Best of the Week
Most Popular
1. US Housing Market Real Estate Crash The Next Shoe To Drop – Part II - Chris_Vermeulen
2.The Coronavirus Greatest Economic Depression in History? - Nadeem_Walayat
3.US Real Estate Housing Market Crash Is The Next Shoe To Drop - Chris_Vermeulen
4.Coronavirus Stock Market Trend Implications and AI Mega-trend Stocks Buying Levels - Nadeem_Walayat
5. Are Coronavirus Death Statistics Exaggerated? Worse than Seasonal Flu or Not?- Nadeem_Walayat
6.Coronavirus Stock Market Trend Implications, Global Recession and AI Stocks Buying Levels - Nadeem_Walayat
7.US Fourth Turning Accelerating Towards Debt Climax - James_Quinn
8.Dow Stock Market Trend Analysis and Forecast - Nadeem_Walayat
9.Britain's FAKE Coronavirus Death Statistics Exposed - Nadeem_Walayat
10.Commodity Markets Crash Catastrophe Charts - Rambus_Chartology
Last 7 days
Johnson & Johnson (JNJ) Big Pharma Stock for Machine Learning Life Extension Investing - 2nd Jul 20
All Eyes on Markets to Get a Refreshed Outlook - 2nd Jul 20
The Darkening Clouds on the Stock Market S&P 500 Horizon - 2nd Jul 20
US Fourth Turning Reaches Boiling Point as America Bends its Knee - 2nd Jul 20
After 2nd Quarter Economic Carnage, the Quest for Philippine Recovery - 2nd Jul 20
Gold Completes Another Washout Rotation – Here We Go - 2nd Jul 20
Roosevelt 2.0 and ‘here, hold my beer' - 2nd Jul 20
U.S. Dollar: When Almost Everyone Is Bearish... - 1st Jul 20
Politicians Prepare New Money Drops as US Dollar Weakens - 1st Jul 20
Gold Stocks Still Undervalued - 1st Jul 20
High Premiums in Physical Gold Market: Scam or Supply Crisis? - 1st Jul 20
US Stock Markets Enter Parabolic Price Move - 1st Jul 20
In The Year 2025 If Fiat Currency Can Survive - 30th Jun 20
Gold Likes the IMF Predicting a Deeper Recession - 30th Jun 20
Silver Is Still Cheap For Now - 30th Jun 20
More Stock Market Selling Ahead - 30th Jun 20
Trending Ecommerce Sites in 2020 - 30th Jun 20
Stock Market S&P 500 Approaching the Precipice - 29th Jun 20
APPLE Tech Stock for Investing to Profit from the Machine Learning Mega trend - 29th Jun 20
Student / Gamer Custom System Build June 2020 Proving Impossible - Overclockers UK - 29th Jun 20
US Dollar with Ney and Gann Angles - 29th Jun 20
Europe's Banking Sector: When (and Why) the Rout Really Began - 29th Jun 20
Will People Accept Rampant Inflation? Hell, No! - 29th Jun 20
Gold & Silver Begin The Move To New All-Time Highs - 29th Jun 20
US Stock Market Enters Parabolic Price Move – Be Prepared - 29th Jun 20
Meet BlackRock, the New Great Vampire Squid - 28th Jun 20
Stock Market S&P 500 Approaching a Defining Moment - 28th Jun 20
U.S. Long Bond: Let's Review the "Upward Point of Exhaustion" - 27th Jun 20
Gold, Copper and Silver are Must-own Metals - 27th Jun 20
Why People Have Always Held Gold - 27th Jun 20
Crude Oil Price Meets Key Resistance - 27th Jun 20
INTEL x86 Chip Giant Stock Targets Artificial Intelligence and Quantum Computing for 2020's Growth - 25th Jun 20
Gold’s Long-term Turning Point is Here - 25th Jun 20
Hainan’s ASEAN Future and Dark Clouds Over Hong Kong - 25th Jun 20
Silver Price Trend Analysis - 24th Jun 20
A Stealth Stocks Double Dip or Bear Market Has Started - 24th Jun 20
Trillion-dollar US infrastructure plan will draw in plenty of metal - 24th Jun 20
WARNING: The U.S. Banking System ISN’T as Strong as Advertised - 24th Jun 20
All That Glitters When the World Jitters is Probably Gold - 24th Jun 20
Making Sense of Crude Oil Price Narrow Trading Range - 23rd Jun 20
Elon Musk Mocks Nikola Motors as “Dumb.” Is He Right? - 23rd Jun 20
MICROSOFT Transforming from PC Software to Cloud Services AI, Deep Learning Giant - 23rd Jun 20
Stock Market Decline Resumes - 22nd Jun 20
Excellent Silver Seasonal Buying Opportunity Lies Directly Ahead - 22nd Jun 20
Where is the US Dollar trend headed ? - 22nd Jun 20
Most Shoppers have Stopped Following Supermarket Arrows, is Coughing the New Racism? - 22nd Jun 20

