Monday, May 16, 2011

S&P Warns of Potential Finance Meltdown

Storm Clouds Gather as Oil, Metals Prices Fall

The big money is calling a halt to the surge in stock prices.

Declines in oil and metals prices are being seen by an increasing number of fund managers and strategists as a signal to get out of riskier areas of the equity market. And that means avoiding things like Chinese IPOs and sticking to the boring stuff, like utilities.

The growing concern is that stocks had priced in an overly optimistic economic path, and the recent breakdown in commodities and shift in equities to safer industries such as health care, suggest a reckoning in coming months.

Ken Fisher, founder of Fisher Investments that manages about $38 billion in equities. is among those concerned many investors have become overconfident.

"I think expectations for the stock market are a bit on the high side," he said.

The thesis that the economy may be slowing will be tested this week with the publication of two regional manufacturing reports from the New York and Philadelphia regions. They are a precursor to the bigger national ISM surveys published at the start of next month.

However, some say there is room for the market to move higher before taking a turn for the worse.

Bullish investors point to robust first-quarter earnings. Just fewer than three quarters of S&P 500 companies beat Wall Street's earnings estimates and investors have pointed to sturdy revenue growth. The S&P's index of retail stocks recently hit all-time highs.

This week there will be earnings from some important retailers, including the nation's largest, Wal-Mart Stores Inc , home improvement companies Lowe's Companies and Home Depot, as well as teen clothing retailer Abercrombie & Fitch.


Prominent strategists at Goldman Sachs and Credit Suisse foresee better results for stocks less tied to the economic cycle. Doug Cliggott, head of equity strategy at Credit Suisse, wrote: "Gone is the U.S. equity performance profile that suggested bold optimism on growth."

Commodities have been at the forefront of the selling so far. Big rallies in hard assets such as gold, silver and oil ended in an ugly slump last week. Silver crashed 30 percent in its worst fall since 1980. Oil, which was until recently worrying investors with its sharp ascent, fell around 15 percent.

There are two schools of thought as to why commodities are slumping. One is that the Federal Reserve's $600 billion program to buy Treasury debt has helped investors divert funds to commodities and equities, creating a bubble in those assets, which is now starting to burst.

"Investors and market observers are divided over whether this is a big deal or not," Cliggott wrote, adding, CS is "in the 'it's a big deal' camp."

The other is that it is a sign of impending weakness in the economy. Copper, known as the "metal with a PhD" for its ability to act as a predictor for the economy given its wide-scale industrial applications, has hit a five-month low.

The reduced appetite for speculative investments has shown in the outperformance of defensive stocks, whose fortunes are less tied to the rise and fall of the economy.

The S&P 500's healthcare and utilities sectors were the performance leaders over the last month, rising 2.9 percent and 2.6 percent, respectively. That is despite a 1.5 percent fall in year-over-year earnings growth in utilities in the first quarter, worst of the S&P's 10 sectors.

Healthcare, long a go-nowhere sector, has had a whopping rally. The sector has gained for seven straight weeks, and is up 14.9 percent this year, best of the 10 S&P sectors.

Energy, down 7.8 percent in the last seven weeks, is the worst performer in that time.

Goldman Sachs says it has become "much less confident in the near-term equity picture," exiting what it called its "top trade" in U.S. banks, and doing the same with a trade that was long industrial shares relative to consumer staples.

Cliggott sees a 10 percent decline at the end of the Fed's so-called QE2 stimulus program -- which is what happened at the end of the first round of Fed buying -- as the "base case" scenario. The firm continues to recommend a short financial/long health care trade, as well as a long consumer staples/short consumer discretionary trade.

EPFR Global, which tracks fund flows, said Friday that global equity funds experienced their first outflow since mid-March.


Small and mid-cap stocks, which typically lead a strong market, have started to see their relative outperformance to large caps wane. Meanwhile, momentum indicators show the strength in S&P 500 is starting to decline as well.

There are also signs of fatigue in the IPO market after a flood of Chinese IPOs and leveraged buyouts at the start of the year.

The stock of Chinese dating website fell in its Nasdaq debut, while social networking site Renren , dubbed China's Facebook, reversed all its gains on its market debut and traded below the offer price.

