Risk/Reward Vol. 285
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
“Where have all the young girls gone?
Where have all the husbands gone?
Where have all the soldiers gone?
Long time passing”---lyrics from “Where Have All the Flowers Gone” sung by Peter, Paul and Mary
“Money can't buy back
Your youth when you're old
Or a friend when you're lonely
Or a love that's grown cold”---lyrics from “A Satisfied Mind” sung by Johnny Cash
“Rock steady baby!
That's what I feel now
Let's call this song exactly what it is”---lyrics from “Rock Steady” sung by Aretha Franklin
Early reports indicate that Black Friday Weekend sales are lackluster. But even if they rebound, they cannot hide the biggest problem facing every economy in the developed world; namely, falling demand for goods and services. Merchants and manufacturers alike are asking “Where have all the young girls gone?/Where have all the husbands gone?/Where have all the soldiers gone?” The sad truth is they are “passing.” Indeed, this year, for the first time since 1950, the number of working age persons worldwide will shrink. Meanwhile, the numbers of those aged 65 and above continue to skyrocket. As warned by Harry Dent (highlighted in Vol. 218 www.riskrewardblog.blogspot.com ) this demographic shift is not good for the world’s economies. The peak age for consumption is 46 which means that Baby Boomer demand crested in 2007. And the following generations simply have not procreated like their predecessors. Who needs a five bedroom house like the Busch’s bought in 1989? Who needs a house at all? Apparently not many, as the sale of newly constructed houses has remained below 500,000 annually since 2008 even in the presence of record low mortgage rates. Between 1963 and 2005, that number averaged 700,000 peaking in 2005 at 1.3 million.
So if demand is dropping how come corporations continue to report record earnings? Remember, corporate earnings are not reported as actual earnings, but “earnings per share”. A corporation can improve its “earnings per share” by increasing actual earnings or by reducing share count. And it is the latter course of action that virtually every corporation in the S&P 500 and the Dow Jones Industrial Average has adopted. “Money can’t buy back/Your youth when you’re old/Or a friend when you’re lonely/Or a love that’s grown cold”—but it can buy back stock. Those corporations comprising the S&P 500 have repurchased over $550billion of their stock in the past 12 months thereby reducing their share count by nearly 3% and increasing “earnings per share” accordingly. In the face of ever shrinking demand, real earnings growth is hard to achieve so corporate managers can and do appease shareholders by buoying their stock price via buy backs.
So are we destined for reduced returns on our investment dollars? Absolutely not. It may not be as easy as it has been since 2010, but hopefully it will not be as difficult as it was in 2008-2009. One sector where I predict a “rock steady” annual return of 5-8% for 2016 is preferred stock. As mentioned countless times in this publication, the return on preferred stock is highly correlated to the interest rate on the US 10 Year Bond. The return on preferred stock will remain stable so long as the rate on the 10Year holds steady. With the futures market now 75% confident that the Federal Reserve will raise short term rates 25 basis points in December and that any increase thereafter will be extremely gradual if at all, one can be reasonably confident that the yield on the 10 Year will stabilize and thus the return on a basket of preferred shares will hold steady. For example, “what I feel now” is that for the foreseeable future PGX will trade between $14.50 and $15.00 and will yield between 5.75 and 6%. For those with an appetite for a bit more risk, any number of closed end preferred stock funds should deliver consistent 8-9% returns.
Throughout my life, I have fallen in love with my own ideas. I know this, and so I establish escape routes in case they don’t work. A perfect example is my 8% loss rule. Don’t any of you fall in love with them. Do your own research; reach your own conclusions. Falling in love with ideas, even one’s own, can be dangerous. In the words of Johnny Cash,
“Love is a burnin' thing,
And it makes a fiery ring
Bound by wild desire
I fell into a ring of fire
And it burned, burned, burned
That ring of fire/That ring of fire.”
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