Investment Strategies IV

Introduction

In my last posting on investments (http://www.morssglobalfinance.com/investment-strategies-iii-specific-suggestions/), I said there were three appropriate investment strategies, depending on where we were vis-à-vis the global recession.

I.     Early – panic, hold dollars;

II.   Middle – search for high yield;

III.  Recovery – buy banks, commodities (including real  estate),  emerging   markets, and bet against the dollar.

Thinking we were beyond panic, I included a list of high yield stocks that were “a good beginning list to work from”. In putting the list together, I recognized the danger with “high yielders” was either a dividend cut or falling profits. So I used the Morningstar Premium database to filter out stocks with a payout ratio greater than 35% and stocks that did not have positive earnings growth over the last year.

The database failed me – when I checked out the companies in the only truly reliable way by accessing their reports to the SEC (www.sec.gov/edgar.shtml), I found the Morningstar database to be woefully out of date. Most of the companies on my high yield list were there because they were losing money: their prices had fallen and dividend cuts were expected.

What I Did

I lowered my yield objectives and purchased two quite safe, reasonably high yield energy stocks: Chevron (CVX) and Sabine Royalty Trust (SBR). I say quite safe, because CVX has significant investments in Myanmar and Nigeria. SBR is interesting – it owns oil and natural gas fields in the United States. It has to pay out all its monthly earnings to stockholders. Its monthly earnings are based on oil and gas prices and volumes two months back. That means that with the higher oil prices in the last few months, it will be paying out more in the coming months. It normally announces the monthly distribution in the first days of each month for stockholders on the 15^th of every month. 

Looking Ahead

Where are we now? Consider first what is happening to US jobs. Here are the data for the last few months:

	Nov 08	Dec 08	Jan 09	Feb 09	Mar 09	April 09	May 09
Nonfarm Employment (in thousands)	-597	-681	-741	-681	-652	-504	-345

The net job loss in May was only 345,000. That is certainly an improvement over the 741,000 jobs lost in January, but the number of unemployed people continues to increase.

How about real estate? The following figures suggest we are not out of the woods yet, especially when you consider that in 2005, there were over 2 million housing starts and 1.3 million new houses sold.

	Nov 08	Dec 08	Jan 09	Feb 09	Mar 09	April 09
Housing starts thousand units, annual rate	655	556	488	574	525	458
New Homes Sold thousand units annual rate	390	374	329	362	351	352

Auto and light truck sales have fallen from 17 million in 2005 to an annual rate of just under 10 million.

(million units, annual rate)	Nov 08	Dec 08	Jan 09	Feb 09	Mar 09	April 09	May 09
Auto/Light Truck Sales	10.2	10.3	9.6	9.1	9.9	9.3	9.9

Durable good orders fell 14.8% in 2008. Through April, they are off another 7%. Nondefense capital goods orders fell 29.6% in 2008. And through April, they are down another 9%.

Finally, consider a couple of business activity indices. Things appear a little better, but there is a long way to go.

	2004	Nov 08	Dec 08	Jan 09	Feb 09	Mar 09	April 09	May 09
ISM Composite Manufacturing Index	60.5	36.6	32.9	35.6	35.8	36.3	40.1	42.8
ISM Nonmanufacturing Index	62.4	33.3	3.8.9	44.2	40.2	44.1	45.2	42.4

What does this data tell us? The job data tells us things are getting worse but at a slower rate. There is nothing positive in the real estate data. Auto sales remain way down, as are all consumer and capital goods orders. One cannot expect spending to pick up significantly while the number of unemployed Americans continues to grow. There is nothing like going from having a job and earned income to no income to force a reduction in consumption. In sum, we have a long way to come back, and the recovery will probably come slowly over time with numerous false starts.

Investment Implications

In my view, nothing has changed from what I said in my last posting except that we are a bit further along in my second period: search for high yields. But it is certainly time to consider more aggressive investments inasmuch as the S&P 500 usually comes 32% in the first year of recovery.

What to do?

1. Bet against the US dollar. Why?

• the demand for dollars as a “safe haven” will ebb;
•  the massive US government deficits that have to be financed in the next two years will dramatically increase the supply of dollars on global markets, and
• a reduced demand for dollars and an increased supply should cause the dollar value to fall.

2. Buy commodities. Why?

• With global population growth, the demand for both food and energy will grow;
• As a bet against the dollar (as the dollar weakens, the dollar price of commodities will increase).

3. Buy the Stocks of Emerging Market Countries. Why?

• There is a growing, increasingly affluent middle class in these countries; so whatever happens in the West, these countries have a built in growth dynamic;
• These middle classes have just discovered equities as an alternative to real estate as an investment;
• As a bet against the dollar (as the dollar weakens, your local currency denominated stock market investments will increase in dollar value).

Speculation: Oil and Nuclear

Over the last decade, global speculators have sent real estate, commodity, and stock market prices into the stratosphere. As a result of the credit freeze, the speculators got out and prices collapsed. This is made clear in the following graph.

 

 Speculators ran both sets of prices up, energy prices somewhat more than food. It appears that some speculators have already returned. Oil prices have almost doubled since December, up from $41 to $70 per barrel. As the following graph indicates, the speculators are also back into uranium. Uranium has recently appealed to me, given the growing number of nuclear plants being built and on the drawing boards.    

  

 Investment Vehicles

I cannot improve much on what I posted last time, so I repeat it here.

Fund Name	3 Yr	5 Yr	Objective	Ticker	Type
Emerging Markets Overall
BLDRS Emerg Mkts 50 ADR	31.28		Diversified Emerg Mkts	ADRE	ETF
iShares MSCI Emerg Mkts	29.96		Diversified Emerg Mkts	EEM	ETF
Bernstein Emerging Markets	35.82	41.18	Diversified Emerg Mkts	SNEMX	M
Latin America
T. Rowe Price Latin Amer	49.61	34.07	Latin America	PRLAX	M
iShares SP Latin 40	45.10	31.05	Latin America	ILF	ETF
South Africa
iShares MSCI South Africa	29.50		South Africa	EZA	ETF
Asia
iShares MSCI ex-Japn	24.68	21.63	Asia	EPP	ETF
Matthews  Pacific Tiger	19.51	30.82	Asia	MAPTX	M
Guinness Atkinson Asia	26.45	34.82	Asia	IASMX	M

                  Source: Morningstar Principia and Don Dion’s ETF database

On nuclear, it is worth looking at the Market Vectors Nuclear Energy ETF (NLR).

Timing

You will never get it right. But given that stock markets come back the most in the first year of recovery, this is certainly a time to be considering reentry.

I am not an investment adviser and nothing I say should be taken as a recommendation to buy or sell an asset.