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Blue Chips: The Time To Buy Is Now

Recs

27

July 02, 2008 – Comments (30) | RELATED TICKERS: MMM , KO , DD

I recently read an article highlighting 5 blue chips that are decent investments right now.  After thinking about it for a moment, I heartily agree.  We're talking about Dow 30 stocks here (non financials - still way too early), and I might throw in a couple of non-dow large caps.

A lot of us talk about oil, gas, energy, and commodities (ag and precious metals).  As a dyed-in-the-wool value investor, I'm always looking at companies that are well-run, and are at a discount to what I think their fair value is.  Right now, there are a bunch of real blue chips that are ripe for the picking that have sold off with the general market, and even if the Dow goes to 9000, should still be good investments for the long-term buy-and-hold (LTBH) investor.

What do I look for in a blue chip company, and what's my investing thesis?  Well as for what I look for, I want a company that has many decades of success, preferably having been in business before 1929 - so you know there is a good company history.  I also look for them to be mostly ethical, to have sound accounting, and to be a market leader in their respective industry.  This is pretty much the definition of a blue chip, but I just wanted to let you know what I'm looking for.  It also helps to see the products of a blue chip company - if you use their products every day, and can see those products, you can do your own simple due diligence by testing those products yourself.

My investing thesis is if a company is well-run, and has steady growth, I am looking for the company to drop with a broad market sell-off, and get a maximum dividend yield on the stock.  Many dividend yielding stocks are yielding much more than your average savings account, and some are yielding more than online big percentage savings accounts.  Assuming the company in question has international sales, you are also hedging your investment from dollar devaluation, and in some cases your total return may be even improved with a dollar devaluation.

Now I want to assure everyone that I'm not suggesting investing in all blue chips.  Many of them are value traps.  But I'd like to highlight some that I feel make really good investments right now.  I'll check back on my blog in a year and see how well my predictions play out.

So here are the blue chips I'm suggesting:

MMM, KO, PEP, JNJ, PM, T, VZ, PG, DD.

Honorable Mention: UTX, IBM, GE (would be a buy but for financial division), MRK, DOW

Ones to avoid: Anything doing with financials or cars. And Pfizer.  Even with the yield that company is just mired in the mud.

Ones I'm not talking about: Heavy industrials (like cat and boeing), and oil/energy (like xom and cvx)

I'm going to highlight the companies I feel are definite buys:

Ticker - Dividend Yield

MMM - Yield 2.9%.  Out of all the Dow stocks, I'm most bullish on 3M.  65% of sales are international.  CEO is a well-respected engineer.  Usually makes brilliant acquisitions.  Used a piece of tape lately?  Or a post-it note?  Wear a shoe?  This company, founded in 1902, will likely never be a huge grower, but a steady grower with a good dividend that will protect your dollar and likely grow it beating inflation, and currently is near a FIVE YEAR LOW.  3M dipped below 70 for a few short weeks in August of 2006, and before that had not been below 70 since 2003, at the tail end of the last bear market.  Did I also mention that in that 2000-2003 bear market, MMM returned a total of 35% (simple return not annualized)?  If this isn't a defensive stock, I don't know what is.  As an American company with American tradition but strong international sales growth, you are getting the best of both worlds: the value of a blue-blooded well-run hard working Midwestern headquartered company, with expansion in the markets that are growing the fastest.  It doesn't matter if oil goes to 300, or to 30.  MMM is going to make money, likely increase their revenues, and likely increase their dividend.

KO - Yield 2.9% Near a 52-week low.  Also with strong international sales.  Also will make money whether oil is 300 or 30.  I'm going to steal the top pitch for the rest of my bull argument: "Stock market goes up you drink coke. Stock market goes down you drink coke. Recession you drink coke.

This pitch could go on forever.

PS. Great emerging market play."

Remember, it's Jack and Coke.  Not Jack and RC Cola.

PEP - Yield 2.7%. Might as well stick with the diabetes makers.  Pepsi management has shown stellar performance over the past 30 years.  It is often held up as a stable of LTBH return value investing by Motley Fool investors going back to 1980.  Just like KO, Pepsi has strong international sales, and people will continue to use their product aaaaaaaaaaaaand... will also make money whether oil goes to 300 or 30.  What's your local bank paying again on savings accounts?  And if the dollar goes down by another 20-30% in 5 years, what will be worth more, the dollars in your account, or a well-run large cap with international exposure?

JNJ - Yield 2.9% Quite possibly the best play on the aging of the US and the world's baby boom population.  Oh yes, did we mention that the "baby boom" wasn't just a US phenomenon - europe and japan and canada and many other countries had baby booms after WW2.  The eldest of these boomers are now 62, and over the next 15-20 years or so we are going to see the world's largest percentage increase in aged people in recorded history.  JNJ has products for people of all ages - from baby shampoo and bandaids for boo-boos, to orthopedic prosthetic joints (hip, knee, shoulder replacements anyone?).  Other JNJ products in my bathroom: Aveeno (soaps and lotions), Listerine, Sudafed, Tylenol.  The bear case for JNJ will be that their pharmaceutical segment will drag on earnings; this may or may not be the case for the future.  But I believe the growth in their other divisions will more than make up than the FDA dragging it's feet on the entire industry, and oh by the way, JNJ tends to do quite well during democratic administrations. (January 1993: 11.0.  January 2001: 46.56.  That's a 4 bagger in 8 years under Clinton.  And that's not counting dividends.  During the Carter administration, JNJ returned almost 50% in 4 years.  This was in a flat market, and again not counting dividends.)  If you had bought JNJ in January of 1970, and not sold a share, each share would be worth about 62 times your initial investment - not including dividends.  Now, I think there might be a bit of a chance for a turn-down in JNJ's share price.  It is a definite buy under 60/share.  At a current level of 64.69, it's slightly undervalued.  What was the dividend yield you say?  2.9% - seems to be a popular number nowadays.

