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3 Investments to Prepare for the Next Bear Market

March 02, 2011 – by Richard Band

You bailed them out once. (The banks, I mean.) Would they dare ask you to bail them out again? Seems like a preposterous question. But not if you’ve listened carefully to the news of late.

A story in Monday’s New York Times caught my eye: “Auto Sales Rise on the Return of Easy Credit.” Ah, that’s why General Motors (NYSE: GM) reported such good Q4 “earnings” last week.

“After radically scaling lending during the financial crisis,” the Times tells us, “banks and the lending arms of the automakers have started to issue loans more aggressively.”

And now the eyebrow-raiser: “Even car buyers with tarnished credit histories are getting financing, in some cases without making a down payment. More than 859,000 new cars were sold to consumers with a so-called subprime credit rating in 2010, a nearly 60% increase from [2009], according to CNW Marketing Research.”

In other words, the banks (and the automakers’ lending affiliates, like GMAC) have learned absolutely nothing from the worst financial crisis since the 1930s. Or, more precisely, they have learned the most deplorable lesson of all: They can lend recklessly, and the taxpayer will bail them out.

Readers have asked whether I believe another financial crunch (and bear market for stocks) lies ahead, perhaps in 2012 or 2013. I think it’s a foregone conclusion.

With Bernanke & Co. issuing the financial equivalent of free heroin, the “dealers” (banks) are only too happy to distribute the junk to the streets — at an appropriate mark-up, of course. You’ll be called upon later to serve in the emergency room, treating the consequences.

Fortunately, I think we’ve got another six months (perhaps a little longer) before we have to take large-scale defensive measures against the next bear market. However, it’s not too early to begin transitioning your portfolio toward a more conservative posture.

On the fixed-income side, get rid of junk-rated corporate bonds. Yield spreads for low-quality corporate IOUs (versus Treasurys or high-quality corporate) have shrunk drastically. From here on, you’ll be far safer with debt issued by developing countries, like the Western Asset Emerging Markets Debt Fund (NYSE: ESD), which is why it is one of our top dividend stocks to buy.

Water Utilities Could Offer a Flood of Profits

On the stock side, I advise you to focus sharply on the small, select group of stocks (and sectors) that still offer solid value in this increasingly overvalued and speculative market. I continue to be excited about the water utilities offering nice dividend yields.

In particular, I like California Water Service (NYSE: CWT), which currently yields 3.5%. Buy CWT at $36.50 or less.

I also like American States Water (NYSE: AWR), which is also based in the Golden State. Diminutive AWR (market value $616 million) boasts a superb dividend record, having increased its payout 56 years in a row.

At Tuesday’s close, AWR yields 3.1%. Buy at $35 or less.  I’m targeting a total return (dividends plus price gain) of 15%-20% in the coming year.