YE 2008 Special Veiwpoint Insert


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Investment Insert to year end 2008 D&C Viewpoint

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YE 2008 Special Veiwpoint Insert

  1. 1. Helping You Navigate an Uncertain Investment World Year End 2008 EQUITY INCOME Portfolio Strategy Update Extraordinary Times Require Extraordinary Action to Protect Your Assets T a long economic decline after slumping businesses and HERE’S NO DOUBT, 2008 was a year for the Market 2008 Snapshot unemployed consumers have exhausted their financial history books. Easily on par with other notable Core Bond Fund 7.8% resources and have no choice but to default on their debt. years like: 1929, 1933, 1941, 1945, 1963, 1968, Physical Gold 6.0 The banking crisis of 1933, for example, happened four 1973-75, 1981, 1987, 1994, and 2001. We don’t have to tell you why. Not withstanding the election of the first years into the Great Depression. Such historical realities Gold ETF 5.0 African-American President, most of what occurred in do not bode well for 2009 and beyond. 4.9 5-7 Year Corp Bonds 2008 was not good. Some financial highlights for the More specifically, we figure we’re about a third of 1-3 Year Treasury ETF 3.0 year are tallied to the right. But again, if you’ve already the way through a recession that began in December seen a recent account statement, you already know pain- 2007. We also expect that the economic decline will be EIP Total Return* -18.0 fully well what happened in 2008. So we won’t spend a as bad as any in the post World War II period. Only Dow Transport -21.0 lot of time sweating the details. Let’s just say that 2008 when insolvent banks are shut down, others are recapi- EIP quot;Equity Only” Return* -24.0 was a year we’d like to forget and leave it at that. talized, and debt levels in general are reduced will the But the overwhelmingly dismal returns for the conditions ease. Put it this way, we’ve just come off the Dow Jones Industrials -33.0 financial markets don’t begin to tell the story of 2008. greatest credit bubble in the history of mankind. A bub- Dow Utilities -34.0 The collapse of the credit markets has rattled the inter- ble that took more than 15 years to form. It’s going to High Yield Bonds -34.0 national financial system to its very core and has yet to take at least that long to unwind. The “unwinding” will regain its footing despite billions in federal loans, money, take the economy and the financial markets to levels last S&P 500 -38.0 credit, federal and Treasury Department jaw-boning, reached in the early 1980s—single digit price-earnings Housing -38.0 and even the political wizardry of the new guy in the ratios on depressed corporate earnings—at the bottom. NASDAQ -40.0 White House. And probably double digit unemployment.(1) Emerging Markets ETF -55.0 Between now and then, we can expect further That’s the message of this update: the economic road downside risks in the stock market. With interest rates ahead is likely to be a bumpy one. What has us concerned is Financial Sector ETF -55.0 at record lows, they only have one direction to go, and the fact that the financial system is in a virtual meltdown Alternative Energy ETF -61.0 that’s up! Making any long-term bond or bond fund an at the FRONT end of what is shaping up to be a long * Equity Income Portfolio Total return for 2008 and protracted economic downturn. In the usual se- and the return from the equity holdings “only.” quence of events, the financial system fails at the END of (Continued on page 2) 2000 Stock 45  “Inflation Adjusted” The Dow Jones Industrials Market Peak Peak to Trough 18 Years? Dollars: 1900 — 2008 The highest on record! 40  35  1966 Stock Market Peak Peak to Trough 30  15 Years 25  1929 Stock Market Peak 20  Peak to Trough 14 Years 15  10  5  D? A B Our Market Forecast 2000—2035 C ‐ 1900 1905 1910 1915 1920 1925 1930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 30 Years 37 Years 34 Years 35 Years ? 1) If our economic forecast comes even close to realization, we think it’s a better than even money bet Obama is a one termer! Remember you heard it here first. One caveat: that’s assuming the Republican’s put up someone who can talk about economic growth policies and walk and chew gum at the same time, no sure thing, that.
