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

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

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...


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Posted 02-18-2011 10:39 AM by Research & Editorial Staff