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This "Junk Rally" Could Burn Stock Investors

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To the bulls, I say: I suppose one must take one's gains where they are to be found. However, you should be aware that the recent rally is built on shaky foundations; indeed, it is the poorer-quality companies that have experienced the largest gains. This has serious implications for all prudent investors.

Outing the "junk rally"
To show that this is a "junk rally," I split the companies in the S&P 500 into five ranked groups based on their Z score. Developed by Edward Altman, a bankruptcy expert at New York University, the Z score predicts bankruptcy risk using market and accounting data. The lower the Z score, the greater the risk of bankruptcy.

For each group, I calculated the average stock return from the end of June and from when the market hit a low on March 9. The following table summarizes some of the results:

Altman Z Score Quintile

Average % Return From June 30

Average % Return From March 9 Market Low

Top Quintile (lowest bankruptcy risk)



Bottom Quintile (highest bankruptcy risk)



S&P 500



Source: Author's calculations based on data from Capital IQ, a division of Standard & Poor's. Note that the interpretation of these results is subject to some caution, because Z scores were only available for approximately two-thirds of the companies in the S&P 500.

As you can see, the companies with the highest bankruptcy risk have produced a much higher average return than those with the lowest risk -- on the order of 2 to 1. Here are some examples of that phenomenon:

Recent Market "Winners"

% Return Since June 30

Z-Score Quintile
(1: Lowest Risk; 5: Highest Risk)

Caterpillar (NYSE: CAT  )



Ford Motor (NYSE: F  )



Freeport-McMoRan (NYSE: FCX  )



Recent Market "Losers" (Nasdaq: AMZN  )



Oracle (Nasdaq: ORCL  )



ExxonMobil (NYSE: XOM  )



Microsoft (Nasdaq: MSFT  )



Source: Author's calculations based on data from Capital IQ.

It's true that the excess returns for lower-quality companies can be partly explained by the fact that this group was also hardest hit in the market decline. However, to quote value guru Jeremy Grantham of asset manager GMO, their resurgence "was excessive and based apparently on unrealistic hopes for a strong, sustained economic recovery."

Investors: Look out below!
A rally built on the weakest companies' stocks contains significant risk, because those stocks are the most sensitive to shifts in sentiment concerning the pace and magnitude of the recovery. Once the market abandons its "unrealistic hopes" for a more rational assessment of economic prospects -- as appears inevitable -- you can expect these stocks to suffer substantial declines, taking broad market indexes with them (at least partially). Investors should consider adjusting their exposure to U.S. stocks accordingly.

Jeremy Grantham's firm, GMO, is forecasting that 'high-quality' U.S. stocks will beat large-cap stocks by more than six percentage points annually over the next seven years. Morgan Housel has identified three high-quality companies that are still cheap.

Quality matters. The team at Motley Fool Inside Value can show you how to build -- and manage -- a portfolio of high-quality company stocks trading at reasonable prices. To find out their top five recommendations for new money now, take advantage of a 30-day free trial today.

Alex Dumortier, CFA, has no beneficial interest in any of the companies mentioned in this article. is a Stock Advisor selection and Microsoft is an Inside Value recommendation. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.

Read/Post Comments (57) | Recommend This Article (121)

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  • Report this Comment On August 12, 2009, at 3:35 PM, Silverados wrote:

    I don't know, I tend to believe Goldman's senior strategists when they say the market will be up 10% by the end of the year.

    You can look at Freeport's 1:7 cash:debt ratio and TIE ratio around 2 and say that they have a high risk of going bankrupt, or you can look at it and say that they may have been a little too aggressive making acquisitions, but the global markets are turning around (see Bettina Wassener's article in the New York Times today) and so FCX has great growth prospects. I look at a company like Microsoft that will definitely not go bankrupt, but what are their growth prospects?

    Microsoft, Exxon, those are stocks that are holding the indices down!!

    You are right to tell investors to be cautious but wrong when you call this market rally built on "unrealistic hopes", hope you don't wait too long to get in.

