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-Now What?
By Neil George
10-11-2008
Chaos: That pretty much sums up the thinking on global markets. The
follow-up is: Get me out of everything. Sell it; I don’t care what it
is, or what the price is. Just get me out.
One market opens and folks sell, and keep selling into the close. The
next market opens and picks up with the selling. As the world turns,
market after market keeps selling.
It doesn’t seem to matter what anything is. Stocks, bonds, funds,
commodities: Nobody cares to take a moment to think about anything other
than going to cash.
It even applies to bank certificates of deposit (CD). I was chatting
with an old pal and business partner the other day, and he was telling
me that folks at his bank are so paranoid that they’re even breaking
Federal Deposit Insurance Corp (FDIC)-insured CDs, paying fees and
penalties, only to turn around and put the same cash into money market
accounts at the same bank. That’s how chaotic things have gotten.
But at least the FDIC is now insuring deposit accounts up to $250,000,
and soon it might be authorized to extend coverage to every dollar
without limit. The way things appear to be going, the next move might be
for folks to take all their cash home.
Perhaps as a precursor to the next move, the US Treasury and the Bureau
of Printing and Engraving ought to get the presses fired up to make sure
we can have our cash in actual bills. Maybe we can get the bigger
denominations, like the old days. Imagine $1,000, $10,000 or even
$100,000 bills. The wheelbarrows wouldn’t be as burdensome as we lug our
cash home.
(By the way, if you’re wondering who’s on the $100,000 bill, it’s
Woodrow Wilson.)
This takes me back some years, to a time when many newsletter editors
were pushing coins. They’d say the end is near, and that you’d better
load up on bullion—or, because the government was thought to be of a
mind to confiscate gold, semi-numismatic coins, which are considered
collectibles. And unlike heavy collector coins, semi-numismatics would
be more easily used as currency.
Back then my response was, How are you going to get change for a loaf of
bread with gold coins? Perhaps we’ll end up going to the whole pieces of
eight, breaking up coins or even just trading gold dust.
What made sense back in the day was to load up on canned goods,
freeze-dried food and ammunition, and then head to your newly acquired
bunker and wait it all out. There were and still are financial gurus who
pitch this as an actual money-management strategy.
All that aside, we need to get a handle on where the bottom is, when
will it show up and what to do between now and then.
You’re not going to panic. You’re not going to make snap decisions
you’ll come to regret. You’re going to look at this rationally.
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My approach continues to be what it always has been. And I’ve used it
through several market selloffs and meltdowns.
This gut-wrenching selloff is bigger and more sustained than anything
I’ve gone through in the past. I typically work through individual
country’s meltdowns, such as Iceland or Hungary of late, or even
regional issues, such as the Asian Crisis of 1995 through 1998. This
time it’s global. However, the results are the same, but on a larger,
scarier level.
There are two things to think about during the downturn. First, such a
turn will provide some spectacular buying opportunities. Buying probably
isn’t at the front of your mind right now; you’re probably focused on
doing what you need to do to keep your portfolio from dissolving.
But consider what I have in mind. The collapses of the past pretty much
are following the same roadmap we’re seeing now. Generally speaking,
what happens is either the government or the private sector ramps up too
much credit and is now leveraged to the moon. The market begins to
question the debt and begins to limit access to credit. Cash starts
leaving, sending the currency down, and the stock markets tank. Bonds
also go south. And this is where it gets ugly.
But the turn comes as the government realizes that policy led to either
a lack of control over leverage or improperly encourages overleverage.
And then the reformation starts, as the private sector, usually from
abroad, begins to come in to grab assets.
The first to be grabbed are real estate and government bonds. The
bulletproof stuff is the first to turn. Then, as bond prices begin to
rebound, yields and interest rates fall, and then the stock market
begins to look more interesting, with lower costs of funding for
business and consumers.
I’ve experienced this countless times in the past while nations went
through reckonings in the 1980s and, especially, in the ’90s. And now
it’s time to do it again.
If you’re looking for bargain buys, start with the bond market; focus on
the corporate side rather than US Treasuries. This is where there’s a
ton of undervalued assets that will pay you well in the years to come.
To get a handle on the bonds I’m talking about, check out the Cash Cows
in the Personal Finance Growth Portfolio. Focus on those listed as
mini-bonds as well as my favorite closed-end funds.
