Wal-Mart (WMT)	$53.21	11.3	2.80%	http://finance.yahoo.com/q/bc?s=WMT

The Bottom Line

Stocks plunged this month when officials in Europe and America failed to adequately address their country’s most pressing economic problems. In the U.S., growth also dropped to a miniscule 1% while inflation jumped to 3.5%.

But the biggest threat to stock prices is a lack of confidence in the future that’s causing businesses and individuals to hold onto their cash. Until that changes, growth is unlikely to pick up significantly.

Wise investors who have been around the economic track a few times are buying high quality stocks that are likely to bounce back once conditions improve. It’s the best way to profit from the downturn.

Until Next Month

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

2011-07-28T22:03:00Z

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 Fear of Default Contagion is Rage'n – The AIA Advocate Newsletter

2011-06-30T16:08:00Z

In This Issue:

The Fear Of Default Contagion Is Rage’n

The Debt Ceiling Deadline Also Worries Investors

Growth Is Weak, But The Second Half Should Be Stronger

Energy Stocks Should Lead A Market Rebound

Blue Chip Tech Stocks Should Also Do Well

The Bottom Line This Month

Stocks continued the slide they began in late April. For all the wailing and gnashing of teeth by investors we might think the market is in freefall. In fact, the Dow and the Nasdaq are only down 4.3% and 4.6% respectively for the two months. Such modest declines don’t even qualify as a correction, much less a bout with the bear.

The stock market numbers for the past 30 days are even less alarming: the two indices eased back 1.1% and 1.5%. The slowdown in the slowdown suggests to us that the slide may be running out of steam.

The Fear Of Default Contagion Is Rage’n

The biggest problem that’s bothering investors is the financial version of a Greek tragedy. This time around, the drama isn’t nearly as interesting as those penned by Homer and Sophocles, but the final has more punch.

The plot of the story revolves around the inability of the Greek government to pay its considerable bills. When Greece dropped the drachma and adopted the much richer euro, the country went on a spending spree. Unfortunately, the money wasn’t used to increase the country’s output of goods and services. Instead, the public sector ranks swelled, wages and pensions were plumped up, and welfare programs went viral. Now the bills are coming due, and Athens doesn’t have the money.

If Greece defaults on a batch of bonds that will mature in mid July, the banks that issued them will be in serious trouble. Since the European banks are all linked together in a giant debt furball, the pain will be spread widely. A series of bank failures could occur.

But that’s not the worst of it. If Greece skips out on its debt it is likely that Portugal and Ireland will do the same. In that case, the toxic relay could spread to Spain whose debts are even larger. Such a chain reaction meltdown would have global repercussions.

Because the stakes are so high, we think Greece will get the loans it needs to get through the next few months. Of course, that won’t do more than kick the can down the road. In theory at least, putting the judgment day off will give Europe time to come up with a more permanent solution to the debt problem. We shall see.

The Debt Ceiling Deadline Also Worries Investors

Never one to be outdone, especially by the Greeks, the U.S. created debt problems of its own, and they are positively Herculean. The most immediate concern is Congress’ failure to raise the government’s debt ceiling which must be done by August 2. If not, federal checks may start to bounce.

Failing to get its financial house in order by the deadline would also bring into question the near sanctity of U.S. Treasury bonds. Currently Uncle Sam’s bonds carry the highest AAA rating, which is one of the reasons they can pay such little interest. If the rating should fall even a smidgeon to AA+, the bonds would no longer look attractive to many buyers until yields go up. Of course, high rates would retard economic growth, which would be bad for stocks.

As with the Greek problem, however, the outcome of a U.S. spending freeze would be so catastrophic, we are confident it won’t be allowed to happen.

Growth Is Weak, But The Second Half Should Be Stronger

The last big item in the worry department is U.S. economic growth, or more specifically the lack of it. The first quarter tally was an abysmal 1.8% (or 1.9% as revised), which is a lot closer to zero than is comfortable.

Second quarter growth was expected to be close to 3%, but it now looks as if the number could be as low as 2.1%. If so, some stock prices may be too high, which is why investors are allowing them to slide.

Unlike the situation with debt that can be put off, a slow economy isn’t quite so easy to fix. Just ask Mr. Bernanke at the Fed who has been trying to goose the economy for three years and doesn’t quite seem to have the hang of it. Nevertheless, hope springs eternal on Wall Street as everywhere else. Several respected economists think the economy will start to pick up in the third quarter. We think they are correct although we don’t expect to see a barnburner.

Energy Stocks Should Lead A Market Rebound

Putting it all together makes us think the stock market is likely to have a rebound within a few months. Besides improving the debt problems and seeing the economy tick up a bit, many stocks are just plain too cheap. In fact, many of the world’s leading blue chips are back to levels last seen 20 years ago.

The leading energy stocks look especially attractive to us because oil prices have dropped in recent weeks. Part of the decline is due to the government’s decision to open the Strategic Petroleum Reserve (SPR) to help bring gasoline prices down for the summer driving season, not to mention the start of the federal election season.

However, oil seems likely to recover once the SPR boost ends. Ditto if we are correct about having better economic growth this fall. The world’s appetite for energy is also in a long term upswing. All in all, we think energy stocks will be excellent performers once they get through this soft patch.

Our top energy recommendation remains ExxonMobil (XOM), the world’s largest and best managed energy company. http://finance.yahoo.com/q/bc?s=XOM&t=1y The stock dropped from $87.98 on April 29 to just $80.25 on June 29, an 8.8% decline. That put the forward P/E at just 8.7, which looks cheap to us.