PM - Yield 3.7%. Me and my buddy Deej know the real deal with this one.  A US-based company that does not have sales inside the US, only international. PM is Philip Morris International.  It beat earnings in it's first report.  Marlboro is arguably the #1 recognized brand on the planet.  As more nations are lifted out of poverty into a more middle class stratosphere, demand for cigarettes is going to go up.  Here in California, the percentage of smokers is small.  But I've been to NY.  People still smoke.  A lot.  And my friends who have been to Europe tell me people still smoke like it's 1950.  Banning smoking in public places won't stop increasing waves of people who are pulled out of abject poverty into a more meager poverty from smoking.  Also because of the international basis, you again get positive currency effects from a falling dollar.  (What's it called when the dollar loses value and the price of goods and services go up again? Oh yeah, inflation.)  The only bear case on PM is potential lawsuits.  I don't see that happening anymore.  The Master Settlement Plan has been upheld by many domestic courts and litigation problems are now no greater for PM than they are for any other company.

T - AT&T. Yield 4.9%. Yowzers.  Kind of like XOM, when they broke up the Rockefeller oil cartel, and then a hundred years later they are all back together, and now AT&T is back in a national and international dominant position.  AT&T in it's current configuration started as SBC Communications in 1983, and ended up taking on the name in 2005 in a merger deal.  Now telecom.  Kind of boring.  Sort of like a utility.  A utility yielding 4.9%.  With a strong base of cell phone customers (the Demon happens to be one of them).  Use an iphone?  You are using AT&T.  Use a blackberry? Chances are you are using AT&T.  Think we'll be using cell phones in 5 years? 10 years? 20?  I do.  And with a strong positon, strong dividend, and organically growing industry, with an industry that has very little competition, you are looking at a solid investment, if nothing else for the income.  I'm not a big fan of their debt load, but that comes with the territory of being a telecom, being very capex intensive.

VZ - Yield 5.0%.  Might as well stick woth the telecoms. VZ also used to be a Baby Bell.  It's like a big family reuinion. :)  In any case, VZ has real potential not just to be an income play, but to be a leader in internet service providing for both consumers and business.  They are also talking about getting into cable service.  Big money, big business, little competition.  Everyone is raving about how awesome FiOS is.  Think we'll be using the internet in 10 years?  VZ is providing the road for you and me to travel the internet superhighway.

I want to note that with both VZ and T, I'm looking at it more from a real dividend/income play.  They are more like utilities.  If I had to buy one right now I'd go with VZ because of FiOS.  Many people also claim that VZ has the best cell phone support.  I have found their support to be equal that of AT&T's.  So that's a wash.  These are defensive plays to be able to park your cash somewhere other than a bank account and not watch the value of each of your dollars fall.

PG - Yield 2.6%.  The lowest yield of the blue chips mentioned here, but still solid.  Products from PG in my bathroom: Mach 3 razor, Crest toothpaste, Vicks vapo rub.  I occasionally have pringles in my food closet, and duracell is my battery of choice. Things i don't have but you might are always, head and shoulders, pantene, oil of olay, tide, dawn, downey, pampers.  This company has been around for 171 years.  That means it didn't just survive the depression and 2 world wars, but also multiple depressions in the 1800s.   I can't find exact numbers, but from the 10Q summary: "Our products are sold in more than 180 countries primarily through mass merchandisers, grocery stores, membership club stores and drug stores. We have also expanded our presence in "high frequency stores," the neighborhood stores which serve many consumers in developing markets." I believe at least 50% of all sales are outside the US and this number is likely higher.  Expect PG to keep growing steadily over the next 10 years.

DD - Yield 3.7%.  Dupont for those who aren't familiar.  I'm wearing down on this blog post and if you've made it this far congratulations.  Dupont has been around for 206 years, is involved in a lot of diverse things, the most exciting of which right now is agriculture.  The most important thing I personally use from Dupont is Kevlar.  No, I'm no a cop or a marine, although Kevlar has helped save likely countless lives in the streets and on the battlefield.  I am, however, a fire performer.  See that fire flower that is my avatar icon?  The way you make a set of fire poi is by attaching a leather handle to a chain, and at the other end of the chain you attack a wick made of - you guessed it - kevlar.  You dip the kevlar wick in a flammable fuel (like kerosine), light it, and presto, you have a set of fire poi to dance with.  Now I'm not recommending you go out and do this, but I am recommending Dupont based on their ability to innovate and create products like kevlar, that can be used for such diverse purposes from body armor protection to fire performance.  And just to let everyone know I'm safe with not just my investments but also my body, Dupont also makes a fiber called Nomex.  I wear Nomex arm-sleeves to protect my arms when I do my fire performance.  What exactly is Nomex?  It's a flame-resistant fiber, and if you've ever watched a Nascar, IRL, or NHRA (hot rod) race, you have seen drivers wearing Nomex, or a firefighter, or... the list goes on.

