Savers have had a difficult time finding suitable places to allocate capital from which they can derive income. I’ve previously warned against allocating new funds to the investment strategy of U.S. Treasuries, as this would likely be the worst investment over the next decade.
Now, it appears that investors are increasingly coming to the same conclusion that I stated several months ago in these pages: U.S. Treasuries are set for a significant drop in price.
The investment strategy over the past couple of years for U.S. Treasuries has been built on several factors, including fear from another stock market crash and weak economic activity in the U.S.
One has to remember, there are only a few possible outcomes for U.S. Treasuries as an investment strategy. If economic growth were not to re-accelerate, the current high level of monetary stimulus could eventually lead to inflation. Considering U.S. Treasuries were yielding extremely low levels at the time I initially warned my readers, the inflation rate over the next decade would erode any yield from U.S. Treasuries.
If the Federal Reserve was successful and the U.S. economy began to rebound, investors would adjust their investment strategy and sell U.S. Treasuries—because higher interest rates would soon follow. They would also allocate capital to other assets that would have a higher expectation of return.
Only if the U.S. economy entered a period similar to Japan’s extended deflationary spiral would U.S. Treasuries outperform other assets. When creating an investment strategy, and considering the stated intent by the Federal Reserve to prevent such a deflationary spiral, the investment strategy of simply buying U.S. Treasuries for the long … Read More
One of the biggest fears for investors is to buy at the top of any market. This is a natural reaction because most of us were taught since childhood to do the opposite. For example, my parents always emphasized the importance of buying products when they’re on sale.
Some people view the significant rise in home prices with apprehension, believing that these prices have risen too far. While it is true that home prices have risen substantially, as long as interest rates remain low, there is potential for further capital appreciation.
Americans aren’t the only ones considering real estate as part of their investment strategy. Recent reports state that China is considering diversifying its foreign exchange reserves, totaling approximately US$3.4 trillion, into U.S. real estate. (Source: Yang, S., et al., “China said to study US property investments with reserves,” Bloomberg, May 27, 2013.)
With the Chinese investment strategy in the past based primarily on investing in U.S. government debt, considering how little this asset class is currently yielding, it does make sense for the Chinese to look at diversifying into other sectors. When looking at the potential for home prices to continue rising versus U.S. government debt, this diversification seems quite prudent.
The ramifications for American home prices could be substantial. It really depends on how China goes about allocating its investment strategy. There are already shortages in many real estate markets across the U.S., which is part of the reason home prices have moved up so quickly.
The Chinese sovereign wealth fund could look at taking stakes in companies that are already involved in real estate and that benefit … Read More
If you invested all of your money in the stock market, you would be exposed to extraordinary risk of a market retrenchment.
Of course, you could also make a lot of money, especially with how well things are going in the current bullish stock market that continues to somewhat defy gravity.
Yet this is also the time you need to take some extra precaution and think about where you are at and what your end goal is in the stock market.
You don’t want to risk your entire investing capital on the stock market, in spite of any temptation to do so. This is when you have to fight against the greed that might be in you—the greed that’s in most of us—and it won’t be easy.
Remember what happened after each of the multiyear peaks in the stock market over the past decades, when the stocks retrenched. I’m not saying the stock market is at a peak. In fact, the bulls look like they are in full control and heading higher on the chart.
You just need to be on top of things, and don’t let greed ravage your sensibility toward the stock market.
Chasing dreams is one thing, but being prudent is another.
I’m not going to say you should run for the exit, but you need to be aware of where your capital is being invested and understand the associated risk factors.
The reality is that a sound investment strategy means understanding asset allocation and diversification to increase the risk and return of your portfolio.
By asset allocation, I refer to the asset mix of your portfolio … Read More
Bank stocks have been one of the strongest sectors in the market over the past year. Bank stocks have rallied sharply after many investors dumped shares on fears that the financial crisis might worsen. Those fears obviously never materialized, and many bank stocks have begun to resume paying dividends and generating profits.
