Thesis: Negative short-term outlook as several factors outweigh an inexpensive stock market according to historical averages. Sovereign-debt risk aversion (non-U.S.), specifically Greece, is weighing down the euro’s value. U.S. domestic stimulus, both monetary and fiscal, appear stretched. The U.S. housing market remains weak as suddenly low prices, government tax-incentives and historically low mortgage rates have been fully taken advantage of by home-buyers and investors. Such stimuli raised domestic home prices modestly from Q1 2010 to Q2 2010, however any further decrease in home prices threaten the U.S. economic recovery.
Inflation is not a valid threat at this time even as the government printing presses continue to increase the domestic money supply at alarming rates. With the financial sector still in arrears after the 2008-2009 credit-crisis, credit-lending has been limited. This constraint keeps prices at bay.
Gold has been rising in 2010 as investors seek a “safe-haven” due to fears of money-supply growth leading to inflation, stock-market risk and volatility, currency risk, sub-par cash yields, financial market volatility, an increase in domestic and international sovereign-debt risk and the risk of war in North Korea and Iran.
Market volatility has left investors burned while the low-rates of return on cash are punishing savers. Investors and savers continue to lean towards gold as a strategic store-of-value and hedge against financial risk.
With this being said, investors and savers can diversify their holdings to include gold and gold-related companies such as gold-producers (miners). The most efficient way to own gold is through the SPDR Gold Shares fund (GLD). This fund is traded daily on the NYSE with enough liquidity to be bought and sold quickly. The fund holds physical gold in a vault in London and thus helps the investor avoid high commissions, storage costs and the risk of theft.
Investors could diversify their gold holdings with gold-producer funds such as Market Vectors Gold Miners ETF (GDX), however keep in mind such funds may rise and fall more than the actual price of gold. Holding individual stocks of gold-mining companies is risky and should be avoided by investors not accustomed to such volatility.
Although the experts agree to disagree in the amount of gold that should be held in a diversified portfolio, a common rule is to hold no more than 20% in one particular asset or sector. For those leading strongly towards gold as an investment a portfolio allocation of 10% is recommended as a good entry-point. Each year the position can be added to or trimmed to maintain a 15-20% allocation.
Income-oriented investors should understand that gold investments will produce little or no income unless the investment position grows over time and gains are sold for income-generation purposes. Physical-gold, which GLD maintains, does not produce a dividend, while gold-producers and related funds rarely distribute dividends and if so they mostly pay below 1%.
With foreign-currency risk elevated with the euro’s precipitous decline, U.S. investors should keep their currency holdings simple: U.S. dollars only. Dollars can be put to work in money-market funds and laddered CD investments. With stock-market volatility a real-treat, money-market dollars can be used to purchase cheap assets during periods of low-asset valuation. While cash yields are historically low, investors must remember that maintaining aggressive cash-levels reduce risk and are increasingly important in today’s time. A recommended level of 25-60% cash is appropriate at this time.
While banks are hesitant to loan in this environment, corporations continue to borrow to finance profitability and roll-over debt. Municipal and state debt is risky on two fronts: aggregate debt is relatively high and most city and state budgets continue to pay out more than projected income. U.S. government debt is expensive due to the Federal Reserve purchases and “safe-haven” money flowing into the country due to the current calamities in Europe. In these times the risks of owning bonds are greater than the rewards and should be avoided.
For those seeking income the remaining 20-60% of the portfolio should be allocated into foreign and domestic stocks. Stable, brand-name, dividend-payers are recommended to produce income and reduce portfolio volatility. Such companies include Wal-Mart (WMT), Verizon (VZ) and Altria (MO). The following recommendations are expected to perform well over the long-term, increase dividend payouts over time and dominate their respective markets. Also, each company represents and industry that performs well in both the expansion and correction phases of the business cycle. These prices are from the early afternoon of July 1, 2010 with the S&P 500 at 1024.50 and the DJIA just above 9700.
Company/Fund Name | Symbol | Price | Dividend | Yield |
Verizon Communications Inc. | (VZ) | 27.85 | 1.90 | 6.82% |
Wal-Mart Stores Inc. | (WMT) | 48.25 | 1.21 | 2.51% |
Diageo PLC | (DEO) | 63.19 | 1.77 | 2.80% |
Statoil ASA | (STO) | 19.06 | 1.02 | 5.35% |
Altria Group Inc. | (MO) | 20.07 | 1.40 | 6.98% |
China Mobile Limited | (CHL) | 49.33 | 1.69 | 3.43% |
Vodafone Group Plc. | (VOD) | 21.02 | 0.86 | 4.09% |
Cardinal Health Inc. | (CAH) | 33.39 | 0.70 | 2.10% |
Disclosure: No positions
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