Goldman argues stocks have been driven further than economic fundamentals justified by heightened risk appetite. Sentiment indicators are elevated, but off highs earlier in the year, while the CBOE Volatility Index, or Vix ,is at pre-financial crisis levels, signs investors may be getting complacent.

Peter Lee, a technical analyst at UBS, is expecting the S&P 500 to run to 1,400-1,450 in the summer before topping out.

Fisher believes elevated expectations will mean the market struggles through the rest of the year. He expects a sideways movement at current levels.

David Joy, chief market strategist of Columbia Management Investment Advisers, one of the largest U.S. fund managers with more than $350 billion under management, has been cutting equity exposure over the past three months.

Joy said he started the year with a modest overweight in equities, but has cut that to "neutral." That was partly a response to the impending end of the Fed's stimulus program, and partly due to the potential for disruption in the energy markets, he said.

How the markets will react to the end of the Federal Reserve's massive $600 billion stimulus at the end of June is a wild card.

"As we get a little closer to the end I think you could start to see the equity market's volatility start to increase," Joy said.

Smart Money - April 2011

Smart Money - April 2011
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SmartMoney comes to you straight from the editors of the Wall Street Journal, the best financial reporters in the business. Every issue brings you the information you need to know to deal with markets and protecting your wealth. Turn to SmartMoney for no-nonsense advice you can put into action.

Technically Precious with Merv

Gold Bounce Goes Nowhere

Well, the gold bounce went nowhere, momentum and volume action were unimpressive. So, what’s next? I would suspect more downside action before things settle down, consolidate and then move back into new highs. But that’s only a hope, not a prediction; unless it happens in which case it was a prediction. An analyst’s first priority is to write in such a way as to be able to say “I told you so” regardless of what happens.


From the long term perspective gold is still not in much danger of a major trend reversal. The price is heading lower but is still some distance above its positive sloping moving average line. The momentum indicator is also moving lower and is already below its negative sloping trigger line, however, all this is still happening well inside the positive zone suggesting weakening but not reversal. As for the volume indicator, it seems to be more into a lateral trend and remains above its positive sloping trigger line. So, as far as the long term rating is concerned, at this point in time it remains BULLISH.


The intermediate term is still in positive shape but much closer to a possible reversal than the long term. Here, gold touched my intermediate term moving average line the previous week and bounce up. That bounce did not go far and it looks like gold may be ready to take another tumble on the down side. For now it is still above its positive sloping moving average line. As for the intermediate term momentum indicator, it is moving lower but remains above its neutral line in the positive zone. It is, however, below its negative sloping trigger line. The volume indicator remains positive above its positive sloping trigger line but not that much above. A few days of negative action and it just might move below the line. Today, the intermediate term rating remains BULLISH. This is confirmed by the short term moving average line remaining above the intermediate term line. Here too things could change with a few days of negative action.


As we see from this week’s chart the bounce did not last long. For those who look for such things the bounce looks very much like a 50% retracement of the previous plunge. Nothing about the bounce was encouraging and the odds are for more downside action.

For today gold remains below its negative sloping short term moving average line. The momentum indicator is back in its negative zone and below its negative trigger line. The daily volume action has not been very impressive and needs to improve for any bounce or rally to have any longevity. We see on the chart an upward sloping wedge pattern which unfortunately has a habit of breaking on the down side. Putting it all together the short term rating is BEARISH, confirmed by the very short term moving average line.

As for the immediate direction of least resistance, baring any global upheaval during the weekend the direction of least resistance seems to be towards the down side and that’s the direction I would guess.


Silver has had a sharper plunge and a weaker bounce than gold. Intra-day wise it even made a lower low versus the plunge low, during this past week. I guess what goes up the fastest comes down the fastest. By all accounts, looking at the chart action, more downside can be expected. I would look at $27 to $31 as a range of serious support. Baring that range the next step would have to be the $18 level. Do we really think it would go that low?


