A few weeks ago at our 14th Annual Investment U Conference in San Diego, I discussed and recommended a number of investment opportunities in the U.S.

Afterwards, an attendee pulled me aside and privately declared that my optimistic outlook was not just wrong but naïve.

He then recited the litany of woes broadcast daily and recycled hourly by the national media: the weak economy, high unemployment, rising energy prices, the continuing housing slump, troubles in the Eurozone, tensions in the Middle East, political gridlock in Washington, the growing national deficit and so on.

(By the time he was done, I could have sworn he said the sun was too bright and the birds were singing too loud.)

“You really need to look at The Big Picture,” he said. Indeed, let’s do that…

We all know the recent downturn was severe and the recovery has been long and slow. But the United States still has the most dynamic economy in the developed world. The best research centers, universities and companies are here. Our country still attracts more immigrants and investment capital than any other. And the industries of the future, from biotechnology to nanotechnology, are centered here.

Many people are still hurting. Yet, despite the gloomy headlines, the majority of us have it pretty darn good.

Consider that in the first half of the twentieth century, most people earned a subsistence living through long hours of backbreaking work on farms or in factories. In 1850, the average workweek was 64 hours. In 1900, it was 53. Today it is 42 hours. On the whole, Americans work less, have more purchasing power, enjoy goods and services in almost unlimited supply, and have much more leisure.

Formal discrimination against women and minorities has ended. There is mass home ownership, with central heat and air-conditioning – and endless labor saving devices: stoves, ovens, refrigerators, dishwashers, microwaves and computers. Senior citizens are cared for financially and medically, ending the fear of impoverished old age.

Quality healthcare was almost non-existent 85 years ago. In 1927, President Calvin Coolidge’s sixteen-year-old son Calvin Jr. developed a blister playing tennis without socks at the White House. It became infected. Five days later, he died. Before the advent of antibiotics, tragedies like these were routine.

Advances in medicine and technology have eliminated most of history’s plagues, including polio, smallpox, measles and rickets. There has been a stunning reduction in infectious diseases. Heart disease and stroke incidence are in decline. A new study from the Centers for Disease Control reports that overall rates of new cancer diagnosis have dropped steadily since the mid-1990s.

We complain about the rising cost of healthcare. But that’s only because we routinely live long enough to depend on it. The average American lifespan has almost doubled over the past century.

We take a lot for granted today. Light is a good example. To get an hour of artificial light from a sesame-oil lamp in Babylon in 1750 B.C. would have cost you more than fifty hours of work. The same amount of illumination from a tallow candle in the 1800s required six hours’ labor. Fifteen minutes of work was the trade off for an hour from a kerosene lamp in the 1880s. Yet for an hour of electric light today, the average American labors half a second.

Or take transportation. For millions of years, we only got somewhere by putting one foot in front of the other. Six thousand years ago, we domesticated the horse. In the 1800s, going from New York to Chicago on a stagecoach took two weeks’ time and a month’s wages. Today you can fly to virtually any major city in the world in under 24 hours and – even with oil near recent highs – for less than a thousand dollars.

And speaking of oil… How many reports have you heard about gas surging to more than $4 a gallon recently? Contrast that with how little you’ve probably heard about the price of natural gas. Four years ago, it was $13. Today it sells for $2. The average American who heats with natural gas saved about $1,000 last year.

Or take computing. In 1987, a megabyte of memory cost $5,000. The Mac II sitting on my desk – with one megabyte of memory and a running speed of 16 megahertz (which Apple described as “blindingly fast”) – cost $5,500. Today an exponentially smaller, faster and better machine costs less than a tenth as much. As for memory, you can buy a terabyte drive today for less than 60 bucks.

Scientists say human beings evolved to have a heightened sense of fear and suspicion. (Those who lived on the plains of Africa without this quality didn’t leave many descendants.) Yet by seizing on the negatives, we often miss the good things happening around us.

In their new book Abundance, technology gurus Peter Diamandis and Steven Kotler offer an alternative view:

“What does the world really look like? Turns out it’s not the nightmare most suspect. Violence is at an all-time low, personal freedom at a historic high. During the past century child mortality decreased by 90% while the average human life span increased by 100%. Food is cheaper and more plentiful than ever (groceries cost 13 times less today than in 1870). Poverty has declined more in the past 50 years than the previous 500. In fact, adjusted for inflation, incomes have tripled in the past 50 years. Even Americans living under the poverty line today have access to a telephone, toilet, television, running water, air-conditioning, and a car. Go back 150 years and the richest robber barons could have never dreamed of such wealth.

