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Investing in Switzerland

Switzerland will always have a special place in the hearts of doom mongers.   For decades its franc has been the “go to” safe haven currency when the world got dicey.   The meticulous Swiss gnomes have always had a well-deserved reputation as prudent stewards of wealth—and a well-deserved reputation for discretion and privacy.  And importantly, their policymakers had little tolerance for inflation.

Investors with long memories will recall that the Swiss franc was the currency of choice in the 1970s for Americans looking to escape rampant inflation (and perhaps leisure suits and disco as well).  Outside of gold Krugerrands, few other asset classes offered much in the way of protection.

Like shag carpet and other novelties from the 1970s, Switzerland is popular again.  It’s easy enough to understand why.  With the world—and particularly Switzerland’s backyard of Europe—in a prolonged period of on-again / off-again crisis, the Alpine country is viewed as a refuge.

Consider the strength in recent years of the CurrencyShares Swiss Franc Trust (NYSE:$FXF).  As the European sovereign debt crisis really started to heat up last year, the franc almost went parabolic vs. the and euro.  Unfortunately, the strength of the currency was killing exports and destabilizing the Swiss financial system.  To the detriment of investors and traders who had been piling into the franc as a haven, the Swiss National Bank came down like a hammer to weaken the value of the franc.  Yet even after the move, many trust a devalued franc over a fragile euro or dollar.   I can’t say I that don’t understand.

There is a lot to like about Switzerland as an investment haven.  It is home to some of the world’s finest multinational companies, including Sizemore Investment Letter favorite Nestle (Pink:$NSRGY), pharmaceutical heavyweights Roche(Pink:$RHHBY) and Novartis (NYSE:$NVS) and engineering juggernaut ABB Ltd (NYSE:$ABB), which is the major competitor to Sizemore Investment Letter recommendation Siemens (NYSE:$SI).

Perhaps unfortunately, it is also home to two of the largest international banks in the world, UBS AG (NYSE:$UBS) and Credit Suisse (NYSE:$CS), two institutions that gave country quite a bit of heartburn during the 2008-2009 meltdown.

Investors looking for blanket exposure to Swiss stocks could consider the iShares MSCI Switzerland ETF (NYSE:$EWL).  It is a basket of Switzerland’s biggest and most influential companies.

A note of warning on this ETF, however.  If you buy EWL, you had better like Nestle, as the food and consumer products company makes up nearly a quarter of the portfolio.  Health care stocks collectively chip in 30 percent as well.  So, well over half of the ETF is investing in defensive (if not outright boring) sectors.    This is not necessarily bad, of course.  It’s just something to consider.

Nestle has been hit in recent years by rising commodity costs and the trend of consumers trading down to generic food products.  Even so, the company has a fantastic foothold in virtually every major emerging market country, and I consider Nestle about the closest thing to a “buy and forget” company available today.  It helps that the company pays a solid dividend of 3.5 percent.

Nestle recently made a splash by announcing that it would buy Pfizer’s (NYSE:$PFE) baby food business for $12 billion.  The purchase fits well with Nestle’s existing product lines, and it further strengthens its position in emerging markets.   Roughly 85 percent of the unit’s revenues come from emerging markets, and I would expect that number to only increase with rising incomes and livings standards.

On April 19, management announced that the company would be raising the dividend by CHF 1.95.  Expect to see more of this in the years ahead.  Nestle is not a “home run” stock, but it should be a steady producer for decades to come.

ABB also announced earnings in April, with mixed results.   Revenues grew by 8 percent  for the quarter , but new orders from China—one of ABB’s key markets—were down 35 percent.   ABB, like Siemens, is a fine company with great long-term prospects in building out the infrastructure that emerging markets need to rise to developed-world status.  But with budgets tight and markets jittery, the next year may prove to be challenging.

The Swiss banks, like their American and European counterparts, also face a rocky road ahead.  Regulators are squeezing risk out of the system and banks are shrinking their balance sheets and reducing leverage—all of which is good for long-term stability.  But it’s not good at all for bank profits.

Credit Suisse revealed late the month that earnings had improved over the last quarter but were down substantially from the first quarter of last year.  Profits were 44 million Swiss francs, down from 1.1 billion the first quarter of 2011.

