AIA Advocate for Absolute Returns : Bear Market

Association of Investor Awareness - Week of 03/26/2009

Research & Editorial Staff — Thu, 26 Mar 2009 13:45:00 GMT

In This Issue:

Banks And Auto Stocks Led The Way Down, And Now Up
Yes, The Rebound Could Be Another Bear Trap
If There Ever Was A Time To Use Stops, It’s Now!
In Many Cities, Real Estate May Be Set To Rise
The Bottom Line

Over the past month, the stock market staged a strong reversal as the Dow and the Nasdaq rose 6.9% and 9.1% respectively. As often happens when investment optimism begins to replace a long period of pessimism, small stocks did better than their larger cousins.

However, many blue chips also performed very well. For example, our first three picks from last month, JP Morgan Chase (JPM), Archer Daniels Midland (ADM), and Ford (F) jumped 21.5%, 5.3%, and 42.3% respectively. Our fourth pick, SPDR Gold Trust (GLD), dropped 2.4%.

Banks And Auto Stocks Led The Way Down, And Now Up

The sharp jump made by JP Morgan Chase was not an isolated event in the battered banking sector. Citigroup (C), Bank of America (BAC), and Wells Fargo (WFC) saw equally impressive gains of 19.4%, 40.2%, and 15.3%.

The best return of all was made by American International Group (AIG), a company we didn’t recommend because it carries too much risk. Over the past 30 days, however, many big investors unexpectedly reversed their outlooks for AIG and the stock jumped from $0.46 to $1.22 - a 165.2% leap.

We think the banks are still greatly undervalued and are likely to rebound more from their horrific plunges. The road back will be volatile because progress will depend largely on the success of the government’s bailout programs.

Nevertheless, at today’s ultra-low stock prices the risk/reward ratio appears to justify taking small positions in Citigroup, Bank of America and Wells Fargo. Fortunately, a small investment is all anyone needs to get positions in what could be the biggest rebound story of our time.

Of the three additional banks that could become top performers, Citigroup is in the worst shape. http://finance.yahoo.com/q/bc?s=C Bank of America is in somewhat better condition. http://finance.yahoo.com/q/bc?s=BAC One or both of them may fail. However, there are strong political as well as economic reasons for the government not to let that happen. But, if the bailouts don’t work and Washington ends up nationalizing the banks, the shareholders will be wiped out.

Wells Fargo is a better prospect. The bank will benefit from the possible demise of Citigroup and/or Bank of America because it would pick up much of their business. http://finance.yahoo.com/q/bc?s=WFC Even without that boost, Wells Fargo should survive the recession and the housing plunge, and begin to recover once conditions improve.

AIG must be considered a rank speculation, which we would normally never mention. http://finance.yahoo.com/q/bc?s=AIG But at $1.20 or so, we believe AIG’s potential to jump on good news is very good. If you want to add a little spice to your life, 100 shares of AIG should do the trick.

In the automotive industry, we continue to think that Ford has the best chance for a profitable recovery. As with the banks, a small position appears to make sense at today’s low price.

SPDR Gold Trust (GLD) continues to look good because it is a hedge against rising inflation and a declining dollar. Both conditions seem more likely to occur than they did last month because the Fed just decided to create $300 billion out of thin air to buy Treasury bonds. We think the make believe money will come back to haunt us within a few months.

Yes, The Rebound Could Be Another Bear Trap

Over the past year we warned that the many rebounds that came along looked like bear traps. In every case we were right. After a few days or weeks of moving up, the market suddenly reversed direction and tumbled to new lows. The same thing could happen again this time.

But even if this rally isn’t the lasting rebound we have all been hoping for, there are some solid reasons to think it could last longer than its predecessors. If so, the rally could be profitable even if it ultimately falls apart.

The first reason for optimism is the market had already fallen 54% when the current upturn began. That’s about as bad as bear markets get. Even if the bear returns for one more raid on stocks, he probably won’t have much further to go.

Secondly, fundamentals are also beginning to reach bear market lows. Many top-quality blue chip stocks now have P/E ratios under 10, which has often been a turning point in the past. Since interest rates are on the floor, low P/E stocks that pay good dividends are especially attractive this time around.

If There Ever Was A Time To Use Stops, It’s Now!

Because there is no way to know if the current stock market rebound is another bear trap or the beginning of a new bull cycle, you may be tempted to stay on the sidelines until the matter is settled.

But if you take the safest position and this rally turns out to be the real deal, you will miss out on its biggest gains. That’s because anywhere from 30% to 50% of a bull market’s returns often occur before most investors realize the turn has finally come.

Fortunately, you can buy stocks with reasonable safety if you place stop loss orders on everything you pick. If the stocks go up as expected, you can raise your stops as you go along. That way if the bear comes back, you will be taken out before much damage can be done.

Remember, stops are very easy to place. To use TD Ameritrade as an example, right after you buy a stock you would enter a sell order at the price you would want to be taken out. When you see “Order Type”, simply click “Stop Market” and enter the appropriate number. Since stops cost nothing until they are executed (which might never happen), they are the cheapest insurance you can buy.

