AIA Advocate for Absolute Returns : Oil Prices

Association for Investor Awareness - Week of 04/30/2009

Research & Editorial Staff — Thu, 30 Apr 2009 14:20:00 GMT

In This Issue:

Signs Of A Better Economy? (Or At Least Not As Bad?)
Stocks For A Weak Recovery
The Bottom Line This Week

Last month investors received another booster shot from Wall Street as the Dow and the Nasdaq rose an additional 1.2% and 5.5% respectively. The gains left stocks up 26% from the rally's jumping off point. With any luck, and a few encouraging numbers from the economy, the rally could continue for another few weeks.

Lest anyone think the bear is finished, however, we must remind you that the market never moves in a straight line very long. Even if this is the start of a new bull market, we must expect to get some nasty shocks along the way. After such a strong rally, the first correction may be close at hand.

Signs Of A Better Economy? (Or At Least Not As Bad?)

Analysts are all over the map when it comes to predicting the future of the economy. Some see improvements, others think the most we have is a slower decline. A few super bears believe the worst hits are still to come, and they are fastening their safety belts.

Because the economic outlook is the most important issue that investors must deal with right now, we will review the three main arguments for each outlook. Of course, we will finish up by giving you our own sterling opinion.

1) The Economy Is Improving:

The strongest indication that economic relief is on the way is the rising stock market. Although many investors are not particularly well informed about economic matters, it's just the opposite with big spenders – and they are buying stocks. Since the market tends to look ahead from six to nine months, economic relief is probably about that far away.

Consumers are also showing greater confidence in the future by traipsing off to the mall a little more often than they did a few months ago. Since consumers are two thirds of the economy, their improving outlook can be a self-fulfilling prophesy. Spending is still very low, but at least the trend appears to be changing.

Business spending is also on the floor, and it will probably remain there for several months. But with consumers beginning to buy goods again, businesses will need to replace them. Inventories are already low for many products. As with consumers, however, a business turnaround is likely to be modest.

Housing remains weak in most markets, but there are signs of life in others. That's not surprising since home affordability, an established measure of housing trends, is higher than it has been in over five years. Many hopeful homebuyers know that prices could go lower, but they also know they might start to go back up again. As a result, many people who can afford to buy at today's prices are deciding to take the plunge. Lower interest rates are another incentive to buy.

Credit for every type of loan is still tight but the situation isn't as bad as the news stories might have you believe. Throughout America, hundreds of regional banks that didn't follow the subprime path to ruin have money for worthy clients. Lending standards are higher than they were during the boom, but that's a good thing. Only an idiot would want to go back to the loosey goosey standards that brought ruin to our country. The bottom line is, people with good credit histories and a respectable down payment can get mortgages. The same is true for business loans, new car financing, and so on.

Oil prices are remaining low, which is probably doing more for the economy than Washington's bailout program. The drop from almost $150 a barrel to under $50 had the same impact as a huge tax cut. Natural gas prices are also on the floor.

Lastly, the bailouts are helping to stimulate several industries, not just banking. Although we are very concerned about the colossal size of the federal debt, the money is a plus right now.

2) No It Isn't:

Naysayers believe the economy is not improving at all, it is just not dropping as quickly. Although the slowdown may be a technical victory, the bears say there is no way to make "less bad" look like "good."

Pessimists also say that the downward trend could continue and take the economy to the same low place it would have reached at the faster pace. This is known as the "we're dead either way" argument.

Other analysts say that even if the economy stops dropping, that doesn't mean a rebound is anywhere in sight. They point to the Great Depression when growth remained at very low levels for several years. During that time the unemployment rate hit 24% and businesses continued to fail.

3) A Disaster Is On The Way:

The toughest crowd are analysts who are certain that a full-blown depression is coming. They call the new calamity the "Greater Depression" to distinguish it from the not-so-bad Great Depression. Arsenic anyone?

The Armageddon crowd believes that the bailout program won't save the banks because they have been too badly damaged to recover. Instead, the depressionists say, the stimulus money will just put off the inevitable for a few months, and make the collapse all the worse.