Just to show I'm putting my calls where my blogs are, I've now picked all the companies detailed here to outperform.  My assertion is that these companies may drop a little bit more, but not much more.

Demondoug owns shares in MMM at the time of publication of this blog post.

30 Comments – Post Your Own

#1) On July 02, 2008 at 8:36 AM, saunafool (98.74) wrote:

In general, I agree with you. I've often said that the Baby Boomers (I'm about 8 years too young) had a big advantage in their investments--in the late 70's and early 80's everything was cheap. They could buy houses for 2X income (granted with a 15% interest rate, but when they refinanced they were in Fat City), they could buy stocks with single-digit P/E ratios and 5% dividend yields, they could buy government bonds which paid 10% or more. All you had to do was save and invest somewhere and you made it big.

Being a post-boomer, we've been faced with overpriced housing, P/E ratios over 20, dividend yields slim to non-existent, and government bonds that pay nothing. That is, until recently.

You just named a nice group of companies paying 3% dividends with P/E ratios in the low teens. These are some of the best yields in the past 15 years.

What about GE? Dividend yield of 4.6%, P/E at 12.4.

Sure, they have a financial division which will probably cause some problems, but almost every other segment of the business has substantial upside. I am most optimistic about GE Power--nuclear plants, coal plants, wind turbines, and all the infrastructure. GE makes it all.

Of course, I own it and have it in my CAPS profile and I'm down, so what do I know?

And one more thing, I am sitting on my savings, chanting the Fool mantra: "Down, Baby, Down." 

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#2) On July 02, 2008 at 8:50 AM, alstry (35.96) wrote:

Demon,

This is where you and I part ways..at least for a little while:)

Until the world washes out the huge overhang of excess debt, this roller coaster is still near the top of the big drop.

Just curious, are you in the hyperinflation camp or depression division?

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#3) On July 02, 2008 at 9:26 AM, TDRH (99.49) wrote:

I like your "cokes and smokes" strategy.  

UTX is one that I am considering putting money into for a long term buy and forget about position.  The company will experience contraction, but it is well run, with well established brands and global distribution. 

I like GE as well, but their finance sector is a black hole.  

I am hesitant though, more bad news on the financial front could force this market to overshoot the bottom.   Always hard to tell when we hit bottom, but until consumption of oil affects available supply and prices stabilize and fall there is too much uncertainty for me.

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#4) On July 02, 2008 at 10:34 AM, Schmacko (55.67) wrote:

GE is still a profitable company and their earnings more than cover their dividend which isn't something "real" financial comapnies can say.  I guess we'll see what kind of shape they're in after they report on the 11th.

 I've owned JNJ shares for a little over 6 months and while they're down about 4% that is still outperforming the market by a wide margin.  And the dividend makes the slight loss a lot more tolerable.  The company has held it's value suprisingly well in a turbulent market.

I bought KO around the same time as I did JNJ.  People were using your exact same logic in your post even back then.  That was a horrible short term investment (it wasn't originally planned to be short term).  I should've red thumbed it when I sold it off at $58.  I think they still have downside.  They're bottlers are all struggling and I have to imagine increased corn syrup prices are going to eat into their margins a little bit. 

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#5) On July 02, 2008 at 12:07 PM, jesusfreakinco (28.91) wrote:

Demon,

I am with Al on this one.  You are too early in your call.  There are too many headwinds facing the US consumer and the rest of the world will sneeze or catch a cold as well as the US continues to contract.

Paulson's comments this morning about the Fed needing to prepare for another large bank failure are a foreshadowing of what is to come.  They know it is a matter of when, not if.  Could it be C or LEH or WB?

Even if another buyout is pieced together, it will lead to falling confidence by consumers and foreign investors.  Things are spiraling right now and won't be getting better any time soon.

I'll look at your rec's in 12 months or so when gold is at 1600, inflation is in the double digits, and unemployment (official stats) are at 10%.  Then that may be the time to buy.

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#6) On July 02, 2008 at 1:31 PM, DemonDoug (34.47) wrote:

Sauna: One needs to look at GM to see how financial divisions can really drag down a company.  Not that GM doesn't have other problems, mind you, but can GE take 4-6 quarters of 1-2 billion in writedowns per quarter?  Or more?  I love their infrastructure business as much as anyone out there.  I've considered dipping my toes in myself, but the thing is, the other companies I've highlighted don't have that financial sector risk in their portfolio of company divisions.