There are only two downsides with stop loss orders that you should know about. First, if the market makes a big down move and then bounces back, you may be sold out when you would have been better off hanging on. Secondly, if the market drops very rapidly and hits your stop, by the time the order is executed the price may have dropped below your sell point. Alas, not much on Wall Street carries a 100% guarantee.

In Many Cities, Real Estate May Be Set To Rise

All the activity in the stock market of late is masking some improving numbers in the housing market. Although the real estate outlook overall is still poor, in some areas prices for rental residential properties have fallen so far that for the first time in nearly 20 years they can “pencil out.” That is to say, the rents they generate can cover the mortgage payments, taxes and maintenance costs – plus provide a positive cash flow to the buyer.

The tax breaks that go with real estate investments —and the potential for long-term appreciation from today’s depressed levels— make real estate even more attractive. In addition, the collapse of the late great housing boom is pushing many new people into the rental market.

As with the stock market, it may be a decade or more before residential real estate gets back to where it was during the boom. But you won’t need a full recovery to make excellent profits. Thanks to the leverage in most real estate investments, only a partial rebound could still double your money.

For example, if you buy a $300,000 duplex with a 20% down payment, the deal will cost you $60,000. Your duplex would only need to appreciate to $360,000 for you to double your money. Meanwhile, the renters will pay the bills.

One way to enter the rental residential real estate market is with experienced partners. In most communities there are groups of people who have been buying properties together for many years. With more attractive deals becoming available, and with credit now very tight, many partnerships should be happy to accept new members. Your attorney, or a seasoned real estate broker, should be able to make the necessary introductions.

The Bottom Line

Investors have been through the mill during the past year. However, we think the disheartening losses paved the way for a dramatic rebound. The upturn may be starting now, or it may not come until later – but it’s on the way. To make the most of it, you will need to put money in the market while most investors are too nervous to leave the sidelines.

Your safest bets are the blue chip stocks we have been recommending for months. More aggressive investors should also consider some of the oversold banking stocks that have been performing well of late. Although the risks are high with the banks, we think the potential rewards are even higher. You can stack the odds further in your favor by using stop loss orders religiously.

Residential rental real estate is also starting to look good in many markets. Ignore the naysayers who suggest that there is no money to be made because it may be ten or fifteen years before prices return to their 2006/2007 highs. As we explained in our discussion, you don’t need a big rebound to make a good real estate investment pay off handsomely.

Association of Investor Awareness - Week of 12/11/2008

Research & Editorial Staff — Thu, 11 Dec 2008 17:35:00 GMT

In This Issue:

The Long-Awaited Bear Rally May Be Starting
Although Weak, Some Hopeful Economic Signs Are Emerging
Credit Is Slowly Opening Up Again
If Fear Subsides, The Outlook Will Improve Immediately
A Recovery Will Bring Unwelcome Inflation
The Bottom Line This Week

As we reported in our previous issue, the sharp stock market advance over the Thanksgiving holiday came to a crashing end on December 1. However, prices have been stronger since then. Although the gains weren't enough to fully erase the earlier plunge, the Dow and the Nasdaq managed to end last week down just 2.2% and 1.7% respectively. From Monday to Wednesday of the current week, the market managed to make some additional gains.

It's significant that the price increases occurred while more bad economic news was breaking. A manufacturing decline, an auto sales plunge, and more job losses should have pushed stocks down several more notches. The fact that investors largely ignored the negatives may indicate that the bear market is close to a bottom.

The Long-Awaited Bear Rally May Be Starting

Many analysts believe that the market's apparent strength indicates that investors may be looking beyond the current situation and are seeing signs that a recovery is on the way.

Our response is that severe bear markets always have strong rebounds that usually become traps for the unwary. In 1933, for example, there was a big rally that investors believed was the recovery they expected after the 1929 disaster. Unfortunately, the rally collapsed within a few months and created another round of big losses for investors.

Although Weak, Some Hopeful Economic Signs Are Emerging

That is not to say that there isn't any light appearing at the end of the dark tunnel. But as the old joke goes, the light may be on a locomotive that's speeding our way.

In this case, the "locomotive" to worry about is declining corporate earnings as job losses and slow economic growth begin to take a greater toll on business activity. Most optimists acknowledge the weak outlook, but they believe it is fully discounted in today's low stock prices.

Another major worry is the prospect of further job losses. However, many analysts are quick to point out that a 6.7% unemployment rate isn't out of line for a recession where a 10% rate is often seen. Again, the optimists say, the market has more than discounted the outlook.

As for overtly positive news, as we reported last week Black Friday sales were much better than expected. Nobody is expecting a consumer spending turnaround anytime soon. But stocks appear to be priced for a much lower spending rate than we may actually see.

