Bull Markets Always Climb “A Wall Of Worry” - The AIA Advocate Newsletter

In This Issue:

Bull Markets Always Climb “A Wall Of Worry”
But “The Wall” May Be Lower Than It Looks
A Correction Seems Overdue
We Never Get Bored Making Money
Bank Stocks Are Finally Turning Around
The Bottom Line

The stock market rally that began in late December continued through the first three weeks of February. Since our last issue, the Dow and the Nasdaq gained 1.8% and 5.1% respectively.

Measured from December 20, the numbers were an even sweeter 7.1% and 13.2%. From the market’s recent low on October 3, 2011, the two indices are up a heart-warming 21.7% and 26.2% respectively. The added gains pushed stocks into official bull market territory. Of course, there is no guarantee that the happy condition will continue.

Bull Markets Always Climb “A Wall Of Worry”

Despite the strong upturn, many investors remain unconvinced that the bull has actually returned. They point to the many serious problems that could send prices back down. The list includes a barely warm economic recovery, the debt crisis in Europe, soaring energy prices, and a possible war with Iran.

Any one of the threats could give the market back to the bear. But, all major upturns begin while scary problems remain. Investors move back into stocks anyway if they think the problems are getting smaller.

But “The Wall” May Be Lower Than It Looks

For example, the debt crisis in Europe may have been defused by the February 18 agreement to bail out Greece for the second time. The Greek people won’t like wearing hair shirts for several years to bring the country’s deficit down, but that’s better than a meltdown.

A possible war with Iran is a bigger concern. But here too there are signs that a tragedy may be averted. Every country that’s involved, including Iran, seems determined to find a way to negotiate a solution to the nuclear issue. If the peace effort is successful, gasoline prices should come back down by themselves.

As to the lukewarm economic recovery, stronger growth is expected during the second half of the year. In any event, the growth we have now is an adrenalin shot compared to the Great Recession. Most American companies that survived the downturn have become very efficient and will be able to find good profits even in a soft recovery.

As it turns out, the recovery is not soft for many industries. For example, U.S. manufacturers are growing at about twice the speed of the broader economy. Ditto for exporters that are also benefitting from stronger than expected growth in China and other developing countries. Agriculture is also very profitable. In addition, many analysts think housing is finally starting to turn around.

A Correction Seems Overdue

Nevertheless, no big stock market move goes very far without a reversal. Since we had an unusually big upturn over the past few months, stocks seem likely to fall back before they make another big jump.

With a correction on the way, many investors may wish to take some profits off the table. At minimum, we think you should protect your gains with stop-loss orders. Even if you are investing for the long term, as we recommend, there is no reason to suffer near term losses. You will do better if you step aside during a correction and buy back in at lower prices after the scare runs its course. You don’t need to call either the top or the bottom to make this strategy work for you.

It can also be a good idea to sell any weak stocks that were pushed up by the rally. Sometimes the best strategy with mistakes is to cut them short at the best terms you can find, and put the money into stronger stocks.

We Never Get Bored Making Money

Fortunately, finding strong stocks is proving to be quite easy. They stand out because investors pushed them up the most during the rally. Many winners are in our “Select Portfolio For Late 2011 and 2012.” Under the assumption that our readers are happy to stick with stocks that are delivering good gains, we are including the portfolio again with updated numbers.

A Select Portfolio For Late 2011 and 2012

Company 02/21/12 11/18/11

Alcoa (AA) $10.41 $9.74 6.9%
Deere & Co. (DE) $84.19 $74.15 13.5%
Caterpillar (CAT) $115.00 $93.86 22.5%
Coca-Cola (KO) $68.82 $67.39 2.1%
Colgate Palm. (CL) $93.37 $88.61 5.4%
Exxon Mobil (XOM) $86.57 $78.05 10.9%
General Elec. (GE) $19.41 $15.67 23.9%
Goldman Sachs (GS) $116.63 $92.00 26.8%
Johnson & John. (JNJ) $65.04 $63.85 1.9%
Procter & Gamble (PG) $64.42 $63.24 1.9%
Wal-Mart Stores (WMT) $60.07 $57.23 5.0%

For An Emphasis On Current Income:

Consolidated Ed. (ED) $57.86 $58.14 -0.5%
Eli Lilly (LLY) $38.75 $36.89 5.0%
Kinder Morgan (KMP) $90.46 $76.57 18.1%

The rally continued to favor industrial stocks. Alcoa, Caterpillar, and General Electric made additional gains from last month. The lone exception was Deere that dropped $2.71.

Our beverage and household product companies also had a good month. Coca-Cola, Colgate Palmolive, Johnson & Johnson, and Procter & Gamble had modest gains. Our sole retailer, Wal-Mart also closed higher than it was in January despite reporting disappointing earnings a few days ago.

Goldman Sachs went up $8.03 for the period. Strong gains were common throughout the banking sector which indicates that investors have finally decided its outlook is improving.

As you may expect when the prospect of capital gains is rising significantly, income stocks look less attractive. Kinder Morgan rose modestly for the month but Consolidated Edison and Eli Lilly lost about a dollar each. With the Fed promising to keep interest rates on the floor through 2014, we think investors will come back to dividend stocks that offer attractive yields.

Bank Stocks Are Finally Turning Around

We mentioned earlier that bull markets almost always start while economic problems still exist. The same is true for industry rallies. That’s the case with the banking sector that has been on the floor since late 2007, and now appears to be recovering.

One of the reasons banks look good is they are sitting on a mountain of cash from the federal bailouts, and they have been looking for opportunities to put it to work. During the recession there was little demand for credit, but that’s beginning to change now that the economy is improving.

Credit card opportunities are also looking a bit brighter. Consumers are using the “fantastic plastic” once again, and card issuers are looking forward to rising profits. Perhaps best of all, consumers in developing nations have also discovered credit cards, which benefits U.S. banks with foreign operations.

Among the banks with improving prospects, we think Citigroup (the holding company for Citibank) looks very attractive for long-term accounts. http://finance.yahoo.com/q/bc?s=C+Basic+Chart It is clear from the stock’s rising price that many investors agree.

We are especially happy to see that China just gave Citigroup the okay to become the first western bank to issue credit cards in the country under its own brand. It’s another opportunity for Citigroup to tap the world’s largest consumer market that also happens to be among the fastest growing in the world.

Citigroup is still carrying some bad paper and debt from its past mistakes. Nevertheless,we think the company is well on its way to turning itself around.

All banking stocks are likely to be volatile, including Citigroup. If you wish to participate in the industry’s rebound while keeping your risks at a minimum, we think you should consider taking a diversified position. A good way to do that is with the iShares Dow Jones US Financial Sector Index Fund (IYF) that tracks all the major banks. http://finance.yahoo.com/q/bc?s=IYF+Basic+Chart

The Bottom Line

The economy continued to perk up last month. Few economists believe that a strong recovery is on the way, but compared to the Great Recession the upturn is most welcome. Many companies will be able to squeeze attractive profits from the modest growth, including several of our blue chips.

We also think the banking industry is finally turning around. It won’t happen quickly, and we can expect a rough ride. But we think the worst is over for the sector. We already own Goldman Sachs, and it has been making gains of late. Citigroup also looks very promising. For a diversified banking position, we recommend the iShares Dow Jones US Financial Sector Index Fund.

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 02-27-2012 8:24 PM by Research & Editorial Staff
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