Association for Investor Awareness - Week of 07/29/2010

In This Issue:

Double Dip, Or Onward & Upward?
Many Winners Should Have Further To Go
Inflation, Deflation – Or Neither?
Beating The Bushes For Returns
The Bottom Line

After nearly six weeks of uncertainty, investors finally decided the outlook for the economy was improving enough to justify higher stock prices. Since our last newsletter in June, the Dow and the Nasdaq went up 3.4% and 2.1% respectively. Nearly all the gains came during the last two weeks.

Double Dip, Or Onward & Upward?

The stock gains notwithstanding, the recovery is still on shaky ground. With growth at an anemic 2.5%, it would not take much good or bad news to push the economy either way.

To make the matter even harder to call, many industries are growing strongly, but others are still losing money.

On the positive side of growth are the multinational blue chips that do a great deal of business overseas. Their profits are rolling in thanks to the healthy global economy. China, India, Southeast Asia, much of South America and many other regions have cooled off a bit, but most analysts think that's all to the good.

If you will forgive our lack of humility, we wish to remind readers that we identified the potential of blue chip companies many months ago – and have been shamelessly recommending them ever since. As a sector, these stocks have consistently been the market's best-performers. We think they will remain market leaders for quite some time.

On the negative side of growth is the housing industry that usually contributes about 10% of America's GDP. It isn't just the developers and construction workers who are suffering. Banks, realtors, title companies, timber companies, furniture makers, and dozens of other enterprises are linked to home sales. Unfortunately, mortgages for home purchases fell to a 14 year low last month, which doesn't bode well for the future.

Many manufacturers are not much better off. The big exporters are doing well, but smaller firms that primarily serve domestic markets are having a tough time. 

Much of the retail industry is also just limping along because nervous consumers are clutching their wallets more tightly than ever. Consumer confidence dropped again in June, which suggests that people won't become big spenders again anytime soon. Recent polls indicate that the new frugality may last many years.

The conclusion we come to is that official economic numbers, and the labels that apply to them, are not of much value. Investors need to look for specific sectors that are doing well and pick the best stocks within them. That way, good profits can be obtained even if the broader economy is struggling.

Many Winners Should Have Further To Go

As to what to buy, there is no better group than the blue chips we recommended last month. They are no longer as cheap as they were, but they are still attractive for long-term accounts. Here is the list again:

Exxon Mobil(XOM) http://finance.yahoo.com/q/pr?s=XOM,
EnCana (ECA), http://finance.yahoo.com/q/pr?s=ECA,
Colgate Palmolive (CL) http://finance.yahoo.com/q/pr?s=CL,
Coca Cola (KO), http://finance.yahoo.com/q/pr?s=KO,
Eli Lilly (LLY) http://finance.yahoo.com/q/pr?s=LLY,
Johnson & Johnson (JNJ) http://finance.yahoo.com/q/pr?s=JNJ,
Merck & Company (MRK) http://finance.yahoo.com/q/pr?s=MRK,
Procter & Gamble (PG) http://finance.yahoo.com/q/pr?s=PG,
General Electric (GE) http://finance.yahoo.com/q/pr?s=MRK.
Bank of America (BAC) http://finance.yahoo.com/q/pr?s=BAC,
Wells Fargo (WFC) http://finance.yahoo.com/q/pr?s=WFC,
JP Morgan Chase (JPM) http://finance.yahoo.com/q/pr?s=JPM,
Goldman Sachs (GS) http://finance.yahoo.com/q/pr?s=GS.
BP (BP) (speculative) http://finance.yahoo.com/q/pr?s=BP,

Updates:

BP (BP) was recommended in our May issue as a speculation. It was right after the disastrous Gulf oil spill. Shocked investors plummeted the stock from $45.58 to $36.52 where we thought it was oversold. BP has since started to inch back up and is now selling for $37.71. We expect more gains, but we rate the stock as a hold for now.

General Electric (GE) just raised its dividend a surprising 20% in an effort to show it is over the worst of the financial crisis and expects to do well going forward. GE remains a buy.

