A celebration of the stock market by Jay Walker, author of The Brink's Truck Burst Open on Wall Street! A Holistic Approach to Finding The Easy Money In Common Stocks. Facts and ideas on how to outperform the general market, portfolio management and risk, with a growing focus on how climate change should affect your investment strategy. All wrapped nicely with a value-oriented investing bias.
Tuesday, September 07, 2010
Dividend Oriented Portfolio Poised to Outperform?
In my opinion, the bull market in bonds is due to come sliding - possibly crashing - down, just as other inflated investments have in the recent past, eg NASDAQ, peak years 2000-2001, US housing market years 2006-2007. Tears are inevitable.
On the other hand, with the idea in mind that you can construct a reasonably safe dividend-oriented, relatively diversified stock portfolio going forward, which provides a yield well above that, AND with decent potential for dividend growth, I screened the S&P 500 for stocks yielding above 3%, in market-leading names I recognize, and with decent (more than 10%) returns on invested capital (ROIC).
Here's the list I came up with, that I think will outperform the S&P500 significantly in total return over the next two years:
The only name that doesn't strictly meet that criteria is General Electric, which has a relatively low return on invested capital, given the capital intensive nature of its business and its past actions as, effectively, a bank.
The dividends all appear reasonably safe with these companies, as they have either relatively moderate payout ratios, or have recently lifted their dividend payments.
The last thing to consider is the potential impact of climate change on these companies over the short to medium term. In my view, none of them have the potential for short-to-medium term implosion, like I detailed for Compass Minerals.
However, some have a bit of climate-change short-to-medium-term risk as I see it, as discussed below:
Altria is a cigarette manufacturer/retailer. It is possible that climate change could affect their business in two ways:
Firstly, smokers tend to be in the lower economic strata; these are the folks who will be most effected by potential food inflation. If they are spending more for food, then less is available for things like cigarettes which, despite their addictive qualities, are still a discretionary purchase. Some smokers may choose to quit if their budgets become more squeezed, accelerating the already evident trend of sales degradation, or they may trade down to lower margin brands.
Secondly, its possible that there could be some tobacco crop failures going forward (drought or too much precipitation/at wrong time), resulting in higher input costs. This would put Altria in the unenviable position of a margin squeeze, or having to hike prices (resulting in sales loss), or consumers trading down to cheaper brands.
On balance, I would rate their short-to-medium-term climate risk issues as moderate.
Heinz is a food manufacturer who could also be affected moderately over the short-term in a manner fairly similar to Altria. While consumers are unlikely to quit Heinz's type of product (they still need to eat), they may well trade down to cheaper brands with lower margins. Secondly, crop failures could also have a similar impact as described to Altria, above.
Sysco has moderate short-term climate risk, since they are a food distributor who supplies many restaurants. If food inflation picks up, then the general consumer will spend less on restaurant meals, meaning that many of Sysco clients could reduce volumes/orders (lowered revenue for Sysco) and suffer some financial distress (meaning Sysco's accounts receivables could also balloon).
Procter and Gamble is the final one which I believe also has some short-to-medium term climate risk. If food inflation occurs, and leaves fewer dollars on the table of their customers, then their customers may very well trade down from the PG family of premium products, to more economically priced ones.
On balance, I would say that this portfolio probably has average climate-change risk on a go-forward basis.
Disclosure: No positions.
On a blog aggregator? Go here, The Confused Capitalist, for additional content and our growing focus on climate change investment strategy.
Tuesday, July 29, 2008
Best of the Rest? Dow Jones Industrial Average
A few days ago, I profiled an eight stock selection of the Dow Jones Industrial Average (DJIA) that I felt would outperform the DJIA over the next couple of years.The selection was based on using a strategy similar to the Dogs of the Dow, wherein I used high yields to favourably indicate the potential for mispriced stocks in the Dow. I chose eight out of the 16 highest yielding stocks, names that included drug and health care companies, telecommunicators, as well as Coca-Cola, Procter & Gamble, and General Electric. I felt these stocks in the aggregate, would produce a total return greater than the DJIA over the next few years.
Generally, drug companies (Pfizer, Merck) selected have had a long cold winter in relation to any positive changes in share prices, despite numerous predictions and suggestions that these offered good value, relative to their moat and prices. Also, payouts are generally at the high end of the earnings range, indicating limited ability for further upward payouts, itself a negative signalling factor about the intermediate future prospects of earnings growth. While Johnson & Johnson doesn't strictly fit into the same criteria, it's greatest revenues are from it's pharmaceutical division, and therefore the share price growth might be stifled by association.
To some extent, the telecommunications companies have had limited payout increases over the past few years, and this can indicate that their earnings growth isn't as robust as it once was.
This leaves, in my mind, three candidates as offering the best combination of safety, dividend yield and potential growth, and potential share price appreciation.
Procter & Gamble has the lowest dividend yield of the remainders (and in fact was in the bottom half of the Dow 30), and also one of the highest PE's of this group. Therefore, it is felt to be more susceptible to share price pull-backs than some others in the group.
This leaves Coca-Cola (KO), and General Electric GE).
Over the past twenty years, Coke (KO) has been one of the most attractive businesses on the planet. It has proven its long-term sustainable competitive advantage, has enormous brand recognition, and achieved very, very, high returns on equity (30-33% over the past five years) over very long periods of time, with minimal use of leverage. Further, earnings growth, while rarely dramatic, is highly visible going forward.
It currently provides a yield in the upper end of the Dow with, in my opinion, far, far, lower than DJIA average business risk. Wall Street consensus estimates suggest that the earnings in 2009 will be $3.36, versus $2.57 in 2007. The business derives 27% of its net income from the US, with 26% from investments in bottling operations likely adding to that figure marginally - suggesting that somewhere in the order of 2/3 of net income is derived from elsewhere on the planet - a nice hedge if you are concerned about the long term stability of the USD.
The dividend payout ratio has varied over the past five years between 50-57%, with 2007 clocking in at 53%.
All-in-all, Coca-Cola has fallen (earnings risen) to become a relative value proposition, and a potential cornerstone building block for a portfolio.
At a different end of the investment spectrum, we have General Electric (GE). It has been priced by the market as if it is a regional bank employing bank-style leverage and with all the attendant troubled homeowner loans. One only needs to look at the current/forward PE ratio at around 13 in either instance, and the yield of 4.5%, to suggest that the market is pricing it like a bank. I suggest that this diversified giant has been egregiously mispriced by the market.
While the company does have a finance division, the retail finance portion (mortgages, credit cards, etc) comprised only 15% of revenue/net income in 2007, and there is a commercial finance division accounting for 20% of revenue/net income in 2007. In total, only 35% of the company looks like or smells like a bank of any sort and certainly the commercial division can't be considered like a retail bank.
Of the remaining revenues and net income, some 35% of the revenue/net income of GE comes from its infrastructure division - hello market, I thought the world infrastructure market still has a "long-tail" of growth?!
Ten percent of revenues relates to health care, also a growth industry, considering the rapid aging of the Western World in particular, but really, now much more of the world since population growth rates are decelerating world-wide.
Finally, the Industrial division (appliances, industrial equipment) at 10% of revenues, and NBC Universal (10%) make up the balance.
Furthermore, 50% of its revenues are derived outside of the United States.
Sorry, tell me again why this is priced and is yielding like a regional bank?
In seriousness though, earnings have continued to rise nicely over the past five years, from $1.55 per share to $2.20 in 2007, with 2008 consensus estimates at $2.21 and $2.34 for 2009.
Dividend payout ratios have ranged tightly from 50-53% in the past five years and, when measured against cash-flow, even tighter from 34.3% to 35.9%. Dividends have risen nicely over that five year period, with substantial raises every year; five years ago they were $0.77 and in 2007, $1.15. Today, they're at $1.24. Returns on equity are very good, ranging between 17-22% over the past five years.
Overall, this isn't a bank, and it's not a highly cyclical stock warranting a low PE. Two different CEO's have proven it's a pretty good business over the past couple of decades.
In summary, I believe that the GE stock is the most obviously undervalued of the two, but that the business dynamics of Coke provide exceptional long-term peace of mind.
In either case, a dealer's choice of outperformance for the next few years, I believe.
Monday, July 28, 2008
DJIA - Diving in Deeper