Alstry: Part of why I like blue chips is that companies like these have survived many currency changes.  If the US dollar ends up being worth zero due to hyperinflation, shares of these companies will still hold value.  Now in a hyperinflation you are best suited holding gold and silver, of course, but I'm not advocating that you ever put all your eggs in one basket.  And that comes to the next point.  I'm in the inflation (not hyperinflation) camp.  I believe we are seeing inflation more in line with shadowstats' numbers, that inflation is running at 10-12% per year overall, and we could see that go up to 20-30%.  By definition this is not a hyperinflation.  But the dollar has lost a lot of value, and government policy is still telegraphing a further devaluation of the dollar.  I think it's possible it might lose another 50% of value in the next 5 years.  My bullishness on precious metals and especially oil is almost primarily due to my research on this.  The thing with the blue chips is that they will be able to keep up with inflation by passing costs, for example Dow Chemical's recent price hikes.  Out of all the companies I've mentioned, I think Dupont might get hit the worst by oil at 300/barrel.  My overall price target for oil was 200/bbl by 2010; I now believe that 300/bbl is more than just an outside shot.  Also if you want an interesting discussion you can read FourthAxis' daily recaps where I've been trying to show him the light that we are going through inflation, not deflation. 

TD: The reason I can't go with UTX is because I don't work with or see any of their products.  Their summary on yahoo finance states that a lot of their business is in defense and aerospace, which I also see taking a downturn more than the other businesses mentioned.  I just don't see as much upside there as I do with MMM.  Now realize that I have a bit of a users bias - I'm using 3M products every day at my job.  It's hard to be bearish on a company when you are going through a lot of their products every day.

Schmacko: Yes, GE is still profitable, and yes they can cover their dividend.  The question is how hard are they going to be hit with their financial sector?  JNJ is a great company.  Not only that but their products are very high quality.  I don't see much downside.  As far as KO and corn, I think there may be a little bit more pain to come, but as a market maker, they set the price and can pass along cost.  I also think that in the next few years corn won't be going parabolic - the ethanol thing is going to die down a bit and let's just assume we don't lose 10% to flooding in 09 and 10.  You may be right in that I could be a bit early, but I'll take KO to beat the market over the next year.

Jesus: I could be early in my calls.  You are right.  But consider: many parts of the world are growing out of abject poverty and into slightly less poor conditions, where people who used to be starving peasants barely eking out an existence, these people can now afford things like - shampoo.  And while I don't expect the BRIC countries to grow at 10% forever, I am expecting a continual upward mobility of their societies (maybe not russia so much, they've basically got a neo-feudal system with King Putin and a bunch of billionaire lords and everyeone else still barely subsisting).  Maybe I am being overly optimistic.  My belief however is that the dollar and the standard of living of US citizens will be downward while the rest of the world raises itself up.  The companies I've listed here all do a lot of business outside the US, and most if not all have more than 50% of their revenues outside the US.  They are, for all intents and purposes, not domestic but international companies.  Paulson and the fed can do all they want; the idea is to put your money in position to benefit the most, and with a recent drop in the share prices of these companies you've got some good options for investing in continued global growth while hedging your dollar exposure.  Even if gold is at 1600, that would mean the currency is devalued even more, and in the case of PM, would mean an even more outsized earnings from currency effects.  A big US bank failure is unlikely to damage non-domestic sales of cigarettes.

And just to be completely clear, I believe the time to start a position is now, however I would not advocate going "all in" on any of these stocks or the market at large.  I'm still around 60% cash in my taxable accounts and around 40% cash in my retirement accounts.  There may be a better time to buy, but right now I feel these companies have compelling valuations for at least a small position.  Keep your powder dry, so to speak, if the market continues to drop precipitously.  The money I've been putting in to the market is money I've saved over the past 6 months or so, not the long-term gains I made in the 03-07 bull market.

 

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#7) On July 02, 2008 at 2:09 PM, Sqwii (< 20) wrote:

Hi demondoug !

Really nice posts you make (:! 

 

Thank you :)

 

What do you think about ESV the oil drilling company? 

 

Sqwii

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#8) On July 02, 2008 at 2:18 PM, DemonDoug (34.47) wrote:

I love ESV.  Deej has done a writeup or two on that company and I'm with him all the way.  I would not personally be building a position in them right now; as you can see by this post, I want to buy when things are beaten down.  Other than JNJ and PM, each of the highlighted companies are very close to 52 week lows, and my favorite, MMM, is near a 5 year low.  Ideally I'd like to buy when there is blood on the streets, but I feel with the amount of money the Fed is pumping, there is an artificial floor under stock equities, and my gut tells me that that money is going to flow into defensive stocks, high quality blue-chippers. 

ESV is a hold at it's current level, around 77.50.  It's a buy around 65, strong buy at 50 or below.  I feel like Cramer making specific positions like that, but that's my gut valuation on it.  Deej might disagree and call it a buy here, and I can't argue with that position, because I see growth in the oil sector over the next 5 years.  My preference however is to wait for a dip in oil, hopefully into the 110 range, ideally under 90, but we may never see that again.  Time will tell.

I'll take cokes and smokes FTW right now. :)

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#9) On July 02, 2008 at 2:19 PM, Sqwii (< 20) wrote:

What about ASFI ?

P/E 3.97

Forward P/E 4.77

P/S 0.86

P/B 0.52

PEG 0.44

 

Maybe a little cheap (: ?

 

Sqwii

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#10) On July 02, 2008 at 2:22 PM, Sqwii (< 20) wrote:

Thanks DD.

 

Yes, I think ESV it's quite good play because of the momentum in it and the trend well above MA 50 and MA200.

 

It is still cheap based on P/E and PEG.

 I also found to you "AKO-A" Soft Drink like KO with amazing low PEG and P/E.

