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Investor's Corner NewsletterBy Will W. Woodard, III, CFP® "We have met the enemy… and he is us." Walt Kelly's Pogo Talking Points The financial markets have been fairly volatile since my last report. Professional investors seem to have gotten the message that corporate profit growth is slowing as the US economy slows, affected as it is by high energy costs and a Fed that has raised interest rates seven times over the last eighteen months. March durable goods orders reported earlier this week fell by the largest amount in two and a half years, and data from the Q1 2005 preliminary GDP report confirmed an economy that is growing, albeit at the slower pace of 3.1% year over year. I have spoken on these pages previously about the frequently counterintuitive nature of the market. This was again demonstrated when the weaker than expected data caused a bit of a rally-interpretation being that the soft data might cause the Fed to stop tightening sooner rather than later. So, to the matter at hand: How do we make money in this type of environment? Are there ways to give your portfolio an edge? Here are some talking points. -Slowing growth equals defensive posture. The Fed is not going to stop raising interest rates until it receives clear and unambiguous confirmation that inflation is in check in the US economy, inflation being a naturally occurring byproduct of high productivity and robust economic growth. So, like the killjoy chaperones at the junior high dance, the Fed is diligent about the economy not having too much fun. Greenspan and co. raise rates, and raise them, and raise them, until they're fairly certain no one at the economic party can get too out of control. The probable outcomes of the Fed's actions are as follows: Fed is successful and stops tightening in time, soft landing for the economy. Fed is successful and doesn't stop in time, recession (hence the Pogo quote). Fed is not successful, rampant inflation/stagflation. The Fed will do all in its power to avoid rampant inflation/stagflation (outcome #3) and (let me try to put this delicately) doesn't have much of a track record in generating soft landings (outcome #1), so it would seem to me that the correct course of action is to anticipate a recession (outcome #2) and CYA-cover your assets. Areas of the economy that tend to outperform in a "tightening Fed, slowing growth" scenario are defensive in nature. I remind myself by saying "Eat, drink, smoke, value". That translates to food, beverage, tobacco, drug companies, hospitals. There are other areas that can work as well--think things that no one will give up. How about women's makeup? How about beer or spirits companies, or maybe a defense contractor? All of the above could be good, just MAKE SURE that you buy best in breed if the valuation allows. -Show me the money! When the Fed is done tightening, most financial stocks become a good place to be invested. Financial stocks work in such a scenario because the spreads between what they pay for capital versus what they charge customers for use of that capital will increase after interest rates plateau. In general I like owning this sector because in most cases the financial statements are fairly straightforward, they are valued reasonably on a price to earnings (PE) and price to book (PTB) basis, and many pay a good dividend to boot. What's not to like? Again, try to own the best of breed if at all possible. - Income Investors-stay Liquid. Fixed-income investors should resist the temptation to chase yield by venturing too far out on the yield curve or toward lower quality credits. (After all, they aren't called junk bonds for nothing, right?) Higher interest rates in the future will cause existing debt to be repriced lower. Think high-quality corporate, some international to benefit from the US deficit, and maybe a North Carolina tax-free (now that has a nice ring to it, doesn't it?) municipal bond fund. -Where not to be: Note that there are going to be exceptions to every rule and that every once in a while a company does such a good job that it warrants owning even at the "wrong time" in the economic cycle, but IN GENERAL it's wise to minimize exposure to: Technology, natural resources, (ie gold, copper) smokestack companies, (ie chemicals, steel, autos) any company that is not profitable, and any company with a high PE ratio. Portfolio Update-The model portfolios that I track on an ongoing basis performed as follows from inception date of 1/15/03 through 4/30/05. (Note: all data includes reinvested dividends and, if applicable, capital gains)
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Worthwhile links: CERTIFIED FINANCIAL PLANNER™ Board of Standards - http://www.cfp.net/default.asp NAPFA, the National Association of Personal Financial Advisors - http://www.napfa.org/ The Financial Planning Association - http://www.fpanet.org/public The FPA's Hampton Roads chapter - http://www.fpahamptonroads.com/ Dare Capital Management & Advisory home page - http://www.darecapital.com/ How 'bout those Tarheels! Will W. Woodard, III, CFP® is president of Dare Capital Management & Advisory, a Registered Investment Advisor and fee-only financial planning firm with offices at 2518 S. Croatan Hwy, Suite E, Nags Head, NC 27959. Dare Capital Management & Advisory offers ongoing investment management services and fee-only financial planning. Mr. Woodard, his firm, or his clients may own the investments mentioned herein. Contact Will at (252) 480-0156 or learn more about the firm at Will@darecapital.com The fine print: This newsletter can be reprinted or forwarded--however, it is requested that reprints of any material in this newsletter include credit to Dare Capital Management and Advisory (252)480-0156 and an email link to will@darecapital.com. Thanks for spreading the word! All of the foregoing is commentary for informational purposes only. All statements and expressions are the opinion of Will W. Woodard, III and Dare Capital Management and Advisory, and are not meant to be a solicitation or recommendation to buy, sell, or hold securities. Mr. Woodard, his firm, or his clients may own the investments discussed in this newsletter. Past performance is no guarantee of future returns. The information presented herein and the company's web site has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. Estimates, assumptions and other forward-looking information are subject to the limits of forecasting. Actual future results may vary for many reasons. Copyright 2004 Dare Capital Management and Advisory-all rights reserved. |
