In This Issue:

Stocks Search For A Bottom
High Energy Prices Will Return
Commodities Will Also Rebound
Infrastructure Spending Is Likely To Soar
The Bottom Line This Week

Stocks stumbled badly again last week as deteriorating economic news caused another round of investors to throw in the towel. By Friday afternoon, the Dow and the Nasdaq were down an additional 5.0% and 7.9%. The declines left the two indices down 35.9% and 42.8% for the year. Ouch!

This week got off to an equally bad start. Although we had a 151 point gain on Tuesday, it was overshadowed by a 651 point slide on Monday and Wednesday.

..."> Association for Investor Awareness - Week of 11/20/2008 - AIA Advocate for Absolute Returns - Investment Strategies, Analysis & Intelligence for Seasoned Investors.
Association for Investor Awareness - Week of 11/20/2008

In This Issue:

Stocks Search For A Bottom
High Energy Prices Will Return
Commodities Will Also Rebound
Infrastructure Spending Is Likely To Soar
The Bottom Line This Week

Stocks stumbled badly again last week as deteriorating economic news caused another round of investors to throw in the towel. By Friday afternoon, the Dow and the Nasdaq were down an additional 5.0% and 7.9%. The declines left the two indices down 35.9% and 42.8% for the year. Ouch!

This week got off to an equally bad start. Although we had a 151 point gain on Tuesday, it was overshadowed by a 651 point slide on Monday and Wednesday.

Stocks Search For A Bottom

As we discussed in our October 16 issue, each additional market plunge marks another step in the capitulation process that must run its course before stocks can begin to recover. How long the selling will last, and how far the market will fall before the carnage stops, is anybody's guess. For the present, sentiment is overwhelming fundamentals.

What we do know, however, is most stocks are more attractively priced than they have been in over 20 years. We can also say that over a century of stock market history shows that investors will eventually price stocks at their proper values. That means we can start to purchase today's high quality bargains with a lot of confidence that they will pay off at some point in the future.

Three important developments look especially attractive now. We think each of them has the potential to significantly increase the value of your long term portfolio.

High Energy Prices Will Return

Contrary to what Joe and Sally MidAmerica may believe, the energy crisis is not over - it has merely been suspended due to the global economic slowdown. When demand picks up again, the world will go back to the tight supply/demand situation that pushed prices into the stratosphere earlier this year.

The numbers tell the story. Before the economy started to cool off, oil producers pumped 86 million barrels a day. At the same time, the world consumed 85 million barrels a day. The million barrel difference was the tightest supply/demand balance we've ever seen in a major commodity.

According to an article in Forbes, world oil demand has since fallen by 1.1 million barrels of oil a day. That small decline still leaves the supply/demand balance on a knife edge. It would not take a very big uptick in the economy, or a problem with supply, to push the world back into an energy deficit. Every expert we consulted expects to see it happen within a few years. Several analysts think that shortages may reappear by late 2009.

Astute readers might look at the data and wonder how such a small decrease in demand could create such a big plunge in prices. The answer is it couldn't do so by itself. However, during the first half of 2008 suppliers were so worried about a possible delivery interruption that they built up their inventories to record levels. The Saudi's even used retired oil tankers as depots.

As a result, when demand slacked off a few months ago the world suddenly found itself awash in oil, and prices plunged. Once the extra oil is gone, prices will start to move back up again.

Attractive Energy Investments:

We think the tight oil supply/demand situation is a great opportunity for long-term investors. One way to play the rebound is to invest in ExxonMobil (XOM), the world's largest energy supplier. http://finance.yahoo.com/q/bc?s=XOM

ExxonMobil is a highly diversified company that produces both oil and natural gas, much of which it turns into petrochemicals, fertilizers, plastics, and other products. The company also has interests in electrical plants that are fueled with XOM's energy.

Despite ExxonMobil's leading position in its industry, the stock now carries a low P/E of 8.2 and a forward dividend yield of 2.2%. All in all, we think XOM is greatly oversold.

Another company that should do exceptionally well over the next few years is Transocean (RIG), a stock we have recommended in the past. http://finance.yahoo.com/q/bc?s=RIG All the major oil producers report that they need to find additional supplies, and they are willing to spend many billions of dollars to get them. As one of the world's leading exploration and development companies, Transocean should capture a great deal of the new business.

Commodities Will Also Rebound

The outlook for raw materials and commodities is nearly identical to that for energy, and for the same reasons. Particularly with agricultural commodities and some industrial metals, the surpluses are not very large. The supplies will disappear quickly when growth starts to rebound.

