Related Resources
Check foreign exchange rates
Look up the latest economic news
See what companies will report earnings
Todays upgrades and downgrades
Jubak's Journal
Recent articles:
• Soaring world debt is your problem, too, 1/30/2004
• 10 stocks for a changed planet, 1/27/2004
• 3 guilt-free steps to making money overseas, 1/23/2004
More...
| | Jubak's Journal
My hell-in-a-handbasket portfolio
Even a relatively minor debt meltdown could push the dollar over the edge, reignite inflation or provoke higher interest rates. Here's how to protect yourself, just in case.
By Jim Jubak
Consequences.
I think its only sound financial strategy to prepare for the consequences of the mountain of bad debt that has built up in China, of the really troubling conjunction of huge government debt and a rapidly aging population in Japan, and of the utter dependence of the United States on the kindness of strangers to fund its dual government and trade deficits. (See my column Soaring world debt is your problem, too for more on these ticking debt bombs.)
Investors who pay attention to fundamentals know that in the long run, such things as mountains of bad debt and undisciplined borrowing do count. The Piper always gets paid -- eventually.
But experienced fundamentally-inclined investors also know that it can take quite a while for eventually to arrive. They also know that projected dangers can materialize in unexpected forms. The debt bomb, for example, could fail to blow up but instead just usher in a long, long period of a gradually weakening dollar and slowly increasing inflation.
So, while I dont think a smart investor will ignore the problem posed by these mountains of debt, running immediately to turn stocks and bonds into a stash of gold and soybeans isnt a particularly good solution.
Take action
So what do you do? Three steps make sense to me:
- Get your own debt under control.
- Make sure that you wont get trapped at the long end of the debt market.
- Gradually build a hell-in-a-handbasket portfolio as part of your larger equity portfolio.
Let me quickly explain points one and two, then spend more time on the hell-in-a handbasket portfolio. (Jubaks Journal is, after all, a column about stocks.)
Global debt is out of control. So what kind of shape is your household debt in? (For more on consumer debt and how you stack up, see my colleague Kim Khans article How does your debt compare?")
Move from adjustable to fixed
Its tough to reduce debt overnight, but heres how you can ensure that the debt bomb wont blow up your personal balance sheet if it goes off. Make sure that all your debt (or as much as you can) carries a fixed rate of interest. I expect a hike in interest rates from the Federal Reserve in the last quarter of 2004 or the first quarter of 2005. (Call me a cynic, but there is an election in November, remember?) So youve got some time to shift from adjustable to fixed debt.
Next, familiarize yourself with the fine print on your loans, especially on your mortgage. If interest rates and delinquencies begin to rise, you can expect that banks and other lenders will move quickly to invoke penalty clauses that allow them to boost interest rates for even a single late payment.
Shorten that maturity
Many fixed-income investors have been forced out to the long end of the bond market in an effort to find a yield above 2%. That move made sense, especially while interest rates were falling. And it didnt cause too much portfolio damage in 2003 as interest rates rose very slightly and bond prices fell.
But that wont be the case if interest rates start to climb in advance of a Fed move or in response to continued dollar weakness. Investors in long-term bonds, whether corporate or government, will see the market value of their bonds drop with every upward hitch in rates.
So while you have time, rearrange your fixed-income portfolio. At the most conservative end of a range of possible moves, you could use bond ladders of gradually lengthening maturities to reduce the average maturity of a portfolio. That would give you a chance to reinvest at least some of your fixed income assets at higher rates.
More aggressively, sell your long maturities now and move the money into dividend-paying stocks of companies with histories of raising dividends over time. Citigroup (C, news, msgs), ConAgra (CAG, news, msgs), Merck (MRK, news, msgs), Wells Fargo (WFC, news, msgs) and Genuine Parts (GPC, news, msgs) all yield more than 3% and have a history of raising dividends. (I built a screen to find these high-dividend growth stocks back on Dec. 23. To run it now and see what names it pulls up, click here.)
Hell-in-a-handbasket stocks
Lets be honest, if a debt bomb or two blows up in the wrong way and takes down a major hunk of the global financial system, which stocks you own wont be especially important. In a worst-case scenario, every financial asset will fall hard. And it wont matter if a companys earnings are priced in U.S. dollars or Thailands baht.
But lets say the consequences from this debt are limited to a weaker dollar, interest rates that climb at a relatively modest rate, global inflation, climbing uncertainty and the like. Then, picking the right stocks can spell the difference between major losses and modest profits.
I dont think any investor needs to implement this entire portfolio right now. This is the time, however, to start moving in this direction. Some sectors that make most sense in the high-debt world that Ive sketched out have already started to move up in price.
