After seven range-bound weeks of the FTSE 100 wobbling up and down from 4300 to 4500 and back again, the market has finally rediscovered its direction. As I expected, it’s fallen from its highs and is down at 4244 last time I checked. Today, we’ll look at what’s worth buying now…
I’ve been consistently sceptical of the “green shoot” phenomenon over the last few months. It did bear all the hallmarks of a bear market rally. The stocks with the worst fundamentals (mainly financials) and that were previously sold most heavily, rose the highest.
More to the point, fund managers, hedge fund managers and pension funds were not buying stocks. The rally was driven by short-termers that care little for long-term value. It was unchecked momentum that has finally been checked…
Alas, the losers in this story are the suckers who believed the hype and bought big.
However, it’s not too late to sell out of those trashy stocks with terrible balance sheets. And there’s one corner of the market that is not just fundamentally superior, it’s also unlikely to feel the brunt of the downturn.
It’s time to get re-acquainted with the world of inflation-beating defensives…
“Cheap, cheap, cheap”
We’ve been long defensives for a while, but we’re being increasingly joined by the City professionals. Citigroup, for example, recently published a European strategy report titled “Cheap, cheap, cheap” extolling the virtues of larger cap, Blue Chip stocks:
“Having enjoyed strong relative gains during the bear market, defensives have been left behind in the post-March rally.
“Many investors have also used defensives, especially large-caps, as a source of funds for the risk trade. As a result, defensive stocks and sectors have moved from looking expensive to cheap in three months.”
In the run up that started in March, investors ditched their reliable defensives to chase a sexier, riskier opportunity. But, like a spurned lover, investors will come back to the safety and predictability that defensives offer.
What we like most about defensives right now is that they are cheap. The group trades on an average P/E under 10 times next year’s earnings. And this represents a 15% discount to the wider market. The last time these stocks were this cheap was in the late 1990s, before they more than doubled! Remember also that most defensives have strong balance sheets so the risk of expensive rights issues or other nasty shortfall surprises are remote.
Best of all, many Blue Chips are great defences against the threat of inflation…
Inflation-beating investments
The big question right now is this, “inflation or deflation?” Either we’ll see a 1970s-style monetary expansion causing huge inflation or we’ll see a Japanese style zombie-bank-driven deflationary spell.
What leads us to believe inflation will be the eventual winner is the advent of “quantitative easing.” The £125 billion spending program launched by the Bank of England in March has already boosted the UK’s monetary base and continues to do so. This means that there is more money sloshing around in the economy.
When you combine a growing monetary base with shrinking national output you get, quite literally, more money chasing fewer goods and services. This is the very definition of price inflation, according to Nobel prize-winning economist Milton Friedman.
So what should you buy in this environment? Let’s take a look...
While gold is often seen as the ultimate store of value, it’s stocks that have the most consistent track record...
Back in 1980, the American Consumer Price Index went up by more than 12%. However, the S&P 500 index climbed 32%. You can see it on a longer time frame, too. Throughout the1980s, the average rate of inflation was a 5.6%. You’d think that that must have hurt investors. And yet, the 80s ended up being superb for stock markets. The S&P returned an average of 12.6% a year.
As mentioned, defensives, more so than small cap or mid cap shares have the most going for them. These are companies that are sector bullies that dominate their respective industries. They have the power to pass on costs without the threat of losing their customer base.
In order to play this trend, there are four areas of the market to focus on:
Food retailers, telecoms, tobacco and utilities.
In these sectors United Utilities (ticker: UU.), Imperial Tobacco (ticker: IMT) and Tesco (ticker: TSCO) all look undervalued and due for a bounce back as inflation joins the bear market as a major headache for UK investors.
Best wishes,
Theo Casey
For The Right Side
Editor’s note: Theo Casey is investment director for The Fleet Street Letter. Click here to access his new report on why the radical threat of hyper-inflation could hit sooner than you think. It shows you exactly what to do and what stocks, funds and commodities to be holding right now.
MARKET NOTES
High risk, high reward with blue-chip penny stocks
BY SHIVVY ARORAIf you’ve got the stomach for high risk opportunities, take a look at blue-chip penny stocks. These are the formerly high-flying large cap stocks, now trading like penny shares. In the US, that means stocks trading below $5 per share.
The chart below shows the percentage gain in prices of three major players, all household names in the US, from early March to date. There’s Citigroup (ticker: C; red line), Ford Motors (ticker: F; blue line) and General Electric (ticker: GE; black line) – and they’ve all been rebounding heavily.
You can see the staggering gains logged in since early March. Here’s the tally – GE: 74%; Citigroup: 160% and Ford: 205%. They make the 35% increase in the S&P 500 index (green line) look pathetic by comparison.
Some blue-chip penny stocks have soared massively since March... 
The trick here is to get in at the right time. With companies that have seen such tough times, you’d be right to be wary of further falls.
Nonetheless, the opportunity here is hard to ignore. These stocks were deeply oversold. In other words, they got dragged way too far down due to panic selling across the market. Eventually, when investors realised these shares had value, they piled back in… and the shares shot higher.
So this could work if we get another massive sell-off. Look for similarly oversold household names, trading like penny shares, which nonetheless have good businesses behind them.
Just remember, it’s not a strategy for the faint-hearted.
Our own Penny Shares expert, Tom Bulford, offers a twice weekly free email, The Penny Sleuth. To see his latest article click here.
The Daily Reckoning – False Hope in the Property Market
BY BILL BONNER
London, England
Thursday, 25 June 2009
The purpose of a man is to love a woman...
And the purpose of a woman is to love a man...
Remember that hit from the ‘60s?
How about this?
To everything there is a season
And a time for every purpose under Heaven...
That is a line from Ecclesiastes that the Byrds turned into another hit song...
Well, what’s the purpose of a correction? It’s to destroy the illusions of the previous bubble period.
How’s this one doing?
Progress is mixed. US consumers seem to have straightened up pretty fast. After the crash, they went into therapy and rediscovered their inner squirrel. Now, according to news and anecdotal reports, they’re saving all the cash they can. Savings rates, which had been near zero, are now bouncing up towards 5%. When they aren’t stashing nuts, they are becoming more independent.
Reports tell us that they are planting backyard gardens... and putting in their own power plants. Yesterday, we came across a website for people who wanted to generate their own power. They’re said to be cutting their own hair... and their own grass, driving less, cooking their own meals, and so forth.
They are prone to backsliding at any moment, of course. And with the feds waving the bottle under their noses every day, many are bound to fall off the wagon. But on the whole... consumers seem to be breaking free of the illusion that they can get rich by spending money.
The property bubble illusion seems to have been given a good whack too. Few folks in the United States of America or Britain would say today that “houses always go up in price.” Or that “you can’t lose in property.” People know it doesn’t work like that. Many speculators and homeowners alike have lost big. They’ll remember it.
Still, while the lesson has been taught... it probably has not been thoroughly learned. Many people still look for the bottom of the property bear market. They think the bottom will come soon... and that they will be able to profit from another big move up. This is not the sort of thinking you get at the real bottom. It’s the sort of thinking you get at false bottoms on the way down. It’s the sort of illusion that needs to beaten out of people by successive waves of disappointment.
Here’s what will happen.
Read on....
To read the Daily Reckoning in full, click here.
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