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Where to Look for Recovery This TimeBy Lynn Carpenter
The Will Rogers joke about investing—“Don’t gamble. Take all your savings and buy some good stock and hold it till it goes up then sell it. And if it don’t go up, don’t buy it” –was born in a time when the stock market was busy taking money out of people’s hands. Something like today. In the 1930s, the stock market had crashed and bank runs meant people standing in line, waiting to take their cash home. People saw it happen in their own towns. This time, it’s a little vague and seems only half real. It’s been going on over our heads, in boardrooms and back rooms, among center-city banks that don’t even take walk-in customers. You don’t see Merrill Lynch walk into Bear Stearns and take its millions out; you read about it later. It all happens with wire transfers. But you still understand that things are bad when even bankers don’t know which banks to trust these days. It’s enough to cause a bear market. This one is mild in its depth compared to the 1930s. We should be thankful, because it’s shaping up to be more like that one than like any bear market you’ve ever seen-- unless you were investing back when Will Rogers was warming up for the Ziegfeld Follies. Investing gets scary periodically. People adjust. Normally, some people quit on stocks, but most investors simply stop speculating and pull back to reliable corners of the market. They seek blue chips with dividends. That “should” be happening now. In fact, because of low interest rates, stock dividends should be more attractive than in any bear market in the past 80 years. A five-year CD pays less than 4%. You can get that much from the dividend on BP or Wells Fargo stock. Wait. You don’t feel safe with Wells Fargo? You’d rather not take a bank stock? Well, now you have the corner of the problem in your teeth. That’s what makes this bear market different. People have been watching the banking problem for over a year, but the dividend problem is just beginning to unfold.
We’ve all been a little slow to accept how deep the problem with banks runs. Even the professional bank watchers are still being blindsided. In December, analyst Richard Bove of Punk, Ziegel and Co, went on CNBC and told the world that Citigroup would never cut its dividend, “not even remotely possible,” Bove declared. Citi cut its dividend in January. It may cut again this month. And I’m not picking on Bove in particular, he just spoke up so clearly. Just this past fall, I thought the crisis made a great time to look at Wachovia Bank. Hah! Wachovia cut its dividend this week. It joins Chemical Bank, National City, Washington Mutual, and First Horizon… the list keeps growing. Now where are the safe corners? Not financials. If you want to switch into dividends, you are more likely to walk into a minefield than green pastures. Over half the companies paying dividends that beat CD rates are financial stocks. This has implications you can use. First, you will have an edge because most people aren’t even thinking about this yet. Especially not the pros because they are even more likely than us amateurs to rely on what they know “should” happen. They usually look for the financials to lead the way out of a bear market. But this time, the mechanism is broken. The first step in the process is failing right now. Financials have lead the way out of past bear markets because they attracted billions of dollars fleeing to the safety of their dividends and conservative business. That swell of money creates rising stocks that give others confidence, and soon the market follows. But not this time. This time, we will have to look elsewhere for signs of a market recovery. While others are still watching financials for signs of recovery, I am going to be watching two other groups: tech stocks and businesses that serve businesses. The rationale for tech is obvious and quite a few people will look there. It’s not dividends or reliability that make them fly—it’s discovery, promise, innovation, growth and exciting prospects that hint of soaring stock prices. Techs have the power to give people excitement and high hopes. The business-to-business group doesn’t offer that kind of sizzle, and that’s why I am watching it even more carefully. When this group recovers, it will be fundamentals like earnings growth and value that drive it. Plus, this is where most people are not looking. That makes this group even more likely to offer a longer and more trustworthy chance to buy low on stocks that have the power to go high. And since we just had a series on chart reading, you tell me what trend line you see on this group (hint, it holds prices down and it’s falling):  That’s right. Bear resistance. As long as the index stays below its bear resistance line, this group is bearish. But you can bet I will be watching it for a breakout. And with your newfound chart reading skills, you can do the same. You can find this index on the Big Charts website (www.bigcharts.com); look under the industries tab. You will note I drew two bear resistance lines. The shorter-term one goes from last October to present. It will be an early warning line and this could be a time to pick up leaders in the group. But the rally might fail when it gets to the second line, the blue one. When this index breaks through that line, the market should be well on its way to recovery. Respectfully, Lynn Carpenter P.S. To let me know what you thought of today's article, send an e-mail to: feedback@investorsdailyedge.com.
The Money Market’s Shadow DanceBy Lynn Carpenter The flight to safety is real. The Investment Company Institute reports that money market funds hit a new record at the end of March with $3,500 billion under management. This is 44% more than a year ago. But the dividend problem we just walked through is sneaking along this cove of safety, too. What’s in Wells Fargo’s money market fund? Bonds from Wachovia, Citibank and Bank of America—three institutions under pressure—make up three of its top 10 holdings. Fidelity Select Money Market invests more than a fourth of its holdings in the financial services industry. Most of the top money market funds that had invested in mortgages and structured investment vehicles last fall have gotten out of them now. But that still leaves many of them with holdings in assets like bank bonds that can lose value. And with the astounding wave of new money that has washed into these funds, the competition is on for the small pool of high quality assets these funds can (or should) hold. If you have money you believe is safely parked in a money market fund, check now to see what it’s holding. Especially if your fund pays a little better than its peers. Money market funds that invest only in Treasuries and government issues are the safest place to be now. Now’s a good time to do this, too. Interest rates are low. Funds are under less pressure to beat corporate bond rates and can hold low-interest assets like Treasuries. But when interest rates begin to rise again, that lull is over. That’s when the temptation into corporate bonds gets stronger and the risks grow.
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256.80