Why smart investors are reading economic tea leaves from Asia
American investors should stop focusing on the U.S. and look at the global economy, says one editor as he updates a key income portfolio.
The U.S. economy is no longer the be-all and end-all.
Market pundits, investors and journalists pore over its every move backward and forward as if they were reading tea leaves.
Canadians certainly follow its machinations closely, understanding full well the many links between the two economies.
But one conservative U.S. editor tells his readers to look up.
“Investors spend too much time these days looking at events in the U.S. economy and what that means for market performance,” we read in Bob Carlson’s Retirement Watch.
“The U.S. is more of a follower than a leader now, and the better indicators are outside the U.S.”
That has been borne out recently, as fears of slower growth in Asia have undermined commodity prices. And that’s just one example.
Although cautious by nature, Mr. Carlson is not pessimistic despite the recent slowdown in the markets. With moderate growth ahead this year, there’s no need to change investments, he says.
But he is watching events closely, and as we usually do, we will watch what he is doing with his Retirement Paycheck Portfolio.
Devoted to high yields
If Mr. Carlson sees no need to change investments, it’s also true that his investments aren’t exactly speculative. And while the specific funds in his portfolio might not interest most Canadian investors, the allocation of these assets is instructive, and not just for conservative investors.
The Retirement Paycheck Portfolio should, by definition, generate the income your take-home pay used to provide. That means it’s different from most income portfolios.
It doesn’t rely on a mixture of bonds, which in today’s market means a low yield and the risk of losing principal when interest rates rise.
Instead, this portfolio is devoted to high yields. Some investment ads boast of 10 to 12 per cent yields, says the editor, but you can’t have that without a lot of risk. It involves perilous strategies and ideal market conditions.
He is content with a yield that tops 10-year Treasury bonds. In fact, his portfolio is earning a 6 per cent yield. “We also don’t want the value of all our income investments tied to interest rates, and we want a diversified collection of investments that do well in different environments.”
The portfolio is not static. It is important to make tactical changes as necessary, which is why Mr. Carlson has a series of sell signals.
One of his key investments is Cohen & Steers Closed-End Opportunity (NYSE-FOF). This is a closed-end fund that invests in other closed-end funds. It has over 100 holdings, in both equity funds — some of which write options — and high-yield bond funds. It’s been trading in a narrow range this year, and it works well in most market conditions. It’s trading at $13.59. Its sell signal is $12.80.
“An inflation hedge that seeks income” is Gabelli Global Gold, Natural Resources and Income Trust (AMEX-GGN). This closed-end fund owns stocks of gold miners and other resource firms. It’s been struggling along with commodity prices and at $18.11, is hovering just above its sell price of $17.60. Remember to add back distributions before triggering the sell price, the editor advises his readers.
Mr. Carlson was also worried about iShares COMEX Gold Trust (AMEX-IAU). It provided solid gains for the portfolio, but “has had a rough time lately.” Still, it has moved up to $15.09, above the $13.80 sell signal.
The portfolio also has a total return bond fund, a high yield bond fund and a closed-end fund with mortgage securities, stocks and corporate bonds. Plus there’s a closed-end fund that invests in preferred shares.
Not afraid of inflation
Any portfolio today must be balanced and re-balanced with the global economy in mind, insists this editor. “Much is made of the stimulus measures the U.S. put in place the last few years, but China’s stimulus program was put in place earlier and was more significant.”
It is equally clear that American companies who do business overseas are growing faster than firms that do not. About a quarter of the U.S. firms on the Forbes Global 2000 list make most of their sales outside the U.S.
American manufacturers can sell to emerging markets. Service companies can’t. Smaller businesses are still “limping along.”
Emerging economies continue to grow rapidly and make use of more commodities than developed economies. But a new round of monetary and fiscal tightening is taking place around the globe.
It is going slowly and it has been “marginally effective,” says Mr. Carlson. Yet it is already causing more negative than positive surprises. The economy is growing at a slow rate and inflation is rising.
“I’m not concerned about inflation at this point. It’s doubled in a year, but that increase is from a very low rate. I think commodity prices will recede as they did from their 2008 peaks, and that will keep U.S. inflation from rising much more. The economy is more of a concern.”
Global tightening is a slow, gradual process, adds the editor. “The fundamental economic drivers of the last couple of years are largely in place.” The economy has enough steam left to grow modestly through the end of 2011, he believes.
There is at least enough momentum to avoid another recession in Mr. Carlson’s opinion. Still, there are “a lot of moving parts to this economy. We’re keeping sell signals updated and watching things closely.”
For informed investors, watching closely doesn’t just mean watching close to home. It means casting a wide view across the global economy.
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