“Nor are these changes restricted to the developed world. In Africa today a Masai warrior on a cellphone has better mobile communications than the President of the United States did 25 years ago; if he’s on a smartphone with Google, he has access to more information than the President did just 15 years ago, with a feast of standard features: watch, stereo, camera, video camera, voice recorder, GPS tracker, video teleconferencing equipment, a vast library of books, films, games, music. Just 20 years ago these same goods and services would have cost over $1 million…

“Right now all information-based technologies are on exponential growth curves: They’re doubling in power for the same price every 12 to 24 months. This is why an $8 million supercomputer from two decades ago now sits in your pocket and costs less than $200. This same rate of change is also showing up in networks, sensors, cloud computing, 3-D printing, genetics, artificial intelligence, robotics and dozens more industries.”

Despite relentless media negativity – designed to attract viewers and thus advertisers – most of society’s trend lines are overwhelmingly positive.

We enjoy economic, political and religious freedoms denied to billions throughout history. All forms of pollution – with the exception of greenhouse gases – are in decline. Our culture gives us an unprecedented ability to store, exchange and improve ideas. And we benefit enormously from the ultimate renewable resource: human imagination and creativity.

Free markets deliver an enormous bounty based on specialization and exchange. Just a small example: Our forebears couldn’t conceive our typical salad bar today because they couldn’t imagine a global transportation network capable of providing green beans from Mexico, apples from Poland and cashews from Vietnam together in the same meal.

Even the world’s poorest are being pulled upward. According to the World Bank, the number of people living on less than $1 a day has more than halved since the 1950s. That still leaves billions in destitution, but according to scientist Matt Ridley, author of The Rational Optimist, at the current rate of decline the number of people in the world living in “absolute poverty” will be statistically insignificant by 2035. The spread of microfinance and cellphone technology in many developing countries, for example, are creating countless opportunities and greater prosperity.

To know how much better off you are than your distant ancestors, you have to recognize how they lived. In his essay A History of Violence, Harvard psychologist Steven Pinker writes:

“Cruelty as entertainment, human sacrifice to indulge superstition, slavery as a labor-saving device, conquest as the mission statement of government, genocide as a means of acquiring real estate, torture and mutilation as routine punishment, the death penalty for misdemeanors and differences of opinion, assassination as the mechanism of political succession, rape as the spoils of war, pogroms as outlets for frustration, homicide as the major form of conflict resolution – all were unexceptionable features of life for most of human history. But, today, they are rare to nonexistent in the West, far less common elsewhere than they used to be, and widely condemned when they are brought to light.”

Thank your lucky stars that you won the lottery simply by being born in the modern era. This is not to downplay our current challenges, including the most predictable crisis in the nation’s history: huge and growing state and federal deficits.

Yet you’ll notice that the extreme forecasts always begin with the words, “If nothing is done…”

Something will be done. Only the most hardened cynics believe that politics will ultimately trump the national interest. The solutions are not politically easy, but they exist. Simpson-Bowles and other bi-partisan commissions have already set the stage for fiscal sanity. State governors like Chris Christie and Andrew Cuomo are now tackling deeply entrenched problems, such as pension shortfalls, that threaten to destroy state budgets. It won’t happen in this election year of political polarization and heated rhetoric, but reform at the national level is coming.

I know some, like the gentlemen in San Diego, will disagree. And it’s true that we all have gaps in our knowledge, biases and blind spots. However, it would be nice if the prophets of doom conceded that as well.

The truth is most of us have it better than we could have imagined a few decades ago. Most of us live long lives, in good health and in comfortable circumstances. By almost any measure, we are living better than 99.9% of those who came before us. Yet we routinely tell pollsters that life is hard and things are getting steadily worse.

As the essayist Randall Jarrell observed:

“People who live in a Golden Age usually go around complaining how yellow everything looks.”

Carpe Diem,

Alexander Green

British Rail Class 42, Lincoln cent, President, Randall Jarrell, rational optimism, San Diego, United States, USD

There are a number of signals that bode well for price appreciation with individual stocks: growing market share, rising sales, strong earnings growth and improving margins…

But you shouldn’t overlook another excellent indicator: share buybacks.

