AIA Advocate for Absolute Returns : Gold

Association of Investor Awareness - Week of 02/26/2009

Research & Editorial Staff — Thu, 26 Feb 2009 14:43:00 GMT

In This Issue:

The Federal Bailout Is A Mixed Bag
Capitulation May Have Been Reached
Some Blue Chip Stocks Will Win Blue Ribbons
A Speculation Is Also Attractive
Gold Regains Its Appeal, But There Are Problems
An Economic Indicator That We Can Love
The Bottom Line This Week

Since our last newsletter on January 29, the stock market took a sharp turn for the worse. In fact, calling it a "turn" is an understatement. "Plunge" would better describe the 9.6% and 4.4% declines in the Dow and the Nasdaq. The slide left the market at a 12 year low.

Curiously, the plunge isn't due to another panic. At this point in the long bear market, most investors are too tired to sprint for the exits. Instead, many of them are dropping their gear and are simply walking off the field.

The Federal Bailout Is A Mixed Bag

Although we wish it were otherwise, we think the market will continue to drop until values become so attractive that they can no longer be ignored. Last month we thought that point had been reached, but the combination of poor economic news and a poorly executed federal bank rescue program sent another wave of discouraged investors to the sidelines. Most people now think the feds are "just winging it" and they won't be able to save the banks or the economy after all.

Overlooked during all the worries about the bank bailouts are other parts of the $787 billion federal package. Many of the individual programs have proven to be effective economic boosters during past downturns. About $315 billion will go towards education and job training. Nearly $190 billion will be spent on direct aid to states. Another $236 billion will go to tax breaks for families, renewable energy credits, and a temporary fix for the dreaded AMT. Most of that money will flow into the economy within a year.

Nevertheless, it now looks as if the economy may not begin to dig itself out of its hole until early 2010. That's not a huge setback from the late 2009 prediction that was becoming common. However, there is a big psychological difference between 2009 and 2010 that is having an outsized impact on investors. As we said earlier, many people don't want to stick around the stock market much longer.

Capitulation May Have Been Reached

The dark mood that is rapidly spreading on Wall Street may have a positive ending. As we said in a previous newsletter, bear markets rarely end until most investors are thoroughly discouraged, and they pull out of the market. Once the capitulation stage is reached, stocks typically start to move up again. Moreover, the final recovery doesn't turn into another bear trap. Instead, it just keeps going.

No one can know if the latest stock plunge marks the bottom of the severe bear market. However, with stocks down nearly 50% from their highs, we are almost certainly closer to the bottom than we are to the top.

Some Blue Chip Stocks Will Win Blue Ribbons

As a result, we continue to urge investors to use this opportunity to buy the bluest of the world's blue chip stocks for prices we have not seen in nearly two decades. Dozens of top-quality companies with very bright futures are in the bargain basement. If you don't make use of this unprecedented Wall Street sale, we think you will kick yourself within a few years.

JP Morgan Chase (JPM) is a case in point. http://finance.yahoo.com/q/bc?s=JPM Unlike most of its rivals, the company is solidly profitable. Not only did the bank stay in the black last year, it is making money now in the toughest economy we've had in recent memory. That's an enormous achievement that shows the underlying strength of this multinational powerhouse.

Nevertheless, JPM is down 54% from the high it reached during the boom. Investors are so afraid of the banking industry, they don't even want to own the best of the group. That shortsightedness is creating an opportunity for more reasoned investors to pad their long term portfolios with this world-class bank at a very low price.

Archer Daniels Midland (ADM) is another multinational blue chip that is ridiculously cheap. http://finance.yahoo.com/q/bc?s=ADM The company is in Wall Street's dog house for two reasons, neither of which will last more than a year or so. First, the slow economy is starting to hit food sales. Secondly, the company's ethanol business has been put in mothballs because oil prices collapsed from $149 a barrel to just $39.

However, food sales are projected to increase worldwide as governments make giant-sized purchases later this year to satisfy their hungry populations. Moreover, most of the money will go for bulk foods, which is the core of ADM's business.

Energy prices will also rebound once the global economy begins to recover. Because oil reserves were drawn down quite a bit during the recent economic boom, when demand picks up again prices should rise even faster, and probably go higher, than they did last time. When it happens, Archer Daniels Midland will be able to put its ethanol business back on line.