JW
The Confused Capitalist
Saturday, July 26, 2008
Not quite the Dogs of the Dow
A recent article in the paper reminded me of the importance of dividends in outperforming the market. Many academic studies have shown that dividend-paying stocks outperform their non-paying brethren by leaps and bounds over time.Further to that, I took a look at the current constituents of the Dow Jones Index, and the current yields available there, with the idea that, based on today's share prices, some of the companies are better situated to outperform the index over the next while. Here are the recent stock prices and the most recent dividends payable for each company (sorted by dividend yield):
Stock - Current Price - Dividend Yield (%)
Bank of America - $29.58 - 8.65%
Pfizer - $18.89 - 7.09%
Citigroup - $18.85 - 6.79%
AT&T - $31.40 - 5.48%
Verizon Comm. $34.45 - 4.99%
Merck - $32.68 - 4.65%
General Electric - $28.71 - 4.53%
Home Depot - $23.80 - 3.91%
JPMorgan Chase - $39.52 - 3.85%
Dupont - $43.81 - 3.74%
Chevron - $82.56 - 3.23%
American Int'l. Group $27.24 - 3.23%
Coca-Cola - $52.06 - 3.07%
3M - $70.95 - 2.90%
Johnson & Johnson - $69.03 - 2.72%
Boeing - $63.83 - 2.66%
McDonalds - $58.65 - 2.64%
Procter & Gamble - $64.46 - 2.64%
Intel - $22.01 - 2.61%
Caterpillar - $70.48 - 2.47%
United Technologies - $65.23 - 2.19%
Alcoa - $31.81 - 2.14%
American Express - $36.62 - 2.05%
ExxonMobil - $81.70 - 2.02%
Microsoft - $26.16 - 1.80%
Wal Mart - $56.83 - 1.74%
IBM - $128.53 - 1.63%
Disney - $31.10 - 1.25%
Hewlett Packard - $43.71 - 0.73%
General Motors - $11.90 - nil (dividend suspended)
These stocks have a median yield as represented by Johnson & Johnson/Boeing of 2.68% and a mean average yield of 3.25%.
What I am looking for here is stocks that seem to be mispriced in my favor - in other words, the dividend yield is higher than might be expected, while the prospects going forward over the intermediate term (5 years or so) for the company remain decent or better. Furthermore, I am looking for companies whose future is less likely to be impacted by higher inflation than average - typically, companies that have lower than average CAPEX requirements. Overall, this is an approach similar to a "Dogs of the Dow" strategy.
Leaving aside the prospects for the financial companies, who have an uncertain outlook - to say the least - over the next while, I like the following basket as likely to outperform:
Drug Companies:
Merck, Pfizer
Communications:
Verizon, AT&T
Consumer:
Coca-Cola, Johnson & Johnson, Proctor & Gamble
Other:
General Electric
These stocks have a median dividend yield of 4.59% and a mean average dividend yield of 4.40%.
While I like some of the companies prospects whose dividends lie in the bottom half, I think that their yield indicates that the market likes them a bit too much at present. If their dividend yield were to rise, the following companies might also interest me:
Hewlett-Packard, Disney, Wal-Mart, Microsoft, Intel, McDonalds (good news already priced in).
That's it - we'll check back on this basket at my annual review cycle, versus the Dow Jones Industrial Average ETF "DIA" which is currently priced at $113.17.
Disclosure: No positions held.

JW
The Confused Capitalist
Sunday, February 17, 2008
Agricultural, it's all about the diet ...
Agricultural-related investments remains one of the big, visible, themes going forward over the next ten years. While there's been some mainstream acknowledgement of these major food issues going forward, for the most part, the media has been relatively quiet about the food inflation.Maybe that's because many countries focus on "core" inflation, which ignores volatile changes in energy and food. These, especially food pricing, are likely to continue to ramp upwards over the next five to ten years.
Feeding the world continues to develop into one of the biggest stories of this century. The supply and demand curves for food, especially due to changing diets in the Far East to have more dairy and meat, continues to favour higher prices for these commodities. Other drivers of agricultural prices are:
- Strong population growth, expected to reach 7 billion by 2013;
- Climate changes challenging agricultural production processes and product quality;
- Arable land per person is decreasing;
- Demand for agricultural products from Bio-energy (sustainable energy resources) market adds an important and competitive new demand source. Agricultural commodities are getting
more and more important for energy generation.
Note: If you're on a blog aggregator, you can visit The Confused Capitalist here (or here: http://confusedcapitalist.blogspot.com/) for additional articles and exclusive content!
This is something I have written about here (provides some specific suggestions, which I continue to support) and here. I re-iterate those calls to make agriculture-related an important part of your portfolio. In Canada, you can now also consider a recent Claymore Investments ETF product, COW, which invests in agricultural companies.
Despite recent run-ups in prices of companies serving the agricultural sector, and the underlying commodities themselves, I consider that this investment theme is still just early in the third inning of a ballgame; a ballgame that itself may even go into lengthy overtime.