According to Standard & Poor’s, U.S. public companies spent at least $437 billion last year buying their own shares back. That was 46% more than in 2010.

Is this a good thing? Absolutely…

Regardless of whether you’re an individual or a corporation, sitting on cash isn’t terribly rewarding these days with the average money market fund paying five one-hundredths of 1%. And if the outlook is uncertain, a business owner doesn’t want to commit to building new facilities or taking on employees that aren’t needed. Nor is it necessarily in the best interest of shareholders to distribute this cash in the form of taxable dividends.

So buying back shares often makes good sense. Why? Because when you divide net income into a smaller number of shares outstanding, you get greater growth in earnings per share. And, ultimately, that’s what drives share prices higher.

Of course, stock buybacks boost earnings per share only if they’re larger than stock issuance. Historically, that hasn’t always been the case. (Much executive compensation today comes in the form of stock options that have a dilutive effect on existing shareholders.)

But in recent quarters, the supply of shares outstanding has been shrinking. And, according to analyst Howard Silverblatt at Standard & Poor’s, during the current earnings season, 97 of the S&P 500 enjoyed a boost to earnings per share of at least 4% from repurchases alone.

More Buybacks Ahead

Expect to see more of these buyback announcements in the weeks ahead. Why? Because U.S. corporations are sitting on more than $2 trillion in cash. That’s enough to buy all of ExxonMobil (NYSE: XOM), Microsoft (Nasdaq: MSFT) and IBM (NYSE: IBM).

There are some caveats, however. Some companies announce their intention to buy back shares and then don’t follow through. If business conditions change, interest rates rise, or cash flow decreases, a repurchase program may never get completed.

The other thing to watch is the exercise of stock options, as mentioned above. If a company is only buying back enough shares to offset the dilution that occurs when executives exercise stock options, you won’t see the buyback boost earnings per share.

But, generally speaking, share repurchase programs are a decided positive. And right now, with money cheap and corporate earnings strong, buybacks are occurring at record levels. Attractive companies in the midst of major share buybacks right now include L-3 Communications (NYSE: LLL) and ConocoPhillips (NYSE: COP).

Having Your Cake and Eating it, Too…

Of course, some analysts would rather see corporate executives buying shares with their own money rather than the company’s money. And I don’t disagree…

But sometimes you can have your cake and eat it too. In a recent study, stocks that were subject to repurchases but not insider buying beat other stocks by nearly nine percentage points over four years. But stocks that were the subject of both repurchases and insider buying beat others by a whopping 29 points over four years.

Which companies have enjoyed share buybacks and insider buying recently? Two of them are Boston Scientific (NYSE: BSX) and Bank of New York Mellon (NYSE: BK).

These are the kind of companies that should handily outperform the market in the months ahead.

Good Investing,

Alexander Green

Business/Finance, Chief Investment Strategist, Corporate finance, dividend, Finance, Financial markets, Margin, New York Stock Exchange, Share repurchase, Standard & Poor's Securities Inc, Stock, Stock market, Treasury stock, United States, USD

There’s a new scaremonger in town. And his name is Robert D. Arnott, a portfolio manager, asset-manager executive and Chairman of Research Affiliates in Newport Beach, California.

Mr. Arnott has a simple thesis. Over the next 10 years, the ratio of retirees to active workers will balloon. Retirees, of course, must eventually sell their stocks to support themselves. But there will be fewer young investors around to buy them. Ergo, returns on stocks over the next 10 to 20 years will be anemic.

If this sounds simplistic, congratulations. You probably have a brain and at least a modicum of common sense. This type of “stock market analysis” is really no analysis at all. More to the point, it doesn’t work. Just ask failed economic futurist Harry Dent, whom I’ve written about before.

While it’s inevitable that there will be 10 new senior citizens for each new working-age citizen over the next decade, that in itself doesn’t portend paltry equity returns.

For starters, let’s look at what’s happening to the world population as a whole. There are currently seven billion human beings living on the planet. At the current growth rate, that total is likely to hit eight billion within a decade.

Now, if you believe that investors in China, India, Brazil and other countries will have no interest in buying companies like Procter & Gamble (NYSE: PG), ExxonMobil (NYSE: XOM), or Coca-Cola (NYSE: KO) in the future, no matter how inexpensively they’re priced, I guess you might put some credence in Mr. Arnott’s thesis.