Many analysts are also encouraged that productivity (the amount of value produced per hour by workers) is on the rise. Clearly, workers who are keeping their jobs are working more hours, or are working more efficiently. When productivity grows, output can increase even when employment declines. We may finish the year with a higher GDP than in 2007 even though employment is lower.

Credit Is Slowly Opening Up Again

The brightest ray of economic sunshine to break through the clouds is on the credit front. Banks are starting to loan money again, albeit cautiously. As you may have noticed, many lenders are now running ads for mortgages, refinancing, auto loans, and the like. It's not a flood, but the tide does appear to be turning around.

Of course, the heady days of easy money are probably gone forever. But, that's as it should be. All we need for the economy to get going again is for banks to return to the lending standards they had before the credit madness began in the late 1990's.

If Fear Subsides, The Outlook Will Improve Immediately

From all the headlines about collapsing home values, rising unemployment, excess consumer debt, and the like, it would be easy to think that most Americans are in financial trouble. But that's simply not the case. Fear, not true hardship, is the biggest reason consumer spending has plunged.

Some of us at The AIA Advocate are old enough to remember the role that a climate of fear had in the severe recession of 1980-81. Even people with secure government jobs wouldn't spend more money than was absolutely necessary. As a result, auto dealers, real estate agents, homebuilders, and so on often went bankrupt in towns that were awash in wealth.

The bright side of the fear picture is it can end as quickly as it began. Americans are predisposed to be optimistic, not down in the dumps all the time. When good news begins to replace the frightening headlines we are seeing now, the economy will start to recover.

A Recovery Will Bring Unwelcome Inflation

However, there is a downside to a recovery that you should know about. So much money has been pumped into our economic system in an attempt to restore credit and prevent bankruptcies that inflation will almost certainly accompany a rebound. Some analysts think inflation is likely to be such a powerful force that investors should play that event rather than an earnings recovery.

Although we believe an earnings rebound will be the biggest money-maker for most investors, taking inflation into account is also a good idea. That's especially true since today's strong dollar will buy a lot of inflation investments at very low prices.

Gold looks especially attractive now. At its current $771 price, the yellow metal is off 23.3% from the $1006 high it reached in March of this year. There is every reason to think that gold will move back up as the value of the dollar declines due to inflation.

A shortage of U.S. gold coins continues, but premiums will come down as the Mint catches up with demand. Meanwhile, premiums for Canadian Maple Leafs and South African Krugerrands remain reasonable.

Alternately, you can buy the SPDR Gold Trust (GLD), a popular exchange traded fund. http://finance.yahoo.com/q/pr?s=GLD We continue to think the ETF is the best way for most investors to buy gold.

Silver is down 52.3% from its $20.92 high set in March. However, silver is largely an industrial metal that is priced to a great extent by the level of economic activity. Since growth is likely to be slow when inflation first begins to be a problem, gold should be a better performer.

Swiss francs continue to look very good longer term. Besides being a good hedge against the dollar, the Swiss currency has a positive effect on overall investment performance. In the latest issue of Review & Focus, Chuck Butler of EverBank World Markets, Everbank.com had this to say about foreign currencies:

Had an investor invested $100,000 in stocks during [the past year], they would have experienced a 39% loss, or a final dollar value of $60,577.29. But if they had added a 20% allocation of gold, and a 20% allocation of currencies (a combo of Swiss, euro, and Japan), their overall portfolio performance would have been a final dollar value of $74,450.82. While the portfolio was still at a loss, the overall value ends up almost $14,000 higher, a 14% improvement vs. the S&P alone.

Treasury Inflation Protection Securities (or TIPS) are also looking very attractive again. These special government bonds have their principal adjusted twice a year to compensate for the rate of inflation.

With TIPS, if you purchase a $1,000 bond and the inflation rate turns out to be 8.0% for the year, its value will be adjusted to $1,080. Consequently, your purchasing power will remain the same as it was when you bought the bond. You are also protected in the unlikely event of continued deflation because your final payment cannot be less than the original par value of the bond.

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

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

If you don't wish to lock up your money for fixed periods of time, you should consider a TIPS fund. We particularly like the Vanguard Inflation-Protected Securities Fund Investor Shares (VIPSX). http://finance.yahoo.com/q/bc?s=VIPSX&t=2y As with most Vanguard products, the TIPS fund carries no load and has a very low 0.20% expense ratio, vs .86% average for its competitors.

The Bottom Line This Week

The financial turmoil that has been hammering the economy and the stock market is likely to continue well into 2009. However, there are some tentative indications that a gradual rebound may begin before the year ends.

Because of the unprecedented amount of money the Fed is pumping into the economy to fight the downturn, a recovery will almost certainly be accompanied by higher inflation. Gold and hard foreign currencies such as the Swiss franc should be good hedges against the declining value of the dollar. TIPS should also prove to be very effective protection against inflation.