The super bears also say the huge federal giveaways are putting so much money into the economy that a period of high inflation –and perhaps hyperinflation- is unavoidable. Therefore, the argument goes, even if the economy starts to pick itself up off the floor, inflation will slam it back down again. The result would be super stagflation, a situation where unemployment remains high at the same time prices soar. It's not a pleasant prospect.

As long-time readers know, we place much more faith on what we actually see happening in the world than what statistics and ivory tower number crunchers say. It's a practice that has kept us in the chips on many occasions when most investors were selling.

For example, we remained bullish on energy efficient industries when oil prices were soaring and most analysts thought modern life was ending. We were of the opinion that railroads, inland shipping companies and other fuel misers would actually benefit from more expensive energy because it would hurt the competition. It turned out that we were right, and our recommendations did well.

Of course, past performance does not guarantee future results, and all that. But for what it is worth, we think the first economic outlook is correct, and the economy is more likely to continue to claw its way out of the hole than it is to begin sinking again. Although a typical recovery seems unlikely, growth should be above the zero mark by the end of the year or by early 2010. If we are correct, many top-quality stocks remain oversold.

Stocks For A Weak Recovery

We hate to repeat ourselves in this newsletter, but on the other hand we never get tired of making money. As a result, we are continuing to recommend the boring multinational stocks that have been doing so well of late. We think their biggest moves are yet to come.

If you only want to make a single blue chip investment, an excellent choice would be the iShares Dow Jones Select Dividend Index (DVY), one of our favorite EFTs. http://finance.yahoo.com/q/bc?s=DVY The index has been performing very well of late. On March 9, DVY closed at $25.91. By April 28, the fund was up to $34.98, a 35% gain. We take back what we said about boring stocks.

We think investors who prefer to buy individual issues should look at three growth companies that should be headed higher.

The first of the three is Alcoa (AA), the giant aluminum producer. http://finance.yahoo.com/q/bc?s=AA Demand for the lightweight metal dropped sharply when the economy fell out of bed and industrial production hit the floor. But even with a small increase in the economy, demand for aluminum should jump smartly.

Deere Company (DE) is another probable winner in an improving economy. http://finance.yahoo.com/q/bc?s=DE The biggest potential for Deere isn't its farm machinery, although sales should improve this year. Instead, demand for the company's construction equipment should begin to rebound as President Obama's infrastructure programs ramp up.

General Electric (GE) http://finance.yahoo.com/q?s=ge should do well as the company continues to get its troubled financial unit back on track. GE's worldwide sales of everything from locomotives to jet engines should also increase. We think this global powerhouse will be a very big long-term winner. A few years from now many investors will wonder how they could have ever thought that GE might not make it through the recession.

Last month we wrote that Ford http://finance.yahoo.com/q?s=F has an excellent "chance for a profitable recovery" and "a small position appears to make sense at today's low price."

That proved to be something of an understatement. When that issue was sent out on March 26, Ford was $2.94. Today Ford closed at $5.45, an 85.4% gain. The worse things get for GM and Chrysler, the better the outlook will be for Ford, the only one of the formerly "big three" automakers that didn't need a bailout. Henry would be pleased.

The Bottom Line This Week

The outlook is improving by inches, but we are a long way from being out of danger. It would not take a very big shock to send the economy and the stock market down again. As a result, we think the best strategy for investors is to use the positive trend we have now and buy blue chip stocks with good outlooks – but protect all your positions with stop-loss orders.

Association for Investor Awareness - Week of 10/23/2008

Research & Editorial Staff — Thu, 23 Oct 2008 17:11:00 GMT

In This Issue:

It's Too Early For A Sustained Rebound
But, There Are Finally Some Signs Of Relief
What Everybody Knows Is Often Wrong
Another Contrary Economic Outlook
Cheaper Energy: The World's Biggest "Tax" Cut
This High Yield Investment Looks Good
The Bottom Line This Week

Mother Market took pity on investors last week when she tossed a few points our way. Actually, it was more than just a few. The total for Monday and Thursday came to a whopping 1338. Since she took back "only" 937 points, the Dow and the Nasdaq ended the period up a welcome 4.8% and 3.8% respectively.

