HELPING PHYSICIANS ATTAIN FINANCIAL SECURITY
By Robert M. Doroghazi, M.D., F.A.C.C.
I don’t know. But here is what I suggest you consider.
I believe the most important factor propping up the stock market, all assets, almost forcing the market higher, is the near out-of-control printing of paper money.
For the last 10 years, the primary force in our society and in the market has been deflation. To prop up the market after the Internet/dot.com bust of 2000, the “Maestro” (Alan Greenspan) just printed money. The result was the real estate bubble. The bursting of that credit bubble in 2006/7 unleashed the greatest tsunami of deflation since the Great Depression. Mr. Bernanke and the Federal Reserve have said they will print whatever is required to prevent a deflationary spiral. The result is the trashing of the US dollar.
There are three things to keep in mind. First, the current market represents poor values. Most important is the dividend yield. It takes a company making real money to pay a cash dividend. Throughout the 20th century, the dividend yield of the DJIA and the S&P 500 was about 4.5%. When inflation is factored out, dividends represented 62% of the wealth generated by US corporations in the last century. The current dividend yield of the S&P 500 is about 1.9% (less than half the historical average).
As I have repeatedly emphasized, I believe we are in a bear market in financial assets and a bull market in hard assets that began in 2000 and probably has another 5 to 8 years to run. I think the stock market rally of the last two years is a cyclical rally, admittedly a very powerful one, in an ongoing bear market, powered by the printing of paper money (vida supra, means see above). The bear market will end when the dividend yield has returned to historical levels (more on the importance of dividends in a later letter).
Lastly, no matter what the nominal (number) value of the stock market, stocks will continue to lose value in comparison to gold. In 1999, it took 43 ounces of gold to buy the DJIA. Now it takes only about 8.4 ounces; in little more than a decade, the DJIA has lost 80% of its value in comparison to gold. When this bull market in hard assets and bear market in financial assets is over, it will take only 1 to 2 ounces of gold to buy the DJIA. Plug in whatever number you want for the Dow to see where gold will end.
Several subscribers have told me they are just plain sick and tired of hearing about gold. If you are a buy-and-hold stock market guy (you have now suffered through 11 years of dead money), and simply refuse to buy the precious metals, I suggest you overweight natural resource stocks, with energy at the top of the list.
Oil is by far the most important commodity. It has the heaviest weighting in all commodity indices. You must have energy to heat your home, drive your car, plant and harvest crops, make plastic and all sorts of other products, and mine minerals. Everything requires energy.
There is a general correlation between gold and oil; both have a value, both require an effort to produce. Since WW II, it has taken an average of 15-16 barrels of oil to buy one ounce of gold (currently about 13 barrels). Note the range has been wide; from as low as 8 barrels (oil is expensive, gold is cheap) to as high as 30 (gold is expensive).
Not surprisingly, as the precious metals have gone up, so have oil and the energy stocks. Many have recently made new highs. XLE provides broad exposure to the biggest stocks in the oil industry (Exxon-Mobil XOM, Chevron (CVX), Schlumberger (SLB) and Conoco-Phillips COP, are the largest holdings).
I believe that the oil service companies will continue to out-perform the major oil companies. OIH is an ETF for the largest oil service companies, and it has been very strong. The oil companies must continue to explore to replenish their reserves.
The coal companies, such as Peabody (BTU) deserve a look. The uranium industry, lead by Cameco (CCJ), was doing well until the Japanese earthquake. Consider agriculture-related stocks, such as the fertilizers (POT and MOS), the equipment makers (DE), the processors (BG), and the ETF MOO (which provides broad exposure to the sector).
The largest non-precious metal miners are BHP Billiton (BHP), Rio Tinto (RIO), and Vale (VALE). China seems to have almost an insatiable demand for copper. The largest copper miners are Freeport-McMoran (FCX) and Southern Copper (SCCO). An interesting play is Molycorp (MCP), one of the few rare-earth miners outside of China.
