Great traders and true value investors know that it’s not only the return function that dictat...
Playing the Fed
06/03/2005 12:00 am EST
Congratulation to Mark Skousen who is celebrating his 25-year anniversary as editor of Forecasts & Strategies— a tremendous feat given his wide-ranging career that includes roles as economist, professor, political proponent, and prolific author. Here’s his latest.
"One of the lessons I’ve learned is that no matter how you prepare for your vocation in life, it’s always a discovery process in finding what you are good at and what you aren’t. You have to learn your limitations. When I started I was more interested in growth stocks. I wanted to make money and make it fast. But as you get older, and wealthier, you discover that income investing becomes something that you increasingly want to focus on. And I have increased my focus on recommending income investments. I have found that most investors, who seek only high income, are not going to achieve that. They may get high yields, but sacrifice capital. You might be tempted to buy a high yielding stock or bond, only to find that the principal has lost value.
"The biggest problem facing investors is the volatility of income investing. The only income investment that is not volatile is either low paying money market funds where the principal is fixed or if you hold individual bonds and hold them to maturity. What’s I’ve tried to do is develop a number of strategies that can increase your chances of earning high income plus capital gains. The number one strategy is what I call the interest rate strategy. What you are looking for here is to take advantage of the Federal Reserve’s interest rate policies. Now Greenspan has been chairman of the Fed since 1987, just before the crash. How many times has the Fed changed monetary policy in the 16 years that he has been chairman of the Fed? Seven times. That’s seven times that you must play the interest rate strategy. That's an average of once very two years.
"What do I see ahead? With commodity inflation subdued, long-term
interest rates coming down, and corporate profits healthy, Wall Street is
getting the green light. We are now entering our fourth year of superior profits
in dividend-paying and other high-income investments. The latest boost to high
income comes from the Federal Reserve. Due to its relatively tight money policy,
investors are benefiting from our high-income vehicles. That’s good news for our
income investments, which represent 40% of our portfolio.
"Our income plays, including Debt Strategies Fund (DSU NYSE), Aberdeen Asia Pacific Income Fund (FAX ASE), and Blackrock Muni Income Fund (BMT NYSE) continue to hold up well in this uncertain environment. Our safest investment, PIMCO Real Return Fund (PRTNX), which invests in inflation-indexed Treasuries, held constant. I also see a fantastic opportunity in Allied Capital (ALD NYSE), a business development company that helps finance a variety of mid-sized companies through long-term debt and equity positions, and collateralized debt obligations. The stock has gone from $15 to $27 over the past ten years, while paying out an annual dividend of 8%-9%. It currently pays out 57 cents a share each quarter.
"Speaking of high yields, I'd like to add a new recommendation in the oil sector: Pengrowth Energy Trust (PGH NYSE), which sells for around $20 a share. This is a highly profitable Canadian oil & gas trust. It just paid out another monthly dividend of 19 cents, and paid $2.14 last year, for a yield of 10.7%. In its most recent first quarter 2005, cash distributions rose 38% to $128 million, representing 84% payout ratio. Its goal is to reduce the cash payout ratio and increase its cash flow. Let's set a protective stop at $17 a share."
"Meanwhile, our two best performers in the Anti-Terrorist Portfolio were the Fidelity Select Defense & Aerospace Fund (FSDAX) and the Vice Fund ( VICEX).Vice Fund (VICEX, $15.89) and the Fidelity Select Defense and Aerospace Fund (FSDAX, $69.26). Both rose more than 3%. The Vice Fund profits from the "sins" of smoking, gambling, and drinking. It invests in companies such as Altria (Philip Morris), Budweiser, and Harrah’s. Some of its best performers include Mikohn Gaming Corp., Reynolds American, and spirits supplier Constellation Brands. The Vice Fund also includes some defense stocks, such as United Defense Industries. The Fidelity Select Defense is a top-rated performer overall, with holdings in Lockheed Martin, Boeing, and Goodrich. I believe these funds will do well in times of war and peace, though the portfolio is geared to profit the most when the terrorist threat increases. I don't think you can go wrong investing in companies with growing dividends and earnings, as is the case with stocks in these funds."
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