  2. 2. Year End 2008 Equity Income Portfolio Strategy Update Page 2 18.00 3-Month & 10-Year Treasury Monthly Yields 17.00 April 1954 to December 2008 16.00 INTEREST RATE OUTLOOK 15.00 Interest rates are at an all time low, in the case of short 14.00 term Treasury Bills, near zero! Call us crazy but we’re 13.00 betting the next move for rates is up! For our strategy for 12.00 bonds see Long-term Interest Short ETF on page 4. 11.00 10.00 9.00 8.00 7.00 6.00 5.00 4.00 3.00 2.00 1.00 0.00 Dec‐66 Dec‐68 Dec‐70 Dec‐72 Dec‐74 Dec‐76 Dec‐78 Dec‐80 Dec‐82 Dec‐84 Dec‐86 Dec‐88 Dec‐90 Dec‐92 Dec‐94 Dec‐96 Dec‐98 Dec‐00 Dec‐02 Dec‐04 Dec‐06 Dec‐08 for the market as a whole reach single digits. Dow Jones Industrial down 33.1% and the (Continued from page 1) equally risky place to be—and that’s before fac- Nothing we see changes that expectation. We’ve NASDAQ Composite index bringing up the rear toring any defaults and a further erosion in the shown the chart at the bottom of page one of the at a 40.5% drop. We have to admit, we never world credit markets. Dow Jones Industrial Average adjusted for infla- thought we’d rave about being down 18%, but As we discuss in the feature, we do not be- tion a couple of times to give an estimate of a time that’s the world we live for now. lieve the “economic recovery plan,” being cobbled line for reaching a P/E bottom. The section in All told 2008 will be a year to remember or together by the new President and his collabora- red is our long-term expectation for the stock maybe to forget. Unfortunately, 2009 is shaping tors in Congress is the fix for what ails the econ- market. We used this chart for our long-term up to bring us a similar outcome. omy. In fact, we believe it could very will make market forecast in 2000. The chart has been im- The Power of Dividends things worse by propping up shaky financial portant in building a long-term investment strat- institutions rather than letting them die so egy. Given the average 15-18 year peak to Cash Flow for Living and Reinvesting healthy ones can prosper. The process is akin to trough ,the chart indicates a bottom somewhere Not since the Standard & Poor’s began keeping thinning a forest of the dead trees so the healthy between 2015 and 2020. That’s the good news. track of dividends in 1956, have payouts been ones can thrive. We point to Japan’s experience The bad news is stocks have a nasty tendency to worse than they were in 2008’s fourth quarter. with a similar ineffectual program over the last 20 linger at the bottom for an extended period of The devastating effects of the credit mess on years, as the ah, “model” we’re about to emulate. time. As much as ten years in some cases. banks and other financial companies pushed over- Our opposition to Obama’s “stimulus” plan all dividend payouts down 30% for the year, while EQUITY INCOME No Exception to the Rule is not partisan. We’re not reactively anti-Obama, special dividends dropped 17% from last year. it’s just that there’s no evidence to support a plan The year of 2008 was notable to us here at On an even more telling note, a total of 606 that is equivalent to the government handing out Deschaine & Company because it was the first out of 7,000 companies reduced or eliminated credit cards and encouraging everyone to go to absolute down year in total return since we began their dividends in 2008, with half of the total in the mall and spend their way to financial wealth. the fourth quarter. This compares to only 44 for the EQUITY INCOME Portfolio strategy in De- Yet, regrettably, the euphoria of Obama mania all of 2007. Conversely, S&P reports that the yield cember 2000. We take some comfort in that well insures its passage. on stocks paying a dividend has doubled over the worn phase: “it could have been worse.” And yes, by Obviously, such economic expectations last two years to 7.28%. But there are surely more gum, it could have been a whole lot worse. For implies risky times ahead for just about all finan- dividend cuts on the way. one, we could have taken the Chinese's lead and cial assets. So that leads us to the critical question; We were not immune to the dreaded divi- bought Blackstone at their initial public offering, what the hell do we do about it? dend cut in 2008. In fact, seven stocks in the EIP ($31 a share now $4.50 as share) and watch our cut or eliminated their dividend last year trigger- capital drop 86%. Fortunately, a modicum of ra- THE STOCK MARKET OUTLOOK ing our SELL signal. The cutters were: BAC, tional analysis prevailed and we managed to ALD, ACAS, AINV, TICC, ARCC, and C. Note, dodge that deadly bullet. The Train to Single digit P/E’s right on Time they’re all financial related businesses. We held about 30% of the EQUITY INCOME A Paradoxically, many of them raised their S VETERAN VIEWPOINT READERS KNOW, Portfolio and a similar