Detective Commentary

What Happened?
A spate of worse than expected economic reports, including home sales and unemployment numbers, stoked fears of a double-dip recession. Problems in Europe and the still-gushing Gulf oil spill exacerbated the problem.

What’s Next?
The weak May housing numbers may reflect sales that were pushed into April as buyers scrambled to qualify for the government stimulus program which required that contracts be signed by April 30.

Also, in around two weeks, companies will start reporting June quarter results and predicting how they expect things to go for the balance of the year. If those numbers look good, and June housing sales rebound from May, the market will probably pick up. If not—we’re could be in for a tough summer.

Caution Advised
If you were in the market during the 2008 collapse and 2009’s amazing rebound, you have probably already realized that trying to guess what the market will do next is a losing game. So, rather than trying to predict the unpredictable, we continue to advise a cautious strategy.

Eventually, the economy in general and the market in particular will recover. But we don’t know when. Thus, continue to invest only funds that you won’t need for six to 12 months so that you can wait out market downturns. Avoid risky bets—instead focus on firms with solid fundamental outlooks that won’t be hurt too much by an economic slowdown. Natural gas and crude oil pipeline operators, utilities, and preferred stocks come to mind.

Steady Eddies
Preferred stocks are a category that I find especially appealing in uncertain markets. Why? Here are our Preferred Portfolio’s average returns, by month, going back 12 months. For comparison, I’ve also included the S&P 500’s return for each month.

As you can see, preferreds have produced unexciting, but relatively steady returns over differing market conditions. However, keep in mind that nothing always works in the stock market and preferreds could get hit hard if we experience another credit market collapse such as happened in 2008.

What’s New?
This month we’re adding three new picks to our Preferred Stocks portfolio. Two of them, rated investment quality, are paying 7.1% to 8.8% estimated dividend yields based on their recent trading price. The third, rated below investment quality (junk), is paying an 8.8% estimated yield and also offers 35% appreciation potential should it trade back up to its issue price. We are also changing our buy/sell ratings on three existing picks.

We are replacing one pick in our Energy Partnerships portfolio with an oil and natural gas producer that is paying a 10% expected dividend yield.

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