By Horacio Marquez
Contributing Editor
Money Morning

In an earnings season that has seen a lot of positive results – as well as a few equally disquieting surprises – it may be a good time to load up on a solid, defensive stock like The Procter & Gamble Co. (NYSE: PG).

In the period between last October and March 29, when the market was gripped by panic-selling and widespread liquidation, we were actively buying the cyclical stocks in energy, other natural resources, and high-technology – essentially the stocks that everybody is very excited about now. 

By doing so we took advantage of low valuations. And as governments around the globe deployed stimulus measures, we enjoyed nice gains on the iShares MSCI Brazil exchange-traded fund (NYSE: EWZ), Diamond Offshore Drilling Inc. (NYSE: DO), Vale SA (NYSE ADR: VALE) and Petroleo Brasileiro SA (NYSE ADR: PBR). 

But since May, I’ve recommended taking profits (for trading-oriented accounts) in most of those pro-cyclical global plays and moving into more “defensive” situations.  I purposely highlight the word defensive, because I believe that on certain occasions these plays actually can become our best offense.

These companies are resistant to recessions because the staples that they sell are necessities that we cannot do without, like toothpaste and soap.  Because of this low sensitivity to general economic activity and low seasonality in general, their cash flows are extremely stable.  This gives them the added advantage of having low, dependable funding, which is a huge advantage when bank and market financing is scarce or comes only at a premium.

There has been nothing said about these companies being up against the ropes with creditors.  In fact, it’s quite the opposite. These companies, in general, generate such strong and even cash aflows that they are able to pay very generous dividends.

So, let’s move into the current earnings season.  While we got out of the way to avoid the negative surprises [like we just saw with Microsoft Corp. (Nasdaq: MSFT) – as evidenced by its stock being down more than 8% in afternoon trading on Friday], many companies were able to beat analyst estimates, thanks to deep cost-cutting. That gave some hope that corporate flexibility once more saved the day. 

But the question is for how long?

We cannot rely on continued cost-cutting measures to beat earnings estimates.  Once a company has cut deeply, it becomes extremely difficult to cut more.  At some point, it needs to start delivering on the top line.  At the same time, the lesson in this earnings season is that China, parts of Asia, and emerging markets are indeed delivering strong growth.

Also, we are seeing increasing evidence that the United States, Europe, and Japan are seeing signs of stabilization – and even a rebound in growth in some browbeaten sectors. 

Hence, I started looking for global companies that can grow strongly in the emerging markets and capitalize on a weak U.S. dollar, but also have enough stable cash flow and critical mass to flourish in a weak U.S. consumer market.

That is how I got to Procter & Gamble. 

This company is the poster child for global marketing. It has more than 20 global brands – each of which exceeds $1 billion in sales.  What’s more, P&G has all the attributes that I described in terms of being recession-resistant, having an impeccably stable cash flow, and low debt levels committed at low interest rates.  More importantly, it is a company on the go.

I recently had a conversation with a top manager of a different global company – a leader in its field. He confessed to me that he believed his own company at times could get complacent.  Sure.  When a company is the leader in its industry, and when few rivals can even dream of competing against it in a range of key products, it is very easy to get complacent. 

But this is not the case at P&G, where the company’s executive management team has been increasing its internal productivity along a number of key variables year after year.

In addition, it just this month elevated an internally bred executive, Robert A. “Bob” McDonald, to the post of chief executive officer. McDonald worked as the company’s chief operating officer under CEO A.G. Lafley, who is now serving as the chairman of the board.

McDonald has the perfect background needed in these times: Exposure to foreign markets, impeccable operational discipline, and solid corporate credentials.  Making logistics happen on a global basis for a company of this magnitude is what is going to pave the way for future profits – but doing so without losing its traditional focus on being a “best-of-breed” marketer and market-share leader in a broad range of consumer-product areas.

Lastly, we are going into P&G before they are due to report earnings next Wednesday (Aug. 5).  If the pattern holds this earnings season, we should be very pleasantly surprised.  Also, we are due to see some rotation out of financials and commodities into consumer staples, many of which have underperformed lately.

