You are either long or short the market, long or short gold, oil, everything is correlated. Stock picking is practically dead. If I had to call it, I’d say we’ve entered a bear market end of April May period. We probably crystallized this with the S&P debt downgrade of U.S. debt. I believe you can make money in any kind of market but it’s clearly much harder in a bear market. It would be easy enough if you could just stay short but bear market rallies are notorious for weakening resolve. Some common themes that should work in this bear market.
1.Trade down. The article I posted earlier was a well researched piece talking about how P&G is challenged with the shrinking American middle class. This is obvious in the extreme out-performance of Domino Pizza, Dollar General, McDonald’s, and other favorites of the lower economic classes. This is the growing part of the economy.
2. Euro collapse- the artificial currency created with the Maastricht Treaty is starting to unravel. Shorting the Euro is the obvious play but several ramifications of this are negative for multinational U.S. companies from Procter Gamble, Caterpillar, to Apple Computer just to mention a few. Many companies like Phillip Morris have had the declining dollar as earnings momentum. This could turn into currency headwinds.
3. Utility stocks – in this zero interest environment with low or no growth, dividends will play a far greater role in overall market returns. As you can see from this chart courtesy of Robert Shiller, the mean dividend yield of the S&P 500 is 4.34%. Considering the yield is closer to 2% than 4%, there is little comfort in this tidbit for the bulls. Utilities like Dominion Resources, are nearing attractive price points.
4. Dividend stocks– we can find a few stocks that offer yields in the 4% range, like Merck, our largest position.
5. Insider buying- normally our most reliable indicator is not as meaningful when it’s all macro now. A CEO can be just as wrong about the economy as the Fed Reserve Chairman.