AIA Advocate for Absolute Returns

The “Magnetism” Of Fundamental Values – The AIA Advocate Newsletter

Research & Editorial Staff — Mon, 29 Oct 2012 21:40:00 GMT

In This Issue:

Investors Pause For The Election
Events, Not Politics, Will Dictate Policy
Many Investments Are Politically Neutral
These Stocks Look Particularly Promising
Most Blue Chip Stocks Are Still Attractive
The “Magnetism” Of Fundamental Values
With Blue Chips, Size Also Matters
The Bottom Line

This month the stock market took a breather from the post-QE3 rally we enjoyed in September. The only surprise was how mild the correction turned out to be. When the closing bell rang on October 24, the Dow and the Nasdaq were off 2.5% and 3.6% respectively.

Investors Pause For The Election

We think the uncertainty about the outcome of the presidential election on November 6 is contributing to the nervousness on Wall Street. It is widely believed that the investment climate will differ greatly depending on whether Mr. Obama or Mr. Romney wins the White House. Since the outcome of the race could go either way, many traders are staying on the bench until the votes are counted.

The concern that many investors have about the election is probably overdone. In his September newsletter, Jim Powell at the Global Changes & Opportunities Report (866-967-4267) published the core items from the Republican and Democratic budget proposals, and they differed very little.

Budget Items	Romney/Ryan	Obama/Biden
Federal Revenues (primarily taxes)	18.4% of GDP in 2016 and 18.5% in 2020	19.1% of GDP in 2016 and 19.7% in 2020.
Total Budget Outlays:	19.7% in 2016 and 19.5 in 2020.	22.4% of GDP in 2016. (No numbers for 2020)
Budget Breakdown
-Discretionary spending	5.9% of GDP in 2016	5.9% of GDP in 2016
-Social Security	5.0% “””””””””””””	5.0% “””””””””””””
-Medicare	3.2% “””””””””””””	3.2% “””””””””””””
-Other Mandatory spending	3.7% “””””””””””””	5.8% “””””””””””””
Interest payments	1.9% “””””””””””””	2.5% “””””””””””””
Data source: The Financial Times

Events, Not Politics, Will Dictate Policy

The similar Democratic and Republican budget proposals illustrate a fact that has been true about American politics for decades: there are far greater differences in campaign rhetoric than there are in what the winners actually do when in office. That’s because the range of possible solutions to America's most serious problems is limited.

Solving the Social Security shortfall is a case in point. Increasing the tax to support the program is a political non-starter. The same is true for cutting benefits. What remains possible is to tweak the system by increasing the retirement age by a year, reducing the cost of living adjustment, and so on. Social Security is just one of many “third rail” issues that politicians know they can’t touch without jeopardizing their reelection prospects.

There are similar constraints with U.S. foreign policy. No president can stop the chaos we are seeing in the Middle East, the expansion of China, the further development of global trade, and so on.

Despite all the bluster and threats many politicians are making, getting into another war also seems out of the question. After 11 years in Afghanistan and 9 in Iraq, the American people would never stand for it.

Many Investments Are Politically Neutral

Every big private sector trend that we can think of is also largely outside party politics. For example, the shale oil and gas that the U.S. badly needs will continue to be developed. The same is true of America's technological advances and the success of our multinational companies. Agriculture will remain more sensitive to weather patterns than to anything Washington may choose to do. The housing industry will continue to claw its way back, and so on. It’s a long list.

The bottom line is, there is no shortage of opportunities available to investors who are wise enough to buy high quality stocks when the markets give them good prices.

These Stocks Look Particularly Promising

One of the best industries to watch now is housing. After a five year plunge, every indicator is now starting to move back up, including the number of houses sold, house prices, and the number of new houses being constructed. None of the numbers are flying off the charts, but they clearly indicate that the industry is recovering.

Lennar (LEN) made additional gains in October and is now up 69% for us. http://finance.yahoo.com/q/bc?s=LEN+Basic+Chart Nevertheless, we think the stock has further to go, and we continue to recommend it. The stock’s P/E is still a low 13.7 that looks attractive to us.

We remain equally optimistic about America's largest banks. America’s preeminent mortgage lender, Wells Fargo (WFC), should have an especially bright future now that housing is starting to recover. http://finance.yahoo.com/q/pr?s=WFC+Profile With a P/E of only 10.8 and a 2.60% yield, Wells Fargo looks like a long-term winner.

In the energy sector, natural gas looks very promising. However, you should steer clear of the producers that are suffering from low natural gas prices. On the other hand, low prices benefit Cheniere Energy (LNG) that operates natural gas shipping terminals in the Gulf Coast region http://finance.yahoo.com/q/pr?s=LNG%2C+&ql=1. The cost of building new facilities is astronomical so Cheniere isn’t currently profitable, but its day is coming.

Low natural gas prices are also helping to revitalize many U.S. manufacturers because it lowers their operating costs. One of our stocks that is positioned to benefit is Illinois Tool Works (ITW) that produces products and equipment for manufacturers in several industries. http://finance.yahoo.com/q/pr?s=ITW+Profile. ITW is up a modest 6.5% since April and seems to have much further to go. It has a low P/E of 12.6 and a 2.50% yield.

Most Blue Chip Stocks Are Still Attractive

Speaking of blue chip stocks, even after the gains they made this year most valuations are still low by historical standards. For the first time in over 50 years, many multinational dividend yields are higher than long term interest rates.

We don’t think today’s attractive blue chip prices will last much longer. Because the leading companies have a long history of appreciation, investors usually bid their stocks up to levels that leave yields well below those on bonds. Only when investors are worried about the future, as they are now, do they flock to bonds that yield less than half what’s available from top quality stocks.

The “Magnetism” Of Fundamental Values

The reason that you can buy undervalued blue chip stocks with confidence is strong fundamentals pull prices up, although it can sometimes take awhile. That means patient investors who buy well-established blue chip stocks when they are cheap will usually make a profit.