A Speculation Is Also Attractive

Even some stocks that are under a cloud are worth your consideration. It's all a matter of the risk/reward balance they offer. If prices are so low that the downside is very small, and the upside could be huge, it can make sense to make small purchases.

Ford (F) is one such stock. http://finance.yahoo.com/q/bc?s=F Unlike Chrysler and General Motors, Ford has not asked for a handout. In addition, critics are all agog about the new 2010 Ford Fusion hybrid family sedan. USA Today called it "the best gasoline-electric hybrid yet." And it has "the industry's smoothest, best-integrated gas-electric power system." Car and Driver put the Fusion up against the Camry Hybrid, the Chevy Malibu Hybrid, and the Altima Hybrid and said "it topped the others…."

Lastly, Ford would obviously be helped if its rivals need to pare back production to stay afloat. GM already plans to dump its Saturn, Saab, and Hummer brands, and Chrysler may not survive at all.

Gold Regains Its Appeal, But There Are Problems

The sinking stock market, poor fixed income returns, possible bank failures, and weak currencies, are prompting countless investors to buy gold as a last refuge. On February 20, the price of the metal came within $25 of reaching its all time high of $1,030 set in March 2008.

Many bulls are convinced that gold will continue to rise in the coming months. They correctly point out that in inflation adjusted dollars, the metal would need to reach $2,200 just to match the price it briefly hit in 1980. Of course, just because gold soared 28 years ago is no guarantee that it will do so again.

In fact, many gold critics say if the metal isn't blasting through the ceiling now, it probably never will. They argue that the economy is in much worse shape than it was in 1980, and so is the outlook for many financial institutions. So they ask, what is gold waiting for? One of our group quipped that if conditions must get twice as bad as they are now to make gold twice as expensive, we will all be back in the stoneage.

Gold's biggest liability is it doesn't do anything. It doesn't make products, grow crops, or otherwise add to the world's real wealth. That's why it almost always sinks when the economy is strong enough to support productive activities.

We think gold makes sense for part of an investor's portfolio, but don't plan on a long hold. For most people, the best way to buy the metal is with the SPDR Gold Trust (GLD) that holds over 1,000 tons of the stuff. http://finance.yahoo.com/q/bc?s=GLD The ETF is easy to buy and sell, there are no storage or theft issues to deal with, and it mirrors the price of gold almost to the penny.

An Economic Indicator That We Can Love

According to the Bespoke Investment Group, http://bespokeinvest.typepad.com/bespoke/ one of the most accurate of the non-traditional stock market indicators is the annual Sports Illustrated Swimsuit Issue. Over the past 30 years, an American has been on the cover of the issue 16 times. In 13 of those years the gain in the S&P 500 was a whopping 81.3%. Overall, the average was a still-healthy 10.6%.

We've decided that the indicator's sterling track record shows that we should pay more attention to the Swimsuit Issue. Accordingly, we have ordered several copies for our analysts that we will examine closely for clues to the economy. We never tire of working for your welfare.

The Bottom Line This Week

The stock market declined sharply last month when investors lost faith in the government's ability to save the banks and turn the economy around. The sour mood feels very much like a classic bear market washout that is typically followed by a rebound.

Although there is no guarantee that the same happy event will happen this time, we think many stock values have become too attractive to ignore. Looking particularly good to us are JP Morgan Chase and Archer Daniels Midland. More aggressive investors should consider Ford, a stock that might deliver extraordinary gains as America's only surviving automaker.

Association of Investor Awareness - Week of 01/29/2009

Research & Editorial Staff — Thu, 29 Jan 2009 13:59:00 GMT

In This Issue:

Reasons For Cautious Optimism Continue To Appear
Many Promising Stocks Attract Long-Term Investors
The Bottom Line This Week

The stock market continued to lose ground last week as the Dow and the Nasdaq declined an additional 2.5% and 3.4% respectively.

A growing number of analysts believe the stock slide will continue until the market tests (reaches) the low point it made on November 20. If so, it will be a classic correction to a bear market rally.

