There are two types of prediction experts, says Warren Buffett.
There are those who don’t know and those who don’t know they don’t know.
I’m somewhere in the middle.
I may have called the bottom and top of housing, the top of subprime and Alt-A, the death of Lehman Brothers and Bear Stearns, the collapse of the UK economy and the Dow’s collapse to 6,500, including its recovery. I may have also called for gold to rally well above $1,000 when it traded under $850.
But I have no idea what this year will be like. No one does…
I can tell you it’ll be full of incessant volatility, though.
I’m not overly pessimistic on our economy, but I am a realist. And I see major threats to the economy going forward. I do believe, though, that’s there’s always a bull market somewhere. While the economy could be shattered by year-end, there’s always a way to make money, and there’s always an economic positive somewhere.
We’ll see more of the same from here.
2013 could be tough year especially if the Fed is serious about ending easing programs. Several committee members said they may need to slow or stop asset purchases “well before the end of 2013” over concerns about the Fed’s investment portfolio.
But let’s be real here. It’s not likely to happen.
An end to QE would pull stimulus from the markets, and crash them… quickly. If the Fed programs were allowed to end, the Dow, for example, would plummet.
It’s a wait and see at this point.
The next big hurdle we face, near-term is the debt ceiling debate. The 2011 debate led to a credit downgrade and a 10% loss in the markets. The risk here is that the debt ceiling debate will again rattle the markets, and send volatility well off its lows.
Even if the debt ceiling debate is short-lived, I strongly believe America will be hit with another credit downgrade.
We’ll also hear a lot about the impending doom of the college debt bubble, the national debt bubble, the derivatives market bubble, and the consumer debt bubbles this year. I’d be surprised if any of them popped this year, though.
But they will eventually pop… All bubbles pop.
A move away from the US dollar as the primary reserve currency will pick up steam. The dollar is doomed. There’s no way around that.
Unemployment will pick up steam, as many more workers are laid off. Food prices could easily soar. Those on food stamps will pick up steam.
The Dow could easily end the year under 12,000 if the Fed ends easing.
And we could see a major economic impact from the Mississippi River.
In fact, according to Time magazine:
“Drought may cause traffic on the Mississippi River – which is used to transport everything from grain to petroleum to coal – to a halt as soon as this weekend. And the stoppage could last for months.
"The lack of precipitation throughout much of the country has brought about drought conditions that the National Climatic Data Center has called the worst since the 1950s. Water levels on the river are lowest in a 180-mile stretch between St. Louis and Cairo, Ill., sometimes referred to as the Middle Mississippi. That’s where the U.S. Army Corps of Engineers has been dredging to maintain a 9-foot channel to allow barges and boats to pass. Most vessels can’t travel in waters any shallower."
"According to the American Waterways Operators (a trade group representing the tugboat, towboat, and barge industry) and Waterways Council (a national public policy organization), a traffic stoppage could occur as soon as this weekend, halting a $180 billion transportation industry. The groups estimate that a disruption in the Mississippi River’s supply chain could affect more than 8,000 jobs, $54 million in wages and benefits, and 7.2 million tons of commodities worth $2.8 billion.”
With recent school shootings, we could see the criminalization of possessing just about every gun out there. Things as we know it in the United States will change drastically.
Overseas, the Middle East will always be explosive. There’s nothing we can do but sit back and watch. Israel and Iran could go at it at any point, driving oil prices through the roof if the Strait of Hormuz is hit.
While I may sound economically bearish, I’m not. I’m a realist. Reality cannot be ignored. Fortunately, there’s always a bull market somewhere.
Anxiety will be the key word of 2013. Unemployment will remain high. Our recession will continue. The national debt will exceed GDP.
It’ll be one heck of a year.
So where to you put your money?
Besides following us in Speed Retirement, here’s another idea to check out.
The Dogs of the Dow
Buy the 10 Dow stocks with the highest dividend yields, cash out by the next year's end, and repeat. It’s that simple.
Once you invest in the Dogs of the Dow, forget it even exists. Just let it run.
You hold the 10 Dogs for 12 months. You don’t add to it. You don’t subtract from it. You just let it run.
These are high yielding stocks that have fallen out of favor with investors. The theory believes these stocks will recover over the year, give the investor a good return, and provide a dividend for good measure.
In practice, the theory isn't too shabby...
• In 1996, they were up 29%.
• In 1997, they were up 22%.
• In 1998, they ran up 11%
• And in 1999, they ran up another 4%.
• In 2000, they were up 6.4%.
• In 2001, they were down 5% and down another 9% in 2002 — both of which still outperformed the major indices in tough market times.
• Despite the bear market of 2000 to 2002, Dogs of the Dow raced 29% higher in 2003.
• By 2004, they ran up 4.4%, giving back 5% by 2005.
• By 2006, Dogs of the Dow ran up 30.3%.
• In 2007, the Dogs came in with flat returns.
• In 2008, they fell 38.8% as compared to the Dow's 31.9% loss.
• In 2009, they flew 16.9% higher, as compared to the Dow's 22.7% rise.
• For 2010, the Dogs were up about 15% vs. an 11% rise in the Dow.
• In 2011, the Dogs were up 12.2% as compared to 5.5% for the Dow.
• In 2012, the Dogs underperformed, delivering gains of 9.6% compared with an 11% increase in the Dow.
The logic behind this investment strategy is this: When you buy these stocks with the highest yields, you're buying the high-quality companies that are out of favor on Wall Street — which makes them bargains.
The Dogs of the Dow for 2013, include the following:
Hewlett Packard (HPQ)
General Electric (GE)
Johnson & Johnson (JNJ)
The best thing to do with these – if interested – is to buy a basket of them.
We’ll be sure to track the results for you as the year goes on.
Take good care,
Ian L. Cooper
Speed Retirement System