Don’t worry about the possibility that the stocks may drop near-term. Proven profit generators will almost certainly bounce back, just as they have done for decades. Meanwhile, the best blue chip stocks will continue to generate dividends.

With Blue Chips, Size Also Matters

You can further increase your odds of success, and minimize risks, if you stick with the largest blue chips. Many have been around for decades and have come to resemble prosperous countries.

There is a large number of super-sized companies from which to choose. Examples include Wal-Mart (WMT) that has revenues greater than the GDPs of all but 25 countries.

Some Comparisons Between Companies & Countries
- Annual Sales vs. GDP -

ConocoPhillips $175.8b,	New Zealand $168.0b
Ford Motor Co. $129.0b,	Slovakia $97.2b
General Motors $135.6b,	Morocco $101.8b
Microsoft $66.7b,	Luxembourg $62.9b
Visa $8.3b	Bahamas $8.1b

Most large companies are also better managed than governments. Dishonesty is also low and almost always results in dismissal.

Put it all together and you have a strong case for buying the world’s leading companies whenever they can be purchased at attractive terms.

The Bottom Line

The glow from QE3 is rapidly fading and investors are taking a breather from their recent buying spree. Investors are also nervous about the presidential election and the effect the winner may have on Wall Street.

Fortunately, most stocks will sink or swim on their own without much influence from Washington. Trends in energy, housing, banking, agriculture and several other industries are largely immune to presidential policies.

Looking the best of all are many large blue chip multinational companies that have been around for decades, and sometimes for over a century. Prices are still attractive for most of the leading companies. Accordingly, we think long term investors should add to their accounts whenever the market gives them good prices.

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...

QE3 and Thee – The AIA Advocate Newsletter

Research & Editorial Staff — Thu, 27 Sep 2012 16:27:00 GMT

In This Issue:

QE3 and Thee

But Will It Work?

The Unemployment Dilemma

There Are Some Economic Bright Spots

What Happened To Inflation?

The Bottom Line

The Fed slipped a skyrocket under the stock market earlier this month when it announced QE3. Although the new stimulus program had been expected, not many thought it would be open-ended. Unlike its predecessors, the new money blitz has no spending limit or cutoff date. Instead, the government plans to spend $40 billion a month on mortgage-backed securities until the unemployment rate comes down to some unspecified level.

Investors reacted immediately to the Fed's announcement by pushing stock prices up another few notches. Additional gains continued to come in for several days. When the closing bell rang on September 26, the Dow and the Nasdaq were up 3.2% and 1.5% for the month. The “tortoise rally” we wrote about last time had turned into a rabbit run.

QE3 and Thee

One of the Fed's goals with QE3 is to give the housing market a boost by pushing down mortgage rates. Since a healthy housing industry, along with its associated industries, can be nearly 10% of the economy, the Fed's intentions are sound.

In practice, however, the lower mortgage rates that QE3 may create are likely to remain on paper. Loan rates are already well below 4% but it is difficult to find a homeowner who qualifies for them. Banks are far too nervous about getting into trouble again to give their best terms to anyone who doesn’t have a near-perfect credit record, and who doesn’t have a substantial down payment.

Nevertheless, the Fed's actions will have a big impact on the profits of lenders who will pay less for the money they do put out. As a result, many bank stocks soared when QE3 was announced.

Wells Fargo (WFC) and JP Morgan (JPM) rose 3.6% and 6% respectively. Bank of America (BAC) and Citigroup (C) each made 8% gains. If the housing market continues to crawl out of the cellar, as we expect, the banks should see their stocks climb higher in the coming months.

On the negative side, QE3 puts further downward pressure on interest rates for bonds, CDs, and other fixed income investments. That’s certainly not good news for people who rely upon interest rate returns for the income they need.

But Will It Work?

The biggest question that hangs in the air after QE3 was announced is, will it have a useful impact on the weak economy?

As much as we would like to answer in the positive, the record suggests otherwise. The economy continued to slip while QE1 and QE2 were in effect. Although its successor will be larger by far, it is still the same type of pump priming program.

We will stick to our opinion we shared with you several months ago that the government can stimulate a slow but basically healthy economy but not fix one that is suffering from structural damage.

The Unemployment Dilemma

The biggest structural problem with the U.S. economy is widely thought to be a lack of jobs. But that’s not the case. There are currently over 3 million job openings, and employers have been beating the bushes trying to fill them. Unfortunately, workers with the necessary skills are in short supply. The result is persistently high unemployment.

It used to be that people with high school educations had enough basic knowledge to quickly learn to do most jobs. Any additional capabilities they needed could be provided by their employers. That’s much less true today in our complex economy.

Modern factories, for example, are often so automated that only one or two people are needed to keep everything running. Those people must have extraordinary skills that often include math capabilities that few college grads possess. The new manufacturing wizards also need to know advanced machine programming and other specialized skills. Very few high schools teach what is needed, and neither do most community colleges.

The brightest light on the employment horizon is coming from Germany where companies have their own schools to train the workers they need. The programs are expensive, but they are helping to make Germany one of the few European economies with a growing economy. Many U.S. companies are scrambling to implement similar in-house facilities.

When we see substantial federal assistance for employers who set up advanced technical training programs here, we will be more optimistic about seeing America's unemployment rate come down.

There Are Some Economic Bright Spots

U.S. economic growth has been slipping all year. From a 2.8% annualized rate in the forth quarter of 2011, growth fell to 2.0% in the first quarter of this year, and 1.7% in the second quarter. It’s no wonder that the Fed launched QE3 even though it is unlikely to be the elixir that many people expect.

Despite the slowing economy, the long-suffering housing industry is continuing to claw its way out of the basement. The two housing stocks we recommended in February – Lennar (LEN) and Equity Residential (EQR) — are both rising. We think the trend will continue, perhaps for several years.