 

Check it out :)

 

Sqwii

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#11) On July 02, 2008 at 2:39 PM, Sqwii (< 20) wrote:

Read my blog DD.

 

Sqwii

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#12) On July 02, 2008 at 4:28 PM, Atleus (< 20) wrote:

Good luck catching a falling knife.  I see the dow dropping below 10k easily, possibly even below 8k.  The Nasdaq may get cut in half.  This is long term, drawn out of course, and there may be some more headfakes along the way. 

Read this: http://jameshowardkunstler.typepad.com/clusterfuck_nation/2008/06/not-your-grandmas-depression.html

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#13) On July 02, 2008 at 7:59 PM, DemonDoug (34.47) wrote:

International sales of all of these companies have organically grown and in some cases exploded over the past 10 years.  Every single one of the companies I highlight have had yoy quarterly revenue increases, and all but MMM have had net earnings increases.  Will their businesses organically contract with demand destruction from faltering economies at home and abroad?  My contention is that these companies provide products and services that, while not completely necessary to living, have become necessary integral parts of every day life.  For example, you don't need toothepaste, shampoo, tampons, a cell phone, or even shoes and clothes to survive.  But can you imagine going a day without these things?  Do you think we are headed towards the day when the amount of cell phone users contracts worldwide year-over-year?

Short of an all-out WW3 between the US and China, I don't see that happening.  There are many superfluous things that can be considered luxuries that can be cut before these highlighted items that many people find necessary once accustomed to them.  We can cut out huge SUV's, starbucks coffee, high end organic produce, jewelry, tv's, video games, full price retail books, airline tickets, expensive car leases... on and on and on.  Notice that I don't have tiffany's, blue nile, automakers, airlines, best buy, electronics makers, whole foods, starbucks, etc. on my to buy list.

Even if the Dow drops below 10k (which it could easily do if BAC and GM go BK - both are part of the Dow 30 and are in big trouble), it is likely the individual stocks I have outlined will have an overall return that will beat holding straight cash.  If you are a true doom-and-gloomer, then go out and buy some physical gold and silver coins.  By all means, I suggest this, in the case of a total meltdown - having a percentage of your portfolio in precious metals is a great way to insure you maintain the value of your capital.

Kunstler is a known Doomer... and while I believe that the standard of living for most US citizens will go down, I do not believe it will be as bad as he puts it.  As our standard of living goes down, the standards of living for those in india, china, and brazil, as well as certain central american countries, and canada, is going up.  I think "The Long Emergency" is a good way to put it... but it's more like death from a thousand cuts as opposed to one slit of the throat.  And the patient isn't going to die, but will be battered and bruised.  He also does not give enough credit to Americans, who have shown time and again the resilience to withstand hardship, meet that hardship head on, and come out prevailing winners.  We are a country of winners.  We've never lost a war.  We've been stalemated, but never lost.  We've never lost land to another country.  Entire swaths of technological and biomedical advances of the last 200 years can be almost wholly attributed to the pioneering spirit, willpower, intellect, and hard work of Americans.  We work damn hard, and despite what immigrationists tell you, Americans are willing to put in a hard day's work - all we ask for is fair compensation.  Because we also stand up for our rights and have shown throughout our history that we aren't just willing to fight for them, but die for them.

I'm not saying that everything is rosy, only that all is not doomy and gloomy.  You'd do well to remember not just the depression, but all depressions that came before it and our victories both militarily, politically, and philosophically.

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#14) On July 02, 2008 at 11:03 PM, nuf2bdangrus (< 20) wrote:

DD  well written.  I have continuously been nibbling around in the selloffs, and trading around core positions.  But this market has no bottom right now. Not even and trades on the long side. Today's closing action was awful, enought that a long term limit on GE at 26.50 got filled, and I cancelled my orders on T, VZ, and DD.  I will enter them on a selloff.  I am still small cap laden, but they all seem to be hanging on to their bottoms. I'm down 10% in 10 days.  And no shorts to hedge, although I did buy FXY today.  Bounced off ema nicely at 92, and I think in the short therm that's a better hedge than going short.

 

I read the same article you did, buying these components of the DOW.  And I think I may dip into JNJ, perhaps T & VZ too.  But I really smell the makings of a panic selloff, the only reason I haven't gone to more cash is that the market is so oversold that it's due for a bounce.  Short interest too high, 1 piece of good news and up we go 400 pts.  

 

I've been eyeballing MMM, and it seems to be basing around 68-70, if it holds I'm in.

 

I did some DD on SNDA and bout Dec 30 calls, just to be rewarded with the stock dropping 6% and the options losing a third.  But I think the Olympics will bring investment attention to CHina, and FXI approaching a double bottom at 120.  

 

Oil is looking awfully toppy, why I;m avoiding all energy stocks, and may sell off my last 2 small caps and wait for a pullback.  THe KOL and the oil stocks behaved terribly today as well.  THe bear market is not over until all sectors roll over.  We are seeing the beginning of that capitulation.

 

Funny, in my 401 I went all cash in Sept, dipped into WB (my employer) at 23.5 small position.  Mistake.   But I tell you, the GW acquisition is the sole cause of the pain there, deposit growth is good and provides 70% of income.  I think its a buy under 15 or when the divy is cut.  A steal at 10. Yes, the damange is not all done, but the selloffs in financials is much slower than the selloffs in other sectors now, and that is a tell to me.