JW
The Confused Capitalist
Friday, January 18, 2008
7.1%? Are you kidding me!!?
Picture: Kruschev (famous table pounder at the UN)Well, 2006 seemed like the year I pounded the table for emerging markets. If you'd listened to me - heck, if I'd taken my advice more seriously - my portfolio and yours would be turning into serious dough by now.
I have a feeling that this year I'll be pounding the table about the banks.
Less than two weeks ago, I wrote about an eight stock portfolio containing three banks - stocks that Warren Buffett had recently added to his position in. Since then, two of the three stocks have fallen in price and the dividend yield has correspondingly increased. These three stocks, recent prices and yields are:
Wells Fargo (Bank) - WFC -$26 - 4.8% dividend yield
US Bancorp (Bank) - USB - $30 - 5.6% dividend yield
Bank of America (Bank) - BAC - $36 - 7.1% dividend yield
I can get a 7.1% yield on a bank stock - the largest bank in America by market capitalization -that's just announced a buyout of a troubled financial institution. 7.1%? Are you kidding me!? I say these banks offer fantastic value at these prices.
Do you really think the banking team would have even considered this buyout if they thought there was any potential they'd have to cut the dividend? Because that's what a 7.1% dividend for a major business institution implies: that a dividend cut, a la Citigroup, is in the works.
Unlike Citigroup, however, Bank of America is still buying. Does that sound like a troubled institution to you? 7.1%? You must be kidding.
Note: If you're on a blog aggregator, you can visit The Confused Capitalist here (or here: http://confusedcapitalist.blogspot.com/) for additional articles and exclusive content!
By comparison, the ETF "SPY" (S&P500) was trading at $132, and a 2.1% yield.
JW
The Confused Capitalist
Credit Crunch: Canadian Banks On Sale
Pictured: A different kind of crunch.The global credit crunch seems to be affecting a lot of bank share prices, including many Canadian banks who have relatively little exposure to the sub-prime slime (CIBC excepted).
One analyst recently pointed out that 10 year Government of Canada bonds were yielding around 3.8%, and that the average weighted dividend yield of the six big banks was around 4.5%. The analyst pointed out that this was as large a spread as he could ever recall.
I too think that the banks offer tremendous value at current prices and yields. I look at it this way, if the credit crunch turns really bad, it's not just the banks that will suffer. There will really be no hiding out anywhere if things turn nasty. Having said that, I don't expect it, and therefore suggest that the current environment is great for buying banks stocks.
Of the Canadian ones, I like four of the six that have avoided most of the sub-prime problems and have dividend payout ratios around 40%.
These include the Royal Bank ($47, DivYield 4.2%, 42% Payout Ratio); my personal favourite, the Bank of Nova Scotia ($45, 4.1%, 40%); the TD ($64, 3.6%, 36%); and, to a lessor extent, the National Bank ($47, 5.3%, 39%). I think that buying a basket of these shares now, will look very good in two to five years. Odds are that the dividends will have been raised nicely over the period, and the shares are quite likely to have been repriced higher as well.
By comparison, the XIU ETF (broad Canadian market) is trading at $74 with a 2.1% dividend yield.
Note: If you're on a blog aggregator, you can visit The Confused Capitalist here (or here: http://confusedcapitalist.blogspot.com/) for additional articles and exclusive content!

JW
The Confused Capitalist
Saturday, January 12, 2008
Would Morningstar like this portfolio?
Recently, I profiled a portfolio that looks like it could do well to help fund a financially secure retirement, based on borrowing against your home, and using dividends to make the payment.Today I joined Morningstar, and looked up the rankings for all of those stocks. Some of their key rankings involve their assessment of overall business risk, the moat of the company, the overall rating (out of five stars), and their estimate of fair value. Now, due to their business model, I consider Morningstar ratings to be of higher quality than that churned out by the average investment house.
Of the eight stocks in the portfolio, only three of them have an overall "three star" (average) rating (Progress, Reynolds and Verizon), with GE having a four, and the rest at five stars. This suggests an above-average portfolio, overall.
The average ratio of current stock price to their indicated fair value is just 80%, with only Verizon over 100% (109%), and all the rest are at 92% or below. This suggests that, as a group, there is room for significant capital growth going forward. The best buy of the group on this ranking is Bank of America, which they estimate is trading at just 55% of their fair value estimate.
All of the businesses exhibit "average" business risk, except for Reynolds (above average) and US Bancorp (below average).
Five of the businesses are defined as having a "wide" moat, while the same three stocks that got an overall three star (average) rating had their moat defined as "narrow". According to information Morningstar publishes, only about 10% of their coverage universe achieves a "wide moat" definition, with about 45% achieving the next highest "narrow moat" ranking, and the balance defined as "no moat". This suggests that this portfolio is far more secure than average in this criteria.
In summary, I'd say that the portfolio is above-average quality in three of these four important categories, while still no lower than average in any category (average in overall business risk).
Note: If you're on a blog aggregator, you can visit The Confused Capitalist here (or here: http://confusedcapitalist.blogspot.com/) for additional articles and exclusive content!