Lennar is doing especially well. http://finance.yahoo.com/q/bc?s=LEN+Basic+Chart The company wisely used the housing downturn to invest in distressed properties. Now the value of those properties is increasing. With real estate prices continuing to remain low in most parts of the U.S., we think the distressed investment business will remain profitable for several more years.

In addition, Lennar purchased properties in several parts of the U.S. where real estate remained in relatively good shape. Two such areas were Portland and Seattle. The value of those properties is also rising significantly.

When we purchased Lennar it was selling for $22.45. The stock is now $37.40, giving us a 67% gain for the seven month period. Because the housing rebound is still in its infancy, we think Lennar has much further to go.

We also recommended Equity Residential in February, an REIT that owns and operates upscale apartment buildings that appeal to successful professionals. http://finance.yahoo.com/q/pr?s=EQR+Profile

Equity Residential looks good to us because it focuses on higher end 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 total, the company owns 579 developments in 24 states.

Equity Residential is only up 3% for us, from $56.08 to $57.76, but we continue to think it will be a top-performer longer term. In addition to the capital gains we expect, this REIT pays an attractive 2.40% dividend. That’s nearly twice what Uncle Sam offers on his 10-year bonds.

Over the long term, Wells Fargo may do the best of all. As we mentioned a minute ago, the banking industry will benefit from QE3, which is why their stocks shot up after the Fed's announcement. http://finance.yahoo.com/q/pr?s=WFC+Profile As America's largest home mortgage lender, Wells Fargo should be in the catbird’s seat as the housing industry continues to recover. It won’t happen quickly, but we think patient investors will see excellent returns.

What Happened To Inflation?

Ever since the Fed started to pump money into the economy to prevent the Great Recession from becoming something much worse, many economists have been predicting the program would trigger another inflation cycle. However, it hasn’t happened.

We think the reason the flood of money from Washington didn’t push prices up is because most of the funds simply replaced what the recession was taking away. Every personal bankruptcy, every home price decline, and every business failure effectively destroyed enormous amounts of money. The Fed was barely able to keep up with the outflow.

In addition, a great deal of the Fed's stimulus money went to the banks – and there it remains. The funds won’t flow into the economy until confidence in the future returns and the demand for money starts to pick up. When it happens, we can expect to see rising inflation appear at the same time.

It’s ironic, but an economic recovery is likely to bring back a problem that killed many of its predecessors, and it could happen again. We live in interesting times.

The Bottom Line

The Fed's new QE3 stimulus program will be larger than most investors expected. As a result, when it was announced there was a rush to buy stocks, and prices rose across the board.

We don’t know how long the rally will last, but we doubt that it will have long legs. That’s because QE3 is unlikely to have a much greater effect on the economy than did its predecessors.

Nevertheless, QE3 should improve the outlook for some sectors of the economy. One of them is the housing industry. We think Lennar and Equity Residential are particularly promising. Home mortgage lender, Wells Fargo should also see its profits rise.

Until Next Time

Will The Tortoise Rally Continue? - The AIA Advocate Newsletter

Research & Editorial Staff — Thu, 30 Aug 2012 19:08:00 GMT

In This Issue:

Will The Tortoise Rally Continue?
Interest Rates Are Still The Key
Every Silver Cloud Has A Dark Lining
Our Portfolio Is Still Doing Well
Current Yield Is Just A Starting Point
The Bottom Line

The stock market shrugged off its correction in early August and resumed its upward climb. It was a little like watching a tortoise make a U turn, but at least prices are now moving in the right direction.

In any event, any investors who didn’t fall asleep during the reversal were rewarded by seeing the S&P 500 inch its way to a four year high. As unexciting as the milestone was, it was welcome.

Will The Tortoise Rally Continue?

The big question now, of course, is will stocks continue to move forward, or will they drop back again?

Many analysts think the rally won’t last much longer because so much of the financial news is bad. The economy is continuing to slow down despite the uptick in the housing market. Growth is likely to remain below 2% for the next few months, and perhaps longer. Job growth is also very weak. That outlook isn’t a recipe for a strong stock market.

Optimists agree that the economic situation isn’t great now, but they think it will improve. Retail sales inched up last month and so did some home sales. In addition, the fall season is typically good for consumer spending as parents outfit their kids for school, and the whole family gets ready for winter. The holiday season is also near at hand, which always loosens purse strings. Since consumers support about 70% of the economy, even a modest increase in their trips to the mall can have a big impact on growth.

Investors are also encouraged by the expectation that the Fed is about to launch another stimulus program. During his August address, Mr. Bernanke said that he stood ready to support the economy fairly soon unless it managed to turn around by itself. Since the latter seems unlikely, we think quantative easing number three (QE3) is on the agenda. If so, stocks should benefit.

Interest Rates Are Still The Key

The outlook for the economy is important, but that hasn’t been the driving force in the stock market this year. Instead, what investors are watching closely is interest rates.

Stocks are attractive primarily because dividend yields remain significantly above what bonds pay. In fact, several dozen blue chips boast returns that are twice Uncle Sam’s rates. Several successful companies pay a lot more than that.

As a result, pension funds, university endowments, insurance companies, and other deep pocket investors have been moving billions of dollars into top quality stocks that have a long history of paying generous dividends. As long as interest rates stay low, we think money will continue to favor stocks.

That brings us back to the Fed and QE3. The program will buy mortgage and government bonds in an attempt to reduce long term interest rates even more and stimulate economic growth. For the near term at least, we think the interest rate outlook will remain favorable.

Every Silver Cloud Has A Dark Lining

QE3 will have the opposite impact on senior citizens who count on fixed income returns to pay the bills. Interest rates are already so low that many retired people are having a rough time making ends meet. The last thing our seniors need is for interest rates to be pushed down even more.

Someday, of course, the interest rate pendulum will swing back up again. We think such a tidal shift will scare a lot of investors and the stock market party will start to break up.

