Hello my favorite readers! Sorry for writing much less lately than I have in the past. It’s been a busy few months!

I know many of you enjoy getting these articles and for my clients, I know you enjoy ‘checking in” on my thinking. With that said, and with the messy financial world we all live in, I thought it was time for a state of the world outline article.

The best headline from today comes from super sarcastic (and super informative) financial blog ZeroHedge:

Europe Is Now Officially Bazooko’s Circus – Italy To Provide €23.5 Billion In IMF Cash To Bailout Italy

Basically, the IMF (International Monetary Fund) ‘rescue” package for Europe needed some more funding and apparently the big contributors will be Germany, France and Italy. The fact that this rescue fund goes toward backing the debt of the affected European countries (including Italy) means that Italy will be borrowing funds to provide for its own bailout.

As ludicrous as this sounds, it’s become all too commonplace in today’s financial world where highly educated “smart” people dazzle the masses with  intellectual speeches trying to make PRINTING MONEY sound like anything but.

Print Money?

You see, under their OWN rules, the European Union, and its central bank the ECB, are not allowed to “print money.” There were also many other rules that were part of forming the union including rules on the maximum level of annual deficit that a member country could maintain (which countries like Greece fudged to get into the EU) that were intended to keep fiscal discipline. This of course didn’t happen.

So where does that leave us –  the little guy? ie you and me?

My thinking, which is far from perfect goes like this. Currently, with global turmoil, money is moving into US financial assets as investors flee to the “safety” of the dollar. I have noticed strength (meaning up moves and lack of down moves) in the stocks of very large US companies that pay dividends and have low price/cash flow multiples – companies such as Altria, Verizon, and Walmart. There has also been a move into US bonds, though it seems a bit more guarded –  bond yields in the US are approaching the lows of 2008.

What happens to commodities and emerging markets?

So for the time being, commodities, including gold, are getting pounded. The strength in the US dollar makes commodity prices lower vis a vis the dollar. emerging market stocks have been weak and most of the indices of high-flying growth countries are down sharply – India’s stock exchange has been drubbed from a combined decline in stock values and fall in their currency.

At the same time, financial stocks, which relied on bailouts in 2008, should expect no repeat of such government generosity. Financial companies responded by making a killing off the cheap money from the Fed and national bailout programs like the US TARP program and paid their management large bonuses that sometimes didn’t even follow good performance (see Fannie Mae and Freddie Mac Bonuses Draw Rebuke from Lawmakers PBS Nov 11,2011).

Where are people investing then?

Investors, especially pension funds, need YIELD. Higher payout stocks such as gas & oil pipeline partnerships, and those mentioned above have been bid up by investors. In my opinion, large pension funds, for example, might be showing some preference for Microsoft with a 3% dividend to a 10 year US treasury bond paying much less. Foreign investors are very likely adding US “balanced” positions – stocks and bonds of US companies and government. Municipal bonds have held up well, maybe because Europe looks worse than Rhode Island to many investors!

Action Plan

Right now, my thinking is that super cheap stocks, with plenty of cash flow, will fare best and perhaps even thrive. management that shows the willingness to buy back shares and pay dividends will continue to reward investors. And there are many stocks trading for small multiples to cash in the bank! never mind that they’re trading at 2-4x cash flow!

If we have a Euro calamity, no stock will be a refuge though in my opinion. therefore, short term treasuries could be a safe parking place in this situation. I intend to add to a few super cheap stock holdings and higher yielding positions. In a 0% world, a 6% yield is tantalizing, not just to me, but to pensions and other big buyers.

And then gold comes in…

This problem, if severe enough, will light up the Fed’s money printing presses. I

Gold

don’t see them letting a recession go through to its conclusion – government types have the hero complex, thinking there is a government solution to everything. They will be proven wrong, but not before reinflating one last enormous time. if this indeed comes to pass, I will add to favorite gold-related positions primarily, and other commodity positions if good opportunities present themselves. If reinflating doesn’t work, or less likely, doesn’t happen, then earning dividends on things we need – fuel, food, basic items, makes sense.

the key is that I in no way, want to be dogmatic. I am ready to buy or sell and have no love for any one investment. let me give you an example where being dogmatic didn’t help:

Warren Buffet bought certain financial stocks in 2008 and he made a lot of money. Perhaps he knew the bailout would come because without the bailout, he would’ve gone to zero on a few of his very large financial positions – and he should have. But my dogmatism about bailouts, shared by a small group of astute investors, was punished as government bailouts made wealthy men out of executives and shareholders of financial firms.

To bring this point to the present, though I believe the printing press is cranking up to hit light speed, I will not hold on to certain positions like gold trying to prove myself right. I’ll watch for the moves and follow. I won’t let being dogmatic about gold hurt me as anything can happen. Keep in mind then that my thoughts above might be so far off of what really happens that it could end up being a joke.

Thanks for reading!

*As of this writing, either myself or accounts I manage hold the following positions mentioned in the column: MO, AMLP, Gold

Note: this article is meant to be some helpful thoughts to share and not investment advice specific to you. Please consult your own advisor regarding investment and financial decisions. See our disclosures page