Association of Investor Awareness - Week of 12/04/2008

Research & Editorial Staff — Thu, 04 Dec 2008 15:52:00 GMT

In This Issue

Black Friday May Suggest A More Optimistic Outlook
Most Insiders Are Not Selling
Bear Market History: How We Compare
Get Paid While You Wait
The Bottom Line This Week

Last week when everyone was stuffing themselves with turkey and other goodies, the urge to consume in abundance spilled over to Wall Street. By the time the market closed on Friday, the Dow and the Nasdaq were up an impressive 9.7% and 10.9% respectively. It was the first five day rally we've seen in over a year.

The enthusiasm for stocks wasn't completely due to holiday cheer. Investors got wind of the fact that Black Friday sales were likely to be better than was first expected. As it turned out, instead of a miniscule 0.9% sales increase, Joe and Sally MidAmerica gave the retail industry a 3% boost. Shoppers were so eager to spend money, they trampled several people who got in their way, one of whom died.

As we are sure you know by now, the enthusiasm didn't survive the weekend. The terrorist attack in Mumbai plus a dismal economic report sent the market down 680 points on Monday. Stocks recovered 442 points on Tuesday and Wednesday but the rebound seems unlikely to last very long.

Black Friday May Suggest A More Optimistic Outlook

The jury is still out regarding the significance of the unexpected spending bounce we saw last Friday. It could have been a one-day shopping spree that won't be repeated. However, the surprise increase could also indicate that Americans aren't as frightened about the future as most economists believe. If so, the economic downturn may not be as severe as the end-of-the-world pundits predict.

Critics argue that the spending boost only occurred because retailers slashed prices for popular merchandise. However, during the tough recession of the early 1980s, deep discounts had little effect on spending.

The bottom line is that consumer spending accounts for two thirds of U.S. economic growth. If the Fed can convince Americans that the outlook for our country isn't as bad as many analysts predict, it won't be.

Most Insiders Are Not Selling

It is also encouraging that most corporate insiders are refusing to sell their shares at today's prices. In Barron's this week, Michael Santoli reported that company officials "are seeing things as just plain bad" as opposed to seeing them as awful. Although "bad" is a long way from "good", the less grim outlook means that stocks may be priced properly for what is on the way. If so, the market may be closer to a bottom than the super bears are saying.

Alas, Santoli also reported that company insiders are not doing any madcap buying. If that decision also has predictive value, we should not expect a rebound anytime soon.

Bear Market History: How We Compare

In a November 30 article in Seeking Alpha, Benjamin Taylor of Brick Financial Management http://www.brickfinancial.com/ compared the current bear market to those from the past. Here is a summary of his findings:

As can be seen, the average length of the bear markets studied was 13.9 months, vs 13 months so far this time. The average decline was -31.7% vs -52% now.

Perhaps most importantly, the percent of the previous high that was recovered when the bull returned averaged 90.7%. Because the current bear market is hitting stocks harder than any of the previous nine declines, we should see a correspondingly greater rebound.

Get Paid While You Wait

Whether or not we are close to a bear market bottom, many top quality stocks are already very attractive. We continue to believe you should be nibbling at the best of them in anticipation of their eventual recovery.

Many readers who agree with our strategy are nevertheless concerned about having their money tied up for what could be an extended period while they wait for nirvana. The way to put those concerns to rest is to buy stocks that will pay you to wait for them to perform as expected. If the stocks yield more than you can earn in the fixed income market, so much the better.

Of course, dividends can be cut – and often are during economic downturns. To help insure that your yields won't go down, we think you should stick with companies that supply basic human needs that don't ride the economic cycle.

To that end, we have compiled a list of blue chip defensive stocks that supply affordable food, water, and healthcare products to people throughout the world. Each of them offers a higher yield than is available from most U.S. Treasury bonds. We think the stocks will make rewarding contributions to long-term portfolios.

ConAgra (CAG) is a packaged foods company that sells meals, snacks, and desserts throughout the world. http://finance.yahoo.com/q/bc?s=CGA Brands include Banquet, Chef Boyardee, Egg Beaters, Healthy Choice, LaChoy, Hunts, Marie Callenders, Swiss Miss, VanCamp, and Wesson – to name only a few. The stock is down 50% from its high and currently pays 5.2%. That's a lot to like about ConAgra.

Heinz (HNZ) needs little introduction to most people who are familiar with the company's condiments, soups, sauces, beans, and other staples. http://finance.yahoo.com/q/bc?s=HNZ Although the product line is not exciting, the company's success is another matter. Heinz yields 4.3%.

Hershey (HSY) is best known for its line of chocolate products, but the company also makes many other treats. http://finance.yahoo.com/q/bc?s=HSY At first glance, it might appear that such goodies are extravagances that won't do well when the economy is contracting. However, Hershey's products are affordable treats that lift most people's spirits without picking their pockets. The company is doing well and offers a 3.3% yield.

McCormick & Company (MKC) is a 120 year old American firm that produces spices, herbs, seasonings, sauces, and flavor products to both individual consumers and major food processors. http://finance.yahoo.com/q/bc?s=MKC The company raised its dividend for over 15 consecutive years, which is an excellent track record. McCormick just raised its dividend and currently pays 3.2%.