 

Getting killed in regular account, but it's too late to short and too late to sell.  CHeck out COW by the way, with the selling off of herds now, depressing beef prices.  Look for a nice pop in the fall.

 

Your patience and dd shows up in your score.  As for the DOW, the Feds have a big hand in trying to hold 10k and keep the unwind orderly, that power for 9 months shook me out of my shorts.  But in the end, market forces will overtake them.  Central Bank balance sheet half corrupted now.  Rates low.  No more bullets left.  They need to defend the dollar, and I think they will, through intervention at Treasury, a coordinated intervention, and rate HIKES.  That should shake out commodities and PM in the short run and give us a buy opportunity. 

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#15) On July 03, 2008 at 4:15 AM, saunafool (98.74) wrote:

DD,

First, I am in the "inflation of goods, deflation of assets" camp. 

You make a good point about America. Guys like Kunstler have been writing books about the demise of the U.S. every time there is a recession or impending recession for probably our entire history. Terrifying titles sell books, but they don't predict the future very well. (Besides, I'm more of an Empire of Debt man myself.)

All of these books do make a good point that the U.S. has worked itself into quite a pickle. We have huge debt obligations on the personal, local, state, federal, and business levels. There is no doubt that the debt is going to be a drag on the economy for a long time.  And the thousand cuts have only begun...

However, in The Black Swan, Taleb points out the reason why America will survive--it is the only place on earth where it is OK to fail. Start a business, go bankrupt, dust yourself off, and try again. In Europe, when you start a business, they check if you've had a bankruptcy in the past and if so, chances are that they won't let you try again.

What does this all mean? It means that basically no matter what conditions the world throws at the U.S., there will always be tens of thousands of people trying to turn their ideas into successful companies. People like to say that our business success is the result of tax reductions or deregulation (although lower taxes and less bureaucracy certainly help). Yet, you can look through the past 100 years or more and in every decade, under every tax or regulatory scheme, you will find new American companies forming and succeeding. This is something uniquely American.

So, no matter how bad it gets, the U.S. will find a way to survive and prosper.

Unfortunately, we've got a hell of a hangover to work off before then. 

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#16) On July 03, 2008 at 8:22 AM, alstry (35.96) wrote:

Demon,

Great work and you clearly fit in the thinker camp.  The fact that we can agree to disagree on a few issues in no way impairs my respect for you.

The BIG question now is whether we are in inflation or deflation.  If most of your assets are in your house, clearly deflation is the direction....if you are living in the third world and practically all of your expenditures are food and fuel, clearly price inflation is your enemy.

I am still undecided how this will ultimately unfold, but right now deflation is my bias.

Thanks again for thoughtful work.

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#17) On July 03, 2008 at 10:46 AM, DemonDoug (34.47) wrote:

Alstry, the thing that most people who believe in deflation don't see is the entire picture.

At any time there are always inflationary and deflationary forces at work in the marketplace.

That last statement should be self-evident, but most people don't realize that.  If things are always going up and down, including the value and supply of currency, there must be inflationary and deflationary forces at work.

The question then becomes, what is the net total of these forces?  Unquestionably it's inflation.  I calculated the cost of oil - just oil mind you - based on the closing price of 6/25/07 and 6/25/08.  The difference was almost 2 trillion dollars on an annualized basis.  In just one year!  (It was a 94.7% gain).

It gets much more complicated than that, but you know as well as I do the BLS out-and-out lies about inflation statistics, and that we are running inflation at well over 10% annually. Unfortunately for the government, financial assets are not calculated in inflation statistics - but even if they were, we would still be inflating away.  Inflation of financial assets is how banks have seized hold of our country and to a greater extent the world at large, and I for one am happy to sit back and let those bastards rot.

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#18) On July 03, 2008 at 5:39 PM, jesusfreakinco (28.91) wrote:

Sauna / DD / Al,

All good points to think about.  In most cases, the trend in place now is your friend and has a long way to go - Finls, HBs, USD - down; commodities, ag, gold - u.

All have a great 4th...  After all, we do live in the best country in the world (I agree w/ Kudlow on this and this alone...).

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#19) On July 03, 2008 at 8:40 PM, nuf2bdangrus (< 20) wrote:

DD...Mr Practical had a great article on inflation/deflation on Minyanville today.  I've been reading him for weeks.

http://www.minyanville.com/articles/inflation-deflation-Fed-crisis-Credit-debt/index/a/17847

 

I think he's right.  Right enough that I am going to abandon my attempts to bottom pick and hold a 30% in equities max, and the rest in currencies or cash.

 

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#20) On July 04, 2008 at 11:58 AM, GS751 (27.46) wrote:

Cokes and smokes is the way to go.  I actually own some KO shares.

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#21) On July 05, 2008 at 5:38 AM, DemonDoug (34.47) wrote:

I completely disagree with Mr. Practical.  He is dead wrong, starting with his supposition:

The traditional definition of inflation (rising prices) and deflation (falling prices) don’t make sense in today’s world. 

He makes this statement and then doesn't explain why this definition doesn't make sense.  The reason?  Because it DOES make sense, it's just that if we used the regular definitions, it wouldn't conveniently fit into his convoluted "deflation" scenario.

