Position yourself for square one

As you are familiar, I follow Insider Trading, the legal kind. Corporate Insiders are rarely wrong and right now they are flashing signals that the markets might be ripe for a pullback. Whether it’s events in Russia/Ukraine, the slowdown in Chinese growth, or deflation from Europe, things are looking a little less rosy than just a few months ago.

This normal ebb and flow in economic cycles is to be expected. The US is in the fifth year of recovery from a devastating financial calamity, the depth of which can only be measured by the time it has taken for a recovery to take place and a tepid one at that.

In previous decades, the United States economy drove global growth. Less than two decades ago, China’s economy was one-tenth the size of the US economy. It is now the second largest economy on the planet and over half the size of the US economy as measured by Gross Domestic Output. That move higher was the single biggest engine of growth for the global economy as China scooped up resources and bolstered economies from Asia and Australia to South America and Africa.

That period of growth has not come to an end, but it is now entering a period of slower growth and that will cause the global economies to adjust downwards their growth expectations. We are seeing the results of China’s slowdown in the prices of commodities and commodity stocks, especially the industrial miners.

Europe is still teetering on the verge of recession with countries like France, Spain and Italy posting miserable growth numbers. Add to this mix the recent events in Ukraine and threat of sanctions on Russia, or worse and the prospects of any type of massive economic recovery fades to the background.

South America is performing direly as well, with the only bright spot being Chile…a country of less than 15 million people. Brazil is barely posting any growth at all and they are the biggest driver in South America with a population of almost 200 million people and a GDP of over US$2 trillion. Interest rates have been pushed up there to stave off inflation and that is causing a slowdown in growth. Argentina, the second largest country and economy, is in utter shambles, devaluing their currency by more than 30% recently.

These grim statistics are pointing towards one outcome: slower global growth. That in turn will lead to slower growth in the US economy and continued lower interest rates.

In the past I have alerted you to trends such as the generic pharmaceutical sector where if you bought companies like Teva Pharmaceuticals (TEVA) and Mylan Labs (MYL) you would be sitting on fat double digit profits when no one else was pondering the future effects of things like Obamacare which benefits these types of companies. Or, you would have missed out on the rally in Municipal Bonds and interest sensitive stocks, among the best performing sectors in the market this year. Our two picks, Everbank Preferred (EVER PrA) and the Nuveen Municipal Income Fund (NMI) are up sharply this year with NMI up more than 12% since January 1^st and paying out a tax exempt dividend of more than 5% (close to six when I made the call).

Now, with the trends in insider selling it looks as if we are getting ready to revisit some old times, when growth slowed down and interest rates continued to stay low. If this trend develops then you want to position yourself in utility stocks, a sector trading at lows while still paying out hefty dividends close to 5%. My top pick here is The Southern Company (SO) and major utility that serves the Southeast US. Interest rate sensitive utilities are one of the few sectors that are showing great value right now after being sold off when rates “appeared” to be moving higher. That ebb and flow may just reverse course back into this sector if we experience a slowdown in the months ahead.

To your wealth,

Banker X.

P.S. from Midas Legacy Editor: Through his Washington contacts, Banker X exposes insider trading activity and sends appropriate specific BUY recommendations to subscribers to his C.H.I.R.P. service.