Is the Sky Falling? No, Just Your Stocks

All over Italy starting in July and extending through August, retailers mark down their wares to clear out the previous year's inventory. All over Italian towns, bright signs announce sales or saldi, discounts of up to 70%. Italians are clever shoppers and wait to shop even more than they normally do during these times of fabulous savings on shoes and lingerie and hats. This year Wall Street has decided to offer some saldi of its own after the great Italian tradition just in time for Ferragosto, the month of vacation that Italians take in August. In truth, most Italians don't actually take a month off, but the tradition is a beautiful one in the abstract. All of the stocks that I have recommended over the past few months are now trading considerably lower than they were when I recommended them, and last week I took advantage of the market chaos and added to positions in Alcoa (AA) and Bank of America (BAC). Are we really going back into a recession after not fully recovering from the last, the proverbial double-dip? Will the European debt crisis really send us back into a global recession?

This DOW chart does look scary, but the low might be in for a while.

My claim is that we are not going back into a recession and that now, while the Wall-Street Chicken Littles are running around trying to get everyone to panic and hide under rocks and the financial media's art departments are preparing graphics to depict financial Armageddon in anticipation of another market collapse---yes, now is a good time to buy. Of course, you must be willing to hold your shares in your (almost) permanent portfolio and continue to add to positions if the market does sink again to or even below levels that we assumed were generational lows in March 2009. Still, I consider the probability to be fairly low that we will have another recession next year, despite European debt fears and despite the frustration that most Americans feel toward all, and I mean all, American politicians. Germany won't allow the Europeans to default, which is good news for the entire world, and the currency market tells us that. I still need about $1.45 to buy one Euro and if the European crisis is truly as bad as Wall Street Chicken Littles want you to believe, the Euro will fall precipitously. Stocks are historically a pretty bad indicator of the future, whereas currencies usually get it right.

Also, although we still are operating on a limited supply of U.S. dollars in the financial system, there probably are still enough to keep the stock market from going down too much more, as opposed to the dearth of dollars we encountered in 2008 when much of the money in circulation went to money heaven. As I've mentioned in previous articles, we are not facing inflation but still must fight against deflation, and the recent market sell off is solid evidence of the lack of U.S. dollars in circulation. If the stock market gets too scary over the coming months, the Fed will step in with a clever way to prop up the markets with a cash injection into the economy, further infuriating the Adam Smith zealots, who secretly pine for the days like those portrayed in the Grapes of Wrath. And eventually government banking regulators, the creators of the financial bottle-neck currently keeping our economy in a coma, will allow the big banks to lend money again.

Right now you should buy stocks that have stable dividends and that generate a whole lot of cash selling their products. One stock that I own whose company fits this description is the consumer products company Unilever (UN), which is currently trading at around $31.50 and which boasts an annual dividend yield of over 4%. So while all those Chicken Littles are fleeing into 10-year U.S. Treasuries, whose annual yield is currently a paltry 2.6%, you can own a global company with global growth potential and a very safe dividend. Unilever has at least 10 brands that you know well (Lipton, Bertolli, Hellmann's) and probably another 20 that you don't. Furthermore, because Unilever is a European company, you get exposure to the European contagion fear without owning a bank.

Unilever's two year chart. There's resistance at $33.50, but the dividend is solid.

If you are adventurous and have a high risk-tolerance, you could buy some industrials like General Electric (GE) or Alcoa (AA), but whatever you do, don't sell your stocks. Wall Street is counting on your selling at the market low so that when someone gives the all-clear signal over an expensive Manhattan lunch in the coming weeks and the Chicken Littles come out of their holes, the Wall Street traders can buy your shares on sale.