Here is another passage that is just wrong:

In 2007, we reached a point where there was just too much debt; no one could take on any more. This is where the Fed’s inflation machine breaks down: If no one can borrow or lend on the credit they offer the banking system, the money supply stops expanding. In fact, as people try to pay off all that debt (retire it) or default on it (destroy it), the money supply, bloated with debt, begins to shrink.  Hence deflation.

This is wrong on so many levels, including the most basic one.  First off, if we really wanted to expand money in the absence of debt, we could easily expand M0.  (That would be the physical currency.)  Secondly, just as you have in any market inflationary and deflationary forces, in the financial world you have things expanding and contracting.  You have to look at the entire picture and the net supply of money.  By the Federal Reserve's own numbers, M2 has risen 6.3% year-over-year from may 07-may 08.  (source: http://www.federalreserve.gov/releases/h6/current/ ).  Where is this deflation?  It is not showing up anywhere.

Also, every dollar we are overbudget on our federal budget is a new dollar also created out of thin air.  This is called "defecit spending."  It too is rising.

Strict measures of money supply, like M3, haven’t fallen - but that doesn’t include the most important broad sources of new money, like derivatives and securitized loans. As the money supply deflates, people borrow less and spending goes down. The deflation thus feeds on itself, because lower spending means lower income and debt becomes even harder to support. Prices in stocks begin to fall as the money supply dwindles.

What this writer fails to realize is the difference between the Financial, Insurance, and Real Estate economies, the Government economy, and the Production/Consumption economy.

And once you understand what the FIRE economy is, how it has infected and taken hold of the global business structure, then you can very easily see how we can have high inflation in an economic slowdown.  And it's not like there isn't precedent - in fact, in almost every economic slowdown we get INFLATION, not deflation.  How many times do we need to say this before people get it?  Weimar Germany, US in the 1970's, Japan after WWII, Argentina, Mexico, Zimbabwe, the Roman Empire, England has had serious periods of inflation... the list goes on and on.  The reason we had deflation in the 1930s was because of the hard gold standard, and once FDR got us off that inflation started right back up, and the reason Japan was/is deflating was because they were afraid of another hyperinflation.  That's it.  If we get deflation in economic contractions as a matter of simple logic, then why did all these other countries have severe inflation?

If you cannot explain why many countries historically have had inflation (not deflation) during economic slow downs, then you have no business claiming deflation as the winner, especially when all signs are pointing to inflation.

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#22) On July 06, 2008 at 9:20 AM, XMFSinchiruna (26.96) wrote:

alstry

Hyperinflation and Depression are not mutually exclusive scanarios.  We will have both... a stagflationary depression that our great-grandchildren will study in business school.

DemonDoug

Those companies are exactly the types of stocks I'll be looking to add near market bottom... I just really don't think we're very close to that yet.  When it feels like a good time to get back into financials... that wil be the time that it's also a good time to get into blue chips, IMO.  In the meantime, I just see no way that many commodities will not outperform those blue chips.

nuf2bdangrus

70 cash and currencies?  Be careful.  That cash us USD... which is about as favorable an asset class as housing stocks, IMO.  Other currencies will have comlicated trajectories as well.  If you're going to park assets in a currency, gold is king.

DemonDoug

Great post!  This debate is hugely important, and I believe every individual investor should be engaged in intensive research into what's happening at the macro level and determine their path to safety (and potentially gains) for themselves.  Thank goodness for CAPS!  :)  Fool on!

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#23) On July 07, 2008 at 11:59 AM, dwot (40.33) wrote:

I use a defintion of money supply for inflation/deflation.  Either the money supply is increasing or decreasing, not both so you can't have both.  I think I agree quite a bit on your position, but I think the price increases that will continue are a lagging factor of the previous inflation.  Price increases respond to inflation/deflation, but they are lagging.  I think money supply is contracting, but if you look at how much it grew, well, prices didn't go up 500%, and that is how far lagging price increases are to the inflation.

I think you are early in your blue assessment, but they are probably a good hedge to US currency which I think is in dire straights.

Good post and good comments.

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#24) On July 07, 2008 at 12:30 PM, DemonDoug (34.47) wrote:

Sinchi:

Part of the reason I'm advocating buying these stocks now (fyi, many of them are up in the past week), is because I believe part of the ongoing re-flation that is happening with the fed will end up putting money into the stock market.  When the money supply increases, that money has to go somewhere, and large caps with decent dividends and p/e's that are at least manageable, and sales and earnings that are steady are growing seem to be a pretty safe place.  I wouldn't be surprised to see p/e ratios of blue chips rise in the next 1-2 years solely due to inflationary policies of the Federal Reserve.  Add on top of that the fundamental strength of these companies and you have a fairly compelling case; timing the absolute bottom is going to be always near impossible, yes there are some downside risks but I think at this point your downside risk is far less than your potential gains.

deb - "I use a defintion of money supply for inflation/deflation... I think money supply is contracting."  There is no need to think if you are using money supply as your definition.  By all measures of money supply, both official and unofficial, the money supply is rising.  I put the link to the data for the federal reserve in comment #21.  If you want a link to an unofficially reconstructed M3, here ya go: Key stats (M3).