Market Oracle FREE Newsletter

AI Stocks 2020-2035 15 Year Trend Forecast

Dow Jones Latest Crash and Recession Proofing Your Stocks Portfolio

Stock-Markets / Financial Crash Nov 22, 2008 - 12:03 PM GMT

By: Andy_Sutton

Stock-Markets Diamond Rated - Best Financial Markets Analysis ArticleWith the most recent two day crash in the Dow Industrials average, we are once again poised at the precipice of oblivion. Two important dominos have been toppled in the past two days. On Wednesday, the Dow closed below the psychological mark of 8000. Granted, the 7997.28 level was not the most pronounced of breaches, but it is worth noting. However, yesterday, we solidified the drop below 8000 and blew right through the October 10 th low of 7773.71 going all the way down to 7552.29. In totality, the listed market has now lost approximately half of its value – in 12 months.


While it would be easy to digress into an analysis of the sheer magnitude of the losses over the past year, it is perhaps more worthwhile to take a look at some of the different investment themes that have been prevalent over the past year and see how they've fared. This is an important exercise since there is still plenty of fuel for more declines, but at the same time there are also overriding fundamentals that will drive things moving forward.

While it is very true that virtually every possible portfolio has in some way been affected by the liquidation over the past 6 months, it is important to note that some areas have done much better than others even though, in most cases, this still means some sort of loss. Hedging strategies can be used to mitigate such losses. The obvious drawback of hedging strategies is that they tend to mitigate gains during times of upward price movements.

Another important consideration in any portfolio is dividends. In the three sample themes we've constructed, we provide the returns with and without dividends. There is an old investing adage with regard to dividends that goes something like “If you're going to have to wait, you might as well get paid for doing it”. The past year has been a shining example of this logic. For those investors who chose to try to ride out the current situation, dividends have provided a nice cushion. The biggest problem with dividends is that they're being cut all over the place. A drastic example of this would be the financial stocks. In many cases, dividends have not only been cut, but eliminated altogether.

Because of this reality, it is important to look not only at the current and prior dividends, but whether or not the cash flow will exist to support future dividends. A good example of this analysis would be the Canadian energy Trusts. A good many of the Trusts are paying the same distributions now as they were when oil was $60/bbl on the way up. And they paid those same distributions even when oil was $150/bbl. The obvious conclusion would be that the funds exist to maintain current levels. However, analysis of the cash flow of these firms is required to either support or refute the ability to continue distributions at current levels.

To construct our exercise, we'll take a look at 3 major themes that have been prevalent over the past year: Consumer Staples, Energy, and Basic Materials. The securities selected were not necessarily part of the S&P Sector Index, but rather they were companies that have been talked about in the media and financial websites, and therefore, were likely to make it into many portfolios. While it would be easy to point to November 2007 price levels, May's levels more completely encompass the rally in the US Dollar, which has been an important direct and indirect driver in the price of many of these stocks.

Consumer Staples – ‘Recession Proof' Model

Security Symbol 5/19/2008 11/21/2008
Wal-Mart Stores WMT $ 56.40 $ 51.05
Colgate Palmolive CL $ 72.08 $ 59.99
Proctor & Gamble PG $ 66.86 $ 58.83
Kraft Foods KFT $ 32.81 $ 25.06
Con-Agra CAG $ 23.86 $ 13.93
Merck & Co, Inc. MRK $ 40.02 $ 22.91
DuPont DD $ 49.50 $ 21.97
Pepsico PEP $ 68.03 $ 50.30
CVS Caremark CVS $ 43.01 $ 24.33
Ultrashort Consumer Goods SZK $ 67.59 $ 122.94

 

The choices for this model were obvious except for Merck & Co., Inc. and DuPont. Merck was chosen because pharmaceuticals represent a fairly steady portion of consumer spending, and this is likely to be the case moving forward. DuPont was chosen mostly because many of their products support the production of consumer goods. In particular, their fertilizer, seed, and various paints and coatings all contribute to the production of consumer goods.