JW
The Confused Capitalist
Wednesday, January 09, 2008
Buying a Dividend Machine

Photograph: Cash-Flow Machine.
It's easy to say, but often tough to do: buy something popular, before it's popular. As Yogi Berra was once reputed to have said, "It's easy to make money in stocks; just figure out which ones aren't going to go up, and don't buy them"
However, research has repeatedly shown that buying stocks that return money to shareholders, through dividends and/or share buybacks, consistently outperform the market, usually by a wide margin (2% or more).
The best buys however, are usually those whose cash returns to shareholders are just beginning to turn upwards, and those that operate in a protected or oligopolistic environment.
Cable and cell companies fit the bill in terms of limited competitors, and two stocks whose fortunes appear to be ascendancy are Rogers Communications, and Shaw Communications.
Both trade both in Canada on the TSX (RCI.B and SJR.B) and also on the US exchanges (RCI and SJR) respectively.
After a several decades of infrastructure build-out and crushing debt, Rogers is emerging as a cash-flow machine. According to a survey of analysts, as reported here, Rogers is predicted to increase dividends from $1.00 annually to $1.60 later this year, to $2.40 is 2009 and $3.20 in 2010. Morningstar provides some further information, here (note, however, that the dividend information is out of date, as it has been recently raised).
What is also interesting here, is that if the consensus dividend projections are correct, it suggests that the stock may well also be revalued significantly higher by 2010. Compared to its recent price at around $41 (Canadian) with a 2.4% dividend yield, very few quality stocks in Canada yield much over 4.5%. Assuming that the $3.20 in dividends by 2010 is correct, this suggests that the stock may well be valued by the market in the low $70 range at that time, with the distinct possibility of something higher.
Similarly , according to a story here, Shaw Communications, a cable and telephone provider expects to be able to continue churning out the dividend increases. Morningstar provides some further information, here (note, however, that the dividend information is out of date, as it has been recently raised). Shaw's recent price of $23 (Canadian) is producing a 3.2% yield, and it also appears that there may be room for significant upward appreciation of the stock price if the dividends keep getting raised.
In another story, Shaw was picked by analyst Peter Gibson at Desjardins Securities in his outperforming focus portfolio, as one of eight Canadian stocks with the potential to outperform the market. He also picked Rogers in that same portfolio.
Note: If you're on a blog aggregator, you can visit The Confused Capitalist here (or here: http://confusedcapitalist.blogspot.com/) for additional articles and exclusive content!
I expect both of these stocks to outperform the broader market over the next five years, and the current dividends (and expectation of future increases) make that prospect just the more tantalizing.

