AIA Advocate for Absolute Returns : t-bills

Association of Investor Awareness - Week of 01/08/2009

Research & Editorial Staff — Thu, 08 Jan 2009 18:52:00 GMT

In This Issue:

It's Time To Start Looking Beyond Current Woes
A Big Cash Horde Is Always Bullish
When It Comes To Rebounds, Too Early Beats Too Late
Eight Blue Chips Many Pros Are Buying
The Bottom Line This Week

There's nothing like the start of a new year to shake investors out of a funk. It happened again a few days ago when the market rallied as the first of January approached. The week the calendar turned over, the Dow and the Nasdaq went up an impressive 6.1% and 6.7% respectively. It was an encouraging end to a dismal year that saw the two indices plunge 33.8% and 40.5% - the third worst performance in recent memory.

Alas, it is far too early to declare an end to the bear market. With manufacturing and home sales dropping to very low levels, it is clear that the economy is still sinking. But as we will discuss later, that doesn't mean that a recovery is off the table for late 2009.

Meanwhile, stocks stumbled during the first three days of this week. By Wednesday afternoon, the market had given up 265 of its hard-won points from the short bout of New Year enthusiasm.

It's Time To Start Looking Beyond Current Woes

Although the market is continuing to be volatile, the uptrend may have longer legs than events this week would suggest. As we reported in a recent issue, investors seem to be losing some of their sensitivity to bad news. Either everyone is so numb that nothing registers anymore, or investors believe the economy is bottoming out and some cautious buying is in order.

We suspect that the latter is the case. The investment press is starting to report that many Wall Street pros with noses for value are starting to launch bottom fishing expeditions. Although nobody is putting everything they have into the market, the amounts being invested are growing steadily.

One of the intrepid investors is Steve Leuthold of the Leuthold Group, a respected institutional research firm in Minneapolis. www.leutholdgroup.com Mr. Leuthold has been a bear for quite some time because he was one of the first analysts to realize the economy was heading for trouble. Recently, however, Mr. Leuthold said, "The stock market is presenting you with one of the great buying opportunities of your lifetime – perhaps the greatest. Stop trying to pick the bottom."

Another good analyst who is starting to pick up bargains is Jim Powell of the Global Changes & Opportunities Report. (www.powellreport.com) In his January newsletter, Mr. Powell wrote, "The CEO's of America's better companies are not jetting around the country in their Gulfstreams asking taxpayers to bail them out. Instead, they are adapting to today's tougher business conditions. Workforces are being slashed, wages are being rolled back, expansion plans are being put on hold, pensions are being cut, and businesses are otherwise becoming lean and mean. Those changes are causing a lot of pain in America, but they are also allowing many companies to earn profits in this damaged economy." Looking particularly good to Mr. Powell are oversold blue chip stocks with global operations.

Not every investment professional is taking long-term positions. Laszlo Birinyi of Birinyi Associates, a money management and research firm in Westport, Conn. is batting for yards rather than touchdown passes. In an interview in the January 5 Barron's, Mr. Birinyi said "We are willing to set up for 10% or 15% gains, especially in a short time period because we've seen the markets reverse so often and so swiftly."

A Big Cash Horde Is Always Bullish

When stocks started to plunge last year, billions of dollars were taken out of the market and were placed in cash accounts. The American Association of Individual Investors estimates that cash now represents 42% of portfolios, an unprecedented amount.

Unfortunately, cash isn't earning good returns anymore – as you are probably painfully aware. The interest rate on 90-day T-Bills is essentially zero. Even 10 year Treasuries are paying only 2.50%. As one retiree said recently, "I went from a comfortable meat and potatoes income to barely getting enough money to buy dog food."

Not surprisingly, investors are more than a little anxious to find a better home for their dollars. When the stock market starts to look attractive again, the flood of money back to Wall Street could give us one of the greatest bull markets in history.

When It Comes To Rebounds, Too Early Beats Too Late

We don't know when the economic tide will turn back up. As we said in recent issues, there is a good chance that we could see some relief towards the end of the year. But even if the market as a whole takes longer to rebound, many individual stocks should start to recover some of the ground they lost during the plunge. In fact, some have already started to rise – as many price charts quickly reveal.

As to the broader market, prices typically begin to recover from a steep downturn from six to nine months before economic growth resumes. That means investors must have the fortitude to buy what they want while the economy is still on the ropes.

It is also typical for new bull markets to deliver most of their gains within a few months –or sometimes weeks- after getting underway. That's another reason that investors should be positioned before a rebound begins.

Eight Blue Chips Many Pros Are Buying

We are not inclined to report what stocks other analysts are recommending, no matter how well known they may be. However, we make exceptions when the luminaries share our foresight, clarity of thinking, and brilliant analysis. Here then –in no particular order- are eight stocks that many pros have been buying, and a few reasons why they are attractive.

