Week of 11/25/2009

Wednesday, November 25 2009 - The AIA Advocate Newsletter

In This Issue:

A Santa Claus Rally Seems Unlikely
But We Could Have A Big January Bounce
Get Your Buy List Ready
A Dollar Obituary Is Premature
Cash Is Still King
It's Time To Start Building A Family Fortune
The Bottom Line This Week

Last month we reported that investors were starting to become very cautious. Since then, several positive earnings reports encouraged traders to add more stocks to their portfolios. The new purchases pushed the Dow and the Nasdaq up 4.7% and 3.4% respectively. It was a great start to the Holiday Season.

A Santa Claus Rally Seems Unlikely

We would like to think that the latest stock market gains indicate that the bull is getting ready to make a nice end-of-the-year dash for the cash.

However, a roaring finish to 2009 may not be in the cards. Typically, as a good year winds down investors become more interested in holding onto their gains than trying to get a bit more. The easiest way to protect profits is to take them off the table.

For professional investors, the urge to stand pat with a winning hand is especially appealing because good numbers lead to good bonuses. Investing isn't like the banking industry where the worse executives do the more money they make.

An end-of-the-year slide can also trigger a larger sell-off if nervous investors decide they need to race for the door. Tax loss selling can also add to a December slide. All in all, the downside looks stronger than the upside for the remaining weeks of 2009.

But We Could Have A Big January Bounce

If history is any guide, a spike in any end-of-the-year selling is likely to create an equally large January bounce. The upturn occurs when investors rush to buy back stocks they felt they should sell in December, but they want to own longer term. Many stocks move more on the bounce than they do during the drop – and the gains often come much faster. A good January rally can be quite a rush.

Get Your Buy List Ready

If the December slump comes as expected, we think you should put it to good use. Any of the blue chip stocks that we have been recommending should be purchased if they end up on the year-end clearance table. Not only should cheaper prices add to your long-term capital gains, they will also boost your dividend yields. With the right stocks, lower prices give investors two ways to win.

One part of the December/January see-saw we urge you to avoid is taking early profits during a first-of-the-year bounce. With the global economy working its way back from the recession, we think you will see greater gains by holding your stocks for the longer term.

Here are several of the top blue chip multinational companies from recent issues of this newsletter that look particularly attractive:

For An Emphasis On Capital Gains:

For An Emphasis On Current Income:

Consolidated Edison (ED) http://finance.yahoo.com/q/bc?s=ED
Eli Lilly (LLY) http://finance.yahoo.com/q/bc?s=LLY
Kinder Morgan Energy Partners, L.P. http://finance.yahoo.com/q/bc?s=KMP

A Dollar Obituary Is Premature

Since mid-March the dollar has lost 14.4% of its value against a basket of major currencies. Many investors expect the trend to continue, which is one of the reasons that precious metals have been going up strongly of late. Both gold and silver are traditional hedges against declining currencies.

Ruinous debts and rising obligations of the federal government are doing the most to hurt the dollar. Thanks to the huge bailout and stimulus programs of the past 18 months, the national debt has soared to over $12 trillion, an unprecedented number. To put it into perspective, $12 trillion is $12,000 billion!

It isn't just Uncle Sam that is in over his head. Joe and Sally MidAmerica are also deeply in hock. Countless consumers bought everything from their houses to their tennis shoes on credit.

Many economists think there is no possible way that America's colossal debts can be paid in full. The only solution, they say, is to effectively cut them down to size by allowing the value of the dollar to fall through inflation. Because wages usually keep up with inflation but debts stay the same, the obligations become easier to pay. In effect, if the value of the dollar drops in half, so does the debt. Lenders, of course, are stuck with the losses.

Cash Is Still King

The dollar bears are almost certainly correct in predicting that another nasty round of inflation is on the way. Currently, however, the American economy is still suffering from deflation and dollars actually buy more than they did before the great recession started.

We think deflation is likely to last several more months, and perhaps longer. If so, the dollar is oversold and will probably rebound. If the Fed decides to raise interest rates, the rebound could be even stronger.

