We’re now wrapping up what will go down as a tough month for the markets. The last week or so has given investors a reprieve from the heavy selling we saw at the beginning of the August. I have urged investors to use some of the up action to go through their portfolio and pull out any “weeds” that could be set to resume their overall downtrends. Any company that has not performed well during the brief bounce-back we have experienced should stand out as a name to consider cutting from your portfolio. Our general rule is to examine any stocks that are trading 25% below their 52-week highs and closely examine the reason for that price weakness. Industry shifts or a continued decline in earnings are two big red flags to watch out for.
Looking at today’s action, earnings results helped lift stocks like Joy Global (JOYG) and PVH Corp (PVH), although both stocks closed well off their intra-day highs. Both companies have seen recent pops following their most recent earnings reports. Remember, traders tend to bet on a pattern continuing until it doesn’t work anymore. Meanwhile, a Wall Street upgrade helped commodity giant Freeport McMoran (FCX) close higher for the day. Interestingly enough, fertilizer stocks like CF Industries (CF) and Mosaic (MOS) did not participate in any of the commodity rally. The fertilizer space has been loved by day-traders on the long side the last couple of weeks. The dividend yields for CF and MOS are minimal and as such, are not suitable for income-seeking investors. Finally, Cyclical plays like Cummins Inc. (CMI), Caterpillar (CAT), and W.W. Grainger (GWW) were some of the biggest percentage winners during the session.
The Census Bureau revealed some startling data earlier this month indicating the concept of the “nuclear family” (just immediate family living at home) is becoming a thing of the past. Quickly on the rise, the data shows, are so-called multi-generational households. Those type of families, defined as those with three or more generations living under one roof, grew to almost 5.1 million in 2010, a 30 percent increase from 3.9 million in 2000. Coming from an Italian background myself, two-family homes were almost always a must-own, with the idea of grandparents living in the smaller unit (and not having to share the same living space), and the rest of the family in the bigger unit. Fast forward to what is going on now and you can imagine all the different economic reasons to explain the shift to multi-generational families sharing the same space.
Moving back in with parents is an obvious money-saver for many. With unemployment at its highest levels in decades, it makes sense that people are looking to significantly cut their expenses. I also think we’ll see the trend continue of younger generations holding off on the idea of marriage until later in life. This concept has already taken hold in countries like Italy and Japan. Japan especially has been battling a demographic downturn in new births, which is one of the reasons some economists believe Japan will remain mired in an economic slump. If the U.S. continues down the same path (some believe our immigration policy will continue to help the nation offset any demographic uncertainties — this however could change with less job opportunities to attract foreign workers), there will certainly be investment ramifications to consider. The mentality of everyone needing to cut back and pitch in to help keep the one big household running could likely put a damper on consumer spending.Riding The Mechanical Bull
As I’ve been saying for the past week, the recent market rallies fall into the “quirky” category, as best as I can describe it. When you see large cap stocks having intra-week swings of 15-20%, you have to really question on what is causing the moves. The lack of fundamental or actual company headlines certainly suggests the influence of computerized trading that you often hear described as the “algorithm machines.” I remember reading a “Wired” article recently that indicated automated/algorithmic/high-frequency trading could account for up to 70% of the daily U.S. trading volume.
We’ve obviously noticed this change in the markets, and have been adjusting our strategy to ensure we’re recommending only the absolute Best Dividend Stocks. For short-term traders, the shift to “machines” dominating the trading action has taken another hit to the already-low odds for success in the day trading lifestyle. When you see stocks trading at 80 times earnings and no analysts bat an eye, the tendency is to think “Hey maybe it’s the late 90′s again.” However, the fact that machines are making a mint off of the daily trading moves, you see that firms are almost held hostage to the run. If analysts say “sell” and prices move higher, they lose clients.
Now of course, there will be a reversion to the means and prices could shift lower very quickly (we saw this happen in the last couple of months as volatility spiked). In those cases, machines and money managers will simply alter their algorithms to take advantage of falling markets. As a former trader myself, I could tell you plenty of stories about making a great trade, only to give it right back again with a bad one. Eventually, the lure to press the action can only lead to reckless market moves, and eventually someone’s account blowing up.
That’s why we’re very cautious when it comes to recommending high-beta dividend names. Back in our early days of Dividend.com, we were a bit more aggressive when it came to recommending lower-yield, higher-growth stocks, but our stance has clearly changed now. We’ve also heard from several subscribers who believe our focus should be on yield alone, and we’re on board with that line of thinking.
Finding the right strategy for investing is essential, and we feel dividend investing works for the vast majority of people out there. Putting what you’ve learned into practice is the second step. We advocate investors develop a monthly system of putting money to work in your brokerage accounts. Automate this process as best you can, so you remove any barrier of thinking whether you want to skip a month or two if the market is pulling back. Embrace the learning process of what you decide your investing strategy is. This basically means you are willing to keep an eye on what your money and investments are doing. Staying in the loop is a great thing and you will get the biggest benefit out of it. Just dabbling in the markets will not get you to where you need to be. Putting money to work every month should be a regular routine. If you have a habit of jumping in and out of the markets, dividend investing is the best remedy for that affliction. You will get a new perspective on what long-term investing and the power of compound interest can deliver.
Thanks for reading everybody. I’ll see you tomorrow!