Financial data analysts at FactSet believe that six weeks from now, thanks to this one catalyst, stock prices - and your portfolio - could see a nice pop.
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- The Most Important Investment You Can Make Right Now
- Investors Turn to TIPS as Warren Buffett Warns on Inflation
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If Mark Twain were alive today, he'd probably say that there are "lies, damned lies, and inflation statistics."
There just aren't many more important numbers that so many depend on and that are so regularly and maliciously manipulated.
You see, wages, pensions, and Social Security are all dependent in some measure on the Consumer Price Index. It affects the income of some 80 million Americans through contracts or indexation.
T.S. Eliot must roll over in his grave every time some smart-alecky financial writer says that "April is the cruelest month."
Having to hear the anti-intellectual elite pretend to have read, never mind think they have the remotest understanding of those words or what follows in one of the most complex literary works of the 20th century is galling enough. But hearing that over-used phrase misused to excuse more underperformance and bad policy is flat-out nauseating.
April 2015 was only cruel to those who remain wedded to the idea that markets are rational, trends move in straight lines, and policy makers have the remotest clue of what they are doing.
I often find myself thinking we are living in the Golden Age of American idiocy.
With the advent of social media, we are exposed to discourse that is often best left unsaid, from actresses discussing their colonic purges to sports talk hosts engaging in tasteless rants on Twitter.
But the idiocy is not confined to social media and is especially rampant in the investment world.
As he often does, famed investor Jim Rogers is putting his money in places that most others will not dare to go.
And right now, Rogers likes several markets other investors are running away from. We're talking about countries that aren't just being avoided - they're actually hated.
Greece decided not to leave the euro Sunday as the pro-bailout New Democracy party narrowly won elections tallying just over 30% of the vote. Investors had feared a win by an anti-austerity movement could lead to a breakup of the euro and possibly the European Union.
That's all good news except stock markets opened lower Monday following the announcement.
Maybe investors really wanted the worst to happen concerning Greece, insuring more action by the Federal Reserve when they meet later this week. QE3 is still a possibility but it seems that some are disappointed by the Greek elections, which could just be a postponement to Greece's eventual "Grexit" from the euro.
European markets rallied following the election results, but by the time U.S. markets opened investor sentiment had become neutral. It seems that until the Fed's meeting concludes on Wednesday investors will be stuck waiting for more news out of Europe to guide them.
One sector that has been vilified recently is financial stocks, and today's headliner is Morgan Stanley (NYSE: MS).
The Wall Street Journal this morning highlighted Morgan Stanley for its leading role in Facebook's IPO debacle.
I was taken aback by the question: "What is the single most important investment I can make right now?"
Not by the question itself - I get that one a lot.
But because of who was asking it and what they excluded.
It was put to me by Jason, Susan and Hao - all of whom are juniors at Skidmore College where I was lecturing last week.
They wanted to know what they - as college students - could do to ensure their financial future.
Not only that, but they specifically asked me to exclude specific investment choices that a more seasoned, older investor would consider.
I thought about it for a few minutes, then responded: "It's discipline."
Investors are faced with a unique challenge, I explained. Many are not at the mercy of the markets as they believe, but are actually subjected to the whims of the person they see in the mirror every morning.
That's why consistent investment results are often more dependent on behavior than actual performance.
Put another way, investors who "behave" themselves by being disciplined tend to do far better than those who don't.
Beating the Markets Takes Discipline
For example, DALBAR, a Boston-based research firm ,released a 2011 report that showed investors had achieved a mere 41.9% of the S&P 500's performance over the twenty years ended December 31, 2010.
In other words, investors managed to leave a staggering 58.1% on the table.
According to the report, the average investor achieved a mere 3.8% a year versus the 9.1% annualized return of the S&P 500 because they tended to jump in and out of the markets at the worst possible moment depending on their emotions.
This reinforces something I talk about all the time in my presentations around the world - investors lose billions by trying to time their decisions based on nothing more than greed, fear or simple paralysis.
In my opinion, it's why the single biggest investment anyone can make is "discipline."
The Oracle of Omaha also had harsh words for traditional bonds.
In a Fortunearticle Buffett went so far as to say, "Right now bonds should come with a warning label."
"They are among the most dangerous of assets," Buffett wrote, "Over the past century these instruments have destroyed the purchasing power of investors in many countries."
To prove his point Buffett labeled inflation as the primary threat to bond investors, noting it takes no less than $7 today to buy what $1 did in 1965.
Instead of bonds, Buffett recommends "productive assets," including farmland and real estate.
But he saved his highest praise for stocks, especially the stocks of companies like The Coca-Cola Co. (NYSE: KO) and International Business Machines Corp. (NYSE: IBM), that consistently deliver inflation-beating returns.
But what if you're not comfortable betting most or all of your chips on stocks? And if traditional bonds are out, where else can investors turn for inflation beating returns?
TIPS Insure Wealth Against InflationEnter Treasury Inflation Protected Securities, or TIPS.
Unlike regular bonds, TIPS are designed to protect your principal against the ravages of inflation.
