With the Global Dow (click on ’5Y’ for five year view) having peaked in the first half of 2011, in line with my incessant warnings last spring and early summer, and having hit its peak far below its 2007/8 peaks, and with the downtrend in the Global Purchasing Managers Index to a new cycle low below 50, the question arises about what unexpected trends in asset prices may be in the process of being unveiled. After all, the above indices are known and publicized. To an extent, they are “in” prices.
In 2007 and beyond, the surprise was that “safe” income stocks such as BofA were not so safe.
My candidate for the current cycle is consumer non-durables. A yield-hungry investing public is buying these for the dividend stream. This exposes them to interest rate risk and to stock market price risk that dividend growth projections begin to get scaled back by analysts as they look at the shrinking pace of growth in the less-developed economies. Concomitant with these risks is old-fashioned margin pressure. The cost to manufacture toothpaste, bottled water or soda, or soap is minuscule compared to the retail price. There is ample room for price-cutting.
Of course, the P&G’s and Cokes of the world lack the leverage that sent Citigroup stock crashing from $50 to $1 in the crisis a few years ago (note that Citi stock has had a reverse 1:10 split since then). However, as a negative offset, a great many of these consumer products companies have already distributed most or all of their earnings via dividend payouts, share buybacks, the occasional poorly-timed acquisition, etc. They may well remain marketing and free cash flow powerhouses, but in general they lack the actual retained earnings in the bank net of debt that cash-loving tech companies prefer to have . Thus the equities of most of the mega-cap consumer non-durables lack that valuation floor of net cash or at least solid tangible book value that supports stocks of companies that may suffer a tough year or two.
This analysis also includes most of the brand and generic pharmaceutical stocks.
In contrast, utilities that are regulated monopolies have “normal” margins and are, well, monopolies. Plus, “everyone knows” their dividends have little or no growth ahead of them. Thus selected utility stocks continue to strike me as better bond subsitutes in this era of ZIRP than the consumer nondurables. Please note that of course, utility stocks are stocks; their market prices have risen a good deal lately, and their dividends are not guaranteed. These may also be volatile financial assets.
In the constant search for relative value, one place I am looking and beginning to invest in is domestic Brazilian stocks. “Everyone knows” that Brazil is a commodities country and that if a purported China bubble bursts, Brazil’s economy will fall apart. In fact, there’s a bit more to Brazil than commodities. Last week I bought BRF for some of the accounts I manage. BRF is an ETF play on domestic Brazilian stocks. Here’s a link to its components that suggests it’s a relative value play. LINK. On a price:book, P/E etc. basis, it looks as though it contains a number of “growth-at-a-reasonable-price” stocks. (Please note this is not a “trade”, rather for me a buy-and-hold investment, so I’m mentioning it on this site rather than my trading blog.) My guess is that I’m a few months early on this given global macroeconomic trends, but OTOH A) you never know and B) it’s easy to forget about these things during a panic if one hits, so I usually find myself buying things like this back at higher prices even I was right about the ”one more drop” thinking. It is critical to do one’s research before “the bottom”, and of course our sophisticated viewers know that as in the 2008/9 market bottoming process, there was no one “bottom”. For example, some stocks and commodities bottomed in October 2008, others in March 2009.
Of course, as always, nothing herein is investment advice, and these comments are presented to stimulate thought amongst our readership.