Johnson & Johnson (JNJ), an old favorite of ours, is up a bit in price but it still looks attractive with a 13.8% P/E and a 3% yield. http://finance.yahoo.com/q/pr?s=JNJ Earnings will be lower than usual this year but this global supplier of healthcare products has great long-term prospects. JNJ is a Dividend Aristocrat that has increased its payout in each of the past 25 years.

Kinder Morgan Energy Partners (KMP), another of our selections, is an energy storage and pipeline master limited partnership (MLP) that yields a whopping 8.6%. http://finance.yahoo.com/q/pr?s=KMP The issue is down with energy prices, but that appears to be a mistake. The volume of fuels being transported is remaining high.

Consolidated Edison (ED) is a major utility that operates in New York, New Jersey, and eastern Pennsylvania. http://finance.yahoo.com/q/pr?s=ED Since the company's customers have a good history of paying their bills in good times and bad, the yield seems secure. The company's location in normally high-growth areas means it should see more business when the economy begins to recover. This Dividend Aristocrat currently yields 6%.

Deere< (DE) is a well-known maker of farm equipment that does business worldwide. http://finance.yahoo.com/q/pr?s=DE What is less known about Deere is it also makes construction equipment that should be in demand as President-elect Obama's infrastructure projects go into gear. The yield is a modest 2.7% but the prospect for excellent capital gains makes Deere very attractive.

Transocean (RIG) is a world-class deep ocean drilling company whose shares dropped steeply as energy prices tumbled. http://finance.yahoo.com/q/pr?s=RIG However, energy prices are only down because global economic growth has declined. When it recovers, energy will shoot back up again. In fact, oil is already starting to rise. As with Deere, Transocean is primarily a capital gains play.

VF Corporation (VFC) is an anomaly in the clothing industry because its higher end outdoor products held up well as the recession set in. http://finance.yahoo.com/q/pr?s=VFC Although investors are starting to notice that they oversold this stock, the P/E is still just 9.9. The yield is 4.1%. The company also has a top management team that has accumulated $600 million in cash, some of which it may spend on acquisitions this year.

United Parcel Service (UPS) also saw its business hold up well when the recession set in. That's partly because Internet sales remained healthy and UPS is the web's biggest product delivery company. http://finance.yahoo.com/q/pr?s=UPS Of course, UPS is also a good play on the broad economy which is probably why Warren Buffett took a position in the stock. Meanwhile, the yield is a competitive 3.2%.

General Electric (GE) is a somewhat more aggressive play than the previous stocks because the company is suffering both from the economic slowdown and the credit crunch. http://finance.yahoo.com/q/pr?s=GE Still, most value analysts think the stock is oversold for its long-term growth potential. GE is selling for just 8.3 times earnings. The stock yields 7.3%

The Bottom Line This Week

We continue to think the economy will remain weak for the first two or three quarters of the year and then slowly start to move back up. Once there are tangible signs that the outlook is improving, the stock market should start to recover from today's abysmal levels. To catch the move, you must take positions while the recession is still in place and most investors remain glued to the bench.

Some noted investors are already starting to take positions in high quality companies that should benefit greatly from an economic recovery. This week we listed eight such stocks that seem particularly likely to increase in value over the next several years.

Association of Investor Awareness - Week of 11/26/2008

Research & Editorial Staff — Wed, 26 Nov 2008 15:07:00 GMT

Special Issue:

When Deflation Comes,

Cash Is King

When everybody is certain the economy and stocks will move a particular way, usually just the opposite occurs. That's just what happened this summer when deflation suddenly overtook inflation as America's primary economic problem. Mr. Murphy, of Murphy's Law, seems to take particular pleasure in messing up the plans of investors.

Deflation, of course, is just the opposite of inflation. Instead of seeing the value of money fall and the prices of goods rise, cash becomes much more valuable and prices decrease.

Deflation is clearly in control today as homes, oil, and even precious metals plummet in price. Now food costs are beginning to sink. Jobs are being lost in most industries. Most experts think that wages will also begin to fall within a few months.

The public is starting to show the effects of the deflationary squeeze. People are selling motor homes, pleasure boats, and many other big ticket items to raise badly needed cash. A disturbing 10% of Ohio's adult population is on food stamps. Of course, retail sales are also weakening.

The Best Deflation Strategy

Although most people are hurt by deflation, investors can profit from a deflationary downturn. To do so it is only necessary to take the familiar rules about inflation and reverse them. Cash rises in value instead of depreciating. Real assets go down in price, not up. Interest rates drop rather than rise. It's all fairly simple. However, it has been so many years since the last deflation occurred, few investors remember what it was like.