Rising interest rates will also be bad news for people who own bonds. That’s because investors won’t buy previously-issued bonds that pay lower rates unless their prices are reduced.

When interest rates start to go up again the biggest loser will be Uncle Sugar. Right now, Washington pays only 1.56% on its 10-year bonds – a record low. As a result, the government can borrow money like a madman to pay its obligations, and that’s what it has been doing. If interest rates rise, so will the cost of servicing the national debt.

Rising interest rates will also be accompanied by rising inflation, a plague that will hurt everyone. Fortunately, it seems unlikely that higher interest rates will show up anytime soon.

Our Portfolio Is Still Doing Well

The blue chip portfolio that we have been following closely for over a year is continuing to do well. The attached table lists the individual stocks and their performance since July 23.

The AIA Advocate Select Blue Chip Portfolio

Company

08/28/12

07/23/12

Percent Change

Yld

Alcoa (AA)	$8.50	$8.14	4.4%	1.40
Deere & Co. (DE)	$73.81	$75.15	-1.9%	2.40
Caterpillar (CAT)	$86.01	$81.58	5.4%	2.40
Coca-Cola (KO)	$38.00	$76.88	-3.7%	2.70
Colgate Palm. (CL)	$106.35	$102.79	3.5%	2.30
Exxon Mobil (XOM)	$88.10	$85.21	3.4%	2.60
General Elec. (GE)	$20.81	$20.09	3.6%	3.30
Goldman Sachs (GS)	$105.03	$93.16	12.7%	1.80
Johnson & John. (JNJ)	$67.51	$63.11	-0.9%	3.60
Procter & Gamble (PG)	$66.99	$64.39	4.0%	3.40
Wal-Mart Stores (WMT)	$72.41	$71.85	0.8%	2.20

For An Emphasis On Current Income:

Consolidated Ed. (ED)	$61.20	$63.56	-3.7%	3.90
Eli Lilly (LLY)	$44.71	$43.83	2.0%	4.50
Kinder Morgan (KMP)	$82.62	$84.65	-2.4%	6.00

The biggest gainers were Caterpillar, Goldman Sachs, Alcoa, and Procter & Gamble. Also going up were Colgate Palmolive, ExxonMobil, General Electric, Wal-Mart, and Eli Lilly.

The biggest decliner was Coca-Cola that appeared to be correcting from earlier gains. Deere also posted a decline due to concerns about the effect of the drought on farm machine sales. Smaller declines were registered by Johnson & Johnson, Consolidated Edison, and Kinder Morgan. All three are attractive income stocks with yields of 3.60%, 3.90% and 6.00% respectively.

Current Yield Is Just A Starting Point

Speaking of dividend yields, some investors won’t buy a stock if the payout is not exciting. That can be a mistake. Unlike the fixed interest rates paid on bonds, stock yields can grow from year to year.

For example, you may purchase a successful blue chip stock when its current yield is 3.0%. If the company increases its dividend 15% a year, the effective yield in five years will be 5.3%. In ten years it will be 10.7%. Those are great returns. Many retired people who purchased blue chips in their 20s and early 30s are collecting more in dividends than they paid for their stocks.

Dividends also reduce the volatility of blue chip prices. If a stock gets too expensive, its dividend yield (price divided by earnings) will drop. In that case, many investors will sell the stock and its price will move back down.

Likewise, if the price drops and yields become more attractive, investors will push the stock back up. Unless something significant happens that surprises investors, blue chips don’t usually make big short term moves.

Many successful companies with large overseas operations have more than enough cash to boost their dividends by as much as 50%. However, if the profits earned overseas are brought home they will be subjected to Washington’s usurious taxes. As a result, the funds can’t be distributed to investors.

However, profits that are kept offshore are not lost to shareholders. Companies often use the money to buy back their own stock, which they can do tax free. Of course, the purchases push stock prices up.

The Bottom Line

The stock market continues to be driven primarily by low interest rates. That’s likely to remain the case unless economic developments deteriorate markedly and dividend yields come into question.

Stocks are also moving up in anticipation of an announcement by the Fed that another stimulus program will be launched. That decision could be made as early as today (Thursday).

After any rally we must expect a correction. If you don’t want to risk your hard-earned profits, you should take at least some of them off the table. Protect everything else with stop loss orders.

Until Next Time

Stocks That Offer Good Yields Plus Likely Growth - The AIA Advocate Newsletter

Research & Editorial Staff — Thu, 30 Aug 2012 18:53:00 GMT

In This Issue:

The Stock Market Is Showing Remarkable Resilience
Why Nervous Investors Are Still Buying Stocks
The Lure Of QE3
Stocks That Offer Good Yields Plus Likely Growth
Watch Out For High Yield Traps
Money Market Mutual Funds Come Under Scrutiny
The Bottom Line

The slow rebound from the spring stock market correction continued through late July. The advance then ground to a halt as new economic problems made investors more cautious. By July 25, the Dow and the Nasdaq were up only 0.6% and 0.2% respectively from last month.

The Stock Market Is Showing Remarkable Resilience

At first glance, the modest advance the stock market made recently was not remarkable. But that’s not the case when you look at the amount of negative news that investors had to deal with.

The biggest worry is the European debt crisis and the recession that grips the region. Prime Minister Antonis Samaras of Greece told former U.S. President Bill Clinton that his country is actually entering another Great Depression similar to what the world endured in the 1930s. Since Spain isn’t in much better financial shape, the dire economic outlook may soon apply to that country as well.

Globally, the economic outlook is better. However, nearly every industrial country is suffering from a decline in growth. The main concern is about China. If its powerful growth engine drops to an idle, the slowdown will spread around the world.

The outlook for the U.S. economy is also less than rosy. Earlier this month, Fed chairman Bernanke warned that growth may decline from 1.9% in the first quarter to just 1.7% in the second half of the year.