The York Water Company (YORW) is a 192 year old company that supplies water to nearly 60,000 residential and industrial customers in Pennsylvania. http://finance.yahoo.com/q/bc?s=YORW Because the company got a start when America was still young, it was able to acquire large water resources that are now extremely valuable. Many natural resource experts think water will be in greater demand than oil within a few years. York is doing quite well already. The company raised its dividend recently and currently pays a 4.5% yield.

Eli Lilly (LLY) is a well known pharmaceutical company that sells its products worldwide. http://finance.yahoo.com/q/bc?s=LLY Although drugs are relatively insensitive to economic conditions, the stock was caught up in the broad Wall Street sell off and is down 41% from its recent high. We like the company's long-term prospects and its present 5.5% yield.

Johnson & Johnson (JNJ) needs little discussion because we featured it recently. http://finance.yahoo.com/q/bc?s=JNJ Since then JNJ announced it will buy Mentor, a leader in cosmetic surgery gear, a smart move in our opinion. Johnson & Johnson is on the S&P list of "Dividend Aristocrats" (see our November 6 issue) and currently yields 3.1%.

AT&T (T) doesn't qualify as a defensive stock, but it comes close. http://finance.yahoo.com/q/bc?s=T The company's wireless and long-distance telecom services have become so important to countless people and businesses, we have no doubt that the company will weather the economic storm and surge ahead when it ends. AT&T has gone through many severe economic cycles and helped create many family fortunes. Meanwhile, the company pays a very attractive 5.6% dividend.

The Bottom Line This Week

Jeff Kearns on Bloomberg (www.bloomberg.com) recently reported that the CBOE Volatility Index –known simply as the VIX- indicates that investors are in for at least seven more months of stomach-churning stock market swings. Although the ride won't be much fun, we are confident that investors who use the drops to buy high quality stocks will make outstanding long-term profits.

The key to success is to stick with multinational blue chips with a long history of surviving economic downturns. You can increase your odds further by selecting companies that pay attractive dividends. Many of the stocks we have been featuring in recent weeks fit the bill and should be considered top candidates for your portfolio.

Association of Investor Awareness - Week of 10/16/2008

Research & Editorial Staff — Thu, 16 Oct 2008 17:12:00 GMT

The Biggest Danger Now Is A Series Of Bear Traps
The Financial Crisis Has Further To Run
Some Bear Market Investments Have Promise
How Long The Bear Might Stick Around
A Contrary Economic Outlook
Another Shameless Plug For Blue Chip Stocks
The Bottom Line This Week

Stock volatility has become so extreme, we had to redraw the charts. Although there have been up and down days as large as those we have seen recently, never before have they come in such quick succession.

Last week, as everyone from New Guinea to New York must know by now, the Dow and the Nasdaq fell 18.2% and 15.3% respectively. That would have been tough enough by itself, but what made the week even more hectic is it contained a 679 point jump that many investors believed was the start of a reversal.

The market leaped forward again this Monday with a breath taking 936 point surge when U.S and European leaders decided on a coordinated financial rescue plan. Stocks took a breather on Tuesday. Then it plunged 733 points the next day on poor consumer spending data. We must expect more whiplash days as the credit crisis continues to unfold.

The Biggest Danger Now Is A Series Of Bear Traps

Although big market swings aren't much fun, they do show that investors are reluctant to quit the game. As we mentioned last week, however, bear markets rarely hit bottom until investors become so discouraged that they want nothing more to do with stocks. Until then, rebounds are likely to be traps for the unwary. Only when rallies become rare, can we begin to feel confident that the bear market has run its course.

The Financial Crisis Has Further To Run

The biggest reason we are not expecting a sustained stock market recovery any time soon is the credit crisis is far from over. Even with the billions (and possibly trillions) of dollars the government plans to inject into the financial service system, a turnaround will take months. In the meantime, more banks, S&L's, and hedge funds are likely to fail. The losses will almost certainly kill any stock rebounds that may get started.

The best strategy to use in a bear market is to buy high value stocks when the market is falling, and sell any lower value stocks when it is rallying. That way, when the bear cycle finally comes to an end, your portfolio will be heavily weighted with stocks that are likely to perform well during the next expansion.

Some Bear Market Investments Have Promise

More aggressive investors can also find profits while the market is dropping. Selling stocks or ETF's short is one way to go, but the strategy is risky. If the market goes up rather than down --and it gets away from you-- losses can be very high. If you do make short sales, you must be certain to protect your positions with stop-loss orders.

For most investors, the safest way to dance with the bear is with a fund that is structured to move contrary to the S&P 500 index. We think the most attractive is the Rydex Inverse S&P 500 Strategy Fund (RYURX) http://finance.yahoo.com/q/pr?s=RYURX . When Wall Street sinks, the Inverse S&P Fund will make you smile.