I have no complaints about P&G’s valuation of 15 times earnings, which, given the company’s stability and the stock’s 3.2% dividend yield, appears undervalued.

Procter & Gamble closed Friday at $55.84, up 68 cents a share, or 1.23%. At that price, P&G shares are down about 24% from their 52-week high of $73.57, and are up 27% from their 12-month low of $43.53.

Recommendation: Buy The Procter & Gamble Co. (NYSE:PG) at market (**).

(**) – Special Note of Disclosure: Horacio Marquez holds no interest in the The Procter & Gamble Co.

[Editor's Note: Veteran Wall Streeter Horacio Marquez is the author of Money Morning's hugely popular "Buy, Sell or Hold" series, and is also the editor of the longstanding "Money Moves Alert" trading service.

In a new free report, Marquez has identified a category of stocks he has labeled "rocket stocks," which display key characteristics hinting that they're ready to move. One such characteristic: Heavy insider buying. In fact, one particular sector right now is seeing especially heavy insider buying - and many investors will be surprised to discover just what sector it is, and what companies top executives are buying into. For a free report that details these "rocket stock" plays, and that outlines this torrent of insider buying, please click here.]

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By Horacio Marquez
Contributing Editor
Money Morning

With the market very near critical support levels, critical earnings reports on the docket, and inflation and employment data set for release, it was more prudent last week to keep the powder dry. But the market surprised to the upside, as key companies reported better than expectations.

Participation in fixed income issuance and trading, gave investment banks buoyancy.  But JP Morgan Chase & Co. (NYSE: JPM) actually confirmed two of the three fears that I outlined last Monday:  A bleak commercial real estate outlook – which will have little consequence for the bank given its limited exposure in this area – and a spike in credit card delinquencies. 

The third fear I had, the rise in residential foreclosures, was confirmed by a report from RealtyTrac that said foreclosure filings in the United States jumped to a record 1.9 million in the first half of 2009.

Of course, there are some indications that the consumer problem loan and unemployment metrics might be in the process of peaking. 

Headline unemployment numbers were much better than expected because of the methodology used for seasonal adjustment, which anticipates maintenance-related layoffs at automakers during this time of the year.  The difference this year is that the layoffs occurred much earlier as General Motors Corp. (NYSE: GRM) and Chrysler Group LLC restructured.  Therefore, the regular seasonal adjustment performed on the number over-corrected for these layoffs that occur at this time.

If unemployment is peaking, we may see end to the consumer malaise in the months ahead. 

Still, the earnings season has just begun. The technology sector has also seen positive surprises, not just in bottom lines but sales growth in some cases – especially semiconductors.  This is very important, since semiconductors typically lead the tech up-cycle.  In this sector, the market has correctly anticipated the good news and rallied.

So, even though the U.S. Federal Reserve has assured the market, and the world, that it will bring an appropriate end to quantitative easing, there remains a possibility that the reduction in monetary stimuli won’t come in time to prevent inflation. Both the Producer Price Index (PPI) and the Consumer Price Index (CPI) came in higher than expected last week, with the main areas of price increases focused on food, energy and at the beginning of the production chain.

The June headline CPI rose 0.7%, while core CPI, which excludes food and energy, rose 0.2%.  This was preceded by a hot PPI, which increased 1.8% from May, the largest monthly increase since November 2007. Once more, the main culprits were food and energy, since core PPI, which excludes these two sectors, was up 0.5% for the month. Still, on a year-over-year basis, core producer prices of finished goods remain 3.4% above those of the previous year.

Hence, the general strength in the price of oil and energy, some agricultural products and industrial metals, along with a pick up in retail sales and a possible peaking of unemployment offers some hope that the “reflation” policies of the Fed and the U.S. Treasury are having an impact.

This is the typical behavior of inflation in the early part of the cycle.  What we do not know is what proportion of these price increases is the result of China’s extraordinary accumulation of oil, copper, iron ore and other resources, and how much is attributable to the standard surge in prices at the beginning of a recovery.

