What you will find inside…
If you missed it this weekend, I’m linking to Barron’s mid-year roundtable article from this past weekend’s edition. I feel that this year’s group discussion at mid-year is particularly helpful, since we’re currently down from where we started at in the beginning of the year. Therefore, this could potentially be a window of opportunity for your portfolio to finish the year strong. A little guidance from a few market experts might help, too.
For those unfamiliar, the Barron’s roundtable is an annual event, which brings a number of notable investors together to discuss what they see in the year ahead and what stocks, funds, commodities and other investments they are bullish or bearish on. The mid-year meeting provides greater insights into what has changed or remained the same from their forecasts from January.
I find this annual roundtable group very helpful for the individual investor. For one, it helps investors get a sense of what the ‘pros’ are thinking about and what they are attracted to. Secondly, it’s a point at which you can start branching off in your research. By this I mean that you may come across ideas that lead you to consider other related investments.
Ten market pros offer their investment advice for the back half of 2011.
2011 Mid-Year Roundtable Report Card.
For nearly a year and half now many foreign countries (mainly developing countries, but Australia is in the mix) have been increasing interest rates and increasing reserve requirements. This summer the Federal Reserve’s Quantitative Easing II will be ending. A national election is upcoming in 2012. As usual, a number of events are happening and are upcoming that can impact the performance of your portfolio.
I’m not much for big predictions, but I think it’s a good idea to at least think about shifts in trends and how such shift could impact your investing game plan. Bear with me as I shoot off a few random thoughts…
What happens when the Fed finally starts to increase interest rates? It’s bound to happen some day soon, right? Free money (or nearly) can’t exist in perpetuity. At least I don’t think so. When rates begin to increase, what will that do for the dollar? I suppose if every other country in the world is doing the same (increasing rates), then it’s a wash, but that sounds like some type of text book situation.
If we hold that the recovery continues, will we come out stronger that Europe? If so, does this mean that the dollar begins to regain some of its strength?
What if Washington gets the deficit under control and drives the current account deficit down? That would be a positive catalyst for the dollar. I think we could agree that the public sentiment wants deficit spending reduced, but will current and/or future politicians have the will to do so?
In the case that the dollar gets stronger, what does that mean for commodities? What does it mean for precious metals? Gold is driven up right now based on anxiety and fear. Increased faith in ‘the system’ would presumably cause investors to migrate away from gold. Other commodities might be hit as well. Oil is priced in dollars and therefore a stronger dollar would lead to lower oil prices, all else being equal.
Questions like those above are good for any investor to consider. Right now it’s hard to think about a strong dollar bull run, but if it does occur is your portfolio ready? If not, what type of plan can you devise to act accordingly? No one wants get caught unprepared.
Their financial repressionary thesis points out that bond prices don’t necessarily have to go down for savers to get skunked during a process of “debt liquidation.” The argument over whether the end of QEII on June 30 will result in higher yields and lower Treasury bond prices is, in a sense, a secondary one. Even if 10-year Treasuries stay where they are at 3.30%, and fed funds close to 0%, savers and financial intermediaries are being shortchanged by both of these yields and everything in between…READ MORE.
My Take: I love Bill Gross and his regular op-ed pieces are something I do not pass up, but it doesn’t take an investor of Bill Gross’s caliber to foresee what he is discussing in this weeks piece. The government has a huge amount of debt and one way to get out front under that debt is to inflate…as in inflation of the currency. Inflation is the grim reaper that comes hidden in more ways than I would possibly want to write within this blog.
Gross is primarily concerned with investments in such things as Treasuries, which have very low yeilds. Thus, the yeild isn’t even covering the devaluation of your money through inflation.
Since the fall of 2008 I’ve stated that the government would bring about inflation as one of its principle ways to ease its debt problem. I wasn’t the only one because it is something that has happened in the past and will happen some place some where in the future. Yet, since this great evil is upon on us, what the heck are we to do?
One area I think you should consider is Canada. Stability and a plethora of investments that are very good inflation hedges. Canada is home to a large amount of companies that deal in natural resources. Whether it’s a bond or stock, Canada is an area where you can turn to, if you are worried about your domestic investments and their inability to hedge against inflationary pressures.
For more information about inflation, I’d recommend you watch a video I produced over a year ago: Protecting Your Portfolio Against Inflation
Baby Boomers are a significant demographic segment of the U.S. population. Many are nearing retirement or are enjoying their retirement years. For an investor, an approaching wave of retirees should cause one to think about what types of stocks this demographic group will swing towards. Consider the trend and think about its logical implications.
Yesterday, today and tomorrow retirees will on average gravitate toward ‘safer’ investments. For example, you would not expect many retirees to be overweight in stocks trading under $5. You would expect a vast majority to be drawn towards stocks that are stable and pay a dividend or invest in a fund that invest in similar securities. Retirees are in most cases living off their investments, which means they are much more risk adverse than the average investor that is in their early-mid career.
When we speak of retirees ‘living off their investments’ this should cause you to think about dividends. When considering stocks, if an investor needs a stable and regular return to sustain their way of life, then they’re going to look towards stocks that have a record of paying dividends. A retiree without a regular income from a job needs to establish regularity through other means. Dividends are one of the tools to achieve this end.