There are two questions I am often asked: 1) is it too late to incorporate bank stocks into one’s investment strategy; and 2) if someone has already owned bank stocks over the past couple of years, is this the time for that investor to start taking profits?
Since the fall of 2011, an index of bank stocks has almost doubled in value. Clearly, an investment strategy that owns a number of bank stocks has seen significant gains in this sector. But no one can rationally expect this type of return to continue forever.
Part of my cautious view on bank stocks, in terms of reducing the sector weighting in an investment strategy, is the fact that there is a limit to upside capital appreciation in every sector. A big question when developing an investment strategy: what is the future outlook for the sector?
Obviously, the low-hanging fruit has already been picked when it comes to bank stocks. Regardless of what was thought about bank stocks in the past, as an investor you are only interested in the potential for growth in earnings and revenues. Large gains have already been realized; now we need to consider how bank stocks fit into an investment strategy over the next decade.
Large concerns for bank stocks shareholders are increased regulation and a … Read More
The massive sell-off in the price of gold bullion has certainly shaken up some investors. However, it seems there are others whose investment strategy has been to wait for a pullback in gold to continue accumulating the precious metal.
Recent data has shown that China imported gold bullion from Hong Kong at a record-high level in March. Net imports into China of gold from Hong Kong were 130,038 kg, compared to 60,947 kg of the yellow metal in February, according to Bloomberg. (Source: “China’s Gold Purchases From Hong Kong Expand to Record,” Bloomberg, May 7 2013, last accessed May 8, 2013.)
While these imports happened prior to the sell-off in the price of gold bullion in April, China has clearly been using an investment strategy to continually accumulate the precious metal whenever it can. With the price of gold in April dropping 14% in just two days—the biggest sell-off in 30 years—this led to an increase in demand for jewelry and coins in China.
Essentially, gold transactions have increased as many more participants use the metal for trading purposes as an investment strategy. Exports of gold from China into Hong Kong were 93,481 kg, a huge jump from February’s exports of the yellow metal of 36,159 kg. Profiting from the volatility, trading in gold continues to skyrocket globally.
The volume of gold bullion on the Shanghai exchange hit a record high on April 22 of 43,272 kg. As more traders use gold in their investment strategy, transactions continue to increase substantially. Following the sell-off in gold bullion prices on April 15 and 16, the China Gold Association reported that retail … Read More
An investment strategy can take many forms. For long-term investors, one investment strategy is to wait for significant pullbacks and enter positions when the price declines.
The recent sell-off in gold bullion has created a substantial increase in demand for the precious metal around the world. It appears that many long-term investors globally are using the investment strategy of buying on dips when it comes to gold.
Following the biggest sell-off in the price of gold bullion in 30 years, international investors are taking the pullback as an opportunity in their investment strategy to accumulate the metal. A sign of demand is the premium that gold buyers are willing to pay.
In many parts of the world, such as Dubai, physical gold bullion prices paid by wholesalers are trading at a premium of $6.00–$9.00 an ounce over the spot rate in London, versus a premium of only $0.50 prior to the sell-off, according to precious metals service provider MKS (Switzerland) SA. (Source: Sim, G., “Gold Rush From Dubai to Turkey Saps Supply as Premiums Jump,” Bloomberg, April 30, 2013, last accessed May 3, 2013.)
The gold bullion trade in Dubai was worth approximately $56.0 billion in 2011, up from only $6.0 billion in 2003. The premium for physical gold is even larger in Turkey. Gold traded as much as $25.00 per ounce higher on the Istanbul Gold Exchange versus London’s price for gold.
The increase in demand for physical gold bullion is a sign that many long-term holders have the investment strategy of buying when the price dips. Considering that the recent sell-off in gold was so significant, long-term bulls … Read More
As the S&P 500 enters the month of May, many people are worried about their investment strategy, especially in light of the old saying “sell in May and go away.” Does this saying hold any value?
Let’s look at the question from two angles: a historical context and the S&P 500’s currently position.
There are some historical facts that raise a few concerns in my mind regarding an investment strategy in the market during the month of May and early summer—not only in terms of actually selling off, but also in terms of increasing volatility.