In any case, I expect continued firmness in these prices in the second half of the year.  After the initial profit-taking and consolidation takes place, the weakness in the U.S. dollar, the expected acceleration in the deployment of the fiscal stimulus, and the traditional seasonal strength of the economy– spurred by back to school and later by the Christmas season – will provide us with as much as 2% growth in gross domestic product (GDP) in the third quarter of and a similar, or maybe even higher number, in the fourth quarter.

That’s why we are going to concentrate on the sector that I expect will gain the most momentum this summer: Public construction.

The global deployment of fiscal stimulus should translate into an unexpected surge in demand for steel.  China’s stimulus is running at full steam, with that economy posting 7.9% growth in GDP in the second quarter – up from 6.1% in the first three months of the year.

Remember that China needs its economy to grow by at least 8% in order to employ the 18 million workers that join their labor force each year.  With deflation still affecting some sectors of the economy, I do not expect Beijing to be quick in removing any stimulus and to only start doing so early next year. China’s public and private construction will remain robust and expand further, providing support for global steel prices.

Since this is a sector call, rather than a company call, and I want to minimize the exposure to a possible mishap in execution from any one company, I recommend buying Market Vectors Steel (NYSE: SLX) exchange traded fund (ETF).

The ETF surged more than 135 last week and is still well below recent highs. It seems to be ready to break resistance and will show very strong price appreciation should this occur.

Recommendation:  Average into the Market Vectors Steel (NYSE: SLX) ETF over the next month (**).

(**) – Special Note of Disclosure: Horacio Marquez holds no interest in the Market Vectors Steel ETF.

[Editor's Note: Veteran Wall Streeter Horacio Marquez is the author of Money Morning's hugely popular "Buy, Sell or Hold" series, and is also the editor of the longstanding "Money Moves Alert" trading service.

In a new free report, Marquez has identified a category of stocks he has labeled "rocket stocks," which display key characteristics hinting that they're ready to move. One such characteristic: Heavy insider buying. In fact, one particular sector right now is seeing especially heavy insider buying - and many investors will be surprised to discover just what sector it is, and what companies top executives are buying into. For a free report that details these "rocket stock" plays, and that outlines this torrent of insider buying, please click here.]

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By Horacio Marquez
Contributing Editor
Money Morning

With the "not-as-bad-as-expected" news surrounding the economy and the initial government stimulus measures have been priced in to the market, we are moving into a period of profound uncertainty.

With the release of Alcoa Inc.’s (NYSE: AA) earnings report, earnings season has officially begun.

In most cases each company’s own "easy" restructurings are also behind us.  They have resorted to massive lay-offs and inventory liquidations to bring costs down to the bare minimum required to run their respective businesses.  Those cuts and gained efficiencies also have been priced in.  Now, it is time for these companies to show what they can do organically.

Energy companies appear to have hit a wall now that China has run out of space to store oil. And other commodities businesses are suffering, too, as the U.S. Federal Reserve seems to have found religion and veered toward a much more prudent monetary policy.

After its last meeting the Federal Open Market Committee (FOMC) signaled the end of quantitative easing, at least for the foreseeable future.  This is of paramount importance, because it seems to be a concession to those who worried that the Fed might debase the U.S. dollar with by over-expanding its balance sheet and fanning inflationary forces down the road.

The Fed has done a tremendous job of first restoring some sense of "normalcy" and confidence in the core markets, like interbank lending and money markets, and then proceeding to work outwards to U.S. Treasuries and mortgage-backed securities.  This later step towards more prudent actions is welcome and you are seeing it in the U.S. dollar and renewed confidence in Treasuries.  The latter have been received extremely well by investors and yields have started to move down, reflecting not only the lack of current inflation, but also the confidence that the Fed will not go bananas with quantitative easing.

So, ahead of a very difficult earnings season, I am not going to try to out-predict the market.  The experts have been going around for a couple of months trying to just that by using expensive consultants that do channel-checking and by contacting the companies themselves to clarify statements made under full disclosure. 

But the earnings season has extraordinary challenges to surmount, that are deriving from the uncertainty that is hanging over the markets like the proverbial sword of Damocles.  

General Motors Corp. (OTC: GMGMQ) and Chrysler Group LLC are emerging from bankruptcy in record time and their costs, debt and massive corporate restructurings will probably make them internationally competitive once more.  But there are still questions about how these companies will cope with the still dormant auto market. 

