In volatile markets and crazy times Louie calms fears and suggests investors go with quality
By Dian Vujovich
Yesterday my friend Steve and I were discussing the market’s downturn. He said the volatile he’s seen in the markets lately is the worst he has ever witnessed. I’d have to agree with him given that we’ve each been watching the markets for over four decades. Regarding yesterday’s market mess, he wished someone in a position of authority would come out and tell the worried and concerned public, whether they are active investors or not–that things are going to be okay. Of course he was right. Then finally somebody did.
In a Navellier MarketMail: Special Update email from Louis Navellier sent last night shortly after 7 p.m., the Manalapan resident addressed the European bond market calamity, interest rates and long-term stock investing.
Here’s what I found both educational and valuable from that newsletter:
“Since the Italian bond market is the third largest in the world after the U.S. and Japan, European banks are loaded with Italian bond debt that is eroding in value as Italian yields soar. Unlike Japan and the U.S., which have their own central banks that buy back government debt and keep interest rates low, Italy cannot get the European Central Bank (ECB) to buy Italian debt until it passes the austerity reforms and tax increases it agreed to in August when the ECB stepped in and bought Italian debt. Ironically, the new head of the ECB is an Italian, Mario Draghi, who was Italy’s top central banker! Yet Draghi will not help Italy until it agrees to pass necessary austerity reforms. Furthermore, Draghi is trying to get the European Financial Stability Facility (EFSF) to buy Italian bonds, so in the meantime, Italy’s bond yields continue to soar and put the country in a precarious predicament. Essentially, while politicians, bureaucrats, and central bankers argue, Italy and Greece are allowed to burn, just like Rome burned when Emperor Nero was playing his fiddle!
“At Navellier, we have consciously tried to avoid any financial stocks that are exposed to the euro-zone crisis. As an ex-banking analyst, I have to say that I have not liked financial stocks in general for quite some time. I also want to assure investors that the U.S. will not follow Greece and Italy into a financial abyss despite the fact that the U.S. budget deficit is actually larger than either Greece or Italy relative to GDP. What is killing Greece and Italy is that their cumulative budget deficits are larger than the U.S. relative to GDP. When interest rates were low, both Greece and Italy could manage their interest burdens, but now that both countries are characterized by soaring interest rates, they have hit their respective breaking points.
“This is why interest rates will not be rising in the U.S., which the Fed has already confirmed, for the next two years. The Fed knows that if key interest rates rise, the U.S. would also reach a breaking point, so I am firmly convinced the Fed will adapt an ultra-low interest rate policy, just like Japan has since the early 1990s. An ultra-low interest rate environment is incredibly bullish for stocks. For example, Coca-Cola* has strong sales, earnings, a 41% return on equity (ROE), and yet has a dividend yield of 2.8%, which is higher than its recent sale of 10-year bonds yielding 2.375%. Historically speaking, when stock dividends yield more than companies’ underlying bonds, it has indicated that the stock market is likely oversold and undervalued.
“I realize investors are scared, especially when they watch CNBC and all the coverage is on the euro-zone crisis. However, when stocks have strong forecasted sales and earnings, high ROE, and are aggressively buying back their outstanding stock, then there is likely to be a strong foundation underneath these types of quality stocks. We especially find Blue Chip stocks with high-dividend yields very attractive in this environment. As a result, investors with longer term objectives who hold quality stocks should try not to panic and possibly even consider buying high-dividend yielding stocks that rank well in our stock grading system.
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