Friday, March 8, 2013

Why Every Investor Should Own Dividend-Paying Securities

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Don Coxe: “Central Banks Are Busy At Work Creating The Next Big Bull Market In Gold”

by Tekoa Da Silva
Bull Market Thinking

I was able to connect with the legendary Don Coxe this week, chairman of Coxe Advisors LLP, during a time in which investor sentiment in the mining and precious metals sector has reached levels of “despair and cynicism”, the likes of which Don has never seen before.
What was encouraging to note however, was that in response to investor sentiment, large mining companies are cutting projects and plans to build new mines—which according to Don, will extend and further heighten the next up-cycle, as well as create shortages in the metals later this decade.
Reflecting on the recent BMO Metals & Mining conference, Don explained that, “The new CEO of Barrick…promised that after they complete their last big project, which will be done in two years—they’re not going to be developing any new mines for a long time. You never once heard that kind of statement being made at a conference from 2003 to 2012…looking further out (because the commodity boom is still intact), we won’t be getting a new generation of mines being brought in 3-4 years from now. So the next shortages will probably develop later in this decade.”
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Letting the VIX tell us when to get out

Can the VIX help us know when it’s time to leave the incredible party Wall Street is throwing?

That’s a crucial question following a day in which the Dow Jones Industrial Average DJIA +0.33%   surged to an all-time high and investors remained as confused as ever about how much further the bull market can go. And the question was on my radar screen anyway, since the VIX was prominently among the myriad indicators you collectively suggested to me in response to my offer two weeks ago to test which of them might have good track records at identifying market tops.

Unfortunately, my research suggests that the CBOE’s Volatility Index VIX -2.22%  leaves a lot to be desired as a market-timing indicator. In contrast to what many contrarians believe, low VIX levels are not bearish. And high levels are not necessarily bullish either. 

The VIX’s median level over the last couple of decades — the dividing line such that half the historical values are below it and half above it — is 18.8. As you can see in the accompanying table, the Wilshire 5000’s average 6- and 12-month returns following below-median VIX levels are higher than what they have been following above-median levels. 

When VIX is... Subsequent 1 month Subsequent 3 months Subsequent 6 Months Subsequent 12 months
Below median 0.9% 2.6% 5.6% 12.5%
Above median 0.9% 2.8% 5.2% 9.6%     

To be sure, just the opposite is the case at the 1- and 3-month horizons. But these differences are not statistically significant at the 95% confidence level that statisticians often use to determine if a pattern is genuine. 

How could investors have been so wrong in their interpretation of the VIX? My hunch is that their mistake is thinking that it is a fear gauge, with low levels indicating excessive complacency and high levels an excess of fear. But fear is not really what the VIX measures.

Fear is not really what the VIX measures.
It instead is a measure of expected volatility, as reflected in option premiums. In the complex algorithm used to calculate the VIX, both big upside and big downside moves contribute more or less equally. Since these large up and down moves often largely cancel each other out, average market returns following high VIX levels are not higher than they are following low VIX levels. 

Some of you, in urging that I take a look at the VIX, suggested a different interpretation: Rather than on absolute levels, I should focus on where it stands in relative terms. Unfortunately, I was unable to find much value in this alternate approach — at least when I measured how the Wilshire 5000 total-return index performed whenever the VIX was above or below several of its moving averages. 

As you can see from the accompanying table, there are only minor differences between how the market proceeds to perform when the VIX is above its recent moving averages and when it’s below. And none of those differences is significant at the 95% confidence level. 

When VIX is Subsequent 1 month Subsequent 3 months Subsequent 6 months Subsequent 12 months
< 1 month average 0.9% 2.6% 5.1% 10.8%
> 1 month average 0.8% 2.5% 5.3% 11.0%
< 3 month average 1.0% 2.8% 5.9% 11.1%
> 3 month average 0.8% 2.3% 4.6% 10.5%
Entire sample 0.8% 2.5% 5.1% 10.8%

None of this is to suggest that there aren’t other ways in which the VIX might be used as part of a profitable market-timing strategy.