The stock’s 2.4% yield isn’t earthshaking, but it’s better than 3-year CDs are paying. Exxon’s dividend has also been paid every year since 1911, a century record that few stocks can match. Moreover, on a split-adjusted scale, the company has not decreased its dividend since 1956.

If you are looking for reliable income plus the prospect of good capital gains, we think ExxonMobil is a stock to have.

We also like the outlook for Arch Coal (ACI) America's second largest coal producer with about 15% of the total supply. http://finance.yahoo.com/q/bc?s=ACI The company specializes in low-sulfur coal that creates less pollution and lowers clean-up costs. As a result, the company’s coal sells for a premium.

We also like the outlook for Arch because its main competitor, the shale gas industry, is under fire for creating water pollution problems that are almost impossible to clean up. Natural gas prices are also expected to rise and reduce the advantage it currently has over coal.

Also in Arch’s favor is the nuclear disaster in Japan that has turned the public in many countries against that power source. The result can only be more coal-fired electric plants. U.S. electrical companies plan to increase their coal-fired capacity by 30% over the next five to eight years.

The fundamentals for Arch are also favorable. The price fell from $34.17 on April 29 to just $25.81 yesterday, a 24.5% drop. Investors are nervous about the slow economy having an impact on volatile coal prices and about the company’s decision to buy International Coal Group (ICO) for $3.4 billion. As a result, the forward P/E is a low 6.5. The yield is only 1.70% but Arch Coal is primarily a capital gains play.

Blue Chip Tech Stocks Should Also Do Well

Tech stocks also look very good to us. Not only is the low dollar boosting exports, many businesses are upgrading their IT networks this year. Nevertheless, the broad sell off on Wall Street brought already-cheap tech giants even lower.

We continue to think that Intel (INTC) is the leader of the pack because its proprietary chips power so many devices. http://finance.yahoo.com/q/pr?s=INTC

Throughout most of the 1980s and 1990s Intel was priced out of reach. Now it is back down to earth at $21.39, a 6.9% decline from $22.97 on April 29. The forward P/E is only 9, vs a five year average of 17.8. That’s remarkable since earnings have been growing 11.1% of late, vs a 5 year average of 7.5%. The yield is 3.40%. The company has a strong balance sheet.

Intel even has a good track record during poor economic times. During the tough 2008-2009 period, the company had an impressive $10 billion in positive cash from operations. If you have been looking for an opportunity to add this blue chip tech giant to your portfolio, we think this is it.

The Bottom Line This Month

Stock prices continued to slide last month, although the pace of the decline slowed. We think the trend will reverse once the European debt crisis has been put on hold and the U.S. government’s debt ceiling has been raised.

Dozens of excellent stocks look very attractive to us. Our favorites continue to be the multinational blue chips that help create, not just participate in, the global economy.

Looking especially good right now are ExxonMobil and Arch Coal that have been hit by falling energy prices in addition to the declining stock market. Tech giant Intel also looks attractive and should perform well in long-term portfolios.

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...

China’s Inflation Is Coming Our way – The AIA Advocate Newsletter

2011-05-26T17:27:00Z

In This Issue:

If The Economy Falters, Expect A QE3 Rescue

Most Blue Chip Stock Values Remain Attractive

China’s Inflation Is Coming Our way

TIPS Are Becoming Popular Again

Another Effective Inflation Hedge

The Bottom Line This Month

The stock market correction that investors had been expecting for several months finally started in late April. So far, it’s been mild. For the month, the Dow and the Nasdaq declined just 2.9% and 3.9% respectively. Of course, there is a chance that the bear is just getting warmed up.

If The Economy Falters, Expect A QE3 Rescue

The issue that concerns investors the most is what the economy is likely to do after the Fed’s second quantitative easing program (QE2) ends on Friday. Few analysts expect anything will happen right away because stimulus programs have a lot of momentum. By July, however, we should begin to see whether or not growth will continue on its own without federal support.

Predicting what will happen to the economy is difficult because growth is not evenly distributed. Manufacturing is very strong. So are agriculture and many export sectors. However, housing and commercial real estate markets are still sinking. Most other industries are doing okay but not great.

In our opinion, the end of QE2 is of less importance than it may appear. That’s because if growth starts to weaken the Fed will almost certainly step in with another round of easing. Although there would be a delay before a new injection of money could take effect, it seems unlikely that investors would sell stocks off during that period.

Most Blue Chip Stock Values Remain Attractive

Another reason we think the stock market is unlikely to take a severe plunge anytime soon is most blue chip stock valuations are still attractive. Multiples for most leading agriculture stocks, for example, are still in the 10 – 13 range. Archer Daniel Midland (ADM), that rightly calls itself “Supermarket to the World”, has a P/E under 10, http://finance.yahoo.com/q/bc?s=ADM&t=1y. “High-flying” Coca-Cola (KO) is only 13, http://finance.yahoo.com/q/bc?s=KO&t=1y. By contrast, the forward P/E for the Dow is about 14.7.

Valuations are even more attractive in America's successful technology industry. The P/E for Intel (INTC), a company that powers the majority of the world’s computers, is just 11, http://finance.yahoo.com/q/bc?s=INTC&t=1y. Microsoft (MSFT) is selling for less than 10 times earnings, http://finance.yahoo.com/q/bc?s=MSFT&t=1y.