  • Report this Comment On August 12, 2009, at 3:39 PM, Guyruns wrote:

    Your analysis is interesting, although terribly misguided. Let's step back and think about this for a second. What happens when a recession hits and the market tanks? Those companies with the highest risk of bankruptcy see much greater decreases in their stock price while the less risky companies see much smaller declines.

    When the market begins to believe that the economy will recover, those high risk stocks that took such a beating have much more upside than those stocks that didn't realizes nearly as much of a decline in value.

    If the highest quality companies were the ones with the highest returns when the market started coming back, either the market would be recovering at a snail's pace, or the high quality companies would be seeing their stock prices reach levels in a very short time that are higher than when the recession began.

    By applying this logic to your article, it looks like the case has been made that the market believes the economy will be recovering soon, otherwise, it would not back the risky companies, because there would still be a great threat of bankruptcy.

  • Report this Comment On August 12, 2009, at 4:20 PM, alexxlea wrote:

    Look at LYG, IRE, AIG, CIT, etc. The spikes those companies got were quite impressive. (I mention the euro banks because of their runs from the lows, and the american institutions because of their 1-day spikes) But all the things that are wrong with those companies definitely back the writer's point here, which is watch out, there is no guarantee that things are going to be great. And of course risk/reward increases as risk increases, but you are relying on shadowy government programs to prop up asset prices and not require the banks to hold enough capital for loan losses. Their mathematics are based on scenarios which will be exceeded two and threefold in terms of unemployment rates and defaults, but by that point your main concern will not be with the paper value of your stocks, but with the solvency of your nations.

  • Report this Comment On August 12, 2009, at 4:32 PM, demoledor wrote:

    The article has a great mistake: It says "The lower the Z score, the greater the risk of bankruptcy" and then shows the highest returns for the companies rated 5 and lowest return for those rated low.

    So... what is it?

  • Report this Comment On August 12, 2009, at 4:47 PM, moefuzz wrote:

    Yeah saw the score discrepancy right away. So I'm going to guess that the first paragraph has it backwards.

  • Report this Comment On August 12, 2009, at 4:51 PM, TMFEditorsDesk wrote:

    @demoledor and moefuzz,

    The article is correct as stated, but agreed that it's confusing. The numbers in the table are actually the quintiles. So, a low quality stock that has a really low Z score would be in the 5th quintile.

    Hope that clarifies.

    -Anand (TMFBomb)

  • Report this Comment On August 12, 2009, at 4:51 PM, plange01 wrote:

    there are so many companys stocks having huge increases even on bad news! there seems to be no reason to this rally just a buying frenzy and you can guess the outcome of that!

  • Report this Comment On August 12, 2009, at 4:55 PM, skeptic86 wrote:

    capital iq's analysis doesnt make sense.

    if companies with the highest Z score is up 50% and the lowest Z scores are up 106%, how is the s&p, a combination of both, only up 47%? im just pointing out an error in calculation there. i understand your point that this rally is on higher risk companies.

  • Report this Comment On August 12, 2009, at 4:58 PM, Aggiemedic01 wrote:

    I expect that the posted numbers are Z score quintiles, first (highest) through fifth (lowest). I expect that the underlying scores are just as described, higher scores land you in the first quintile. A bit misleading in the presentation though.

    I agree with the others here that this is pretty faulty analysis. Companies closer to bankruptcy are likely to have much higher volatility. To take Ford as an example, now that it seems (regardless of what the financials might suggest) that it is unlikely to go bankrupt, it makes a lot of sense that it should have a sharp rebound. Same story for a lot of different stocks.

    On the other hand, the stocks mentioned as strong (MSFT, ORCL, and XOM in particular) have other hugely relevant factors dragging down their performance.

  • Report this Comment On August 12, 2009, at 5:01 PM, jdlazar wrote:

    This is awfully doom and gloom, isn't it? I bought some of the very bluest of the blue chips at their bottoms by placing pretty ridiculous limit orders.

    Junk is always junk...why are you ignoring how well the blue chips have done in this "sucker's rally?"