percentage of client port- dividend in 2008. In ACAS’s case, right up to the we’ve said the stock market’s been in a long- folios in money market funds to offer some princi- time they announced they were eliminating it. As term bear market since it peaked in 2000. The pal protection from what we saw coming in 2008. the credit crisis hit financial stocks particularly Standard & Poor’s 500 Index negative total an- Our high cash position did mitigate losses to a hard because they have to continually access the nual return of 2.9% over the eight years since 2000 negative 17.9% total return, while the stocks in the validates our contention. We also believe the portfolio dropped 23.7%. Those numbers compare current bear cycle will not end until P/E ratios to the S&P 500 index which was down 38.5%, the (Continued on page 4)
  3. 3. Deschaine & Company L.L.C. Page 3 EQUITY INCOME Portfolio Equity Income Portfolio Year End 2008 Data Year End 2008 Update Current Dividend 3 Yr Div Ret Yd to Name Ticker Price Yield Grwth 2008 Target T EQUITY INCOME Portfolio as of December 31, HE Altria Group Inc. MO         16.99             10.00              2.65         (31.31)       51.80 2008 is shown to the left. The stocks highlighted in Ameren Corporation AEE         34.92               7.27                ‐         (34.59)       52.70 green currently meet our investment criteria, however, as Anglo Amern Plc Adr AAUK           9.65               4.36                ‐         (33.80)      (13.90) we’ve suggested in the commentary, any new stock pur- Arthur J. Gallagher & Co. AJG         24.15               5.25              7.43           12.71       36.16 chases should be done with a great deal of trepidation and Associated Banc‐Corp ASBC         16.44               7.36              7.70         (18.31)       77.06 with the expectation that they could drop—possibly a lot— B&G Foods, Inc. BGF         10.60             15.70           42.76         (37.08)       50.82 further. If you already own any of the stocks, with the excep- BB&T Corporation BBT         21.88               8.29           10.34           (4.31)       78.25 tion of the banks, we’d generally suggest holding them, as- BP PLC ADR BP         42.76               7.60           15.16         (32.36)     101.63 suming, you’ve already got plenty of cash (money market Biovail Corp BVF         10.55             15.90           30.20         (18.65)     329.00 funds) to protect your portfolio. As we indicated, our current Bristol‐Myers Squibb BMY         21.88               5.54              0.89           (6.05)       24.30 asset allocation is 50% of the portfolio in the EIP stocks shown here. In case you can’t do math, that’s essentially a 1% Chevron Corporation CVX         72.47               3.43           13.89         (18.31)       14.68 position in each stock, with a tweak here and there depending Computer Programs & Systems  CPSI         23.69               6.08           44.23           25.26       38.50 on portfolio changes mandated by market reality. Consolidated Edison Company ED         41.33               5.68              0.88         (15.76)       20.32 CPFL Energy SA ADR CPL         39.52             12.64                ‐         (25.60)     136.30 Some Other Suggestions to Help Protect Your Assets Dominion Resources, Inc. D         36.39               4.43              3.94         (21.56)       25.30 We offer the following suggestions on things you might do ENI SpA ADR E         45.01               8.02           31.64         (30.49)       20.12 to help protect your assets during these difficult times. If you General Mills, Inc. GIS         60.84               2.80              8.18             9.49     150.10 have any suggestions of your own, please pass them along GlaxoSmithKline PLC ADR GSK         34.90               5.92              5.38         (22.27)        (7.00) and we’ll include them in future issues. H.J. Heinz Company HNZ         37.25               4.40           10.06         (16.50)       47.16 Health Care REIT, Inc. HCN         41.20               6.48                ‐             0.30      (20.57) • Make sure your bank is FDIC insured, not all are. Integrys Energy Group, Inc. TEG         42.55               6.36              4.41         (12.18)       44.50 • Consider selling bond mutual funds. With interest rates at J.P. Morgan Chase & Co. JPM         26.95               5.50              2.86         (25.13)       46.10 record lows, they have no place else to go but up. Having Kraft Foods, Inc. KFT         29.58               3.79           10.54         (14.56)       55.60 said that, the Fed recently announced they intend to keep Microchip Technology, Inc. MCHP         18.78               6.95           79.60         (34.88)     266.80 rates low for as long as it takes, but their power to do so is