VERSACE: Tried-and-true can soften bumpy ride

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ANALYSIS/OPINION:

Like many people, I woke up Thursday morning and, as I scratched my head, realized we are halfway through 2010.

The halfway point, at least for me, tends to be a time to consider where I’ve come from and what lies ahead for the next half. This is true for exercise, long drives like the one to Hilton Head, S.C., last week, or investing and the stock market.

Through the markets’ close on Wednesday — June 30, the last day of the year’s first half — the major indices continued the roller-coaster pattern I have described over the past year — a drop into early February followed by a steady climb into late April and then a series of drops through the end of June.

The net effect is that all the major indices are down by percentages in the mid-single digits for the first six months of 2010, with the largest drop posted by the Standard & Poor’s 500 Index, which was down 6.2 percent. It will be a few weeks until data from Morningstar and other fund-tracking sources are available and shed some light on how mutual funds and hedge funds have performed for both the second quarter and first half of 2010.

The pullback in the stock market is something I have been warning about for more than a few weeks as more data points have emerged to call into question the strength and sustainability of the economic recovery. In recent weeks, the media have stoked the fires with talk of a double-dip recession with both thought leaders and economists putting out verbose and bloated arguments as to why and why not a double dip could occur.

Recoveries tend to be spotty, and, as I have described in recent columns, they also can be three steps forward, two steps back. Consider the weakening housing market and falling home prices and ongoing high fresh unemployment claims and unemployment and underemployment levels. We will get June employment levels on Friday, but initial unemployment claims released Thursday jumped well above Wall Street expectations, as did continuing claims. Now factor in the news that 1.3 million unemployed won’t get their unemployment benefits reinstated before the holiday weekend and hundreds of thousands more will lose their benefits in the coming weeks. Aside from our domestic concerns, global deficits are running high, and now growth expectations for China have been called into question. A risk to the idea that we could simply export our way to growth?

These data points, along with the pending impact of the BP Gulf oil-spill crisis and what that means for jobs, tourism and the like in the Gulf, have put consumers back into a depressed state. Oh, and did I mention the stock market has been volatile in recent weeks? Gallup’s Economic Confidence Index weakened in late May through mid-June, a precursor for the steep drop in consumer confidence reported by the Conference Board on June 29.

This raises concern over how much of a leading indicator Wednesday’s weaker-than-expected ADP Employment Report for June will be for Friday’s unemployment report. Heading into Friday’s report, Wall Street expected a loss of 100,000 jobs, which I would note is a reversal from the job gains of the past two months. We all know, however, that those gains were largely census-worker-fueled and it’s only a matter of time before those temporary jobs unwind. As always with the employment report, the data behind the reported figures and headlines are crucial, particularly the breakdown between private-sector and government jobs. The combination of a weaker-than-expected employment report and a low trading-volume day in advance of the Fourth of July holiday weekend could be a recipe for disaster, in my opinion.

With a light economic calendar next week followed by corporate earnings soon thereafter, I’d tighten up my investor seat belt — the bumpy stock-market ride could continue for a while longer.

But rather than view our investing glass as half-empty, let’s sharpen our pencils and consider how to capitalize on any pronounced pullback in the market. First and foremost, we know consumers are saving more, which is a good thing. Second, given consumer confidence levels and the expected return to job losses, odds are consumers will resume tight-fisted behavior in terms of parting with what disposable dollars they will spend.

To me, this spells concern for certain restaurant chains and companies that offer high-priced clothing and other items. In the past, I have mentioned key retailers such as Big Lots, Ross Stores, Marshall’s, T.J. Maxx and Kohl’s that are benefiting from the cash-strapped-consumer trend.

I think it prudent, given the potential risk ahead, to examine companies with solid balance sheets and good dividends that offer products that consumers will need to buy in good times and bad. Paper and personal care products, chocolate, alcohol and, yes, tobacco all spring to mind. Is it sexy investing? No but these are tried-and-true items that consumers will buy in most environments,, and several have above-average dividends.

Chew on that this holiday weekend. Happy Fourth of July, God bless America, and good investment hunting.

Chris Versace is director of research at Think 20/20 LLC, an independent research and corporate access firm based in Reston, Va. He can be reached at cversace@washingtontimes.com. At the time of publication, Mr. Versace had no positions in companies mentioned. However, positions can change.

About the Author
Chris Versace

Chris Versace

Chris Versace, the “Thematic Investor,” is the director of research at Think 20/20, an independent equity research and corporate access firm located in the Washington, D.C. area. Before Think 20/20, Mr. Versace was the portfolio manager of Agile Capital Management (ACM), a thematically driven alternative investment fund. The groundwork for ACM was laid during Mr. Versace’s tenure as senior vice president of equity ...

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