  • Report this Comment On August 12, 2009, at 5:12 PM, jaywoo wrote:

    here we go with the " contrarians " again , could you writers just give it a rest ? , had you been " so knowledgable " why did you you not predict todays upward movement yesterday ? this is getting worse than the tabloids. NUMBERS TALK !

  • Report this Comment On August 12, 2009, at 5:17 PM, Deepfryer wrote:

    "It's true that the excess returns for lower-quality companies can be partly explained by the fact that this group was also hardest hit in the market decline."

    This is the reason. The stocks that were hit the hardest in the crash were generally the ones that benefited the most from this rally.

    Look at emerging-market ETF's, like EWZ or PGJ: they were hit very hard in the crash, but then they went up like rockets during the rally. It's about their beta, not their z-score. There are plenty of solid investments that have outperformed the market during this rally.

  • Report this Comment On August 12, 2009, at 5:17 PM, jprior101 wrote:

    Your article is correct. This rally is not built upon a solid foundation. Take a look at unemployment numbers. These jobs are not coming back anytime soon. This is not doom and is called reality.

  • Report this Comment On August 12, 2009, at 5:37 PM, blackxactofool wrote:

    This is a stupid question. Please excuse.

    Is the author saying CAT is riding close to bankruptcy? If so, can someone point out a link to the latest on the situation or why?

  • Report this Comment On August 12, 2009, at 6:01 PM, TMFAleph1 wrote:

    pv 355,

    Thanks for you interest.

    The return data is correct. There is no contradiction between the two tail quintiles having average returns of 50% and 104%, respectively and the S&P500 having a return of 47% over the same period:

    1.) As the name 'quintile' implies, the stocks in the S&P 500 were divided into FIVE separate quintiles, not just two.

    2.) The S&P 500 return is a weighted average return, weighted by the float-adjusted market capitalization of each stock. By contrast, the average return of the stocks in each quintile is an equal-weighted average.


    Alex Dumortier

  • Report this Comment On August 12, 2009, at 6:12 PM, Bonefish100 wrote:

    So which is it? In one place you state that a "low Z score means higher risk of bankruptcy" and in the chart that follows you state that the higher the Z score, the greater the risk.

    Shoddy workmanship. If you're going to write something, please make it CLEAR.

  • Report this Comment On August 12, 2009, at 6:18 PM, jazzman62 wrote:

    Poorer quality companies doing well? GE, JNJ, PEP "poor-quality" ? you lost me there, guy.

  • Report this Comment On August 12, 2009, at 6:27 PM, mitchjl wrote:

    jprior101 message talks about unemployment and jobs not coming back.In a recession recovery, jobs are the last to recover for an obvious reason..It takes time for a Corporation to ramp back up before a job call back.

  • Report this Comment On August 12, 2009, at 6:39 PM, mitchjl wrote:

    Captainwacks remarks about a Kennedy death is a political message and is not needed on this board.His message is offensive to me and probble offensive to others on this board.

  • Report this Comment On August 12, 2009, at 7:26 PM, JakilaTheHun wrote:

    While I agree that the rally has benefited some of the so-called "junk companies" more than the top-quality companies, I'd also argue that the market has taken very few pains to differentiate between the two in many sectors. There has also been a tendency to look solely at debt, while ignoring sustainable cash flows.

    I analyze the REIT sector most often and the reason I began buying in heavily on that particular sector was because the market seemed to regard almost every single REIT out there as "junk". To be sure, there are a lot of "junk" REITs out there and many of them have rallied significantly since March. At the same time, however, there are a lot of well-managed REITs that have good cash flows and high-quality properties that were priced for some sorta real estate apocalypse of epic proportions.

    While it's arguable that companies like Brandywine (BDN), DCT Industrial Trust (DCT), Winthrop (FUR), and Lexington Realty Trust (LXP) made some mistakes in the bubble years, I believe the market has greatly overreacted and all of those companies are still undervalued by the market.

    The market seems to reward and punish sectors more than individual companies. Take oil services for example --- while I can understand some the market beating down some of the more highly levered companies to an extent, I have a harder time grasping why the market has severely punished Ensco (ESV), which has low debt, and has historically produced some fairly impressive cash flows.

