SubscribeEconomic Downturn: Profiting with the 5 Pillars
February 14, 2008
Just listening to investors or analysts talk these days and it is hard to miss the ongoing chatter about an apparent and impending recession. Some analysts say we are already in one, others point to its arrival in the near future. Regardless of what the experts have predicted, no one can deny our country’s economic downturn. Looking at the pathetic housing market, the recent lackluster results in the financial markets, and the absolute horrific price of gas, it is fairly easy to assume we are well into an economic downturn, moving toward a full-blown recession.
So what do you do when it comes to investing in this turbulent time? Do you panic and pull out all your investments, toss the cash in a garbage bag and hide it under the mattress until this is all over? Some might advise such a ridiculous strategy, but the truth is that there is a benefit in being an smart investor during this time.
Investing, like any other business, is all about making good use of whatever advantage you have, and when the masses pullout, it is often a good time to think about going in.
Recession/bear market investing is absolutely different than traditional investment strategies for many reasons. To begin with, the average investor should probably not enter into risky investments like futures trading, option buying, or strategies that utilize leverage at a time like this. When an investment is considered a risky move in a good economy, then in a bad economy it should be considered off limits, unless of course you have a powerful grasp on the art of the advanced trading style that gives you a leg up. For most investors though, it is a good idea to stay away from such a risky endeavors, and focusing on the 5 pillars of investing during economic downturns.
The Five Pillars of Investing During Economic Downturns:
1. Understand The Business Cycle
2. Perform an Internal Audit Before Buying Anything
3. Invest in Evergreen Industries
4. Invest in Long-Term, Proven Winners
5. Look for Deep Value Stocks
The first and most important move any investor can make during an economic downturn is to educate themselves about the business cycle. All businesses, and as a whole our economy, go through a cycle. They have growth periods, followed by stagnant periods, followed by downward periods. This is something that happens to Read more
Preferred Stocks for A Volatile Market
January 8, 2008
Several readers and podcast listeners have recently emailed in questions concerning preferred stocks. It seems that these inquiries were prompted because of the levels of low-yielding cash positions they are amassing within their portfolios. So, here are a few pointers.
Preferred stocks have long been thought of as a safe haven from many of the nasty downturns that occur from time to time within the equity markets. Now seems to be one of those times. During the first few trading days of 2008 the unusually high volatility is adding to an already tense situation on Wall Street. The dreaded “R” word has been appearing in conversations as we see additional data points that are moving us steadily towards a slowing economy.
The alternatives for investors are contracting, particularly when we see many positions hit hard without much logic or notice. A glance at the recent 52-week high/low list for January shows a disproportionate number of names making lows. Unless we see a significant change in the current mindset of investors OR some magic from the housing and credit markets, we should plan on seeing more of the same market conditions for the next few months.
So, what is an investor to do? Cash is definitely king right now and even though it seems a sacrilege to keep money out of what is usually considered productive investments, the daily whipsaw has the potential to make even the most seasoned investor take notice. Even with the ongoing credit concerns and financial stocks in sorry shape, there may be an opportunity in high-grade preferred stocks.
Investopedia has a good working definition for Preferred stocks:
A class of ownership in a corporation that has a higher claim on the assets and earnings than common stock. Preferred stock generally has a dividend that must be paid out before dividends to common stockholders and the shares usually do not have voting rights.
The precise details as to the structure of preferred stock is specific to each corporation. However, the best way to think of preferred stock is as a financial instrument that has characteristics of both debt (fixed dividends) and equity (potential appreciation). Also known as “preferred shares”.
The one catch is that many of these stocks seem to come from the financial sector which has not been seeing any hope of moving past their current dilemma in any time soon. Even so, the names on the following list have good ratings and are showing a yields substantially above market. Now may be a time to continue buying some of these as an alternative to the money that will otherwise be temporarily sidelined.
Realize that the current yield will help top protect some downside movement thereby giving a slight cushion if there is a downward movement in share price. Also note that on average, preferred stocks have also seen greater than usual swings recently. Usually, we have seen a maximum of a 5% variation in share price, even in poor market conditions. Recently though, some of these have seen their price range increase to 10%.
Still, there is probably a place for these in longer-term portfolios that need diversification that includes fixed income.
Note: The criteria used in this filter: Current yield above 6.50%, an A+ or better rating and qualification for the 15% dividend tax rate.
(FBP.D)(GS.B) (HBC.A) (HFC.B) (IND) (INZ) (LEH.F) (MER.I) (MET.B)
Disclosure: Horowitz & Company clients may hold positions in some or all of the stocks mentioned.
Profitable Resolutions for the New Year
December 31, 2007
It seems that the commitment made to resolutions each New Year is such a common pastime that the United States government actually has a web page dedicated to the “Top New Year’s Resolutions.” According to the “government-made-easy” site (www.usa.gov), there are a dozen or so popular resolutions that we seem to revisit year after year. This year, think about taking those same resolutions and applying them to your investments and finances. Here are a few ideas for The Disciplined Investor:
Lose Weight – Put your investment portfolio on a diet! In other words, get rid of the fat and keep it off! Look carefully through the list of your investments. Do you have stragglers that you are keeping just because they have been there for years? There is no better way to clean up AND rebalance a portfolio than getting rid of non-performing positions. Make a list of the stocks, bonds and mutual funds that do not seem to meet your investment objectives. Be critical and maybe even a bit brutal and cut out the unnecessary load.
