You Should Listen When These Guys Talk
The Dynamic Wealth Report
August 6, 2010
by Corey Williams, Editor
A few months ago, I told you about the increasing risk of
deflation.
Now, some Wall Street investment heavyweights are preparing for possible
deflation. It’s a scary development. I’ll tell you what you need to do
in a minute…
According to a recent article in The Wall Street Journal, Bill Gross,
Jeremy Grantham, David Tepper, and Alan Fournier are preparing for
deflation.
These aren’t your typical “the sky is falling” nut jobs. These are guys
managing serious money.
Gill Gross runs the $239 billion Pimco Total Return Mutual Fund. Grantham founded the $107 billion investment firm GMO LLC. Mr. Tepper
runs a $15 billion hedge fund Appaloosa Management LP. And, Fournier runs
a $4 billion hedge fund Pennant Capital.
When guys like this talk, you should listen.
The story centers on US GDP growth. And right now we’re dangerously
close to dipping into deflation territory.
US GDP figures were released last week. They show the US economy is
growing at an annual rate of 2.4%. Slower than the 2.6% growth
expected and a full 1.3% slower than last quarter.
The problem is GDP needs to grow at more than 2% to avoid deflation.
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So far the deflation trade is slowly gaining traction. But you need to
take action now, before it’s too late.
After the financial crisis in 2008, deflation fears were everywhere. But
it didn’t materialize because of massive government intervention.
Who can forget the TARP bailouts or the $787 billion American Recovery
and Reinvestment? Not to mention the trillions of dollars worth of
treasuries and mortgage-backed securities the Fed purchased…
These actions prevented deflation then. But what about today?
Simply put, the political environment in Washington and around the world
has changed.
European governments have already committed to less spending. They’re
pushing through tough austerity measures. They’re balancing their
budgets, not spending to stimulate the economy.
And politicians in the U.S. are under fire too. The massive national
debt has sparked outrage across the country. It’s the driving force
behind the Tea Party movement. And like it or not, the Tea Party
is a
growing political force.
It would be political suicide to call for another massive stimulus
package.
Call me crazy, but I’m willing to bet politicians will do whatever it
takes to get re-elected. These politicians are spineless windbags. They
won’t do what needs to be done.
The bottom line is governments don’t have enough bullets. If the economy
continues on its current path, we could enter into a period of deflation
and slow growth (much like Japan, who has seen deflation for two
decades).
Clearly it’s not a good situation.
Once deflation sets in, it’s already too late.
A cycle of falling prices is hard to stop. Businesses and consumers
spend and invest less. It hurts profits. Businesses don’t hire new
employees. Prices decline further… and the cycle repeats.
Alright, enough of the gloom and doom.
The point is deflation is a real possibility. And you need to prepare
for it now.
You can prepare your portfolio by taking one simple step. Add more
income producing investments.
Companies with “relatively certain” cash flows are a great place to start.
Then look for stable dividends.
The reason’s simple. Companies have a difficult time growing in a
deflationary environment. Without earnings growth, stock price
appreciation will be limited or non-existent. Dividend yields become
even more valuable.
Two sectors fit this bill perfectly. Take a look at utilities and MLPs. These sectors have a long history of stable cash flow and paying
dividends.
The easiest way to get exposure is with an ETF or ETN.
The ETF I like for utilities is the Utilities Select Sector SPDR Fund
(XLU). It mirrors the utilities sector of the S&P 500. XLU holds 37
large cap utilities and has a solid dividend yield of 4.07%.
And for exposure to MLPs, JPMorgan Alerian MLP Index ETN (AMJ) is a great
way to go.
AMJ tracks the Alerian MLP Index. This index is made up of 50 midstream
energy MLPs. These are mostly pipelines. They get paid to transport oil
and natural gas from point A to point B. It’s currently yielding 6.3%!
The reality is nobody knows if GDP growth will be strong enough to avoid
deflation.
But when guys like Bill Gross, Jeremy Grantham, David Tepper, and Alan
Fournier start angling to make money from deflation… It’s a good idea to
pay attention.
And thanks to ETFs and ETNs, you can easily add exposure to income
generating sectors like utilities and MLPs.
•
SRS Labs (SRSL) was upgraded by Maxim Group this
week. They now have a buy rating and a $15 price target on the stock. An industry leader in surround sound, audio, and voice technologies
reported better than expected quarterly revenue.
• Cooper Tire & Rubber (CTB) was downgraded to hold
by BB&T Capital Markets this week. The tire maker reported solid
quarterly earnings but shares slipped on their “cautiously optimistic”
outlook.
• Argus started coverage on Herbalife (HLF) this week
with a buy rating. The nutritional supplement maker recently beat
analysts’ revenue and earnings estimates.
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