They’ve been slammed in a very erratic fashion lately, which is exactly
why they’re such good deals for the turn. But we’re getting ahead of
ourselves.
We’re not going to try to cash in on the rebound; we’re focused on what
will get us through the current mess. And that comes down to my four
rules of investment.
First, look at stocks that satisfy the tried and true mantra, “pay me.”
Dividends that keep coming will buy a lot of time between now and the
turn. The stock prices might fall, but if the companies behind the
stocks keep paying it’s worth hanging with them through the mess.
Second, just because a stock is paying a dividend now doesn’t mean it
will keep paying. We need to make sure the operation behind the dividend
payer is sustainable. Focus on businesses that are less growth dependent
but are essential: utilities, energy and other key industries. Look at
how they’ve fared during recessions, such as the one at the beginning of
the current decade as well as the one of the early ’90s.
Third, just because the company behind the dividend-paying stock is in a
sustainable business and market doesn’t mean it will be able to sustain
its finances. To make it through, companies need to have ample cash on
hand to match up with current liabilities. You can measure that by
current and quick ratios, which simply divide cash and/or cash and
short-term assets by short-term liabilities. The closer to 1 or higher
the ratio is the better.
Then look at when debt--either bank loans or bonds--have to be rolled
over. The further out the better it will be. And if something is coming
due, make sure management has a plan in place to roll it over.
Such has been the case with plenty of my favorites, including petrol
producer Linn Energy (NSDQ: LINE). The partnership is in a sustainable
business and generates tons of cash. Its debt rollovers have been
planned out, with the company actually having excess capital that it’s
deploying via share buybacks. I’d prefer a bigger dividend, but the
partnership has sufficient financial and business sustainability that it
doesn’t have to hoard cash but can reinvest it.
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Fourth, you need to get a handle on market risk for each of your
holdings. Just because it pays well and is sustainable business-wise and
financially doesn’t mean you can handle the volatility of the market.
Only own as much as you can handle; don’t get yourself in a situation
where you become so wired up that you can’t leave your computer or TV
screen for want of more financial news.
You’ll get through this. A lot of cash and capital are being pumped into
the markets, with much more on the way. This doesn’t mean stock prices
won’t get worse in the near term. But it does mean that, for quality and
sustainable stocks and bonds that pay you, you can be patient and ride
this out.
And leave the canned goods for others.
Now What? How About This…
Sometimes staying too close to a problem keeps you from seeing the
bigger picture. And that view is necessary in order to make the right
decisions. The economy won’t whither away, nor will the stock market.
How about setting aside some time to step back to gain a bit of
perspective? Join Elliott Gue, Roger Conrad, Gregg Early and me on a
cruise through warm waters from Miami, on to island stops including St.
Barthelemy, through the Panama Canal and finally to Costa Rica.
Click here for details.
Dead Guys of the Week
Many a baseball player is asking the question, Now what? After all,
generations of ballplayers, from the 1940s on up, learned the game from
George Kissell, who’s dead at 88 years.
If you happen to reside around the St. Louis area or have followed the
Cardinals over the years via the long reach of KMOX radio, George is a
familiar name. And for others, George was the coach they wish they had
back in Little League. Although he never made it to The Big Show, he
empowered countless prospects to get and stay there.
While George might have been great at breaking down the basics of
baseball, another George, George Palade, who’s dead at 95 years, was
working on breaking down not just ballplayers but the rest of us--cell
by cell.
His work in cell biology netted him one of those Nobel Prizes they’ve
been handing out this past week. George Palade earned his in medicine
back in ’74.
Speaking Engagements
Fall is the perfect time to enjoy Washington, DC’s outdoor treasures and
catch a glimpse of nature’s splendor. And this year you can enjoy the
immediate aftermath of the presidential election in the seat of the
federal government.
Join Roger Conrad, Elliott Gue and me for the DC Money Show Nov. 6-8,
2008, at The Wardman Park Marriott.
Click here or call 800-970-4355 and refer to priority code 011363 to
register as my guest.
I’ll also be appearing at the following events:
North Bay Investors Forum, Santa Rosa, Calif., Oct. 11, 2008
The World Money Show, London, England, November 2008
The 2008 KCI Investing Cruise, Dec. 1-12, 2008
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