A look at the best and worst performances for the month of May since 1928 by Bespoke Investment Group, LLC shows that for the S&P 500, two of the top-10 worst Mays (May 2010 with a 8.2% contraction, and 2012 contracting by 6.27%) and one of the top-10 best Mays (May 2009 with 5.31% growth) occurred during the recent bull market that started in 2009. (Source: “S&P 500’s Best and Worst Months of May Since 1928,” Bespoke Investment Group, LLC web site, April 30, 2013, last accessed May 1, 2013.)
Clearly, volatility in the S&P 500 has increased substantially for the month of May for the past few years over the course of the current bull market, and your investment strategy certainly needs to take that volatility’s timing into account. Additionally, since the bull market’s beginning in 2009, the S&P 500 during the month of May has averaged a decline of 2.64%.
Looking even further back, many investors have continued to alter their investment strategy for the S&P 500 during the month of May—and the … Read More
I hope you didn’t get caught off guard this past Monday with the broad market sell-off.
If you did, you need to really think about risk management and having a good investment strategy in place so that you can avoid or minimize the impact of a market correction.
And if you think that stocks will rally, don’t be so sure, because the current market climate is tricky and remains highly vulnerable to another correction, which, of course, could be much bigger.
You need to get rid of that invincibility feeling that’s probably stuck with you during the recent rally.
Success in trading and investing has nothing to do with bravery. Taking a risk to make big gains makes sense and has its place, but after the advance we had, you also need to be prudent and hedge your gains against the highly likely and bigger correction that’s still to come.
You need to have a viable investment strategy.
Taking some profits off the table makes sense, but you also need to protect your outstanding positions.
The sell-off on Monday indicates how nervous the market is, and don’t let anyone tell you otherwise.
So it’s an opportune time to remind you that you all need to hedge just like professional money managers.
My favorite investment strategy to protect gains is the use of put options as a defensive hedge against market weakness, or something that is called a protective put, or put hedge.
There is no special knowledge required. And it’s quite simple and easy to execute.
Think of this strategy as akin to buying insurance on your home, car, life, … Read More
Last week, the new governor for the Bank of Japan (BOJ), Haruhiko Kuroda, announced a game changer for that nation’s quantitative easing policies. The BOJ now plans to initiate monthly bond purchases in the amount of 7.5 trillion yen (US$77.8 billion) per month in an attempt to increase inflation to two percent within the next two years.
When it comes to creating an investment strategy based on this quantitative easing policy, there are two initial takeaways. The first is that this will put pressure on the Japanese yen to weaken its value; the second is that stocks will rise within that nation, since many firms are exporters and will benefit from this quantitative easing plan.
This investment strategy has already begun, as large institutional investors have started front-running this announcement, starting with the election of the new Prime Minister of Japan last fall. However, the country is just about to embark on this new aggressive quantitative easing plan that will last approximately two years—if not longer. There is still plenty of time to profit from an investment strategy using this quantitative easing announcement as a catalyst.
The Japanese yen has already weakened, but it’s poised for additional decline with such an aggressive quantitative easing policy. One investment strategy is to consider the possibility of shorting the yen. Recently, George Soros and Bill Gross stated that this quantitative easing policy could significantly push the yen down further than most people believe.
Soros commented, “If the yen starts to fall, which it has done, and people in Japan realize that it’s liable to continue and want to put their money abroad, then … Read More
One of the most difficult things to do is to try and determine the future level of economic growth. There are so many variables that go into the level of economic growth that no model can accurately predict the exact level.
What we can do is look for signs of economic growth, or a lack thereof, and create an investment strategy based on these indications. Looking backward won’t help; we need to look forward.
One method that can help is to see what the professional investors are doing, as they are on the cutting edge when it comes to creating a profitable investment strategy.
Last week saw two distinctly different moves by professional traders. The first was that hedge funds made a massive trade against copper. With global inventories piling up, professionals have an investment strategy that will benefit from the price of copper if it drops.