When the closing bell finally rang on Friday and the week's gains were locked safely away, some of us let out a happy little "hurray." However, our killjoy number cruncher pointed out that with so many wild swings happening every week it was inevitable that the market would occasionally end on a high point. In other words, the bounce could have just been a random event. Rats!

On Monday of this week the market jumped another 413 points, but it gave back 746 points on the following two days. Oh well, the mini-rally was fun while it lasted.

It's Too Early For A Sustained Rebound

Although we were disappointed, we were not surprised that the bounce didn't last very long. There are still too many buyers around to think the bear market has run its course. As we said two weeks ago, the real recovery is unlikely to arrive until the last of the bulls have been chased away. That day is probably still several months ahead of us.

History also suggests that valuations need to rise before a sustained rebound will occur. To be sure, there are now some very attractive stocks on the bargain table. Chubb (CB) has a P/E of 7.2 and a 3.0% dividend yield. Pfizer's (PFE) numbers are 13 and 7.6%. For Merck (MRK) the teasers are 12.3 and 4.9%. It's becoming a long list.

However, most stocks have merely gone from sky high to fairly priced, which suggests they have further to fall. In most bear markets, the P/E ratios for the Dow blue chip stocks usually drop to 10 or less before they make a major rebound. At the present time, the Dow's P/E is 15.7.

But, There Are Finally Some Signs Of Relief

Nevertheless, some encouraging developments are starting to appear. An increasing number of banks are beginning to loan money to their most credit-worthy customers. Banks are also beginning to loan money to each other which helps make credit available where it is needed most.

In addition, many pension funds, insurance companies, universities, and corporations are starting to provide funds to businesses. Interest rates are also coming down a bit. It all points to a slow restoration of the credit system upon which our economy depends.

However, there is another problem with the credit crisis that is rarely discussed. In today's slow economy, many companies are putting their expansion plans on hold. As a result, the demand for credit is falling. If that trend continues, it won't make much difference if more money becomes available.

What Everybody Knows Is Often Wrong

When it comes to economics and investing, what "everybody knows" is often wrong. In fact, the greater the consensus about a particular outlook, the more likely it is that just the opposite will occur.

Oil prices are a recent case in point. Only three months ago, everyone from Nobel economists to Joe and Sally MidAmerica was certain that high priced oil was here to stay. Many of the most experienced people on Wall Street were equally certain that oil would reach $200 a barrel by the end of the year. Those outlooks seemed completely reasonable at the time.

Nevertheless, oil prices soon collapsed. Today oil is selling for only $70 a barrel, a 53% decline from its peak.

Another Contrary Economic Outlook

A small but growing number of economists are now beginning to think the widespread doomsday outlook for the credit crunch and the economy is also dead wrong. We spotlighted the idea last week when we wrote about Casey B. Mulligan, a professor of economics at the University of Chicago who said, "...the economy doesn't really need saving. It's stronger than we think." And, "The non-financial sectors of our economy won't suffer much from even a prolonged banking crisis, because the general economic importance of banks has been highly exaggerated."

This week, Gene Epstein at Barron's wrote a two page article titled "Sorry, Chicken Little" that also cast doubt on the growing belief that the economy is doomed. He acknowledged that a recession seems inevitable due to the credit crisis and lower home values. But Mr. Epstein also said, "...it's possible that the downturn could prove to be one of the briefest and mildest on record." Talk about a contrary opinion!

Cheaper Energy: The World's Biggest "Tax" Cut

Mr. Epstein's main argument is the huge plunge in oil prices represents a massive booster shot for the economy that will soon begin to take effect. Not only is cheaper energy a benefit by itself, it should also bring down many other prices.

The first recipient of energy relief will be the American consumer who now has more money to spend than was true a few weeks ago. In many households, the savings totals several hundred dollars a month. As people begin to spend some of the money, inventories will be reduced, manufacturers will need to ramp up again, wages and employment will benefit, and so on.

To that happy outlook we will add that a reduction in scary news about bailouts and rescue packages should also help increase consumer spending. As we mentioned in a previous issue, Joe and Sally are mostly staying away from the mall because they are scared, not because they have no money.

