Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
Peloton 35% CRASH a Lesson of What Happens When One Over Pays for a Loss Making Growth Stock - 1st Dec 21
Stock Market Sentiment Speaks: I Fear For Retirees For The Next 20 Years - 1st Dec 21 t
Will the Anointed Finanical Experts Get It Wrong Again? - 1st Dec 21
Main Differences Between the UK and Canadian Gaming Markets - 1st Dec 21
Bitcoin Price TRIGGER for Accumulating Into Alt Coins for 2022 Price Explosion - 30th Nov 21
Omicron Covid Wave 4 Impact on Financial Markets - 30th Nov 21
Can You Hear It? That’s the Crowd Booing Gold’s Downturn - 30th Nov 21
Economic and Market Impacts of Omicron Strain Covid 4th Wave - 30th Nov 21
Stock Market Historical Trends Suggest A Strengthening Bullish Trend In December - 30th Nov 21
Crypto Market Analysis: What Trading Will Look Like in 2022 for Novice and Veteran Traders? - 30th Nov 21
Best Stocks for Investing to Profit form the Metaverse and Get Rich - 29th Nov 21
Should You Invest In Real Estate In 2021? - 29th Nov 21
Silver Long-term Trend Analysis - 28th Nov 21
Silver Mining Stocks Fundamentals - 28th Nov 21
Crude Oil Didn’t Like Thanksgiving Turkey This Year - 28th Nov 21
Sheffield First Snow Winter 2021 - Snowballs and Snowmen Fun - 28th Nov 21
Stock Market Investing LESSON - Buying Value - 27th Nov 21
Corsair MP600 NVME M.2 SSD 66% Performance Loss After 6 Months of Use - Benchmark Tests - 27th Nov 21
Stock Maket Trading Lesson - How to REALLY Trade Markets - 26th Nov 21
SILVER Price Trend Analysis - 26th Nov 21
Federal Reserve Asks Americans to Eat Soy “Meat” for Thanksgiving - 26th Nov 21
Is the S&P 500 Topping or Just Consolidating? - 26th Nov 21
Is a Bigger Drop in Gold Price Just Around the Corner? - 26th Nov 21
Financial Stocks ETF Sector XLF Pullback Sets Up A New $43.60 Upside Target - 26th Nov 21
A Couple of Things to Think About Before Buying Shares - 25th Nov 21
UK Best Fixed Rate Tariff Deal is to NOT FIX Gas and Electric Energy Tariffs During Winter 2021-22 - 25th Nov 21
Stock Market Begins it's Year End Seasonal Santa Rally - 24th Nov 21
How Silver Can Conquer $50+ in 2022 - 24th Nov 21
Stock Market Betting on Hawkish Fed - 24th Nov 21
Stock Market Elliott Wave Trend Forecast - 24th Nov 21
Your once-a-year All-Access Financial Markets Analysis Pass - 24th Nov 21
Did Zillow’s $300 million flop prove me wrong? - 24th Nov 21
Now Malaysian Drivers Renew Their Kurnia Car Insurance Online With Fincrew.my - 24th Nov 21
Gold / Silver Ratio - 23rd Nov 21
Stock Market Sentiment Speaks: Can We Get To 5500SPX In 2022? But 4440SPX Comes First - 23rd Nov 21
A Month-to-month breakdown of how Much Money Individuals are Spending on Stocks - 23rd Nov 21
S&P 500: Rallying Tech Stocks vs. Plummeting Oil Stocks - 23rd Nov 21
Like the Latest Bond Flick, the US Dollar Has No Time to Die - 23rd Nov 21
Why BITCOIN NEW ALL TIME HIGH Changes EVERYTHING! - 22nd Nov 21
Cannabis ETF MJ Basing & Volatility Patterns - 22nd Nov 21
The Most Important Lesson Learned from this COVID Pandemic - 22nd Nov 21
Dow Stock Market Trend Analysis - 22nd Nov 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

How to Profit From a Slowing U.S. Economy During Second Half of 2010

Companies / Investing 2010 Jul 19, 2010 - 05:31 AM GMT

By: Money_Morning

Companies

Best Financial Markets Analysis ArticleLarry D. Spears writes: As much as the architects of the U.S. stimulus might otherwise wish, it's becoming increasingly apparent that the U.S. economy won't be hot-rodding its way into a higher gear in the year's second half.

At best, the U.S. economy will chug along in low gear - managing only minimal overall growth, while bouncing over economic speed bumps that exist in more than a few key sectors. At worst, the engine of economic recovery will sputter, or stall completely - leaving Americans stranded alongside the fiscal roadside, or to roll backward into a double-dip recession.


