Since I graduated from Shaker Heights High School in 1959, the most important driver of long-term stock market returns has been the direction of interest rates. Bonds compete with stocks in investors’ portfolios. When interest rates rise, the prospective return on bonds goes up. In order for stocks to remain competitive with bonds, their prospective returns must also rise. Prospective stock returns rise when prices and valuations fall. Think of the dividend yield on a stock. If you own a $100 stock that pays a $4 annual dividend, you are looking at a 4% yield. If the price of that stock falls … [Read more...]
A Raging Bull Market in MLPs
The raging bull market in MLPs shows no signs of slowing. Since the S&P 500 peaked in October of 2007, MLPs have gained more than 33%, while the S&P 500 dropped 25%. YTD, MLPs are up 17%, compared to a loss on the S&P 500. … [Read more...]
A Simple Strategy for Stock Market Success
For over four decades I have used a simple strategy to successfully invest in the stock market. I invest exclusively in dividend paying stocks. I especially favor those with high yields, a strong balance sheet, and a history of annual dividend hikes. This strategy is simple, but it works. Historically, high dividend payers have outperformed non-dividend payers. In the chart below I show the growth of $1 in non-dividend paying stocks to the growth of $1 in the highest yielding quintile (top 20%) of U.S. stocks. The difference in performance is profound. $1 invested in non-dividend payers in … [Read more...]
Bear Market In Cyclical Stocks
The bull market in cyclical stocks that began in March of last year is officially over. The YRPI Early Cyclical Index is down 23% from its April 2010 high. Early cyclicals are now in a bear market. As is evident on our chart, in relative terms, stable growth stocks are surging relative to cyclicals. The YRPI Stable Growth Index has outperformed the YRPI Early Cyclical Index by 22% since late April. … [Read more...]
Dow Industrials vs. Gold
In the last 115 years there have been three secular bull markets in gold versus the Dow. The current secular bull market in gold is the third. In each of the last two gold bull markets, the ratio of financial assets to gold fell to a ratio of less than three. The current ratio of the DJIA to gold is 8.3. Based on historical precedent the secular bull market in gold still has a ways to go. At the extremes, before this bull market is finished, gold could rise to over $5,000 per ounce or the Dow could fall to less than 2,500. … [Read more...]
Are Small-Cap Stocks Running Out of Steam?
Is the strength in small-cap stocks running out of steam? I’m not talking about the recent correction in small stocks, but rather the relative performance of small cap stocks versus large cap stocks over the past decade. My chart shows the ratio of small stocks as measured by the Russell 2000 index to large stocks as measured by the S&P 500. When the ratio is climbing, small stocks are outperforming large stocks, and when the reverse is true large stocks are outperforming. You can see clearly from the chart that the decade of the 1980s and 1990s was a period when large-cap stocks were in … [Read more...]
A Troubling Trio of Economic Indicators
In over four decades in the investment business, I have found that the most reliable economic indicators are not those released by government statistical agencies, but those that are available real-time in the stock, bond, and commodities markets. Three charts I have been monitoring regularly to gauge the strength of the economic recovery are Young Research’s Moving the Goods Index, lumber prices, and copper prices. Young Research’s Moving the Goods Index is a market-cap-weighted, non-airline transportation index. If the Moving the Goods Index is in a bull market, chances are the … [Read more...]
The Crash
The Regional Economist from the Federal Reserve Bank of St. Louis is a must-read for any serious investor. The quarterly review provides business and economic commentary for the states in the eighth Federal Reserve District—which are “central to America’s economy.” I’ve been studying the most recent review and want to discuss with you a table in the cover story, “Economic Hangover: Recovery is Likely to be Prolonged, Painful ,” by Bill Emmons. I’ve customized the table to help illustrate that easy money and out-of-control government spending lead to reduced stock-market returns. The crash was … [Read more...]
A 500% Return in High-Yielders
Do you invest in master limited partnerships (MLPs)? MLPs are publicly traded limited partnerships. They combine the tax benefits of a limited partnership with the liquidity of a publicly traded security. MLPs pay no entity-level tax. They are pass-through entities. MLP unit holders are allocated a proportionate share of the revenue and expenses of the partnership. Most of the publicly traded partnerships in the U.S. are in the energy transportation and storage business. These are the companies that own the pipelines and storage terminals that move oil and gas from the oil fields to the … [Read more...]
Avoid Financial Ruin
Did you know that the S&P 500 is down 5% since year-end 1999? That’s not just price; I’m including dividends here. What an atrocious return. And for the privilege of losing 5% of your capital, you’d have had to endure two of the most severe bear markets in history with peak-to-trough declines of 50% or more. Investors who retired at year-end 1999, at the height of the tech bubble, undoubtedly had too much invested in the stock market. The weekly asset allocation survey conducted by the American Association of Individual Investors showed that in January of 2000, investors were putting … [Read more...]
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