I know that probably 100% of my readers look to the major, most popular Gold Indices to get their bearings as to what is happening in the overall gold stock market. I look at my own Indices and especially the Composite Index for an understanding of what’s happening, overall. While the major Indices are now at a slightly lower level than their peak of early 2008 the Merv’s Composite Index of Precious Metal Indices is still some 32% above its previous peak. This is the difference in overall average performance of the 160 stocks in the Merv’s Index versus the weighted performance of the few highly weighted stocks in the major Indices. Precious metal stocks have been doing a lot better than these major Indices have let people to believe.

The Merv’s Composite Index is, however, showing a real danger potential ahead. Depending upon the indicators one uses the long term rating for this Index is now BEARISH. However, to confirm such bearishness I would wait for the long term momentum indicator to drop into its negative zone (which could be momentarily) and for the Index to break below its resistance lines. There are two of them but a move to the 450 level on the Index would break below both. We have an up trending wedge pattern which is most often broken on the down side. We have a support which may or may not hold. So, I would still not be in panic mode but would be pretty close to it. Of course, in the end one would look at the individual stocks before acting. There are always stocks that move counter to the prevailing trend but I would not risk money on it. Get out when the charts and indicators tell you to and protect your capital. Precious metal stock speculation (and it is all speculation, even stocks such as Barrick) is a risky business, no need to take greater risks than you have to.

Merv’s Precious Metal Indices Table

Well, that’s it for this week. Comments are always welcome and should be addressed to

By Merv Burak, CMT

The Entire US Bull/Bear Debate In One Big Slide from Morgan Stanley

Capital Accumulation and Opting Out of the Consumerist Machine

by Charles Hugh Smith
Correspondent Ken R. offers examples of opting out of the consumerist marketing machine.

In broad brush, frugality is mocked and scorned in American culture because it is extremely subversive to the dominant consumerist machine. Frugality and the work ethic have deep roots in the Northern-European-Protestant (key root:"protest") ethos: a penny saved is a penny earned, the Lord helps those who help themselves, etc. Many other cultures from around the world share these same values.

The connection between the Protestant ethos and Capitalism has been a given since Max Weber's work in the early 20th century ( The Protestant Ethic and the Spirit of Capitalism). The key feature of Capitalism is not greed--that existed long before capitalism and flourishes in non-Capitalist societies. The key feature of Capitalism is capital accumulation, i.e. what's left after expenses are subtracted from income, i.e. savings that can then be invested in productive assets.

Frugality is a key mechanism of "capital accumulation." We have been brainwashed into thinking that "growth" and "the good life" are based on consumption. The motivation for the brainwashing is obvious: those with capital invested in productive assets want others to squander all their earnings on consumption, as that boosts profits.

Without capital, there can be no wealth accumulation (unless you're a "too big to fail" bank and you can borrow billions from the Federal Reserve for free, and then deposit the money at the Fed for a nice "free-money" yield).

For all of us who are not corrupt officials and/or corrupt bankers (love that revolving door) then accumulating capital is our only hope of escaping consumerist poverty.

A vast consumerist marketing machine seeks to encourage consumption at every turn. You are nothing but what you own, wear and drive. This insecurity and dependence on "cool stuff" for an identity and sense of worth is the key dynamic of the marketing machine. (I discuss this at length in my book Survival+.)

One of our young friends is a Chinese student who recently completed her graduate studies in the U.S. and returned to China. Since we have had many Chinese and Chinese-American friends for the past two decades, one of her joking observations of American life resonated with us: Americans try to save 5% and spend 95% of their income, she noted, where Chinese try to spend 5% and save 95%.

This is how frugal families (often legal immigrants) pay off their mortgages in a few years: not 30 years, 3 years. With the debt gone, then they start accumulating capital.

The key to capital accumulation is to opt out of the consumerist machine. Longtime correspondent Ken R. recently shared some of his experiments in frugality. I know many of you have similar experiences and values. Those who do have capital/assets, while the typical American has little to none.

It is my observation that income is only loosely correlated to capital and asset accumulation. Yes, we all need moderate income in order to save. Interestingly, those with moderate incomes seem to save more than those with high incomes. We are brainwashed into believing that our lack of wealth is "caused" by not making enough money, but it seems more likely that a lack of assets is more the result of expenses exceeding or matching income, whatever that income may be.