A much bigger issue is what will come next if the November lows are reached. Pessimists believe the market will continue to decline until blue chip P/E ratios get closer to 10. If so, the S&P 500 would drop from today's 832 to 750, or so. Super bears think the index might fall another hundred points.

On the other hand, optimists believe the market will bounce back in a classic stage two bear market rebound. If history repeats, the second time should be the charm as a new rally would typically test its former highs – and then continue up. The 298 point jump the market took during the first three days of this week suggests that the optimists may be right.

Reasons For Cautious Optimism Continue To Appear

We are of the opinion that if another big economic shock doesn't occur, the market will follow the second scenario and begin to move up again.

Our more optimistic outlook isn't based upon wishful thinking. Instead, we see additional indications that the economy may begin to claw its way out of the hole starting late this year. Here are some of the most important changes that suggest this tough recession may not last as long as most people expect:

First, as we reported last week house sales are continuing to pick up as buyers decide to make use of the lower prices that are now available in many markets. Since home prices are continuing to weaken throughout America, we think sales will increase further in the coming months.

Second, cash levels are now at record levels. At the same time, interest rates are at near-record lows. Not surprisingly, cash levels dropped last week and, for the first time since August 2007, volume picked up on Wall Street. We think the numbers indicate that investors are moving some of their cash from fixed income accounts into better-paying stocks.

In our opinion, dividend yields are more important to investors now than P/E ratios. Solid companies with payouts above 3.25% seem unlikely to decline much further even if their multiples are still a bit high for a severe bear market.

Third, oil prices are beginning to tick up again. Part of the rise is due to a reduction in supply by oil producers. But analysts also think higher prices reflect small increases in global economic activity. In the past, oil has been a good barometer of early changes in growth that didn't show up on economists' radar screens for several months.

A similar case can be made for the recent uptick in gold prices. Critics may say the change only indicates that investors are expecting inflation to come back. However, the only way inflation can return is if deflation is on the way out. We can think of few changes that would be more bullish for the economy than a slowdown in the destruction of assets.

Fourth, there are old adages on Wall Street that say, "don't fight the Treasury" and "don't fight the Fed." That means don't bet against the Treasury's ability to rejuvenate the economy by pumping money into it, or the Fed's ability to boost growth by lowering interest rates.

For all the problems that the bailout programs will create, they should also have a positive impact on the economy. However, it will probably take from six to nine months before the beneficial effects begin to show up.

Fifth, consumer confidence is at record lows. As Dr. Steve Sjuggerud at Daily Wealth (www.dailywealth.com) pointed out recently, the lows typically occur just before a recession runs out of steam and growth starts to inch back up. The tougher the recession --as in 1973-74 and 1981-82-- the more reliable the indicator becomes.

Sixth, the more we look at what's happening in America the more it looks like the financial crisis is much worse than the economic crisis. In other words, most of the red ink is pouring out of banks. Nearly all blue chip industries are seeing their profits slashed, but most of them are still in the black. Some companies such as Apple, IBM, Heinz and Google are doing very well – to name only a few.

Any company that is weathering today's storm is a lot stronger than its stock price would suggest. In addition, most companies are rapidly adjusting to the tougher conditions.

Seven, as we discussed last week, credit is continuing to come back. To the great surprise of many investors, the pharmaceutical giant Pfizer was able to raise $22.5 billion to buy Wyeth. To be sure, the lenders took precautions against a default, but that should always be the case. If lenders had been running their businesses responsibly in recent years, there would be no credit crisis.

Although the Pfizer/Wyeth case is attracting a great deal of publicity, thousands of much smaller deals financed by regional banks are doing the most to help turn the economy around.

Eight, people in every walk of life are absolutely certain that the economy is circling the drain. However, what everybody "knows" is often wrong. In this case, the expectations of more pain may be accurate near term, but they are almost certainly off the mark for the longer-term.

Lastly, the Conference Board just announced that the Leading Economic Index rose 0.3% in December. That wasn't a very big increase. However, almost all analysts were expecting another decline. The news didn't attract much attention because one month does not make a trend. But if the index moves up again in January, we think Wall Street will take notice.