Overall, I continue to like Swiss stocks in general and Nestle in particular.   But given the nonexistent yields and the SNB’s recent tendencies to aggressively lower its value, I’d stay away from currency positions in the franc.

Disclosures: Charles Sizemore is long Nestle.

Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

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Time to go Bargain Hunting

With volatility erupting out of Europe again, investors are left to wonder: Is this an opportunity to buy at attractive prices all of those great stocks that “got away from you” in the first quarter run-up, or is it portent of nasty things to come?

It would appear to be a little of both.

Even before the five-day selling spree, stocks were reasonably priced compared to historical measures, and they were downright cheap when compared to bonds and other common asset classes.  When you combine this with the generally gloomy sentiment towards stocks that has persisted for much of the past year, your risk of significant loss in a high-quality stock portfolio is almost nil.

Can stocks go from cheap to cheaper?  Absolutely.  It happens all the time.  But the conditions for a real bear market are simply not in place.  Fed policy remains loose, inflation remains largely tame, and stocks are cheap and underowned by individual investors and professionals alike.  These would be the conditions I would look for in a new bull market, not a bear market.

Still, after rising 28 percent from the 2011 Euro-crisis lows, stocks were due for a breather.  After returning 12 percent in the first quarter, the S&P 500 had already exceeded the returns that most analysts expected for the entire year.

This is where that “nasty portent of things to come” comes into play.  To borrow a quote from Lord Byron, it appears that the equity markets have “squandered their whole summer while ’twas May,” or more accurately April in this case.    As a result, I expect the major indices to move sideways in a choppy, range-bound market for most of the second quarter or until the latest scare coming out of Europe subsides.

Given this, how are investors to position their portfolios?

In a range-bound market, you can make money in one of two ways.   You either actively trade, attempting to buy at short-term lows and sell at short-term highs.  Or, you can orient your portfolio towards dividend-paying sectors and simply collect your checks while waiting for prices to firm up.   For the bulk of your nest egg, it is this second course of action I would recommend.   This is the approach I have taken in my Tactical ETF Portfolio in holding the Wisdom Tree Large Cap Growth ETF (NYSE: $DLN) and the PowerShares International Dividend Achievers ETF (NYSE:$PID).

For more active trading, investors might consider a contrarian bet on Spain.  I wrote favorably about Spain at the beginning of the quarter (see “Eurozone Member to Watch: Spain”), and I would reiterate this view today.  Spain has some of the cheapest stock prices and highest dividend yields in the world today, and Spanish firms outside of the construction sector tend to get a significant percentage of their revenues from outside the crisis-wracked country.

Keep the faith, dear reader.  There is money to be made in this market.

This article first appeared on MarketWatch.

Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

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The Next Boom: Profiting from a Housing Recovery

Last week, I announced to the world what a momentously bad investment I had just made (see “I just made a horrible investment”).

Yes, dear reader, I was dragged kicking and screaming against my will into homeownership by my wife and two-year-old son.  My days of enjoying my Saturday mornings as an urban yuppy, drinking freshly-ground French press coffee and reading the weekend edition of the Financial Times on the patio of my Dallas Uptown highrise, are over.   Instead, they are spent at the local Home Depot (NYSE: $HD) buying rope and tools to hang a tree swing.

Men who pound away on financial calculators for a living have no business being within 100 yards of a Home Depot.  We don’t have the foggiest clue what we’re doing, and we end up spending small fortunes on tools we don’t need and have no idea how to use. And after buying it all, we generally abandon the project halfway through and end up paying a professional to redo it all.

I bring all of this up for an important reason.  The housing market has a disproportionately large impact on the health of the economy.  In addition to the obvious construction and mortgage finance industries that directly benefit from the construction and sale of homes, virtually every other industry benefits as well from an overall higher level of consumption.  When you own your dwelling, you tend to spend a lot more money on the things that go in it.  This would include furniture, appliances, electronics, decorations and artwork, and—yes—even tree swings.  Many of these purchases (though probably not the tree swings) are purchased on credit.  Thus housing and credit booms go hand in hand.

