How to face a turning point in the markets and the economy
Even before the Greek debt crisis exploded, this U.S. observer was warning that the markets and economy faced a time of reckoning.
If this were a thousand years ago, people might have said the world was coming to an end.
Between catastrophic oil spills, the Greek debt crisis and a berserk stock market, they would have had circumstantial evidence in their favour.
This seems like a good time to turn to an observer who has treated the long stock market rally with caution, if not skepticism.
Mr. Bob Carlson has consistently warned his readers that the sinister effects of the credit crisis would not go away quickly or easily.
He has also been insistent that the U.S. recovery has been the product of artificial stimulus rather than a genuinely healthy economy.
And now, he writes in Bob Carlson’s Retirement Watch, we are at a fork in the road.
“We’ve had two economies and markets for more than a year. Soon, we’ll find out if the one that has been carrying the load and has been supported by the government will be able to pull the other up to a sustainable and healthy growth rate.”
Before we get his thoughts on what we are liable to find over the horizon, we’ll take a glimpse into one of his portfolios. As an investor who has largely avoided stocks for the past few years, his approach is of some interest in light of this week’s chaotic events.
In case of crisis
Mr. Carlson’s Retirement Paycheck Portfolio does hold one stock. But Verizon Communications (NYSE-VZ) has been “the stumbler in this portfolio,” he says.
It has certainly caromed around, reaching a high of $34 before Christmas and hitting its 52-week low yesterday at $26.49.
Still, it does have “a dividend yield exceeding a typical bond yield,” says the editor. The yield is now 6.8 per cent on the dividend of $1.90.
More timely are two other entries in the portfolio (remembering this report was written just before this week’s crisis). “We want some hard asset protection in this portfolio in case of new financial crises.”
One is Gabelli Global Gold, Natural Resources and Income Trust (AMEX-GGN), a closed-end fund holding gold miners and other resource firms. It trades at $16.66.
Another is iShares COMEX Gold Trust (AMEX-IAU). It pays no income, but “gives us an asset that is likely to do well should a crisis arise.” It trades at $118.52. And it appears in four of the editor’s portfolios.
Taken together, these two gold holdings constitute 10 per cent of the Paycheck portfolio. An investment grade bond fund makes up 20 per cent.
The portfolio also holds significant investments in utility, infrastructure and pipeline businesses through closed-end funds or limited partnerships.
Conflicting forces
Taking a hard glance at the future, Mr. Carlson sums up the conflicting forces we face.
First, we know that growth is strong in the emerging economies, especially in Asia. They are back to where they were before the collapse of Lehman Brothers in 2008.
The same can’t be said for the U.S. and Europe. They declined more than their Asian counterparts, and in most economic areas “won’t return to their 2007 peaks for several more years.” And they are more indebted.
Second, U.S. companies with a global reach are doing much better than smaller domestic companies. Their profits and revenues are growing because of their overseas business. They have also benefited more from government stimulus programs.
Third, manufacturing and “old fashioned” businesses are doing well. They cut back on inventories and ramped up production. But will this continue once inventories are restored and production depends on sales, the editor asks?
Service industries are not doing as well. Consumption and sales are rising, but only at very modest rates.
Can’t continue indefinitely
Fourth on the list is employment, or unemployment. It is stagnant, reports Mr. Carlson (and a report today notes that while payrolls in the U.S. increased, the jobless rate is still close to 10 per cent).
Fifth, consumer spending is rising. “This means that saving is falling again or borrowing is increasing (which is not likely).” Consumer buying now depends on incentives and falling prices, adds Mr. Carlson.
Finally, the developing and developed economies are heading in different directions fiscally. Inflation is the threat in the emerging nations (and China is working to slow down growth and limit inflation).
In the developed world, deflation and cleaning up debt are the order of the day. And that is compounded by “the Greek debt crisis and the potential for similar crises in other countries.”
“We’re near a potential transition,” the editor repeats, “because the current patterns can’t continue indefinitely.”
U.S. sales are sustained by falling prices, government stimulus, rising stock prices and less saving by consumers. Yet the stimulus is receding, and people can’t dip into their savings forever.
“Investors took more risk over the last year,” adds the editor, “but their appetite for risk is waning.” And it has probably waned a good deal more in the past few days.
Stocks are overbought, in Mr. Carlson’s opinion. High yield bonds and other investments are at peak value. Something’s got to give. Perhaps it has already started to give.
Concludes this editor: “That’s why we’ve emphasized safety and income in recent months.”
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