    So, even if I agree in a way, that people should beware of holding onto "junk companies" simply because they have rallied, I think it is an exaggeration to say that rally was fueled mostly by junk. In reality, it's been both by (a) junk and (b) companies the market has mistakenly labeled as "junk"

  • Report this Comment On August 12, 2009, at 7:27 PM, JakilaTheHun wrote:

    Just for the record, I'm long on all the companies I mentioned above: BDN, DCT, FUR, LXP, and ESV.

  • Report this Comment On August 12, 2009, at 7:50 PM, NOTvuffett wrote:

    Truth, I think the Kennedy thing was in poor taste too.

    I think you missed the point of that other blog though, it wasn't talking about raising cap gains just on the wealthy, it was for everyone. A retired man commented after you that such a tax increase would have a material effect on him, that doesn't sound like a rich guy that should quit crying.

  • Report this Comment On August 12, 2009, at 8:09 PM, NWA10000 wrote:


  • Report this Comment On August 12, 2009, at 8:10 PM, NWA10000 wrote:

    How interesting that you consider Grantham a value guru! I thought he was just an anti-American,

    Keynesian perma-bear with delusions of grandeur!

  • Report this Comment On August 12, 2009, at 8:23 PM, Varchild2008 wrote:

    WHAT GAINS!?!? My portfolio has gone Sideways since March 9th (Dow 6500) ! ! just kidding.

    Seriously though.. I never let the Market direction dictate my moves and decisions.

    I bailed out of (MSM) on my own decision...

    I bought into (WHR) at $19 / $30 my own decision.

    I sell when I believe it is time and I buy when I believe it is time.... I don't worry about where the market WAS or what I think the market WILL BE....

    I just invest in the market I have...

    Not the market I WISH I had.

    Stop the second guessing of market directions and focus on fundamental health status and pulse of your portfolio.

  • Report this Comment On August 12, 2009, at 8:28 PM, tradingmarkets wrote:

    In technical terms, the rally is at an important level. It may pull back from here. This is the 38% retracement level from 2007 we are hitting. Nasdaq is against a line that connects all tops since 2000. Volume has been decreasing since the rally started. All of these and the wave pattern fits the description of a counter trend wave 2 rally in Elliott Wave terms.

    Last but not least, we have had Newsweek declare on cover page that the recession is over. Therefore, all conditions for the next major leg down is in place. Buckle up. MARCH LOWS WILL NOT HOLD!

    Latest signal is short:

  • Report this Comment On August 12, 2009, at 8:34 PM, automaticaev wrote:


  • Report this Comment On August 12, 2009, at 8:38 PM, dragonLZ wrote:

    Has the author of this article ever made any money in a bull market? I bet he hasn't.

    If he thinks this relly is on shaky foundations because "poor quality companies have experienced the largest gains", I think he should stick to buying bonds. Or baseball cards. Or...

    I'm sure he's an expert in something, but I'm sure that's not stocks.

    Is this guy serious with his "analysis"?

    What a joke...

  • Report this Comment On August 12, 2009, at 8:54 PM, Varchild2008 wrote:

    Here's a challenge to the BEARS.

    If the RETAIL earnings tomorrow are mostly to all misses then you have a point about a counter trend wave down....

    So.. Let's see shall we? Cause if the Retail stocks are producing earnings beats tomorrow then there won't be much reason for Wall Street to get "SHORTY" for quite awhile.

  • Report this Comment On August 12, 2009, at 8:57 PM, sentinelbrit wrote:

    Yes, the junk has rallied precisely because such stocks got hammered as investors over-reacted and feared armageddon. And investors focused on the short term. Two stocks that should survive are RDN and DDR. These stocks got pummeled but have rallied strongly in the last month. People have to stop focusing on the next month or six months - these are the stocks that will prove hugely rewarding over the long term. Six months ago, everyone thought BAC was a load of rubbish. One way to make money in the stockmarket is to go against the consensus. And boy, has that been wrong!