The Fed is also trying to get Congress to play Santa Claus by sending another round of checks to individual Americans. The stimulus package we had earlier this year had a measurable impact even though most people put most of it into savings. With the holiday season right around the corner, the better part of a second helping of federal money will probably be spent.

Lastly, the economy will also receive a modest boost if the Fed lowers interest rates another half percent, as is widely expected. Such a reduction would leave the rate at 1%, a level that proved to be a magic charm when Alan Greenspan used it in 2003. This time around, the impact of cheaper money may be less because lending is slow for reasons other than interest rates. Still, a reduction would be an added stimulus to growth.

We are not trying to be Pollyanna. Huge economic problems remain, and they will take a toll. However, the end of the world may need to be postponed. If so, a stock market recovery may be closer than most analysts expect.

This High Yield Investment Looks Good

One investment that won't be helped by ultra-low interest rates is fixed income returns. Consequently, if your bonds and CD's will soon come due, they should be rolled over to longer term securities to lock in today's higher returns.

Alternately, readers might consider putting some of their money in high quality investments that have good dividend yields. We think one of the most attractive is Kinder Morgan Energy Partners LP (KMP). http://finance.yahoo.com/q/bc?s=KMP

Kinder Morgan is a master limited partnership that owns and operates over 25,000 miles of oil, natural gas, and fuel pipelines in the U.S. The company also has 150 terminals that store and transport petroleum, petrochemicals, coal and other bulk items by rail and truck.

Although energy prices are off sharply, KMP owns very little of what it pumps. As a result, KMP's price held up well while energy was dropping from $149 to $70. The price did drop sharply when the stock market fell out of bed recently, but it is now rebounding strongly.

Kinder Morgan is attractive because it currently yields 7.9%. Moreover, dividends have been increased for 12 years in a row and have been paid since KMP was formed in 1992. That's an excellent track record.

The kicker is that Kinder Morgan should also appreciate in price in the coming years. All in all, KMP appears to be ideally suited for the current conditions in the stock and fixed income markets.

The Bottom Line This Week

The dark cloud that hangs over the economy and the stock market opened up a bit over the past week. Although many serious problems remain, there are reasons to be optimistic that they are slowly being resolved. Some analysts think the process will take less time than is generally believed.

Meanwhile, several investments offer dividend yields that will keep investors warm while they wait for brighter days to come. Kinder Morgan Energy Partners LP looks especially attractive.

Week of 08/28/2008

Research & Editorial Staff — Thu, 28 Aug 2008 17:25:00 GMT

In This Issue:

Tensions Between The U.S. And Russia Are Serious
Oil And Commodities React To The Threat
Defense Stocks Look Even Better Than Last Week
And So Does The Dollar
Inflation vs Deflation Contest Heats Up
But Inflation Should End Up With The Gold
The Bottom Line This Week

Last week the stock market revealed that it has more underlying strength than world events would seem to justify. If the market is once again acting as a leading indicator of the future, the outlook is brighter than is generally supposed.

Despite the fact that a new cold war seems to be underway, the Dow was only off 0.3% last week. The Nasdaq declined 1.5%. The market dropped 242 points when it reopened on Monday, but it regained nearly half the loss on Tuesday and Wednesday.

Our feeling is that investors want to be buyers and can only be held back by disturbing news. That's a big difference from a bear market mentality when bad news drives prices and good news is ignored.

Tensions Between The U.S. And Russia Are Serious

Investors' underlying optimism aside, the prospect of another cold war is not a trivial concern. Russia has been using very harsh language about what it sees as an American attempt to surround it with NATO states and U.S. anti-missile batteries. There is a chance the arguments could have serious consequences.

Vladimir Putin of Russia promised that his country would respond to the threats, and that is clearly happening in Georgia. In addition, on August 18 Russia sent a large fleet of naval vessels towards the port city of Tartus in Syria. The goal appears to be to obtain an agreement to build a naval facility in the country. If so, it would give Russia its first base on the Mediterranean Sea. Washington won't like that at all.