Note that most of the stocks mentioned in the last few paragraphs pay dividends, some of them quire handsome.
Be aware of the potential problems with using stocks as a “surrogate”, rather than investing in the commodity directly. First, because they are stocks, they are affected by the broad market. If the market goes down, they can go down. Secondly, these companies have input costs such as labor and energy. What they produce may go up; their profits may or may not.
Lastly, politics can never be overlooked. The big oil companies have previously been slapped with a “windfall-profits” tax. The companies noted there were rough years when profits were down, but our lawmakers weren’t impressed one bit with that (seemingly logical) argument. Coeur D’Alene (CDE) and Pan American Silver (PAAS, see chart p. 4) were really spanked last week when the (leftist) Bolivian government announced they were changing the rules. Try to stick to companies in politically-stable areas; that respect private property, such as North America, Europe and Australia.
If you would like more perspective on this subject, I suggest Investing in Resources: How to Profit from the Outsized Potential and Avoid the Risks (Day, John Wiley &Sons).
The US dollar continues to lose value, to lose purchasing power (see discussion below, and chart, p. 5). If you refuse to invest in the precious metals, then at least consider trading your depreciating dollars for other “things”, such as the stocks of the companies that produce “things”.
RMD
Suze Orman, on CNBC last week, said:
“Just because you can afford something doesn’t mean you should buy it”.
RMD comment: I like that girl. I again recommend her book The Road to Wealth (Riverhead Books) be a core of your investment library.
Headline of the WSJ, 4/12/11. “Fed Plays Down Inflation: Speeches Signal US to Keep Credit Cheap as Others Tighten”.
RMD comment: I had my first $60 gas fill-up last week. I don’t know what they are eating or driving at the Fed.
Moreover, the Fed has a stated policy that 2% inflation per year is desirable. I think this is obscene. 1) A 1-year CD pays less than 2% interest. Then you pay taxes on the interest. The system is rigged for you to lose purchasing power (and push everyone into a higher tax bracket). 2) With two percent inflation per year for 20 years, your money has lost half of its purchasing power. There is no incentive to save. 3) If 2% is desirable, then a little more probably wouldn’t be that bad, right?
Inflation is the government’s way to steal your wealth; it is a cruel, insidious tax.
This is from a subscriber, a retired English Professor and Past-President of the Rhetorical Society of America, in response to my comments on when one should use good or well.
“The sense verbs; feel, look, taste, sound and smell are followed by predicate adjectives since they modify the subject, not the verb.
I feel good. It tastes good. He looks good.
Since many people say “I feel well”, most dictionaries have adapted and list an alterative use of “well” as an adjective meaning “in good health”. Dictionaries represent usage, not correctness. Notice how peculiar it sounds to say “it smells well” or “it tastes well”. WH, MO
RMD comment: I made a stupid mistake that I caution against all the time: I ‘thought” I knew what I was talking about on a subject outside of my area of expertise. Investing lesson: Invest in what you know.
I hear students taking courses such as yearbook and culinary arts. Do they still teach rhetoric?
Good friend Dr. Jerry Murrell grew up in the 40s and 50s in Tyler, TX. One of the internists in town contracted bulbar polio. During the 20+ years he spent in an iron lung, he supported his family, including sending all of his children through college, by both hospitals and all of the internists allowing him to read their EKGs. “Bob, could you imagine the hospitals and physicians of today showing such collegiality”?
RMD comment: No.
I recently mentioned there are beavers living in our lake in New Franklin. Last week, while (again) cleaning the drainage pipe of the twigs, branches, sticks, logs, cattails, brush, mud and muck, I found—an empty Bud Light can.
RMD comment: This is like a 50s sci-fi movie. These beavers are even nastier than I thought.
Forbes, 4/25/11. “Up in Smoke: If you Own Tobacco Bonds, Antismoking Campaigns and Money-grubbing by the States Could Harm Your Financial Health”.
RMD comment: The article is far too complex to summarize. If you own Tobacco Bonds; check into them. If you don’t know what they are, make sure not to buy them.
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