  • Of the 9 companies in this model, all 9 experienced a loss over the period from 5/19/2008 through today. The hedge used was the Proshares Ultrashort Consumer Goods (SZK).
  • Unhedged, this model lost 27.44% ex-dividends, and 26.03% with dividends.
  • Hedged, this model lost 13.24% ex-dividends, and 12.01% with including dividends.
  • The model paid $6.39/share in dividends during the course of the period studied.

Energy – MLP/ Canadian Royalty Trust Model 

Security Symbol 5/19/2008 11/20/2008
Penn West Energy Trust PWE $ 33.83 $ 12.42
PenGrowth Energy Trust PGH $ 20.84 $ 7.84
Baytex Energy Trust BTE $ 29.20 $ 12.09
Harvest Energy Trust EOD $ 25.52 $ 9.20
Schlumberger SLB $ 106.63 $ 40.02
Permian Basin Royalty PBT $ 24.74 $ 16.27
Kinder Morgan Partners KMP $ 60.22 $ 45.37
Buckeye Partners BPL $ 49.11 $ 27.77
US Oil/Gas UltraShort DUG $ 25.26 $ 46.98

 

This model contains 4 Canadian Royalty Trusts, an oil service company, two Master Limited Partnerships (MLP's), and an express Trust. The model is heavy on the side of Canadian Royalty Trusts because they have been a popular vehicle for individuals to invest in oil and natural gas.

  • Of the 8 issues in this model, all 8 experienced a loss from 5/19/2008 through today. The model is hedged with the US Oil/Gas Short ETF (DUG).
  • Unhedged, this model lost 51.16% ex-dividends, and 46.32% with dividends.
  • Hedged, this model lost 41.93% ex-dividends, and 37.42% with including dividends.
  • The model paid $16.94/share in dividends during the course of the period studied.

Base Materials Model

Security Symbol 5/19/2008 11/20/2008
Dow Chemical DOW $ 41.55 $ 17.02
Freeport McMoran FCX $ 124.83 $ 18.86
Alcoa AA $ 43.75 $ 7.87
US Steel X $ 180.22 $ 23.41
Monsanto MON $ 122.17 $ 65.26
Southern Copper PCU $ 37.52 $ 10.25
Air Products APD $ 22.57 $ 12.19
Newmont Mining NEM $ 49.06 $ 26.82
Kimberly Clark KMB $ 63.76 $ 53.58
Ultrashort Basic Mat. SMN $ 27.77 $ 121.35

 

This model contains basic materials producers including mining, chemical, paper, steel, and fertilizer/seed companies. The simple logic used to make the case for Base Materials over the past year has been that a growing world requires more and more resources. The idea of a US recession has been used to attack this rationale over the past 6 months in particular.

  • Of the 9 issues in this model, all 9 have experienced a loss over the period studied. The model is hedged with the Ultrashort Basic Materials ETF (SMN).
  • Unhedged, this model lost 65.68% ex-dividends, and 64.57% with dividends.
  • Hedged, this model lost 50.00% ex-dividends, and 48.94% with including dividends.
  • The model paid $7.57/share in dividends during the course of the period studied.

Conclusions and take-home ideas

It is imperative for investors to understand at this point the purchasing power of cash. We have been on the stump talking about purchasing power for the past two and a half years, but contrary to the normal trend, we are now seeing Dollars become more valuable in terms of stocks, housing, and many consumer goods. Even the most durable of the three themes presented in this article has lost more than 12% just in the past 6 months. While there have been brief rally periods combined with much volatility, the overall trend has been down. And looking at the fundamentals, there are more reasons stacked on the side of further decline right now than reasons arguing for an increase.

However it must be noted that perhaps the biggest ‘fundamental' arguing for increases in equity markets is the trillions of Dollars in new money and credit which has been pumped into financial institutions over the past few months. For whatever reason, that money has largely stayed on the sidelines for the meantime. It is our firm belief, however, that this will change, and when it does we'll have ourselves another epic paradigm shift, and cash will once again become trash. Identifying the inflection point will be the key. Stay tuned.

By Andy Sutton
http://www.my2centsonline.com

Andy Sutton holds a MBA with Honors in Economics from Moravian College and is a member of Omicron Delta Epsilon International Honor Society in Economics. His firm, Sutton & Associates, LLC currently provides financial planning services to a growing book of clients using a conservative approach aimed at accumulating high quality, income producing assets while providing protection against a falling dollar. For more information visit www.suttonfinance.net

Andy Sutton Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules