The Stock Market’s Bark Was Worse Than Its Bite – The AIA Advocate Newsletter

In This Issue:

The Stock Market’s Bark Was Worse Than Its Bite

More Volatility Seems Likely

The Fed Finally Acted, Sort Of

Should Investors Stay Away Until The Market Quiets Down?

Multinational Stocks Are Resisting The Downtrend

The Bottom Line

Wall Street’s expensive roller coaster ride continued without a break in September. Since our last issue, the Dow closed up or down, 250 points on seven days, which was about 25% of the time. During the same period, the Nasdaq had seven days that were plus or minus 50 points. In between the biggest moves, both indices gyrated back and forth more than enough to keep investors nervous.

The Stock Market’s Bark Was Worse Than Its Bite

But, there’s more to the story. When the month-long period started on 8/25, the Dow stood at 11,149.8. Yesterday it closed at 11,010.9; a loss of 138.9 points, or -1.3%. The Nasdaq started at 2419.3 and ended at 2491.6, which was a gain of 72.3 points, or 3.0%.

So, for all the hand wringing, gnashing of teeth, and Valium popping, the market damaged our nerves a lot more than our wallets.

More Volatility Seems Likely

We think the stock market’s big swings are likely to continue, at least through the end of the year. That’s because the news that’s pushing stocks around is making equally big moves in both directions.

Take the Greek debt crisis, for example. One day we will learn that a default seems unavoidable. That’s a big deal because it would almost certainly trigger a European recession. Since Europe buys about 20% of America's exports, the recession would quickly leap to our side of the pond. So, any real sign of a default in Greece sends stock prices into a tailspin.

Then a day or two later, European leaders will get together and propose a bailout for Greece. Relieved investors push stocks back up again.

The U.S. Congress is not about to take a back seat to the Greeks when it comes to brinkmanship. No sir. The game of chicken that our elected dingbats play with each other over every budget proposal is an even bigger show. Congress out did itself with the debt ceiling fiasco.

As with the Greek crisis, after all the arguments and posturing for the media are over, the problems are just pushed down the road a few months. Of course, stock prices always reflect the changing prospects of every event.

Likewise, each time Fed chairman Ben Bernanke says something about the economy, investors try to decide if he is likely to launch another stimulus plan. If the consensus is yes, stocks soar. If it’s no, they sink. And the circus goes on.

The Fed Finally Acted, Sort Of

Speaking of the Fed, the agency launched two new programs during its September 21 meeting. The very next day, the Dow plummeted 391 points. Investors were clearly not happy with the Fed’s lackluster effort to help the economy.

The biggest problem was with Mr. Bernanke’s new Operation Twist. The name refers to the Fed’s decision to sell short term bonds and buy long term bonds to twist the interest rates around. The goal is to lower long-term rates so that mortgage costs will go down, house sales will go up, and all will be right with the world. Lower rates are also intended to make business loans more attractive.

The problem with the Fed’s strategy is that interest rates are already on the floor. People aren’t buying houses because mortgages are too expensive. It’s because they don’t have the necessary 20% down payment or sterling credit scores. Others don’t have a job so not even a zero percent mortgage rate would help them. Many prospective buyers are also holding out hoping to see lower house prices.

Likewise, businesses aren’t borrowing money to expand because there is no need to do so, not because they can’t afford a loan. Consumer spending is so low, most businesses are happy just to keep their doors open.

Mr. Bernanke also decided to make king-sized loans to European banks that are in trouble. The move isn’t as generous as it may first appear. The money is to be used by the banks to service loans to U.S. creditors who must be paid in dollars. In other words, the money will come back. At least that’s the plan. This program also has little potential to reinvigorate the U.S. economy.

However, the Fed hinted that it would act again if necessary. If the economy slips much further towards a recession, a real stimulus program is likely to be forthcoming. We think stocks will rally at the first hint that the Fed is about to give the economy a real booster shot.

Should Investors Stay Away Until The Market Quiets Down?

We would not blame anyone for wanting to retreat to the sidelines until the stock market see-saw quiets down. Unfortunately, that isn’t likely to happen anytime soon. There are too many big, unresolved issues that could go either way. Some of them could take years to work out.

To make matters worse, there aren’t many good alternative places to put investment money. Bond yields are terrible. Even a 10-year Treasury only pays about 2%. You would need a microscope to measure the returns from T-bills. Money market funds are completely beneath the radar.

Holding cash in any fixed income account has another problem: losses to inflation. Prices started climbing at a 3.6% annual rate during the second quarter, although we think they recently dropped back as food and fuel costs moderated. Nevertheless, the value of cash is likely to fall due to inflation in the coming months.

An even worse situation exists with precious metals. They took a body slam during the stock scare. Real estate is doing so poorly we don’t even want to think about it. Most commodities are also declining due to the weakening economy.

Stocks are the only big investments that offer good returns. The price of owning them is to endure a wild ride. However, we think the long term profits will make hanging on worth your while.

The most promising stocks are the big multinationals that are doing well in the global economy. They are also doing the best of all in the stock market. Because their earnings are global, adverse events in one region don’t have the potential to do as much damage as they do to single-country stocks.

Multinational Stocks Are Resisting The Downtrend

The case for the big multinationals is easily made by looking at their recent performance. We took the list we published last month and compared their prices at the time with where they are now. All but four of the 14 stocks managed to rise during that difficult period.

Company Aug 23 PRICE Sep 27 Price Percent Change LINK
Abbott Labs (ABT) $50.51 $51.20 1.37%
Coca-Cola (KO) $69.06 $69.57 0.74%
Colgate Palmolive (CL) $87.01 $91.07 4.67%
Consolidated Ed (ED) $55.38 $56.60 2.20%
Deere (DE) $72.66 $69.48 -2.40%
ExxonMobil (XOM) $73.66 $72.91 -4.38%
General Electric (GE) $15.54 $15.76 1.42%
General Mills (GIS) $36.75 $39.45 7.35%
H.J. Heinz (HNZ) $51.44 $51.67 0.45%
Johnson & Johnson (JNJ) $64.97 $63.82 -1.77%
Kraft Foods (KFT) $34.09 $34.93 2.46%
McDonalds (MCD) $89.53 $89.74 0.23%
Procter & Gamble (PG) $63.02 $63.26 0.38%
Wal-Mart (WMT) $53.21 $52.03 -2.22%

We think the companies that showed the greatest strength during the market scare are likely to do the best going forward. The top three are General Mills, Colgate Palmolive, and Kraft Foods. Investors who are primarily interested in income should do well with Consolidated Edison.

The Bottom Line

September was another volatile month for stocks. When the dust settled, however, the Dow was down slightly and the Nasdaq were actually up a bit. How long this state of affairs will last depends on the resolution of the debt crisis in Europe, the slow U.S. economy, and other big problems that have investors worried.

If the U.S. economy slips closer to recession we may actually have a modest stock rally. That’s because the Fed will probably step in with a real stimulus package that will have some meat on its bones.

In the absence of overriding bad news, we think many multinational stocks will continue to do well. Most of them are still finding good profits in the global economy that is stronger than in either Europe or the U.S. Among the stocks we have been following most closely in recent months, General Mills, Colgate Palmolive, Kraft Foods, and Consolidated Edison have been showing the most resistance to market weakness.

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 09-29-2011 10:20 AM by Research & Editorial Staff
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