My chart shows the long-term performance of $1 invested in the consumer non-durables sector in June of 1926 to $1 invested in the S&P 500 at the same time. The consumer non-durables industry includes companies that make and sell everyday items. Demand for non-durables, or what are more commonly referred to as consumer staples, is not heavily influenced by the business cycle. You don’t stop eating or brushing your teeth just because the economy is in recession. The consistency and stability of consumer staples companies definitely appeals to investors in or nearing retirement, but all … [Read more...]
Stay Defensive
Confidence in the economic recovery is improving, and retail investors are moving back into equities. Here are four reasons to remain defensive in the face of this renewed optimism: Stocks are now discounting a sustained and robust economic recovery. A second contraction in economic output is no longer priced into the market. If the economy contracts or comes up short of expectations, stocks could be in for a significant correction. Taxes on income, capital, and possibly even consumption are going up. Higher taxes resulting from Obama’s health-care boondoggle are only the tip of the … [Read more...]
The Payday Indicator
Alert! My Payday Indicator is signaling the worst environment for investors during my investment career. Conservative investors have been left with scraps on the floor; there isn’t even a decent chuck burger to be had, let alone a T-bone steak. At the end of 2009, investors were asked to take on more risk and receive less reward than at any other time since I’ve been in this business. My Payday Indicator replicates a portfolio invested 50% in Dow Jones Industrial Average stocks, and 50% in three-month T-bills. As you can see from my chart, the yield on this portfolio is the lowest on … [Read more...]
Searching for Yield?
With yields of 0.15% on T-bills and 2.6% on five-year CDs, the temptation of many investors is to reach for yield. Don’t do it. When you reach for yield, you are either taking on too much credit risk or too much maturity risk. With a flood of government debt issuance in the pipeline, and a bloated Federal Reserve balance sheet, much higher interest rates are a dangerous prospect. Don’t forget that a seemingly modest 1% rise in interest rates could decimate a long-bond portfolio. I’m talking about losses upwards of 20%. That’s not what most bond investors sign up for. Instead of reaching for … [Read more...]
Here’s the $64,000 Question
The current bull market in stocks is now 12 months old. The S&P 500 has risen 74% since the March 2009 lows. After a mini-correction to start 2010, investors have aggressively bid up shares, driving the S&P 500 up 11% over the last two months to a new 52-week high. Many institutional investors jumped in early and as a group they are now fully invested, as evidenced by the low liquid asset ratio of stock mutual funds (read more here). But individual investors were late to the party. Two damaging bear markets in ten years caused some hesitation. The most likely catalyst for a … [Read more...]
A Miracle Metal
Nature's supply of the element thorium is virtually unlimited. This silvery-white metal is mildly radioactive and wouldn't do you much harm if you carried a piece around in your glove compartment. A recent well-done technical paper in Wired estimates that a liquid fluoride thorium (LFT) reactor uses only one ton of raw thorium per gigawatt output. For a uranium-fueled light water reactor, 250 tons of raw uranium are required. The annual fuel cost for a LFT 1-gigawatt reactor is estimated at $10,000 versus $50 million to $60 million for uranium. The proliferation potential for LFT reactor … [Read more...]
A Proposal 83% of Americans Support
March 11, 2010 Caroline Baum writes that 83% of Americans would support term limits in the House and Senate. Senator Jim DeMint of South Carolina has introduced a “Term Limits for All” constitutional amendment. His amendment would limit every House member to three terms and every senator to two.www.ustl.org. The reelection rate in the House is close to 95%, and in the Senate it is 88%. The advantage of incumbency and the rigging of congressional districts has created the “career politician.” Our Founding Fathers wouldn’t approve. Career congressmen and senators wield too much influence … [Read more...]
Wall Street’s Dirty Secret
March 5, 2010 The New York Times ran a must-read article this week on the important differences between brokers and investment advisors. As I have written in the past, the difference between brokers, or self-labeled “financial advisors” who work for big brokerage houses, and registered investment advisors is stark. Brokers are held to a suitability standard whereas investment advisors are held to a fiduciary standard. The suitability standard is the great enabler of Wall Street. Securities distribution is the primary motivation of the brokerage industry. Brokers don’t get paid for … [Read more...]
Avoid These Securities
February 26, 2010 One sector of the financial markets that is greatly underpricing risk today is municipal bonds. State and local governments are facing extraordinary budget pressure. The recession has eviscerated tax revenues, but spending requirements have not dropped. During the last fiscal year, some state and local governments relied on federal stimulus money to balance their budgets. But federal handouts cannot be relied upon indefinitely. The federal government has funding problems of its own. And tax increases aren’t always an option. To deal with extraordinary budget pressure, … [Read more...]
A Snapshot of the Economy
February 19, 2010The Conference Board Leading Economic Index (LEI) came out this week. The LEI increased 0.3% from December. Each month when the Conference Board releases the leading, coincident, and lagging indicators, my staff sends me an updated table of the numbers (see below). I use the table to spot changes in trend and momentum in the economy. I grade each indicator individually and as a group. This monthly exercise gives me a good snapshot of the health and strength of the economy. What are my indicators signaling this month? The leaders continue to increase, but momentum is losing … [Read more...]
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