Today I want to discuss some stocks that are nicely beaten up and could be long-term bargains. But first, an update on a few things. From what I hear, about $30 trillion worth of stocks has disappeared from various investment portfolios. I also hear that about 40 per cent of money around the world has evaporated. And many readers tell me their portfolios are down 35 to 45 per cent. The drop in the value of portfolios pretty well matches the drop in the money circulating around the world. Plus, the velocity of money has dropped from seven to two. That’s how many times a dollar moves from person to business and so on before it goes home.
Then I heard today (February 12, 2009) that real estate takes something like five years to bottom out and bank stocks are tied closely to real estate. That may not be the exact story, but I think we can more or less paint ourselves a picture of what is ahead. If the five-year cycle is real, then we’re only half way through it. That means trouble ahead for many investors.
Many think that stocks will recover like a “V.” Well, some stocks might. In our holdings, Agnico Eagle (AEM) is the only stock that has recovered close to its old price and IMG gold is close behind. Many stocks are floating around in a chart that looks like a series of “W”s. Some stocks might be like a backwards “J”— down a lot and up some. But many could be like an “L”— down a lot and sideways for some time.
How long is “some time” is the big question. But let’s be honest. The U. S. has put out around $9 trillion and other countries and central banks are putting out billions and billions to try to get the economies going. I think if they were honest, they would say that at best, the big supply of new money might just stop the bleeding. The global economy is around $55 trillion and even if I’m a little off in my numbers, at least 10 per cent of that economy has been chopped.
I’m not quite sure how a 10 per cent drop in the global economy matches up with having 40 per cent of currency evaporate, but I suspect there was a lot of credit money circulating around the world and that debt is being called home.
Besides, Americans have become savers. The typical American has been saving about 0.6 per cent of his or her salary. They didn’t think they needed to save while their investment portfolios and the market value of their houses were going up. Now both have crashed and the value of homes may keep falling for some time. Of course, if a person has owned the house for more than five years, and if a person doesn’t have to retire, both values of house and portfolio are more academic than cause for concern.
However, wealth is a state of mind for many. It’s one thing not to have wealth and it’s another thing to have it and lose it. Many people spent the money they borrowed against their house, and as investments grew, it was quite easy for them not to save money yet feel quite wealthy.
I hear many investors lost $100,000 to $150,000, which is about a third of their portfolio. This is in both Canada and the U. S. Next the value of many homes in the higher priced areas has come down a lot. Not in Winnipeg, but then they didn’t go up much here either.
So people feel poorer. The typical American has upped his savings to 3.6 per cent of income and many feel they are headed to six or eight per cent. There is no way a person can save enough day to day or year to year to make up for the $150,000 loss or the drop in the value of a home. But savings offer comfort and it would be ironic if that higher saving rate was one more reason the American economy will be in trouble for longer than most people think.
Add in an unemployment rate of seven per cent — going to nine per cent — and you can see that the American economy is not what it used to be. Keep in mind too that 93 per cent of Americans are still working and many had or have a second income from a sideline job or business. And most people will do something to keep the wolves from the door.
And that is the real message. Companies are cutting costs, often by laying off people to match the work force to the new, smaller market. The good companies will survive while the poor ones will be taken over for pennies on the dollar by the survivors. This cleansing has been going on for decades in the U. S. and it’s going on again. Individuals too will adjust to their new lower net worth and income. They have to. It might take time and they might not like it but they will.
But if anyone thinks a $9 trillion injection of money into the U. S. economy will help get it back to the good old days, I suggest you think again. I also think that most governments will not spend all the money they show in the headlines and on TV. Most governments quietly hope that their attempts at propping up the economy will start to work about the time the individuals and companies have adjusted to their new financial position. Then as the economies slowly recover, the governments can take the credit for that.
Over all, I think what happened in 2008 was a wakeup call. People, get your financial act together. I don’t think we’re heading for a ’30s-style depression, but I don’t think we’re going back to the good old days either.
