Invest or Die Poor

Do I have your attention? Good. This is serious stuff. If you are like the vast majority of Americans, you are primarily responsible for your own financial future. And the deck is stacked against you. In the old days, before the 1990’s or so, it used to be that you got a job, worked there for 20 or 30 or 40 years, retired at 60 or 65 with a nice pension, then lived your remaining lives playing golf, tending your garden or doting on your grandchildren. Unfortunately for you, the rules have changed and you must change with the times, before it’s too late.

Today, you must save and invest for yourself, and basically by yourself. Your investing options include a 401k (or 403b or a 457), various IRA’s (traditional, rollover, beneficiary Roth, SEP, SIMPLE) and basic taxable accounts. Within these basic frameworks you can invest in individual stocks and bonds, REITs, MLPs, mutual funds and ETFs, options, etc. The key word in all of that is “invest”.

Unfortunately, traditional avenues for “saving”, like bank deposits and certificates of savings (CDs), are no longer viable options for building, or even protecting, your wealth. With interest rates at or near zero, and inflation around 2%, you actually lose money (after taxes and inflation) by putting your money in the bank. To put that in some perspective, if you put $100,000 in the bank in an account that earns 0.10% (which is generous), you would earn a paltry $100 per year. Assuming you pay about 30% in taxes, that leaves you with a meager $70, or about enough money to pay for one tank of gas.

Even bonds (in this case I mean high quality government or corporate bonds), a staple of many investment plans, offer far too little yield today to compensate you for taking enormous interest rate risk. Sometime in the next 12 months or so rates will likely begin to increase, at which point bond investors will start to lose money on their current holdings. High yield, or junk bonds, do offer slightly better yields, but the easy money has already been made there. The spread between treasuries and high yield is far to small today to warrant new investments in high yield.

So what are your options? What can you do to generate a decent return on 30 or 40 years of saving and investing, that will outpace inflation, and create sufficient wealth to live out your days without running out of money? You MUST invest in the stock market in some way. Whether it be through individual stocks or via mutual funds and ETFs, stocks give you the only viable way, TODAY, to achieve a viable financial future.

I recommend putting your money in high quality, dividend-paying equities that have a history of paying those dividends, in increasing amounts, year after year. Properly selected, a portfolio of stocks like Verizon (VZ), ExxonMobil (XOM), Lockheed Martin (LMT), Pfizer (PFE), Emerson Electric (EMR), Union Pacific (UNP), Medtronics (MDT) and JP Morgan (JPM) just to name a few, will very likely grow much faster than inflation, or any other liquid investment option. (*Disclosure: I own every one of those stocks in my own accounts and for clients).

To summarize, I believe that we must all take responsibility for our own financial futures. In doing so, we must also recognize that times and conditions change. The current conditions dictate that we have to invest the vast majority of our savings in order to have any reasonable hopes of achieving a secure retirement. Looked at over a 5, 10, 15, 20 or 25 year time horizon, this type of investment plan isn’t as risky as you might think, and it offers the only reasonable way to earn enough money to fund your retirement. So if you aren’t already investing your retirement money, you better get started before it’s too late.

Don’t Panic

As of the close of business yesterday, the Dow Jones Industrial Average was down 1,136 points, or 6.8%, since the end of 2013. The venerable average was down 5.3% in January, which lead many seers to warn that the market would therefore be down for the full year. I’m here to disagree with that sentiment. I believe that this is simply a long overdue correction in a bull market that began in March 2009 and remains in place today.

Quite simply, the fundamentals underpinning this bull market remain in place. Corporate balance sheets remain pristine and profits continue to grow. The Federal Reserve remains committed to keeping interest rates artificially low and will inject liquidity into the system at the first sign of danger. Congress has already passed a budget deal and is likely to approve an amendment to the debt ceiling without a protracted fight. And finally, the economy continues to grow, albeit at a somewhat modest pace. All of this suggests that the stock market should again move higher.

Keep in mind that there are relatively few alternatives to an intelligently constructed stock portfolio when it comes to saving for your future. Interest rates at the bank are actually negative when viewed after taxes and inflation. Government debt is not much better. Corporate debt generally has positive yields, but you’d have to extend the maturities too far into the future to reap any reasonable yields, and in doing so you would incur significant interest rate risk. On the other hand, there are many solid, blue-chip stocks that pay annual dividends of 3% or better and are increasing those payments at rates far better than inflation. Good examples include Pfizer (PFE), Verizon (VZ), Proctor and Gamble (PG) and Chevron (CVX). [Disclosure: All four stocks are among the Top 25 positions held by Werlinich Asset Management] And while you enjoy those dividends, you also have the possibility of long-term capital growth.

