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U.S. Economy Shifting into Higher Gear

Economics / Economic Recovery Apr 09, 2010 - 04:06 AM GMT

By: Sean_Brodrick

Economics

  • Best Financial Markets Analysis ArticleWhy Oil and the Dollar Are Going Up at the Same Time
  • 4 Indicators Indicating the Economy Is Revving Up
  • 3 Forces That Will Kick Energy Stocks into Overdrive
  • How YOU Can Profit from This Trend

Boy, the market is getting interesting. If you step back from the day-to-day zig-zags in prices, you can see that the dollar is trending higher … oil is trending higher … gold is trending higher … stocks are trending higher! How can this be possible? After all, we’re used to other asset classes moving opposite to the dollar.

More importantly, where do you want to put YOUR hard-earned money to work in this crazy market?

I think these developing trends in the markets come down to good ol’ fashioned optimism. Investors around the world are growing more bullish on the global economy and even more so on the U.S. Sure, they could be wrong. This whole bubble could burst tomorrow. But let me show you what the bulls are looking at.

#1) U.S. Light Vehicle Sales Rising. America is a car-obsessed culture, so it’s good news that U.S. light vehicle (car) sales rose 24% in March from the previous year.

U.S light vehicle salesSources: Wardsauto.com and Econbrowser.com

This is the first impressive year-over-year improvement in quite some time. In fact, excluding cash-for-clunkers, it’s the best month we’ve seen since August 2008.

Here’s even better news for automakers: GM still sold even more cars in China in March than in the U.S. So it’s win-win for the U.S. and global economies.

#2) Manufacturing Is Getting Back in Gear. The Institute for Supply Management (ISM) Index rose to 59.6 for March. Take a look at this chart and you’ll see a level of recovery that is usually associated with gross domestic product growth of 5% to 6%.

ISM Manufacturing: PMI Composite Index Source: St. Louis Fed

This means that managers reporting improvements outnumbered those reporting declines by the highest margin seen since 2004.

Now for the global economy: Purchasing Managers Index numbers are rising around the world. A global index produced by J.P. Morgan rose to a 70-month high of 56.7 last month, compared to 55.4 in February.

So again, we are seeing expansion in both the U.S. and the global economy.

#3) Economy Outside of Manufacturing Is Also Revving Up. First, let’s look at the chart of the ISM Non-Manufacturing Composite Index …

ISM Non-manufacturing Composite Index Source: Econoday.com

The ISM reports that …

The NMI (Non-Manufacturing Index) registered 55.4% in March, 2.4 percentage points higher than the seasonally adjusted 53% registered in February, and indicating growth in the non-manufacturing sector. The Non-Manufacturing Business Activity Index increased 5.2 percentage points to 60%, reflecting growth for the fourth consecutive month. The New Orders Index increased 7.3 percentage points to 62.3%, and the Employment Index increased 1.2 percentage points to 49.8%. The Prices Index increased 2.5 percentage points to 62.9% in March, indicating an increase in prices paid from February. According to the NMI, 14 non-manufacturing industries reported growth in March.

#4) Other economic news is bullish as well. Furniture sales are rising … retail sales are up 7 months in a row … cargo volume at major ports is expected to rise 8% in April … gasoline demand is up 1.8% year-over-year even before the summer driving season.

So, we are seeing car sales increase, manufacturing activity increase, non-manufacturing activity increase, and a surge in economic activity as consumers spend and retailers restock.

We probably still have a lot of pain to go through before a real economic recovery gains traction. Heck, the unemployment rate is still nearly 10%, and I’m expecting a decent correction in the markets. The financial crisis has been papered over — for now. Big problems could come back to haunt us down the road. But all things considered, is there any wonder that oil prices are going higher, even as the U.S. dollar is rallying?

And here’s the funny thing about the U.S. dollar rally. It is creaming the euro. But other currencies — particularly commodity currencies — are rallying even harder than the greenback.

I’m talking about the Australian dollar and the Canadian dollar. The Australian economy is so strong that Australia’s central bank recently raised its benchmark interest rate by 0.25%. That’s lighting a fire under the Aussie. Meanwhile, the Canadian dollar is trading at parity with the U.S. dollar for the first time since July 2008.

This augers well for the commodities that give the Canadian and Australian dollars their strength — oil, gas and metals. It also is a vote of confidence for the global economy.

Oil Prices Should Head Higher, But Be Careful!

As I recently told CNBC in an interview, yes, we do have plenty of oil in storage … though storage levels are coming down. Nonetheless, I think that investor optimism on the global economy and expectations of increased demand in emerging markets will drive oil prices to between $93 and $98 this year.

I expect that as oil prices near $100 a barrel, investors will change their driving habits and OPEC will turn on the taps. Saudi Arabia alone says it has 4 million barrels per day in spare capacity. And that will drive oil back to support in the low $70 a barrel range.

The trips either way could be zig-zaggy and frustrating for investors. Nonetheless, a range between the low $70s and the mid $90s is very good for a whole flock of energy companies.

So you can play this trend by investing in ETFs that hold baskets of the best energy stocks. And compared to the rest of this market, energy stocks are cheap!