The ProFunds UltraBear Fund (URPIX) is equally broad in scope as the Inverse S&P Fund, but it is much more aggressive. http://finance.yahoo.com/q/pr?s=URPIX UltraBear also acts contrary to the S&P 500 - but it seeks to double the size of the moves. The fund uses the same investment vehicles as its more conservative cousin, but it purchases more of everything to gain extra leverage. Of course, the lever swings both ways: The UltraBear fund will decline quickly if the S&P 500 index rises. Neither of the Rydex funds charge a load.

The best strategy to use with a bear market fund is to buy it during the first big rally and hold it for the duration of the downturn. Trying to jump in and out of the fund with each market change is rarely successful. Staying with the dominant trend almost always pays the greatest rewards.

How Long The Bear Might Stick Around

As we said earlier, we doubt that the bear market will be going away anytime soon. But just how long might it be before the bull returns? More importantly, how long is it likely to take before the bull replaces the bear's losses?

In an attempt to shed some light on the subject, value investor Ali Khan took a look at the four biggest bear markets we had over the past 30 years. www.investmentplayground.net We put his research into a table that shows what we might expect from the current tug of war between the bear and the bull.

Bear Market	Duration	Percent Decline	Time To A Full Recovery
Jan 1973 - Oct 1974	21 months	57%	3.5 years
Aug 1987 - Dec 1987	105 days	35%	21 months
9/11 Terror Attack	28 days	21%	105 days
Mar 2002 - Sep 2002	173 days	29%	15 months
Average of first 4	234 days	35.5%	20 months
Oct 2007 - ?	264 days so far	40% so far	?

As you can see, the current bear market has already lasted 30 days longer and has fallen 4.5% deeper than the average. However, the crisis that triggered the current downturn was far greater in monetary terms than the previous four. It is most comparable to the severe bear market of 1973-74 when the market dropped 57%. If we see a repeat of that tough downturn, stocks will drop another 17%.

Of course, history rarely repeats itself. However, as Mark Twain observed, it often rhymes.

A Contrary Economic Outlook

You may recall that on several occasions during the past year we remarked that the economy was doing better than analysts expected. Even during the third quarter, when a recession was a forgone conclusion by nearly everyone, we noted that mainstream America was actually doing fairly well.

A few days ago, Casey B. Mulligan, a professor of economics at the University of Chicago, made a similar observation when he said, "...the economy doesn't really need saving. It's stronger than we think."

Prof. Mulligan made the case that "The non-financial sectors of our economy won't suffer much from even a prolonged banking crisis, because the general economic importance of banks has been highly exaggerated." He pointed out that pension funds, university endowments, venture capitalists, and corporations also provide large sums of money to businesses.

In addition, the average corporation gets about 25% of the funds it needs from its own cash reserves. If necessary, companies could get as much as three times that amount by cutting their dividends.

The professor also pointed out that banking services aren't about to vanish. To be sure, some banks are failing - but others are taking their places. If the survivors don't loan money, they won't last very long themselves. In any event, most businesses won't be hurt if the credit freeze lasts for a few quarters.

We think Dr. Mulligan is correct about the economy. His outlook certainly fits the pattern we have been seeing ourselves. If his prediction is correct, the stock market rebound could come a lot sooner than almost anyone expects.

Another Shameless Plug For Blue Chip Stocks

Whenever good times return, we are confident that the blue chips we have been recommending will be at the head of the Wall Street parade. As we have been reporting throughout this difficult period, many of our leading stocks are already doing better than expected.

Three of our companies that surprised investors over the past few days were General Electric (GE), Intel (INTC) and IBM. GE's profits fell 22% but they were above expectations. Intel turned in a 12% profit jump. IBM also said it will soon report an earnings increase.

But, as we mentioned earlier, wait to buy until rallies collapse and prices drop from the bargain basement to the liquidation table.

The Bottom Line This Week

Although the economy appears to be doing better than is generally believed, a recession seems likely that may last into the first quarter of 2009, and possibly further.

Rather than grumble about the slowdown, we think investors should use it to their advantage. Bear market funds such as the Rydex Inverse S&P 500 Strategy Fund look good for the near and medium terms. When their time at bat ends, many multinational blue chips are likely to score home runs.

Week of 10/09/2008

Research & Editorial Staff — Thu, 09 Oct 2008 14:47:00 GMT

Bargains Are Starting To Appear
A Bottom Fishing Check List
The Bear Isn't Finished Yet
Big Drops Lead To Big Rebounds
Financial Stocks Attract More Attention
There Is One More Shoe To Fall
The Biggest Question: Will The Bailout Work?
The Bottom Line This Week

Wall Street's thrill ride continued over the past week as investors made king-sized moves after every drop in the economic outlook. By the time the closing bell rang on Friday, the Dow and the Nasdaq were down 7.3% and 10.8% respectively. A good time was definitely not enjoyed by all.

Once again, investors saved their biggest gyrations for the following Monday when the market plunged some 800 points. Fortunately, the market regained 430 points before the end of the day. Stocks resumed their slide on Tuesday and Wednesday when they fell a total of 689 points.