JW
The Confused Capitalist
EFT Benchmark: Broad Canadian Market "XIU" (on the TSX) - $80.40 (Canadian)
Tuesday, January 08, 2008
Make dividends work for your retirement
If you are going to buy stocks on credit, via a home mortgage loan, now is an excellent time to consider doing so. Bankrate.com currently shows the average national 15 year fixed at 5.08% and 30 year at 5.56%. Here's how to make those fantastic rates work for you.Let's say that you and your wife have poor retirement prospects (never saved any money) and are both now 50. By purchasing strong dividend- paying stocks, you can actually build a substantial positive cash-flow by retirement.
By screening for large-cap stocks, with strong dividend history, we can assemble a moderately diversified portfolio, with strong dividend history. Here's a selection of eight large-cap S&P500 stocks with a five year history of increasing their dividend over time - by an average of 8.5% annually. (Name - Industry - Stock Symbol - Recent Price - Dividend Yield)
- Wells Fargo (Bank) - WFC -$27.68 - 4.35%
- US Bancorp (Bank) - USB - $29.71 - 5.61%
- Bank of America (Bank) - BAC - $39.90 - 6.35%
- Pfizer (Pharmaceuticals) - PFE - $23.23 - 5.52%
- Progress Energy - (Utilities) - PGN - $48.37 - 5.19%
- Reynolds American (Tobacco Conglomerate) - RAI - $67.37 - 5.17%
- Verizon (Communications) - VZ - $43.35 - 3.96%
- General Electric (Industrial Conglomerate) - GE - $36.04 - 3.44%
These stocks, if bought in equal amounts, would currently produce an overall dividend yield of 4.95%.
Assuming the dividends continue to grow by an average of 5% annually (against the actual average five year growth of 8.5% annually), by year five the dividend income ($843 monthly) would nearly match the actual payments, before the interest write-off.
Under the same assumption, by retirement at 65, a dividend income of $1372 per month would be produced, and by the time the mortgage is paid off in 30 years, $2852. If the dividend income grows at the same pace it has over the past five years, then you'd have to revised those two prior figures significantly upwards, to $2243 and $7628 per month, respectively. Sure eases the worry of being on a "fixed income" later in life!
Note: If you're on a blog aggregator, you can visit The Confused Capitalist here (or here:
http://confusedcapitalist.blogspot.com/) for additional articles and exclusive content!
As a final plus, if the stock value also grew at an average of 5% per year, then the value of that portfolio in 15 years would be $332,628 and $691,510 in 30 years.
Lest anyone think that three of these stocks - the bank stocks - are too risky - be advised that billionaire genius investor Warren Buffett has recently added to his stash in these three stocks. And uncle Warren isn't noted for buying into distressed companies.
By the way, there's also a ton of academic research showing that dividend-paying stocks produce a better rate of return over time, and are less volatile than non-dividend-paying stocks.
Tuesday, January 01, 2008
Report Card - Predictions in Review
This is the time of year when many financial columnists and bloggers review their picks, predictions and suggestions made during the past 12 months.I'm not going to do that, since this blog specifically makes the point that investing is a longer-term process, and picking your winners and losers an average of just six months later is foolish and leads to thinking which doesn't improve your long-term results.
What I am going to do is review the 2006 predictions and suggestions I made, providing a better longer-term outlook.
This blog started in February 2006, and on Feb 19th I looked at a portfolio heavy in dividend companies, with the hope that the dividend growth over about 5 years or so, would then pay enough in dividends to make a theoretical mortgage payment used to buy those securities with. Based on history, I was looking for a 10% annual portfolio growth, with about 5% of that coming from dividends, and 5% from capital growth.
Overall, the portfolio is up 12%, plus the dividend yield of about 5% annually, which is producing a return pretty much bang on. The dividends have also grown, from 4.75% annually of the initial portfolio value, to 5.08% annually now. Call that a win overall.
Incidentally, with long-term mortgage rates now in the 5.3% (15yrs) to 5.8% (30yrs) range, now is an excellent time to revisit that same strategy, although I expect the portfolio might well get stuffed today with many more financial firms, given some of their perceived difficulties and consequent high yields. Read the entire Leverage Series.
Emerging markets was a popular theme for me, calling them good value in March/06, May/06 and October/06. Buying the most-popular emerging markets ETF, "EEM", you'd be up anywhere from 45% to 55% depending upon your entry point. The S&P 500 moved up only 10-15% over that same period. Call that a clear victory.
I also suggested in March/06 that uranium producers had a long tailwind in their industry, given decades of under-mining the resource and shortages to come. The world's largest single uranium producer, Cameco ("CCJ") moved up by just 5% since then, against a 14% increase in the S&P500. However, since then, Cameco has also been plagued with production problems, which has likely impaired its stock price. Still, call this a loss.
In early March/06, I also warned that I felt the US currency would continue its descent, and later re-iterated this call in April. Since the initial call, the US dollar has lost 18% when measured against its largest competitor currency, the Euro. Call this a win.
Also in March, when many were suggesting that Berkshire's Warren Buffett had his better days behind him, I suggested it would be too early to count an extraordinary investor like him out. Since then, Berkshire shares have risen by 63%, rising from $87,400 to $142,200. Call this a win.
In mid-March, I felt that the oil-boom in Alberta Canada, was going to continue to positively impact their real estate sector, and suggested three companies who would likely be prime beneficiaries. Since then, these stocks have risen by an average of 42%, against Canada major stock index, the S&P/TSX60 (represented by the ETF "XIU" on the TSX) which has risen by 20% since then. Call this another win.
In late March, I suggested that inflation was on the upswing (a win), and that as a result of this, US homeowners would be wise to lock-in their variable rate mortgages (ARMs) to 15 or 30 year fixed rates, as rates will be higher in 2-3 years, and much higher in 5-7 years. While the jury is technically still out, long-term fixed mortgages were in the 6.25% range then. The freeze-up in the credit markets has resulted in the Fed dropping its rates, and 15-30 year fixed mortgages are now in the 5.3% (15 yrs) to 5.8% (30yrs) today. Call this a loss.
In April/06, I suggested that constructing a simple, sensible, long-term portfolio was as simple as "1,2,3 - A,B,C". That portfolio used just six ETFs, tracking both domestic and international markets. The portfolio gave consideration to value type investments, as well as growth through a 25% holding in emerging markets. It was also much more balanced internationally than most investors holdings, with 60% of its holdings outside of the US market. This portfolio has returned 22%, against an 11% increase in the ETF "SPY" (which tracks the S&P 500). Call this a clear win.
In April, I also suggested that the US market had reached its peak for quite a while to come - since then the S&P 500 has risen by 14%. Call this a clear loss.
In April/06 I also said that Canada's Ontario land-title provider Teranet (TF.UN), would likely jump upon its IPO issue to reflect a lower yield. While that did happen, it also fell subsequently on some poor results. Call that one a draw.
Looking back now, it seems like an easy call to say that the US residential real estate was going to get trashed, but then, not so many were certain of that. I made calls on this sector in March/06 saying it was too hot and re-iterated that again in June/06. In July/06, I twice advised against investing in home-builders or related stocks, warning that "it won't be pretty out there in two to four years". This warning came despite some sensible bloggers, notably Geoff Gannon and Bill of No-Do-Das, suggesting they looked like good long-term investments. Depending on which point you use, the home-builders ETF "XHB" has fallen by as much as 55% since then. Call this a can of "whupp ass" victory.
In September/06, I suggested another simple ETF portfolio, this time for Canadian investors, using just four ETFs. This one would have half of the portfolio invested outside of Canada, with the balance in the country. That portfolio is up 37% on a local (Canadian) currency basis, compared to a 22% improvement in the country's major index (S&P/TSX60). Call this another clear win.
Finally, in November/06, I suggested an investment in the leveraged split shares of LSC and ALB (trading on Canada's TSX) exchange representing several Canadian insurers and banks respectively, looked like good value. Since then then have fallen by an average of 2%, against the S&P/TSX60 increase of 13%. Call this a clear loss.
Well, that's about it - the way I read this is that I got almost all the major calls right - that is, the portfolio suggestions, the ETF builders (e.g. emerging markets, etc.), currency calls, and the real estate meltdown. And while I was right on the inflation rate indications (upward), I didn't anticipate the Fed dropping rates due to the credit market freeze up. And I also missed on a few individual stock predictions. However, I would say that my biggest miss was calling a US market high in April 2006. Overall, though, I'm pleased with how the suggestions have turned out.
I hope that my 2007 predictions and suggestions look as good in 2009 as these ones generally have.PS (Jan 6/08): I now also recall a 2006 year end survey by Birinyi Associates who run the Blogger Sentiment Poll, asking which S&P500 stock did I think had the potential for the greatest increase over the year. I selected Coke, "KO", which closed on the trading last day of 2006 at $48.25 and the last day of 2007 at $61.37, for a 27.2% increase. By comparison, the ETF "SPY" (representing the S&P500) gained just 3.2% over the same period. Call that also a clear win.
Note: If you're on a blog aggregator, you can visit The Confused Capitalist here (or here: http://confusedcapitalist.blogspot.com/) for additional articles and exclusive content!

JW
The Confused Capitalist
Saturday, December 08, 2007
Betcha a $Billion or two ... Warren Buffett buys more bank stock
Filings covering the period ending September 30 2007 showed that Berkshire Hathaway added to stakes in three large U.S. banks with increased stakes in Wells Fargo & Co (NYSE:WFC), U.S. Bancorp (NYSE:USB) and Bank of America Corp (NYSE:BAC).Between then and now, prices in two of those three banks fell by around 10% at one point or another, while stock in US Bancorp was available at around the same price as its lowest price in the quarter ending Spetember 30th.
Given Mr. Buffett's well-known penchant for buying discounted, out-of-favour stocks, do you think his next filing will show he added to those positions with his ~$40 Billion cash hoard?
Betcha a billion or two he did.
Note: If you're on a blog aggregator, you can visit The Confused Capitalist here (or here: http://confusedcapitalist.blogspot.com/) for additional articles and exclusive content!