Clearly, the professional traders don’t believe there will be enough economic growth to absorb such a high level of inventory, which is currently at a nine-year high globally. (Source: Richter, J., “Hedge Funds Most Bearish Ever on Copper, Favor Gold: Commodities,” Bloomberg, March 25, 2013.)
Hedge funds increased their short positions in copper by a massive 53% last week, according to the Commodity Futures Trading Commission. Copper is closely associated with economic growth, since so many industries use copper. As economic growth expands, the use of copper does as well.
The build-up in copper supply is worrisome, as this means that either builders are holding back on ordering more copper, unsure of how strong economic growth will be in the second half, or … Read More
The current crisis in Cyprus is a sad example of the mistakes that many professional and retail investors make when creating an investment strategy. This bailout plan is painful, but it is only a symptom of the problem, not the cause.
While much blame will be placed on finance ministers and international organizations, such as the International Monetary Fund (IMF), I believe the real blame, which stems from one of the most common and biggest investor mistakes, lies in the mismanagement of capital by the banks themselves—the mistake: not diversifying their assets.
Essentially, the current crisis stems from the fact that Cypriot banks are approximately 7.5-times larger than the entire country. These funds come in the form of deposits into the banks, which then need to create an investment strategy for this capital.
In most normal economies, the banks take in deposits and lend to businesses, supply mortgages for homeowners, and make various investments, both domestically and internationally. The biggest investor mistakes occur when there is a lack of diversification.
Because Cyprus is so tiny, these banks cannot properly diversify their investment strategy domestically. Instead of spreading the capital amongst various international investments, they essentially pumped a huge share of this capital into Greek bonds.
While hindsight is 20/20, and we now know how bad an investment strategy this was, even before the crisis, a proper risk evaluation should have told anyone that this is one of the biggest investor mistakes possible.
When the Greek bonds tanked and investors in these bonds had to take a haircut, the assets on the books of Cypriot banks declined substantially versus their liabilities, … Read More
As the rebound in home prices continues, many people are trying to determine what the best investment strategy is at this point in time.
Let’s take a look at what has happened and what is most likely to occur in the future for home prices to help create a long-term investment strategy.
At the end of 2012, due to the increase in home prices across the nation, 1.7 million homeowners, who were underwater (meaning their mortgage was worth more than the value of their homes) a year ago, had positive equity, according to CoreLogic. (Source: Gopal, P., “U.S. ‘Underwater’ Homeowners Regain Equity as Prices Rise,” Bloomberg, March 19, 2013.)
The rise in home prices continues, as January saw a 9.7% increase over year-ago levels. According to CoreLogic, if home prices rise by five percent more, an additional 1.8 million homes will return to positive equity.
Clearly, there is no doubt that the proper investment strategy over the past year has been to gain exposure to the real estate market, as home prices have increased substantially.
Part of the rise in home prices is due to institutional investors who also have foreseen this investment strategy and have set out to purchase thousands of homes to convert into rental units. Because of the low yields on government bonds, many institutional investors are attracted to the high margins from renting units out as an investment strategy.
As I’ve mentioned in these pages several times before and when the stock was trading much lower, The Blackstone Group L.P. (NYSE/BX) is a great company that has aggressively bought in excess of 20,000 single-family homes and … Read More
The Dow Jones Industrial Average rallied for 10 straight days and, in the process, established several record highs. And while the Wall Street bulls are glorifying the upward move, I continue to believe a correction is on the way—I just can’t tell you when or by how much. The thing I would warn you against is chasing dividends on Dow stocks. The average dividend yield on the 30 Dow stocks currently sits around 2.82%.
The top-five dividend yields belong to AT&T Inc. (NYSE/T), Intel Corporation (NASDAQ/INTC), Verizon Communications Inc. (NYSE/VZ), Merck & Co., Inc (NYSE/MRK), and Microsoft Corporation (NASDAQ/MSFT). The problem with chasing the dividends on these stocks is that I feel there is limited upside in the share price appreciation potential at this point.