Many Promising Stocks Attract Long-Term Investors

Since we are long-term investors, we continue to urge our readers to use the bear market to pick up high quality stocks at bargain prices. Many of the world's finest multinational blue chips are affordable for the first time in over a decade. If you don't buy them now, you may not get another chance to do so for another ten years or so.

Readers who have been with us awhile undoubtedly remember the names of the blue chip value stocks that we have been recommending. We keep waving their flags because we think they are the stocks that most investors should buy.

This week we will discuss two recommendations that we have not featured recently, plus one new one for your consideration.

H.J. Heinz (HNZ) is back in the news, and for good reason. http://finance.yahoo.com/q/bc?s=HNZ Heinz is one of the many companies that managed to increase its earnings in fiscal 2008. Nevertheless, the stock price is still very low, and the dividend yield is a very attractive 4.6%. In addition, this solid blue chip raised its dividends in 40 of the past 41 years.

Heinz is also very unlikely to lose its leadership standing in its industry anytime soon. Nearly all of its products are rated either first or second in their markets. And since most of the company's products (such as ketchup, mayo, pickles, etc.) are inexpensive, shoppers are not under any great pressure to switch to cheaper brands.

IBM (IBM) is at the other end of the technology spectrum from Heinz, but it is doing no less well. http://finance.yahoo.com/q/bc?s=IBM The company just released its fourth-quarter numbers, and they are impressive. Profits rose 12% during a time when most banks were having staggering losses. Moreover, IBM issued a rosy outlook for 2009. The company is expecting to earn from $10 to $11 a share vs $8.75 predicted by analysts.

IBM is a good example of a giant company that is nevertheless able to think and act quickly as business conditions change. A year ago management noticed that the hardware side of its business was losing ground to an explosion of rivals that were finding it easier to enter the server market. As a result, IBM started to place more emphasis on software and services that are harder for competitors to match.

Home Depot (HD) is a new recommendation that popped up on our value screens this month. http://finance.yahoo.com/q/bc?s=HD The company needs little introduction since its home improvement stores can be found in nearly every city.

After soaring in price during the real estate mania, the stock dropped sharply when the bubble ended. However, Home Depot is still profitable. That's not surprising since many people who hoped to purchase new homes have decided to fix up their old places instead. Home Depot has expansion debts, but it has the income to cover them. Meanwhile, the dividend is an attractive 4.1%.

The Bottom Line This Week

The economy is not out of the woods. Far from it. Growth should continue to sink for another few months. However, there are some early signs that the situation will change for the better late this year. Since prices for many blue chip companies are currently very low, and most yields are high, we think investors should take positions for what should be better days ahead. Among the companies that look especially good are Heinz, IBM, and Home Depot.

Week of 08/28/2008

Research & Editorial Staff — Thu, 28 Aug 2008 17:25:00 GMT

In This Issue:

Tensions Between The U.S. And Russia Are Serious
Oil And Commodities React To The Threat
Defense Stocks Look Even Better Than Last Week
And So Does The Dollar
Inflation vs Deflation Contest Heats Up
But Inflation Should End Up With The Gold
The Bottom Line This Week

Last week the stock market revealed that it has more underlying strength than world events would seem to justify. If the market is once again acting as a leading indicator of the future, the outlook is brighter than is generally supposed.

Despite the fact that a new cold war seems to be underway, the Dow was only off 0.3% last week. The Nasdaq declined 1.5%. The market dropped 242 points when it reopened on Monday, but it regained nearly half the loss on Tuesday and Wednesday.

Our feeling is that investors want to be buyers and can only be held back by disturbing news. That's a big difference from a bear market mentality when bad news drives prices and good news is ignored.

Tensions Between The U.S. And Russia Are Serious

Investors' underlying optimism aside, the prospect of another cold war is not a trivial concern. Russia has been using very harsh language about what it sees as an American attempt to surround it with NATO states and U.S. anti-missile batteries. There is a chance the arguments could have serious consequences.

Vladimir Putin of Russia promised that his country would respond to the threats, and that is clearly happening in Georgia. In addition, on August 18 Russia sent a large fleet of naval vessels towards the port city of Tartus in Syria. The goal appears to be to obtain an agreement to build a naval facility in the country. If so, it would give Russia its first base on the Mediterranean Sea. Washington won't like that at all.