The outlook for the large financial behemoths that are due report earnings is equally uncertain. We still need to see how these institutions play around with their toxic asset valuations, their loan loss reserves and their predictions for the future, particularly given the potential stumbling blocks on the road to recovery.

The three obstacles that I find especially troubling are:

1. The spike in credit card delinquencies.
2. The outlook for commercial real estate.
3. And the pending second wave of residential foreclosures, now in the prime and option-ARM sectors.

But do not discount the possibility of seeing mark-ups in toxic asset valuations that might favor some financials strongly.

Now, with the Fed seemingly on hold and the U.S. government’s stimuli only 30% deployed and showing little traction, where is the growth going to come from, especially since unemployment blew right through the promised 8% peak to the current level of 9.5%? On top of that, last week’s rise in continuing jobless claims and Friday’s drop in consumer sentiment offered little solace.

The good news in all of this is that savings rates spiked to 7% as consumers used their money to pay down debt.  Even though this improvement in consumers’ balance sheets does not show in immediate sales growth, it bodes very well for the future.  And this savings trend, which translates into reduced demand for imported consumer products, together with rising exports, resulted in the lowest trade deficit in nearly a decade.

We are making the difficult progress that we need to make in order to restore the U.S. economy to financial health, and that, in turn, is helping the dollar and Treasuries in the short term.

So, based on these massive uncertainties, waiting to be played out, the best risk-reward ratio appears to be in bonds.  With a massive U.S. Treasury supply well absorbed, we are going to jump into long term U.S. Treasuries for a conservative upside, while we keep waiting for resolution on the healthcare reform, social security, and corporate earnings.

Recommendation:  Buy the iShares Barclays 20+ Year Treasury Bond ETF (NYSE: TLT) (**).

(**) – Special Note of Disclosure: Horacio Marquez holds no interest in the iShares Barclays 20+ Year Treasury Bond ETF.

[Editor's Note: Veteran Wall Streeter Horacio Marquez is the author of Money Morning's hugely popular "Buy, Sell or Hold" series, and is also the editor of the longstanding "Money Moves Alert" trading service.

In a new free report, Marquez has identified a category of stocks he has labeled "rocket stocks," which display key characteristics hinting that they're ready to move. One such characteristic: Heavy insider buying. In fact, one particular sector right now is seeing especially heavy insider buying - and many investors will be surprised to discover just what sector it is, and what companies top executives are buying into. For a free report that details these "rocket stock" plays, and that outlines this torrent of insider buying, please click here.]

By Horacio Marquez
Contributing Editor
Money Morning

It is high time for our political leaders to make some key decisions.  And that translates into large uncertainties for investors that have held the market in a range and with low volume.

We do not know whether “Cap and Trade” legislation will pass the Senate and we do not know whether and any healthcare bill will pass through Congress, or what that bill might entail.  And these two issues are paramount for the future of America.  

As we discussed earlier, cap and trade could cause incremental costs in energy for all of the United States, particularly in all carbon-based generation of electricity.  Increasing these costs will make carbon-based energy less competitive with alternative sources, like solar and nuclear.  The benefits of this legislation will be less carbon emissions, cleaner air, less dependence on imported oil and the creation of new jobs in the alternative energy sector. 

However, this all comes at the expense of jobs in the traditional energy sector, which is currently the backbone of our energy policy. It also means higher job losses in the rest of the economy due to higher energy costs.  Remember that the United States is the “Saudi Arabia of coal,” given its abundance here.

All of these uncertainties are huge, as are the stakes for a multitude of sectors.  I have been surprised by the unpredictable decisions of our legislators many times.  In addition, legislative add-ons that tack hundreds of pages onto a bill right before it comes to a vote make prior analysis nearly impossible.  Therefore, unless the outcome is almost a foregone conclusion and the details are clearly spelled out well beforehand, making strong bets on their legislative outcomes is just plain gambling.

The unemployment rate rose to 9.5% in June as the economy shed 467,00 jobs. That’s up from 322,000 in May.  Jobs are a lagging indicator and tend to peak well after the economy has peaked.  But they are the best coincident indicator of economic activity. 