You have to understand why we have bubbles in the first place.  A bubble cannot occur in the absence of policies like these.  That's why there are now books called "America's Bubble Economy" - we have replaced the business cycle with the bubble cycle.  So the question then becomes, in the continued deflation of the housing bubble, where to put our money so we can catch the next wave upward.  My contention and many others believe that a combination of alt/green/clean energy and tech and infrastructure (especially water) will be the "next big thing," and have placed our bets accordingly.  As a branching of the next bubble, certain companies and industries will benefit, and I believe the ones I've highlighted are poised to do well in the next reflation.

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#25) On July 08, 2008 at 9:56 AM, Sqwii (< 20) wrote:

Hi we are in a deflation :-) (My algoritm prediction program)

 

So we will be in a deflation the next months.

 

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#26) On July 09, 2008 at 2:13 AM, awallejr (79.49) wrote:

Demon I am pretty much in your camp.  I see so many quality stocks for sale at the moment.  Unfortunately I am getting creamed short run, but I still like the thesis long run.  I own GE, BP, T, VZ amongst others in real life. 

With respect to the deflation/inflation argument, I don't see us in a deflationary period.  Using housing prices as proof is not really accurate.  It depends on WHEN people bought them.  If you bought a house for $100k, it went to $500k and is now at $300k you are still well ahead.  If you bought at the tail end then yes you got hurt.  If you could, however, actually afford to continue paying for the home, then its current fair market value may not matter, since 10 years from now you will be ahead.

The real estate market will eventually stabilize. It is just a matter of time and a matter of what the Fed does with interest rates (which I submit they won't raise for awhile).  Remember, real estate is finite, and only increases in value over time as the population grows. Just have to endure those corrections. 

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#27) On July 11, 2008 at 6:06 PM, DemonDoug (34.47) wrote:

Update:  I'm going to track the stocks I picked on this blog in the comment section, and I'm going to use the price on 7/2/08 (from yahoo finance) to determine their returns.

MMM - 68.48

KO - 51.37

PEP - 65.76

JNJ - 64.64

PM - 50.60

T - 32.89

VZ - 35.63

PG - 62.69

DD - 41.65

 

Currently, as of end of day 7/11/08, all of my picks on these blue chips are in the green in CAPS.  Some of them are lower in pure share value, and some higher, but all have outperformed the S&P 500.  The only one I hadn't picked on caps was JNJ, as I'm still waiting for a pure drop in share price on it.

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#28) On July 13, 2008 at 1:05 AM, dexion10 (27.74) wrote:

DEMON DOUG - Glad to see you are still out here posting.  I think you are one of the best on CAPS - however I also think you are going to be wrong suggesting that any of the DOW 30 are good investments right here. 

I wish I had time to link in many graphs and charts of similar cycles but unfortunately I don't. 

Instead I'd just suggest that you are fighting the trend and the data at this point that says earnings are going to continue to decelerate - forward estimates are not reliable nor are profit margins. 

Many studies will show that when profit margins are decelerating you don't want to own stocks period. Granted there will be some trades during the bear market.. but it's not time to INVEST in anything. 

With analysts predicting $88 -$98 of earnings for the S&P 500 whilst the S&P only mustered 16.76 in Q4 2007 - there would appear to be a lot of room for disappointment (even if financials stop writing things down).  

The DOW 30 and most other stocks are value traps in my opinion. One thing that I think you are being slow to respect is THE CYCLE.  I've been slow to respect it to but, let me tell you there is no where to hide here EVERYTHING is going to keep getting whacked.

Again there will be some trades to be made as the market trades down - and we are probably nearing a short term opportunity now - but that's all it is.

Lastly when it comes to investing in large caps like the DOW - let me share a little secret... the law of large numbers applies to stocks... mathmatically speaking large caps can't outperform for long periods of time - they're over-owned.

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#29) On July 29, 2008 at 8:59 PM, DemonDoug (34.47) wrote:

Dex - some of these stocks aren't part of the dow.  PEP and PM are not part of it, and neither is MMM.  The point with blue chips is you don't expect huge volatility, but as long as their earnings are growing, you expect their share price to gradually go up over time; the key is to get them when they are beaten down.  My overall premise is that these companies are still growing earnings (KO got nailed on a write-off, but revenues still up), and add in the dividend and you have a good shot at a 10-15%/year return for the next 5 years.  Sure, things are cyclical, but cokes and smokes are not as cyclical as, say, orders for jets and heavy machinery (BA and CAT).  Incidentally, all but T are up in caps, and looking at current share price, VZ and T are the only ones that are lower.  I expect this trend to continue, and I expect VZ and T to be steady growers along with the dividend payout to give you that 10-15% return - irrespective of what the rest of the Dow does.  I also think the Dow will go down more than it should because of the replacement of MO with BAC.  BAC is going to drag the Dow down while MO (or PM) would have kept it's value higher.

I would recommend buying all those stocks at the prices I have listed in comment #27.

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#30) On July 29, 2008 at 9:04 PM, DemonDoug (34.47) wrote:

whoops, i don't know why i wrote that.  MMM is certainly part of the dow. :P  But PEP and PM definitely aren't.  They still are solid blue-chippers though.  I wouldn't be surprised if PEP is put in at some point, especially if BAC goes under.

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