Market Watch

There continues to be nothing positive to say about the market. The national debt, unemployment, trade imbalance, government deficit, unsold real estate market and poorly capitalized banks remain unsolved problems. The only solutions to the problems are solutions that create more government, which further indebts the taxpayers. The “stimulus” bill was created by the government, for the government, and for the people who work for the government. Until there is a clear sign that solutions to these problems exist, it is hard to reason why the Dow Jones industrial average would go anywhere but down, or stay in this trading range just above 10,000 points as it has, seemingly, forever. 

The biggest problem facing investors today is what to do with their money, and to whom they should entrust it. If Wall Street could not manage its own money, how can it manage ours? The answer is that it cannot. The losses that Wall Street suffered resulted from bad investments that Wall Street sold to gullible investors like us. Tragically, Wall Street is obsolete, and the only way left for it to make money is to (1) manage ours; and (2) raise money to fund the federal government’s deficit spending. The latter constitutes by far the greatest part of the balance sheets of Wall Street firms. Wall Street’s income from sales of Treasury securities is huge, and, really, at this point, Wall Street is nothing more than the financing arm of the U.S. government.

Forty years ago Wall Street had one purpose — to raise capital for the growth of American industry. As American corporations got more sophisticated, they began to bypass Wall Street and issue their own securities to the public without using Wall Street as a conduit. That huge and extremely profitable source of income for Wall Street continued to diminish throughout the 1970s and 1980s. 

In the 1970s and 1980s Wall Street also invented several different financing vehicles to create revenue lost from the loss of the sale of corporate stocks and bonds. Most of those financing vehicles like REITs, ETFs, CNOs, etc. created huge revenues for Wall Street which sold them throughout its systems (like a Merrill Lynch) to investors who trusted their stock brokers. As Wall Street got greedier, and borrowed more money for the schemes that it sold to us, the risk of this house of cards caving in increased. 

 At this point, Wall Street does not know how to reinvent itself. Prudent investors should look to establish parameters for their own investments that they dictate to whoever manages their money. 

 Look back over the years and muse over how our investment life would have turned out if we were disciplined enough to keep, say, 60% of our money in equities and 40% in cash and bonds. And, then, think about the same formula in the future with the caveat that the 60% of our portfolio represented by stocks must be only in A, or A+ rated stocks. And maybe that’s where we ought to be at this point. Why?

1. Wall Street is in an upheaval and who knows where things will wind up;

2. The government is a mess, digging a deeper and deeper hole for the taxpayers through more and more debt, and that is not only unresolved, it’s not even addressed;

3. Banks who manage money for individuals have had the same problems that Wall Street has had, because they have been buying the junk that Wall Street has sold them; and,

4. Money managers are hard to check out. 

So in order to see our way through this financial crisis, what could we do for ourselves that would educate us enough to help determine our own investment path? How can we develop enough confidence in our decisions, to remain comfortable, and not be in the slightest bit stressed out about our capital? How can we do this when there are hundreds of investment services out there sporting opportunities to “double your money, get at least 25% annual returns,” etc.? 

The answer is to use investment services that provide reliable statistics like Value Line (www.valueline.com) and I.Q. Trends (www.iqtrends.com). I.Q. Trends, for example, follows the 250 best-capitalized corporations in the world that are dividend payers and comply with U.S. security laws. If a corporation doesn’t have a long record of paying a dividend, it is not included in the service. Market Watch agrees: The opportunity for us to do well over a period of years is best insured when we invest in companies that have a strong record of increasing dividend payments to stockholders. In order to pay those increasing dividends, the corporations must have increasing earnings.

While many services give us ample amounts of information, I.Q. Trends uses only stocks that are dividend payers and ranks them four ways: as undervalued stocks; overvalued stocks; stocks in a rising trend; and stocks in a declining trend. In the undervalued stock category, which is the category in which we should buy, there are 83 stocks listed, of which 15 of the stocks are A+ rated. A+ ratings are the lowest risk and safest stocks that an investor can own. Those A+ dividend payers alone include names like Wal-Mart, Walgreens, Target, Sysco, Proctor & Gamble, Coca-Cola, Colgate-Palmolive, Johnson & Johnson and Exxon. These companies are in the under-valued category, because from a price point of view, they are selling at historically low price-earnings ratios. For example, Exxon is selling at 11 times earnings and Johnson & Johnson is selling at 12 times earnings, both considerably below their average historical price-earnings ratios. That means that these undervalued A+ stocks have the best opportunity, at this time, of providing capital gains over the next several years. 

Now, let’s say that whatever our ratio of stocks to cash and debt might be, we only buy A+ stocks, particularly in this market. That will be, by far, for the average investor, much better over a period of years than investing in all the junk that Wall Street packages and sells through “Merrill Lynch” type systems. Stockbrokers are primarily honest people, however, they are salesmen and subject to the sale of all these Wall Street schemes. They, themselves, are inundated with the products. They are given quotas to sell the products, which stockbrokers willingly accept, because (A) they have come to believe in the products; and (B) they receive additional incentive to move the products because of outsized commissions.

In markets like this, if we become committed to keeping large cash balances and investing in stocks that are only A+ rated dividend payers, we’ll sleep well and do well financially. In addition to the above services, Yahoo, AOL, Bloomberg, and a host of other services provide statistics you can use to create charts of stocks you want to follow. There are services that will show you how to set up such charts, or contact your accountant who will certainly be able to lead you in the right direction.

If you target only A+, and A-rated, stocks, the services will generally agree on those 100 or so top corporations.
 
Caveat Emptor.

George Rauch, Longboat Key, is chief executive officer of Bradenton-based General Propeller and a former Wall Street investment banker.