On July 22, economics correspondent Alan Wheatley summed up the economic situation best when he said, “Faster, Higher, Stronger” is the motto of the Olympics, but “Slower, Lower, Weaker” more nearly describes the economies of most countries that are competing in the event.

Why Nervous Investors Are Still Buying Stocks

The resilience of stock prices in the face of so many economic problems may make it appear that investors are basically optimistic about the future. We don’t think that’s actually the case. Instead, we think investors are buying stocks because the safer alternative, fixed income investments, offers abysmal returns.

Many of the world’s finest companies have dividend yields that are twice what Treasury bonds pay. The yield on some blue chips is three or four times Uncle Sam’s rate.

The difference in the annual payouts offered by stocks and bonds can have a big impact on a person’s life. The interest Uncle Sam pays on 10-year Treasuries is currently just 1.53%. At that rate, a retired person with a million dollars in bonds would earn only $15,300 a year, barely enough for a room in a flop house.

By contrast, thanks to its 3.60% dividend yield, $1 million in Johnson & Johnson (JNJ) would generate $36,000 a year. Not enough? At its current 5.70% yield, leading pipeline company Kinder Morgan Energy Partners (KMP) would pay $57,000. It’s no wonder that good dividend stocks are in demand.

The Lure Of QE3

Savvy investors also know that putting money into stocks will give them a stake in an expected new Federal quantative easing (QE3) program. A great deal of the Fed's stimulus money always finds its way into the stock market where it pushes prices up. Investors who want their share of the windfall know they must be in line ahead of time.

So far, the Fed has declined to launch QE3 because Mr. Bernanke doesn’t think the economy needs intensive care, at least not yet. But with growth slipping from bad to worse, a QE3 booster shot is probably not far away.

With QE3 waiting on the sidelines, we have what appears to be a contradiction. Investors usually buy stocks because they think the economy is improving. This time, stocks are popular because the economy is slowing down enough to trigger another Fed handout. It’s a strange new world we live in.

Stocks That Offer Good Yields Plus Likely Growth

Of the 14 principal blue chip stocks we recommended over the past two years, all but Alcoa and Goldman Sachs are up in price. The two lowest gainers are Procter & Gamble and Johnson & Johnson. The two top stocks are Coca-Cola and ExxonMobil.

The AIA Advocate Select Blue Chip Portfolio

Company

07/23/10

07/23/12

Percent Change

Yld

Alcoa (AA)	$9.85	$8.14	-17.4%	1.5
Deere & Co. (DE)	$53.04	$75.15	41.7%	2.4
Caterpillar (CAT)	$57.29	$81.58	42.4%	2.6
Coca-Cola (KO)	$47.26	$76.88	62.7%	2.6
Colgate Palm. (CL)	$74.34	$102.79	38.3%	2.4
Exxon Mobil (XOM)	$53.89	$85.21	58.1%	2.7
General Elec. (GE)	$13.21	$20.09	52.1%	3.4
Goldman Sachs (GS)	$128.02	$93.16	-27.2%	2.0
Johnson & John. (JNJ)	$54.96	$63.11	23.9%	3.6
Procter & Gamble (PG)	$55.38	$64.39	16.3%	3.5
Wal-Mart Stores (WMT)	$45.90	$71.85	56.5%	2.2

For An Emphasis On Current Income:

Consolidated Ed. (ED)	$39.22	$63.56	62.1%	3.8
Eli Lilly (LLY)	$29.81	$43.83	47.0%	4.4
Kinder Morgan (KMP)	$56.91	$84.65	48.7%	5.7

We think all our stocks, including Alcoa and Goldman Sachs, still look attractive for long term accounts. However, a few companies appear to have especially good prospects. That group includes Coca-Cola (KO) that sells affordable luxuries throughout the world, Colgate Palmolive (CL) and Procter & Gamble (PG) that have global customers for their personal hygiene and housewares products, and Johnson & Johnson (JNJ) that markets its pharmaceutical and related products in nearly every country. We think the four companies have the ability to increase their profits even as the global economy slows down.

With bond interest rates nearly on the floor, our three current income investments look even better than they did when we purchased them. The outlook should remain good for Consolidated Edison (ED), Eli Lilly (LLY) and Kinder Morgan Energy Partners (KMP), all of which have yields that are far higher than Treasuries offer.

Watch Out For High Yield Traps

Speaking of income, many investors who were burned during the 2008 stock market swoon won’t buy shares no matter how sweet the dividends may be. Instead, the nervous investors are searching for the highest yields they can find from fixed income securities that they assume are much safer.

In many cases, however, the high yield instruments that savers are being offered carry far more risk than those they are avoiding in the stock market. We worry that many high yield investors will suffer substantial losses if the risky securities default, as some will surely do.

It is good to remember that the reason a security offers a high yield is because it carries a proportionately high risk. High yield securities will rarely be insured, and will usually be backed by little or no collateral. If the security fails, the investor will probably be out of luck.

We urge our readers to leave high yield securities to experts. The great majority of investors will do much better, and stay safer, with a diversified portfolio of reliable dividend stocks, such as those we have been recommending.

If you don’t want to build a portfolio of your own, we suggest the iShares Dow Jones Select Dividend Index (DVY), an ETF that tracks the 100 highest-yielding securities (excluding REITs) in the Dow Jones U.S. Total Market Index. http://finance.yahoo.com/q/pr?s=DVY+Profile The fund is ideally positioned to benefit from the market’s preference for large, stable, dividend stocks.

Money Market Mutual Funds Come Under Scrutiny

Far safer than high yield fixed income securities, but not risk free, are much lower yielding money market funds offered by banks and brokers.

It is important to understand that money market funds are mutual funds, not deposit accounts that are FDIC insured. When you put money into a money market fund you are actually buying shares that are managed so that each one is worth a dollar.