A contrarian trade you can play is employing the “Dogs of the Dow” investment strategy, which is simple and has beaten the Dow on average since 1972. The five companies included in this group are the lowest-priced stocks.
The theory is that these Dow companies are facing some issues, but with a turnaround, they can generate some above-average returns and, as such, are viewed as contrarian stocks.
Let’s take a look at the strategy.
At the close of March 15, the five dogs of the Dow were:
1. Alcoa Inc. (NYSE/AA; $8.58)
2. Bank of America Corporation (NYSE/BAC; $12.38)
3. Intel ($21.20)
4. Cisco Systems, Inc. (NASDAQ/CSCO; $21.68)
5. Hewlett-Packard Company (NYSE/HPQ; $22.42)
Now take a look at the results, assuming you bought these five dog stocks based on the close on December 31, 2012 with the advance to March 18.
The table shows four … Read More
When developing an investment strategy for a given market sector, you need to consider numerous variables. Increasingly, the variables are becoming far more complex due to the global nature of business these days.
One market sector that many analysts pay close attention to is the steel industry. Because steel is used in so many parts of an economy, signs of increasing or decreasing production can help give indications as to how strong or weak the global economy is operating.
Of all the countries in the world, China is a huge player in the steel market sector. When looking at an investment strategy that incorporates steel and iron ore, which is the main ingredient in the production of steel, trying to determine current and future output by China is crucial.
According to the Chinese National Bureau of Statistics, crude steel production increased 9.8% in February, breaking the previous record set in January. Both the real estate and automobile industries within China have regained momentum, resulting in an increase in investments in factories and other fixed assets by 21.2% during the first two months of 2013, versus the same time period in 2012. (Source: Yap, C.W., “China’s steel production climbs 9.8%,” Wall Street Journal, March 12, 2013.)
Additionally, those investors whose investment strategy incorporates the steel market sector based in America might see this as a cautionary sign: not only are the Chinese producing a huge amount of steel domestically, but exports of steel rose 25% from the year-ago period.
And remember, the steel market sector within China is a money-losing proposition. Most steel makers do not make a profit in China, … Read More
The market appears to have another bull leg, with the Dow closing higher in 10 straight sessions, setting multiple record-highs in the process.
With the advance, there are now questions regarding the sustainability with arguments on both sides. Even former Federal Reserve Chairman Alan Greenspan went on CNBC and suggested the stock market did not show “irrational exuberance,” saying stocks were cheap. (Source: Belvedere, M.J., “Greenspan: No ‘Irrational Exuberance’ in Stocks Now,” CNBC, March 15, 2013.) There have been others also supporting the bull case, yet some pundits have also come out and suggested the market is set for a downfall.
While I’m encouraged by the recent rally to multiyear highs, I believe the rapid pace of the advance is not sustainable and stocks are priming for a setback, but I’m not sure when or by how much. I do believe 2013 will be positive for stocks, but at this time, you also need to be aware of the risk and vulnerability on the charts, especially with the S&P 500.
So while the global economy is improving, the catalyst for the upward move in stocks has largely been the easy monetary policy worldwide that has resulted in a low interest rate environment and the search for alternative investments to low-yielding bonds. Without the easy money, I highly doubt stocks could have risen at such a rapid pace.
At this time, you need to think about a viable investment strategy in case stocks falter.
One investment strategy would be to take some profits off the table, but then you may miss out on a potential stock market rally.
You can buy … Read More
The recent pullback in gold bullion has certainly hurt gold mining stocks. While one can develop a sound investment strategy, if the price of the stock continues moving downward, it makes it extremely difficult to step in and buy.
Gold mining stocks have seen a serious sell-off over the last few months. So what about gold mining stocks as a long-term investment strategy?
To begin with, looking at the commodity from an investment strategy point of view, gold has pulled back and has bounced off a key support level. Obviously, whatever direction the price of gold moves, the majority of gold mining stocks will move in tandem.
No one can predict the price of a commodity for certain. However, we do know that there remains strong demand for physical gold and that central banks around the world continue to have easy monetary policies.
