Structuring a Portfolio for the Current Economic Climate

Includes: DVY, JNJ, SDY
by: Roger Nusbaum

To hear Nouriel Roubini and Stephen Roach tell it, China is getting apprehensive about its treasury holdings because of the rampant dysfunction manifesting in the US political system as our "leaders" try to cater to what they think are the interests of their constituents, which of course potentially serves their own interests of being reelected.

One point not getting enough attention is the role that the US plays in the world order as a consumer, as a military defender of many other countries (regardless of anyone's opinion on that) and as the world reserve currency (for now anyway). To repeat from past posts (both mine and from other people), this means that the world has a huge vested stake in the US not imploding. The world's vested stake does not spare the US, as an investment destination, from eroding slowly however. I've been making the point that a slow erosion has been going on for years and unfortunately will continue. To that end David Rosenberg (via Barry Ritholtz) has some ideas about how to structure a portfolio into current events;

  1. “High-quality corporates” plus companies with “A-type” balance sheets and “BB-like yields.”
  2. Reliable dividend paying Stocks (including preferreds).
  3. Low debt-to-equity ratios, high liquid asset ratios, good balance sheets, no heavy debt.
  4. Hard assets: Oil and gas royalties, REITs – focus on income stream.
  5. Sectors / companies with “low fixed costs, high variable costs, high barriers to entry/some sort of oligopolistic features, a relatively high level of demand inelasticity.” This includes utilities, consumer staples + health care.
  6. Alternative assets that do not rely on “rising equity markets” or are independent of volatility trades.
  7. Precious metals. Specifically, he puts a $3,000 target on Gold.
Obviously the list can be implemented with ETFs although anyone actually doing this should stick with individual issues for point number one, high quality corporates. I think the list is intended to focus on the shorter term. A way to tweak it for the longer term would be to add themes like food and water (a reader at Seeking Alpha called me Malthusian) and exposure to a few countries that seem to have a good chance for long-term out performance either because of resources, emerging middle class, strong fundamentals or a combination of those three.

As a practical matter this could look like the following (corresponds to the list above):

  1. Individual corporate notes
  2. A dividend ETF like iShares Select Dividend Index DVY or SPDR Dividend ETF SDY
  3. Here I would prefer individual companies like client holding Johnson & Johnson (NYSE:JNJ), I don't know of any ETFs but maybe Russell will come out with a balance sheet ETF soon?
  4. There are all sorts of individual issues and funds in the royalty space but you need to learn the tax implications
  5. For utilities, health and staples there are plenty of individual stocks and ETFs, which could allow for combinations of higher yielding US blue chips and growthier emerging market sector funds or theme funds.
  6. WisdomTree is doing more and more here, there are also a lot of merger arb products and other forms of long short that strive for a somewhat absolute return.
  7. I have no idea about $3000 gold but the trends for a weaker USD and stronger gold and other currencies seems like it is here to stay.

Above I mentioned a couple of themes and as for countries, long time readers will know I like Latin America and Scandinavia among others and I am working on a way into Africa.

The idea from Rosenberg seems to be trying to sidestep the US-ground zero. I don't think there will be an implosion and I doubt Rosenberg thinks that otherwise I think he'd be suggesting a basket of "safehaven" currencies instead. If there is an implosion then we will take defensive action upon a breach of the 200-DMA.