Sunday, July 27, 2008

Rest & rethink

Markets have been in free-fall for a couple of months followed by a sharp recovery 2 weeks ago. Bank stocks led these moves. After being very oversold, they rebounded sharply recently. Bank of America (BAC) had fallen to 18½, bounced back 15 only to lose 30% of that gain in the last couple of days. Others which had fallen below 10 had sharper recoveries followed by profit taking. Earnings reports for banks are largely over, stocks will have to live off macro economic news releases & these reports may not be pretty.

No secret, this has been an ugly year for stock averages. Dow & S&P 500 are down 14% while NAZ fell only 11%. A variety of Dow stocks have been punished badly this year (including the 2 oil stocks) contributing to the decline in the Dow:

AT&T (T)..........................24%
Bank of America (BAC)..........28%
Chevron (CVX)....................11%
Citigroup(C).......................36%
Exxon-Mobil (XOM)...............12%
General Electric (GE).............23%
Hewlett-Packard (HPQ)..........13%
IBM (IBM)..........................13%
JP Morgan Chase (JPM)...........9%
Pfizer (PFE)........................17%
Procter & Gamble (PG)...........12%

Pfizer deserves mention. This is the largest drug company in the world with a 40 year history of consecutive higher dividends. After falling to the 17s a couple of weeks ago, the stock has recovered to 18.89 yielding 6.8%, one of the highest yields for an S&P 500 Dividend Aristocrat. Its main drug, anti cholesterol Lipitor, has been a drag on the stock for some time. Lipitor has only 3 years remaining under patent protection, a time frame not lost on investors. More new drugs in the pipelines, but none has set off any alarms. Long track records are always impressive, they clearly have one. Yield conscious investors might take a fresh look at Pfizer.




I continue to think junk bonds deserve more respect. They yield 12%, 800 basis points above the Treasury bond rate. This spread has to be one of the highest spreads in history! Yes, there's risk. If the recession becomes more severe, defaults could increase. But this spread can cover a lot of mistakes.

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