  • Report this Comment On August 12, 2009, at 9:13 PM, NOTvuffett wrote:

    It is amusing to note that he cites two groups of stocks- "winners" and "losers", and gives some number that implies the winners are more likely to go bankrupt. Obviously, Mr. Market likes the winners better. Is he calling Mr. Market stupid? That could be tempting fate.

    Our Foolish Overlord's tell us about the "collective intelligence of the CAPS community". The average CAPS score of the "winners" group is 3.33, that of the "losers" group is 3. Wow, CAPS agrees with Mr. Market.

  • Report this Comment On August 12, 2009, at 9:55 PM, skeptic86 wrote:


    that means the data is misleading. if stocks who scored a Z of 1 went up 50% and stocks with a Z of 5 went up 104%, that means stocks who scored 2-4 must have went up less than 47%. which doesn't agree with the trend you are suggesting (higher the risk of bankruptcy the greater the gain since march). Also, stocks who scored 2-4 must make up a higher percentage of the s&p or stocks who scored 5 must make up a tiny percentage. therefore the data above either does not represent the majority of stocks or the 104% gain represents an insignificant minority.

  • Report this Comment On August 13, 2009, at 12:02 AM, blackxactofool wrote:

    Will someone please explain the author's depiction of CAT as riding close to bankruptcy or am I misinterpreting?

  • Report this Comment On August 13, 2009, at 12:20 AM, booyahh wrote:

    Man, a lot of people didn't study high school math, and don't know the difference between a weighted average (which is what the S&P is), and an arithmetic avg (which is what the 50% and 104% are). Also, some people don't know what a quintile is, and are confusing it with a Z-score.

    Maybe the Fool should set up a math tutorial.

  • Report this Comment On August 13, 2009, at 3:27 AM, wyrfox wrote:

    This "article" is a clear case of picking the examples to assure the assumption. Yes the math is faulty, but the market as a whole, much less the math, do not support this proposition. I, nor anyone else, knows what the market may do in the next few days or weeks, to guess is emotional and the author may have been more influenced by his emotions than his academics. Nonetheless to project a market response based upon a overly simple model is folly. Perhaps Mr. Dumortier was just trying to Fool us into realizing that point.

  • Report this Comment On August 13, 2009, at 4:15 AM, TMFAleph1 wrote:


    Thanks for your interest.

    The math isn't faulty -- I'm happy to send you the spreadsheet that contains all the primary data and the statistics if you wish to verify it.

    I did not pick the examples to prove my hypothesis. The examples in the second table are just that: examples. The statistics in the first table were calculated on all the available data for the companies in the S&P 500 (the z scores were available were available for 340 of them, or approximately two-thirds, as is noted under the table).

    Furthermore, I'm the first one to say that no one knows what the market will do over a period of days or weeks; in fact, I regularly state this explicitly in my articles (check my article dated August 11, 'Has the Dow Topped?', for example). However, it is possible to make educated guesses about what is likely to happen eventually, based on valuation, for example.


    Alex Dumortier

  • Report this Comment On August 13, 2009, at 5:22 AM, plange01 wrote:

    the biggest false rally in a depression ever! this is strictly a time to trade! no buy and hold here.musical chairs the old childrens game dont get caught holding no name spec stocks when reality set back in .they will drop to nothing and never return...

  • Report this Comment On August 13, 2009, at 10:49 AM, skeptic86 wrote:


    I used the wrong word by saying there was an error in calculation. What I meant was there is an error in interpretation of the calculation. When anyone makes a statement about the general trend of the stock market, they will want to use the most relevant information. We all agree the s&p 500 is a pretty good index for the market in general. When analyzing the s&p, we should present data that makes up the majority of the index.

    So either stocks with a 1 or 5 dont represent the majority of the s&p 500 or stocks with a Z of 5 represent an insignificant portion of the s&p. And either way stocks scores of 2-4 dont represent the trend suggested. For instance, lets say the market cap for stocks with a Z of 1 equals 30% of the s&p. And the market cap for stocks with a Z of 5 is 10%(a pretty significant portion i think). That means stocks with Z's of 2-4 make up 60% of the s&p. So .3*50+.1*104+.4*X=47. X must equal 36%. In this hypothetical situation 2-4 dont represent the trend. Nor do 1's and 5's represent the majority of the market. Anyway you twist the market caps of the groups you come up with the one or more of the errors in logic.

