If you’ve missed the point of the last 2 weeks of market action, let me get you up to date: 2014 is going to be rough, really rough. We’re going to need to go back to the defensive playbooks we haven’t used for 4 years, but which saw us through great profits at relatively little risk. We need to go back to 2009.
You know I am a commodity guy and I’ve written recently about the continued weakness of base metals, particularly copper and zinc, and coal, commodities I consider crucial indicators of a continuing robust recovery.
Look at the worst performing stocks of the last two years and they are almost all commodity names, particularly coal and copper names – Peabody (BTU), Alpha Natural Resources (ANR), Vale (VALE), Freeport (FCX) – I could go on. So what is the difference today and why am I turning so defensive on the market? Commodity strength becomes that much more of a factor, precisely because Fed activity is beginnings its taper and strong stock index results last year seemed to ‘borrow’ gains from our current year.
But with dropping share prices, and concurrent dropping bond yields, we’re looking at another 2009 scenario where dividend producers represent such a sharp arbitrage opportunity. And it’s with bond-like stocks were going to find our best ideas now.
Now’s the time to give up, and I mean entirely, on high-beta names for the near term – the reports and performance today of Twitter and Pandora should tell you something, even if you’re a singularly energy-centric analyst like I am. No, it’s time to get into rock solid large cap dividend payers, just like the scary moments after the financial crisis of 2008.
The names that worked so well then aren’t available now, however. We can’t find solid 5-6% dividend returns in the shares of McDonald’s (MCD), or Kimberly-Clark (KMB), or 3M (MMM). But in the energy space, because of a brutal January, there are a few equally good opportunities emerging. Let me suggest two.
BP: This is by far and away the most undervalued major. Even with a David Einhorn inspired rally today, BP delivers a solid, absolutely rock solid 5% dividend. While focus remains on the Deepwater Horizon disaster and the continuing liabilities associated with those settlements, BP has…