Russia was also very unhappy with the West's approval of Kosovo's independence from Serbia, a traditional Russian ally. Mr. Putin made it very clear that the argument for Kosovo's independence applied equally well to Abkhazia and South Ossetia in Georgia. On Tuesday of this week, Russia decided to formally recognize the independence of both regions. Now the world is waiting to see what the American response will be to the latest Russian moves.

Oil And Commodities React To The Threat

Although U.S. investors are taking the problems with Russia in stride, the same is not true everywhere. Global markets are finally pushing oil prices up in anticipation that supplies could be cut. That's a sharp departure from the resilience of oil during the early days of the conflict in Georgia.

Gold, industrial metals, and several other raw materials also jumped in price last week after falling sharply earlier this summer. As with oil, investors are nervous that supplies could be disrupted.

The bottom line is that readers should consider the growing problem with Russia as they make their investment plans. There is no need for undue alarm but neither should investors have a cavalier attitude towards the events.

Defense Stocks Look Even Better Than Last Week

One part of the stock market that is likely to profit from increasing global tensions is the defense sector. Our recent recommendation of the Fidelity Select Defense & Aerospace Fund (FSDAX) http://finance.yahoo.com/q/pr?s=FSDAX and Raytheon http://finance.yahoo.com/q/pr?s=RTN could not have been more timely. Both investments stand to gain from the possibility that another cold war may be starting.

Orbital Sciences (ORB) is also in a very good position to appreciate over the next few years. http://finance.yahoo.com/q/pr?s=ORB When the company was formed in 1982, nearly everyone in the aerospace industry laughed at the effrontery of the young firm that thought it could enter the space business from scratch and with only a few million dollars.

The guffaws came to a halt 16 years ago when Orbital Sciences launched its first space vehicle. Since then, the company has delivered over 110 satellites and space-related systems to its customers.

Orbital Sciences' niche is providing small, and often reusable, launch systems. The company is the developer of the unique Pegasus rocket that is released from an aircraft at high altitude and then shoots into orbit. The Taurus series of rockets are ground-based variants of the Pegasus.

The company also produces the Minotaur rocket. It is the only U.S. launch vehicle that can be deployed from all American spaceports, including those operated by commercial interests. Taken together, the company's rockets offer the most efficient means to place small payloads in orbit.

Lastly, the company is a major supplier of interceptor booster rockets that will carry kill vehicles to destroy long-range enemy missiles in midcourse before they reenter the atmosphere. Another system intercepts enemy missiles in the early phase of flight when they are most vulnerable. Both developments are part of the layered missile defense system the government is in the process of placing around the world. The program will be worth many billions of dollars over the next few years.

And So Does The Dollar

At first glance it might seem that the dollar should weaken if America faces a period of rising tensions with Russia. Instead, the dollar has been strengthening.

One reason the dollar is strong is countless people around the world are becoming nervous about the euro, our currency's main competition. That's because many European countries share a border with Russia. In addition, several of them have joined NATO, a move that Russia vehemently opposes.

There is also a purely economic reason for the euro's weakness. The European economy is weakening which means the EU Central Bank is unlikely to raise interest rates as expected. If the European economy slips much more, the bank might even lower rates. The poor interest rate outlook is making the euro less attractive than the dollar.

As with our defense stocks, the PowerShares Dollar Bull ETF (UUP) also looks better this week than it did last time. http://finance.yahoo.com/q/pr?s=UUP The same is true for ordinary dollar accounts, CD's, and T-Bills. The returns from the interest they pay is pathetic, but the dollars themselves are starting to buy more of what you need – especially imported products.

Inflation vs Deflation Contest Heats Up

During the past several years, the biggest monetary threat Americans faced was rising inflation. Although the official rate remained low, the government conveniently took food and energy costs out of the equation to make the numbers look better. For real people who like to eat and keep their homes comfortable, the cost of living has been rising steadily.

However, when the credit crunch began billions of dollars started to disappear from the economy. Every bankruptcy, foreclosure, and layoff reduced the amount of money in our system. The hemorrhage was as least as large as the amount of money and credit the Fed was pouring into the economy.