Citigroup (C), JP Morgan Chase (JPM), and Wells Fargo (WFC) all reported rising second quarter earnings. Ditto for Goldman Sachs (GS) whose earnings set a new record. We continue to think the big banks will deliver excellent profits longer-term. All four banks are still buys.

Eli Lilly (LLY), Johnson & Johnson (JNJ), and Merck (MRK) are still feeling the effects of investors' nervousness about the new health care law. Several expiring drug patents are also a concern. We continue to think the negative impact from the law on drug prices will be more than offset by the millions of new people who now have insurance. We are also impressed by the many new drugs that are on the way. The three companies remain buys.

Inflation, Deflation – Or Neither?

Washington has been pumping so much money into the economy to stimulate growth, many analysts have been expecting a stiff round of inflation. So far, that old monetary plague has failed to appear.

The main reason inflation is nowhere to be found is most of the government's stimulus money is still stuck in the banks. Mr. Bernanke at the Fed has been cajoling the tightwads to open their vaults and make loans to deserving businesses.

However, the demand for money has fallen off a cliff. Businesses are unwilling to go into hock to expand their operations when demand for products and services is low. For the near-term at least, the stimulus funds are not an inflation threat.

Investors, who always seem to be worried about something, have switched their concern from inflation to deflation. The latter occurs when money leaves the economy due to business failures, personal bankruptcies, unemployment, falling home prices, and the like.

When money goes poof, the remaining dollars become more valuable and prices decline. People see the trend and they wait for even lower prices before they will spend money. It is a self-fulfilling expectation that keeps the downturn going.

All in all, deflation is bad for the economy. It is also very hard to fight. The Japanese have been battling deflation for 15 years with little success.

At this point, we don't think either inflation or deflation is a threat to the recovery. The most likely outlook is for very low inflation for an extended period of slow economic growth.

At the same time, we expect unemployment will remain high, incomes are likely to be frozen, and the economy will still feel like a recession for millions of consumers.

Beating The Bushes For Returns

The biggest problem investors are having now isn't finding rising stocks, it's getting a decent return on their cash. As part of the Fed's attempt to stimulate the economy, the agency pushed interest rates almost down to zero. That's great for borrowers, but terrible for depositors and people who are trying to live on their fixed income returns.

Fortunately, in the low inflation economy we have today, cash isn't losing much buying power while it sits on the sidelines. Getting deposits to gain headway is much harder, but not impossible.

One solution is to put money into stocks that pay good dividends, and have been doing so for many years. One such company that is already on our buy list is Eli Lilly (LLY). The stock is currently is paying 5.6%, vs 3.04% for 10-Year Treasury Bonds. Merck (MRK), another pharmaceutical company we recommend, is paying 4.4%. Both stocks should also give long-term investors attractive capital gains.

For the best CD rates, we suggest that you visit www.bankrate.com and click on CDs & Investments. Pick the maturity of the CD you want and click Search. Underneath the name of each bank will be a series of stars that indicate the institution's safety rating. All the banks have FDIC insurance. Nevertheless, we suggest that you select CDs from institutions with at least 4 out of the possible 5 stars.

For 1-year CDs, these were the top three banks that fit the ratings criteria as of July 27:

SallieMae 1.55% No minimum deposit https://banking.salliemae.com/
CapitalOne 1.50% $5,000 minimum dep http://www.capitalone.com/directbanking/
Ally 1.47% No minimum deposit http://www.ally.com/bank/high-yield-cd/

The Bottom Line

Stocks broke out of their holding patterns in July and pushed the market back into positive territory for the year. Considering the lackluster economy, the market's performance is better than it could be.

The bluest of the blue chips have been doing the best of all. We think they will stay on top over the next few months. Fortunately, we have been favoring the big blues all along. Many of them are still very attractive.

Finding good fixed income returns is much harder. However, many blue chips with dividends are delivering better yields than Treasuries, plus they offer good prospects for long-term capital gains.

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...


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.

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Posted 07-29-2010 4:13 PM by Research & Editorial Staff