Russia was also very unhappy with the West's approval of Kosovo's independence from Serbia, a traditional Russian ally. Mr. Putin made it very clear that the argument for Kosovo's independence applied equally well to Abkhazia and South Ossetia in Georgia. On Tuesday of this week, Russia decided to formally recognize the independence of both regions. Now the world is waiting to see what the American response will be to the latest Russian moves.

Oil And Commodities React To The Threat

Although U.S. investors are taking the problems with Russia in stride, the same is not true everywhere. Global markets are finally pushing oil prices up in anticipation that supplies could be cut. That's a sharp departure from the resilience of oil during the early days of the conflict in Georgia.

Gold, industrial metals, and several other raw materials also jumped in price last week after falling sharply earlier this summer. As with oil, investors are nervous that supplies could be disrupted.

The bottom line is that readers should consider the growing problem with Russia as they make their investment plans. There is no need for undue alarm but neither should investors have a cavalier attitude towards the events.

Defense Stocks Look Even Better Than Last Week

One part of the stock market that is likely to profit from increasing global tensions is the defense sector. Our recent recommendation of the Fidelity Select Defense & Aerospace Fund (FSDAX) http://finance.yahoo.com/q/pr?s=FSDAX and Raytheon http://finance.yahoo.com/q/pr?s=RTN could not have been more timely. Both investments stand to gain from the possibility that another cold war may be starting.

Orbital Sciences (ORB) is also in a very good position to appreciate over the next few years. http://finance.yahoo.com/q/pr?s=ORB When the company was formed in 1982, nearly everyone in the aerospace industry laughed at the effrontery of the young firm that thought it could enter the space business from scratch and with only a few million dollars.

The guffaws came to a halt 16 years ago when Orbital Sciences launched its first space vehicle. Since then, the company has delivered over 110 satellites and space-related systems to its customers.

Orbital Sciences' niche is providing small, and often reusable, launch systems. The company is the developer of the unique Pegasus rocket that is released from an aircraft at high altitude and then shoots into orbit. The Taurus series of rockets are ground-based variants of the Pegasus.

The company also produces the Minotaur rocket. It is the only U.S. launch vehicle that can be deployed from all American spaceports, including those operated by commercial interests. Taken together, the company's rockets offer the most efficient means to place small payloads in orbit.

Lastly, the company is a major supplier of interceptor booster rockets that will carry kill vehicles to destroy long-range enemy missiles in midcourse before they reenter the atmosphere. Another system intercepts enemy missiles in the early phase of flight when they are most vulnerable. Both developments are part of the layered missile defense system the government is in the process of placing around the world. The program will be worth many billions of dollars over the next few years.

And So Does The Dollar

At first glance it might seem that the dollar should weaken if America faces a period of rising tensions with Russia. Instead, the dollar has been strengthening.

One reason the dollar is strong is countless people around the world are becoming nervous about the euro, our currency's main competition. That's because many European countries share a border with Russia. In addition, several of them have joined NATO, a move that Russia vehemently opposes.

There is also a purely economic reason for the euro's weakness. The European economy is weakening which means the EU Central Bank is unlikely to raise interest rates as expected. If the European economy slips much more, the bank might even lower rates. The poor interest rate outlook is making the euro less attractive than the dollar.

As with our defense stocks, the PowerShares Dollar Bull ETF (UUP) also looks better this week than it did last time. http://finance.yahoo.com/q/pr?s=UUP The same is true for ordinary dollar accounts, CD's, and T-Bills. The returns from the interest they pay is pathetic, but the dollars themselves are starting to buy more of what you need – especially imported products.

Inflation vs Deflation Contest Heats Up

During the past several years, the biggest monetary threat Americans faced was rising inflation. Although the official rate remained low, the government conveniently took food and energy costs out of the equation to make the numbers look better. For real people who like to eat and keep their homes comfortable, the cost of living has been rising steadily.

However, when the credit crunch began billions of dollars started to disappear from the economy. Every bankruptcy, foreclosure, and layoff reduced the amount of money in our system. The hemorrhage was as least as large as the amount of money and credit the Fed was pouring into the economy.

