Have you ever suffered from "headline fatigue"? It's caused by too much exposure to anxious, sensational headlines that the ill-informed believe drives stock prices. The headlines de jour were typified by one that read "Deal or No Deal? Stocks Fall as Skepticism Rises Over Europe". As we approach the ECB meeting and Friday's EU summit, the question investors worry about is whether the Central Banks will print trillions to save the day. Another worrisome headline reads, "Risk on/risk off and Moneyball Economics" written by the MarketWatch editors. The gist of the article is, "If Europe's leaders manage to reestablish confidence in their respective sovereign bond markets, then it's "risk on" and commodities and lower quality, more speculative stocks, should do phenomenally well. "But if we have another setback — say, if a major piece of reform legislation gets torpedoed by squabbling among Euro nations, or a botched referendum — then it's 'risk off' and you'd better be in cash." So pessimism is back on the table, and the question is, what's it all about and what should investors do?
Climbing a "Wall of Worry"
In the almost 40 years that I've been a stock investor, I've seen this situation dozens of times. A "Wall of Worry" is a euphemism for programmed volatility. It's the old "two steps forward and one step backward followed by two more steps forward". The key word in the paragraph above is "forward", which is the predetermined direction that stocks will be going for the time being. Just look at this five-day chart of the Dow Jones Industrial Average:
A picture paints a thousand words, and you can see the "dance" and the direction. It's what the Market Mavens are calling for and have decided, and so we will see more of the same in the next few weeks. There may be some occasional "unexpected surprises" or a couple of big pull-backs. But the stock market action since the end of November is clear. For now, the market averages will "Climb a Wall of Worry" which will be followed by a rousing version of "Happy Days are Here Again" and the accompanying rally. How to Play This Kind of Market Action
There are three major "responses" that are appropriate and usually profitable. First, buy the dips. Accumulate more of what you believe are the best performers. I've been doing that with the precious metals producers, and Tuesday was an encouraging day with one of my bigger holdings, Hecla Mining (NYSE:HL), up 10% in a day. On dips, I'll be accumulating one of the "value bargains" of the precious metals sector, AuRico Gold Inc.(NYSE:AUQ). AUQ engages in the exploration, development, and production of gold and silver mines and projects in Mexico. The company was formerly known as Gammon Gold, Inc. and changed its name to AuRico Gold Inc in June, 2011. Recently, it acquired Northgate Minerals. With quarterly revenue growth of 101% and a 66% gross margin, AuRico Gold is definitely the best of the smaller gold producers in my opinion and others as well.
Second Response: Don't be afraid, and if you want to be cautious, then buy some cash-generating companies like International Paper (NYSE:IP) or Intel (NASDAQ:INTC) after one of those pull-backs. Jim Cramer spoke about this response on his "Mad Money" TV show Tuesday. I'd recommend you watch the segment and sift through the script for the "good stuff". Cramer spend a great deal of time talking about Carrizo Oil & Gas (NASDAQ:CRZO). Overall he's touting it as a "Growth and Takeover" story that's riddled with risk. More conservative investors may prefer solid, profitable, dividend-paying companies like ConocoPhillips (NYSE:COP), selling at 9 times earnings and paying a 3.6% dividend. Pengrowth Energy Corp (NYSE:PGH) is a Canadian energy company paying 7.7% that was also endorsed by Cramer on his Tuesday show. One of my personal favorites is Devon Energy (NYSE:DVN), which seems very cheap at less than 6 times current earnings and a 1% dividend that may be raised soon. With a 44% Operating Margin and a 46% Profit Margin, Devon fits the description of a "cash-generator," and has close to $7 Billion in cash now. Learn about them and study their annual report and news releases by clicking here.
Third Response: When the market gets too "frothy" and over-bought, do like the Oracle of Omaha suggests and "...sell when everyone's greedy". Take your profits and run, especially with stocks that are selling at rich multiples and have been driven higher by unattainable expectations. It seems more obvious with every passing day that the markets have been programmed to the old "climb a wall of worry" pattern of movements. Recognizing this pattern and responding responsibly (unemotionally) can mean that investors are in a season of "sowing and reaping" that can bring desirable results.
Consider the three responses mentioned in this article and the examples of stocks that can be considered for a "Climbing a Wall of Worry" period of time. One last thought. If you're a speculator and want to benefit (or take on more risk) from the potential financial bailouts and printing of money to save Europe, consider a company like ABB Ltd.(NYSE:ABB), which is another "cash-generator" and pays a 3.6% dividend. It has many products and services which keep the cash flowing. See their site. ABB is a Swiss company that provides power and automation technologies for utility and industrial customers worldwide. If the ECB and EU summits offer encouraging solutions or even big, temporary cash injections, companies like ABB will rally.