Here are Ken R.'s comments:

My house sits on a piece of property that is about 3 acres. Of that 3, I would say about 1.5 has grass that needs cut and the rest is wooded. A few years ago when my 20 year old farm/garden tractor mower blew up I decided there was no way I was paying $4000.00 for a new "must have" yuppie John Deere tractor. So I went the local small business lawn mower repair guy and bought a 15 year old push mulching mower from him for $40 bucks. I call it frankenmower and yes I sweat my ass off pushing it around but I needed to lose weight. The 15 year old mower cuts fantastic and the $40 I spent went into an American businessman's hands.

Last fall my very old (over 20 years) trimmer started to have problems. Again, I am not spending money on a new corporate made, profit motive only, piece of lean six sigma garbage that does not help an American business person. Went on Craigs list, found a guy cleaning out his garage and bought a used professional grade trimmer for $50 bucks that would have cost me over $300 new.

When I went to buy a car 3 years ago, I could have gotten a big ticket. I took the bare bones Hyundai that gets 33 MPG and I am driving it till it drops. Are you familiar with the term psychological obsolescence? It's how the marketing folks convince the masses the piece of cheap garbage they have now is no longer " cool " and needs to be replaced by a new piece of mass produced garbage. Probably most of your readers are above the ploys of marketing but I wonder what the percentage is of folks that are clueless about how they are being led?

Thank you, Ken, and kudos to you for improving your health and strength while also saving money. Ken sent me this quote, which is of course is in my list of aphorisms: "Without health there is no happiness. An attention to health, then, should take the place of every other object." (Thomas Jefferson, 1787)

Bonus quote:
"The man who has a garden and a library has everything." (Cicero, via Lee Bentley

Eclipsing a terrible milestone as home prices fall harder than the 1928 through 1933 Great Depression Collapse: Lessons from the Great Depression

Multiple sets of indicators are clearly showing that the housing market is entering a second winter. Home prices are inching closer to cycle lows and indicators of housing distress are rampant throughout the country. Home prices during the troubling five years of 1928 through 1933 saw a decline of 25.9 percent nationwide and this was during the Great Depression. The latest Case-Shiller data shows that home prices in the 20 City and 10 City composite measures are down by 32 percent from their 2006 peak. This is now nominally the worst housing correction since the Great Depression. The continuing correction in housing is economically challenging middle class households in ways vastly different from those during the Great Depression. What is troubling about the new cycle lows is that the liquidity injected into the banking system by the Federal Reserve simply delayed the inevitable while diverting precious resources to a broken financial system. The painful lesson of the new reality is that household income, the gas in the engine, is simply too low to support prices even at today’s new lower levels.

This is part 32 in our Lessons from the Great Depression series:

27. Current Net Worth Drop of $13.8 Trillion Equivalent to 21 Percent Drop.

28. The Gospel of Economic Prosperity

29. New home sales fell 80 percent from 1929 to 1932 and fell 82 percent from 2005 to 2011.

30. Economic déjà vu from the 1937-38 recession

31. When government and financial institutions become one.

The Great Housing Crash of 2006

home prices since the great depression

Source: Economist

Many were early to call a bottom in the housing market last year. It all varied on what data you were looking at. It was true that the home buyer tax credits and the Federal Reserve pushing mortgage rates lower created an artificial stimulus that did revive the market briefly. You should ask yourself what these actions covered. The home buyer tax credits and the Fed intervening made home buying cheaper only because an artificial floor was temporarily placed. Home prices for many years have not been dictated by the market in the sense of an open transparent market where sellers and buyers compete for goods in a somewhat balanced system. Home prices have so many artificial carrots and glistening bells and whistles that the real price is hard to ascertain. Imagine the government stepping in and offering a giant tax credit for buying SUVs. It is logical to assume that at least initially, sales will increase as the real price of the vehicle is pushed lower. Yet in the end market prices have to reflect more steady measures. As the tax credit evaporated and the Federal Reserve’s mortgage buying spree ended, the reality was American households simply do not have the income to support current prices. You can see the recent up and down here:

case shiller two year window

Home prices have been falling steadily since the summer of 2010. The fact that we still have close to7,000,000 homes in the shadow inventory tells us that we still have a long way to go before any normal housing market is restored. This by far is the worst housing collapse ever and it is still ongoing. This isn’t some closed chapter in our history books. We are still experiencing the actual correction. You can see from the above charts and gather a sense of how deep this correction is. Or maybe this chart can help:
home price correction historical chart


Keep in mind the above chart is inflation adjusted while the 25.9 percent correction is based on nominal levels. No matter how you slice this correction it is the worst on record. To get closer to the baseline prices would need to fall 43 percent from the 2006 peak. A number that seemed preposterous only a few years ago is now within touching distance.