Of course, this also works in reverse. The U.S. economy has been in the dumps since the bursting of the housing bubble, with consumer spending and retail sales growth tepid at best.

All of this is about to change, and the catalyst will not be another stimulus bill or quantitative easing.  It will be demographics.

As a “thirty something” member of Generation X, I’m actually a little late to the homeownership party.  Knowing full and well what a terrible “investment” a personal residence is, I put it off as long as I could until family considerations made further delay all but impossible.  My generation is small relative to the one that came before it—the Baby Boomers—and the one that came after it—the Echo Boomers.  And our impact (or lack thereof) on the housing market has already been made.

It is the Echo Boomers that should have property developers salivating.  These children of the Baby Boomers, born in the 1980s and 1990s, form a generation even larger than that of their parents.  And they are quickly entering their peak marriage and family formation years.

The settling down of the largest generation to date will create unprecedented demand for starter homes and rentals.  Meanwhile, new supply has all but disappeared in the wake of the bust.  New home construction hit its lowest levels on record last year…breaking the record lows of the year before and the year before.

It may seem absurd to talk about given the foreclosure backlog that still plagues the market, but in a few short years we may actually have a housing shortage, at least in the cities attracting these new families.

It’s too early for me to recommend that readers buy homebuilders based on these fundamentals, and in any event homebuilder stocks have already had a phenomenal run.  The SPDR S&P Homebuilder ETF (NYSE: $XHB) has nearly doubled in less than six months, and homebuilders tend to be wildly volatile.

Figure 1: SPDR S&P Homebuilders

The best course of action would be to build a portfolio of entry-level rental properties.  While your principle residence is a terrible investment (it’s a major drain on cash flow), rental properties are an entirely different story.  If bought correctly and at reasonable prices, they generate a positive cash flow every month that is tax advantaged.  Depreciation and other charges ensure that much (if not all) of your cash income is tax free.  And real estate is a more reliable hedge against inflation than precious metals like gold or silver.

No less an authority than Warren Buffett would appear to agree.  The Economist recently quoted the Sage of Omaha as saying that he would buy “a couple hundred thousand” homes if it were practical for him to do so (see “Holding Back the Spring”).

Investors without the patience or the bankroll to buy a portfolio of rental properties can settle for apartment REITS or for the stocks of companies that cater to a recovering housing markets such as Home Depot or rival Lowe’s (NYSE: $LOW).

Oh, and about that tree swing.  It took me four hours of cursing and swearing, but I finally got it hung properly.  My two year old son loves it.

This article first appeared on MarketWatch.

Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

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Investing in the Age of the Frugal American

The February 13 issue of Barron’s made a statement that caught my eye:  Americans are paying down their mortgages.  (See “Paying Down the Mortgage.”)

50% of all refinancings now result in smaller loans that the previous mortgage.  Rather than using their homes as a virtual ATM machine, extracting equity (if you have any) to meet current expenses, Americans are actually retiring their mortgage debt early.  It’s a remarkable change in behavior for a nation of consumers who, just a few short years ago, had a well-deserved reputation for wanton frivolity in their personal finances.

As Barron’s pointed out, paying down your mortgage at, say, 4% can be considered an “investment” when bonds yield barely 2%.  But more than this, it is a change in sentiment brought about by changing demographics.  America’s Baby Boomers, the largest and richest generation in history, are entering a new phase of their lives.  With retirement approaching fast, the Boomers are adopting the fiscal habits their parents were known for.  (We all eventually become our parents; it just took the Boomers a little longer than past generations.)

A role model for the parsimonious

The Boomers are the engine that has made the U.S. economy (and by proxy world economy) go over the past 30 years, and their reticence to spend will have a real impact on economic growth.

What does this mean for investors?  Surprisingly, the news isn’t all bad.

True enough, top-line revenue growth for companies that depend heavily on the American market will almost certainly be modest in the decade ahead.  Earnings per share growth, where it happens, will have to come from share count reductions through stock buybacks and from revenue growth in emerging markets.

