The Great Search for Yield

by Addison Wiggin & Ian Mathias

  • Eric Fry, Jim Nelson on why a certain sector should be on your watch list

  • Plus, Dan Amoss offers advice as to when stocks might be worth buying

  • Two dismal data points: U.S. birth rate hits record low while youth unemployment soars to record high

  • Chris Mayer and 5 Min. readers deliver harsh truth… what could be the beginning of the end for investing in Brazil

  By now, everyone and their mother knows the U.S. stock market is a losing bet. The big indexes went nowhere over the last decade, absolutely plummeted in the last few years and now even the 2009 snap-back rally is officially kaput.

Thus, a logical question to begin today’s 5: Is it time to start buying stocks again?

Dividends in the S&P 500 now yield 2.11%, a mere 50 basis points from the 10-year Treasury note’s dismal 2.6% coupon. In other words, the S&P’s yield is 78% of the 10-year’s.

The historic average, says research out his week form brokerage firm Brockhouse Cooper, is 42%. There have been just 50 occasions since 1973 when this ratio was greater than one standard deviation from that average, as it is now. After each of those instances, the S&P 500 returned an average 12% over the next year.

And that’s not including dividends.

  “Many investors did not buy stocks in 1980,” Eric Fry remembers another lousy year for the market, “even though they were selling for seven times earnings, because long-term Treasury bonds were yielding 15%.

“Stocks were statistically cheap. No doubt about it. But to justify taking the risk of buying stocks in 1980, an investor would have had to anticipate annualized returns above 15%. To many investors, that hurdle seemed too high to try to clear. When risk-free Treasuries provided a 15% return, buying stocks — even very cheap stocks — seemed not just imprudent, but ridiculous.

“By contrast, the statistically not-cheap equities of today face negligible competition from most other asset classes. Short-term Treasury securities yield next to nothing, while long-term Treasury securities yield only slightly more than nothing.

“Furthermore, we would remind our dear readers, equities represent interests in enterprises that produce capital, rather than obligations from a government that absorbs capital. Therefore, as James Grant argues in a recent issue of Grant’s Interest Rate Observer, many U.S. blue chip stocks may be cheap enough… at least relative to Treasuries.”

  “In today’s stock market, dividend payers offer the closest thing to security,” our income analyst Jim Nelson declares, “but not every dividend is created equally.

“If you had bought one share in every dividend-paying company in the S&P in January 2009, you’d have expected to receive about $28.39 in total dividend payments, because that's what you'd have received just one year earlier. But by Dec. 31, 2009, you would have actually received only $22.41. The drop comes from 78 different dividend cuts or suspensions in the S&P 500 during 2009. To put that in perspective, there were only 12 total cuts in 2007.

“You can see that during 2009, the rate of dividend decreases skyrocketed. By the end of the year, most of the companies that planned on cutting already did. So the number of decreases subsided. This chart shows the percent change, not the actual number. To be fair, there were only a few months when the number of dividend cuts outweighed the number of dividend hikes.

“So if we are headed for further crashes, which some think is inevitable, dividend payers in general aren’t too much safer than nondividend payers. The right ones, however, are.”

For those “right” dividend stocks, you won’t need to look much further than Jim’s Lifetime Income Report. Since its inception, only one stock in the LIR portfolio has suffered a dividend cut, while 13 have increased payments… some more than once.

If you seek these kinds of stable returns, click here for Jim’s favorite dividend play — a high-yielder backed by one of the most fiscally prudent governments in the world.

  “The next couple of years aren't as important to a stock's value as you might expect,” Dan Amoss offers as a word of caution. “Most of any stock's value today depends on the present value of free cash flow that the company can generate between, say, the years 2015-2040.

“These future cash flows get discounted at a rate that's heavily influenced by the cost of equity. A higher cost of equity translates into much lower present value. Here's a rough analogy: Higher mortgage rates lower a homebuyer's purchasing power, just as a higher cost of equity lowers a stock's value today.

“Many factors can drive the future direction of free cash flows up or down. Lately, it's become clearer that fiscal policy and a sluggish economy will likely drive them down. At least that's the market's message when it, declines despite all of the so-called ‘earnings beats.’ I doubt we'll see a sustained rally in the S&P 500 until 10-year Treasury yields turn back up in a sustainable manner.”

To protect yourself from the market Dan describes above, check out his latest online presentation — fresh off the virtual presses. In it, he’ll show you some little-known government reports that often identify which stocks are about to fall.

