Billionaire Howard Marks’ Remarks on Fed Frustrations

Brett Owens, Chief Investment Strategist
Updated: October 27, 2015
TheMarkets

Earlier this week, Oaktree Capital Group’s billionaire co-founder Howard Marks had some sharp words for the Fed. He told Bloomberg:

“I wish the government would get out of the business of setting rates, and I wish rates would stop being unnaturally low.”

Marks is probably the richest and smartest money manager that individual investors have never heard of. He has a cool $100 billion under management and he’s been a regular on Forbes’ World Billionaires list for several years running.

Oaktree is famous for a number of gutsy, profitable moves – many of which have involved distressed debt. The firm has earned its clients an astounding 19% after fees on its distressed debt funds – helping make Marks himself a billionaire twice over.

With that kind of money and track record, why is Marks so worked up about interest rates? …
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Easy Double-Digit Returns From No Sales Growth?

Brett Owens, Chief Investment Strategist
Updated: October 27, 2015

Most investors think stock prices always follow earnings. So they obsess over profits – and the sales growth needed to drive them higher.

They’re partly right – but they’re more wrong than right. Their first-level thinking is missing a couple of small but critical nuances.

First, stock prices are quoted per share. When you buy a stock, you’re not buying the entire company. Instead, you’re buying a very small percentage as represented by your shares. So as a shareholder, it’s actually irrelevant to you whether or not your company’s earnings go up in absolute terms. What matters to you is that its earnings per share (EPS) go up year-after-year.

And second, while you may need sales growth to drive perpetual earnings growth (because cost cutting has its limits), you don’t actually need sales growth for EPS growth. …
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Put Alcoa’s Spinoff on Your Watch List

Brett Owens, Chief Investment Strategist
Updated: October 27, 2015
Mining-Truck

Aluminum maker Alcoa (AA), down 41% year-to-date, is starting to attract attention from contrary-minded investors. They’re misguided – it’s foolish to buy a stock just because it’s gotten crushed. But they’re actually on the right track (albeit for the wrong reason), because Alcoa’s ugly duckling business is likely to deliver beautiful swan stock returns.

The corporate spinoff – where a company splits into two (and sometimes more) new publicly traded firms – is barely a blip on the radar for many first-level investors. They prefer to fixate on its much-ballyhooed cousin, the IPO.

That’s too bad for them, because while hot new offerings may pop for big gains out of the gate, they’re equally likely to erase those gains—and more—once the hype dies down. They’re also much more likely to be overpriced at the outset. …
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Why Preferred Shares Will Be Fine When Rates Rise

Brett Owens, Chief Investment Strategist
Updated: October 27, 2015
calculator-v2-200

Many investors are concerned that high yielding preferred shares will not perform well in a rising rate environment. I’ve heard from several readers who share these sentiments. Since April 1st, ETFs like the PowerShares Preferred Portfolio (PGX) and the iShares S&P U.S. Preferred Stock Index Fund (PFF) are down 2% and 3.7% respectively.

These fears are overblown for a couple of reasons:

  1. It’s unlikely that interest rates are going to rise high enough to make these yields unattractive in relative terms anytime soon.
  2. These days, more preferred shares have floating rates anyway.

Not familiar with preferred shares? You’re not alone – most investors only consider “common” shares of stock when they look for income. These are the shares in a company you receive when you place an order with your broker online or over the phone. …
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3 REITs to Weather Any Fed Action

Brett Owens, Chief Investment Strategist
Updated: October 27, 2015
PopulationData2

Last Thursday, Janet Yellen told investors the same thing she always says. They, in turn, took the news as they usually do. They panicked and sold everything.

The S&P 500 finished Friday down 1.6%. The Dow dropped 1.8%. And the Nasdaq fell 1.4% – but Real Estate Investment Trusts (REITs) held up well. As a sector, they finished the day unchanged, while my favorite subset immediately rallied (more on this shortly).

REITs themselves usually pay higher dividends than regular stocks, as they can avoid income taxes if they pay out most of their earnings to their investors. These higher payout ratios have boosted their popularity with investors since interest rates went to zero in 2008.

The Vanguard REIT Index Fund (VNQ) has doubled over the last seven years, but it’s down 13% from its January highs. …
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3 Dividend Stocks Ready to Boost Payouts Twice in 2016

Brett Owens, Chief Investment Strategist
Updated: October 27, 2015
canadian-flag-200

With the S&P 500 yielding a measly 2.1%, where’s an income investor supposed to look these days?

I’ll tell you where. A place where the dividends flow like maple syrup, and the companies raise their payouts not once but twice a year. I’m talking about a little place called Canada.

Investors loved the Looney and everything else Canadian when crude oil was trading hands for triple-digits. It wasn’t too long ago (January 2013) that the Canadian dollar was more valuable than its U.S. counterpart. It’s shed 25% against the greenback since.

Canadian stocks peaked 18 months later than its currency (about this time last year). They’re down 15% since. Our neighbors to the north have a commodity-driven economy, and resource prices – most notably that of oil – are usually the leading indicator when it comes to asset valuations. …
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Big Oil Remains a Big Dividend Trap

Brett Owens, Chief Investment Strategist
Updated: October 27, 2015
Big Oil

This time last year, crude oil was selling for more than $90 per barrel. Today it’s half that, and yield hunters are excitedly sorting through the spill in oil stocks. Stalwarts like Chevron (CVX), Exxon Mobil (XOM), and BP plc (BP) are paying 5.6%, 4%, and 7.8% respectively. At first glance, these look like great deals from reliable dividend payers. Unfortunately, these “yield bargains” are likely to cost you a few times more than you’ll earn in payouts.

No matter how well these companies run themselves, the actual price of oil is outside of their control. And when the goo is in freefall, their stock prices get drilled. Exxon fared the least worst of the three over the past year, shedding “just” 27%. BP dropped 33% and Chevron, which some incorrectly believe is insulated from falling oil prices thanks to the diversity of its operations, fell 40% over the same time period. …
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This 6.5% REIT Is On Sale

Brett Owens, Chief Investment Strategist
Updated: October 27, 2015

Most individual investors get scared when stock prices plummet. Most individual investors also underperform the market itself consistently. This is no coincidence.

Market drops are a great opportunity to put new capital to work – especially if you’re an income investor. When you purchase shares for cheap, you’re also getting more dividend per dollar you invest. This boosts your portfolio’s overall yield. And you can actually turbocharge this strategy, too, simply by avoiding a single pitfall.

Income Investors Have Only One Thing To Fear

If you buy a stock for the dividend, is there any reason why you should care if its price goes down or up? Hopefully you won’t need to spend the capital within five years– otherwise you should have purchased a shorter-term vehicle that guarantees return of principal, like a CD. …
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Why Kimberly-Clark is a Washed Up Dividend Aristocrat

Brett Owens, Chief Investment Strategist
Updated: October 27, 2015
KMB-CashFlow

Consistently growing sales of diapers, paper towels, and tissues have padded the pockets of Kimberly-Clark (KMB) shareholders since the company went public in 1928. KMB has paid a dividend for 81 years in a row, and raised it for 43 straight years and counting. But this streak is in danger if the company can’t peddle more paper products soon.

In 2014, KMB paid out 70% of its free cash flow (FCF) – 86% of its earnings – in dividends. And while its FCF lingers near 2010 levels, the company has increased its dividend by 18% since then. As management “keeps the streak alive” it’s taking on debt to fund shareholder rewards – ever increasing dividends and share buybacks. Since 2010 it’s spent 63% of its FCF on dividends: …
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