But that’s highly unlikely. Citizens of capitalist countries are getting wealthier and better educated all the time. And the world is becoming more integrated. Would you really have a problem buying shares of Toyota (NYSE: TM), British Petroleum (NYSE: BP) or Nestle (OTC: NSRGY.PK) if they were bargains?

Of course not, regardless of the demographic trends in Japan, Britain, or Switzerland.

Mr. Arnott doesn’t just miss the big picture about the future, however. He also misinterprets the past. In a recent Wall Street Journal interview, for example, he talks about the collapse of Japan’s stock market over the last 23 years and blames it on the country’s aging population.

I have a better explanation. When the Nikkei 225, Japan’s leading stock market benchmark, climbed to nearly 40,000 in 1989, it was a bubble of epic proportions. Many stocks traded at more than 100 times earnings. And real estate was even more absurd. Just the 1.32 square miles that encompassed the Imperial Palace in Tokyo were valued at more than all the real estate in California combined.

Now that’s nuts. Crazier still were the Japanese banks that loaned money against these wildly inflated property values. This led to a protracted banking crisis that Japan’s political class refused to clean up.

To imagine that the two deflationary decades that followed this mania were the result of an aging population is like blaming this year’s warm winter on your aching big toe. Yet Arnott insists we should hunker down since “[Japan’s] demography is 10 years ahead of ours.”

Want to know what will really determine stock prices in the future? Earnings. I challenge you to look back through history and find even one publicly traded company that increased its profits quarter after quarter, year after year, and the stock didn’t tag along.

Perhaps our aging retirees will buy less in the future and contribute less to U.S. corporate profits. But there are billions of consumers around the world hungering for homes, computers, cars, phones, health insurance, credit cards, pharmaceuticals and golf clubs. They’re likely to be an engine of world economic growth – and rising U.S. corporate profits – for decades to come.

Don’t let anyone scare you otherwise.

Good Investing,

Alexander Green

Business/Finance, California, Conglomerate, Economics, Finance, Financial economics, Japan, New York Stock Exchange, Robert Arnott, Robert D. Arnott, Stock, Stock market, United States

Does Low Volatility Put Your Portfolio At Risk?

by Alexander Green, Investment U Chief Investment Strategist
Friday, January 27, 2012: Issue #1695

The stock market gyrated so wildly in 2011 that many investors finally threw in the towel.

How else can we read the massive equity fund redemptions that occurred in the second half of last year?

But, apparently, the market has taken its anti-anxiety medication. After last year’s gut-wrenching swings, U.S. stocks have been surprisingly tranquil. For 13 straight days, the Dow has moved up or down less than 100 points.

This is good news for bullish traders and bad news for those who have been making money trading the VIX. Let me explain…

The VIX is the ticker symbol for the CBOE Market Volatility Index, a popular measure of volatility in S&P 500 index options. According to The Wall Street Journal, this so-called “fear gauge” has fallen 20% to levels unseen in six months.

Why? One reason is that the U.S. economy appears to be getting back on its feet. Despite all the pessimism in the Eurozone, U.S. corporations are busy reporting yet another quarter of all-time record profits. (Just how long will mom-and-pop investors ignore this salient point?)

The Dow is up almost 500 points for the month. Fund companies report that money is flowing back into equities again. Yet the calm makes some investors nervous. I hear many analysts crying out that the market is about to plunge again.

Deluded, Ignorant, or Both

Let’s start with the straightforward declaration that anyone who claims to know “what the market is going to do next” is, by definition, someone who is ignorant, deluded, or both. The market will rise or fall next week or next month based on next week’s or next month’s news. Yesterday’s news has already been discounted. (As Legg Mason’s Bill Miller likes to say, “If it’s in the papers, in the price.)

Moreover, there’s no historical evidence to show that a market pause generally precedes a correction. And the data go back pretty far.

For example, market analyst Mark Hulbert has loaded the Dow’s daily returns – all the way back to its creation in 1896 – into his statistical software. For each trade date since, he calculated the Dow’s trailing volatility and then looked to see if the stock market performed any different following periods of low volatility than it did at all other times.

