I am retired and take educated guesses on all things financial.

October 03, 2008

October 3, 2008: The Best Offense Is A Solid Defense

President Clinton signing the deregulation act that allowed financial institutions to co-mingle. Courtesy, New York Times, November 13, 1999.

Now that Congress has passed and the President has quickly signed what may well prove to be a rather ineffective piece of pork-laden legislation to inject more failed socialism into our free market economy, I believe that the individual investor should take steps to defend hard-earned assets and protect against what is almost sure to come: a national recession,followed by a global recession, followed by a round of dollar inflation and higher U.S. tax rates that will be described in the next Presidential term as confiscatory.

Licking some wounds in this unforgiving market, I have tried to simplify my portfolios to anticipate the above scenario - knowing that no one can predict the future. So I hedge my own feelings and retain some stocks that are dividend rich in lousy sectors that may turn on a dime into favorites.

The dividend-rich stocks I recommend include Master Limited Partnerships in oil and gas transmission. These include Kinder Morgan Energy Partners (KMP), Energy Transfer Partners (ETP), TEPPCO (TPP) and Enbridge Energy Partners (EEP). I own TPP and EEP.

Other dividend-rich securities examples include out-of-favor stocks such as Dow Chemical (DOW),Annaly Mortgage Perpetual Preferred 7.85% (NLY+A), Monmouth Realty (MNRTA) and the Alpine Global Dynamic Dividend CEF (AGD).

These type of securities are all speculative to a greater or lessor degree, with a secure dividend floor to resist plummeting to ground zero.

To invest as per my prognostication, you may wish to consider the following.

Rental real estate: If you have even the slightest inclination to invest out of the stock and bond market, buy into the real estate fire sale in a neighborhood near you. Bank short sales are easy and common transactions now (offer 40 cents on the list price for a cash offer to start). Rental rates are steady to up, the market is in need of rental units in neighborhoods. Urban subsidized rents are guaranteed and rising. With inflation and higher taxes on the horizon, the tax benefits of direct ownership of real estate is compelling. A 20%+ return before tax benefits is well within reach. Remember that real estate is, in the final analysis, a people business vs. a brick and mortar business, which is one reason why otherwise astute money managers flop as landlords.

Inflation Protected Securities: iShares TIP Inflation-Protected Bond Fund (TIP), or buy TIPs directly from the U.S Treasury web site. Inflation may well come close to 12% or higher as the government printing presses roll 24/7 to bail out liberal-inspired social justice programs and to concurrently stave off a severe recession. Circa 1977-80. One benefit: The new President will be a one term President as we finally get fed up and sort out our political mess.

International Dividend Fund: Fidelity Strategic Income Fund (FSICX).I like the breadth of holdings and the mild diversification of currencies.

Safe Haven Stock Fund: iShares Switzerland (EWL). Gold-plated companies with a world-wide reach in a protective investment environment with a trusted currency. Keeps you in the game for the first stages of an eventual economic recovery.

Gold: First time I have recommended this commodity. 5% in a gold ETF such as iShares COMEX Gold Trust (IAU).

Bond Funds: Vanguard Short-Term Corporate Bond Fund (BSV),iShares Lehman 1-3 Year Treasury Bond Fund (SHY).

Preserving capital and gaining interest to boot is not a lot of fun and adventure. It's your money. Protect it for now to avoid having to fight the urge to become extremely speculative later in a futile attempt to recoup lost monies wasted away trying to game this market.