    TMFMarathonMan, Im not saying your article is wrong or anything, it was very thought provoking (and i agree that this is a junk rally for other reasons). Im just pointing out something that didnt seem right to me. For example, what if companies with a 1 represent 10 billion dollars of transactions and companies with a 5 only represented 10 million. That would make stocks with a 5 insignificant and the rally is real (this is a 'what if' situation). Maybe the missing 1/3 of the data supports conclusion. Thank you for writing the article and your responses.

    p.s. booyahh, please keep your insults to yourself. this is a community for learning and discussion. im actually pretty good at math and if someone on here asked me to explain a calculation, i would do my best to do so.


  • Report this Comment On August 13, 2009, at 12:20 PM, hudsondusters wrote:

    This of course goes almost without saying that rallies after crashes are led by junk. Naturally. In March the binary outcome, bankruptcy or survival, tilted heavily towards bankruptcy. Stocks like Ford were close to zero. If bankruptcy is still theoretical, and more so for some, that threat is a lot less likely now then it was in march, even if the economy doesn't speed ahead, it is no longer on the verge of collapse.

  • Report this Comment On August 13, 2009, at 1:09 PM, KKnese wrote:

    I wonder if the wise institutional investors are driving the market? I also wonder if those wise people are wisely using trend analysis (chartists) to determine their picks or if they are actually looking at the balance sheets (fundamentalists) of their targets? If the big money is going by charts, maybe fools should look at the charts, determine who is going to go up, then look at the fundamentals to see who doesn't deserve it. Then it's shorts time baby!

  • Report this Comment On August 13, 2009, at 1:44 PM, Netteligent09 wrote:

    Red flags on tech stocks are everywhere. Who would pump money in these tech stocks?

    We need a healthy market, not speculation or manipulation.

  • Report this Comment On August 14, 2009, at 4:11 AM, joandrose wrote:

    At the end of the day , there is in fact only one show in town - and that is the co-ordinated rescue plans being implemented by Govts internationally to preserve their economies.

    These plans will be made to work or we will have total international chaos .

    Markets are at the start of recovery mode now . The Dow has plenty of room to move up simply because so many companies share prices are so undervalued .

    Even if unemployment figures rise temporarily from 4 to 10 percent - simple maths says that 93 percent of previous consumer discretionary spending is still intact . The reason consumer purchases ( and company sales figures ) are down is not that there is no money - it is that consumers are now saving and not spending.

    A new phenomenon in America !

  • Report this Comment On August 14, 2009, at 2:17 PM, markofzorro wrote:

    "No tree grows to heaven," and I can't believe this rally can last, especially with the parlous economy propped up by vast government handouts that are soon to end -- as foreclosures grow.

    So, friends, how about recommending a few stocks to sell short while we wait for the next bottom?

  • Report this Comment On August 14, 2009, at 6:18 PM, Dadw5boys wrote:

    I found a better return making short term loans to small businesses that banks are not making right now. It is also keeping people on jobs and the business doors open.

    I could raise the interest I charge but being part of keeping my community going means more right now.

    I even go to the jobs and lend some tools if I have them to help the guy get it done.

    So you guys can play with these Masters of the Universe and thier fixed game all you want I found a better place to play and I smells a lot better too.

  • Report this Comment On August 14, 2009, at 6:39 PM, dbbfool63 wrote:

    If it's time to buy and this rally turns out to pay off in the long run..........

    Then all I have to say is this was never a depression or any problem with the economy except for the part the Government has played in one of the biggest parts in a scandal between the Rich hedge funds, a few others, and of course you guessed it, the Government.

    We have never recovered like this and continued on even in times where the economy was not great, but we were far from a depression.

    Maybe when Obama slipped up in one of the debates by calling the stock market "gambling with your money" and telling people not to gamble their retirements away to the rich who control the market.

    I'm wondering if that might have been an early hint to get out ASAP.

