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Part Two: Cash, corrections, the end and feeling fine

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It`s the end of the world as we know it -- or is it?

In my last post, I discussed cash on corporate balance sheets, whether all that cash on balance sheets is the best use of corporate funds, and what companies will do with that cash (hopefully, sooner than later).
 
Onward …
 

Squabble, squabble, squabble: What happened to collaboration?

We’ve watched U.S. and European politicians do little. Squabbling doesn’t really count as a productive activity these days. Playing politics looks pretty selfish. Procrastinating looks plain stupid. The crisis in Europe is a serious issue that requires a serious response. Most probably, one that involves world-wide collaboration.

The markets are going to force politicians to get their acts together. This isn’t the time to think regionally. The global economy is here, like it or not. It’s time to act for the greater good rather than protecting one’s own backside.

We live in a global world. Interconnected, with dependencies that aren’t always transparent on the surface of things, a large event in any one country or region has far-reaching consequences. Yet too many politicians are shouting, “Mine!” Toddlers in daycare show more skill in sharing and thinking about their larger community.

iShare

Warren Buffett’s belief that increasing taxes on high income-earners is the way to go has become popular with many people. There seems to be a growing feeling of community amongst some individuals. A feeling that it’s time to share the wealth, and that tax cuts for the wealthy have gone too far.

Agree or disagree with Buffett’s belief on taxes, he`s a man that’s been, to understate the obvious, fairly successful at what he does. No wonder he has something like superhero status amongst Berkshire Hathaway’s shareholders and the followers of what’s become the “cult of Warren”. Not to mention that he’s one of the biggest philanthropists in history. He also advocates that the wealthy should follow his example. He counts Bill Gates amongst his admirers and a fellow in philanthropic efforts.

Project Band-Aid: (It’s [not] just a flesh wound)

Solutions in Europe have been largely plastic. But Band-Aid’s are short-term. Germany is coming under increasing pressure to be a leader in Europe rather than dwelling on its own self-interests. Take a look at the share prices of German banks or the MCSI Germany Index down 28 per cent year-to-date.

The market’s telling us you can’t have your cake and eat it, too. You can’t create markets, sell to them and leave them, according to investors. Not without paying for the engagement ring, at least. And the price tag is more than three months’ salary.

What investors would really like to see is a unified Euro bond. Perhaps leadership in Germany (and Europe broadly) needs to think more about the greater good (including Germany) rather than more national self-interests.

After all, why create a broader community in Europe if when crises appear leadership is going to become nationalistic? Marriages are for better or worse. If any one nation in Europe thinks it’s going to skate away from the Europen crisis, it’s sadly mistaken. The fact is the interconnectedness of financial instituitons, financial transactions and myriad moving parts is not going to ignore Germany. It’s punishing its stock market along with those of other European countries. And inaction and lack of adequate response will make this situation worse.

President Obama’s under pressure as well. American politicians have looked just as ridiculous as their European counterparts. The inability to collaborate, to forge solutions and move forward is getting a lot of press. Markets gave the Operation Twist strategy a big thumbs-down within moments, and today’s activity in the markets reinforces that.

So, wait a minute … Where’s opportunity?

Here:

  • Corporate profits are near record levels
  • Corporations are in better shape than some governments
  • Corporate bonds look better than some nations’ bonds
  • Global housing bubbles have burst already (largely)

In Canada, we are fortunate to have a strong bond market, but in the U.S. and Europe, there are more than a few questions regarding bonds. However, during the last few days’ extreme market volatility, investors still threw their money into the U.S. dollar and Treasuries – liquidity foremost in their minds.

Bonds and dividend yields

Bonds have done exactly what they were supposed to do in this correction. They have provided income and have risen dramatically as investors ran for cover. With bonds yielding very low rates of return (despite functioning as insurance in portfolios) in both the U.S. and Canada, the situation seems better and better for strong dividend-paying stocks long-term. Recently, we saw the S&P dividend yield rise above the 10-year Treasury.  In Canada, dividend yields have also risen dramatically. Your dividend yield is paying you to wait. Not bad.

The economic situation may be deteriorating; still, it’s hard to imagine that GICs are going to be worthwhile as an investment for anything other than short-term concerns in the current environment of low interest rates.

Hopefully, many investors have been following a strategic protocol of rebalancing their portfolios.  If they have, they don’t need to worry as much about the volatility in today’s markets. They may have to wait for better returns, but at the same time, they’ll get paid to wait knowing they own solid companies with a history of dividend payments.

Holding dividend-paying equities is really important because it’s the end of the world as we know it. But it’s been the end of the world as we knew it so many times before. Past is prologue. Perspective is very persuasive.

In the end, dividends provide what more speculative investments can’t:

  • A solid income stream

While the pain created by the Financial Crisis, and the current crisis in Europe is serious, investors who’ve followed prudent rebalancing strategies will be able to:

  • Count bond and dividend payments as they sleep

And that’s probably the best measure of whether your portfolio accurately measures your ability to tolerate risk … being able to sleep at night.

It’s the end of the world as we know it (like so many times before), but from an investor`s perspective, a solid income stream might help us feel fine.

Related:

As if on cue, Warren Buffett announced today that Berkshire Hathaway would buy back its own shares.

Warren Buffett bought $4 billion worth of stock in the third quarter as markets slid, investors worried and pessimism gathered steam.

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2 Responses

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  1. I love your blog … Excellent Blog!

    Raelene Scribner

    October 25, 2011 at 2:04 pm


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