The short answer? Nope. He came up empty. Perhaps that’s the reason for the old Wall Street saw: “Never sell a dull market short.”

There are two things to conclude here:

• The hair-raising volatility that made trading (going long) the VIX like taking a tootsie roll from a toddler is over, at least for now…
• The other important takeaway is that traders and investors have no historical reason to believe that the recent pause portends a market downturn ahead.

Sure, a spike in oil prices, a hedge fund blow-up or a nasty surprise from across the pond could change that in a nanosecond. But bolts out of the blue are just one of the many short-term hazards of trading and investing.

For now, the market is taking a breather. But that doesn’t mean it isn’t about to get a second wind.

Good Investing,

Alexander Green

Amex Volatility Index, Business/Finance, CBOE S&P 100 Volatility Index, chicago board options exchange, Derivatives, Dow 30, Dow Jones Industrial Average, Finance, Financial economics, Financial markets, investment, Mark Hulbert, Market trend, Mathematical finance, United States, VIX, Volatility

Why This Market Truism Just Isn’t True

by Alexander Green, Investment U Chief Investment Strategist
Monday, December 5, 2011: Issue #1657

In my first book, The Gone Fishin’ Portfolio, I made a confession that startled some readers…

I retired from the investment services industry while I was still in my early 40s, but many of my clients had not become financially independent. This was not because I advised them poorly. I dealt with my clients honestly and gave them the best advice and service I could.

Yet, in many ways, they operated at a disadvantage. Some had a poor understanding of investment fundamentals. Others found it impossible to commit to a long-term investment plan. Many were simply too emotional about the markets, running to cash at the first hint of danger.

Contrarian instincts are rare, too, I learned. Few people are emotionally stirred by low stock prices. But every time there was a correction, a crash, or financial panic, my Scottish blood would surge, my pulse would rise, I’d rub my hands together, and start buying.

My clients, on the other hand, often did just the opposite, sometimes because they were too nervous but often because they bought into the old chestnut that a good investor doesn’t buy into a market downturn.

“The trend is your friend,” they’d say. Or “Don’t try to catch a falling knife.” This is surely the conventional wisdom in some quarters, but it’s not particularly wise. Here’s why …

For the last several months, traders have obsessed over problems in the Eurozone and the strength (or perceived weakness) of the U.S. economy. Taking a decidedly downbeat view, the market had a pretty horrendous November. But sentiment can turn on a dime and stocks can put on a furious – and completely unexpected – rally.

If you don’t already own stocks, it’s tough to catch the train after it has left the station.

Yet many gurus, including growth-stock advocate William O’Neill and his widely read publication Investor’s Business Daily, often insist that you shouldn’t but a stock unless the market itself is in a confirmed uptrend.

That may make sense in theory, but it often fails in practice. For instance, on page one each day, that paper reports whether the market is in a confirmed uptrend or downtrend. (And sometimes hedges, using language such as “Uptrend Under Pressure.”)

As we all know, this has been a volatile year for the market with the major indices bouncing up and down repeatedly. But you could hardly have chosen a worse strategy than to wait until the market was in a confirmed uptrend before buying. All that meant was that you bought into every short-term spike and then hit your trailing stops over and over again. (It must feel like banging your head against the wall.)

The Oxford Club has hit a number of its stops this year, too, sometimes protecting profits, other times protecting principal. But by buying great companies when the market was under pressure, we ended up with a lot of attractive entry points and plenty of both realized and unrealized profits.

True, if stocks go into a secular bear market, you can end with losses no matter how well you timed your entry points. However, you can never know whether a market drop is merely a correction or something more ominous until you are looking in the rear-view mirror.

You have to stick your neck out occasionally, pick your spots and buy stocks. If you don’t, what are you going to do? Buy bonds yielding 2.5 percent? Hold a money market paying less than one-tenth of one percent? It’s tough to beat inflation or meet your financial goals that way.

Let me make one thing clear, however. It’s most definitely a mistake to buy a troubled company that’s in a downtrend, no matter which way the broad market is heading. (That only works for those with exceptionally long time horizons – and often not even then.) But buying great companies when the broad market is a downtrend gives you a chance to obtain good prices on fine long-term investments and take advantage of tradable short-term rallies, too.

The next two months are traditionally one of the strongest periods for the stock market. No one can say, of course, whether that tradition will hold. But it’s a reasonable strategy to buy great companies when the market is down.