Only rarely are money market shares in danger of falling below a dollar (called “breaking the buck”). But since many money market funds hold European debt, the assumption of safety may no longer be justified.

The risk that a money market mutual fund will fail is still quite small, but it is no longer essentially zero. In our opinion, the interest rates the funds pay are too low to justify taking any risk at all. As a result, we think you should consider switching to a money market fund that invests exclusively in U.S. government-backed securities. All major brokerage companies offer them.

Alternately, put your cash in a FDIC-insured money market account or CD from your bank.

The Bottom Line

The stock market is doing better than might be expected given the amount of disturbing economic news we have today. We think stocks are holding up because the best of them currently offer considerably better returns than bonds. Investors are also looking ahead to another round of quantitative easing from the Fed that should boost stock prices.

Most of our blue chip recommendations have been doing very well over the past two years. We think they will continue to reward long term investors.

Until Next Time

Investors Are Worried, But So Far No Panic.

Research & Editorial Staff — Thu, 28 Jun 2012 01:47:00 GMT

In This Issue:

Investors Are Worried, But So Far No Panic
The European Debt Crisis Spreads To Spain
Europe’s Cure Is Known, But Will They Take It?
Corporate Earnings Are Also A Problem
Why Stock Prices Are Holding Up
A Red Carpet For “Dividend Aristocrats”
The Bottom Line

In June, stock investors decided to take a time out from the relatively mild sell-off they started in early May. Perhaps most investors were too busy trying to stay cool during the sizzling heat wave to pay much attention to their portfolios. Whatever the reason, the Dow and the Nasdaq managed to inch ahead 1.9% and 1.7% respectively.

Investors Are Worried, But So Far No Panic

The biggest question about the stock market is why it’s holding up as well as it is. The economic news from nearly all fronts is negative. Europe is in recession. The U.S. economy is expected to dip below 2% this year, and the global economy is also slowing down.

At the same time, the sovereign debt crisis in Europe is getting worse. If the problem can’t be contained, the region may slip into a deeper recession. If that happens, economic growth in the U.S. and China will slide even more.

The European Debt Crisis Spreads To Spain

The Greeks had their important election on June 17 in which they were expected to either back candidates who favor austerity and keeping the euro, or those who don’t. Unfortunately, the election was almost a draw. Although the winners are those who advocate keeping the status quo, they didn’t receive a big enough margin to decide the issue.

In an effort to placate all sides, the new government is expected to ask for a two year extension of the deadline for meeting its austerity mileposts. The EU lenders don’t like the idea, but they may need to accept it. Either way, the Greek crisis is far from over.

At the same time, the debt crisis in Spain, that we warned about last month, took center stage. Since Spain contributes about 10% to the European economy, vs. only about 2% for Greece, preventing its banks from melting down is the EU’s new priority.

It appears that the European Central Bank and the region’s emergency funding agencies will come to Spain’s rescue. However, the paltry $125 billion bailout that’s being offered looks more like a bandage than a cure. As with the situation in Greece, the crisis in Spain promises to drag on and on. Of course, patching the situation up beats having a meltdown.

Europe’s Cure Is Known, But Will They Take It?

Usually when things go wrong in human affairs, the source of the problem can be identified. However, fixing it is rarely so easy.

What got Europe in trouble was giving a common currency to very different types of countries. If the euro had only been adopted by the productive and thrifty Northern Europeans, everything would have been fine. But when less financially responsible nations were given the euro, they went on a 10-year borrowing and spending spree. Now they can’t pay their bills.

The other part of the problem is the European Central Bank is “central” in name only. It is nothing like the Fed, where decisions can be made by one man and his board of advisors and put into action quickly.

In Europe, big decisions about finance (and almost everything else) require the agreement of 17 country representatives who come from different cultures, different economies, and have different priorities. Not all the representatives even speak the same language, and they often don’t trust each other.

Due to the poor harmony within the EU, its leaders only address problems when they reach the crisis stage, and they only do the bare minimum to prevent a disaster. As we said earlier, nothing actually gets fixed.

The bottom line is, don’t expect the debt crisis in Europe to be resolved anytime soon. The best we can hope for is that Europeans will continue to do enough to prevent a disaster that could torpedo the global economy. It makes us think of Mark Twain’s famous comment that the increasing aches and pains of old age are tolerable when “compared with the alternative.”

Corporate Earnings Are Also A Problem

Investors are also facing a problem with the outlook for corporate earnings. Many U.S. companies are now starting to decrease their profit projections. Negative announcements about the current quarter outnumber positive reports by 3.5 to one. We have not seen that level of caution since the quarter that followed 9/11.

Some of the bad news can be attributed to the trend among company CFOs to bad mouth their outlooks and then surprise everyone by doing a lot better. But that game doesn’t account for the level of caution we are seeing this time. There just isn’t any way to put a positive spin on the impact of a softening global economy.

The earnings outlook looks particularly glum for the energy industry. The relatively sudden glut of natural gas from shale deposits is driving energy profits into the basement.

Just three months ago, oil was selling for over $125 a barrel. Now it is about $90, a 30% decline. Similar drops are occurring for coal, industrial metals and other raw materials.

Why Stock Prices Are Holding Up

With all the bad news that’s going around, we might expect stock prices to be taking a swan dive. Instead, the market’s declines have been mild, and have often been flat. So, what’s holding everything up?

We think, stocks owe their resilience to bonds, that are paying even less. Since money needs to be somewhere, the only alternative to bonds for most investors is to buy top quality stocks and enjoy the dividends they pay until the outlook improves.

Dividends, of course, can only stay up if profits do too. Since earnings look soft, we can expect to see some dividend reductions over the next year or so.

But smaller dividend checks aren’t automatic. Many companies favored by insurance companies, pension funds, endowments, and little old ladies will often dip onto their reserves during periods of slow growth, and keep their dividend checks at current levels. Some companies will even maintain their dividend growth rates when earnings are soft.

