How investors can turn fear into profits
If you have a logical plan for reading the markets, says a U.S. advisory, you can profit while others panic, as with several Canadian stocks.
Be greedy when others are fearful.
We’ve heard that half-maxim by Mr. Warren Buffett quite often lately (the other half, of course, is to be fearful when others are greedy).
It’s a great idea. Get into the market when others are bailing out, and you’ll set yourself up for the future with good stocks at bargain prices.
But this approach works best when you can read the markets more clearly than those who are scrambling for the exits. And for that, you need some clearly defined benchmarks.
For one set of benchmarks, we turn to a respected U.S. observer, Mr. Elliott H. Gue, editor of Personal Finance.
The first principle, he says, is simple. If you don’t have a plan before the storm hits, watch out.
“Investors who lack a consistent approach to analyzing the markets and a logical plan of action tend to panic at the first sign of trouble.”
One of the best ways to avoid panic, he affirms, is to monitor certain market and economic indicators that have a proven track record.
In this case, they are U.S. indicators, but there are similar benchmarks in Canada. And wise Canadian investors keep a weather eye on the U.S., since the two markets tend to feed off each other.
In fact, we will begin by updating the three Canadian stocks in this advisory’s Growth Portfolio.
Good bet for the future
The world’s largest uranium miner, Cameco Corp. (TSX-CCO; NYSE-CCJ) is a good bet for the future, according to this advisory. Almost six weeks ago, when the advisory featured the stock (see Daily Buy-Sell Adviser, May 4), it was trading at $24.79 and uranium was at $41.75.
Today the stock is at $24.05 and uranium is at $40.75. But the spot price is illiquid and many utilities have contracted their supplies for the next few years. The best is yet to come for Cameco as a number of existing deals wind down and demand opens up, says the advisory.
It is a buy up to US$35 and yields 1.1 per cent on the $0.28 dividend.
Goldcorp (TSX-G; NYSE-GG) is this advisory’s “favorite gold miner.” Gold mining shares should be core holdings for investors, it says, and this one is a buy up to US$45.
It was $43.75 in Toronto six weeks ago and is up slightly now to $44.05 (but only $42.78 in New York). The yield on the 18-cent dividend is 0.4 per cent.
The third Canadian stock, conglomerate Brookfield Asset Management (TSX-BAM.A; NYSE-BAM), is currently a hold for this advisory. It trades at $25.15 and yields 2.1 per cent on a 53-cent dividend.
Positive spells recovery
To read the markets, you must pick your benchmarks carefully, says Mr. Gue. Investors who track dozens of indicators can find themselves paralyzed by conflicting signals.
One he relies on constantly is the U.S. leading Economic Index (LEI). He has a basic rule for reading it. When the year-over-year percentage change sinks below zero, recession is imminent.
But a move from negative to positive territory spells recovery. This simple rule held true in 2007, as the LEI foreshadowed the recession. In mid-summer 2009, it indicated that a recovery was underway.
So far, the year-over-year change for 2010 is historically high at over 10 per cent. The April reading was down, but this doesn’t mean the U.S. is slipping back into recession, says the editor.
It’s common for the year-over-year change in the LEI to moderate as a recovery unfolds. Several consecutive bad readings might be cause for concern, he admits. You can follow it yourself, if you’d like, on the Conference Board web site — http://www.conference-board.org.
No reason to panic
The bears in the market argue that the credit contagion in Europe is liable to nip the recovery in the bud. Mr. Gue isn’t buying it.
The TED spread (the difference between U.S. Treasury bills and eurodollar futures) is at 40 basis points. It was over 400 at the height of the credit crunch in 2008.
Plus yields on U.S. corporate bonds have been holding steady, and even junk bonds aren’t completely junk.
But the key indicator in the credit markets today, says this editor, may well be credit default swaps (CDS) for the EU countries. “CDS allows investors to hedge against a sovereign default; an uptick in CDS prices suggests heightened default risk and fear.”
Mr. Gue has been closely following the CDS spreads for Italy (he gets his material on credit default swaps from Bloomberg). The Italian spreads remain high, although lower than 2008 levels. “A spike in the CDS spread would likely precipitate further action from EU policymakers,” he states. “An easing would catalyze a significant rally.”
Recent market action is no reason to panic, this editor states firmly. Corrections of 10 to 15 per cent are not unusual during market rallies.
Positive economic momentum in the U.S. and European core markets, he says, and overblown concerns about credit, “reinforce my view that the downdraft is a correction within a cyclical bull market — not the beginning of another downturn.”
He advises his readers to gradually build positions in the sectors that should benefit the most by an eventual market rally, such as energy, industrial and technology stocks.
He might have added, buy some Canadian stocks while you’re at it.
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