If your goal is to sell high, you have to start by buying low. And market corrections – like the one we’ve seen lately – give you an excellent opportunity to do just that.

Good investing,

Alexander Green

Business/Finance, Chief Investment Strategist, Collective investment scheme, contrarian investing, Finance, Financial economics, Financial markets, investment, Market trend, Short, Stock, Stock market, Technical analysis, United States

The One Place to Invest for Growth, Income… and Safety

by Alexander Green, Investment U Chief Investment Strategist
Monday, November 14, 2011: Issue #1642

Eight weeks ago, I wrote an Investment U column pounding the table for dividend stocks. Since then, they’ve ratcheted higher, but I still see plenty of upside ahead.

Someone who shares my enthusiasm for high-yield stocks right now is my friend and former colleague Rick Pfeifer, Senior Portfolio Manager at Fund Advisors of America, a  Florida-based money management firm.

On a recent trip to the sunshine state, I stopped into his office to hear why he, too, feels this is one of the best places to put your money to work today.

Q: Rick, there’s an awful lot of fear and anxiety about the economy and the stock market right now. Investors are confused and uncertain about what to do with their money. What is your take on things?

A: In a market as volatile as this, you have to spread your bets. But my take is this: If you’re looking for growth, buy dividend-paying stocks.

If you’re looking for income, buy dividend-paying stocks. If you’re looking for safety, buy dividend-paying stocks.

Q: Why?

A: The first question every investor has to ask himself is, “How should I divide my money among stocks, bonds and cash?”

The average money market fund currently pays two one-hundredths of one percent. At that rate, you will double your money in just 3,600 years.

Q: Not terribly attractive.

A: Definitely not.

And Treasury yields won’t make you jump up and click your heels, either. The 10-year guy is yielding two percent, which translates – at best – to a zero-percent yield after inflation.

Q: Tough to meet your investment goals that way.

A: Right.

In my view, dividend stocks are a good place to be right now for several reasons. Let’s talk about safety first. When the Dow traded at these levels 11 ½ years ago, it sold for 47 times earnings. Today it trades at less than 14 times earnings. Stocks are cheap right now on the basis of sales and earnings.

But even during market declines, dividend-paying stocks hold up better than non-dividend-paying stocks and sometimes fight the broad trend and rise in value. The reason is obvious. These tend to be mature, profitable companies with stable outlooks, plenty of cash and long-term staying power.

Q: U.S. companies are sitting on a record amount of cash now, too, right?

A: Correct.

U.S. companies currently hold more than $2 trillion in cash, a record. Thanks to this economy and the current Administration (don’t get me started), companies aren’t hiring and they’re not boosting spending. So a lot of this cash is rightfully going back to shareholders.

The Dow currently yields more than bonds. And dividend growth among U.S. companies has averaged 10 percent per year over the last two years, more than double the long-term dividend growth rate.

Q: Okay. Dividend stocks are less risky than non-dividend payers and currently pay more than cash or bonds. But how do you think this group will perform in the years ahead?

A: We can only use long-term historical performance as a guide, but the numbers are pretty darn encouraging. Over the last 50 years, for instance, the highest 20 percent yielding stocks in the S&P 500 returned 14.2 percent annually.

That’s good enough to double your money every five years – or quadruple it in 10. And if you were even more selective, say investing only in the 10 highest yielding stocks of the 100 largest companies in the S&P 500, your annual return would have been even better, 15.7 percent.

Q: We should add the standard caveat here about past performance and point out that there are risks with dividend stocks, too, right?

A: Indeed. You have to be selective. An investor would be foolish to plunk for a stock just because the dividend is large. The market is full of “dividend traps,” troubled companies that pay hefty dividends to keep investors from bailing out.

Q: How does an investor avoid those?

A: Mainly, by doing his or her homework. You need to look at prospective sales and earnings growth. You have to examine the balance sheet and make sure that the company isn’t too highly leveraged.

You have to note cash balances. And, perhaps most importantly, you need to analyze whether the payout ratio is sustainable.

Q: So can you give us a few examples of high-yielders that have you been buying in your managed accounts lately?

A: I’ve been nibbling at Windstream Corp. (Nasdaq: WIN), a well-run communications and networking company with an 8.3-percent current yield. I like oil and gas producer Enerplus (NYSE: ERF), with its high operating margins and 7.7-percent dividend.