Most of the reasons underlying this assessment were clearly laid out in Money Morning's comprehensive Midyear Economic Forecast series article, "The U.S. Economy Is Headed for a Second-Half Slowdown." For our purposes, a brief summary of some of the recent statistical data will suffice, most notably:

•Although growth in U.S. gross domestic product (GDP) for the second quarter is expected to come in at 3.8% - up from a sickly 2.7% annual rate in the first quarter - that's still well below the growth levels needed to sustain a healthy economy. It's also still sharply lower than the 5.6% growth achieved in the fourth quarter of 2009, when the recovery seemed to be on track.
•Given population growth, economists say growth of 3% is needed just to break even, and 5% or more is a must if job creation is to expand - which isn't happening. Just 431,000 jobs were added in May, versus expectations of 513,000. Of that total, 411,000 were temporary - linked to U.S. Census hiring.
•The U.S. Federal Reserve has revised its economic outlook downward, pledging on June 23 to hold interest rates at artificially low levels in a continuing attempt to prop up what it called a "faltering" recovery - one that might not return the U.S. to prosperity until well into 2012.
•The Conference Board's Index of Leading Economic Indicators was flat in April and rose just 0.4% in May, both less than forecast and both signaling slower growth in the second half of 2010.
•The level of consumer spending, which can account for as much as 70% of U.S GDP, was revised downward to just 3.0% in the first quarter, with even lower numbers expected when the second quarter reports come out. Retail sales fell sharply in May, ending a seven-month winning streak, and total spending plunged by 1.2%. The drop in spending was reflected in the level of orders for durable goods, which fell by 1.1% in May (though they actually rose by 0.9% when the transportation sector, which includes autos and commercial aircraft, was excluded).
•Business activity showed little sign of taking the growth burden away from consumers, as the Philadelphia Federal Reserve Bank (Philly Fed) Index fell to 8.0 in June from 21.4 in May, a clear indicator that growth in the U.S. manufacturing sector is softening. On the plus side, businesses have the ability to spend if they want to, since Corporate America is currently sitting on its largest cash hoard in history.
•Consumers are unlikely to start opening their wallets without a significant improvement in the employment situation - and there's been none. The number of new weekly jobless claims continues to average above 460,000 - and economists say it's hard to achieve any meaningful growth until the number of new weekly claims falls below 400,000, and stays there. Overall, the June unemployment rate was 9.5%. That was down from 9.7% in May, but the decrease didn't warm the hearts of economists who say the rate decreased only because so many discouraged workers quit looking for work.
•That consumer concern was reflected in Tuesday's report of a huge drop in the Consumer Confidence Index - from 62.7 in May to just 52.9 in June.
•Despite 30-year mortgage rates that are below 5.0%, housing demand continues to fall. According to the Mortgage Bankers Association, mortgage applications fell 5.9% in the mid-June report, while refinancing activity declined by 7.3% and applications for new home loans fell 1.2%. Things are also likely to get worse, according to the National Association of Realtors (NAR), which predicts a steady increase in foreclosures through the remainder of the year, with more homeowners getting "under water" on their loans, delinquency rates (now at 14%) rising and sales rates continuing to decline.
•Although U.S. protectionists view China's recent decision to let the yuan appreciate against the dollar as a major victory, the American economy is likely to see little benefit in the form of cheaper imports. That's because roughly 70% of the price Americans pay for imported products is due to the costs of shipping, advertising, sales expenses, rents and profit margins. Thus, even if wages rise in China and the yuan gets steadily stronger, the impact on prices here will be minimal.
•The just-passed financial reform bill could turn into a major fly in the economic ointment. If critics are even partially correct, this well-intentioned - but hugely politicized - measure will almost certainly slow down job creation, keep credit tight, increase consumer costs, limit competition, substitute rules for reason in the determination of "too big to fail" and, ultimately, add to the already massive federal debt load.

"Slowdown-Play" Stocks

So given all this "good news" heading into the second half of 2010 and beyond, what are investors supposed to do? How can you protect yourself - and even make more money - in a slowing economy?

There are actually three possible approaches, which you can use individually or in combination.

