You’re probably wondering why Bill wasn’t mentioned in the title of this segment. Well, the TED I’m referring to is the TED spread. The TED spread is the difference in the yields between T-Bills and the short term bank lending rate. When the sh*t hit the fan last fall, the yields on T-Bills were beaten to death by the sharp increase in demand due to the rotation of investors out of stocks and into T-Bills to wait out of the storm. Historically, the spread in a normal market is about 10-50 bps (0.1%-0.5%), but last fall saw record spreads over 200 bps (2%). Generally, the spread fluctuates according to the supply and demand of T-Bills.
So, you’re probably wondering why the hell I’m writing about this. Well, here’s the deal. The spread has been gradually shrinking since the end of the 1st quarter. As of the end of May, the spread was sitting at around 60 bps (0.6%), which means that the yield of the T-Bills is increasing. So, what does this tell us? The supply of T-Bills is increasing, which means that more investors are starting to take the money they parked into the T-Bills and are investing it elsewhere. What else does this tell us? Well, it tells us that folks are feeling more confident about the market and are starting to put money back into stocks, which could signal a broad rally and not suckers rally. It also tells us that companies are starting to issue bonds again, which gives rise to the credit freeze thawing. Several companies had bond issuances ready to go, but held them out of the market until they felt the demand was there.
Remember what I’ve told you before. The market tends to recover well in advance of the economy. If you wait for unemployment to drop and some wing-nut from the Fed. declaring the recession is over, then you will have missed the boat on the rally. If you recall, around this time last year, the Fed. finally announced we were in a recession that started in November 2007. I declared it in January 2008 as it was happening, not 8 months into it. Am I saying you should jump in with both feet? Hell no. Do your homework and buy in incrementally. Be aware of inflation and keep a healthy amount (20%-30%) on the sidelines in case things go south, so you can remain flexible and be able to scoop up any bargains that may come or at least increase any current positions and lower your cost per share. Tune in next time, when I discuss inflationary hedges and why gold may be a poor choice, let alone the consensus best choice to hedge inflation. Until then……Be excellent to each other and party on dudes! (you know I had to come back to that!)
Wednesday, June 17, 2009
Thursday, June 11, 2009
How And When To Get Defensive
What the heck does investing defensively mean? Why and when should we invest in such a manner?
Ah, these questions are very common and often addressed on such silly shows that appear on MSN, however, they are rarely ever explained in a manner that the average investor can understand. They merely spit out terms such as cyclical and business cycle to describe stocks. They probably use this, because they themselves have no f’ing idea what they are talking about.
Anyway, what does investing defensively mean? In the most basic terms, it means investing in companies that do well or are consistent during economic booms and busts. Basically, they produce goods and services that are needed regardless of the state of economy and market (a.k.a. non-discretionary items). Some of the best defensive companies actually perform better when economic conditions are poor.
Why should you invest defensively? The main reason for having your portfolio contain some defensive stocks is so you have a hedge for when the market takes a big dive. This will mitigate your portfolio from having a large drop and taper your paper losses. It also helps balance your portfolio.
When should you invest defensively? This question has a not so simple answer. It all depends on the person and their investment goals. If you are the type that doesn’t like a lot of risk, then your portfolio should contain mostly a diverse number of defensive stocks with a mix of bonds, cash and other equities. If you like a lot of risk, then you should probably only invest defensively, when you think the market is ready for a large drop (at least 10%). Then you would trade out your bull market stocks for defensive stocks. If you just the average investor willing to take a little risk, but not a lot of risk, then you should always carry some defensive companies in your portfolio. If you think the market is overvalued and due for a correction, then you would want to increase your defensive holdings to reduce your losses in the event of a large drop. If you think the market is undervalued, then you should look to lighten up on your defensive holdings and snap up stocks with bigger potential upside.
To further illustrate what defensive stocks are, I’ll list some examples and why they are considered defensive stocks.
Johnson & Johnson (JNJ)- huge product line from shampoo to over the counter medicine. Nearly all of their products will continue to be purchased during poor economic times.
Proctor & Gamble (PG)- basically, the same reason as JNJ, but their product lines deal heavily in beauty and health care. However, they also have food and coffee brands.
McDonald’s (MCD)- does well in any economy, but does extra well in poor economies, since people will sacrifice the health for cheap food.
Reynold American, Inc. (RAI)- one word, “Tobacco”!
Ah, these questions are very common and often addressed on such silly shows that appear on MSN, however, they are rarely ever explained in a manner that the average investor can understand. They merely spit out terms such as cyclical and business cycle to describe stocks. They probably use this, because they themselves have no f’ing idea what they are talking about.
Anyway, what does investing defensively mean? In the most basic terms, it means investing in companies that do well or are consistent during economic booms and busts. Basically, they produce goods and services that are needed regardless of the state of economy and market (a.k.a. non-discretionary items). Some of the best defensive companies actually perform better when economic conditions are poor.
Why should you invest defensively? The main reason for having your portfolio contain some defensive stocks is so you have a hedge for when the market takes a big dive. This will mitigate your portfolio from having a large drop and taper your paper losses. It also helps balance your portfolio.
When should you invest defensively? This question has a not so simple answer. It all depends on the person and their investment goals. If you are the type that doesn’t like a lot of risk, then your portfolio should contain mostly a diverse number of defensive stocks with a mix of bonds, cash and other equities. If you like a lot of risk, then you should probably only invest defensively, when you think the market is ready for a large drop (at least 10%). Then you would trade out your bull market stocks for defensive stocks. If you just the average investor willing to take a little risk, but not a lot of risk, then you should always carry some defensive companies in your portfolio. If you think the market is overvalued and due for a correction, then you would want to increase your defensive holdings to reduce your losses in the event of a large drop. If you think the market is undervalued, then you should look to lighten up on your defensive holdings and snap up stocks with bigger potential upside.
To further illustrate what defensive stocks are, I’ll list some examples and why they are considered defensive stocks.
Johnson & Johnson (JNJ)- huge product line from shampoo to over the counter medicine. Nearly all of their products will continue to be purchased during poor economic times.
Proctor & Gamble (PG)- basically, the same reason as JNJ, but their product lines deal heavily in beauty and health care. However, they also have food and coffee brands.
McDonald’s (MCD)- does well in any economy, but does extra well in poor economies, since people will sacrifice the health for cheap food.
Reynold American, Inc. (RAI)- one word, “Tobacco”!
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