Just look at this chart comparing the Energy Select SPDR (XLE), a basket of leading energy stocks, against the SPY, an ETF that tracks the S&P 500 …

Energy has underperformed the broad market all year. But that seemed to change last week

You can see that energy has underperformed for over a year. In fact, the S&P 500 gained 6% for the year through the end of last week while the XLE gained just half that.

But that started to change last week — when energy blew away all sectors last week, gaining 4.4% in the process. Energy has continued to do well this week. I think investors are looking at oil prices moving into a higher range … with the potential for extraordinary profits for select stocks.

You could buy the XLE. Or there are other exchange-traded funds that will let you target stocks that could outperform the broad energy sector — like the SPDR S&P Oil Gas Exploration and Production Index (XOP).

Or, if you really want to crank up the profit potential, you could buy individual stocks.

How YOU Can Beat the Street!

That’s what we’ve done in my new monthly publication, Crisis Profit Hunter.

I fired off my first recommendations in Crisis Profit Hunter on January 26th. Out of the 11 positions I’ve recommended in 3 bonus reports and 2 issues, eight are in the energy complex. 10 of the 11 are showing open gains. Not bad for just out of the gate.

Crisis Profit Hunter is beating the S&P 500, which you can see from the following chart. I tracked what would happen if, instead of investing in the Crisis Profit Hunter recommendations, you put that money in the S&P 500.

Percentage Gains - CPH vs S&P 500

And remember, for most of this time, the S&P 500 has been outperforming the broad energy sector. So why is Crisis Profit Hunter outperforming? The secret is simple: Dividends!

Eight of the 11 Crisis Profit Hunter positions pay big fat dividends. Once you start adding those in, Crisis Profit Hunter leaves the S&P 500 in the dust. This is in less than three months — I can’t wait to see what happens over the whole year.

Why the Party’s Just Getting Started

I think there are THREE forces that are going to kick the Crisis Profit Hunter portfolio into overdrive.

Two Words: Free Money! Make no mistake, the broad market is rising on a flood of money that the government is throwing at banks. The banks don’t want to loan this money out to ordinary folks like you and me, so they’re using it to play the markets.

Yeah, there are better ways to use taxpayer money. But do you think this free money flow is going to stop now? In an election year? Anything can happen, but I’d say the Good-Time Charlies in Washington won’t dare to take away the punch bowl until after the November election — if then! And that means plenty of free money to keep the party going.

Dividend Payouts Will Add to Outperformance. Plexus Asset Management recently issued a multi-year comparison of the dividend yields of stocks in the S&P 500 Index and the forward real returns (total returns, or capital movements plus dividends). The study covered the period from 1871 to March 2010 and used the S&P 500 (and its predecessors prior to 1957). The verdict: The performance of high-yield stocks — like many of the picks in Crisis Profit Hunter — blew away the competition. Stocks with an average dividend yield of 7.1% returned 10% over 10 years. Stocks with an average dividend yield of 2.3% returned just 2.6%.

The reason is simple. You can’t lie about a dividend. Stocks that pay nice dividends and raise them regularly are in the sweet spot of the market.

Energy Prices Should Keep Trending Higher. The Crisis Profit Hunter portfolio is heavily weighted toward energy because that’s where some of the juiciest dividends are. And the outlook for oil is bullish.

  • Global demand is expected to rise by 1.5 million barrels per day to 86.5 million barrels per day in 2010 — that’s more than 1,000 barrels per second!
  • Most of that new demand is coming from emerging markets. The number of cars in India, China and other emerging markets is surging.
  • Result: China is increasing its demand for oil by at least 5% annually. And India’s demand for Saudi oil in particular has doubled in the past year.

Sure, the global economy could run off the rails, and all this could go away. We’re preparing for that potentiality in Crisis Profit Hunter as well. But as the old saying goes, you should make hay while the sun shines. And right now, the sun is shining in the energy sector.

This is a big trend. You don’t have to chase the market. Wait for a good-sized pullback and then buy. If you’re doing it on your own, be very careful. The next big move in the market could be down … but that could give us some extraordinary buying opportunities for the rest of the year.

Yours for trading profits,

Sean

P.S. Sign up for Crisis Profit Hunter today, and I’ll send you four FREE reports just for signing up. Those special reports are “Gold and Silver Superstars,” “Pipeline to Profits,” “Income Gushers,” and “Water — the Most Valuable Resource of the 21st Century.”

The recommendations in these reports, plus the picks in the first two issues of Crisis Profit Hunter, are designed to kick off your portfolio with a bang. Don’t waste another minute — get your subscription to Crisis Profit Hunter TODAY!

This investment news is brought to you by Uncommon Wisdom. Uncommon Wisdom is a free daily investment newsletter from Weiss Research analysts offering the latest investing news and financial insights for the stock market, precious metals, natural resources, Asian and South American markets. From time to time, the authors of Uncommon Wisdom also cover other topics they feel can contribute to making you healthy, wealthy and wise. To view archives or subscribe, visit http://www.uncommonwisdomdaily.com.


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