In July, the money supply actually shrank. Data compiled by Lombard Street Research show that M3 (broad money) fell by almost $50 billion during the month, the biggest thirty day decline since modern records began in 1959. It shows that deflation gained the upper hand in spite of the Fed's efforts to control it.

But Inflation Should End Up With The Gold

In a deflationary environment, the value of money goes up, and that's what we are seeing today with the dollar. At the same time, precious metal prices usually decline, which has also been happening.

If we believed that deflation would continue for any length of time, we would make several changes in the recommendations we made in recent months. However, we think the deflationary period will be brief and inflation will come back. Most likely, the turnaround will occur before the year is over.

If we are correct, you should use this period to buy inflation hedges at today's bargain prices. Gold and silver, for example, are less expensive now than they were earlier this year.

We also think energy stocks will rebound within a few months. Again, if we are right, you should use this time to buy more of the industry leaders while they are cheap. At the minimum, we think you should own the Fidelity Select Energy Service Fund (FSESX) that holds the major exploration and development companies in its portfolio. http://finance.yahoo.com/q/pr?s=FSESX

As we explained last time, the official inflation number should continue to climb for another month or two because it reflects changes that have already happened. It won't be the first time Uncle Sam tells you one thing, and the real world tells you just the opposite.

The Bottom Line This Week

Rising tensions between the U.S. and Russia are having very little effect on the stock market, at least for now. However, if the situation gets much worse we can expect the market to decline. This is a time for investors to be cautious.

One sector that should benefit from the tiff with Russia is defense. The dollar is also benefiting from the threat of a new cold war, and from economic problems in Europe.

Lastly, energy stocks are still very cheap despite the small uptick in oil prices we saw this week. As with the defense stocks, it's time to buy more energy shares.

Until Next Week

The AIA "Advocate For Absolute Returns", a weekly 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 Thursday...

Week of 08/14/2008

Research & Editorial Staff — Thu, 14 Aug 2008 17:22:00 GMT

In This Issue:

Surprise! Oil Prices Can Plunge As Well As Soar
Russia-Georgia Conflict Shows Oil Retreat Has Legs
The Dollar Is Rebounding By Default
We Know We've Said This Before, But "Buy The Bargains"
The Bottom Line This Week

Last week, the stock market continued to make the big swings that started several days earlier. This time, however, we were delighted to see that the pattern was skewed towards the positive. Thanks to a 332 point gain on Tuesday and another 303 point jump on Friday, the Dow and the Nasdaq ended the week up 3.6% and 4.5% respectively.

Those were very nice numbers for a five day period, especially since poor economic news –and the Russian/Georgian war- continued to dominate the headlines. However, none of it could overcome the enthusiasm investors had for the recent plunge in oil prices that brought the magic $100 level within sight. If oil gets that low we will see rejoicing on both Wall Street and on Main Street. We might even raise a glass ourselves.

Meanwhile, Mother Market is testing our resolve. After rising 49 points on Monday, stocks dropped 250 points through Wednesday. More gyrations are undoubtedly on the way.

Surprise! Oil Prices Can Plunge As Well As Soar

When oil started to drop sharply, many investors doubted that the move would go very far. Most people had come to accept the argument that the world's increasing population, and its expanding economy, could only make oil more expensive.

Long term, we think the arguments for higher priced energy are correct. However, prices depend on the delicate balance between supply and demand, which can fluctuate widely nearer term. With a high volume commodity like oil, where a gusher is produced every day, it only takes a small decrease in demand to create a flood of excess product. The market adjusts to the surplus by dropping prices, as it is doing now.

The oil bulls also forgot that markets often get ahead of themselves. Speculators pushed the price of oil to a level it probably won't reach due to market forces until late 2009 or 2010. As a result, oil was due for a rollback even if demand had not dropped.

Russia-Georgia Conflict Shows Oil Retreat Has Legs

We were given a preview to oil's most likely near-term performance when Georgia made the mistake of poking the Russian bear in the backside two weeks ago. Because Georgia has a major pipeline that carries Caspian oil to Turkey, and on to Europe, the war should have sent prices soaring. That's especially true since Russia dropped a few bombs close to the pipeline. Nevertheless, oil fell another two dollars to the $113 area.

