Association for Investor Awareness - Week of 08/27/2009

In This Issue:

The Outlook Is Better For An Improving Economy
Profit Growth Can Be Misleading
Big Companies Still Have An Advantage
Emerging Countries Are Making A Strong Recovery
Two Long Term Dividend Payers Look Good
Fasten Your Seat Belts, Oil Prices Are Roaring Back
The Bottom Line This Week

It's been a bear market for bears recently as their many doom-and-gloom pronouncements have gone wanting. The old bull just won't quit, despite all the logical arguments that predict his demise. It's a good lesson that paying attention to what is actually happening in the stock market is more profitable than following theories. Mother Market always has the last word.

The numbers tell the story. Since our last letter on July 29, the Dow and the Nasdaq have gone up 5.2% and 2.9% respectively. In only one of the four weeks did the market slide into negative territory, and then by less than 1%. By contrast, the best week registered a 7.3% gain. That's the sort of tailwind we like to have.

The Outlook Is Better For An Improving Economy

Of course, the rally could come to grief overnight. Stocks are rising on the expectation that the economy is finally coming out of recession, and companies will again make oodles of money. The unofficial office pool index suggests that most people on Wall Street think growth rates will be higher than Grandpa Bernanke at the Fed is predicting.

One accomplished tea leaf reader we talked to said his off-the-record prediction is that growth may exceed 4% next year. That would be quite a jump from two points behind the zero line, which is where the economy is today.

Profit Growth Can Be Misleading

Even if the economy doesn't win the long jump next year, most well-run companies should continue to see their profits increase. That's because nearly all of them have been on lean-and-mean programs that have cut costs to the bone. So even though revenues have been abysmal, profits have been on an upswing.

Of course, lean-and-mean can only go so far. At some point, all the useful cuts will have been made and profits must come from actually selling more goods. That change will mark the real beginning of a recovery.

Big Companies Still Have An Advantage

The big blue chips have a king-sized advantage when it comes to selling more products, even if the optimists are wrong and the U.S. economy just dribbles along. The global economy, where most mega companies do most of their business, is still doing well – and it should do even better next year. If so, the multinationals will once again prove that big is the size to be in the 21st century world.

The stronger global economy will also help many U.S. firms that don't have facilities overseas. Many exporters are beginning to see their order books fill up as foreign firms ramp up their operations to meet their expected needs. As a significant side benefit, rising exports will help the U.S. trade balance, which has been suffering mightily for several years.

Emerging Countries Are Making A Strong Recovery

Speaking of the global economy, nobody is doing better than the emerging market countries. You may remember them from a few years ago when they were also on a roll. However, the high achievers plunged when their main customer, the U.S., slipped into the red.

Now many developing countries are growing quickly again. This time around, the countries are tapping into their own regional markets rather than putting all their efforts into winning U.S. orders. Fortunately for the local suppliers, the approximately 2.5 billion people in developing countries want just as many plastic salad shooters and cars as their American counterparts.

Doing best of all are the BRIC countries (Brazil, Russia, India, and China). The first two are in the catbird's seat for growth because they are major suppliers of energy and raw materials to industrial countries of all sizes.

From an investor's standpoint, emerging markets still look good for long-term portfolios because they are many years away from reaching their peaks.

To that end, we once again recommend the iShares MSCI Emerging Markets Index ETF (EEM) http://finance.yahoo.com/q/bc?s=EEM. When we first presented the fund on June 26 it was $32.32. The price is now $36.47, a 12.8% gain. We think more is on the way, but we can expect some bumps along the road. Emerging markets will always be volatile, which is why we think the best way to invest is with a diversified fund.

Two Long Term Dividend Payers Look Good

Closer to home, we continue to recommend stocks that pay rising dividends. Although fears about inflation are continuing to make the rounds, deflationary forces are still at work in our economy. As long as that situation continues –which we think will be longer than most people think— the buying power of dividends will increase.

If you purchased a selection of the blue chip companies we have been recommending in recent months, you probably don't need to make additions to your dividend portfolio. But if you want to gild the lily, we think you should add Sysco Corp. (SSY) to the group. http://finance.yahoo.com/q/bc?s=SYY

Sysco is the leading supplier of food to colleges, hospitals, corporate cafeterias, hotels, and restaurants in the U.S. The company has been winning many orders because it can operate more efficiently than its customers can do on their own. At the same time, Sysco can usually provide a better and more diverse menu.

We think Sysco has excellent prospects for several years of growth. The company has been strengthening its business capabilities by purchasing other food suppliers in its field. As a result, Sysco will be coming out of the recession much better equipped to generate new business than any of its rivals.

Sysco also shines in the dividend department. The company currently boasts a 3.8% yield which should increase by 10% annually for the next few years. The stock price is also likely to do well.

Another stock with an attractive yield is Abbott Laboratories (ABT) a 121 year old company that produces and sells healthcare products throughout the world. http://finance.yahoo.com/q/bc?s=ABT

Abbott, of course, is best known for its many successful pharmaceuticals. But the company also offers a variety of diagnostic products that are in widespread use. In addition, Abbott produces infant formula and adult nutritional drinks – and it supplies stents, vessel closure devices, and related products for coronary applications.

One of the reasons we think that Abbott is attractive is the stock is down due to all the worries about a national health care program. If such a plan is passed, there is a possibility that drug prices will be forced down. However, we think the large increase in the number of people who will receive care will more than make up for the shortfall.

Abbott's yield currently stands at 3.5%. As with Sysco, Abbott Labs will probably continue to increase its annual payout, as it has been doing for 37 straight years. Nearer term, the stock should make an attractive catch-up move once the outlook for national health care clarifies.

Fasten Your Seat Belts, Oil Prices Are Roaring Back

Although it has not yet caused gasoline prices to shoot up, the price of oil has more than doubled since its low point earlier this year. In fact, at about $75 a barrel, oil is about half way back to its all-time high of $149 that it set during the late, great economic boom.

The main reason oil prices have been rising strongly is China and other developing countries have been buying all they can find. The countries are stockpiling as much as possible because they think that supplies will become tight again as the global economy improves. We think they are right.

China is not just buying oil, it is also buying producers. The country has become Brazil's biggest customer, and is rumored to be in negotiations to purchase the largest oil company in Venezuela.

In Africa, where there are few local oil companies with which to do business, China's approach is to extract the oil itself by setting up its own operations. Local governments and warlords are happy to give China a free hand to do whatever it wants in exchange for their piece of the action.

The price of oil is like the proverbial tide that lifts all boats. When it goes up so do the profits for companies that sell it. Since ExxonMobil (XOM) has a delightfully large amount of the stuff, we think it is the company to buy. http://finance.yahoo.com/q/bc?s=XOM

The Bottom Line This Week

Like the Energizer bunny, the stock rally just keeps going. The downside with both the bunny and the rally is, when the end comes it will be sudden. Therefore, we think this would be a good time to take some profits off the table, and to put stop loss orders on everything else.

Two new companies that look very good to us are Sysco Corporation and Abbott Laboratories. Because they are in defensive sectors, the stocks should not be as sensitive to a market correction as their more aggressive cousins. We also like the dividends the two companies pay, and the prospects for more.

With oil prices on a tear again, this appears to be a good time to buy more ExxonMobil, a stock we recommended on several occasions.

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 Thursday...


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Posted 08-27-2009 2:06 PM by Research & Editorial Staff