JW
The Confused Capitalist
Sunday, November 25, 2007
Sectors Still Look Poised for Outperformance
The groups I liked included some of the bigger banks (although I warned that further declines of 10-20% also looked possible), whose yields were then in the 3.4% to 5.0% range or so.
They also included some of the large engineering firms, who I see as prime beneficiaries of the design and oversight work needed to build out the emerging markets infrastructure, and the work needed to replace the aging infrastructure of the western world.
It also included several emerging markets suggestions, and a later posting suggested that distressed credit buyers would have the opportunity to load up their balance sheets with cheap debt, which could fuel earnings for years to come.
Since those predictions, the S&P 500 has bounced up and then down, and is essentially flat over that period.
Note: If you're on a blog aggregator, you can visit The Confused Capitalist here (or here: http://confusedcapitalist.blogspot.com/) for additional articles and exclusive content!
The banks mentioned have generally declined, most by about 10-20%, but with Citigroup getting trashed. On the other hand, some have held up pretty well, considering the magnitude of write-offs announced since then. I still like them, and now most of the yields are now in the 5-7% range, making them even more attractive in the face of what I see as a weak market. Maybe it's just me and Warren Buffett who like the bank stocks at these prices.
Engineering firms still look good as a look term-prospect, but this may be somewhat tempered by the fact that most of those discussed have moved sharply upwards, by 10-50% since then.
The emerging markets suggestions have also moved up, by about 15-20% on average of the group discussed.
Finally, a later August 2007 suggestion of looking at some distressed credit buyers is essentially flat as a group.
I still like all of these groups, and think that current prices are likely to look good several years from now.

JW
The Confused Capitalist
Sunday, November 04, 2007
Food Inflation will continue and accelerate
Nevertheless, here's several ways to invest in what I believe is a long-term trend towards higher food prices:
Van Eck Global's fifth ETF, Market Vectors Agribusiness (AMEX:MOO), which recently debuted and is already up nearly 20% since then. The ETF includes subsectors of the agriculture, such as agricultural chemicals at 34.3% of the index, agriproduct operations, 33.5%, agricultural equipment, 24.3%, livestock operations, 5.6%, and ethanol/biodiesel, 2.3%.
The 40 companies from 13 countries in the index must have a market cap of at least $150 million and a monthly trading volume of 250,000 shares. These companies are primarily engaged in the business of agriculture, and must derive at least 50% of their total revenues from agribusiness. According to information on the fund sponors site (Van Eck), as of Sept 2007, the fund had a PE of ~27, a PB of ~3.5, and a dividend yield of 1.06%.
There are also several ways to invest more directly in the foodstuffs, either through ETFs or ETNs. Two recent products from Barclays (ipathetn) are as follows:
"JJA" tracks the Dow Jones–AIG Agriculture Total Return Sub-Index. The Index is currently composed of seven futures contracts on agricultural commodities traded on U.S. exchanges. The weightings are currently as follows: Coffee 8.0%; Sugar 7.0%; Soybeans 28.0%; Wheat 23.6%; Soybean Oil 9.9%; Cotton 9.3%; Corn 14.3%. According to the information provided by the sponsor, the annual return from the index looks like this: 1yr = 44%; 3yr = 12%; 5 yrs = 6.2%; 10 yrs = -(minus)1.7%.
As you can see, owning the index constituents would have been very good during the past year, and very lousy over the past 10 years.
"JJG" tracks the Dow Jones–AIG Grains Total Return Sub-Index, which has an underlying composition of three futures contracts on grains traded on U.S. exchanges. They are weighted as follows: Soybeans 42.6%; Corn 21.6%; Wheat 35.8%. According to the information provided by the sponsor, the annual return from the index looks like this: 1yr = 64%; 3yr = 14.9%; 5 yr = 6.4%; 10yr = -(minus)1.4%.
Judging by the return differences between the two products over the past year, it appears that the Grains component of the "JJA" ETN (which is 66% of that ETN) has provided almost all of the 44% annual return; in fact, my calculation shows that it's responsible for 41 points of the 44% return.
PowerShares also offers a foodstuff type ETN, DB Agriculture; "DBA".
It tracks the Deutsche Bank Liquid Commodity Index - Optimum Yield Agriculture Excess Return. The index is a rules-based index composed of futures contracts on some of the most liquid and widely traded agricultural commodities – corn, wheat, soy beans and sugar, in equal weightings (i.e. 25% each). However, the weightings in the fund are only periodically rebalanced, and as of October 25 2007, the weightings had changed to as low as 17% for sugar and as much as 31% for soybeans. Index return history as of September 28 2007; 1Yr = 36%; 3yrs = 15%; 5yrs = 11% and 10yrs = 1.6%.
This ETF started trading in January 2007 at $25 and closed at $29.28 on October 26 2007, providing a 17% return since that date.
Note: If you're on a blog aggregator, you can visit The Confused Capitalist here (or here: http://confusedcapitalist.blogspot.com/) for additional articles and exclusive content!
Finally, according to recent press releases and web-articles, ProShares is going to be offering a leveraged ETF tracking the Dow Jones-AIG Agricultural Index. When they start trading, this will offer the opporunity to track the index, but on a double-leveraged basis. The release date of the ETF isn't known at this time. Expect a one to four month delay as typically seen.

JW
The Confused Capitalist
Monday, October 29, 2007
Move out of both the US and Canadian Dollar?

Sometimes, you've got to recognize good fortune and take advantage of it. Other times, you've got to move to avoid trouble.
For my blog readers, who seem to be mostly a mix of my fellow Canadians, and my "American Cousins" (yes, I really have some), it seems to be a time for both.
Firstly, the Canadian dollar is now trading at high levels, and just today punctured levels not seen since the currency starting floating in 1970. In other words, a modern era record high. So it may seem unusual that now is the time I'd begin suggesting that it's appropriate for my fellow Canadians - likely with much of their wealth invested in Canadian companies - to begin looking outside the country.
However, while I fully expect that the currency may well continue its climb, prudent investing requires re-balancing, particularly when something has appreciated dramatically. A once in a 37 year event (record high currency) qualifies.
So, I'd suggest that many of you start looking at ways to diversify at least some of your investment portfolio outside of Canada. While this might hurt returns over the short term (no one can really "call the top" of any currency assent), it looks to me to be a prudent move over the longer haul. In other words, buying international assets when they look cheap to us.
Note: If you're on a blog aggregator, you can visit The Confused Capitalist here (or here: http://confusedcapitalist.blogspot.com/) for additional articles and exclusive content!
Secondly, for my American Cousins, unfortunately, I wouldn't recommend getting more heavily into US assets at this time. Let's face it, the American fiscal situation is a mess, with the national debt at unprecedented levels (roughly $27,000 per person) and projected to continue growing, and many Americans themselves hampered by heavy -unprecendented really - levels of personal and mortgage debt.
Combine these twin bombs of debt, personal and federal, with many recent announcements by central banks the world over that they intend to reduce their holdings of US currency, and where do you think the currency is headed?
Or perhaps another way to put it would be: Do you really think you're smarter than the these central bankers who are leaving the US currency like a plague?
So, to both my fellow Canadians and my American cousins, I think that now is a good time to begin looking at other internationally-denominated investments. Reducing exposure to your Canadian or American assets at this time seems prudent, and likely to boost long-term returns.