We must conclude from oil's weakness during the Russian-Georgian conflict that its fundamentals have deteriorated significantly. It's another indication that we could see oil drop below $100 before the correction ends, although some reversals must be expected.

One caveat is in order. If the U.S. or Israel attacks Iran, oil prices will shoot back up within hours.

The Dollar Is Rebounding By Default

Another abrupt change that analysts were not expecting is the recent upturn in the value of the U.S. dollar. As you probably know, the greenback had been on a losing streak for several years. As measured against the euro, the dollar fell from $1.06 in January 2000 to $0.63 in April of this year, a 40.6% decline. Now the greenback is up to $0.67.

At first glance, it is surprising that the dollar is getting stronger. The U.S. economy is slow, the federal debt is soaring, the credit crunch is in full swing, and housing prices are still falling.

Nevertheless, the value of the dollar is largely set by interest rates. For months, most currency traders were convinced that Europe would soon be forced to raise its interest rates to fight inflation. Then the European economy started to slow down which is taking pressure off inflation. As a result, Europe –horror of horrors- might actually lower interest rates. The bottom line is that the U.S. dollar, and dollar-based investments, became competitive again.

As with oil, however, the longer term outlook for the dollar isn't good. We continue to believe the dollar won't make a lasting rebound until the U.S. recovers from its seven year borrow-and-spend binge, and its costly aftermath. That process could take several years.

We Know We've Said This Before, But "Buy The Bargains"

When it comes to making investment recommendations we hate to sound like a broken record. On the other hand we've found that clients never get bored with making money. To that end, we will say once again that investors should use the reversals in oil prices and the dollar to pick up bargains. When the powerful forces that drove the investments in opposite directions over the past few years begin to reassert themselves, we will see the primary trends return. If you want to participate in those plays, you must take positions while most investors are bailing out of them.

The dollar is the easiest rebound to play. Nothing could be simpler than opening a foreign currency account, or buying a foreign currency CD, in a U.S bank. If your bank doesn't have them, we recommend EverBank World Markets that has many strong currencies available. www.everbank.com

Alternately, you can invest in a good foreign bond fund. The pick of the litter continues to be the T. Rowe Price International Bond Fund (RPIBX). http://finance.yahoo.com/q/pr?s=RPIBX The no-load fund seeks to provide high current income and capital appreciation by investing in bonds from France, Japan, the United Kingdom, Austria, and similar advanced countries.

As you can see from its price chart, the fund has declined 0.57% over the past 30 days, which reflects the rise in the dollar. When the dollar turns back down, the fund will rebound. We think RPIBX is an excellent hedge against the costly financial problems that are doing so much damage in the U.S.

Longer term investors should also consider the T. Rowe Price International Stock Fund (PRITX). http://finance.yahoo.com/q/pr?s=PRITX This no-load fund invests the majority of its assets in stocks of established non-US companies in both developing and developed countries. PRITX offers investors a broad position in the growth of the world economy that is still in its infancy.

In the energy industry we continue to favor exploration and development (E&D) companies. Every time we hear another politician say "drill, drill drill" we think "money, money, money." Even if the U.S. coastlines aren't opened up for energy extraction, there will be a lot of E&D elsewhere. The bottom line is clear, if the world wants more energy it will need to spend the enormous amounts of money that will be needed to find it.

There are several good E&D companies with bright futures. If you can own only one, we think it should be Transocean (RIG). http://finance.yahoo.com/q/pr?s=RIG The company specializes in finding energy in difficult areas including miles below the sea, and in festering tropical swamps. If there is any more oil to be found –and we think there is- Transocean will be a big winner.

We are also recommending Suncor Energy (SU) http://finance.yahoo.com/q/bc?s=SU&t=1y, EnCana (ECA) http://finance.yahoo.com/q/bc?s=ECA&t=1y, and Sasol (SSL) http://finance.yahoo.com/q/bc?s=SSL&t=1y All three secure energy stocks are down sharply with oil's decline because they have high production costs. The same lever will swing the other way when oil prices bounce back up. These three stocks are great long-term buys.