Homeownership increase causes housing correction more widespread pain


Source: Census

When the Great Depression hit roughly 46 percent of Americans owned their home. Most of the mortgage debt was modest although on much shorter balloon payment deadlines that were exacerbated by the collapse. When the bubble unfolded in our current crisis nearly 70 percent of Americans were homeowners with massive amounts of mortgage debt. Most Americans derive their net worth from their home. So a collapse in housing values has sent a ripple through the balance sheets of the vast majority of Americans. Even if you are part of the one-third of homeowners with no mortgage your home values just cratered 32 percent on a nationwide basis. Depending on where you live this could be much worse or better. However it is likely you have lost a good amount of housing equity.

The problem itself isn’t so much that homeownership shot up to 70 percent but how it was financed. As many of you are well aware in the last decade U.S. median household growth was non-existent. Families are earning what they did going back to the late 1990s. Yet the cost of a gallon of gas is now up over $4 in many areas, local and state governments are raising taxes for dwindling budgets, medical care costs are soaring, and the cost to feed your family is also sky high. So the fact that home prices rose in light of all of this is a stunning reflection of the mania we have lived through. There will be books written on the insanity that is the U.S. housing market and history will not look favorably on many of our actions but the truth is history is still being written.

The adjustment in the housing market is still fluid and dynamic. I recall reading an article in the summer of 2009 showing some prescient insight into the market. In the article this chart was produced:

csi peaks

Source: Moody’s

“(Moody’s) A number of indicators of housing have bottomed, and there are tantalizing signs that the descent in house prices is at least moderating. When all is said and done, this housing correction, easily the worst on record for the U.S., will see the national Case-Shiller® house price index fall nearly 40% from its 2006 peak. The correction will be not only deep but also lengthy, with the U.S. price index bottoming in the second quarter of 2010. The national price level will not regain its 2006 high until 2020, a peak-to-peak housing cycle of 14 years. Regions will vary substantially, however, with areas that saw prices rise most taking the longest to return.”

What is interesting is that the market did hit a bottom early in 2010. Yet what wasn’t accounted for was the double-dip in the housing market which is what we are now clearly in. The enormous backlog ofshadow inventory will keep a steady stream of lower priced properties for years to come. I also find it interesting that the above chart is able to predict 12 years out and that California will see peak levels again in 2023. Frankly, I think projections going out more than 3 years for housing prices in this current market is similar to flipping a coin since all we can say with certainty is that home prices cannot go up with no significant income changes. People keep asking about certain financial ratios about when it would make sense to buy. Unfortunately we now live in a much more challenging financial world. The metrics now have to change completely. We are used to paying very little for food and fuel in relation to total household income. Other countries are used to paying more:

us food chart

As we all know the cost of food is and has been going up yet income has remained stagnant or has dropped. The amount that can be spent on housing by default decreases. The Fed has essentially focused on the borrowing side of the equation by trying to lower rates to adjust to this new lower income world. Ironically this artificial intervention by the Federal Reserve has harmed most Americans while favoring investment banks around the country who really are the only sector who benefit from inflated housing costs. Lower home prices are actually beneficial to the one-third that rent. The one-third that own but have no mortgage are likely to not change their spending habits. It is the two-third that own and have a mortgage that are largely in play. If people purchase carefully and actually treat a home as a place to live, then if prices dipped another 20 percent it would not matter. The narrative that home prices need support is largely a banking propaganda piece trying to keep inflated balance sheets propped up.