Pay Off Debt – Be careful not to over-borrow. While margin can be utilized for good reason, it is not appropriate for most investors. Make sure that your accounts are free from margin debt and commit to paying down any outstanding loans. Close positions that have been bought on borrowed money. If you have been accessing the margin features of your brokerage accounts to pay down bills…DON’T!
Save Money – It is time to stop paying high commissions and fees. There is no reason for anyone to be paying the high costs associated with front- or back-end loaded mutual funds. Of course, even with no-load funds, the managers Read more
SAPI Slugs 2008 - Quant Screen Results
November 29, 2007
S&P Index Slugs (SAPI Slugs) Adapted from Pages 44-45 of The Disciplined Investor - Essential Strategies for Success
According to MSN Money, this simple but effective value search presents a pure yield play. It is similar but potentially superior to the better-known “Dogs of the Dow” search we reviewed on November 14th because it draws from a wider pool of large-cap stocks and includes a secondary financial-strength overlay.
The search was also developed and tested by money manager and author Jim O’Shaughnessy. The strategy calls for buying the top 20 stocks from the result set of this search, ranked by dividend yield. These should be held for 1 year and then rescreened and rebalanced. It can be combined with O’Shaughnessy’s Momentum Growth search to create a balanced 30-stock, 1-year portfolio. This search criteria and others are available in the stock screener section of the MSN Money website and can also be downloaded from The Disciplined Investor website. Below is the criteria used to create the screen with the MSN Money Deluxe Screener.
The theory of using more than one screen is to allow for greater diversification within the portfolio. This way, if one particular screening method is sorely out of favor, the other may help to avoid massive losses. In his research, O’Shaughnessy built portfolios for one year each. Translated, this means that once you buy the resulting stocks and effectively hold them for 52 weeks, you can rerun the screen to find the stocks to include in the next cycle.For most individual investors, this is a tedious task and can result in excessive trading fees. Also, as has been discussed, the tax implications alone could be extremely detrimental to a portfolio’s performance. This is precisely why these methods are often used within tax-deferred accounts along with additional fundamental overlays. Suffice it to say that these screens should be used as initial idea generators, not as absolute methodologies.
Click Table to Enlarge
The theory of using more than one screen is to allow for greater diversification within the portfolio. This way, if one particular screening method is sorely out of favor, the other may help to avoid massive losses. In his research, O’Shaughnessy built portfolios for one year each. Translated, this means that once you buy the resulting stocks and effectively hold them for 52 weeks, you can rerun the screen to find the stocks to include in the next cycle. For most individual investors, this is a tedious task and can result in excessive trading fees.
Also, as has been discussed, the tax implications alone could be extremely detrimental to a portfolio’s performance. This is precisely why these methods are often used within tax-deferred accounts along with additional fundamental overlays. Suffice it to say that these screens should be used as initial idea generators, not as absolute methodologies.
This chart shows a 1-Year price performance for the 10 highest yielding stocks within the SAPI Slugs using the above screening criteria.
Frolicking at Hell’s Gate - Mortgage Mayhem
November 21, 2007
The only thing worse than running out of Turkey on Thanksgiving is talk about cutting dividends on stocks. This is nothing to take lightly. It ranks up there with yelling fire in a theatre and is almost as bad as telling investors that they cannot withdraw money from their accounts. The recent flurry of negative news concentrating on the financial sector has investors running for cover, as they are apprehensive about what else could lurk beneath the surface. Of course, that point is relatively clear to most. What may not be so apparent is what financial firms will do in their desperation to help defray costs associated with their frolic through Hell’s Gate, now better known as the mortgage business.
It is very troubling to find that the “shoes dropping” are not showing any signs of abating. In fact, it seems that the number of shoes related to the problems in the financial sector can only be matched in quantity to those found in the closets of Imelda Markos. The truth is that this recent announcement by Federal Home Loan Corporation, aka Freddie Mac (FRE) a traditional and conforming lender is much more significant as now, it is known that the spread of the sub-prime problem has seeped into areas which were not anticipated by most analysts.
Direct from the pages of the Freddie Mac website: “as of September 30, 2006 held a $3 billion cushion over the OFHEO mandatory target surplus.
This is real, permanent, at-risk capital that provides the first line of defense in the unlikely event of a financial catastrophe at Freddie Mac. Since shareholders are the ones providing the capital, they – and not the taxpayers – will be the ones to bear the losses. Shareholders expect an adequate return on their investments in exchange for putting their money on the line, but like any other investor, they buy our stock at their own risk.”
According to reports by the company, Freddie Mac saw the fair value of its net assets decreased by about $8.1 billion in the third quarter. Freddie Mac has also hinted at the possibility of the cutting their dividend in a defensive move to protect the required level of capital surplus requirement imposed by regulators. A cut to their dividend would immediately help to stem the reduction of assets due to their ailing portfolio; but whether it is significant enough is yet to be seen. Read more
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