While that is a sound investment strategy, it does not guarantee that gold will see an increase. The market could continue declining, as more sellers of paper gold emerge.
Assuming that gold prices will increase, gold mining stocks are beginning to look attractive, because they’ve declined to such a level that many are trading at a discount to book value. This means that if the company were to be bought and sold in pieces, the sum of the parts is worth more than the current stock price.
This type of investment strategy, looking for value, is one approach that an investor can take when trying to determine which gold mining stocks might be suitable for their portfolio. Momentum is not bullish for gold mining stocks at the … Read More
When it comes to creating an investment strategy, the crucial variable is determining where one believes corporate earnings will be in the future. Trying to determine what the future landscape will be, and not necessarily the current level of corporate earnings, is the real goal.
One of the strongest sectors in the global economy has been the growth of smartphones. The latest data from Gartner, Inc. (NYSE/IT), a leading technology research company, show that during the fourth quarter of 2012, smartphone sales reached 207.7 million units, up a staggering 38.3% from the same time period in 2011. (Source: “Gartner Says Worldwide Mobile Phone Sales Declined 1.7 Percent in 2012,” Gartner, Inc. web site, February 13, 2013, last accessed February 19, 2013.)
Even while much of the world’s economies are not growing at extremely robust levels, a solid investment strategy continues to be focused on smartphone products that are driving corporate earnings in that sector.
Gartner estimates that for 2013, smartphone sales will total nearly one billion units. This clearly shows that corporate earnings will continue to grow in the smartphone category for the near future, which leads me to look for an investment strategy that can take advantage of this information.
While many focus on the hardware manufacturers, I think the big winner over the next five to 10 years will be Google Inc. (NASDAQ/GOOG). Because Google has been able to develop its “Android” platform software to work on both high- and low-end smartphones, this opens up the entire world as a potential marketplace.
I don’t believe many parts of the world will pay the high price for some of … Read More
One of the most important aspects to consider when creating an investment strategy is to try and determine where demand might be in the future. Given the relatively weak global economy, this certainly adds complexity to long-term investing.
Austerity is the buzzword at the moment. Many governments are continually espousing the need for greater austerity. However, while austerity is the goal, there are still some areas where governments are increasing spending, creating an opportunity to develop an investment strategy. And this includes railways.
According to the consulting firm Roland Berger, the market globally for railway-related spending has been increasing at 3.2% per year throughout the recent global downturn, and they believe spending will increase at 2.7% per year until 2017. Roland Berger also predicts that metro rail systems will grow at a much faster rate, at an estimated six to eight percent per year. (Source: “Metro Systems: Going underground,” The Economist, January 5, 2013, last accessed February 14, 2013)
These types of projects appear quite favorable for those interested in long-term investing. With multiple countries increasing spending in their railway system, this should bode well for a diversified company with an investment strategy that can capitalize on these opportunities.
Countries interested in making significant increases on rail-based transportation include Brazil, India, many Middle Eastern nations, and China. Beijing now has the largest metro system in the world, at 442 km with just under six million daily users. The second-largest metro system is Shanghai at 423 km in length.
Long-term investing is about trends that last many years. While many firms say they are creating an investment strategy based on long-term … Read More
It’s amazing how resilient the equities market has been in spite of the concerns regarding the budgetary cuts and debt ceiling, the eurozone’s economic stalling and debt, and the earnings risk.
The current equities market has some bull legs and could advance higher, driven by more encouraging earnings and economic news; but we are also at a crux, with the S&P 500 at 1,500 and the Dow recently breaking to 14,000. The reality is that the advance we saw in January is not sustainable at the same pace, based on my technical analysis. Just think back to last year. After an equally strong start and January, stocks began tapering off in February after the first quarter.
On the one hand, I can see this market moving higher to new multi-year highs; but on the other hand, I feel that there’s chart risk, as evidenced by the potential third top on the S&P 500, which I recently discussed in this newsletter. The early success of the earnings season is already discounted into the market. The nice economic recovery in the U.S. is also discounted. We need more positive readings out of the financially challenged eurozone, as well as China.