While you are waiting for the previous stocks to pay off, our shorter-term recommendation of Valero Energy (VLO) should keep you from getting bored. http://finance.yahoo.com/q/pr?s=VLO As we predicted in our July 24 issue, America's leading oil refiner has been caught in a pinch between rising oil costs and extreme price resistance at the pump. Now that oil costs are coming down more rapidly than gasoline prices, Valero's outlook is turning around – and so is its stock. Valero is one of the few energy plays that can gain when oil prices retreat.

Timing: In a declining market, bargain hunters should resist the impulse to make their purchases all at once. A better plan is to buy a little at a time as the situation unfolds. That way you will get at least part of your portfolio at the lowest possible prices.

The Bottom Line This Week

The oil correction is showing that it has stronger legs than most investors expected. It is impossible to know how far the price will drop, but we are only about $14 away from the psychologically-important $100 mark. We should hit it by the end of the year, and perhaps a lot earlier. Meanwhile, energy stocks are very attractive.

Similarly, the dollar's rebound could run several months. Buying foreign currencies along the way should prove to be a very profitable strategy longer term.

AIA Advocate for Absolute Returns : Oil Prices

Association for Investor Awareness - Week of 04/30/2009

Signs Of A Better Economy? (Or At Least Not As Bad?)

Stocks For A Weak Recovery

The Bottom Line This Week

Association for Investor Awareness - Week of 10/23/2008

It's Too Early For A Sustained ReboundBut, There Are Finally Some Signs Of ReliefWhat Everybody Knows Is Often WrongAnother Contrary Economic OutlookCheaper Energy: The World's Biggest "Tax" CutThis High Yield Investment Looks GoodThe Bottom Line This Week

It's Too Early For A Sustained Rebound

But, There Are Finally Some Signs Of Relief

What Everybody Knows Is Often Wrong

Another Contrary Economic Outlook

Cheaper Energy: The World's Biggest "Tax" Cut

This High Yield Investment Looks Good

The Bottom Line This Week

Week of 08/28/2008

In This Issue:

Tensions Between The U.S. And Russia Are SeriousOil And Commodities React To The ThreatDefense Stocks Look Even Better Than Last WeekAnd So Does The DollarInflation vs Deflation Contest Heats UpBut Inflation Should End Up With The GoldThe Bottom Line This Week

Tensions Between The U.S. And Russia Are Serious

Oil And Commodities React To The Threat

Defense Stocks Look Even Better Than Last Week

And So Does The Dollar

Inflation vs Deflation Contest Heats Up

But Inflation Should End Up With The Gold

The Bottom Line This Week

Until Next Week

Week of 08/14/2008

In This Issue:

Surprise! Oil Prices Can Plunge As Well As SoarRussia-Georgia Conflict Shows Oil Retreat Has LegsThe Dollar Is Rebounding By DefaultWe Know We've Said This Before, But "Buy The Bargains"The Bottom Line This Week

Surprise! Oil Prices Can Plunge As Well As Soar

Russia-Georgia Conflict Shows Oil Retreat Has Legs

The Dollar Is Rebounding By Default

We Know We've Said This Before, But "Buy The Bargains"

The Bottom Line This Week

Until Next Week

It's Too Early For A Sustained Rebound
But, There Are Finally Some Signs Of Relief
What Everybody Knows Is Often Wrong
Another Contrary Economic Outlook
Cheaper Energy: The World's Biggest "Tax" Cut
This High Yield Investment Looks Good
The Bottom Line This Week

Tensions Between The U.S. And Russia Are Serious
Oil And Commodities React To The Threat
Defense Stocks Look Even Better Than Last Week
And So Does The Dollar
Inflation vs Deflation Contest Heats Up
But Inflation Should End Up With The Gold
The Bottom Line This Week

Surprise! Oil Prices Can Plunge As Well As Soar
Russia-Georgia Conflict Shows Oil Retreat Has Legs
The Dollar Is Rebounding By Default
We Know We've Said This Before, But "Buy The Bargains"
The Bottom Line This Week