And – this one is a bit different – I’ve been picking up a 10.3-percent yield with the Gabelli Global Gold Trust (AMEX: GGN). There are plenty of other attractive high-yield situations out there, too. They should be owned, of course, as part of a more broadly diversified portfolio.

Q: I agree, Rick. Thanks for your time. Let’s chat about this sector again in a few weeks.

Good investing,

Alexander Green

[Editor's Note: Fund Advisors offers Investment U subscribers a complimentary portfolio review. For more information, feel free to call Rick - or his partner Greg Galloway - at 800.438.3040 or 407.667.4729.]

Business/Finance, Corporate finance, dividends, Earnings growth, Finance, financial ratios, FUND ADVISORS OF AMERICA INC, High yield stocks, Human Interest, P/E ratio, Rate of return, Rick Pfeifer, Stock, Stock market, United States, Yield

Why You Should Buy Japan Now

by Alexander Green, Investment U’s Chief Investment Strategist
Monday, April 25, 2011: Issue #1498

“Buy Japan now?” a friend asked recently. “Are you nuts?”

His sentiment is understandable. Aside from the unfathomable human suffering in Japan over the past several weeks, there have been enormous economic setbacks as well.

Sendai, the biggest port in northeast Japan and a major exporter of auto parts, machinery and marine products, was virtually wiped off the map. Half a dozen oil refineries in the same area, representing a third of the nation’s entire refining capacity, are shut down. Roads, bridges, railways and other major infrastructure have been destroyed. And the Japanese economy – already limping along for most of the past two decades – is also beset with the world’s highest public debt relative to GDP (225%) and a rapidly aging population.

Why would anyone want to invest here?

In my experience, those words accompany virtually every great buying situation. But it takes more than just a lack of interest to create a true contrarian opportunity. Both sentiment and valuations have to be at an extreme.

And that’s certainly the case here…

Japanese Stock Prices Are Less Than Book Value

The average Japanese stock is selling for less than 14 times its annual profit. That’s cheap, and Japanese accounting methods also tend to understate earnings. An even better indicator is found in book values (assets minus liabilities). Stocks around the world (including the United States, Europe and China) currently sell for approximately two times book value. In Japan, they sell for less than book value. By this measure, U.S. stocks are twice as expensive as Japanese stocks.

What will turn Japan’s market around? For starters, the enormous rebuilding that will be required over the next few years. Devastated areas account for seven percent of Japan’s economy and a substantial portion of its land mass. A lot of businesses will receive substantial contracts as a result of the catastrophe.

History shows that Japan is adept at rebounding from catastrophe. (Take World War II or the 1995 Kobe earthquake as examples.) And when Tokyo enters a bull market, it can look like the Silver Spurs Rodeo. For example, if you invested $10,000 in the S&P 500 in 1970, two decades later it would have been worth more than $76,000. Not bad.

But the same amount invested in the Nikkei 225 would have turned into more than $600,000.

How to Buy into Japan’s Advanced Economic Power

Although China’s economy has now eclipsed Japan’s in size, Japan is still Asia’s most advanced economic power, with world-leading technologies and an unmatched infrastructure.

The cost of doing business in Japan has decreased dramatically in recent years, as well. Land prices, office rents and labor costs have come way down. So have taxes and tariffs. And the government has instituted serious banking reforms.

The nation also sits on a mountain of personal financial assets – more than $100,000 for every man, woman and child. After a decade of negative stock market returns, most of this capital is sitting in low-yielding bank deposits. Even a small fraction of these assets returning to the equity market could give it a serious jolt.

So how do you play a rebound? Consider a Japan ETF or some of the country’s unloved blue chips like Toyota (NYSE: TM), Mitsubishi Financial (NYSE: MTU), Canon (NYSE: CAJ), or NTT DOCOMO (NYSE: DCM).

The healing there will take time, of course. But just as the U.S. stock market rebounded from the recent financial crisis quicker than almost anyone expected, things in Japan may look dramatically different in six to 12 months from now.

Of course, very few people believe that. But, in one sense, that’s a good thing. Negative sentiment and low valuations are the defining characteristics of contrarian investing.

Bottom fishermen, cast your nets.

