Association of Investor Awareness - Week of 10/30/2008

In This Issue:

A Big Rebound May Be Close
Like Kids In A Candy Store
Super Stocking Stuffers
These Trends Are Your Friends
The Bottom Line This Week

Another bear trap snapped shut last week when the 4.8% stock market gain from October 6 - 10 turned into a 5.4% loss for the Dow and an ugly 9.3% plunge for the Nasdaq.

As has been the usual pattern during this stock market plunge, the drop was larger than the previous bounce. One of our group compared the market to a slot machine that gives just enough money back to make people want to keep playing.

We saw another inducement to play on Tuesday of this week when the market surged nearly 890 points when it became known that the Fed would lower interest rates again. When the official announcement came on Wednesday, stocks eased back 74 points. It was a textbook example of the old Wall Street rule to "buy on the rumor, sell on the news."

A Big Rebound May Be Close

An especially large bear market give-back seems likely to come soon. The Dow is down 37% so far this year and is due for a bounce. Although the economic outlook is continuing to decline, and most corporate earnings are starting to slip, investors appear to have overcompensated for the changes.

Technical analysts are also making a strong case for a bounce. They point out that the S&P 500 index is 25% below its 50 day moving average. That has only happened five times in the last 80 years. Each time, the index rallied a minimum of 14%.

If we have the expected rebound, we can expect to see a blizzard of rosy projections from Wall Street that claim the plunge is over, and investors should jump on the bandwagon before it is too late. Someday, that outlook will be correct - but probably not for several months.

Like Kids In A Candy Store

As stocks continue to gyrate, the best time to make purchases for the longer-term recovery will be after each new plunge. As we have been saying for several weeks, many high quality blue chips haven't been this cheap in years. Some global powerhouses are at 20 year lows. That's an invitation to start buying, but slowly.

At the head of the cheap list are the financial service giants that nearly went over a cliff when the credit crisis bubble burst. Uncle Ben Bernanke at the Fed and generous Henry Paulson at the Treasury are prepared to spend every last penny of the public's money to make sure the giants make it through the emergency. What better outlook for the bank's investors could there be?

The outlook for the financial service moguls is actually better than it may first appear. Although Congress expected the banks to use their bailout money to make loans and get the economy moving again, they are using it instead to replace the funds they lost when the crisis hit. In other words, the banks bolstered their balance sheets. That's not good for the stalled economy (at least over the short term) but it is great for prospective investors.

In addition, the bailout recipients are planning to use much of the federal largess to buy up smaller banks that didn't have enough clout to get their snouts in the public trough. As a result, the survivors will emerge from the downturn even bigger and better-positioned in the global economy than they were previously. That's a recipe for long term investment success if there ever was one.

Super Stocking Stuffers

We are comfortable recommending any of the big financial service giants that are either on the government's bailout list, or were strong enough not to need help. The winner's circle includes Goldman Sachs (GS), Morgan Stanley (MS), JP Morgan Chase (JPM), Citigroup (C), Wells Fargo (WFC), and Bank of America (BAC).

For maximum safety, however, we continue to think investors should pick a good mutual fund. We will risk being repetitive and once more recommend the no-load Fidelity Select Financial Services Fund (FIDSX).

The Fidelity fund is off 30.8% this year. It may get cheaper before it turns around. But a year or so from now we are confident that FIDSX will be much higher. The fund should make a wonderful stocking stuffer for a child or a grandchild this holiday season.

These Trends Are Your Friends

Whenever big downturns strike, nearly everything gets whacked. But as time goes on, investors realize that some companies are doing much better than the norm. In almost every case, the stronger companies are part of powerful trends that can be slowed down, but not stopped by short term economic downturns.

There are several unstoppable trends at work today. Although the leading companies in each of them are feeling the effects of the financial crisis, their extended outlooks remain unchanged. Here are the trends and companies we think are slam-dunks for future growth:

Energy: We are in the eye of the peak oil storm. As we can all painfully recall, rising demand and dwindling supplies pushed oil to record levels a few months ago before the economy began to slow down.

Now the world is wallowing in the oil inventory the suppliers built up before the decline. Once these supplies have been drawn down we will be back to a tight supply/demand balance, and prices will start to move up again.

As we've seen during previous energy cycles, each new turn of the wheel starts from a higher bottom and goes to a higher top than its predecessor. Thanks to the global economy, the next oil price upturn should again break new ground.

Of the many energy companies we have recommended, we think Suncor Energy (SU), EnCana (ECA), Exxon Mobile (XOM), and Transocean (RIG) look especially promising.

Please notice that we have not included any solar, wind, or other alternative energy stocks on our list. Although those stocks have great promise, with the mainline energy companies on the bargain table there simply isn't any need to take on the risks that go with small and largely untested stocks. When the leading energy companies rebound, their performance will not be disappointing.

Industrial Commodities: The very same argument that applies to energy also applies to commodities. Among the latter, we think industrial metals have the best prospects for a big rebound. China's needs alone promise to put prices for most metals back into the stratosphere once today's financial crisis begins to ease.

Of the many investments that look good in the industrial metals industry, we think BHP Billiton (BHP) is the one to own. The company has the largest selection in the world and is already the leading supplier in many markets.

China: The emergence of China is another unstoppable trend that will create enormous long-term profits. The country is currently unhappy because its growth rate dropped to 9%. Perhaps we should take up a collection for them. In any event, China's stock market is sharply down which makes it look very good to us.

We are particularly bullish on the long-term prospects for China Mobile (CHL) because the company occupies an essential role in the country's economy. Mobile services are much more important in China than in most countries because landline telecom links are frequently of poor quality and are often not available at all. Consequently, much of the population relies on cellular-based communication and Internet services.

India: What China is to manufacturing, India is to global business services. The top company by far is Infosys Technologies (INFY) that provides IT services to many of the world's largest corporations. When companies begin to expand again, Infosys will get many new orders.

Population Growth: The world's population is still expanding and millions of people in developing countries can now afford a higher quality of life. In China, India, South America, and dozens of other places, people are eating better, and they are buying consumer products that promote good health and make their daily lives easier.

Several multinational giants are providing the products that most of the developing world wants to buy. The list includes Archer Daniels Midland (ADM), Procter & Gamble (PG), and Johnson & Johnson (JNJ) - to name only a few. We think all three companies are slam-dunks for long-term profits.

Financial Services: See previous section.

The Bottom Line This Week

There are many investment strategies on Wall Street that have good track records. The best of them by far is to buy high quality blue chip stocks when they are cheap and hold them for long-term appreciation. Since that opportunity exists today, we urge you to ignore the fears that most investors have, and start to buy selected issues.

The most promising companies are those that are part of major trends that won't be stopped by downturns in the economic cycle. Looking especially good are leading companies in China and India, plus those that supply the world with energy, industrial commodities, food, consumer items, and banking services.


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Posted 10-30-2008 11:09 AM by Research & Editorial Staff