Should You Pare Back on Growth Stocks?

03/06/2012 6:30 am EST

Focus: INCOME

Ken Himmler

President and Founder, Integrated Asset Management

Bearish signals on the horizon, says advisor Kenneth Himmler, who believes that traders who are bidding stocks higher have short memories. He says growth will come back, but investors may have to be patient through the remainder of the bear cycle.

Kate Stalter: Today, I am speaking with Ken Himmler, president of Integrated Asset Management.

Ken, I understand that you have a fairly bearish view. I wanted to ask you about that. Given some of the euphoria in the mainstream media about new multi-year highs in the major indices, what is your take on all that?

Ken Himmler: My take is that people have very short memories when it comes to markets and money. People get caught up. It is as bad as probably the fashion trend—you know, one day one fashion is in, and the next day it is out. Haircuts are in, haircuts are out.

I have been doing this almost 30 years, and I don’t have a short memory. I can remember just not too long ago, there was a CNBC interview. People were leaving their jobs to become day traders; they were renting these little offices within shopping plazas. Well, we don’t see that anymore.

Then, not too long ago, I saw CNBC and people were leaving their jobs to become real estate flippers. I don’t see that anymore. It is the same mentality. It is human nature; people want to jump on the bandwagon.

For me, I look at the economic indicators. The economic indicators are:

  • We still have 15% to 16% unemployment.
  • We still have massive problems in Greece, Spain, Italy, and Portugal.
  • China is on the edge.
  • We have our federal government buying back our own paper and devaluing our currency.
  • We have $1.5 trillion of mortgages that still haven’t foreclosed.
  • We have a monetary policy with the banks that are so tight that the person earning a decent income can’t even buy a house.

So I have a real problem when the P/E ratio on the S&P is at 16 and people are buying up the market and everybody saying it is going to 15,000 on the Dow. I live in a real world where it is all based upon the financials and the fundamentals, and I don’t see it.

The people on Wall Street are saying, “Yes, but corporate profits are up.” Well, they can select those few companies where the corporate profits are up. But as a whole, the average is not that the corporate profits are up.

So you ask me, what is my take on it? I hope that fills it in.

Kate Stalter: So given all that, how are you advising your clients at this point, Ken? What actionable steps do you advise that they take?

Ken Himmler: Well, No. 1, a lot of times people want to still invest in growth, and it depends on what age they are.

In my eyes, there are three tiers in your life: There is the learning stage, there is the earning stage, and then sometimes there is the yearning stage.

So if you are in your 20s or 30s, of course, you should be in growth investments. If you are in your 40s and 50s, maybe there is a balance…but if you are in your 60s and 70s, I am highly suggesting that people don’t depend upon growth for their income. Use dividend stocks, use covered call strategies, use GICs, use the same things like TIPS and I-Bonds—things that will be steadier income payers.

Because if you ask me, do I believe in this country? Absolutely, I believe in this country. If you ask me, do I believe that growth stocks will come back? The answer is yes. But when? It could be 20 years from now.

Let’s face it: We are still—no matter what the recent market has just gone up to—we are still 12 years into a bear market. We just recently, in the last 30 days, broke out of the bear market. In 1999, the Dow was 11,900; it has been hovering that way just until the last two months.

So we are 12 years into a bear market. The shortest bear market in the last 100 years has been 17 years. So when somebody says, “Will it come back?” It will come back, but we just don’t when. So that is the problem.

I am recommending that people don’t try to bet on growth. Bet on things that will pay an income; the dividend strategies, covered call strategies, and GIC strategies…that is what I am recommending.

Continued…

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Kate Stalter: Tell us a little bit more about that, then. Specifically within those strategies what are some things you like right now?

Ken Himmler: Well, I do like things such as MLPs—master limited partnerships —and I like oil royalty trusts.

I like what I call aggregated trusts, which are companies that go out and they find investment companies that are paying high dividends. I like mortgage aggregation trusts. I like things that are paying in the 8% to 9% dividend range.

If that person has already developed their guaranteed income…I am not suggesting that the retiree goes out and puts everything into something paying 8% or 9%, because they are going to get a volatility, or standard deviation, on that thing anywhere between 15% to 20%.

So if a person already has guaranteed income—it could be Social Security, it could be a pension plan, it could be done through a GIC—then and only then do you go out and operate a dividend strategy such as that.

The second strategy that I really believe in right now is the covered call strategy. A covered call strategy on average produces somewhere in the 6% to 7% range. And I like that, because a lot of people don’t want to get out of the stock market.

If there is ever a good time to use a covered call strategy, in my opinion, it is when the market has hit all-time highs. Because then you can sell the covered call at a higher value than where you are, and if the market stays or drops, you will then keep that option premium, and offset some of your risk.

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