A Red Carpet For “Dividend Aristocrats”

Every year Standard & Poor’s publishes a list of companies in their composite index that have managed to increase their distributions every year for at least 25 years. Earlier this month, there were 51 companies on the list of “Dividend Aristocrats.” We most humbly note that several of our recommendations are on that hallowed list.

Name	Symbol	Yield

Archer Daniels Midland	ADM	2.40%
Abbott Laboratories	ABT	3.30%
Coca-Cola	KO	2.70%
Colgate Palmolive	CL	2.50%
Consolidated Edison	ED	3.90%
Exxon Mobil Corp.	XOM	2.80%

Name	Symbol	Yield

Family Dollar Stores	FDO	1.20%
Illinois Tool Works	ITW	2.70%
Johnson & Johnson	JNJ	3.70%
McDonald’s Corp.	MCD	3.20%
Procter & Gamble	PG	3.80%
Wal-Mart Stores	WMT	2.40%

All our Dividend Aristocrats continue to look good to us. Four of them stand out for their potential to prosper in today’s slower economic growth. The stocks pay more than 10-year Treasuries plus they have excellent prospects for long term appreciation.

McDonald’s (MCD) looks especially attractive when you compare its performance to the stock market. The accompanying combined chart shows the 5-year price history of the company and the Dow Jones Index. You will notice that during the plunge the Dow took in early 2009, McDonald’s barely wiggled. That doesn’t mean the company is impervious to a decline, but it clearly has a history of resisting market scares.

McDonald’s also has good fundamentals. The P/E ratio is 16.6 and the dividend yield is currently an attractive 3.20%. In addition, the company paid a dividend every year for 35 years. We think the stock will continue to be an excellent long-term performer.

Exxon Mobil (XOM) is the world’s largest energy company. Although energy prices are currently down, we think the long-term outlook for the sector remains excellent. Exxon Mobil is particularly attractive now since its P/E ratio is a low 10.0. and its yield is 2.80%. Long-term investors should see excellent returns from Exxon Mobil.

Johnson & Johnson (JNJ) is a leading supplier of pharmaceuticals, medical devices, and personal healthcare products. The company operates over 200 separate divisions that do business in nearly every country in the world. The increasing size of the middle class in Asia is giving Johnson & Johnson an especially good outlook. The company’s P/E ratio is 18.2, which is a bit high, but its yield is an attractive 3.65%.

Wal-Mart (WMT) is also doing well. In most communities Wal-Mart is the lowest-cost supplier of groceries and other necessities that families consume in large amounts. As a result, Wal-Mart is picking up a lot of business from customers that previously shopped at Safeway, J.C. Penney, and other stores that are more expensive. The economic slowdown should push even more shoppers to Wal-Mart. The P/E is 14.1 and the yield is 2.40%.

The Bottom Line

Despite all the troubling news from Europe and elsewhere, stocks remained mostly flat in June. That resistance may not continue if the economic outlook deteriorates further. A new worry about corporate earnings could also tip the scales downwards.

One group of stocks that investors are learning to love is blue chips that have yields much higher than the Treasury offers. Looking especially promising right now are four of our recommendations: McDonald’s, Exxon Mobil, Johnson & Johnson, and Wal-Mart.

Until Next Month

A Summer Rally Seems Likely

Research & Editorial Staff — Thu, 31 May 2012 20:52:00 GMT

In This Issue:

Stocks Or Bonds, That Is The Question
Greece Is Still A Big Concern
A Summer Rally Seems Likely
Housing Is Starting To Attract Investors
The Market Is Expanding For Private Services
The Bottom Line

The stock market correction we have been expecting finally arrived in early May. We would have been happier if it had waited a couple of years, but Mother Market didn't ask for our opinion.

So far, we can't complain about the downturn. As such events go, this one has been fairly mild. By the end of the month the Dow and the Nasdaq were down just 6.4% and 9.0% respectively. Of course, the bear may just be warming up.

Stocks Or Bonds, That Is The Question

Even before the correction began we felt that stocks were priced attractively. That's even more true today. Dozens of top quality multinational companies have multiples below 10 and yields above 4%.

By contrast, 10-year Treasury bonds are paying a miniscule 2%. That's actually a negative real return because it's below the inflation rate. In effect, bond investors are paying Uncle Sam to take their money. It doesn't take an MBA in finance to know that's not how a bond investment is supposed to work.

Of course, the value of bonds has the potential to rise if interest rates go lower. But with rates already barely above the floor, the potential gains from this point appear to be quite small.

Since the returns from bonds are on the thin side, we suspect the reason investors are buying them is due to the shaky economic outlook in the U.S. and Europe. Treasuries may not pay very well but they are reliable safe havens.

Greece Is Still A Big Concern

It's beginning to look as if Greece may abandon the euro, a currency that has not been forgiving of the country's borrow-and-spend habits. The only way Greece can get out from under its debt burden is to default on its bonds, or go back to its old drachma currency that it will promptly devalue. If the latter option is used, Greece will be able to pay its creditors with cheaper money.

By itself, Greece is not a major threat to the European economy to which it only contributes about 2% of annual growth. But if Greece bails out of the euro, there is a good chance that Spain, Portugal, and Ireland may do the same. And that, dear reader, would be a huge problem for Europe.

We don't know how the European debt crisis will turn out. However, leaders in every country are working overtime to find a solution to the problem. We think the odds are that they will be successful.

A Summer Rally Seems Likely

If Europe avoids Armageddon, and the U.S. economy continues to cook along at a moderate pace, many stocks seem likely to shrug off the correction and move back up this summer.

Among the stocks we have been following most closely over the past year, several appear to be in the priority line for rebounds.

Alcoa (AA), Caterpillar (CAT), and General Electric (GE) need moderate to good economic growth to prosper. If we are correct that the economy will be better than the extreme conditions many investors expect, these stocks should have a good summer.