With the price of oil still hovering around $110 a barrel, we would expect the leading energy stocks to be near the top of their historic valuations. Not so. The P/E for ExxonMobil (XOM) is 11.5, http://finance.yahoo.com/q/bc?s=XOM&t=1y. ConocoPhillips (COP) is an even lower 8.5, http://finance.yahoo.com/q/bc?s=COP&t=1y.

Even cheaper valuations are to be found among America’s largest financial service firms. Bank of America (BAC) is selling for only 7.7 times earnings, http://finance.yahoo.com/q/bc?s=BAC&t=1y. Wells Fargo (WFC) barely tips the scales at 8.2, http://finance.yahoo.com/q/bc?s=WFC&t=1y.

We are just amazed at the low blue chip valuations that are common. In many cases, we have not seen their like in over 20 years. It might be another 20 years before we see them again.

Of course, anything can happen on Wall Street. When investors are frightened they don’t look at numbers before they hit the “sell” button. Nevertheless, we think the risk/reward balance for many of America's finest companies is very much in the investor’s favor. The eight blue chip stocks we just mentioned should be top performers for long-term investors.

China’s Inflation Is Coming Our way

Inflation has not been a problem in the U.S. for several years. One of the reasons is China has been flooding our country with low-priced consumer products. More recently, China’s inexpensive exports have blunted the impact of the recession for countless U.S. families that are struggling to cope with reduced incomes.

However, China’s long economic expansion is leading to higher inflation, and it will soon spread to the U.S. China’s official CPI is only 5.3% but that is almost certainly lower than the actual rate. Gasoline prices in the country are up 11.2%. Food increases are harder to determine but they appear to be in the 8.3% range.

Adding to China’s inflation problem are rising commodity prices. They are taking a toll since China must import most of the raw materials it needs for its vast manufacturing industry. To cap it off, China’s workers are demanding, and getting, higher wages. In some sectors, paychecks have gone up 20%.

Until recently, China absorbed rising production costs and kept its prices steady in order to retain market share. That’s no longer possible and Chinese exports to America are starting to go up in price. The result will be higher inflation for our consumers than the Fed has been predicting. Economist John Williams of Shadowstats www.shadowstats.com believes the true rate of inflation in the U.S. is now close to 10%.

TIPS Are Becoming Popular Again

With inflation on the rise, we are again recommending Treasury Inflation Protected Securities (TIPS). These special government bonds have their principal adjusted twice a year to compensate for the rate of inflation.

With TIPS, if you purchase a $1,000 bond and the inflation rate turns out to be 5.0% for the year, its value will be adjusted to $1,050. Consequently, the purchasing power of your money will remain the same as it was when you bought the bond. You are also protected in the unlikely event we have another period of deflation because your final payment cannot be less than the original par value of the bond.

If inflation rises, not only will your principal be adjusted upwards, your twice-yearly interest payments will also go up. So, if inflation occurs throughout the life of your bond, every interest payment will be higher than the previous payment. If deflation occurs, your interest payments will decline.

Investors can buy TIPS directly from the U.S. Treasury Department's Bureau of the Public Debt. The bonds may be purchased in increments of $100. The minimum purchase is $100. The bonds are available in 5-year, 10-year, and 30-year maturities.

Uncle Sam will hold your TIPS in a Treasury Direct Account set up in your name. You can get the necessary information and forms using the link: http://www.treasurydirect.gov/indiv/products/prod_tips_glance.htm

If you don't wish to lock up your money for a fixed period of time, you should consider a TIPS fund. We continue to like the Vanguard Inflation-Protected Securities Fund Investor Shares (VIPSX). http://finance.yahoo.com/q/bc?s=VIPSX&t=2y As with most Vanguard products, the TIPS fund carries no load and has a very low 0.22% expense ratio, vs .85% average for its competitors.

Another Effective Inflation Hedge

Another way to help protect your assets from going through the inflation wringer, is to put some of your money in foreign currencies. For most investors, the object of diversification isn’t to profit from currency swings. That’s a game for experts, and a risky one at that.

Instead, the goal should simply be to preserve the purchasing power of your savings. That’s easy to do with diversified currencies since they are valued in relation to each other. When one goes down others go up, and vice versa.

We continue to think the best and easiest place for investors to set up foreign currency accounts is with EverBank World Markets, or 888-882-3837. You can open deposit accounts in any one of 20 individual currencies or put your assets in one of the bank’s diversified currency CDs. One of the most popular CDs is the Investor’s Opportunity Basket that contains the Australian dollar, euro, Mexican peso, and the New Zealand dollar.

The Bottom Line This Month

The stock market correction that has been expected for several months appears to be underway. So far, the decline has been mild but that is likely to change if the economy stumbles this summer.

Market conditions aside, many high quality blue chip stocks appear to be very attractive. The list includes Archer Daniels Midland, Coca-Cola, Intel, Microsoft, ExxonMobil, ConocoPhillips, Bank of America, and Wells Fargo.

With inflation starting to pick up, we think investors should also consider putting some money in TIPS and foreign currencies.

