I believe in portfolio adjustments based upon new information. The changes I propose are based on the $400 billion Operation Twist program. Clearly the goal is to reduce the 20-30 year Treasury Bond yields. Federal Reserve Chairman Ben Bernanke confirmed yesterday the economy continues to struggle. Based on those general observations, here are my immediate recommendations:
Relax and Capitalize
I have received about 30 emails asking what to do with a certain stock. The time to ask for a stock opinion is not when stocks are ramping up or spiraling downward. My advice, based on my own strategies, is "if you don't know then you should sell." The investor can always buy back the stock. I believe in turning off CNBC and any distracting "the sky is falling" news. Readjust your portfolio to one of strength to reflect the new realities, remedy any under performing assets, and select the best breed in respective industries.
Who are the winners?
The short-term winners are those who are long Treasury Bonds. As long-term interest rates fall, long-term Treasury Bonds rise in value. In an economic down cycle, stick with the necessary consumer staples and services. I recommend purchasing a blue chip utility, such as Southern Company (SO). The stock provides an ample 4.4% dividend yield.
I also recommend adding Altria Group Inc. (MO), Philip Morris International, Inc. (PM), Collectors Universe Inc. (CLCT), McDonald's Corp. (MCD) and American Capital Agency Corp. (AGNC). American Capital Agency Corp. benefits by owning long-term Fannie Mae, Ginnie Mae and Freddie Mac mortgages.
Altria Group Inc. (MO) sells Marlboro tobacco products in the U.S. Philip Morris International, Inc. (PM) sells the Marlboro stable of tobacco products worldwide. These business models have proven to be recession resistant. Altria offers a 6% dividend yield and Philip Morris offers a 4.5% dividend yield. Philip Morris recently raised its dividend payout by 20%.
McDonald's will continue to serve hungry families day in and day out. The food is served quickly and inexpensively. The stock is growing worldwide and receiving franchise fees on a monthly basis. McDonald's has a stock buyback plan in effect and the annual dividend yield is 2.7%. This is a blue-chip name that can be a staple to build your portfolio around.
Collectors Universe is a small-cap company with zero debt. The lack of debt on the balance sheet allows Collectors Universe to pay a 8.6% dividend yield. Collectors Universe offers coin collectors a grading service for their prized coins. This is a recession proof business as coin owners want to authenticate their coins.
Who are the losers?
I believe insurance stocks are in a losing sector. Companies such as Allstate Corporation (ALL) cannot invest in long-term bond yields with minimal returns and expect to meet their liability obligations. The computer model simulations, in pricing insurance premiums, assume higher yields than are currently offered. Pensions, endowments, insurance companies will all lose potential income necessary to plan for future obligations. Operation Twist has simply created long-term rates to fall below normal or historic levels.
Should I hedge my positions?
I believe in hedging. If this is your first hedge - and you don't use options - consider the ProShares Short S&P500 (SH). The ProShares Short S&P500 (SH) is simply an inverse fund of the SPDR S&P 500 (SPY). If your portfolio has various assets going up as other positions are falling, the net result will mitigate painful market downturns.
Disclosure: I am long SH, MO, PM, CLCT, MCD, AGNC.