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Market Analysis: Where To Put New Money

October 14th, 2010 Leave a comment Go to comments

The market has discovered “dividend” investments over the number of months. This is both good news and bad news.  Tobacco, Energy Partnerships, Oil Trusts, and Real Estate stocks, which are  long time boring income investments are on fire. These are the gains in these stocks just in the month of September:

  • Phillip Morris (PM) – 10%
  • Altria (MO) – 8%
  • Enterprise Products Partners (EPD) – 9%
  • Enerplus Trust (ERF) – 15%
  • Realty Income (O) – 4%

These are reasons why:

  • Interest rates are near zero, which depresses bond yields. Given the language of the Federal Reserve recently, its likely to stay that way for longer than perhaps was expected earlier this year.
  • All asset classes (stocks, bonds, commodities, gold, etc) are appreciating as a response to the depreciating dollar. When the dollar depreciates, everything denominated in dollars goes up in price to compensate.
  • Stocks are cheap. Investors realized that some stocks, adjusting for risk are cheap.

Of course cheap is relative. While some stocks may still be cheap, it looks at though prices have moved too quickly. The bad news, higher prices mean less income.

One of the trades that I am making this month is to buy into preferreds, as I talked about over the weekend.

Here in summary are what I see developing as good investments in this market:

  1. Preferreds still are paying good yields, if you buy investment quality below par.
  2. Defense contractors are very cheap right now, in response to expected lower defense spending going forward. See this article which talks about Lockheed Martin. This is still developing, the key is to find the ones that are beaten down but can otherwise survive with businesses outside of defense contracts.
  3. The foreclosure mess has come up again, this time as banks are stopping foreclosures due to bad paperwork. Banks stocks are taking a hit, but I think the better play here is the bank preferreds. These stocks survived the 2008 Recession, so its unlikely that this wave will kill them this time.
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