Until Next Month

The Best Strategy For Investors - The AIA Advocate Newsletter

2011-04-28T17:59:00Z

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

Federal Money Is Fueling The Bull Market - The AIA Advocate Newsletter

2011-03-31T21:39:00Z

In This Issue:

Federal Money Is Fueling The Bull Market

Disasters Create New Opportunities

“No Nukes” Is Good News For Conventional Energy

The Bottom Line This Month

Over the past month, this old world has taken quite a beating. The volatile Middle East and North Africa (MENA) region continued to boil in political conflict. At the same time, Japan suffered a double natural disaster plus a nuclear emergency that seems to be getting worse. Oil prices also continued to move up.

As each new strain arrived, we expected the stock market to plunge. Although there were a few moderate declines, when all the gyrations were tallied the Dow was actually up 2.3% for the month. The Nasdaq rose 1.4%.

The resilience of the stock market reveals that it has a great deal of underlying strength. Although it’s possible that stocks are nearing a breaking point that will be triggered by an additional shock, we think prices are more likely to rise in the coming months.

Federal Money Is Fueling The Bull Market

The stock market is holding its own in the face of adversity because the economy is bouncing back from the recession. Corporate earnings are rising, manufacturing is starting to pick up again, the weak dollar is boosting exports, and interest rates are remaining low.

Nevertheless, the positives for the economy are base hits not home runs. We are seeing nothing like the strong recoveries of the past. In addition, housing is continuing to slip, unemployment is remaining high, oil and food prices are rising, and the dollar is weakening. So, why are stocks doing so well?

We think the answer is, billions of dollars of the Fed’s stimulus and bailout funds are making their way into the market. That’s not surprising since stocks are currently the only investment game worth playing. Real estate in most regions is comatose. Commodities are doing well, but most investors stay away from them. Bonds are pariahs. And, for all its glamour, the precious metal market is small. At the same time, fixed income returns are so low nobody wants to keep cash on the sidelines.

The winner by default is the stock market. It’s another reason to think the bull has further to run. But, as we said last month, we must expect some corrections along the way. One of them already seems overdue.

Disasters Create New Opportunities

The human suffering and property destruction we are seeing in MENA and Japan are heartbreaking. At the same time, the steps people in those areas are taking to solve their problems are inspiring. As investors, we can participate in their efforts and help ourselves at the same time.

We think the biggest changes the disasters will make are in the use of energy. For the next few years, at least, the nuclear power revival will probably be tabled. There may never be another nuclear plant constructed in Japan. China will probably finish the 27 nuclear complexes under construction, but they may be the last. It looks like the German people are also turning thumbs down on nuclear. The same may be true in America despite President Obama’s support for the industry.

“No Nukes” Is Good News For Conventional Energy

With nuclear power on life support, the only energy sources currently able to take its place are coal, natural gas, and oil. Of the three, oil is the least competitive. Oil also looks less reliable since so much of it comes from troubled countries where supplies could be interrupted.

That leaves coal and natural gas on the bidding table. Two leading suppliers and one exploration and development company for those fuels look especially good to us:

Arch Coal (ACI) is America's second largest coal producer. http://finance.yahoo.com/q/bc?s=ACI+Basic+Chart The company has over 3.9 billion tons of reserves in 19 mines located in both the eastern and western parts of the U.S. In addition, much of the company's coal is the low-sulfur variety that sells for a premium price.

Some readers may doubt the potential of coal because burning it creates large quantities of the greenhouse gas, carbon dioxide. It's a valid concern.

However, new carbon capture and storage technologies promise to solve the greenhouse gas problem. Although the technology isn't yet used on a large-scale, we think it will be soon. And since coal is the world's least expensive energy source, there is plenty of margin available to invest in new cleanup technologies and still remain competitive.

Meanwhile, the U.S. has 1,493 coal-fired electric plants it will be using for at least another decade. In fact, U.S. electrical companies plan to increase their coal-fired capacity by 30% over the next five to eight years. The additional demand can only bolster Arch's bottom line.

EnCana (ECA) is a leading Canadian natural gas company we have recommended in the past. http://finance.yahoo.com/q/bc?s=ECA+Basic+Chart With nuclear power in limbo, we think EnCana’s prospects are especially good.

EnCana owns or leases over 12.7 million acres with proven natural gas deposits of 12.8 trillion cubic feet (Tcfe). The company believes it has another 39 Tcfe of gas yet to be tapped. Those numbers are probably only a fraction of what the company may be able to recover using new shale gas technologies. In 2010, the company set a goal to double its production over the next five years.

The abundance of shale gas has thus far been a mixed blessing. As with any supply/demand commodity where the supply suddenly increases, the price of natural gas has been falling. However, the low price is prompting countless businesses and homeowners to switch to natural gas from much more expensive oil. We don’t think it will be very long before the demand for gas once again catches up with the supply. It will happen much faster if, as we believe, the electric power industry uses a great deal more of it in the future.

Longer term, we think natural gas will also see greater use in transportation. UPS already runs its trucks on natural gas. The public has yet to switch to natural gas for transportation primarily because few filling stations carry the fuel. However, the availability will increase as rising oil prices give natural gas a big cost advantage over gasoline or diesel.

We also like EnCana’s prospects because it is very efficient. The company has its exploration, extraction, and distribution systems finely honed to maximize profits. All in all, we think EnCana is heading for a prosperous future.

Transocean (RIG) is the world’s leading offshore oil and natural gas drilling contractor. http://finance.yahoo.com/q/bc?s=RIG+Basic+Chart The company specializes in technically demanding situations including drilling in deep water and operating in harsh environments. Of course, those are the places where any significant new supplies of oil and gas may still be found.