Warren Buffet recently said that he has not yet seen any green shoots in the economy.  Conversely, General Electric Co. (NYSE: GE) Chief Executive Officer Jeffery Immelt said that all the pieces are in place for a recovery in the United States.  Yet the only areas of strength he mentioned were abroad:  China, some areas of the Middle East and other emerging economies.

But what we can all agree on right now is that there is no inflation in sight, despite the massive amounts of quantitative easing from the U.S. Federal Reserve.  But it won’t be long before inflation does rear its ugly head. 

Like the people in Germany who were deeply affected by hyperinflation, I remember living and analyzing companies in Argentina in the 80s with inflation rising at a rate of 1% a day.  It was not fun, and the distortions to economic activity and financial statements were amazing.

Although the Fed has repeatedly indicated that it is ready to remove the monetary stimuli at the appropriate moment in an aggressive-enough fashion so as to preclude an inflationary spike, neither we can be sure that the central bank’s actions will meet with immediate success. 

Federal Reserve Chairman Ben S. Bernanke is very capable and his resolve gives me comfort, but as former Fed Chairman Alan Greenspan told us when he was running the central bank, there are important variables in monetary policy that the Fed cannot know for sure: Among them are the lags between the Fed’s actions and the response in the economy and the precise sensitivity of the economy’s response to the Fed’s actions.  It is like steering a large transatlantic ship while watching in the rearview mirror.  By the time you see an iceberg, the ability to reverse or alter the course is very limited.

If we observe that the level of both monetary and fiscal intervention in the economy is at historic highs, then we have to understand that applying the just doses of intervention and reducing those doses as the economy gains a “self-sustaining” pace is a very tricky exercise.  Even allowing for the best of intentions and the immaculate professional abilities of the Fed, this will be a very difficult task to pull off.  And what is self-sustaining growth, anyhow?

We also need to understand that the current reflationary policy, which was employed to prevent the country from falling into a deflationary spiral, is actually seeking to create a little inflation.  And it would be unpardonable to see the country fall back into a double-dip recession after all this intervention, should the Fed pull on the reins too soon. 

In fact, the Fed and the Treasury Secretary Timothy F. Geithner have repeatedly led us to believe that they intend to see the recovery ingrained before withdrawing significant amounts of stimuli.  It makes all the sense in the world.  The logical implication is that they would rather see an unpleasant reading or two on the inflation front than see an unpleasant reading on the growth side.  It is a very difficult situation to manage and they are not perfect.

So right now, when inflation expectations are well subdued, it is a good idea to add a position in Treasury Inflation-Protected Securities (TIPS).  The easy way of doing this is by buying the iShares Barclays TIPS Bond Fund (NYSE: TIP).

All of these pending uncertainties that I mentioned are adding to the traditional summer doldrums and we are seeing very low stock trading volumes.  So we are going to take advantage of the situation to get a good valuation on these bonds well before inflation expectations pick up. 

Also, adding bonds to the portfolio has a stabilizing effect.  And the two traditional worries with bonds: A drop in the value of the U.S. Dollar and an increase in inflation are actually hedged, at least in part, with TIPS.  Because inflation is fully hedged as the principal is indexed by the consumer price index (CPI) index.

Recommendation:  iShares Barclays TIPS Bond Fund (NYSE: TIP) at market (**).
(**) – Special Note of Disclosure: Horacio Marquez holds no interest in the iShares Barclays TIPS Bond Fund.

[Editor's Note: Veteran Wall Streeter Horacio Marquez is the author of Money Morning's hugely popular "Buy, Sell or Hold" series, and is also the editor of the longstanding "Money Moves Alert" trading service.

In a new free report, Marquez has identified a category of stocks he has labeled "rocket stocks," which display key characteristics hinting that they're ready to move. One such characteristic: Heavy insider buying. In fact, one particular sector right now is seeing especially heavy insider buying - and many investors will be surprised to discover just what sector it is, and what companies top executives are buying into. For a free report that details these "rocket stock" plays, and that outlines this torrent of insider buying, please click here.]

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