Earnings, Warren Buffet, Bonds

Last week's newsletter stated that earnings from companies should be positive, beating estimates, and that this should support the stock market. Last week, 78% of the Dow stocks reported better than the estimated earnings and stock markets around the world rose. The Dow rose to a high for the year breaking the 9000 mark, up about 4% for the week. This earnings trend should continue giving support to the stock market this summer.Numerous experts have been giving their opinion about the direction of the stock market based upon a number of reasons.

These experts cause more confusion than providing real guidance. The best thing to do as an investor is to monitor the data and remember that stock prices increase as earnings grow and earnings grow as economic business conditions improve, which is the current situation. Earnings are growing now due mostly to cost cutting measures and improving business conditions. Since cost cutting only goes so far, revenue growth is key for stock prices next year.

I read in Barron's this week that Warren Buffet was asked this week about where to invest now given that the Dow had reached 9000. It was stated that Warren Buffet recommended continuing to own stocks and avoiding long term treasury bonds and cash for long term investments. Since I have been saying the same thing, I think he is rather smart. It was also reported in Barron's that Warren Buffet stated that the best types of bonds right now are mid term corporate bonds.

A bond is a debt obligation where an investor is paid interest and gets back their original investment. Lots of different types of bonds exist including municipal (state and local government), treasury (federal government) and corporate (companies). Municipal bond interest is tax-free which makes it a good choice for any account other than a tax deferred account like a traditional IRA. Corporate bond interest is taxed which makes it an especially good choice for a tax deferred account like a traditional IRA. Corporate bonds are rated by several agencies and can be lumped into investment grade and junk bond, a conservative investor will want mostly investment grade bonds. A junk bond rating for a company does not mean that the company that issue them is junk, they typically are an excellent company.

Bottom Line: The current investment direction of investing in stocks and stock market mutual funds should be maintained for a long term investor seeking growth who is willing to take some risk. Mid-term corporate bond funds that are mostly comprised of investment grade bonds are also an excellent choice for a conservative investor.