I could be wrong, however, if somehow the global economy and financial markets muddle through. Just in case, Ive kept an eye out for solid defensive stocks that have a good chance to appreciate in price if the global economy continues, without explosion, to ride current trends. Here are stocks I think are worth considering:
Protection from a falling dollar
Oil stocks. Oil is priced in dollars, so you might expect a falling dollar to hurt oil stocks. But the oil producers have a mechanism called OPEC (the Organization of Petroleum Exporting Countries) that allows them to take the purchasing power of the dollar into account when they set global oil prices. When the dollar falls in value, OPEC can make up the difference by raising the price of oil. And the non-OPEC oil producing giants such as Exxon Mobil (XOM, news, msgs), BP (BP, news, msgs) and Shell Transportation & Trading (SC, news, msgs), one of the holding companies for the Royal Dutch/Shell Group, are only too happy to go along. The result is an earnings report like the one Exxon Mobil released on Jan. 29: Earnings per share were up 21% for the quarter and 10 cents a share better than Wall Street had projected.
U.S-based multinationals with big non-dollar sales. In the most recent quarter, Alcoa's (AA, news, msgs) foreign earnings accounted for 83% of the companys total earnings. At Coca-Cola (KO, news, msgs), the figure is 65%. At 3M (MMM, news, msgs), 41%. At Citigroup, 41%. As the dollar falls against local currencies and foreign earnings are translated into U.S. dollars for a U.S.-based companys earnings statement, those foreign earnings represent more U.S. dollars. Other big foreign currency earners include Pepsico (PEP, news, msgs), American International Group (AIG, news, msgs) and big drug makers such as Pfizer (PFE, news, msgs). This foreign exchange exposure is one reason that many Wall Street analysts expect big-cap stocks to outperform this year.
Gold stocks. Gold is the emotional haven of first and last resort whenever the future starts to look uncertain. If youre new to gold, start small and start at the conservative end of the gold company spectrum. Dont plump immediately for the riskiest small cap that used to be the specialty of the exceedingly speculative Vancouver exchange. Newmont Mining (NEM, news, msgs) is a good place for the newcomer to start, especially since the stock has pulled back in recent weeks (13.5% in January) along with the general retreat in gold prices.
Protection against inflation
Global demand for things such as nickel, iron ore, aluminum, coal, oil, copper and soybeans is rising along with the economies of China and India, so even if inflation doesnt pick up, commodities stocks should do well. But if inflation does surge, prices of commodities will at least keep pace. I would underweight commodity producers whose prices are based on strong currency countries -- Australia at the moment, for example. These will give up part of their earnings edge as the dollar weakens. In the meantime, consider Phelps Dodge (PD, news, msgs), Inco (N, news, msgs), Southern Peru Copper (PCU, news, msgs), Freeport-McMoRan Copper & Gold (FCX, news, msgs), Bunge Ltd. (BG, news, msgs) and Companhia Vale Do Rio Doce (RIO, news, msgs). Noranda (NRD, news, msgs), a Jubaks Picks stock, has dropped back to an attractive price for building or adding to positions.
Protection against single-country risk
Dont put all your eggs in one basket is an adage that fewer and fewer U.S.-based investors have bothered to follow in the last decade. But I think its time to put it to use again as a way to defend against the possibility that a debt bomb could strike hard at an individual financial market.
Or at a combination of markets. Now that China is the hot international market, many U.S. investors have built portfolios in which China represents the only overseas exposure. Thats a problem because China is one of the two countries that I think is most likely to go through a debt-induced shakeout. The United States is the other.
Still want exposure to a fast growing giant? Add India to your portfolio mix. Two banks, ICICI Bank (IBN, news, msgs) and HDFC Bank (HDB, news, msgs), are ways to profit from the rise of the Indian middle class. Brazil looks cheap to me right now. Investigate Petrobras (PBR, news, msgs), Unibanco-Uniao de Banco (UBB, news, msgs) or Companhia Brasileira de Distribuicao (CBD, news, msgs).
Protection against rising interest rates
Its hard to find companies that should actually benefit from rising interest rates, but they do exist. Paychex (PAYX, news, msgs) makes money from the very short-term float it gets on payroll and other client monies. Higher rates add to that profit.
And dont forget companies with huge short-term portfolios that will generate massive cash flows that can be invested at higher rates as interest rates rise. Warren Buffett has positioned Berkshire-Hathaway (BRK.B, news, msgs) in just this way.
One final word: If interest rates rise, the high price-to-earnings (or no-earnings in many cases) stocks that led the market rally in 2003 will, history suggests, suffer more than their share of any damage.
Whatever else you may do, this isnt the time to be adding risk to a portfolio.