But I have my doubts when it comes to any of the more straightforward ways in which investors typically use the VIX.

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Are Stocks Cheap?

Each and every day, we are bombarded by a never-ending series of asset-gatherers whose sole aim in life is to convince investors to put more money to work. Whether it is because ‘we are climbing a wall of worry’, whether ‘long-term’ equity investors always do well, whether the ‘cash on the sidelines’ is coming out (note – remember there is a seller for every buyer and a buyer for every seller); the most frequently proposed reason for buying stocks is ‘because they are cheap’. No matter where they are trading – high or low – they are cheap. Well, in an attempt to suggest otherwise – or at least provide fact rather than accepted wisdom, the following two charts from Morgan Stanley’s Adam Parker provide the reality that, in fact, stocks are not cheap - and given where rates are, they are in fact expensive. Empirical fact not fiction.
S&P 1500 – Price to Forward Earnings at its long-term median – and highs post-crisis.
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2 Low-Cost, High-Yield Dividend Machines for Investors on a Budget

"I just don't have enough money to start investing."

I often hear this statement from friends who are interested in investing in the stock market but truly believe they don't have the capital to start. Many erroneously believe that you need a bare minimum of five figures just to dip your toe into the markets.
Some of these people are very knowledgeable about dividend reinvestment or savings strategies for their retirement but are convinced they can't start investing because they don't have enough money.
Well, nothing could be further from the truth.

It doesn't matter if you only have $1,000. The bottom line is the sooner you start investing, the better.
With proper management, sensible stock selection and consistent addition of capital over time, small accounts can easily grow into large ones.

Investors on a budget should look for investments that provide the best bang for their buck in terms of relative safety. This means low-priced, high-yielding securities. My rule of thumb is to stick with investments that cost less than $10 per unit or share if you want to maximize your portfolio.

Sometimes, it requires looking at unexpected places to find investment instruments best suited for small investors.

Investing through closed-end funds (CEFs) can provide the small investor an entry into the high-yield investing community at a low relative cost and higher safety margin than similarly priced investments. (more)
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These 2 Deep-Value Commodity Stocks Have at Least 50% Upside

As the major indexes post multi-year highs, many investors credit the invisible hand of the Federal Reserve.
The Fed's pump-priming quantitative easing (QE) has acted as a key source of liquidity for a range of investment classes, from small-cap stocks to junk bonds to the leading blue chips.
The Fed's moves were also expected to boost various commodities -- and the stocks that are pegged to them -- but this entire asset class has started to lag stocks by a widening margin in recent quarters. The still-slow global economy is just one of factors affecting them.
But as the global economy stirs to life, demand for commodities could strengthen, boosting pricing. Here are two commodity producers that have fared badly in recent years, but now hold deep value and upside when the global economy firms up.
Barrick Gold (NYSE: ABX)
This is the world's largest gold producer in terms of production and market value, and is a poster child for the key issue plaguing the gold-mining sector: Rising costs.
In 2009, Barrick mined gold (on a cash basis) for less than $500 an ounce -- this figure is expected to exceed $630 an ounce this year. In light of the drop in gold prices, from about $1,900 an ounce in the summer of 2011 to a recent $1,575, Barrick's profit margins have steadily narrowed. That helps explain why shares hit fresh two-year lows with each passing week.
Yet thanks to a series of new lower-cost mines that are gearing up for production, Barrick's mining costs are finally set to reverse course as we head into mid-decade. Merrill Lynch's analysts see Barrick's mining costs falling below $600 an ounce by 2015. Assuming gold prices remain constant, Barrick's margins and operating cash flow will likely begin to rebound. (Every $50 per ounce in gold prices in either direction is expected to have a $350 million effect on annual cash flow).  (more)Please bookmark us