Jim Powell, editor of the Global Changes & Opportunities Report (www.powellreport.com) suggested recently that readers can take advantage of a near-term dollar bounce with the PowerShares DB U.S. Dollar Index Bullish Fund (UUP). http://finance.yahoo.com/q/bc?s=UUP The ETF is structured to gain when the dollar rises against the euro, Japanese yen, British pound, Canadian dollar, Swedish krona, and the Swiss franc.

Inflation Is On The Way

Since rising inflation and a lower dollar seem likely longer term, investors would also be wise to use current conditions to get ready for them. Any near-term strength in the dollar should make gold, silver, strong foreign currencies, and other inflation hedges less expensive.

For most investors, the best way to invest in gold (as opposed to buying it for an emergency) is to purchase the SPDR Gold Shares ETF (GLD). http://finance.yahoo.com/q/bc?s=GLD For silver, we recommend the iShares Silver Trust ETF (SLV). http://finance.yahoo.com/q/bc?s=SLV Both ETFs, of course, track the metals they follow almost to the penny, and they can be traded just like stocks.

We think the most attractive foreign currency is the Australian dollar that is supported by that country's vast supply of valuable natural resources. While the U.S. dollar was sliding earlier this year, the Aussi currency gained 19.4%.

The best place to buy any foreign currency is still EverBank World Markets where deposit accounts and CD's are both available. www.everbank.com

It's Time To Start Building A Family Fortune

At this time of the year, people focus on their families and their investments at the same time. Accordingly, we think it is appropriate to consider taking steps to create a family fortune that will outlive yourself, perhaps indefinitely. With proper planning, and enough time, joining the Rockefellers, Vanderbilts, and other dynasties is easier to do than you may think.

Three years ago, Humberto Cruz showed how tax-free compounding within a Roth IRA, plus IRS inheritance rules, is making it easier than ever to create a fortune for your heirs. Here are the basics:

1) Start a Roth IRA and build it up to $100,000 by age 65. Try to keep breathing for another 20 years or so and don't withdraw money from the fund. Unlike a regular IRA, with a Roth no minimum distributions are required while the owner remains alive.

2) Name your spouse as the designated beneficiary of your Roth IRA.

3) When you die your spouse will roll your IRA into his or her own.

4) Your spouse then names your child as the beneficiary and lives another 10 years.

5) When your spouse dies, your child will inherit the IRA and should stretch out the withdrawals over his or her life expectancy using IRS tables.

6) Assuming an 8% annual return for 27 years, the beneficiary will receive $3,515,951 absolutely tax free.

7) Lastly, the child will start a Roth IRA and continue the process.

For details about how to use IRAs to create great wealth we recommend the book Parlay Your IRA Into A Family Fortune by Ed Slott (Penguin 2008). It's available from Amazon. www.amazon.com

The Bottom Line This Week

Stocks are continuing to move ahead. If the pattern continues, prices are likely to decline in December, and jump back up after the first of the year.

We think investors should use any late year market weakness to buy more of the blue chip multinational companies that we have been recommending in recent months.

All of us at The Association for Investor Awareness

wish you and your family a very Happy Thanksgiving!

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 ...

Disclaimer

All material presented herein is believed to be reliable but we cannot attest to its accuracy. Investment recommendations may change and readers are urged to check with their investment counselors before making any investment decisions.

Opinions expressed in these reports may change without prior notice. The Association for Investor Awareness, Inc. (AIA) and respective staffs and associates may or may not have investments in any companies, stocks or funds cited herein, may or may not have long or short positions and/or options and warrants relating thereto and may purchase and/or sell these securities or options at any time in the open market or otherwise without further notice. AIA, its Officers, Directors, Employees and Affiliates may receive compensation for the dissemination of this information.

Communications from AIA are intended solely for informational purposes. Statements made by various contributors do not necessarily reflect the opinions of AIA and should not be construed as an endorsement either expressed or implied. AIA is not responsible for typographic errors or other inaccuracies in the content. We believe the information contained herein to be accurate and reliable. However, errors may occasionally occur. Therefore, all information and materials are provided "AS IS" without any warranty of any kind. Past results are not necessarily indicative of future performance.

Tagged as: inflation, gold, stocks, everbank, rally, investment-strategies, roth-ira, dollar