The best way to make money from a deflationary downturn is to use the opportunity to buy deeply-discounted assets that you will sell for much higher prices when the economy starts to recover. Wise investors are doing just that by purchasing blue chip stocks at fire sale prices – a strategy we have been recommending for many months.

You Must Have The Green To Make The Scene

Because the ability to make bargain purchases is the key to making a deflationary cycle pay off, you should hold more cash in your trading account than you would do ordinarily. You won't earn much interest, but you will more than make up for the shortfall with the money you will save when buying high-quality assets at today's declining prices.

Where To Stash Your Cash

For most people, the best place to keep liquid assets is in FDIC insured certificates of deposit from secure banks. If your bank should fail, the government will print whatever amount of money is needed to make sure that insured accounts are restored. In an extreme case, you might need to wait a few days for your money, but you will get it.

As we said in our October 2 newsletter, you can get a list of current CD rates offered by top banks from Bankrate.com. www.bankrate.com Stick with banks that have at least a 3-star (***) rating. Here's an updated list of what's available now:

The Best CD Rates In The U.S. From Secure Banks
Bank	1-Yr APY	2-Yr APY	Address	Min Deposit
GMAC Bank	4.16%	4.35%	http://www.gmacbank.com/	$500
Nationwide Bk	3.97%	4.16%	http://nationwidebank.com	$500
EverBank	3.92%	4.07%	http://everbank.com	$1,500
Centennial Bk	3.90%	4.30%	http://www.centennialbank.com	$10,000
Capital One	3.78%	3.92%	http://www.capitalone.com	$5,000

Getting Around FDIC Limits

To boost the public's confidence in America's banks, Congress just increased the FDIC insurance limit from $100,000 per account to $250,000. Please note that the $250,000 limit will expire on December 31, 2009. After that date the limit will drop back to $100,000. Consequently, you should not put more than $100,000 in a CD that will mature after the higher insurance limit ends.

The new $250,000 limit is high enough for most people, but many investors have more to protect. One way around the FDIC insurance ceiling is to deposit money in different banks. However, multiple accounts are troublesome to set up and monitor.

Now some innovative banks are doing the legwork themselves by creating insured accounts in several places for their customers. The individual accounts are then packaged into jumbo CDs that are sold to the bank's preferred clients. Because no account exceeds the $250,000 limit, the new CDs are FDIC insured even if they may be worth several million dollars.

If your bank doesn't offer these combined account CDs, you might wish to contact EverBank and ask about their Insured Advantage Certificates of Deposit. The bank constructs the insured CDs in amounts up to $50 million. Terms run from three months to five years, and returns are usually a bit above market rates.

T-Bills Shine

If you will accept lower interest rates, T-bills are also safe places to keep cash. The shortest T-bill maturity is 90 days. However, locking up some funds for three months at a time should not be a problem if you have ready cash available elsewhere.

Foreign Currencies Offer Double Protection

Another option for holding cash is the Merk Hard Currency Fund (MERKX). http://finance.yahoo.com/q/pr?s=MERKX Merk offers investors a diversified foreign currency portfolio that will rise in value if the dollar resumes its slide, as we expect will happen in a few months.

Some Cash Should Be The Folding Variety

When we recommend having plenty of cash available we are referring to actual folding money in addition to funds kept in banks. Some of the best bargains you will be offered during the economic troubles are likely to be at local sales where greenbacks will speak louder than checks.

You should also have a good supply of paper currency on hand because the digital money in your bank may as well be on the moon if anything disrupts the network. If the financial service industry continues to unravel, the Fed may need to declare a bank holiday while it tries to fix the mess. In either case, ATMs, credit card approvals, check verification, online banking, and the accounts themselves will be off line. That's when "mattress liquidity" will prove its value.

It is also possible in a banking emergency that regulators will restrict the amount of money customers can withdraw. That's what happened when 200 banks failed in 1988. In some areas, withdrawals were limited to $1,000 a month. We would have a hard time living on that allowance, and we bet you would too.

This year Goldman Sachs, Countrywide, and many hedge funds also suspended or put limits on withdrawals. The accounts were based upon failing investments not deposits. However, some commercial banks are in similar distress.

Keeping cash in safety deposit boxes is another way to go, but they have limitations. When many financial institutions failed during the banking crisis of the 1980's, some customers could get to their safety deposit boxes and others couldn't. If you want to use a safety deposit box to hold cash, it would be better to open one in a local trust company than in a bank.

Inflation Will Eventually Return

Deflation is the dominant monetary condition now, but a return to inflation is a virtual certainty longer-term. That's because the Fed is fighting the credit crunch and the economic downturn by flooding the economy with money. At some point, the sheer number of dollars will overcome the deflationary forces that are currently at work.

