Investment assessment - midyear 2008

This is a fraidy cat, of the most extreme! He is called Tom Cat & as a fraidy cat spends most of the time hiding in a closet or under a futon. During these time, a lot may feel a kinship to Tom Cat, but it's not necessary. He's well fed & will be fine. Very smart investors will recognize the value of using this time to prepare for selecting good investments.





The widely watched S&P 500 Index chart below shows stocks have had a very tough going in recent months. In the first 6 months of 2008, S&P 500 is down 190 or 13%. That qualifies as a major kick in the head. Even worse, there are no signs of an early end to the market decline. But positive actions taken now will pay off!

S&P 500 Index




The 2 year chart is not pretty. This year, the S&P 500 has lived under the 200 day moving average. Even without being a technical expert, the picture it shows is ugly! June is shaping up as the worst June in many years, but don't lose heart.

High yields will help a very smart investor weather the storm. Junk bond funds yield over 10%, over 600 basis points above the Treasury bond rate. This is considered a very high premium for the added risks on these bonds. For the brave, modest investments in these could do well.

Real estate trusts, REITs, commonly yield 6-10%. Some will go over bumpy roads ahead, but careful selection can lock high yields for the coming years. There is also a tax advantage for personal money invested in REITs. Many pay divs which are partially tax free & another portion of the div could be considered capital gains. Something to think about.

Master Limited Partnerships, MLPs, commonly yield 7-10%. Their structure is built around 80-90% of the distribution being tax free. However, there is a fair amount of tax hassle associated with distributions. Partners get K-1 tax forms late, after Mar 15. The tax cost basis has to be recalculated yearly after the K-1 forms are received. Being a partnership requiring annual tax filings, these are generally not IRA friendly. But for a personal investment, the largely tax free yields are high & the long run track record of of the index (Alerian MLP index) is excellent.

Alerian MLP Index







The S&P Dividend Aristocrat list is a little more spotty. These are the "big guys" in the S&P 500 with track records of at least 25 years of yearly div increases. Unfortunately, past success does not necessarily predict the future. Just a few years ago, there were 7 banks on the list. 2 dropped off this year & another 2 are expected to cut divs this year, taking them off the list. Bank of America (BAC), US Bancorp (USB) & State Street (STT) remain. BAC yields 10½%, an indication that some consider their div at risk. Masco (MAS), maker of bathroom & kitchen fixtures, is not expected to cover the div. Pfizer (PFE) has a high yield because their #1 drug Lipitor has only a limited life left under patent protection. But many others in the group, while struggling to achieve higher earnings, are expected to persevere with increased divs, come what may.

Next week probably will be grim & the coming months should require dedicated investors to maintain a "stiff upper lip." Earning high yields while waiting for a major correction in the markets can make it easier (& more profitable) to adjust to difficult market times