The demographic fact that a much larger portion of the population will soon be retired matters to all investors. Why? It matters because emerging trends can be investing opportunities, if you can foresee them and act before the rest of the herd.
I’m contending that high yield stocks that have a reasonably stable price and have shown a history of consistently paying and growing their dividend distributions are going to become increasingly sought after in the years to come. Companies that provide essential services, such as energy (just one off the top of my head), are going to be more attractive to a growing portion of investors.
What is an investor to do? This trend is slow moving, so it’s not as if you need to run out and buy today. As an investor I would find companies that are stable, pay sizable dividends and are providing a product or service that people will turn to whether it’s great or not so great times economically (you may want to look at funds, too). After you have made your selection of prospects, think about what price you’d like to buy in at. Finally, sit and wait for the market to go to where you want the stock’s price to be.
If you’re in your positions for the long-term, I believe you will be well positioned to profit from this trend. Greater demand for these stocks will put pressure on their share price, which will enable you to benefit from both stock price appreciation and the dividend yield. Lastly, keep in mind that if interest rates sky rocket off their current low of lows, then you should re-evaluate this strategy. A sizable risk-free rate will be enticing to the retired (this is not the case now.).
The world’s largest bond fund began betting against the United States last month by taking short positions on its debt on expectations the nation’s shaky finances will drive interest rates higher and imperil its triple-A rating…READ MORE.
My Take: PIMCO is the ‘largest bond fund’ referenced above. As you may know, Bill Gross the Chief Investment Officer of PIMCO has expressed his concerns over excessive government debt in the U.S. for a while now. If the article is correct, Gross is now putting his money where his mouth is (in figurative terms).
I think Gross is of the opinion that big cuts to defense, medicare, medicaid and social security are very unpopular with the majority of Americans. Big cuts throughout these programs are not likely to be something that a politician can help get re-elected. If this is true, then the drive to make sufficient cuts in the budget are likely to be to weak willed to control the tide of government debt.
As government debts increase more Treasuries will need to be purchased. More debt will make the U.S. look more risky to investors, which will require a larger interest rates to be offered to attract buyers.
We live in very interesting and challenging times.
Low rates have created quite a dilemma for those with cash stakes who are suddenly at a loss for how to make a reasonable return on their money. This is becoming an even bigger problem as inflation begins to heat up. With cash earning 0%, it won’t take long until investors lose lots of purchasing power…READ MORE.
My Take: While I understand the rational for low rates in these difficult economic times, I worry about the unattended consequences. Saying we’ll do X in order to cause Y to happen is pretty straight forward, but what is changing because we’re doing X and causing Y to occur? As Milton Friedman once stated, “There’s no free lunch.”
Low interest rates are great for many people/businesses, but they are also a burden for others. If you’re a retired person attempting to structure your portfolio to meet a certain fixed income level, the job now is more difficult than ever. With rock-bottom rates being given to savings, money-market and CD accounts, you almost have no choice but to increase your portfolio’s risk to obtain the return you need to get by.
Younger people might not think about the difficulties of these rates on those retired because they’re not dealing with an equivalent situation. The problem of receiving little reward for putting your money away in FDIC secured accounts is a real one. It’s going to become even more real, if we see a growing amount of inflation throughout the economy. Not only will savers not be rewarded through higher savings rate, but they will be penalized by an increasing rate of inflation.
If savers turn to the market to get their interest rate/dividend yield fix, what happens if the market stumbles? Maybe it won’t happen, but if it does, it’s not going to be pretty for a lot of people that are indirectly being forced into investments that carry varying degrees of risk.
As more of the baby-boomers become retirees, a greater need will be placed on investments that can provide for a monthly or quarterly income payment. If interest rates are kept down by the Fed, retirees will continue to be forced to take more risk than what they had planned to take in order to earn a level of return necessary to maintain their standard of living. Artificially low rates do not provide a free lunch.
My Take: First, the op-ed pieces that Bill Gross puts forth are some of the best on the Internet. While you may not agree with him all the time, he presents well reasoned and well researched arguments.
Secondly, the topic that he’s writing about in this entry is focused on the potential default by the government on its debt. If you’ve talked to me in the last 2 years, I’ve said over and over that the government would promote inflation to turn the debt we have now into pennies on the dollar. Devalue the currency and you devalue your debt.
We do not live in a vacuum and the devaluation of our debt means many things to many people outside of the U.S. Debt holders will not be fond of such actions. If you’re inside the U.S. the concerns raised by Bill Gross should send off a yellow flag in your head. If his notion about these back-door default scheme by the government come true, then how will this impact your current investment/savings strategy?
In the coming weeks I will be looking at a few ways to internationally diversify your portfolio in such a way that you hedge your bets against deterioration of the dollar, while still investing in solid companies that do not cause your portfolio’s risk profile to shoot off the charts.
The United States is on a fiscal path towards insolvency and policymakers are at a “tipping point,” a Federal Reserve official said on Tuesday...READ MORE.
My Take: Well, this isn’t the most comforting thing to read. Yet, the author does add that he thinks we will avoid insolvency. Though many of us take a more micro focus when investing, it’s important that we keep our eyes on the macro environment. If investors are scared from macro conditions, it’s typically very difficult for even ‘good’ investments to rise above the tide.
Great insights from Ray Dalio on where he sees the market going in the next 2 years. I highly recommend this video.