When it comes to investing in the stock market to build a retirement portfolio or to generate income from “well-earned” capital, the financial world has changed dramatically in the last 5 years.
For most investors, preserving capital is priority. However, the first thing to do is not to lose capital.
And when it comes to preserving capital a key is to avoid lousy companies and lousy stocks. Call them “Old Normal” stocks – they are either dead in the water or in the process of drowning.
There are stocks covered here that represent some of the most widely owned stocks by U.S. and international investors.
And there are stocks that have been “the darlings” of Wall Street and the financial media for years, but most of them have become irrelevant in the “New Normal” stock market.
These are stocks you should avoid to preserve “your capital.”
And, if you own any of the following — in my view — these are the names to move out of to generate cash to prevent getting killed in the long term.
If the U.S. is not already in a recession — it should prove to be milder than the last one — it will be soon, who will get hit the most? Middle tier retailers that do not discount enough or do not offer the higher quality goods and customer service that serves retailers well during recessions.
The two most vulnerable are J.C. Penney (NYSE:JCP) and Sears (NASDAQ:SHLD). JCP saw sales fall 26% in Q3 and it is on a downward slide that may not end Sears is a dead man walking and has been for many years. Have you bought anything in Sears lately? The bottom line – and I quote a man I loathe, Jim Cramer, the son of a Dad involved in retail. “No retailer needs to survive.”
Federal Austerity Victims
Even after coming to an agreement to avoid the fiscal cliff, its pretty clear that eventually programs are going to be cut. The worst federal program — other than the more than $200 million plus spent on military bands while the wounded wait months for prosthetic devices — is loan support for online, for profit colleges. These are a legal scam totally dependent on federal largesse. The big name is Apollo (NASDAQ:APOL), a little one that is a mess is Corinthian Colleges (NASDAQ:COCO), the entire sector is headed down and many will go out of business.
Fracked oil and more importantly fracked natural gas that is selling for less than $4 an MCF is killing coal. Coal stocks are down more than 50% in 2012 – and it will get worse and it won’t jet better. Gas is not only cheaper it is cleaner, new EPA regulations mean no new electric power plant will be built using coal, I could do go on. Two names that some geniuses on Wall Street are bidding up are Arch Coal (NYSE:ACI) and Peabody (NYSE:BTU), stay far, far away.
Ignore the trading noise around Apple (NASDAQ:AAPL) the stock, because the company is killing its competitors. Ignorant “value” investors are now seeing big tech names that have been crushed and are screaming “value, value.” Tech does not work that way – there is no intrinsic value to many tech names, it is all about the competitiveness of their product lines – and lack thereof. Nokia (NYSE:NOK) is done; Research in Motion (NASDAQ:RIMM) is done; Microsoft (NASDAQ:MSFT) is going nowhere; Dell (NASDAQ:DELL) will slide for many years and so will Hewlett Packard (NYSE:HPQ).
European Everything Victims
By everything I mean recession, deficits, debt and busted banks. Oh yes, busted banks – European banks are poorly capitalized, especially German state banks and have huge exposure to the sovereign debt of Greece, Italy Spain and Portugal. Why do you think otherwise arrogant and sanctimonious German politicians are willing to risk the wrath of equally sanctimonious German voters to bail out Greece?
A day of reckoning is coming – and when the banks get bailed out it will mean massive dilution of shareholders, the TARP did that temporarily, in Europe it will last for a long time. So stay away from the pundits recommendations that European banks stocks are cheap and in particular avoid Banco Santander (NYSE:SAN) of Spain 30% unemployment is rising, malnutrition is breaking out in some places, invest somewhere else.
Willfully ignorant critics keep screaming about the Fed and the expansion of its’ balance sheet and inflation. Their screams are based on seventy five year old textbooks. Inflation comes from too much spending power – not too much money – facing too few goods and services. The developed world has one third less spending power than five years due to the removal of credit and there is no shortage of anything anywhere in the world except foodstuffs and responsible politicians (arguably an oxymoron).
These inflation hawks have helped drive up the price of gold. Bernanke has it right – and gold is going nowhere in the short run. Over the long haul I believe everyone should have some gold in their portfolio, not to hedge against inflation but to leverage the ignorance of the people who hedge against inflation. But next year I expect gold to stay flat and any big moves will be down, not up.