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Stock Market Investing Too Late to Buy, Too Early to Sell

Stock-Markets / Investing 2010 Dec 09, 2009 - 01:03 PM GMT

By: Q1_Publishing

Stock-Markets

Best Financial Markets Analysis ArticleIt can be a frustrating time for investors.  Stocks have had a great run, but the rally is cooling. The run in real assets – gold, oil, and other commodities – is taking a much anticipated breather.

Corporate and government bonds are, at best, fully valued. At worst, they’re significantly overvalued.


But a new trend is starting to form. One that’s being created out of necessity. One which, at first glance, doesn’t sound remotely exciting, but it should be well worth taking a look at now.

Investing Win/Win: Safety and Upside

You see, investors and savers have a big problem right now. There is no place they can earn a decent return, safely. Yields are pathetically low almost everywhere – stocks, bonds, savings accounts.

But investors and savers are forced to wait it all out. They don’t want to buy more stocks now at this level. They don’t want to put too much of their savings in volatile assets like gold and silver. So they just take what they can get elsewhere.

For example, the average money market yield is a paltry 1.02%. Yet there are $3.319 trillion sitting on the sidelines in money market funds according to the Investment Company Institute.

The problem with such low rates is that inflation is slowly destroying the value of savings. The Fed expects inflation, as tracked by the U.S. government’s CPI, to be 2.2% next year. According to Shadowstats, which tracks inflation based on the formula used in the 1990s, inflation is 7% per year.

It’s a tough spot to be in, there’s no doubt about it. But that’s why I expect a renewed interest in dividends.

That’s right, at the Prosperity Dispatch, we believe “boring” dividends are about to make a major comeback. And a few left-for-dead sectors (revealed below) are going to emerge as market leaders. Here’s why.

History is on Your Side

We’ve all heard the arguments for sticking to dividend paying stocks. They provide regular cash flow, act as a buffer against market declines, and pay off well over the long run of 20 or 50 years.

Right now though, there’s actually much more to the reason dividends are going to come back into favor.

First, there are so few other options to earn a decent return, safely. As mentioned above, bonds and money market funds aren’t even keeping up with inflation. Investors will be forced to turn to other sources of stable, above-inflation yields.

Buying high-yielding stocks will become an act of necessity.

Second, dividend stocks are the best places to be during tough markets.

Let’s face it, we are in a secular bear market for stocks. There have been short-term cyclical ups and downs over the past decade (and there will continue to be), but steady declines in P/E ratios signal the bear market is real. And economic growth of 1% to 2% over the next few years will feed the secular bear. That’s where dividends do best though.

For example, between 1929 and 1954 stocks went nowhere. It took 25 years for the Dow to recover from its 1929 peaks. Over the same time period, however, an investor who reinvested their dividends would have earned a 331% total return.

For 25 years, the markets went nowhere, but thanks to dividends a $10,000 investment would have been worth $43,100 at the end of a 25-year bear market.

Of course, that was a long, long time ago. But the dividend-focused strategy still works today. During the 10 years between March 2000 and March 2009, the S&P 500 fell 37.4%. Meanwhile, the Dow Jones Dividend Index rose 34%.

If history is any indication, dividends are a great place to be right now. And considering the slow-growth economic malaise in the year ahead, dividends will become even more desirable in the future. That’s why now is the time to go after the large, safe yields in the market.

Good Things Come to Those who “Weight”

Our often-reproduced research of historical asset bubbles reveals a solid way to predict large sweeping market trends.

In fact, one of our most reliable bubble indicators can be used to predict the best places to look for dividend payers now. Here’s how.
In the past, the best bubble indicator is when a single sector accounts for an outsized portion of the entire S&P 500.

It happens time and time again throughout the market’s boom and bust cycles. For example, the technology sector accounted for 29.2% of the S&P 500 market value at the height of the dot-com bubble in 1999. The energy sector accounted for 25% of the S&P 500 market value in 1980. The financial sector peaked at 22.3% in 2006, a few months before subprime debt began to weigh down the entire sector.

Clearly, when a specific sector accounts for an excessively large part of the S&P 500 (a clear signal most investors are putting their money in the same spot) a collapse isn’t too far away.

This is why I like the two S&P 500 sectors which are farthest away from bubble territory.

The chart below shows the relatively small valuations for the telecom services sector, like Verizon and AT&T, and the utility sector:

According to sector weight analysis, telecoms and utilities are two of the most underappreciated sectors in the markets.

Of course, these two sectors will likely never become the true 20%+ bubble leaders. After all, they are utilities and telecoms. But they are historically undervalued relative to their past portion of the S&P 500.

For instance, the utilities sector currently accounts for 3.7% of the index. That’s 40% below what the sector accounted for at its 20-year peak of 6.2%. Also, the telecom sector currently accounts for 3.17% of the index. That’s less than half of its 20-year peak of 7.2%.

Basically, that means there’s a lot less downside and a lot more upside for these sectors.

The proof of value doesn’t stop there. The dividend yields also signal telecoms and utilities are the cheapest sectors in the S&P 500. The index as a whole is expected to yield 2.0% this year. Meanwhile, telecoms and utilities are expected to pay out 6% and 4.64% this year, respectively.

If high yields are a sign of depressed prices and lack of investor interest, telecoms and utilities, as the two highest yielding S&P 500 sectors, are certainly out of favor.

The Good Side of Government

Finally, there’s one final factor to consider in investing moving forward – government.
While the government tries to reach its tentacles deeper into the technology, financials, and healthcare sectors, it’s tough to imagine it being possible to regulate telecoms and utilities more than they already are.

Also, the telecoms and utilities are politically favored industries. The government has shown little hesitation to go directly after the coffers of oil companies, banks, and health insurance companies with a slew of new or increased taxes.

When it comes to utilities and telecoms though, the government is handing them more cash than ever. Just look at the recent stimulus package. Most of the green energy projects are being put together by the major utilities. And government is gladly putting up the cash for the “Smart Grid.” Telecoms are getting a big cut too. The billions of dollars set aside for expanding the broadband access is getting funneled through the major telecom companies.

We may not like the government reaching deeper and deeper into the private sector. GDP growth will likely suffer from it. But it is something you have to take into consideration when making investments now. And utilities and telecoms are well positioned to benefit from it all.

Getting Started Right

As you can see, these two out of favor sectors have a lot going for them.

They are beaten up, out of favor, and offering a lot of benefits to investors willing to take a contrarian look at them now.
So it may seem frustrating that the opportunities are fairly limited and there are relatively few low volatility places to park your “safe” money.

History shows, however, this is the best time in years to look to traditionally “boring” sectors to outpace the markets in the months and years ahead.

Good investing,

Andrew Mickey
Chief Investment Strategist, Q1 Publishing

Disclosure: Author currently holds a long position in Silvercorp Metals (SVM), physical silver, and no position in any of the other companies mentioned.

Q1 Publishing is committed to providing investors with well-researched, level-headed, no-nonsense, analysis and investment advice that will allow you to secure enduring wealth and independence.

© 2009 Copyright Q1 Publishing - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


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