So while the bias remains positive, the biggest investor mistakes may be to get too comfortable and let down your guard.
Just take a look at the CBOE Volatility Index (VIX) based on the S&P 500, which is known as the “fear factor.” The VIX reading on February 6 was 14, which is well below some of the high readings since 2004, as shown on the chart below. The low VIX reading … Read More
When it comes to developing and creating a long-term investment strategy for your portfolio, one of the more difficult aspects is maintaining a focus on the horizon. What this means is that sometimes one needs to look past the short-term aberrations and focus on where the economy and stocks will be in the future.
The topic of mining stocks has come up quite often lately. Initially, when one talks about mining stocks, many people automatically gravitate toward gold and silver companies.
I would suggest that there are data showing that other commodity mining stocks might offer strong long-term potential capital appreciation.
Professionals know that the market price of a stock offers far more information than any one data point. If the price of a stock or commodity is moving, this is certainly an indication of where people are placing their funds through their own investment strategy.
While some might have an investment strategy primarily in mining stocks, I would urge diversifying away from any one commodity in this sector, creating a more diversified portfolio in general.
Getting ahead of the curve over the retail public is a difficult but attainable investment strategy. I would suggest that, in addition to looking at economic data in forming one’s own analysis, one should look to the price charts and see what’s happening on the ground.
Recently, we’ve seen a recent breakout in one commodity that might surprise a lot of people: copper.
“Doctor Copper,” as the commodity is often called due to its ability to predict economic growth, has just broken out of its downtrend. While many are focusing on the recent negative … Read More
Over the last few years, the aggressive monetary policy plan by the Federal Reserve has left many income investors in a difficult position. The low level of interest rates has reduced the income-generating potential of traditional fixed-income products.
Increasingly, more people are creating an investment strategy, looking for stocks with a solid dividend yield to add income to their portfolio.
For dividend yield investors, 2012 was a great year. In total, the S&P 500 corporations paid $281 billion in dividends in 2012, a record high, according to analyst Howard Silverblatt at S&P Dow Jones indices. (Source: “Dividends Galore: Expect Another Record Year in 2013,” Wall Street Journal, January 7, 2013.)
The total paid out in dividend yield was a 17% increase from 2011, and a 14% increase from 2008, which was the previous high until 2011. As I’ve written before, special one-time payments played a large role in dividend yield for 2012. More corporations announced special dividends in December 2012 than at any other time since 1955.
Even though dividend yield taxes are going up, I still believe that due to the low interest rate environment, more institutions will be creating an investment strategy that will focus on placing their funds with companies that pay out a solid dividend yield.
Part of creating an investment strategy is to anticipate what other investors will do. While I do believe interest rates will eventually rise, this most likely won’t occur in 2013. For many people, this will leave an investment strategy to still favor dividend yield over the relatively low rates of fixed income.
With the 10-year Treasury yielding approximately 1.9% and … Read More
The NASDAQ is up 20% this year, as stocks continue to edge higher to multi-year highs. Blue chips are at their highest level since December 2007. Small-cap stocks are hot, up a sizzling 3.1% in September following a 3.3% advance in August. The S&P 500 is at a five-year high, and while the index has held above 1,400, the possibility of the multiple top formation concerns me, based on my technical analysis.
Now is the time to make sure that your portfolio is not overly vulnerable to a stock market correction if one were to surface. Of course, you should always take some profits off the table, a key for stock market success.
In my view, a critical investment strategy includes asset allocation, diversification, and the addition of small-cap stocks to maximize the expected return of your portfolio and increase your stock market success.
The concept of asset allocation should be a key part of any prudent investment strategy, as it will increase your stock market success.
Asset allocation refers to the asset mix of your portfolio, which is divided into the three major asset classes—cash, fixed income, and equities. Too much equities and you are vulnerable to selling. Too much cash and you could miss out of a stock market rally.
As the macro and micro factors change, you should rebalance your asset mix and modify your investment strategy, thereby increasing your stock market success.