For example, defense giant Lockheed Martin (LMT) pays a dividend that yields 3.5% at the current price. And the stock has tripled over the past ten years, which represents an average annual growth of about 12% per year for the past decade. While there is no guarantee the stock will continue that rate of growth for the next ten years, if it only grows at half that rate, the stock could double over the next decade, not including the dividend payments. What bond can give you the same growth potential? [Disclosure: LMT is the 3rd largest position held by Werlinich Asset Management.]

When looked at through a longer term prism, an intelligently managed stock market portfolio remains the best option available in order to save and invest for long-term growth and future financial security. 

QE3

About 30 minutes ago Fed Chairman Ben Bernanke, as expected, announced another round of quantitative easing (QE3) in a futile attempt to stimulate our moribund economy. This is simply throwing good money ($40 billion per month) after bad. In addition to the aforementioned bond buying program he guaranteed that rates will remain exceptionally low until at least 2015. While this is great for borrowers, it is punitive for the elderly and those living on fixed incomes. Worse, it will likely have little or no affect on the economy in the short run and will undoubtedly add to the growing fiscal crisis that we’re facing. The government, and by extention the Fed, should cease in it’s fruitless efforts to contravene market forces and allow the economy and the stock market to ebb and flow according to their normal market cycles. While the stock market liked the move today, which is good for me and my clients, especially those of us holding gold, I worry about the long term consequences.

Revisiting My 2012 Fearless Forecasts

These were the predictions that I made in the January 19 edition of my monthly newsletter, “News and Views”. All in all, they aren’t too bad after seven months. And you’ll notice that I predicted the Giants would beat the Patriots in the Super Bowl. Got that one dead right.

  1. I think the broad markets will be up in 2012. Put me down for a 10% gain for the Dow Jones Industrial Average, which will finish the year around 13,440. As usual, it won’t be a straight line to get there; there will likely be three or four corrections of at least 5% and up to as much as 15%. But investors who hold tight will be rewarded.
  2. Clearly the Fed will leave short term rates unchanged for the entire year; they’ve already declared as much. I also believe that there will be no new “quantitative easing” plans as the economy improves organically. I think the yield on the 10-year Treasury will stay in a range of 1.75% – 2.50% and the 30-year bond will hold at roughly 1.00% higher than the 10-year. Short rates will likely continue to hover around zero.
  3. Forecasting the direction of the dollar is tough because as bad as things here have been, economies around the world are much worse. So much depends on what happens in the ECU and what happens domestically as our elected officials debate tax policy. Therefore I’m going to forecast, like last year, that the dollar index will trade in a relatively narrow range for most of the year at 75-85.  
  4. The price of West Texas Crude is no longer simply a factor of supply and demand. It also trades on the health of the global economy, sentiment and the relative value of the dollar. That being said, I think the price of WTIC will stay for much of the year between $90 – $110, with outer boundaries of $80 and $120, unless there is a strike on Iran, at which time oil prices could briefly spike to $150.  
  5. The price of gold has moved higher in each of the last 11 years and I’m confident it will do so again this year. My upside target is about $2,000 per ounce while the downside is about $1,450. The primary trading range will probably be something like $1,600 – $1,850. I think the price of silver could test $50 per ounce again while it’s downside is probably around $26.  
  6. The housing market will continue to suffer in 2012. Average prices will remain depressed thanks to foreclosures and short sales. Even historically low rates won’t move this market as only consumes with pristine credit looking to buy conforming homes will be offered mortgages. The jumbo market remains effectively closed.  
  7. I think the average rate of GDP growth over the next four quarters will be around 2.5%, which is better than 2011.  
  8. Jobs will continue to be one the most important domestic stories of the year. The unemployment rate will likely top out around 8.7% to 10.2% before falling, at best, to around 9% by the end of the year. 9.5% might be the best we get. The U-6 measure for unemployment, a more accurate gauge of the true unemployment situation, will likely remain in the 16%-17% range.  
  9. I believe President Obama will defeat Mitt Romney in a relatively close election as a divided GOP is unable to coalesce behind Romney. The Tea Party is marginalized and the Senate remains in Republican control. Fiscal austerity, job creation and tax policy are the main debate points. The electorate forces Obama away from class warfare and back to the middle (ok, that’s my wishful thinking).  
  10. There will be a military strike on Iran by some nation. There will be more unrest in Russia as the population rises against Putin. There will be more violent weather this year, continuing the carnage from 2011. Europe will continue to push their fiscal problems into the future, offering palliative band aid solutions rather than applying the tourniquet. And the Giants will surprise everyone and beat the Patriots again in the Super Bowl (ok, more wishful thinking).