Coca-Cola (KO), Colgate Palmolive (CL), Johnson & Johnson (JNJ), Procter & Gamble (PG), and Wal-Mart (WMT) weren't hit as hard as the industrial companies, but we think they were also oversold. These stocks should have nice bounces in a summer rally.

Consolidated Edison (ED), Eli Lilly (LLY), and Kinder Morgan (KMP) are primarily income stocks. All of them look good to us because their dividends are over twice what Uncle Sam pays on his most popular bonds. Although we are not expecting big price moves from these stocks, we think they offer a nice combination of long-term growth and attractive dividends.

Housing Is Starting To Attract Investors

We are also optimistic about what appears to be the start of a rebound in housing. The turnaround is unlikely to come quickly, but the long-term gains this greatly oversold industry should deliver promise to be exceptional.

There are several reasons that the outlook for housing is improving. The first, of course, is the extreme discounts that are common on most homes. Nationally the decline in prices averaged about 31%. In many cities, the decline was 50%, and sometimes more. Those savings are starting to attract buyers.

Buyers are also attracted by today's rock bottom mortgage rates. Thirty year home loans are now commonly available for under 4%, a number not seen since the early 1950s. Most prospective homeowners realize that such exceptional rates are unlikely to last very long, so they are making their moves now.

The demand for rental housing is also starting to push prices up. Investors all across the country are finding that for the first time in decades, rents will cover mortgage payments, taxes, and maintenance – and also provide some positive cash flow.

The economics of making housing investments are so compelling, people all across America are starting to buy homes to rent out. Nationally, many partnerships are being formed that often buy dozens of properties. In some cases, whole subdivisions are being purchased and converted to rentals.

The obvious question is, if it costs less to buy than to rent, why aren't more renters becoming homeowners?

The answer is, many workers no longer feel confident enough about their job security to make 20 and 30 year mortgage commitments. Neither do many people feel they are likely to stay in one place for an extended period. In these uncertain times, buying a home just doesn't make as much sense is it did years ago.

Many other renters would very much like to buy a home, but they can't qualify for a loan. Banks that were burned during the housing bust usually want 20% down and a near-perfect credit score to write a mortgage. Those are high hurdles to jump.

There is also a cultural shift occurring among many young adults. Homeownership is less often a part of their American dream. Many expect to be renters all their lives, and are very comfortable with that outlook.

One company that is benefitting from the new housing trends is Equity Residential (EQR), a real estate investment trust (REIT) that specializes in rental real estate. The company owns or has investments in over 400 properties in 16 states plus the District of Columbia.

Equity Residential specializes in upscale apartments in cities with good economies and young professionals who can afford to live well. The company knows how to appeal to its customers with attractive buildings in popular neighborhoods. Many buildings also have pools and exercise facilities.

All in all, EQR seems to be on the right track for an extended period of growth.

The Market Is Expanding For Private Services

The slow economy and weak tax collections are making it difficult for the government to build and maintain the nation's infrastructure. Almost everything is out-of-date and in need of repair. The solution is to give the responsibility to private companies.

In many communities, trash collection, ambulance services, highway maintenance and even sanitation systems are being privatized. At the federal level, several highways and airport services are also being operated by efficient private companies.

We think a promising way to profit from the privatization trend is to own stock in the Macquarie Infrastructure Company (MIC) .

Currently, Macquarie is focusing on airport services, a rich area that generates a lot of cash and rapidly pays for itself. The company owns or leases parking lots, airport ground transport systems, aircraft fueling services, airport terminals, hanger services, and fixed base operations for private pilots. In every case where the company makes investments, competition is limited or non-existent.

Macquarie also has interests in commercial heating and cooling operations in Las Vegas. In addition, the company produces and distributes synthetic natural gas and liquefied petroleum gas in Hawaii.

We think private companies such as Macquarie will be asked to take over many more public facilities that can no longer be provided by government agencies. This trend will take time to develop, but it has the potential to be enormous.

The Bottom Line

The stock market correction that started in early May continued through the month. So far, the downturn has been mild which leads us to think the market has more support than meets the eye. If we don't have an economic meltdown in Europe, a summer rally may be in the cards.

Many multinational stocks appear to be oversold and should rebound. Rental housing also looks very good to us, especially Equity Residential. The trend towards privatizing government services should have a long run and benefit the Macquarie Infrastructure Company.

Until Next Time

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

Research & Editorial Staff — Wed, 04 Apr 2012 02:38:00 GMT

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

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

Research & Editorial Staff — Tue, 28 Feb 2012 02:24:00 GMT

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

Research & Editorial Staff — Thu, 26 Jan 2012 19:01:00 GMT

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

Research & Editorial Staff — Wed, 23 Nov 2011 05:14:00 GMT

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

Research & Editorial Staff — Thu, 27 Oct 2011 05:36:00 GMT

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

Research & Editorial Staff — Thu, 29 Sep 2011 15:20:00 GMT

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

Research & Editorial Staff — Thu, 25 Aug 2011 19:54:00 GMT

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

Research & Editorial Staff — Thu, 28 Jul 2011 22:03:00 GMT

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

Research & Editorial Staff — Thu, 30 Jun 2011 16:08:00 GMT

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...

AIA Advocate for Absolute Returns

The “Magnetism” Of Fundamental Values – The AIA Advocate Newsletter

QE3 and Thee – The AIA Advocate Newsletter

Will The Tortoise Rally Continue? - The AIA Advocate Newsletter

Stocks That Offer Good Yields Plus Likely Growth - The AIA Advocate Newsletter

Investors Are Worried, But So Far No Panic.

A Summer Rally Seems Likely

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

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

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

Long Term Investors Can Profit From Today’s Lower Prices

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

Confidence Will Be The Key To Growth

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

Many Excellent Stocks Are Oversold – The AIA Advocate Newsletter

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

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

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