A great investment strategy for stock market success is the use of Put options as a hedge against weakness.
The more risk assumed, the higher the expected rate of return; albeit, this is not … Read More
The economic forecast continues to be gloomy for America, with little positive news expected, making any investment strategy that much more difficult to formulate. On top of the worldwide economic slowdown, America is facing massive budget cuts that are due to hit January 2, 2013—a tornado to in the economic forecast. This includes approximately $55.0 billion in automatic cuts for the defense market sector.
This is not new, as various corporations have continually attempted to make the public aware that without the political will to fix the fiscal problem and prevent these budget cuts from being enacted, America’s gross domestic product (GDP) will be severely hit next year, depressing the economic forecast even more. I wrote about this in the article “Lockheed Martin Warns of Impending Crisis Unless Action’s Taken,” as the defense market sector is a huge target.
With such a negative economic forecast, one would think that politicians would attempt to work together to avert this disaster. However, it appears that politicians are only interested in deflecting negative criticism away from themselves.
The president of Pratt and Whitney, a subsidiary of United Technologies Corporation (NYSE/UTX), David Hess, stated that because of the company’s economic forecast and the looming budget cuts, it is about to issue notifications to employees that might be laid off. This is due to a provision of a law called the WARN Act, which requires employers to notify employees at least 60 days prior to any plant closures or layouts.
Pratt and Whitney is only following the letter of the law. However, the U.S. Labor Department stated that companies in the defense market sector should … Read More
Google Inc. (NASDAQ/GOOG) is one of the most unique technology stocks. There are many technology stocks that try to rival Google. Google sets itself apart from other technology stocks through innovation as a key investment strategy. But this desire to expand too far has led to some mistakes. While many investors believe Google to be a pure marketing company, it has expanded its investment strategy to include the retail sector.
The retail sector is a slightly different animal for Google, and technology stocks need to adapt their methods for that sector.
Google has recently announced that it will be selling tablets directly to consumers, along the same lines as Apple Inc. (NASDAQ/AAPL). Technology stocks will tend to copy each other once they see a firm has been successful with an investment strategy. The tablet market is one in which Google is falling behind, as Apple currently holds approximately 73% of the market share, according to industry research firm Gartner Inc. In addition to Apple, Amazon.com, Inc. (NASDAQ/AMZN) also sells a tablet, for the lower end of the retail sector, which, funny enough, runs off of Google’s “Android” operating system.
The success of Amazon’s tablet, the “Kindle Fire,” is a problem for Google, as other firms decide to build their platform on top of the Android operating system. This will cause more fragmentation in the retail sector, resulting in Google losing control of its operating system. The advantage of Google’s search engine is that it controls and can keep track of all the searches that are occurring, mining this data for marketing purposes. This data is worth billions of dollars. Once … Read More
With his recent comments on the idea of breaking up the big bank stocks, Sanford Weill, former CEO of Citigroup, Inc. (NYSE/C), joins an increasingly large group of analysts, experts, and former employees within the sector who are raising concerns and voicing opinions that the current banking situation is in need of structural change. The comments from Weill and others who have worked in the financial sector are surprising in that their investment strategy for many years has been to increase the size and scope of the big bank stocks.
This is certainly a 180-degree shift in thinking regarding bank stocks and an investment strategy for them. With the financial crisis that ensued several years ago, it has become quite apparent that the complexity and incentive structure at bank stocks need to change. The government coming in and supporting bank stocks when trouble arises has skewed the incentive structure and investment strategy of the people who work there.
I am all in favor of capitalism. One of the largest reasons that America has become the largest economic nation in the world in such a short time span is because of the incentive structure system built in a capitalist society. The problem is that in recent times, the incentive structure regarding the investment strategy of bank stocks has distorted the system. The hunger in a capitalist society is encouraged through the attainment of large rewards through risk-taking. Money is risked on new products and innovations, with successful investors benefiting. However, when a risky investment strategy has very little downside—for example, by having the government support losses—this changes the calculation for those … Read More