Because the amount of money being created by the government is unprecedented, when inflation returns it may be higher than we have ever seen in this country. On September 22, John Williams of Shadow Government Statistics (www.shadowstats.com) predicted that high inflation may return as early as next year. He also said that the more the government spends, the sooner the problem is likely to hit.

The conclusion to be drawn is clear: while you are making good use of the deflation cycle that is here today, you should also get ready for the period of inflation that is on the way. As we will show in the next section, many investments that are cheap today should deliver excellent gains during longer term.

And Investments Purchased Now Should Soar

Blue chip stocks that investors accumulate now at bargain prices should make spectacular gains when deflation ends and the economy gets going again. Look for leading companies that do business worldwide selling products that everyone needs. Examples that we have discussed in recent months include Coca-Cola (KO) http://finance.yahoo.com/q/pr?s=KO, Procter & Gamble (PG) http://finance.yahoo.com/q/pr?s=PG, Colgate Palmolive (CL) http://finance.yahoo.com/q/pr?s=CL, Kraft Foods (KFT) http://finance.yahoo.com/q/pr?s=KFT, General Mills (GIS) and http://finance.yahoo.com/q/pr?s=GIS, Johnson & Johnson (JNJ) http://finance.yahoo.com/q/pr?s=JNJ – to name only a few.

We think you should avoid buying small, obscure companies now. Such stocks are attractive when the economy is strong and blue chips are overpriced. But when you can get the best of the best companies at bargain prices, as you can do today, they are the stocks to buy.

Real estate is a traditional hedge against inflation. If you live in a city where the real estate plunge seems to be bottoming out –and there are many such places- we think you should get ready to do some bargain hunting. Because there are millions of people who will no longer qualify for home loans, rentals will offer the most potential for appreciation.

Precious metals should also do well when inflation takes hold again. Just be certain not to over invest in them. We are entering the most difficult economic period in over 75 years and gold is up only 9.6% from its pre-crisis level. On September 29 when the bailout vote failed and the stock market plummeted, gold only gained $5.50. However, gold should shine when the value of the dollar begins to decline again.

Strong foreign currencies look very good. Even without the new bailout costs, the dollar was destined to fall in value due to the government's soaring debts. Now the downside for the dollar is much worse due to the additional trillions of dollars the government is spending to revitalize the banking industry.

Fortunately, you currently have a window of opportunity to exchange some of your dollars at fairly good prices. Because the dollar is a traditional safe harbor during times of trouble, it moved up when the financial crisis swept around the world. However, the panic buying won't last forever. When it ends, the dollar will be valued solely on the basis of its declining fundamentals.

The alternative currency of choice is the Swiss franc. The euro was pushed off center stage by political and economic problems in the European Union. After the conflict in Georgia, Russia's shared border with several EU countries is also casting a shadow over the euro.

On the other hand, Swiss currency has little geopolitical risk, so that's where you should be. Once again, EverBank is a good place to go for insured Swiss franc accounts and CD's, all of which pay interest.

The Bottom Line This Week

The deflationary recession that is at work today is an adversity that can be turned into an advantage by knowledgeable investors who have the courage to buy what everyone else is selling.

High quality stocks and other assets that are purchased at today's steep discounts can be expected to rebound strongly when the economy begins to recover. The same will be true of real estate, precious metals, and solid foreign currencies.

AIA Advocate for Absolute Returns : t-bills

Association of Investor Awareness - Week of 01/08/2009

It's Time To Start Looking Beyond Current Woes A Big Cash Horde Is Always Bullish When It Comes To Rebounds, Too Early Beats Too Late Eight Blue Chips Many Pros Are Buying The Bottom Line This Week

It's Time To Start Looking Beyond Current Woes

A Big Cash Horde Is Always Bullish

When It Comes To Rebounds, Too Early Beats Too Late

Eight Blue Chips Many Pros Are Buying

The Bottom Line This Week

Association of Investor Awareness - Week of 11/26/2008

When Deflation Comes,

Cash Is King

The Best Deflation Strategy

You Must Have The Green To Make The Scene

Where To Stash Your Cash

Getting Around FDIC Limits

T-Bills Shine

Foreign Currencies Offer Double Protection

Some Cash Should Be The Folding Variety

Inflation Will Eventually Return

And Investments Purchased Now Should Soar

The Bottom Line This Week

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

It's Time To Start Looking Beyond Current Woes
A Big Cash Horde Is Always Bullish
When It Comes To Rebounds, Too Early Beats Too Late
Eight Blue Chips Many Pros Are Buying
The Bottom Line This Week

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