Good investing,

Alexander Green

Business/Finance, China, contrarian investing, Economics, Finance, Financial economics, fundamental analysis, Japan, New York Stock Exchange, Stock, Stock market, Stock selection criteria, United States, USD, Valuation

The End-of-the-World Portfolio… Is it Too Early to Have One?

by Alexander Green, Chief Investment Strategist

Wednesday, June 9, 2010: Issue #1277

First one friend called. Then another. And then yet another.

Now their friends are calling me, too, asking about my “End-of-the-World Portfolio.”

So I’ve decided to just go ahead and tell everyone about it.

All the friends who called – and their friends, too – are well-educated businessmen. They’re convinced that not only the United States government, but also the governments of Europe, Britain and Japan have simply lost their tether.

We’ve all seen deficit spending before. It’s been a problem for decades. But nothing like this…

Putting the Eye-Popping Numbers into Perspective

The unfunded liabilities for Social Security, Medicare and Medicaid alone now top $108 trillion.

Of course, that number is too large to mean anything to most of us. It’s only when you bring it into context that it becomes alarming.

The $108 trillion is approximately $815,000 per U.S. taxpayer. (And this is just the projected shortfall in Social Security, Medicare and Medicaid. It has nothing to do with the rest of the federal debt, which tops $13 trillion.)

Entitlement spending in other parts of the world is an even bigger problem. And the federal deficits are even more gargantuan. In Japan, for example, debt as a percentage of GDP will hit 200% this year.

Many of my friends look at the fiscal problems in Greece – that necessitated a $1 trillion bailout from the European Union – as just a warning shot across the bow. They’re concerned that things are only just beginning to unravel and will get considerably worse.

Are they right? Only time will tell. But here’s what they keep telling me…

Are You At the Mercy of Wasteful Governments?

“Alex, I busted my hump to earn this money. I’ve paid taxes on it. I’ve saved it instead of spending it. I’m not going down with the ship if those boneheads in Washington spend us into oblivion. How do I protect myself?”

Let me begin by saying that I’ve listened to apocalyptic economic forecasts for decades now. Putting all your money in gold bullion, freeze-dried food and shotgun shells hasn’t been a particularly auspicious strategy.

The difference here is that these folks aren’t gloom-and-doomers who have droned the same message for over 30 years. They are ordinarily optimistic folks who think Western governments are driving the world economy down the road to ruin.

The knock against democracy in Greece and Rome a few thousand years ago was that once the electorate realized they could use their representatives to loot the Treasury, all would be lost. Lately, that remark is looking prescient.

As one friend summed it up: “Look, Alex, I don’t care if I’m wrong about Armageddon and my returns turn out to be lower than what they might have been. Just tell me what to do so I can hang on to what I’ve got and maybe match or beat inflation by a little bit.”

How to Allocate Your Assets in the “End-of-the-World Portfolio”

With that modest goal in mind, here is my suggestion if you want to hunker down for the end of the world – a posture that admittedly may be premature.

• Put 40% of your liquid portfolio in a laddered portfolio of AAA-insured, tax-free bonds. (Be sure to buy state-specific bonds if you’re in a high-tax state.)
• Put 40% in a laddered portfolio of inflation-adjusted Treasuries, also AAA-rated. (For tax reasons, these are best owned in your retirement account.) This is your protection against inflation, as Uncle Sam might opt to spend us out of a tight spot with interest rates already near zero.
• Put the remaining 20% in defensive, blue-chip, dividend-paying stocks. I’m referring to food companies, healthcare companies, utilities, defense contractors, gold mining companies and the like. This should provide some growth and income.

Why include stocks at all? Because 200 years of history shows that an 80/20 split between stocks and bonds is actually less risky than a 100% bond portfolio.

On a personal note, I would not invest my own money this way. (At least not yet.) I’m not calling for the end of the world.

But my friends seem grateful just to have a clear-cut plan. One of them even concedes that it’s not his “End-of-the-World Portfolio”: “I tell people it’s my “Cup-Your-Groin Portfolio.”

I suppose it is. I only hope our elected misrepresentatives get the message before we all need one.

Good investing,

Alexander Green

Laddering means varying your portfolio between short-, medium- and long-term bonds. This is your protection against deflation and the virtual certainty of higher taxes.

Business/Finance, Doomer, Economy of the United States, Government, Government debt, Medicare, Political economy, United States, United States public debt