As more and more disposable income is taken up by items outside of housing the amount of money Americans can finance for purchasing a home dwindles. This is why the demand for lower priced homes is healthy while markets where jumbo loans are needed are basically groveling at the feet of the government for more subsidies to keep prices inflated. Why would these supposedly rich areas need subsidies? What is it to the rich family to pay a little more from their healthy income to a house payment? The answer is that these markets are largely giant shell games where cars are leased and jumbo mortgages reign supreme. No doubt there are very wealthy enclaves with real solid incomes but you have other areas like Culver City or Pasadena where much of the economy is a paper tiger. You have households making $100,000 to $150,000 a year living as if they made $300,000 and above.

What can we learn from the Great Depression housing market and the one we are currently living in? First, many of the safety nets absent from the Great Depression like giant handouts to banks, food stamps, unemployment insurance, the FDIC, and stronger government intervention have made things look much better. Yet this is like a storm ravaging your property and you being happy that you have insurance. Sure, the place is covered but someone is still going to pay for the cost. I have few qualms about unemployment insurance or even food assistance since these keep people from absolute destitute situations and in terms of costs, are relatively low. For example $64 billion was paid out in 2010 to 40,000,000 families through food assistance. This money is spent back into the economy immediately. To put this in perspective look at the absolute failure of the home buyer tax credit:

“(WSJ) The credit wasn’t great for taxpayers, either. IRS says it paid $26 billion in home buyer credits in 2009 and 2010, enough to cover the maximum $8,000 credit for more than 3 million buyers. (It says at least $513 million went for fraudulent claims. Some claimants hadn’t bought houses. Some filed twice. Some were under age 18 or incarcerated.)”

Let us not forget about the multi-trillion dollar elephant in the room regarding the bailouts to the unworthy and financially broken financial system. The fact that most Americans have their wealth in housing and this was turned into a speculative casino by Wall Street is incredibly irresponsible. The reality of the new home price lows should tell you really who the bailouts were targeted for.

In the end home prices will continue to decline simply because no income growth has shown up in over a decade. Even if we do see income growth, we have to measure this with other rising costs like food and fuel. In the end, you can’t eat your house and maybe this is why the American Dream is now being redefined.

The "Real" Mega-Bears

It's time again for the weekend update of our "Real" Mega-Bears, an inflation-adjusted overlay of three secular bear markets. It aligns the current S&P 500 from the top of the Tech Bubble in March 2000, the Dow in of 1929, and the Nikkei 225 from its 1989 bubble high.

This chart is consistent with my preference for real (inflation-adjusted) analysis of long-term market behavior. The nominal all-time high in the index occurred in October 2007, but when we adjust for inflation, the "real" all-time high for the S&P 500 occurred in March 2000.

Here is a nominal version to help clarify the impact of inflation and deflation, which varied significantly across these three markets.

See also my alternate version, which charts the comparison from the 2007 nominal all-time high in the S&P 500. This series also includes the Nasdaq from the 2000 Tech Bubble peak.

Defensive Stocks Shine as Stock Market Slows

After sailing through its best first quarter since 1998, the stock market is starting to lose some momentum. The Standard and Poor's 500 stock index, a broad market benchmark, is up just 1 percent this quarter after jumping 5.4 percent in the first three months of the year, in large part because of conflicting data about the health of the economy.

One group — defensive stocks — is doing just fine. Utilities, health care and consumer staples are all considered a good defense against a slowdown because they tend to have stable profits no matter what happens in the broad economy. The items they sell aren't ones people stop buying when their budgets are tight. And for the last six weeks, investors have been putting money into stocks of companies like Aetna or Kraft Foods that cater to everyday needs, like health insurance or coffee.

Each of the defensive industry groups has gained more than 5 percent this quarter. Health care — the best of the three — is now up 14.2 percent for the year, after lagging sectors like energy and industrials during the first quarter. What's more, the number of shares exchanging hands in defensive industries is also increasing. Higher volume often signifies that a stock on the rise will continue to rise — or that a declining stock will keep falling — because it reflects increased investor interest in a stock. The daily trading volume of the SPDR Consumer Staples Select ETF, for example, is double the rate it was in January.

Meanwhile, industrials, a group that investors buy more when they expect an economic pickup to lead to new buildings or machines, are flat for the quarter. Energy companies are down 6.9 percent this quarter because several reports have indicated demand for oil is falling as gas nears $4 a gallon.