Bargains Are Starting To Appear

It is encouraging to see that most of the big market drops are starting to attract bargain hunters, including big hitters such as Warren Buffett. That's not surprising since many stocks are clearly oversold when measured against their long-term potential.

We were delighted to see that one of the stocks Mr. Buffett picked for a multi-billion dollar investment was General Electric, a company we started to accumulate in February. Other stocks the value investors are buying include Burlington Northern, Cisco Systems, Coca-Cola, IBM, Kraft Foods, Hewlett-Packard, Intel, Procter & Gamble, and Pfizer – all of which have been recommended in The AIA Advocate.

A Bottom Fishing Check List

In times like these when the bear is still raging, successful bargain hunters don't take undue risks. Although they venture into the storm, they only buy stocks when the odds of winning appear to be solidly in their favor.

The first thing the bottom fishers look for is lots of cash and very little debt. With a strong balance sheet, a company can make it through a tough period even if it lasts quite a bit longer than expected.

The odds of success rise higher if the companies provide products and services that people need even when times are bad. Food, drug, and basic retailers are favorite choices.

Of course, stock fundamentals must also be right. A good rule of thumb is to find companies with price to earnings ratios that are close to their historic lows. For example, the P/E for SuperValu (SVU) is currently an attractive 7.3. By contrast, the P/E for Amazon.com (AMZN) is a stratospheric 42.6.

It's also highly desirable to get some income while waiting for the big payoff. Comparing SuperValu and Amazon again we find a 3.3% dividend and none at all, respectively.

The Bear Isn't Finished Yet

With all the fear we see in the market today, we doubt that stocks will turn around any time soon. First there needs to be a stomach churning washout, an ugly process Wall Street calls capitulation. It occurs when investors become so discouraged they keep selling stocks no matter how cheap they are becoming. When the last of the stragglers are out of the market, stocks will finally stop sinking.

Once a floor has been reached, smart money will begin to come in from the sidelines where it was waiting patiently for months. The influx of cash will solidify the market bottom and lay the groundwork for a recovery.

Currently, the market's partial rebounds after every drop indicate that the capitulation phase of the downturn is still to come. When it finally arrives, we hope you look beyond the carnage and remember the event marks the end of the bear market.

Big Drops Lead To Big Rebounds

Although the final stock market shakeout is still on the way, we continue to think you should begin to do some cautious value buying. Dr. Steve Sjuggerud of DailyWealth (www.dailywealth.com) looked at 150 years of stock data and found that over the past 70 years, there was only one time that the market turned in a worse 12-month performance than the period that's currently ending. (Assuming that stocks finish October about where they are now.)

Dr. Sjuggerud also found that when stocks had a terrible 12 months, they usually followed up by having 12 very good months. The only exceptions were after the dot-com bust and the Great Depression. However, stocks were at record highs during those two times, which is certainly not the case today.

There is one caveat: the relationship between year-long declines and recoveries only applies for the worst 12 months in a bear market. We may not be there yet.

Financial Stocks Attract More Attention

We were pleased to see the article, Financial Stocks, Yes Financial Stocks, To Consider in Barron's this week. As you undoubtedly recall, we have been recommending the group since the meltdown slashed their prices over the summer.

The only place we would differ with the Barron's article is with the stocks that were mentioned. Since many additional banks and S&L's are likely to fail before the blood bath is over --and it is impossible to know with certainty which ones they will be-- we think picking individual issues is not the best way to proceed.

Instead, we continue to recommend the Fidelity Select Financial Services Fund (FIDSX). http://finance.yahoo.com/q/bc?s=FIDSX When the sector rebounds, so will the fund, no matter how many firms don't make it through the shakeout.

There Is One More Shoe To Fall

Right now, the world is understandably focused on the financial service industry. In its shadow, however, another giant sector is starting to look weak: consumer spending. Because consumers account for about 2/3 of our economic growth, if they curtail their spending significantly the downturn will intensify.

Unfortunately, Joe and Sally MidAmerica are starting to grip their pocketbooks more tightly. The big three automakers saw their sales decline about 30% last month. Most shopping malls are also seeing sharp reductions. If the trend continues through the winter holidays, we could see the first quarterly drop in consumer spending in nearly two decades.

The bright spot in the consumer picture is most Americans are being frugal because they are scared, not because they don't have the means to buy what they want. If the federal rescue program appears to be working, millions of Americans will breathe a sigh of relief and go shopping again.

The Biggest Question: Will The Bailout Work?

We believe the government's efforts to turn the credit crisis around can work, but only if it is greatly expanded. Here's what most economists think should be done:

First, the big banks aren't the only financial service firms that are in trouble. Many regional banks, credit unions, savings & loans, and hedge funds are also on shaky ground. Collectively, they are worth more than the giant firms that are in the news every day, and they also need a lifeline.