Microsoft Corporation MSFT         17.87               2.55           11.20         (44.39)      (27.00) finite. When their plan stops working, inflations will roar. Paychex, Inc. PAYX         25.34               4.87           33.01         (24.60)     132.50 Bond FUNDS have high fees and unlike individual bonds, they never mature, so when interest rates soar, bond funds Permian Basin Royalty Trust PBT         13.84             16.93           14.93           (4.77)       18.90 be the first to get pummeled. Once under water, they may Pfizer Inc. PFE         15.27               8.29           20.51         (16.85)     113.50 never come back. Also, it’s nearly impossible to know what Philip Morris International Inc PM         39.86               3.85 NA NA      (23.90) assets they hold. Do your really want that risk right now? Pinnacle West Capital PNW         34.50               6.08              4.79         (19.44)       48.50 Interestingly, high yield bond funds are realizing a flood of Plum Creek Timber Company PCL         32.79               5.03              5.76         (21.43)       20.90 new investor money seeking higher yields. Individuals Progress Energy, Inc. PGN         39.93               6.20                ‐         (12.93)       21.40 poring money into a sector of the market is never a good Realty Income Corporation O         20.79               7.76              7.86           (8.16)       29.60 sign. Remember, tech stock funds took in record amounts Reynolds American, Inc. RAI         38.99               8.79           18.98         (34.70)       75.70 in 2000, do we have to tell you what happened next. Southern Company SO         34.01               4.84              4.07           (0.03)         3.70 • Take an inventory of what is really important to you: do Southern Copper Corporation PCU         15.33             12.24           78.51         (50.38)     124.60 you really need two houses, and a several cars? You’d be Standard Register Company SR           7.50             12.20                ‐         (14.32)       53.50 surprised how liberating it can be to simplify. The Dow Chemical Company DOW         12.97             12.50              6.86         (59.25)         6.80 • If you’re close to retirement consider, working a year or UIL Holdings Corporation UIL         27.33               6.23                ‐         (14.05)       83.70 two more. The additional income and not taking any Unilever PLC ADR UL         22.69               4.36              6.81         (36.30)      (16.80) money out of retirement accounts can have a significant United Online, Inc. UNTD           6.13             11.01              3.40         (45.08)     128.50 difference in your long-term financial health. • You’re not alone. Everyone is faced with the new eco- US Bancorp USB         15.22             11.12           16.79         (16.59)     656.90 Wayside Technology Group, Inc. WSTG           7.11               8.44              0.77         (16.78)     114.30 nomic reality caused by the credit crisis. We’re here to help, either as a friend, a sounding board, or to take over Wells Fargo Company WFC         20.53               6.13              8.26             1.88       38.90 the responsibility to watch your assets every day. All you Zenith National Insurance ZNT         32.12               7.59           36.29         (24.40)     104.40 have to do is call us at (618) 397-1002. Eaton Vance Enhanced Equity Income EOI         12.48             13.40                ‐         (28.79)       51.80 Eaton Vance Enhanced Equity Income II EOS         11.53             14.80                ‐         (30.20)       82.20 Totals/Averages           13.29         (20.16)       73.79 PUBLISHER: MARK J. DESCHAINE, EDITOR: JOHN H. DESCHAINE, CONTRIBUTING EDITOR: TOM O’HARA, COPY EDITOR: MARNIE E. DESCHAINE,TECHNICAL ADVISOR: JOSEPH M. DESCHAINE. VIEWPOINT is a complementary publication of Deschaine & Company, L.L.C. a registered investment advisor in Belleville, Illinois. This information has been prepared from sources deemed reliable, but its accuracy is not guaranteed. It should not be assumed that any securities discussed will be profitable or will equal past performance, or is it an offer to buy or sell any security mentioned. Deschaine & Company and/or one or more of its clients, employees, family or friends may have a position in the securities discussed herein. © 2009 All rights reserved. This issue was published on January 25, 2009. If you would like to receive a complementary copy quarterly, simply send us your address and the preferred method of delivery: by emailing us at and we would be happy to add you to one of our mailing lists. Rest assured no one from Deschaine & Company will never contact you, unsolicited—honest. We simply don’t have the time or the desire to hassle people.