The tougher the job, the more likely it is that Transocean will get the contract. In September 2009, Transocean drilled the deepest oil well in history at a depth of 35,050 feet in the Gulf of Mexico. That milestone put Transocean in the running for many new contracts in the deep waters off Africa and Brazil where new energy fields have been discovered.

Transocean also excels with innovative technology and novel drilling procedures. Particularly valuable is the company’s proprietary dual drilling process, which significantly reduces the time necessary to complete a well. Since drilling projects at sea can cost well over $1 million a day, the ability to do a job quickly gives the company a big competitive advantage.

Underwater energy exploration and development work is not without dangers. In April 2010 while drilling in the Gulf of Mexico, an explosion on the company’s Deepwater Horizon killed 11 crewmen and then sank. The disaster also led to the worst offshore oil spill in U.S. history.

Although the Deepwater Horizon was leased to BP at the time, Transocean is named in several lawsuits, and it can also expect government fines. These problems will probably continue for many years.

Nevertheless, after all of Transocean’s problems are considered, the fact will remain that no other company is as well equipped to extract oil and natural gas from the world’s undersea reserves. We think that capability will lead to many profitable years for the company.

Morningstar summed it up best in a March 29, 2011 report when it said, Transocean “still presents the most compelling risk-reward prospect among drillers.”

Note: ExxonMobil (XOM) and BP Plc (BP), that we featured in recent issues of this newsletter, are still on our recommended list. Both companies have excellent long term outlooks in our energy-hungry world.

The Bottom Line This Month

We can’t remember a time when the world suffered as many shocks as it has over the past few months. Given the trauma, we worried that the stock market might drop like a rock. Instead, it weathered the storm very well. We think that indicates that stocks have a great deal of underlying support.

The political turmoil in the Middle East and North Africa, plus the disasters in Japan, are changing the fortunes of several energy companies. Nuclear power is now out of favor in many countries. Filling the void will be coal and natural gas. That’s good news for Arch Coal, EnCana, and Transocean.

Until Next Time

Long-Term Investors Will Welcome A Wall Street Sale - The AIA Advocate Newsletter

2011-02-18T16:39:00Z

In This Issue:

Stocks Are Overdue For A Correction

Lock In Your Profits With Stop-Loss Orders

Long-Term Investors Will Welcome A Wall Street Sale

Inflation Is Baaaaack!

The Bottom Line

Since our last newsletter in mid-January, the stock market continued its heartwarming advance. The Dow crossed the psychologically-important 12,000 mark and the Nasdaq broke the 2800 level. For the year, the two indices are up 6.1% and 6.5% respectively.

The numbers are even more impressive when the current leg of the bull market is measured from where it began on July 2, 2010. The surge took the Dow from 9686.5 to 12288.2, a 26.9% gain. The Nasdaq sprinted ahead 35.1% from 2091.8 to 2825.6.

If we measure the entire bull cycle from its origin on March 9, 2009 we get truly stunning numbers. From its base of 6547.1, the Dow rose 87.7%. From 1268.6, the Nasdaq surged 122.7%.

Stocks Are Overdue For A Correction

We are sticking with our forecast from last month that, “2011 should deliver additional gains as the Great Recession continues to slowly fade away.”

However, before going much further along the road to nirvana we expect to have an old-fashioned correction, and it could be a whopper. Nothing goes very far on Wall Street without a reversal, and this latest leg up for the bull is already nearly eight months old.

In addition, investors have been brushing off bad news that would ordinarily give them pause. The stock market only wiggled when oil moved from $70 to $100, when another round of scary numbers were released about the U.S. budget, and when revolutionary fever swept the Middle East.

Curiously, the market's resistance to negative news is one of the strongest indications that a correction is on the way. That's because the declines that were bypassed are likely to come all at once when a "last straw event" finally convinces investors that it’s time to sell. The trigger for the downturn could be a relatively minor event that might otherwise be of little significance.

Lock In Your Profits With Stop-Loss Orders

If you have not used stop-loss orders before, this would be a good time to start. Stops, as they are most often called, are directions that you give your broker to sell a stock if it hits a certain price. In most cases, the price named is below the current price. If the stock suddenly drops to the level you picked, it will be sold automatically.

Here’s a real-world example: if you bought Alcoa (AA) for $12.38 when we first recommended it in late November 2009, you saw it rise 42.0% to today’s $17.59. You may not want to sell the stock that could continue to rise. However, you don’t want to risk losing your nice profit.

A good solution would be to keep Alcoa but place a stop-loss order at $15.50. If Alcoa takes a sudden plunge and is sold at your stop price, you will walk away with a 25.2% profit.

An even better solution would be to put a trailing stop-loss order on the stock. In that case, instead of picking a price at which you would want Alcoa to be sold, you would pick a percent drop at which you would want to be out. If you choose 15%, the stock would be sold if it drops to $14.95.

The beauty of a trailing stop is it will rise as the stock goes up. So if Alcoa goes from $17.58 to $25.00, your 15% stop will increase to $21.25.

Stop-loss orders work well during normal stock market drops. During a crash, however, the price of your 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.

For example, during the severe market drop last May stops worked as they were intended until the worst of the “Flash Crash” began. During the few minutes when the market went into free fall, sell orders could not be executed until prices were well below their stop-loss points. Then the market bounced back up again. It was a maddening situation.

Although stop-loss orders may not offer perfect protection, they put the odds solidly in an investor’s favor. That’s always been the key to long-term success on Wall Street.