In fact, TIPS zig when other securities zag, providing diversification and safety to your portfolio.
TIPS are considered to be an extremely low-risk investment since they are backed by the U.S. government, and their par value rises with inflation while their interest rate remains fixed.
Here's how they work.
The recent bankruptcy of Eastman Kodak reminds investors they don't make companies like they used to.
Founded in 1892, Kodak shows that very few of these 19th century giants exist anymore.
Companies, like washing machines, just don't have the staying power they used to. Even the largest companies these days are unlikely to outlast a 40-year investing career.
The evidence for this increased corporate mortality rate is both substantial and startling.
According to John Hagel III, Co-Chairman of Deloitte LLP Center for the Edge and author of "The Power of Pull" (Basic Books, 2010), the lifespan of such companies is now about 15 years. That's a stunning change from 1937 when the average life expectancy of the companies in the Standard and Poor's 500 Index was 75 years.
A similar 1983 study of the 1970 Fortune 500 found the life expectancy of its companies to be around 40 years, with a third of them vanishing in the intervening 13 years.
Thus the progression from 75-year corporate lifespans to 40 and now to 15 since 1937 has been clear and more or less smooth.
That was before Federal Reserve Chairman Ben Bernanke swooped in with a "red cape" and fired the bulls back up.
Since the Fed reassured the world that interest rates will remain at "exceptionally low levels" for another two years, gold has jumped more than 3%.
UBS AG (NYSE: UBS) described the situation simply, "if investors needed a (further) reason why they should be long gold now, they got it yesterday ... a more accommodative policy is a very good foundation for gold to build on the next move higher."
To gold bugs, two more years of near-zero, short-term interest rates means negative real interest rates are here to stay, and this has historically been a strong driver for higher gold prices.
Bernanke and the Fed aren't the only central bankers in the fiscal and monetary bullring.
Brazil has cut its benchmark interest rate a few times and China lowered its reserve rate for banks in December. According to ISI Group, 78 "easing moves" have been announced around the world in just the past five months as countries look to stimulate economic activity.
One of the main weapons central bankers have employed is money supply, which has created a ton of liquidity in the global system. Global money supply rose 8% year-over-year in December, or about $4 trillion, according to ISI. I mentioned a few weeks ago how China experienced a record increase in the three-month change in M-2 money supply following China's reserve rate cut.
Together, negative real interest rates and growing global money supply power the Fear Trade for gold. The pressure these two factors put on paper currencies motivates investors from Baby Boomers to central bankers to hold gold as an alternate currency.
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Despite criticism that he's buying into a top-heavy market, that IBM is at a premium, and that he's losing his touch, chances are Buffett knows exactly what he's doing.
And guess what, it's exactly what I've been counseling investors to do since this crisis began - bolster defenses by putting money to work in companies that are backed by trillions of dollars in tailwinds, and have solid defensible businesses (Buffett calls these "moats").
According to a Berkshire Hathaway Inc. (NYSE: BRK.A, BRK.B) filing made Monday but dated Sept. 30, 2011, Buffett also waded into General Dynamics Corp. (NYSE: GD), DirecTV (Nasdaq: DTV), CVS Caremark Corp. (NYSE: CVS), Intel Corp. (Nasdaq: INTC) and Visa Inc. (NYSE: V).
In the third quarter, Buffett funneled $10 billion into Berkshire's IBM stake, which now stands at 5.5%. Of course, Berkshire maintains a $13.5 billion stake in The Coca-Cola Co. (NYSE: KO) that remains the firm's largest.
Buffett Pulls the TriggerAs a long time Buffett watcher, I am somewhat surprised that he picked up Intel and IBM, if only because the Oracle of Omaha has a well-documented aversion to tech.
Still, I can see the logic. Both companies are global giants poised to profit from the whirlwind of growth set to take place thousands of miles from our shores in the decades ahead.
There are technical similarities, too.
For instance, IBM's price has risen more than 29% this year. As a result, at least five analysts have removed their buy recommendations because they believe the stock may have run its course, according to Bloomberg News and YahooFinance . At the moment, less than 50% of the analysts who cover IBM recommend buying the stock.
Back in 1988, it was much the same situation. Coke had more than doubled in size and analysts had much the same reaction when it came to doubts about further growth. Many openly bashed the stock's prospects and completely ignored the global growth potential that today is Coke's mainstay.
Coke is up tenfold since then. Enough said.
Here's what I think Buffett sees:
The widely watched sale drew interest from around the country as debate continued over whether the stability of municipal finances has been a factor in market prices. The tax-exempt bond market has been overwhelmed by a deluge of supply that has decreased demand, depressed prices and forced yields higher.
"The tax-exempt municipal bond market is a cold, cold world right now for issuers and taxpayers," Tom Dresslar, a spokesman for the California State Treasurer told The Wall Street Journal. He added that the state decided to cancel another $267.3 million bond sale it planned to price this week "in light of market conditions."
- Is the market cheap?
- And has it under-performed over the past year?
If the answer is "yes" for both those questions, that market is much more likely to get my vote.
But with every rule, there are also exceptions. As we will see.