  4. 4. Deschaine & Company L.L.C. Page 4 nomic circumstances, we think (Continued from page 2) Equity Income Portfolio Annual % Returns credit markets to operate a modest 5% bet the shaky Cumulative Annualized financial sector will drop fur- their business. Often, if a   2001  2002  2003  2004  2005  2006  2007  2008  Return Return bank stock price got ham- ther is a reasonable one. We’ll 104.4 9.4 EQUITIES “ONLY”  21.8  8.1  28.2  24.4  4.6  21.9  .2  ‐ 23.7  mered, it presented a buy- limit our downside with stop/ 77.8 7.5 TOTAL RETURN  15.8  6.9  19.3  19.4  3.8  19.0  1.1  ‐ 17.9  ing opportunity because losses on all shorts. even in slow economic S&P 500 INDEX    ‐12.0  ‐21.9  28.5  10.7  4.9  15.6  5.5  ‐ 38.5  - 20.9 - 2.9 • Short Dow 30 ETF. Bet- times, banks have cash flow from interest and fees Portfolio Asset Allocation: In the most ting the Dow stocks will drop, see above. that can cover the dividend. As an investor, the radical change in the EQUITY INCOME Port- Think GM. smart thing to do was to use the opportunity to folio’s asset allocation in its history, begin- • Short Emerging Markets ETF. With the buy more shares. Not so in 2008. The credit envi- ning February 1, 2009 portfolios asset struc- world economy in a protracted slump, the ronment in 2008 was so severe and changed so ture will be as follows: still overvalued emerging markets are quickly that many banks had years of uninter- likely to fall further. rupted dividends broken before being acquired or Equities: 50.0% • Long-Term Interest Short EFT. This Cash: 25.0% bailed out. ETF and the Gold Stock ETF below are Short Financials ETF: 5.0% bets on inflation returning once the world Short Dow 30 ETF: 5.0% EQUITY INCOME Portfolio gets a gander at the trillions in bonds our Short Emerging Markets ETF: 5.0% government will be issuing soon. That fact Strategy Review for 2009 Long-Term Interest Short EFT: 5.0% alone is likely to push interest rates, which Gold Stock ETF: 5.0% It’s Not the Return on Your Money, in the case of the short-term treasury bill Total Portfolio: 100.0% it’s the Return of Your Money! are currently close to ZERO, much higher W the usual Let’s discuss our thinking for each asset class: from fears of rising inflation E’RE GOING TO SKIP • Gold Stock ETF. This is a basket of Gold detailed review of the EQUITY INCOME Portfolio and in its • Equities. We’ll continue to manage the mining stocks. Since few gold stocks pay 50% of the portfolio in equities just as we’ve much of a dividend, we can’t find any that place offer a more generic investment strat- done with the EIP over the last eight years. meet our investment criteria. Besides, this egy including specific recommendations. We We will just focus on stocks we believe offers us more diversification than we could think such an approach will be more useful to have the financial strength to maintain do on our own. more investors. their current dividend. Any dividend Some of the assumptions we used in com- growth we’ll just consider a bonus. Any There you have it. The most radical strategy piling our recommendations are: purchases will be made with the full expec- change in EQUITY INCOME Portfolio history. A tation that the stock will be 20 or 30% (or strategy designed to protect our assets in what we • The economy is in a protracted downturn more) cheaper in the future. Which, now believe is the most difficult investment environ- that could last as long as five years. that we think of it, is the way all equity ment in a generation. We’ll do our best to keep • The credit down cycle that began in late investing should be done. you apprised of our strategy in future issues. 2007 will continue to unwind, causing • Cash. We will maintain 25% of the portfo- We always welcome your questions regard- deflationary pressures on prices and asset lio in money market funds. While short- ing our strategy or any other aspect of our invest- values short term. term rates don’t offer much return, the cash ment management services. As well, we’re happy • The economic stimulus will have little cushion, just as it did in 2008, will help to meet with you to discuss our strategy and offer effect on economic growth, but will fuel an protect portfolio’s downside risk. Second, our thoughts on it’s suitability, in whole or in part, inflationary cycle over the long term. the cash will provide buying power as for your personal circumstances. • Interest rates will remain low until the stocks get cheaper, as we are certain they We would also be happy to review your credit cycle shows sign of a bottom, at will—eventually. And last, as interest rates existing portfolio or asset list. The portfolio re- which time inflationary pressures will push rise for inflationary pressures, the cash view is always free and with no obligation. them higher. allows us to benefit from rising rates. If you’d like us to do a review of your invest- • Stock prices are still 50% above their long- • Short Financials ETF. The last ten years ment portfolio. all you need to do is provide us term bear market bottom. with the ticker symbol and the number of shares has brought investors what’s known as • The financial sector remains the most or units, either as one list or listed by portfolio, “Exchange Traded Funds.” Theses are you prefer and we’ll enter the information in our vulnerable sector of the stock market. baskets of stocks set up to achieve a specific handy-dandy computer and provide you with a • The economic slump will put many nor- investment objective. In the case of the detailed review all your own. Free for nothing! Short Financial ETF, its a basket of large mally safe dividends at risk. Simply email the information to financial stocks designed to go up when the We keep all informa- financial sector of the S&P 500 index goes Those are just a handful of the many assump- tion provided to us in strict confidence. down. Its what’s known as “shorting the tions we considered when formulating the We see the next couple of years as challeng- market.” In ordinary times we would re- investment strategy for 2009 and beyond. ing ones. We want to do what we can to help you frain from making such bets, however like survive it with your wealth intact. we said, “extraordinary times require extraor- dinary measures.” Under the current eco-