Long-Term Investors Will Welcome A Wall Street Sale

If we have a stock correction of 10% or more this spring, many long-term investors will cry crocodile tears as they view the wreckage. The tearful investors will then make bargain purchases of leading companies that are likely to deliver excellent profits for the next few years.

Energy is one sector that bargain hunters should put high on their buy lists. Although the cost of energy is already rising, we think the long-term outlook is for even loftier prices. Exploding demand from China and India all but guarantee many years of expanding profits for the world's leading energy suppliers. And now the colossal U.S. economic engine is starting to rev up.

Many of the best energy stocks are still attractively priced. In our opinion, the most promising of the large firms is ExxonMobil (XOM, NYSE). 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, the stock is selling for only 13.4 times earnings, and yields 2.10%.

Exxon wins two ways when oil prices go up. First, of course, the company sees higher profits from the oil and petrochemicals it sells. Secondly, the value of Exxon’s huge reserves goes up, which can give the stock an added boost.

Exxon also looks attractive because it recently acquired XTO Energy, the largest natural gas producer in the U.S. Natural gas prices are currently low due to new wells and increased supplies. However, energy consumers throughout the world are rapidly converting to NG from much more expensive oil. The result should be rising demand and prices for NG.

More speculative, but with good performance so far, is BP P.L.C. (BP) – another major energy company. We first recommended the company last May after it had its disastrous oil spill in the Gulf of Mexico.

At that time we predicted that BP would recover from the spill and eventually go onto new highs. The stock has since moved up from $42.56 to $47.00, a 10.4% gain. We think the biggest part of BP’s recovery is still on the way.

This appears to be an opportune time to add to a BP position. The stock recently stalled because investors are nervous that some of the “missing” oil from the Gulf of Mexico spill may have settled on the bottom. If so, BP may be hit with additional cleanup costs and lawsuits.

Nevertheless, BP has a lot of the oil and natural gas the world needs. Legal problems or not, the company will almost certainly prosper longer term.

The bottom line is, in our energy-starved world we think ExxonMobil and BP are very attractive long-term investments.

Inflation Is Baaaaack!

It has been so long since inflation eroded the value of our dollars and dollar-based investments, many people have forgotten about it. But after three years of the government’s multi-billion dollar stimulus and bailout measures, inflation is back.

Washington would have you believe that inflation is well under 2%, and is barely worthy of your notice. However, when we buy food, fill up the gas tank, visit the pharmacy, or pay dozens of other bills, it is obvious that inflation is much higher than the government is reporting.

John Williams, a respected economist with Shadow Government Statistics (www.shadowstats.com ), definitely agrees. He maintains that if we calculate inflation the way we did until the government conveniently changed the formula, inflation would be closer to 10%. That’s alarming.

The basic strategy for dealing with inflation is to move from paper dollars to real goods whose prices usually rise to compensate for currency declines. Gold and silver are traditional hedges against inflation. Ordinarily, real estate would also be on the list – but not this time due to its recent collapse. Fine art, antiques, rare coins, and dozens of other valuable items can also rise in price as the value of our currency falls.

For many investors, the most effective and convenient way to protect their assets against inflation is to buy Treasury Inflation Protection Securities (or TIPS). Please see the January 13 issue of the AIA Advocate for the details about these special Treasury Bonds, and how to buy them. Or log onto http://www.treasurydirect.gov/indiv/products/prod_tips_glance.htm .

The Bottom Line

The economy is continuing to work its way back from the Great Recession. The stock market has been rising at an even faster pace, and is overdue for a correction. If the economy continues to grow as expected, stocks should recover and start another leg up.

Meanwhile, inflation has returned and the prices of many goods and services are rising. Two blue chip stocks that should weather the storm particularly well are ExxonMobil and BP. Uncle Sam’s TIPS bonds also look attractive because their returns are indexed to the inflation rate.

Until Next Time

Doom and Gloom Crowd Missed It Again – The AIA Advocate Newsletter

2011-01-13T22:42:00Z

In This Issue:

Stocks Are Off To A Good Start

The Recovery Continues To Gain Momentum

Black Gold And Golden Grain May Be Black Swans

TIPS Look Good Again

The Bottom Line

Last year turned out to be better for both the economy and the stock market than the doom and gloom crowd predicted. We think the new year will be even less joyous for the chronically pessimistic. We might be inclined to feel sorry for them, except we are too busy chasing new opportunities.

Stocks had a particularly good year. Although there were several scares between January and December, the Dow and the Nasdaq ended 2010 up 11.0% and 16.9% respectively. If history is any guide, 2011 should deliver additional gains as the Great Recession continues to slowly fade away.

