Chris B

Tough Times for Dividend Investors

Dividends are being cut because they don't make business sense right now.

Today's "dividend aristocrats" are increasingly the companies who chose to take on (or maintain) debt at ~7-10% to pay dividends to their investors, who are in turn earning 2% on those dividends in money market and bank accounts. Those investors are doing the equivalent of borrowing from the bank to earn interest in a savings account.

That math just doesn't compute for me.

The Road Ahead for Investors

On Mar 24 05:03 PM Fred Voetsch wrote:

"Well...yes, but where's the bottom? If you invest in the stock market here and it goes to 1,500 and doesn't come back to this level for 15 years then you have a problem."
----------------------...
Nobody worries much about the possibility of the market going down until it already has. Past performance is no indicator of future performance, yet our expectations rarely deviate far from the exact same outcome that happened the previous year. The rear-view mirror has never predicted the future before, yet for some reason we can't help ourselves but to rely on it. If you must look at history, look at index performance during the year or two following double-digit % declines.


"...have you seen another period in history where an entire society has been as leveraged up as we are? "
----------------------...
In terms of national debt to GDP, we were in a far deeper hole in the post WW2 period (which was a great time to buy stocks). Over several years, this debt was paid down to lower levels. I'm sure there were dire predictions at the time too!

In terms of household debt, the peak was a few years ago. Now the consumer savings rate is 3% and rising. That's mostly going towards paying down debt. Meanwhile credit card limits, auto loans, etc. are becoming more conservative. Consumer debt will continue to fall. Also, people taking advantage of once-in-a-lifetime low mortgage rates like we have now does not constitute a crisis, it constitutes wisely locking in low payments for the future.


"Do you want to lose all your money AND your job? I would say it is wiser for most to hedge to the downside and if the economy improves you might not care if you lost a bit of your investments while if it gets much worse you then have some backup."
----------------------...
Nobody should put every penny into the stock market, as wild price fluctuations are typical. I hold enough cash to get through 1-2 yrs of unemployment, good times or bad, and self-finance home improvement and big purchases rather than taking out loans. The only money you should have in stocks is money you won't need to access for 10 yrs. Yet, many people are advocating fleeing the markets just because prices went down. That's not the thinking of successful investors.


"All I am saying is that "we can't go much lower" is not a wise investing strategy."
----------------------...
Who needs hope when you can analyze a company's financials, estimate future earnings, and produce a reasonable estimate of the present value of future earnings, discounted by bond yields plus risk premia? Many investors have no interest in this kind of homework, and thus they are implicitly relying on the markets to tell them what an appropriate price for an investment is. I'd say that efficient markets theory is the unwise investment strategy, especially if it is followed up by selling anytime paper losses are experienced.

The Road Ahead for Investors

Good points. It was the peak, not now, that was the prime time to move to more conservative assets. Near the bottom is the prime time to take on risk.

The market prediction of zero inflation for a decade is ridiculous. Buy TIP with your safety money.

Opportunities in a High Correlation World

In 1999, I saw that the tech bubble was about to burst, but I held onto my one remaining stock, Wal Mart, based on the following assumptions:

a) Unlike the tech stocks, WMT had a reasonable PE, so it would hold its price even as the tech sector, and only the tech sector, collapsed.

b) As investors fled technology, their money would flow into high-quality stocks.

Well, as everyone knows, WMT never again reached its high near $70. Investors sold WMT down to the $40's to cover their tech losses, and few new buyers stepped forward because tech had wiped them out. Meanwhile, new money didn't flow into different sectors of the stock market, it flowed into cash!

In hindsight, I should have seen the ENTIRE MARKET as one sector in investors' portfolios, competing with cash, real estate, currencies, commodities, commercial paper, treasuries, private businesses, property, etc. I should have thought of market participants not as a fickle herd bouncing from sector to sector in the stock market, but as short sellers caught in a squeeze, retirees who had lost future income, or leveraged index buyers/sellers. When things go badly, they simply hit the "sell" button on their browser. Selling out is much easier to do now than it was 30 years ago!

Thus, anything that can be bought or sold through your online broker is correlated, perhaps irrationally. For investors who want to protect their portfolio balances, that leaves few options. Hedge funds and short ETF's have multiplied in the last 10 years, but their shortcomings are becoming obvious. Even commodity ETF's have failed to preserve value this time around. The reason: they all have a "sell" button. Soon, treasury and gold investors will learn this lesson, as they too have sell buttons now.

Thus, if you want portfolio or income stability, buy a rent house (and don't overpay), a timber tract, a professional education, or a CD ladder. The illiquidity of these investments is what makes them less correlated with the more liquid securities market.

The Riskiness of Bonds

There are decade-long periods when bonds perform better than stocks, and this may well be one of them.

However, pigs get slaughtered in environments like this, so there's no reason to get greedy. Out of control charts, unprecedented deviations from long-term means, and earnings estimates that failed to factor in higher defaults: these were the warnings we had this time last year. Many people thought oil was a sure bet 6 mos. ago and they lost big time. When they got into stocks, they lost again. Now they're pumping up treasuries, on the verge of losing yet again. It all made sense at the time.

If I was to do anything, I would short treasuries using ETF's like TVT and PST (yes Felix, retail investors can easily short t-bills). After all, can treasuries really get any more expensive than offering a near-zero yield? Yes, we could be in for a Japanese scenario for a decade, but overpriced treasuries seem to be the only certainty.

As for corporate bonds, I would be very careful. If deflation is killed by our current massive monetary expansion and investors come to expect Paul Volker-1982-style rate increases in the near future to control the inflation that will result, those yields could be woefully inadequate. I would wait for higher yields to come and I would avoid many companies (most financials, retailers, consumer discretionary) whose business model have become obsolete in the coming world of 10% consumer savings rates.

Is Buying Bonds Really a Good Idea?

On Dec 31 09:02 AM tonton wrote:

> If you have cash you have the risk of the bank the money is deposited
> and I think that is more that a soverign bond risk.

I'm not sure what country you're writing from, but in the US we have the FDIC, which limits the downside to a couple of days delay in getting your money out in the worst case scenario that your bank goes broke. The FDIC is run by the same people who create the money, so their cash supply is not in question. People just need to be careful not to go above the insured limit at any one bank. A more urgent worry is the possibility of a currency crash or high inflation.

Sophisticated investors may chose to hedge against currency risk by holding other currencies in foreign bank accounts. Investors who do so should, of course, be very aware of the regulatory and deposit insurance environments of those countries. Flipping forex contracts is an option to hedge currency risk while avoiding bank risk, but the additional counterparty risks, costs, taxes, and maintenance reduce the utility of this approach.

Largest Bond ETF Now Trading At a Massive Discount

I'm holding BND and I'm considering selling and then buying AGG or a similar fund. I know they're both irrationally discounted and affected by panic selling, but this way I would get to harvest tax losses - which is the one thing in this market I can do to guarantee some kind of return! I'll enjoy reversion to the mean later.

Silver Linings: Allure and Risk

Based on these numbers, perhaps the govt. is charging too low an interest rate to AIG et. al.

I'd like to see a longer term chart.