Deflation Risk? How You Can Profit...
The Dynamic Wealth Report
May 21, 2010
by Corey Williams, Editor
Did you see the latest news? Inflation is now at a 44-year low.
According to U.S. government numbers (if you can trust them), prices were
flat from the previous month.
Core consumer prices are only up 0.9% in the last year. Remember, core
prices strip out volatile food and energy prices. Any way you slice it,
this is well below the Fed’s target inflation rate of 1.5% to 2%.
It looks like inflation fears have been overdone. Now the possibility of deflation is back on the table.
So where should we invest if deflation takes hold?
The simple answer is… cash.
Cash is king.
If deflation takes hold, I see the U.S. Dollar benefiting from its role
as the world’s reserve currency. The U.S. Dollar is a safe haven. It
jumps in value as investors seek the safest currency available.
One way to play the trend in the U.S. Dollar is by purchasing the
PowerShares DB US Dollar Index Bullish ETF (UUP). UUP goes up in value
as the U.S. Dollar goes up in value relative to a basket of foreign
currencies.
Another area to look at is income producing investments.
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During a prolonged period of deflation, stock price gains are often
stunted.
Just look at Japan. They’ve been struggling with deflation for over a
decade. In the 1990s, their government bailed out banks after bubbles in
equities and real estate burst. (Sounds familiar doesn’t it?)
The Japanese stock market is stuck in a perpetual bear market. It’s never
been able to get back to the highs set in the early 1990s.
If Japan is any indication, stock price gains could be nonexistent for
U.S. focused buy and hold investors. That puts a premium on dividend
paying stocks. Dividends will be the best way to generate decent
returns.
There are a number of ETFs that focus on dividend paying stocks.
Take a look at the iShares Dow Jones International Select Dividend Index
Fund (IDV). It holds a basket of stable, dividend paying companies from
around the world. It’s currently yielding 3.87%. A perfect way to grab a
good yield with international diversification.
You should also look at preferred stock.
A preferred stock is a hybrid of a stock and a bond. Dividends aren’t
always guaranteed like with a bond. But often the company must pay
preferred dividends prior to paying dividends on the common stock.
iShares offers an ETF focused on U.S. preferred stocks. Take a look at
the iShares S&P U.S. Preferred Stock Index Fund (PFF). It’s currently
yielding better than 7%.
Early indicators are pointing toward the possibility of deflation. These
three ETFs should deliver solid profits in a deflationary environment.
Keep these ETFs in mind as we see continued pressure on consumer prices. They’re not going to blow your doors off with explosive growth,
but
they’ll deliver solid income even if stock prices are flat.
• Dollar Tree (DLTR) was upgraded by Jeffries this
week. They now have a buy rating and a $77 price target on the stock. The discount retailer reported earnings yesterday. Management raised
their 2010 earnings guidance above analyst estimates.
• Wendy’s / Arby’s Group (WEN) was downgraded to sell by
Argus this week. The fast food chain operator and franchisor is
suffering an identity crisis since merging the two operations.
• Oppenheimer started coverage on Gulf Resources (GFRE)
this week with an outperform rating. They manufacture chemicals used in
oil and gas field exploration in China.
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