"People are becoming more conservative in their outlook and their spending as oil prices have risen," said Quincy Krosby, the chief strategist at Prudential Financial. Investors have begun to worry that energy prices will sap consumer and business spending, she said.

There has been good news about the economy recently. More companies in the S&P 500 are beating analyst sales estimates this quarter than at any other time since the recession ended nearly two years ago. Companies are also adding jobs at the quickest pace in five years, with 700,000 jobs added in the last three months.

Even so, Andrew Goldberg, a market strategist for J.P. Morgan Funds, believes defensive stocks will continue to do well until it's clear that oil prices will not be a drag on overall growth.

"If Americans are spending more money on gasoline, that means less money will be spent on flat-screen TVs and vacations," said Goldberg. "You have to view this economic recovery as a patient in the I.C.U. We're off the respirator and well on the way to a full recovery, but oil prices can cause a relapse."

Investors who think that the growth rate of economy isn't going to lead to higher corporate profits are attracted to defensive companies for two reasons. These companies — in the business of providing everyday needs like electricity, toilet paper, and telephone service — are in industries that deliver reliable earnings. Kraft, for example, saw its sales fall only 4 percent in 2009 even though consumers cut back elsewhere. Even with that drop, the company has increased sales by an average of 7.6 percent annually over the past five years.

That allows defensive stock companies to pay higher dividends than, say, a technology company that may be expanding its business rapidly. AT&T Inc. pays a quarterly dividend of 43 cents per share, giving it a 5.5 dividend yield. That's far higher than the 3.18 percent yield on a 10-year Treasury note and vastly more than an investor would get from, say, consumer favorite Apple Inc., which doesn't pay a dividend.

Defensive stocks are also a cheap way to get dividend returns compared with the S&P 500 index, which currently costs 15 times earnings and yields 2 percent. AT&T costs just 9 times earnings, despite gaining 2.8 percent this quarter.

Coca-Cola Co., another defensive stock, costs 13 times earnings after gaining 2.8 percent this quarter and comes with a 2.8 percent yield. Google, by comparison, costs 23 times earnings and doesn't pay a dividend. It's fallen nearly 10 percent over the quarter. Higher yields mean that investors will still benefit even if stock prices stall, Goldberg said.

Of course, some investors are buying defensive stocks simply because many underperformed over the past two years.

Dimitre Genov, the portfolio manager at the $58 million Artio Global Equity Fund, bought Dean Foods last year when its 52 percent drop landed it among the five worst-performing stocks among the 500 companies that make up the S&P index. The Dallas-based company, the country's largest dairy, is up 34 percent this quarter, thanks in large part to quarterly results that topped Wall Street's expectations after the company cut costs and raised its forecast for full-year earnings because grocers are raising costs for store-brand milk, the company's chief competitor.

"The laggards of last year are the winners now," he said.

US Economic Calendar For The Week

DateTime (ET)StatisticForActualBriefing ForecastMarket ExpectsPriorRevised From
May 168:30 AMEmpire ManufacturingMay-171821.7-
May 169:00 AMNet Long-Term TIC FlowsMar-NANA$26.9B-
May 1610:00 AMNAHB Housing Market IndexMay-161616-
May 178:30 AMHousing StartsApr-530K565K549K-
May 178:30 AMBuilding PermitsApr-570K590K594K-
May 179:15 AMIndustrial ProductionApr-0.4%0.5%0.8%-
May 179:15 AMCapacity UtilizationApr-77.5%77.7%77.4%-
May 187:00 AMMBA Mortgage Index05/13-NANA+8.2%-
May 1810:30 AMCrude Inventories05/14-NANA3.781M-
May 182:00 PMFOMC MinutesMay-----
May 198:30 AMInitial Claims05/14-400K420K434K-
May 198:30 AMContinuing Claims05/07-3700K3713K3756K-
May 1910:00 AMExisting Home SalesApr-5.40M5.22M5.10M-
May 1910:00 AMPhiladelphia FedMay-1517.518.5-
May 1910:00 AMLeading IndicatorsApr-0.1%0.0%0.4%-