Attractive Commodity Investments:

One company that is already bouncing back is Archer Daniels Midland (ADM), an old favorite of ours. http://finance.yahoo.com/q/bc?s=ADM From its 2008 low of $13.53, the stock is back to the mid $20 area - a move that occurred while the economy and stock market were dropping.

The ADM rebound should not be a surprise because many foreign economies are still growing, and so are their populations. Since ADM deals in inexpensive basic foods, including grains and oils, the company should remain on a growth track for as far ahead as we can see.

Yet to recover is another top-performing AIA Advocate pick, BHP Billiton (BHP). http://finance.yahoo.com/q/bc?s=BHP This leading supplier of industrial metals is more sensitive to the economy than ADM, but that means it should rise even more strongly when growth begins to pick up. Meanwhile, BHP has an incredibly low P/E of 5.7 and an eye-popping 5% yield.

Alas, the yield may decline later this year if lower earnings force the company to reduce its dividend. Nevertheless, we believe BHP is an excellent value that will be very rewarding in long-term accounts.

Infrastructure Spending Is Likely To Soar

Last week we discussed how President-elect Obama is likely to affect the U.S. economy. He has since announced that one of his first moves will be to boost spending to upgrade and expand America's woefully out-of-date infrastructure. Besides fixing serious problems, the projects will create countless jobs and pump badly needed cash into the economy.

One of the first projects will be to upgrade and expand our antiquated electrical grid. As many readers may have experienced first hand, the system is so strained that large regions of the country have been plunged into darkness due to relatively minor equipment failures.

Another reason the grid must be upgraded is much of it is unable to handle the additional power that will be produced by the new electrical plants that are scheduled to be constructed. Two solar and wind power projects have already been cancelled because the local grids could not handle the extra loads. This bottleneck must be removed before America can solve its energy problems.

Attractive Infrastructure Investments:

One company that is in the catbird's seat to profit from efforts to improve our electrical grid is General Cable (BGC). http://finance.yahoo.com/q/bc?s=BGC As its name suggests, the company is a major producer of high-capacity electrical wires that are used in power transmission systems worldwide. In addition, the company produces wires and cables that are used within electrical plants. Products are also supplied for many industrial applications.

General Cable looks especially attractive because it has been hammered by the slow economy and the stock market plunge. Its price is down 86% from its January high, which is out of proportion to its earnings decline from $1.11 to $1.07. Such an extreme sell-off can only happen during a market panic. When the sell-off ends, General Cable should move back up.

We also like the outlook for Quanta Services (PWR), a company that installs and maintains electric power transmission lines and power distribution networks. http://finance.yahoo.com/q/bc?s=PWR In addition, the company provides many services to the natural gas, telecom, and cable TV industries.

Quanta is also down sharply from the high it reached when the economy was booming. Although the outlook for continued profit growth this year has dimmed considerably, the stock appears to be greatly oversold for its longer term potential.

The Bottom Line This Week

In the current race for the exits, investors are tossing many high quality stocks aside no matter how good their long term prospects may be. Leading companies in the energy, commodity, and infrastructure sectors are especially attractive. However, we continue to urge everyone to buy stocks a little at a time because prices may go lower before they begin to turn around.


Disclaimer

Copyright 2010 The Association for Investor Awareness, Inc. All Rights Reserved

All material presented herein is believed to be reliable but we cannot attest to its accuracy. Investment recommendations may change and readers are urged to check with their investment counselors before making any investment decisions.

Opinions expressed in these reports may change without prior notice. The Association for Investor Awareness, Inc. (AIA) and respective staffs and associates may or may not have investments in any companies, stocks or funds cited herein, may or may not have long or short positions and/or options and warrants relating thereto and may purchase and/or sell these securities or options at any time in the open market or otherwise without further notice. AIA, its Officers, Directors, Employees and Affiliates may receive compensation for the dissemination of this information.

Communications from AIA are intended solely for informational purposes. Statements made by various contributors do not necessarily reflect the opinions of AIA and should not be construed as an endorsement either expressed or implied. AIA is not responsible for typographic errors or other inaccuracies in the content. We believe the information contained herein to be accurate and reliable. However, errors may occasionally occur. Therefore, all information and materials are provided "AS IS" without any warranty of any kind. Past results are not necessarily indicative of future performance.




Posted 11-20-2008 9:31 AM by Research & Editorial Staff

Comments

Robert Greener wrote re: Association of Investor Awareness - Week of 11/20/2008
on 12-23-2008 3:20 PM

I have not been receiving investorsinsight in my email for the past month.  Wondering why??