The first approach is to look beyond the overall economic situation, and focus instead on individual sectors and stocks that are either resistant to slowdowns or likely to grow in spite of (or because of) the deteriorating financial situation. Three stocks you might consider that fall into this category are:

•Diageo plc (NYSE: DEO), recent price: $68.00: A classic "sin stock," Diageo will benefit from the reality that consumers tend to drink more when times are bad. And few companies are better-poised to capitalize on this reality than London-based Diageo, which distills, brews, bottles, packages, distributes and markets fine spirits, beer and wine. The company's brands include Smirnoff, Johnnie Walker, Captain Morgan rum, Bailey's Irish Cream, J&B scotch, Tanqueray gin, Crown Royal whisky, Guinness stout, Beaulieu Vineyard wines and countless others. The stock made a 52-week high of $71.99 in late April, sold off with the rest of the market in May, but bounced nicely off support at $60 and has been heading higher again. The company has solid earnings of $3.64 a share and pays a dividend of $1.77, good for a yield of 2.6%.
•ArthroCare Corp. (Nasdaq: ARTC), recent price: $26.54: Just as people continue to drink in bad times, they also continue to get sick, and to treat their illnesses - a trend likely to ramp up under the new healthcare reform plan. ArthroCare develops, manufactures and markets medical devices used in the application of its patented, minimally invasive "Coblation" technology, which uses disposable surgical wands that employ radio waves to treat a variety of orthopedic conditions. The company experienced a sharp increase in revenue and first-quarter income from operations of $15.1 million, up from a loss of $3.9 million in the same quarter a year ago. The stock is also a favorite of the funds, with 77% of its outstanding shares held by institutions, including 3 million by Fidelity alone.
•Yum! Brands Inc. (NYSE: YUM), recent price: $40.07: Even if the U.S. economy won't benefit that much from higher wages in China and a stronger yuan, U.S. companies that have hefty sales in China will - and Yum! is a leader in that category. With 37,000 restaurants in 110 countries - including KFC, Pizza Hut, Taco Bell, A&W, Long John Silver's and others - plus packaged-food items under the same brands, Yum! stores are a favorite of China's exploding middle class. The stock has a 52-week range of $32.49 to $44.00, earnings of $2.26 a share and pays a dividend of 84 cents.

Partnering Up

The second approach investors can take when economic growth is slow - especially when interest rates are also in the cellar - is to forget about capital gains and focus instead on income. That means concentrating on high-dividend stocks - or, for really big yields, so-called master limited partnerships (MLPs). Since dividend stocks have been frequent Money Morning topics (see the May 29 article, "How to Fuel Your Retirement with Dividend Cash"), I'll just mention a couple of MLP prospects here:

•Linn Energy LLC (Nasdaq: LINE), recent price: $26.65: This Houston-based partnership develops gas-and-oil properties throughout the U.S. - but not offshore. At the start of the year, it had 1,712 billion cubic feet equivalent of oil and gas reserves, and operated 4,688 wells. With a market capitalization of $3.95 billion, Linn pays out $2.52 a year, equating to an 8.93% yield.
The third - and most broadly defensive - approach is to purchase specialty exchange-traded funds (ETFs) that are designed to move in the opposite direction of a major market index. These so-called "inverse ETFs" use futures, options and other assets to create a passive portfolio that's expected to mirror the movements of leading indexes, but in the opposite direction. In other words, when the market falls, you profit.

The shares trade on stock exchanges, just like regular equities. Four of the leading inverse index ETFs are:

•Short Dow30 ProShares (NYSEArca: DOG), recent price: 53.60 - Inversely tracks the Dow Jones Industrial Average.
•Short S&P 500 ProShares (NYSEArca: SH), recent price: $54.53 - Inversely tracks the Standard & Poor's 500 Index.
•Short QQQ ProShares (NYSEArca: PSQ), recent price: $44.65 - Inversely tracks the Nasdaq 100.
•Short Russell2000 ProShares (NYSEArca: RWM), recent price: $42.84 - Inversely tracks the Russell 2000 Index.

Finally, if you don't want to shake up your entire portfolio or spend hard-to-come-by cash on purely defensive measures, the one thing you should definitely do to ride out the economic slowdown - assuming it will be accompanied by a flat or mildly bearish market - is write "covered call" options on your existing stock positions.

With market volatility as severe as it has been in recent months, option premiums are very high, meaning you can frequently bring in an extra $200, $300 or more by selling a relatively short-term (two or three months to expiration) out-of-the-money call against every 100 shares of a stock you own (at least those priced at $10 a share or more). This brings in added income and provides a couple of dollars of extra price protection should the stock pull back in the near term.

The worst that can happen is the market will rally before the calls expire and you will have to sell your shares - at a price higher than you could get for them today. Not a bad "defensive" outcome - especially since you get to keep the premium you receive either way.

Source :http://moneymorning.com/2010/07/19/u.s.-economy-3/

Money Morning/The Money Map Report

©2010 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or 72 hours after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in