In July, the money supply actually shrank. Data compiled by Lombard Street Research show that M3 (broad money) fell by almost $50 billion during the month, the biggest thirty day decline since modern records began in 1959. It shows that deflation gained the upper hand in spite of the Fed's efforts to control it.

But Inflation Should End Up With The Gold

In a deflationary environment, the value of money goes up, and that's what we are seeing today with the dollar. At the same time, precious metal prices usually decline, which has also been happening.

If we believed that deflation would continue for any length of time, we would make several changes in the recommendations we made in recent months. However, we think the deflationary period will be brief and inflation will come back. Most likely, the turnaround will occur before the year is over.

If we are correct, you should use this period to buy inflation hedges at today's bargain prices. Gold and silver, for example, are less expensive now than they were earlier this year.

We also think energy stocks will rebound within a few months. Again, if we are right, you should use this time to buy more of the industry leaders while they are cheap. At the minimum, we think you should own the Fidelity Select Energy Service Fund (FSESX) that holds the major exploration and development companies in its portfolio. http://finance.yahoo.com/q/pr?s=FSESX

As we explained last time, the official inflation number should continue to climb for another month or two because it reflects changes that have already happened. It won't be the first time Uncle Sam tells you one thing, and the real world tells you just the opposite.

The Bottom Line This Week

Rising tensions between the U.S. and Russia are having very little effect on the stock market, at least for now. However, if the situation gets much worse we can expect the market to decline. This is a time for investors to be cautious.

One sector that should benefit from the tiff with Russia is defense. The dollar is also benefiting from the threat of a new cold war, and from economic problems in Europe.

Lastly, energy stocks are still very cheap despite the small uptick in oil prices we saw this week. As with the defense stocks, it's time to buy more energy shares.

Until Next Week

The AIA "Advocate For Absolute Returns", a weekly 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 Thursday...

AIA Advocate for Absolute Returns : Gold

Association of Investor Awareness - Week of 02/26/2009

The Federal Bailout Is A Mixed Bag Capitulation May Have Been Reached Some Blue Chip Stocks Will Win Blue Ribbons A Speculation Is Also Attractive Gold Regains Its Appeal, But There Are Problems An Economic Indicator That We Can Love The Bottom Line This Week

The Federal Bailout Is A Mixed Bag

Capitulation May Have Been Reached

Some Blue Chip Stocks Will Win Blue Ribbons

A Speculation Is Also Attractive

Gold Regains Its Appeal, But There Are Problems

An Economic Indicator That We Can Love

The Bottom Line This Week

Association of Investor Awareness - Week of 01/29/2009

Reasons For Cautious Optimism Continue To Appear Many Promising Stocks Attract Long-Term Investors The Bottom Line This Week

Reasons For Cautious Optimism Continue To Appear

Many Promising Stocks Attract Long-Term Investors

The Bottom Line This Week

Week of 08/28/2008

In This Issue:

Tensions Between The U.S. And Russia Are SeriousOil And Commodities React To The ThreatDefense Stocks Look Even Better Than Last WeekAnd So Does The DollarInflation vs Deflation Contest Heats UpBut Inflation Should End Up With The GoldThe Bottom Line This Week

Tensions Between The U.S. And Russia Are Serious

Oil And Commodities React To The Threat

Defense Stocks Look Even Better Than Last Week

And So Does The Dollar

Inflation vs Deflation Contest Heats Up

But Inflation Should End Up With The Gold

The Bottom Line This Week

Until Next Week

The Federal Bailout Is A Mixed Bag
Capitulation May Have Been Reached
Some Blue Chip Stocks Will Win Blue Ribbons
A Speculation Is Also Attractive
Gold Regains Its Appeal, But There Are Problems
An Economic Indicator That We Can Love
The Bottom Line This Week

Reasons For Cautious Optimism Continue To Appear
Many Promising Stocks Attract Long-Term Investors
The Bottom Line This Week

Tensions Between The U.S. And Russia Are Serious
Oil And Commodities React To The Threat
Defense Stocks Look Even Better Than Last Week
And So Does The Dollar
Inflation vs Deflation Contest Heats Up
But Inflation Should End Up With The Gold
The Bottom Line This Week