    Well, at least he got one thing right so far because lately it has seemed as though the market is like a Casino and you either bet for or against it.

    I have made money, but something does not add up.

  • Report this Comment On August 14, 2009, at 6:44 PM, prose976 wrote:

    One thing that everyone "pooh-poohing" this rally fails to consider - the rally doesn't have to reverse course. It just level off and stay in a range for years. Then what? Cry, cry and cry again, wishing for that giant pull-back that's going to help you get back in the game for what you consider a "fair" price.

    Wake up people. We just arrived - at the fair price that is. Since March, we've been working our way back there - and now we've arrived.

    Boo-hoo, you say? Why? Because you just can't believe that you missed it?

    Buffet got in too early...he's doing alright. I missed the March lows but now have a 60% gain that started in April.

    Sorry, Bears. We may have a precipitous drop, gradually, over time, but if you're waiting for a big, second gift to come to your rescue in your time of need, it's not coming.

    There are plenty of stocks that have brought Mr. Market back to its current levels that pay dividends. Guess what? Even though those dividends may have shrunk since before the March drop, they still pay better than most other savings instruments. So, why shouldn't we leave our money in these stocks, collect dividends and watch the value of our shares increase as all you bears decide it may be better get your dividends rather than wait for that "sign from God" that you were right?

    It's tough to admit you're wrong. But sometimes you just have to.

    BTW, my 60% is out of the market, and I'm fully positioned back in it. As the market goes down I buy more shares. There's a good chance that the market is supported by money from investors like me.

  • Report this Comment On August 14, 2009, at 6:45 PM, dbbfool63 wrote:


    I commend you for doing what you are, you are helping to keep your community alive without the greed that the banks and lending companies use to destroy & bankrupt communities like yours.

    I sure wish the Government would see how bad you make them look.

    I would be proud to live somewhere like that because thats the American way, everyone wins.

  • Report this Comment On August 15, 2009, at 3:40 AM, ossurman wrote:


    Sorry, these are not the junk stocks that rallied. This is straight Obamanomics: Forget the fundamentals. If it looks good, and sounds easy (i.e. someone who makes more than you will help you coast...) then" BUY! BUY! BUY!". .

    In recent months you couldn't lose with that philosophy.( e.g. Ford stock at $2:50 rallied enough to cover the losses I encountered earlier when I bought at eight bucks! ) Unfortunately that philosophy along with free health care ( if you live long enough while standing in line for access to treatment ) is about to bite the dust.

    As for the market, you won't see the March lows but as Felix Zulauf predicted months back in the Barrons Roundtable...the fall months will see a moderate but significant correction, The market right now looks better than the economy a year out.

    Best approach : Keep the good stuff, take your profits and raise cash to by back in at year's end.

    Some of my favorites: LMAT, FXI, AMSC ( could retreat, then take off... ), MMR ( Talk about cheap--but solid ) and Coca Cola.

    Oh yes...and Gold Stocks. They could go down a bit here; then watch them fly. At the moment FSAGX is 50% of my portfolio, down from a 70% position in gold stocks before the Market headed south.

    Have fun!

  • Report this Comment On August 15, 2009, at 1:37 PM, Racovius wrote:

    My cat's breath smells like catfood.

  • Report this Comment On August 15, 2009, at 10:02 PM, JSinvestmentguru wrote:

    I disagree with a lot of this...When everything tanked, I sold the stocks that had been sliding for three years or so like Pfizer, Dell. I avoided deadbeat companies like GM and focused on good companies with lots of cash and no risk of bankruptcy like Apple which went from 87 to 166 for me, Delmonte which went from $6 to 10 for me, etc. I also like INTC, Deere, Oracle. I am sticking my neck out for LTD, HOG now but I think that companies that have good prices on call options are good deals because if you sell these calls, you insure yourself from the downside and if not you get the profit up front. I have been finding myself having to continually roll up the options. I sold out of DLM recently because it doesn't have a good options market. It looks to be about as good to sell these stocks now and sell puts a year or so out at a price lower than the sales price....It looks like you can make 15%/year easily now if you use some option trading but you limit your upside....