JW
The Confused Capitalist
Wednesday, October 24, 2007
Thinking Ahead: Ten Years Out
One of the themes I've tried to engage readers in here, is that by playing some fairly obvious trends, and coupling those with reasonable valuations, is a relatively easy way to outperform the market.One theme I've pounded on over the past one-and-a-half years is the emerging market theme. It doesn't take too much heavy lifting in the thinking department to realize that with soaring GDP growth rates of 8-12% annually in some of these countries, expecting their stock valuations to follow isn't much too much of a mental stretch, even for weak thinkers like me.
So, thinking ahead, and about 10 years out is a good target, it becomes much easier to think that an overweighted emerging markets position is likely to be both prudent, and very profitable. Now, the graphic above showing firestroms in California (currently displacing one million people) obviously suggests that this posting isn't about emerging markets.
That's correct - this is about alternative energy production. While climate change and global warming have been warned about and was easily readable in the popular media 20 years ago(Time Magazine, for instance, awarded Planet Earth as "Man of the Year" in 1989, due primarily to concerns about global warming), it's only recently that most people are finally waking up to the severity of the problem.
As the problem continues to grow in the public mind, so too will the demand for solutions. These will be invoked on a political and individual basis. As the negative consequences of inaction become more and more and more visible and the predictions more dire, many will begin making personal change AND demanding societal change. This is inevitable.
Note: If you're on a blog aggregator, you can visit The Confused Capitalist here (or here: http://confusedcapitalist.blogspot.com/) for additional articles and exclusive content!)
What is also inevitable is major changes to our type of energy consumption and to the pattern of use. For instance, emerging economies will begin to use far more energy than in the past. This is good for them, but not good for the planet. The energy hogs of the planet - that's us in the western world - will finally begin to reduce consumption outright - not just on GDP weighted basis. Since we were "first in" to this pattern of inefficient energy use, it also is right that we strive to be "first out" of the pattern.
This brings us to our investment opportunity. Looking ten years, does anyone see a world in which the general populace isn't pressuring the politicians to fund alternative energy, to create incentives/disincentives to change energy use, and possibly even to restrict certain types of energy use? Perhaps rationing, a popular method for "spreading the pain" and acknowledging that we're all in this together, will become popular.
In any case, I personally cannot envision a world in 10 years where alternative energy isn't a significantly larger economic sector than it is today.
Of course, my much beloved ETFs provide a way to play this trend while avoiding single company risk. The recent launch of three ETFs targeting this sector might lead some to utter the usual cliques and say that this is a clear sign that this market segment has "topped". Yet the reasonable valuations, societal trends, and my common sense, tell me "no", that is not the case at all. And that is why I am willing to significantly overweight my portfolio to this segment.
While I do not pretend this is a comprehensive list, here are three ETF names in this sector:
Market Vectors Global Alternative Energy ETF (GEX) started trading on the New York Stock exchange. The fund, tracks the Ardour Global index (Extra Liquid), which is comprised of stocks in 30 publicly traded companies engaged in alternative energy production. These stocks are selected from a stable of 250 companies in this space. At least 30% of the names are not US-domiciled companies, and may therefore be attractive to those wishing some diversification out of the US currency. It is however, a relatively concentrated ETF, with 60% of the value being held in the top ten positions. Yahoo Finance shows the current PE as ~30.
Power Shares Global Clean Energy Fund (PBD) is based on the WilderHill New Energy Global Innovation Index. The Index seeks to deliver capital appreciation and is composed of companies that focus on greener and generally renewable sources of energy and technologies facilitating cleaner energy. The modified equal weighted portfolio is rebalanced and reconstituted quarterly. It currently holds 84 positions. It also has limited exposure to US companies, with only 26% of the ETF having US domiciled companies. Yahoo Finance shows the current PE as ~26, while information from PowerShares says the PE is ~42.
Finally, an all US domiciled companies is the First Trust NASDAQ Clean Edge ETF (QCLN)which started trading in February, covers five sub-sectors of the alternative energy industry: renewable power generation, renewable fuels, energy storage and conversion, energy intelligence, and advanced energy-related materials. The investment has above average concentration, with the top ten positions holding 55% of the value. It seeks to track the NASDAQ Clean Edge U.S. Liquid Series Index. Yahoo Finance reports the PE as ~25.
One caution with all of these ETFs is that they are presently quite small, none having assets of more than $100 million. But I predict that will change dramatically by the time 2017 has rolled around. Clean energy - a future whose time is now for the investor.

JW
The Confused Capitalist
Saturday, September 29, 2007
The people have spoken - well 15 of you anyway ...
- 27% said it would have touched a point at least 25% lower;
- 27% said it would have touched between 12% to 19% lower;
- 33% said the dip would be relatively minor, between 0-12%
- 13% said that it wasn't going any lower - that 1476 would be the low water mark over that time frame. So far anyways, those who chose this option have been correct, as the market gapped up the next day on the back of the FED rate reduction and waved good-bye to 1,476.
Interesting, but obviously not scientific in any way, given the self-polling aspect, and tiny sample size.
[Note: If you're on a blog aggregator, you can visit The Confused Capitalist here (or here: http://confusedcapitalist.blogspot.com/) for additional articles and exclusive content! ]
JW
The Confused Capitalist
Saturday, September 08, 2007
Emerging Markets hold the line in equity decline


