Fed Fights Dead Economy, but there’s Still Room to Make Money

Posted by on Aug 10, 2010 | No comment

While all eyes will focus on today’s FOMC meeting on U.S. monetary policy, traders scrambled to square positions ahead of the Fed’s response to overwhelming evidence that QE-I isn’t providing the Keynesian magic it had hoped for.

Expectations now center on how aggressive—or not—the Fed will be in this U.S. post-stimulus environment, which still suffers from remarkably weak aggregate demand, even after a herculean expansion of its balance sheet and record fiscal stimulus and bailouts from Washington.

As the Fed fears a Japan-like deflation, the central bank will do whatever it takes to fight the powerful forces characteristic of the “winter season” of consumer and business austerity as balance sheets undergo a “debt cleansing” necessary for the coming “spring” of renewed economic growth.

These economic winter seasons come about every 60-80 years, according to the early twentieth-century Russian economist Nikolai Kondratiev.

The Fed is fighting the chill of winter as mightily as possible without spooking investors into abandoning the dollar all together from what could be interpreted as intentional policy of dollar debasement—which is the plan all alone. But the Fed also doesn’t want every fund manager to load up on Treasuries forever.

Continued Fed easing will be an “extended period of time” is clearly a sign that the Fed is more frightened of a second act of economic collapse than it is worried about inflation. It will take one calamity at a time.

The king of bonds, Bill Gross, co-CEO of PIMCO, suggests that the yield curve is telling him that the smartest money doesn’t expect a Fed exit strategy to be implemented any time soon.

“When you analyze that portion of the [yield] curve, it says the Fed is on hold for a long, long time,” Gross  said during a radio interview on “Bloomberg Surveillance” with Tom Keene. “When you get down to 50 basis points on two-years, that’s giving you a signal that there’s not much left on the table.”

Looking at the yield gained by parking cash along the curve, Goss interprets that the wisdom of professional money says there won’t be any meaningful spending by corporations and households until Obama either enters his second term or we have a new president. Then, the long-awaited “green shoots” will emerge during the Kondratiev Spring.

“What the market really thinks is that for the next two to three years, the Fed doesn’t do anything, but then magically nominal GDP and inflation reappear,” said Gross.

According to Gross and his bond-trading colleagues, equity investors may be in for a long wait before the bull emerges. U.S. economic growth is most likely to be slow—at best—according to this financially savvy group. Until the cleansing of record household and government debt reaches a level that’s more manageable to service, stocks may, in fact, trade sideways for a couple of years.

This “sideways scenario” is gaining traction on the Street.

Nicholas Sargen, chief investment officer at Fort Washington Investment Advisors sees a “‘choppy, sideways’ U.S. stock market” until business and consumers feel Washington and the Fed can lower the unemployment rate. In an interview with Carol Massar and Matt Miller on Bloomberg Television’s “Street Smart,” Sargen believes stocks will trade sideways until the U.S. economic outlook and uncertainty on the political front become clearer.

In the meantime, money still can be made in a sideways market by investing in stocks which pay dividends—with some of them paying high rates too. As more money managers become convinced that the U.S. economy will likely be on a mild slope to recovery. The idea of buying stocks which payout high dividends could provide earlier entrants with capital gains as well from latecomers to the strategy.

The caveat to this strategy, of course, is the risk that the company discontinues its dividend payouts. A couple of metrics to look at includes the company’s dividend payout ratio (less than 60%) and the history length of the company’s payout.

The latter metric should trump the former sometimes. But these stocks are exceptions.

For instance, U.S. telecom company CenturyLink (NYSE: CTL) has been in business since 1968. The Louisiana-based company has been paying dividends consistently since Richard Nixon resigned as U.S. president in 1974.

The company pays an 8% dividend. But more importantly, the dividend has been paid for 36 straight years, having been increased each year since 1974.

CenturyLink’s top-line is stable and growing, too.

Other stocks which should be considered include:

Vodafone (NYSE: VOD)

Div.% 6.9%
Payout 51%
P/E 10

Eli Lilly & Co. (NYSE: LLY)

Div.% 5.3%
Payout 49%
P/E 9.1

Redwood Trust Inc. (NYSE: RWT)

Div.% 6.6%
Payout 54%
P/E 8.1

About BeaconEquity.com

BeaconEquity.com is committed to producing the highest-quality insight and analysis of small cap stocks, emerging technology stocks, hot penny stocks and helping investors make informed decisions. Our focus is primarily on the underserved OTC stocks market, or “penny stock” market, which has traditionally been shunned by Wall Street. We have particular expertise with renewable energy stocks, biotech stocks, oil stocks, green energy stocks and internet stocks. There are many hot penny stock opportunities present in the OTC market everyday and we seek to exploit these hot stock gains for our members before the average daytrader is aware of them.

Beacon Equity Group Disclaimer

This newsletter is a paid advertisement and is neither an offer nor recommendation to buy or sell any security. We hold no investment licenses and are thus neither licensed nor qualified to provide investment advice. The content in this report or email is not provided to any individual with a view toward their individual circumstances. Beaconequity.com is a wholly-owned subsidiary of BlueWave Advisors.

While all information is believed to be reliable, it is not guaranteed by us to be accurate. Individuals should assume that all information contained in our newsletter is not trustworthy unless verified by their own independent research. Also, because events and circumstances frequently do not occur as expected, there will likely be differences between the any predictions and actual results. Always consult a real licensed investment professional before making any investment decision. Be extremely careful, investing in securities carries a high degree of risk; you may likely lose some or all of the investment.

About BeaconEquity.com

BeaconEquity.com is committed to producing the highest-quality insight and analysis of small-cap stocks, emerging technology stocks, hot penny stocks and helping investors make informed decisions. Our focus is primarily OTC stocks in the stock market today, which have traditionally been shunned by Wall Street. We have particular expertise with renewable energy stocks, biotech stocks, oil stocks, green energy stocks and internet stocks. There are many hot penny stock opportunities present in the OTC market everyday and we seek to exploit these hot stock gains for our members before the average daytrader is aware of them.

Beacon Equity Group Disclaimer

This newsletter is a paid advertisement and is neither an offer nor recommendation to buy or sell any security. We hold no investment licenses and are thus neither licensed nor qualified to provide investment advice. The content in this report or email is not provided to any individual with a view toward their individual circumstances. Beaconequity.com is a wholly-owned subsidiary of BlueWave Advisors.

While all information is believed to be reliable, it is not guaranteed by us to be accurate. Individuals should assume that all information contained in our newsletter is not trustworthy unless verified by their own independent research. Also, because events and circumstances frequently do not occur as expected, there will likely be differences between the any predictions and actual results. Always consult a real licensed investment professional before making any investment decision. Be extremely careful, investing in securities carries a high degree of risk; you may likely lose some or all of the investment.

Copyright Beacon Equity @ 2012