In addition, the collapse of subprime, no-document, and ninja (no income, no job, no assets) mortgages started the credit crisis, but they aren't its only problem. Also at risk are countless short term loans that individuals and businesses make to each other. Bank to bank loans are also drying up. All these sources of capital are essential to the smooth functioning of our economy, and must resume.

It appears the government is starting to include additional financial service firms and types of loans in its rescue program. On Tuesday, Fed Chairman Bernanke announced a plan to buy large amounts of short-term debt in an effort to get lenders to make credit available again. On Wednesday, the Fed also lowered interest rates ½ point. Other measures are undoubtedly on the way.

The final bailout cost, of course, will be well above the initial $700 billion allocated for the rescue effort. In fact, the language in the law clearly states that $700 billion is the limit that can be spent "at any one time." Some economists think the total bill could be three times the initial figure. By this time next year we should know what the final tally is likely to be, and whether the massive spending is having the desired effect. Keep your fingers crossed.

The Bottom Line This Week

The financial service crisis appears to be moving faster than the government can keep up. One analyst referred to the rescue program as a "whack a mole" strategy. However, the money that Washington is spending should begin to take effect within a few weeks.

Meanwhile, some stock bargains are appearing. We think investors should start to make some cautious purchases over the next several months. Financial, food, drug, and basic retailers look the most attractive now.

AIA Advocate for Absolute Returns : Bear Market

Association of Investor Awareness - Week of 03/26/2009

Banks And Auto Stocks Led The Way Down, And Now Up

Yes, The Rebound Could Be Another Bear Trap

If There Ever Was A Time To Use Stops, It’s Now!

In Many Cities, Real Estate May Be Set To Rise

The Bottom Line

Association of Investor Awareness - Week of 12/11/2008

The Long-Awaited Bear Rally May Be StartingAlthough Weak, Some Hopeful Economic Signs Are EmergingCredit Is Slowly Opening Up AgainIf Fear Subsides, The Outlook Will Improve ImmediatelyA Recovery Will Bring Unwelcome InflationThe Bottom Line This Week

The Long-Awaited Bear Rally May Be Starting

Although Weak, Some Hopeful Economic Signs Are Emerging

Credit Is Slowly Opening Up Again

If Fear Subsides, The Outlook Will Improve Immediately

A Recovery Will Bring Unwelcome Inflation

The Bottom Line This Week

Association of Investor Awareness - Week of 12/04/2008

Black Friday May Suggest A More Optimistic OutlookMost Insiders Are Not SellingBear Market History: How We CompareGet Paid While You WaitThe Bottom Line This Week

Black Friday May Suggest A More Optimistic Outlook

Most Insiders Are Not Selling

Bear Market History: How We Compare

Get Paid While You Wait

The Bottom Line This Week

Association of Investor Awareness - Week of 10/16/2008

The Biggest Danger Now Is A Series Of Bear TrapsThe Financial Crisis Has Further To RunSome Bear Market Investments Have PromiseHow Long The Bear Might Stick AroundA Contrary Economic OutlookAnother Shameless Plug For Blue Chip StocksThe Bottom Line This Week

The Biggest Danger Now Is A Series Of Bear Traps

The Financial Crisis Has Further To Run

Some Bear Market Investments Have Promise

How Long The Bear Might Stick Around

A Contrary Economic Outlook

Another Shameless Plug For Blue Chip Stocks

The Bottom Line This Week

Week of 10/09/2008

Bargains Are Starting To AppearA Bottom Fishing Check ListThe Bear Isn't Finished YetBig Drops Lead To Big ReboundsFinancial Stocks Attract More AttentionThere Is One More Shoe To FallThe Biggest Question: Will The Bailout Work?The Bottom Line This Week

Bargains Are Starting To Appear

A Bottom Fishing Check List

The Bear Isn't Finished Yet

Big Drops Lead To Big Rebounds

Financial Stocks Attract More Attention

There Is One More Shoe To Fall

The Biggest Question: Will The Bailout Work?

The Bottom Line This Week

The Long-Awaited Bear Rally May Be Starting
Although Weak, Some Hopeful Economic Signs Are Emerging
Credit Is Slowly Opening Up Again
If Fear Subsides, The Outlook Will Improve Immediately
A Recovery Will Bring Unwelcome Inflation
The Bottom Line This Week

Black Friday May Suggest A More Optimistic Outlook
Most Insiders Are Not Selling
Bear Market History: How We Compare
Get Paid While You Wait
The Bottom Line This Week

The Biggest Danger Now Is A Series Of Bear Traps
The Financial Crisis Has Further To Run
Some Bear Market Investments Have Promise
How Long The Bear Might Stick Around
A Contrary Economic Outlook
Another Shameless Plug For Blue Chip Stocks
The Bottom Line This Week

Bargains Are Starting To Appear
A Bottom Fishing Check List
The Bear Isn't Finished Yet
Big Drops Lead To Big Rebounds
Financial Stocks Attract More Attention
There Is One More Shoe To Fall
The Biggest Question: Will The Bailout Work?
The Bottom Line This Week