Tuesday, August 28, 2007
The Upside of Declining Consumer Confidence
The Conference Board reported that consumer confidence dropped in August, giving up nearly all of its July gains.As the Conference Board reported it ...
"A softening in business conditions and labor market conditions has curbed consumers' confidence this month. In addition, the volatility in financial markets and continued sub-prime housing woes may have played a role in dampening consumers' spirits. But, despite less favorable conditions and in spite of all the recent turmoil, consumers still remain confident. And, current Index levels suggest further economic growth in the months ahead."
(Note: If you're on a blog aggregator, you can visit The Confused Capitalist here (or here: http://confusedcapitalist.blogspot.com/) for additional articles and exclusive content! )
It was reported that this was a prime cause of weakness in the stock market today. Despite notions to the contrary, declining consumer confidence is a good, healthy response to the indebtedness of both the consumer, and the federal government.
Acting otherwise would be a denial of reality. For those soundly in the bullish camp, let's review some facts:
- Household debt at unprecedented levels;
- A negative household savings rate, something never seen in the midst of an economic expansion;
- Federal government debt at the highest levels in recent memory, and still growing;
- The continuing trade deficit;
- The prospect of a continuing decline in the currency, meaning the Fed has to continue to walk the tightrope between importing inflation on the one hand, and managing the orderly decline of the currency on the other. All the while trying to massage the debacle in the credit markets. An undertaking fraught with short and/or long term risk. Take your pick.
Yes, there's times to be confident, like when things are humming along really well. This isn't one of those times. Then there's the confidence that comes from having been in a place of despair, but when the trends are moving in the right direction. This isn't one of those times either.
Now is a time to make sure you get your own financial house in order.
Start with the basics - your household budget. Review it for unnecessary expenditures. Trim your debt levels, with the most expensive interest rates first. Save some money! Use a high yield account, or find some solid blue-chip stock prospects, or broad-based ETFs. Save (anyone remember the word?) ... save ... save ...
In short, the upside of declining consumer confidence is the ability to not to be a monkey brain - to recognize the potential for trouble (like now), and put some preventative personal actions in place. While the trouble may or may not materialize, planning and acting like this will serve you well in any case. Now isn't the time to be an overconfident consumer - its' the time to be a confident saver!
Don't be blind to reality - open your eyes, look around, think, plan, and act. Are you a monkey?

JW
The Confused Capitalist
Monday, August 13, 2007
WallSt.Net Podcast
This posting is essentially related to some stuff I talked about on the podcast.
Firstly, anyone interested in buying my book can go here.
Secondly, in terms of some of the stuff I talked about in the podcast about why this blog is a bit different than many out there, I mentioned specifically, dividend investing, and long-tail investing. Here's a couple of articles I've posted that kind of give you a bit of the flavor of these topics, here, here and here. And for those who know me and my bent towards value investing, I re-submit this evidence ...
Now, in terms of stuff I specifically recommended (either avoiding, or moving towards) ...
AVOID
Real estate stocks, especially home-builders (see the reasons why, in an article I wrote in my other life) and avoid sub-prime lenders; the first for three to five years; the second for two plus years. Pessimism after that will be prevalent and then would be the time to buy. There's still too much optimism in the market.
BIG BANKS
Conversely, the really big banks are getting tarred with the "sub-prime" brush, which isn't warranted, in my view. Many of these institutions are tremendously strong, with great balance sheets and will easily weather this storm, and perhaps come out of it with better than ever opportunities. They're also paying great dividends right now, and most have raised their dividend recently. This is another sign that they are probably being mis-priced in the market. Some to look at would include:
- CITIGROUP - yielding about 4.6%
- Wells Fargo - yielding about 3.4%
- Bank of America - yielding about 4.6%
- Wachovia - yielding about 4.6%
- US Bancorp - yielding about 5.0%
Of course, those risk-takers might wait for the next mini-plunge which, if it occurs, might raise these yields by another 50 to 100 basis points (i.e. prices might fall by another 10-20%). However, I think they're good enough deals as they sit. Don't delay too long on these folks - "on sale" today!
EMERGING MARKETS
Emerging markets remain a very-long-term theme that investors will be able to successfully play for a decade at least (provided the stocks don't get overpriced). On a purchasing power parity (PPP) basis, these economies currently account for about 20-25% of world trade, yet most conventional financial advisers suggest a 5% weighting or so. This is a serious backward-looking mistake. No investor with a 20 year horizon can afford to take such a light weighting in these strong growth markets.
While the conventional BRIC countries have been bandied about as "the" emerging country investment destinations, other countries also have strong profiles too. A personal favourite of mine remains South Korea, with nearly an "emerged" economy, yet very cheaply priced.
Here's some ways to play the emerging markets theme, via ETFs, in my personal order of preference:
- Wisdom Tree's ETF - "DEM" - a dividend-weighted emerging market ETF. This ETF should prove more resilient than many emerging market investments during market corrections, while retaining most of the upside during exuberant bull markets.
- The Claymore Investments ETF - "EEB", which is designed to provide exposure to the BRIC countries, through ADRs. Because ADR issuers tend to be large, liquid companies, this also reduces some risk.
- The iShares S.Korea ETF, "EWY" - a narrow singly country focussed ETF.
- The iShares Emerging Market ETF, "EEM" - a very broadly-based emerging market ETF.
AGRICULTURAL COMMODITIES
I think this sector is going to have a huge tailwind going forward, something I've written about here. In later postings, I'll elaborate on how to play this trend.INFRASTRUCTURE BUILD OUT
This is tied in with several other trends, including the re-building of the industrialized world's infrastructure to make it greener (using mass transit for instance, to replace the crappy aging stock of roads and bridges).
Also, the infrastructure build out in the emerging markets is something that's going to continue to occur during the next several decades. For instance, the Chinese GDP per head is about 1/4 of what it is in the US (on a PPP basis), while in India it's about 1/10 (PPP basis). These economies will also obviously be building out their infrastructure. Accordingly, I like some of the very large manufacturers, like General Electric ("GE") & Siemens AG ("SI"), but I especially like the engineering firms that'll obviously be beneficiaries of the design and over-sight work needed here. Some names in this sector include:
- Fluor Corp. - FLR
- Foster-Wheeler - FLWT
- Jacobs Engineering - JEC
- Stantec Inc. - SXC
- SNC Lavalin - SNC (on Canada's Toronto Stock Exchange)
Well, that's about all for right now - if you're new to the site, feel free to poke around. If you're a regular, thanks for coming by.