  • Report this Comment On August 16, 2009, at 4:08 AM, bmi2000 wrote:

    i believe this is a very false rally ,it has no legs. reporting companies show decreased revenue and decent profit percentages compared to revenue.Profit levels are defiantly lower than last year as are overall revenues. profit is being squeezed from decreased labor cost and greater efficiency within their systems. for the next month or two we will see the same results from most companies. by then investors will see and have a handle on the false ceiling of this rally. As the distance between todays cost and the 200 day MA gets wider traders will get ready to unload. then it will be september and october and we all know what happens then.

    I am out aug 31st. historicaly bad things happen to rallies in sept and oct. by the way golf is the best during those 2 months probably because i am not watching stock tickers.

  • Report this Comment On August 17, 2009, at 3:16 PM, capsmasterbri wrote:

    Although I agree in general with your thesis and believe some of the rally is unjustified, it's not as simple as that. Some of the high risk stocks which have gained have done so because their risk has significantly improved. Some of the low risk stocks you've named are HORRIBLE and in fundamental decline. Low risk does not mean profitable or even growing.

  • Report this Comment On August 17, 2009, at 3:35 PM, capsmasterbri wrote:

    On the risk end of things, an example of risk improvement is on energy companies. The Altman Z ratio was calculated using previous quarter results, which were the result of oil prices quoted in said time period. Therefore implicit in the Altman Z ratio is that oil prices are the same today as they were 4-5 months ago. Since that's obviously not the case, such a discrepancy is essentially a risk improvement that Altman Z is unable to capture (until 1-2 quarters later). Remember, it takes at least a full quarter for oil prices to have a cumulative effect on the bottom line.

  • Report this Comment On August 17, 2009, at 8:22 PM, VegasMartin wrote:

    Absolute junk rally. Once Dow hit 9,100 I decided to short Palm and it still kept going up until this pullback came. Has anyone who has bought this stock over the last 4 months even looked at this company's income statement and balance sheet? It's horrendous!

  • Report this Comment On August 18, 2009, at 6:54 PM, CanSlimmerUK wrote:

    If we learned anything from the crisis and recession, it's that there's no going back from a global, highly integrated economy. US unemployment numbers will continue to rise through the end of the year, and certain sectors will continue to suffer, but on the whole, companies are leaner and meaner---in the US and abroad. I'll be interested to see how worker productivity has changed. And in the longer term, China has slowed down, but it won't stop. There are just too many people eager to join the party (and I don't mean politically ;) ) who haven't yet. Even in the midst of relative US domestic weakness, watch the 'rise of the rest' pull US back up with it. It's going to (continue to) be a fun ride, if volatile at times. The energy and atmosphere in China's free trade zones reminds me of what it might have been like walking the streets of Manhattan, Pittsburgh or Boston at the turn of the last century. Entrepreneurs are everywhere; growth is everywhere; it's a fever pitch. The need for infrastructure will continue to increase, and those emergent winners will become tomorrow's GEs. 20, 30, even 40 points in the next few months will seem like chump change in the next 3-5 years for certain issues. Remember 'investors', speculation is derived from the latin 'speculari'---which essentially means being observant. Cheers.

  • Report this Comment On August 19, 2009, at 3:48 PM, Netteligent09 wrote:

    Bad Earning & Lousy Forecast..Stocks surged..No clue. Simply amazing.

    Hewlett-Packard posted a 19% drop in quarterly profit as sales fell sharply in several of its key businesses.: earnings of $1.64 billion, or 67 cents a share, for the quarter ended July 31, down from $2.03 billion, or 80 cents a share, a year ago.

    H-P's quarterly revenue fell 2% to $27.45 billion from $28.03 billion a year earlier, despite several billion dollars in additional revenue from tech-services company Electronic Data Systems, which H-P acquired.

  • Report this Comment On August 20, 2009, at 5:47 PM, stockmenot wrote:

    I have been picking up good quality energy stocks, because my gut tells me that we will have a bump in the energy sector this fall: What are your thoughts, all my Motley Fool Friends?

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