  Stock sellers had the advantage yesterday, as the S&P 500 fell 1.4%. Thin volume and some hangover from Friday’s 1.7% Fed-fueled jump was more than enough to do the trick. And with data points like these, it’s hard to be a buyer today:

  U.S. birth rates have hit a record low, while youth unemployment has reached a record high. Oy… that ought to cripple a generation or two. Here’s the quick and dirty:

  • The birth rate in the U.S. fell to 2.6% in 2009, the National Center for Health Statistics announced late last week. That’s 13.5 births for every 1,000 people, the lowest rate ever recorded. Even during the Great Depression, approximately 18 babies were born for every 1,000 Americans

  • And among the ranks of lanky teenagers and college students, the unemployment rate hit 19.1% in July, the Labor Department said Friday. For this demographic (16-24), that’s the worst mid-summer reading since the government started keeping track back in 1948. This group’s labor force — meaning, kids who were actively working or looking for work — fell to a record low 60.6% this summer, too.

  Not all of today’s data are so dark: U.S. home prices rose 4.4% in the second quarter, says today’s monthly release of the Case-Shiller home price index. In June, the last month the homebuyer tax credit could truly be utilized, prices jumped up 5%.

Of course, considering the dreadful, all-time terrible July home sales number we saw last week, the next release of the Case-Shiller index ought to be the interesting one. Next month we’ll see if July’s crash in sales affected prices… hmmmm… just maybe.

  Amid all the uncertainty, gold is shining bright. The spot price jumped up $10 in early New York trading this morning and is just above $1,245 an ounce as we write.

  “I am an avid traveler over most of Latin South America,” a reader writes, responding to Brazil’s sudden threat of nationalizing farmland. “A few years ago, I traveled to Brazil and came home to a group of farmers eager to invest in its land for cotton and corn production. I was received with open arms by the Brazilian people, but I always have my suspicions about foreign countries, especially Latin countries.

“Latin American people are very resourceful and highly intelligent, waiting for the next opportunity. After I read Dilma Rousseff was running for president and all the tariffs were placed against American producers, I have grown very sour with Brazil and offer a simple warning: Stay away! You will be the next victim of a scam. Research of Dilma Rousseff will reveal she has a very dark past and is fully aligned with none other than Hugo Chavez. The future of Brazil is bleak if this lady (scoundrel) is elected.”

The 5: “I think Brazil's announcement is a big deal,” Chris Mayer responds. “We may not feel the effects immediately, but Brazil's hostile turn toward foreign investment helps plant the seed for another food crisis.

“All of which makes our agricultural companies more valuable. BHP's bid of $130 per share for PotashCorp seems especially inadequate against this backdrop.

“It also makes me wonder about investing in Brazil at all. There is all that hype over Brazil's offshore oil discoveries, for instance. Yet what will the return on investment be there? Won't the government also look for a hearty slice of any profits? I wonder if this ill wind is a one-off event or a harbinger of a larger storm down the road.

“We'll see. But Brazil forgets there is a larger world out there. The money will just go elsewhere. Brazil will be the poorer for it.”

  “The only problem with Social Security,” another reader writes, “is that it is funded with a regressive flat tax of 12% on the pretax wages of the poor and lower middle class. The wealthy have been permitted to completely opt out of the system while simultaneously reaping the greatest rewards in history in the form of massive tax cuts and economic policies designed specifically to benefit the top 1% of the population.

“If I pay a flat tax of over 12% of my pretax income into the general federal receipts to live in a civilized country, then so can everyone else, regardless of income. Do that and you could LOWER Social Security taxation.

“Talk of raising the retirement age and the tax rate levied on the poor and lower middle class is not going to fly. Unemployment among people in their 50s and 60s is skyrocketing. Raising the retirement age is the equivalent of throwing them onto the street.

“You people live in a fantasy world.”

The 5: This will be the last place you’ll find advocates for higher taxes… but that doesn’t mean we shouldn’t prepare for them.

  “Regarding the reader outraged by Alan Simpson's comments,” our last reader writes. “I fully sympathize with the outrage concerning Social Security, but there are a few key things to grasp:

  • Social Security is not, and never was, any kind of individual annuity or investment plan of any kind. All it ever was or will be is a program for today's workers to pay benefits for today's retirees on the promise that in the future tomorrow's workers will do the same for us

  • There is no SS account with your name on it measuring your gozintas and gozouttas. It's irrelevant to the way the program operates

  • You will never get your $250,000 plus interest back. The World War II generation, like my grandmother of blessed memory, got far more out of it than they ever put in. Boomers might break even. Gen Xers and beyond will lose money, unless there is a seismic shift in jobs and demographics with our children.

“The grass is green, the sky is blue, and that's the way Social Security operates. You'll feel better if you direct your outrage at an issue you can actually affect.”

The 5: Amen. If we all spent half as much time planning for retirement as we do watching television, searching for Barack Obama’s birth certificate and writing nasty letters to your 5 Min. editors, we suspect Social Security wouldn’t be such a sore spot.

Did you say gozintas?


Addison Wiggin

The 5 Min. Forecast

P.S. By the way, here’s a good place for you to get started:

Legally Collect Thousands of Dollars Each Year… from the Other Government-Backed Retirement Program.

P.P.S. Tomorrow, we’re going to release a sneak peak of our new doc project. “Coming to an inbox near you!” Watch for it…


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