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Fall Leaves and Stocks Dropping

Waiting for solid economic footing before making big moves


Where did summer go so fast?  Outside my office window, the weather is cool, cloudy and wet—quite a contrast to the warm sunshine we enjoyed over the Labor Day weekend.  Stocks, too, got off to a fallish start Tuesday, with the Dow sagging 55 points (although other indexes put in a more creditable showing).  Gold closed at a five-month high.

There’s a fierce tug-of-war afoot right now in the financial markets.  Around the globe, signs of an economic slowdown are mounting.  Even in Fortress USA, the Institute for Supply Management reported that its monthly survey of factory purchasing managers slipped in August to 49.6, the lowest reading since July 2009.

Any number below 50 indicates that more businesses are experiencing slower activity than faster.  In recent days, similar gauges for China and Europe have reflected an even sharper contraction.  The outlook for world economic growth over the next few quarters is sketchy at best.

Yet many investors cling to the hope that fresh money-printing (“quantitative easing”) schemes by the Federal Reserve, the European Central Bank and perhaps the Bank of China will spark another rally for stocks, commodities and risk assets in general.

Maybe.  (We, too, are allowed to hope!)  As I pointed out in the September newsletter, though, it’s becoming painfully obvious that each new round of monetary stimulus is having less and less impact on both the financial markets and the real economy.

Prudence demands, therefore, that we pare our risk in areas where we think it might come back to bite us.  Accordingly, I’m making a couple of tweaks to the model portfolio, effective immediately.

First, among our Growth & Income Plays, we’re selling Pepsico (NYSE:PEP) and replacing it with Coca-Cola (NYSE:KO).  PEP is making a brave effort to turn around its North American soft-drinks unit, but Coke will be a tough target to catch.

If we were in the early stages of a business expansion, I would lay my money on the underdog—bigger potential gains.  With the economy struggling, however, I believe we’re better off with the more defensive name.

Also in the Growth & Income category, we’re selling Government Properties Income Trust (NYSE:GOV).  I see no immediate danger to GOV’s dividend.  Nonetheless, I’m concerned that the upcoming “fiscal cliff” negotiations in Washington could result in longer-term cutbacks in federal spending and employment.

If so, GOV might face increasing pressure on its rental and occupancy rates over the next few years.

Counting dividends as well as capital appreciation, GOV has handed us a respectable 36% return in just over three years.  Let’s nail down our profits.

If you’re looking for an investment to replace the dividend income from GOV, you might consider Pembina Pipeline Corp. (NYSE:PBA).  Current yield: 6%.  Monthly payouts.

In August, management reaffirmed a goal of boosting PBA’s dividend 3% to 5% a year.  Assuming the share price rises more or less in step with the dividend, I figure you should be able to pocket a 9% to 11% annual return through 2017.

P.S.  After today’s close, Facebook (NASDAQ:FB) said in a regulatory filing that CEO Mark Zuckerberg won’t sell any of his shares in the next 12 months.  That’s an encouraging gesture of good will.

Before touching the stock, however, I want to see more evidence that FB can build its advertising revenues at an acceptable pace.  The Q2 figures were underwhelming.  Stand aside for now.

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