In fact I think 2008 sent out the message that most people cannot hope to work just 25 or 30 years and live 80 or 90 years in a style that has never been matched in history except maybe by royalty. In the years ahead, it looks to me that the people who run a five-legged stool will be OK. Why? Because they will know how to make money with money and they will have a second skill and they will be able to make money with stocks for years and years after they can’t do what they are doing now.
I’m not saying you have to learn that skill from me and StocksTalk, but I am suggesting you learn it and use it. And the sooner the better.
There is another possible solution sent to me from a reader in Calgary. He quoted some guy who figures that if the U. S. let in a couple million hard-working rich people from India, China and so on, they’d buy the empty houses, they’d need cars, and they’d start businesses. And they’d create new ideas, products and systems.
However, if the U. S. does not let them in, they will stay home and innovate and go forward while Americans stay busy trying to survive with stale ideas and technology that’s getting older and older.
MANAGE THE TAXES
Look at your tax position if you plan to sell covered calls on stocks that are beaten down. Suppose you bought Potash Corp at $200 and now it’s $100. If you sell calls you can pick up $4 to $5 a month per share in a trading account that money is taxed as capital gain. However, if you’re losing $100 a share on POT and selling covered calls it would be a shame to pay income tax even on the half taxable money while your portfolio sucks.
So it might be worthwhile to sell some losers to trigger a capital loss so you can offset the profits you should or could make from selling covered calls. Of course you do have all year to sell to trigger a loss but it is something to think about.
BEATENUPSTOC KSTHA T COULD BE BARGAINS
I’m not recommending any particular stock, but as I look across my list of stocks I see shares of some pretty good companies trading at half or even a third of their past value. Of course maybe that’s all those shares are worth today, but the survivors have had top notch management and top notch management finds ways to survive, take advantage of down turns and grow.
Here’s a quick list. I don’t know if this is the right time to buy these stocks or not, but I sure am watching them. They include Alcoa (AA), Caterpillar (CAT), John Deere (DE), Russel Metals (RUS), Cameco (CCO), ag stocks such as Agrium (AGU) and Monsanto (MON), oil stocks Husky (HSE) and Imperial Oil (IMO), and Canadian National Railway (CNR). I like a couple drillers, including PetroBank (PBG) and Petro Brazil (PBR). For a refiner, I’m watching Tesoro (TSO).
If real estate really takes five years to fix itself, maybe it’s a little early to buy bank shares. Anyone who already owns them likely should learn how to sell covered calls on them and bring in cash. Take Bank of Nova Scotia. The price dropped from $54 to $30 and holders received a couple bucks for a dividend. A more crafty person could have sold calls on those shares the past 16 months and picked up a pretty easy $1 to $1.25 per month per share, which would have reduced losses by $12 to $15 per share. This would go a long way to offset the $24 drop in the price. Plus selling covered calls brings in cash, as do the dividends, which would then position the portfolio to buy more good stocks at these bargain prices.
Of course, some cynics say selling covered calls limits gains. That has not been a problem this past 18 months, and if my feelings about the future of the economy are anywhere close, odds are that limiting gains will be the least of worries for most investors.
Our portfolios are up three to seven per cent to the middle of February, while stocks are down about five to six per cent for the year. Around February 17, I will look at our stocks. If they are above our strike prices, I will buy the calls back and sell into the next month. If the price is below the strike price I will let them expire worthless and sell another call on those same stocks the next week. This is a rare strategy not understood by most, but it sure has worked for us.
To close, I have a quick comment on the Tax Free Savings Account. Many readers of StocksTalk have merged two strategies with fine results. They set up the TFSA and bought a couple hundred shares of a stock like Cameco, Fortis, PetroBank, Russel Metals, Shaw or other stocks that cost under $25. Then they sell calls close to the money and expect to make a $90 to $150 a month with that account. Nice.
Andy Sirski lives in Winnipeg. He manages his own portfolios, runs a small tax business, and publishes a newsletter called StocksTalk. In it Andy reveals what he does with his stocks month by month. If you want a free one-month subscription, send an email