Stocks Are Off To A Good Start

The Santa Claus rally that we predicted in late November showed up right on time, and most of our stocks got nice presents. Here is the list of recommendations we published in that issue, and their performance since then:

A Select Portfolio For Late 2010 and 2011

Company

11/22/10

01/10/11

Change

Alcoa (AA)	$13.29	$16.49	24.1%
Deere & Co. (DE)	$77.25	$84.58	9.5%
Caterpillar (CAT)	$84.00	$93.39	11.2%
Coca-Cola (KO)	$64.27	$63.06	-1.2%
Colgate Palm. (CL)	$78.39	$77.89	-0.60%
Exxon Mobil (XOM)	$70.19	$75.13	7.0%
General Elec. (GE)	$16.03	$18.51	15.5%
Goldman Sachs (GS)	$161.05	$169.76	5.4%
Johnson & John. (JNJ)	$63.62	$62.16	-2.3%
Procter & Gamble (PG)	$63.56	$64.36	1.3%
Wal-Mart Stores (WMT)	$54.38	$53.73	-1.2%
Average From November 22, 2010			6.2%

For An Emphasis On Current Income:

Consolidated Ed. (ED)	$48.70	$49.23	1.1%
Eli Lilly (LLY)	$34.55	$34.49	-0.2%
Kinder Morgan (EP)	$70.36	$71.00	0.9%
Average From November 22, 2010			0.6%

Overall Average From November 22, 2010			5.1%
Dow 30 Blue Chips During The Same Period			4.1%

The clear leader of the pack was Alcoa (AA) that had a stunning 24.1% gain during the 41 day period. The company is benefiting from the strong global economy that is pushing aluminum prices sharply upwards.

Likewise, Caterpillar (CAT) is selling a great deal of heavy equipment to countries that are rapidly expanding their infrastructure to keep pace with their economic growth. General Electric (GE) and Deere (DE) are riding the same wave that may have a decade or more to run.

ExxonMobil (XOM) is also doing well as oil prices continue to rise (see the next section). Goldman Sachs (GS) finally started the secondary rise we have been expecting for several months. Both stocks should have another good year.

Lagers include Coca-Cola (KO), Colgate Palmolive (CL), Johnson & Johnson (JNJ), and Wal-Mart (WMT). All four companies cater to the rising numbers of affluent middle class people in developing nations. We think the companies will play catch-up over the next few months.

Among our three income stocks, ConEd (ED) and Kinder Morgan EP (KMP) made small gains while Eli Lilly (LLY) continued to lag. We think Lilly will raise its dividend this year, which should give the stock a boost.

The averages for our recommendations also look good. Our growth stocks rose 6.2% for the period vs 4.1% for the Dow.

As a group, our income stocks rose only 0.6%. We are not disappointed since they are yielding 4.8%, 5.6%, and 6.3% respectively. Our effective yields are actually higher because we paid less for the stocks than they currently cost.

The Recovery Continues To Gain Momentum

As we indicated earlier, the biggest reason that many stocks have been doing well is the economy is slowly inching its way out of the hole. Manufacturers are getting new orders, retailers are starting to make music with their cash registers, exporters are benefiting from overseas growth, and so on. We are not hearing many Champagne corks popping, but the mood is definitely brightening in America.

That’s not to say that our biggest economic threats have gone away. On the contrary, unemployment is still pushing 10%, the housing industry remains in deep trouble, wages remain weak, interest rates are starting to inch up, and inflation may become a problem later this year.

The bottom line is, the recovery is real, but it is also fragile.

Black Gold And Golden Grain May Be Black Swans

The biggest immediate threat to the recovery is the rising price of oil. From $70 a barrel last spring, oil reached $90 in late December. Some industry insiders think $100 oil is on the way, and may arrive fairly quickly. Because the cost of energy is a “tax” that nobody can avoid, if it rises too high the recovery could be put on hold.

The best way to turn the energy threat into a positive for us is to own ExxonMobil (XOM) or another major producer. Although it is more speculative, BP Ltd (BP) should also perform well.

The rising price of food is another cloud over the economy. The drought in Russia damaged that country’s wheat crop so severely, Moscow terminated grain exports. Floods in Australia are ruining that country’s grain crop just as surely as drought did in Russia. With the fortunate exception of rice, similar shortages are occurring with several other staples. As with energy costs, rising food prices can retard growth.

In our opinion, the best and easiest way investors can invest in agriculture is with the Market Vectors Global Agribusiness ETF (MOO). The “Moo fund” tracks the stocks of most of the world’s leading agriculture companies.

For a broad investment in the commodities themselves, we recommend PowerShares DB Agriculture (DBA). The ETF tracks the price of corn, wheat, soy beans, sugar, and other widely traded agricultural commodities — not the stocks of the companies that produce them.

TIPS Look Good Again

With interest rates on the rise, and inflation sure to follow, Jim Powell at the Global Changes & Opportunities Report (www.powellreport.com ) believes Treasury Inflation Protection Securities (or TIPS) are looking attractive again. These special government bonds have their principal adjusted twice a year to compensate for the rate of inflation.

With TIPS, if you purchase a $1,000 bond and the inflation rate turns out to be 5.0% for the year, its value will be adjusted to $1,050. Consequently, your purchasing power will remain the same as it was when you bought the bond. You are also protected in the unlikely event of continued deflation because your final payment cannot be less than the original par value of the bond.

If inflation rises, not only will your principal be adjusted upwards, your twice-yearly interest payments will also go up. So, if inflation occurs throughout the life of your bond, every interest payment will be higher than the previous payment. That inflation adjustment could be a lifesaver for retired people who depend upon regular income to live.

Investors can buy TIPS directly from the U.S. Treasury Department's Bureau of the Public Debt. The bonds are available in 5, 10, 20, and 30-year maturities. Uncle Sam will hold your TIPS in a Treasury Direct Account set up in your name. You can get the necessary information and forms using the link: http://www.treasurydirect.gov/indiv/products/prod_tips_glance.htm

If you don't wish to lock up your money for fixed periods of time, we think you should consider a TIPS fund. We particularly like the Vanguard Inflation-Protected Securities Fund Investor Shares (VIPSX). http://finance.yahoo.com/q/bc?s=VIPSX&t=2y As with most Vanguard products, the TIPS fund carries no load. The fund also has a very low 0.25% expense ratio, vs .83% average for its competitors.

