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Peace, Love and Happiness in the Market

Market indicators are looking least for now


Are you feeling groovy?  Apparently, a lot of investors are.  Monday, after a quiet day of trade on Wall Street (the Dow fell 38 points, but NASDAQ gained 2), a key barometer of investor nervousness closed at a five-year low.

We’re talking, of course, about the Chicago Board Options Exchange Volatility Index, known as the VIX for short.  VIX is kind of a geeky indicator, but basically it rises when options traders are expecting bigger swings in the Standard & Poor’s 500 stock index, and vice versa.  Typically, though not always, bigger percentage moves in the S&P are associated with a falling stock market.

So we’re at the lowest closing VIX (13.70) since June 19, 2007.  Options speculators are feeling very relaxed.  They’re looking for the stock market to creep along “on little cat feet” — mostly upward.

Well, it’s a pleasant vision, and let’s hope it comes true.  Shucks, if the world’s problems were to recede somewhat, the VIX could tumble to 10 or less, as it did in 2006.  Everything seemed so wonderful back then.  House prices were rising, stock prices were rising…

Uh-oh.  You see, markets always appear calmest shortly before the bottom falls out.  That’s why, as astute investors, we want to guard most against complacency when signs of it are blossoming all around us.

I’m not quite ready to take our model portfolio equity weighting (51%) any lower, because we’re already in a very conservative position.  What’s more, I think we do have to allow for a possible burst of pre-election euphoria on Wall Street.

By tapping Rep. Paul Ryan as his running mate, Mitt Romney will probably end up sharpening the debate on fiscal issues.  If enough investors decide that the debate is pushing the nation toward substantive fiscal reform, stock prices may keep climbing all the way to year end.

Still, I advise you to use any ongoing market strength as an opportunity to weed out stocks (and funds) that you don’t care to hold for the long term.  Focus your limited buying on companies with strong defensive attributes, such as a generous dividend yield.

Portfolio Update

On the sell side, we’re saying good-bye to another of our emerging-markets stocks, Taiwan’s Chungwha Telecom (NYSE:CHT).  Since our initial purchase in January 2011, CHT has notched a total return of 10%, including price gain and reinvested dividends.

While that’s not a horrible showing, I’m concerned that the analyst consensus is projecting CHT will log a double-digit earnings decline in 2012 and only a minimal recovery in 2013.  The stock has mounted a decent bounce off its April low, but now seems to be running into heavy overhead resistance.  Let’s bow out of this Niche Investment.

Something is still worth buying, though.  Canada’s Pembina Pipeline Corp. (NYSE:PBA) fits our profile of a low-risk income investment — a growing “toll taker” business that generates a current yield of 6.1%.  PBA, which transports about half of Alberta’s conventional crude oil, has boosted its payout 54% in the past 10 years.

I’ll have more details for you in our September issue, but I’ll whet your appetite by mentioning that PBA—unlike master limited partnerships in the pipeline sector—issues a simple Form 1099 at tax time, rather than the complex and confusing K-1.  Even better, the Canadian government waives the usual 15% withholding tax on dividends paid to U.S. residents if you hold the shares in an IRA or other retirement account.

Dividends are paid monthly, and we’ll add the stock to the model portfolio under a new category, Toll Takers, which will capture PBA plus our master limited partnerships.  We’ll devote the same weighting (5%) to Toll Takers that we’re currently assigning to MLPs.

P.S.  Nice earnings report today from Sysco (NYSE:SYY).  But the spike in the stock takes SYY well past our buy limit.  Wait for a pullback and don’t overpay for only modest growth!

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