Andy Sutton submits:With the most recent two day crash in the Dow Industrials average, we are once again poised at the precipice of oblivion. Two important dominos have been toppled in the past two days. On Wednesday, the Dow closed below the psychological mark of 8000. Granted, the 7997.28 level was not the most pronounced of breaches, but it is worth noting.
However, Thursday, we solidified the drop below 8000 and blew right through the October 10th low of 7773.71 going all the way down to 7552.29. In totality, the listed market has now lost approximately half of its value – in 12 months.
While it would be easy to digress into an analysis of the sheer magnitude of the losses over the past year, it is perhaps more worthwhile to take a look at some of the different investment themes that have been prevalent over the past year and see how they’ve fared. This is an important exercise since there is still plenty of fuel for more declines, but at the same time there are also overriding fundamentals that will drive things moving forward.
While it is very true that virtually every possible portfolio has in some way been affected by the liquidation over the past six months, it is important to note that some areas have done much better than others even though, in most cases, this still means some sort of loss. Hedging strategies can be used to mitigate such losses. The obvious drawback of hedging strategies is that they tend to mitigate gains during times of upward price movements.
Another important consideration in any portfolio is dividends. In the three sample themes we’ve constructed, we provide the returns with and without dividends. There is an old investing adage with regard to dividends that goes something like “If you’re going to have to wait, you might as well get paid for doing it.” The past year has been a shining example of this logic. For those investors who chose to try to ride out the current situation, dividends have provided a nice cushion. The biggest problem with dividends is that they’re being cut all over the place. A drastic example of this would be the financial stocks. In many cases, dividends have not only been cut, but eliminated altogether.
Because of this reality, it is important to look not only at the current and prior dividends, but whether or not the cash flow will exist to support future dividends. A good example of this analysis would be the Canadian Energy Trusts. A good many of the Trusts are paying the same distributions now as they were when oil was $60/bbl on the way up. And they paid those same distributions even when oil was $150/bbl. The obvious conclusion would be that the funds exist to maintain current levels. However, analysis of the cash flow of these firms is required to either support or refute the ability to continue distributions at current levels.
To construct our exercise, we’ll take a look at three major themes that have been prevalent over the past year: Consumer Staples, Energy, and Basic Materials. The securities selected were not necessarily part of the S&P Sector Index, but rather they were companies that have been talked about in the media and financial websites, and therefore, were likely to make it into many portfolios. While it would be easy to point to November 2007 price levels, May’s levels more completely encompass the rally in the U.S. Dollar, which has been an important direct and indirect driver in the price of many of these stocks.
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