The Bottom Line

Both the economy and the stock market appear to be heading for a good year. Stocks are leading the way up as they usually do when investors anticipate growing economic strength.

At this point, investors may pause a while to see if they have been right about the economy. If the expected growth is confirmed, stocks should make another advance later this spring. If not, a correction will surely occur.

Three black swans that could spoil the party are higher oil prices, rising food costs, and increasing interest rates and inflation. The best way to deal with the threats is to buy stocks that will profit from them. Two that fit the bill are ExxonMobil (XOM) and Market Vectors Global Agribusiness Fund (MOO). For an inflation hedge we recommend Treasury Inflation Protection Securities (TIPS).

Until Next Time

Beating a Dollar to Death

2010-12-23T14:34:00Z

When you’re down on your luck—or when you’re embarrassingly cheap, as I am—you occasionally find yourself trying to fob off on some unsuspecting cashier a dollar bill in such poor condition that you yourself would not accept it. This is because there is deep within the breast of every capitalist something that will not allow him to give up on a piece of paper money, no matter how tattered it has become. Doing so would chip away at the almost mystical agreement among nations that underlies the value of all printed currency. This is true despite the fact that there is a point, if only inside our heads, at which a dollar bill becomes so damaged that it can no longer possibly be backed by the full faith and credit of the government of the United States. (It must be admitted that there are those who hold dollars to an even higher standard. For them, if it will be rejected by a vending machine, it no longer qualifies as legal tender.)

Paper money suffers three principal forms of abuse:

It is laundered. Washing machines transform crisp bills into impossibly thin rag-like things that will not pass the “feel test.” Rule of thumb: If your dollar feels like a two-hundred-year-old pair of underpants, there is a good chance the guy at the drive-through window will look askance at you when you try to pass it off. But sometimes you’ll be lucky and your freshly washed dollar will maintain a semblance of its original texture. Perhaps most importantly, it will remain more or less rectangular. In many cases, however, the edges of it will crumble away in the washing machine and wind up in your lint trap. You have to make a judgment call here. If three corners remain intact, you’re probably OK. Two good corners may work if you’re not missing too much of the other two. The serial numbers on both sides of the bill should obviously be there as well. The worst-case scenario, however, is when the bill is washed while wadded up inside a pants pocket. You usually end up with something the size of an olive, and unfolding it into anything approximating its original shape requires the delicate touch of a neurosurgeon. Unfortunately, few of them are willing to work for a rate that makes their hire practical for the recovery of a one-dollar bill.

It is torn. Sometimes partially, sometimes completely. Sometimes by being handled roughly, sometimes by being shoved haphazardly into a wallet and being crushed by an enormous American buttocks. Needless to say, Scotch tape is your friend. Partial tears will rarely raise an eyebrow from anyone you hand the bill to. On the other hand, a bill that has been torn in half and reassembled is an object of enormous suspicion no matter how low the denomination. Tape one-half of a bill to another, and you will be treated as if you have, like Dr. Frankenstein, dug up body parts from all over a cemetery and stitched them together into a monster. Best to conceal the repaired dollar inside a stack of other bills of the same denomination to avoid suspicion. Pro tip: When you pay, fan the bills—not quite enough to reveal the point of repair—while counting them aloud before handing them over to the cashier.

It is stained by food, beverage or something worse. A dollar whose color has been significantly altered is a problem. One that smells like something is a bigger problem. One that is sticky is the biggest problem of all. A cashier who had scraped her knuckle on the edge of her register once offered me change with fresh blood on it. There is a line I will not cross, and that was it.

All that being said, it turns out that we are far too neurotic about the condition of our money. Merchants don’t obsess about it nearly as much as we do. They know they can simply take our raggedy looking bills to the bank and exchange them for lovely new ones. The only thing you have to concern yourself with is the occasional cashier who seems to believe he has a shot at becoming Secretary of the Treasury if he closely inspects the condition of every bill that comes into the 7-11 where he works.

As you can see on the handsome graphic I grabbed from CreditLoan.com, the expected lifespan of our money is surprisingly short. The five-dollar-bill’s is shortest of all, averaging just sixteen months. C-notes, by contrast, are usually good for eighty-nine months.

Though it goes against an impulse hard-coded into the DNA of every living capitalist, the ultimate lesson when it comes to the condition of your money is simple: Don’t worry, be happy. Feel free to fold, spindle and mutilate. Write phone numbers on it. Use it to wipe up maple syrup at breakfast. Uncle Sam’s not worried about your broken-down dollar bill. He’ll make more.

AIA Advocate for Absolute Returns

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All of us at The Association for Investor Awareness wish you and your family a very Happy Thanksgiving!

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Technology Stocks Are Bouncing Back

The Bottom Line This Month

Until Next Month

Federal Money Is Fueling The Bull Market - The AIA Advocate Newsletter

Long-Term Investors Will Welcome A Wall Street Sale - The AIA Advocate Newsletter

Doom and Gloom Crowd Missed It Again – The AIA Advocate Newsletter

Beating a Dollar to Death

Paper money suffers three principal forms of abuse:

All of us at The Association for Investor Awareness
wish you and your family a very Happy Thanksgiving!