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How to Earn 8.25% on CashBy
Saturday, July 3, 2010
The reflexive rebound is over...
Bob Farrell was chief market strategist at Merrill Lynch during the 1960s, 1970s, and 1980s... and many old-timers consider him a market legend.
Farrell put his stock market wisdom into a collection of simple, timeless nuggets he called "the 10 rules for investing." They're posted all over the Internet (you can find one copy here)...
Look at rule No. 8: Bear markets have three stages – sharp down, reflexive rebound, and a drawn-out fundamental downtrend.
Farrell's eighth rule sums up my view of the stock market right now. The 2008 credit crunch was the sharp down, the bounce from March 2009 to April 2010 was the reflexive rebound, and we've now entered the drawn-out fundamental downtrend...
I don't expect any more credit crunches or cash panics from here. The government will make sure of that. Instead, I think we've entered a long period of economic housecleaning, where businesses and individuals unwind their bad investments and rebuild their finances.
What's the best investment strategy for this environment? It's simple...
First and foremost, you need to preserve your capital. Stocks are going to fall for several years in a row. So forget traditional "buy and hold" stock market strategies. You want to hold a large cash balance. When the third stage of the bear market ends, you'll find once-in-a-generation bargains in stocks, commodities, and real estate. You'll only be able to take advantage of these bargains if you have cash in hand.
Second, use your cash to generate income. If you can increase your cash pile by just 4% or 5% a year, you'll be in a better position than 99.9% of other investors when the bear market ends.
Here's the thing: You can't use traditional income investments to do this. The Federal Reserve will likely keep interest rates at zero for the duration of the bear market. So forget bank CDs, money market accounts, and savings bonds. They won't generate any worthwhile income for you.
Also, don't touch the usual high-yield vehicles. I'm talking about REITs, income trusts, master limited partnerships, municipal bonds, and high-yield funds. These investments worked wonderfully in the last bull market. But in the bear market, they're garbage. Many of these investments will end up worthless. Forget them.
In the stock market, I'm looking for recession-resistant companies with long track records of raising their dividends. McDonald's (MCD) is a good example. Its dividend doubles every four years or so... and it sells the cheapest food in the nation. The worse the recession gets, the more hamburgers the company will sell.
In the bond market, I only recommend notes issued by companies with huge cash balances. This way, I know my readers' money is safe and there's no way they'll stop paying us interest and dividends. Take Hilltop Holdings preferred shares (HTH-PA on Yahoo) for example. Hilltop's balance sheet is 88% cash. By buying Hilltop's preferreds, we're lending money to this cash pile at 8.25%.
Hilltop won't go bankrupt, as it's almost entirely composed of cash, yet we're still able to generate a large income stream.
These are just a couple of the safe, income-generating investments I'm looking at right now. In a few years, when the best companies in the world are paying 10% dividend yields and trading at six times annual earnings – and you have a giant pile of cash and dividends sitting in your brokerage account – you'll see the wisdom of this income strategy.
Good investing,
Further Reading:
Alright, fine. You've built up your cash pile. Now what? Stash it under the bed? Tom's got a few better alternatives for you. They're safe. They're liquid. And they'll pay you a better return than your mattress. Read more here: My Favorite Ways to Hold Cash.
If you're limiting yourself to income investing's "usual suspects," you're missing out on one of the market's greatest wealth-compounding stocks. As Tom recently wrote, "Even though these companies are the favorite income investments of professional investors, most retail investors have never considered them..." Get the details here: You've Never Considered This 20% Income Opportunity.
Market NotesCHART OF THE WEEK: TAKING THE "LONG VIEW" OF GOLD Now that gold has soared from $925 an ounce to $1,200, it's amazing how many people CNBC trots out to explain every random $20 move in the metal.
We hope by now all DailyWealth readers realize trying to analyze every move in the gold price is a waste of time. We don't see gold as an investment. We see it as real-money "crisis insurance." We bought our gold long ago... and we hope to never have to use it. Not much more "analysis" is needed here.
We also encourage folks to take the "long view" when taking stock of their gold holdings. This long view – a 10-year chart of gold – is our chart of the week.
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Stat of the week
1.21 million
Number of GM-branded cars sold in China so far this year. It's the first time in the company's history that cars sold in the first half of the year in China outnumbered cars sold in the U.S. In The Daily Crux
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