AIA Advocate for Absolute Returns : investing

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 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...

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

Research & Editorial Staff — Fri, 18 Feb 2011 16:39:00 GMT

In This Issue:

Stocks Are Overdue For A Correction

Lock In Your Profits With Stop-Loss Orders

Long-Term Investors Will Welcome A Wall Street Sale

Inflation Is Baaaaack!

The Bottom Line

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

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

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

Stocks Are Overdue For A Correction

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

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

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

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

Lock In Your Profits With Stop-Loss Orders

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

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

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

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

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

Stop-loss orders work well during normal stock market drops. During a crash, however, the price of your stock may fall below your stop level before the automatic sale system can take you out. In that case, you will get a lower price than you expected.

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

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

Long-Term Investors Will Welcome A Wall Street Sale

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

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

Many of the best energy stocks are still attractively priced. In our opinion, the most promising of the large firms is ExxonMobil (XOM, NYSE). http://finance.yahoo.com/q/bc?s=XOM&t=1y Not only is the company the most profitable in its industry, it also has lots of cash and only modest debt. Nevertheless, the stock is selling for only 13.4 times earnings, and yields 2.10%.

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

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

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

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

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

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

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

Inflation Is Baaaaack!

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

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

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

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

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

The Bottom Line

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

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

Until Next Time