The good news is that investors can still make a decent profit under these conditions, assuming they choose their investments wisely and pay a reasonable price.  With less need to expand their businesses, many American companies are finding themselves with unprecedented levels of cash on hand. Some—such as notorious tightwad Apple ($AAPL)—are simply stockpiling the cash (Apple’s cash balance is estimated to be an astonishing $100 billion).

But others, including Apple’s rival Microsoft ($MSFT), are using their excess cash to reward their shareholders with share buybacks and, even better, dividends.  Microsoft raised its dividend by a full 25% last year, and more increases are expected in 2012.

A better example might be that of tobacco “sin stocks.”  Unlike Apple and Microsoft, which still have robust and growing demand for their products, American tobacco firms have faced slowing demand for their products for decades.  But with no need to spend cash on investment and no need to advertise, tobacco stocks have still proven to be fantastic investments, with total returns beating the sox off the S&P 500 over the past decade.  And nearly all of this is due to their rock-solid dividends.

I consider dividends to be the key to profitable investing in the years ahead.  There will be periods when speculative growth stocks are more attractive, and we happen to be one this quarter (seeSin Stocks Trail Their More Virtuous Peers as an example).  But for the core of your portfolio, stable, dividend-paying stocks are an attractive option in a world of slow growth and bond yields of just 2%.

If you liked this article by Sizemore Insights, you’d probably enjoy The Sizemore Investment Letter, our premium members-only newsletter. Click here for more information.

Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

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Risk Aversion Ad Absurdum

Barron’s ran a featured story by Kopin Tam in last weekend’s edition titled “Just Don’t Lose It” that was telling.  Tam pointed out that, even after the best January in well over a decade, investors weren’t embracing equities, and neither were their financial advisors.  Only 44 percent of financial advisors planned to increase their clients’ exposure to stocks in 2012 compared to 63 percent this time last year.

I wasn’t particularly surprised to read these statistics.  After all, the financial wealth of this country is dominated by the Baby Boomers, the largest and richest generation in history.  The Boomers lived through the biggest bull market in history (1982-2000), but they also saw a decade’s worth of returns go up in smoke in 2008.  At this stage of their lives, they don’t feel like they can afford the risk of another meltdown.  I get that.  Even while I myself am bullish, I understand Boomer risk aversion.

This is where it gets weird: it’s not the Boomers that are skittish. It’s their children.

As Tam writes, “Risk aversion is particularly acute among ‘Generation Y’ investors born after 1980, who have decades to go before they retire but are especially reluctant to invest… As a result, this cohort allocates roughly 30% of their money on average to cash, more than any other age group.”

Far from being the reckless risk takers that youth are wont to be, this generation is showing a level of risk aversion I might have expected from an elderly retiree that lived through the Great Depression.   Fully 40 percent of the Gen Y investors said they would “never feel comfortable investing in the stock market.”

I can’t say that I don’t understand the general squeamishness with equities these days.  The same Barron’s article noted that the average daily move in the S&P 500 was 1.44 percent in the second half of 2011.  That’s nearly double the 0.75 percent average that has prevailed since 1928.

Still, when I see this kind of pervasive fear in the market, particularly among those who should normally be aggressive, I can’t help but be bullish.  Bearishness has reached the level of the absurd.

For the past two years, I’ve advocated investing in high-quality, dividend-paying stocks, and I continue to recommend these as the bedrock of a portfolio.   The alternatives for most conservative investors are sparse.  Cash pays nothing in interest, and most bonds pay only slightly more.  Meanwhile, the cash levels of U.S. companies are at an all-time high, and dividend payouts are hovering near all-time lows.  Conservative investors can assemble a portfolio of stocks that will out-yield a bond portfolio today and that will almost certainly benefit from rising dividends in the years to come.

For more aggressive investors, the time has come to “risk up” by buying the sectors that took the biggest beating in 2011.  I am bullish on Europe (see “Going Long on Two Euro Stocks”) and emerging markets (see “Emerging Markets Will Make a Comeback in 2012”).  And while I don’t make a habit of recommending commodities, I would have to add commodities to my list of cyclical sectors likely to do well in 2012.

If you liked this article by Sizemore Insights, you’d probably enjoy The Sizemore Investment Letter, our premium members-only newsletter. Click here for more information.

Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

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