Im sure these suggestions havent exhausted the universe of ideas for defending against the debt bombs now out there. As usual, Ill be happy to share reader ideas for other solutions in a follow-up column. Just e-mail me.
| Jubaks hell-in-a-handbasket portfolio | | Company | Industry | Jan. 30
close | | Stocks to protect from a falling dollar | | | | Exxon Mobil (XOM, news, msgs) | Integrated oil and gas | $40.79 | | BP (BP, news, msgs) | Integrated oil and gas | $47.60 | | Shell Transportation and Trading (SC, news, msgs) | Integrated oil and gas | $40.30 | | | | Stocks of U.S-based multinationals
with big non-dollar sales | | | | Alcoa (AA, news, msgs) | Aluminum | $34.18 | | Coca-Cola (KO, news, msgs) | Beverages, food | $49.24 | | 3M (MMM, news, msgs) | Diversified industrial | $79.09 | | Pepsico (PEP, news, msgs) | Beverages, food | $47.26 | | Pfizer (PFE, news, msgs) | Pharmaceuticals | $36.63 | | | | | Gold stocks | | | | Newmont Mining (NEM, news, msgs) | Gold mining | $41.66 | | | | | Stocks that protect against inflation | | | | Phelps Dodge (PD, news, msgs) | Copper | $75.67 | | Inco (N, news, msgs) | Nickel | $37.43 | | Southern Peru Copper (PCU, news, msgs) | Copper | $43.90 | | Freeport-McMoRan Copper & Gold (FCX, news, msgs) | Copper and gold | $36.86 | | Companhia Vale Do Rio Doce (RIO, news, msgs) | Steel and iron | $53.67 | | Bunge Ltd. (BG, news, msgs) | Agribusiness | $34.20 | | Noranda (NRD, news, msgs), | Industrial metals | $14.50 | | | | | Stocks that protect against single-country risk | | | | ICICI Bank (IBN, news, msgs) | Banks, India | $15.01 | | HDFC Bank (HDB, news, msgs) | Banks, India | $29.00 | | Petrobras (PBR, news, msgs) | Oil & gas drilling and exploration, Brazil | $29.40 | | Unibanco-Uniao de Banco (UBB, news, msgs) | Banks, Brazil | $23.29 | | Companhia Brasileira de Distribuicao (CBD, news, msgs) | Grocery stores, Brazil | $22.99 | | | | | Stocks that protect against rising interest rates | | | | Paychex (PAYX, news, msgs) | Payroll and office services | $37.48 | | Berkshire-Hathaway (BRK.B, news, msgs) | Financial services, utilities | $2,981.00 |
|
Changes to Jubak's Picks
Buy ICICI Bank
Im taking my own advice from the hell-in-a-handbasket portfolio and diversifying Jubaks Picks beyond the U.S. equity markets by buying shares of Indias ICICI Bank (IBN, news, msgs). The company is in the process of making a transition to a consumer lender, and the stocks valuation hasnt yet caught up to the transition. In fiscal 2002, about 88% of the companys loans went to corporate and project finance; in fiscal 2003 retail loans had grown to 32% of the banks loan portfolio, and Merrill Lynch projects retail loans will top out at around 60% of the portfolio is fiscal 2006. That transition is important to investors because Indian consumer banks such as HDFC Bank (HDB, news, msgs) earn higher multiples than commercial banks. Im adding the shares, which trade on the New York Stock Exchange as American Depository Receipts (ADRs), to Jubaks Picks with a December 2004 target price of $21 a share. (Full disclosure: I will buy shares of ICICI Bank three days after this column is posted.)
Buy Newmont Mining
Im going to take advantage of the pullback in gold prices to add Newmont Mining (NEM, news, msgs), the class of the gold sector, to Jubaks Picks. Gold is a hedge on global uncertainty, which doesnt figure to be in short supply for the next decade, and on a weak U.S. dollar. Newmont insiders sold shares in December when Newmont traded near $50 a share; now that the stock is at $40, I think its time to build the position I recommended in my hell-in-a-handbasket portfolio in this column. (I doubt that this will be the last gold stock Ill add to the Picks.) My target price for Newmont Mining shares is $50 by July 2004. (Full disclosure: I own shares of Newmont Mining in my personal portfolio.)
New developments on past columns
Bull market in metals is just beginning
Shares of Freeport-McMoRan Copper & Gold (FCX, news, msgs) took another beating on Monday on the same old news from a new source: Rio Tinto (RTP, news, msgs), which has a joint venture with Freeport-McMoRan at the Grasberg mine in Papua, Indonesia. Rio Tinto told investors that the recent slide that disrupted mining at the huge mine in the western half of the island of New Guinea could result in a major shortfall in production in the first half of 2004. Thats exactly what Freeport-McMoRan itself said when it announced the slide in October.
Even though the news should be in the stock price, Freeport-McMoRan shares fell more than 3% in early trading anyway in the generally soft market for mining shares. The price rebounded late in the day to close down 1.36%. Id use this weakness, as a buying opportunity in Freeport-McMoRan shares. Look to see if it brings Rio Tinto, a play on Chinas growing demand for iron ore, down to an attractive entry point as well. Rio Tinto shares were down 2.19% at the market's close.
Editor's Note: A new Jubaks Journal is posted every Tuesday and Friday.
E-mail Jim Jubak at jjmail@microsoft.com.
At the time of publication, Jim Jubak owned or controlled shares in the following equities mentioned in this column: American International Group, Berkshire Hathaway, Freeport McMoran Copper and Gold, Merck, Newmont Mining, Noranda, Paychex, Pepisco, and Pfizer. He does not own short positions in any stock mentioned in this column.
|
