Many capital gains have evaporated

Devastating barely describes the destruction in the stock markets over the last few weeks. The Dow chart, shown in my prior posting, shows the Dow tumbled more than 3K in the last 3 weeks. This damage can only be described as overwhelming, healing will not come quickly.

Just last week, Coca Cola (KO), one of my IRA stocks, dropped 10 for no real reason. They didn't do anything wrong. However in just one week the stock depreciated 20%. That story was repeated for about every stock, not just in the US, but in the world. Forget about a V shaped recovery for stocks or economies around the world after all the destruction the markets have gone through in recent weeks. The long term recovery will be slow & painful. Everybody will have to hunker down & get used to markets with new rules. Sure, markets are more greatly oversold than they ever have been. There will be a rebound pop which could be 1K or more lasting a few days. But that won't cure anything, not after the deep & extensive damage that has been done. Markets will be on defense for a long time going forward.

The VIX index, measuring volatility or what some call the "fear" index, has risen to levels which could not have been imagined just 2 weeks ago. Shown in the chart below, 20 used to be considered a very high number & 40 was considered astronomical. On Fri it hit 75, but closed at 69.95. These extraordinary levels are not expected to last but major damage has been done which will take a long time to repair.


VIX -- Volatility Index -- 2 months





The concept of capital gains will have to be rethought after all stockholders have seen 25-50% of equity values wiped out in a few weeks. Popular TV shows are asking about what to do.

Yields will become increasingly important, not for just the brave. Today every dividend is under a dark cloud. The elite S&P 500 Dividend Aristocrats are losing members quickly. These are S&P 500 companies with a minimum track record of 25 consecutive years of higher dividends. While S&P hasn't disclosed much information about them in the last couple of years, many have been dropped or may not last much longer. Out of 7 banks in the group 4 years ago, only 2 remain. General Electric, a Dow stock with AAA credit rating & member of this group, yields over 6% but has to defend its ability to pay the current dividend. Others have essentially record high yields (over 5-6%) indicating the market views the dividends as risky. While this is an excellent group from which to select companies, careful selection is more important than ever as long track records are not always helpful in predicting future dividend payments & increases.

MLPs offer record high yields. Double digit yields are common with many in the 12-15% range (or even higher) & much of the dividends are not taxable in the current year. Pipelines make for a boring business, but are important in building US infrastructure. REITs owning property have have hard assets, like pipelines, offer record high yields, also in double digits with some of the dividends being free from taxes or taxed at lower rates. For the very brave, junk bond funds yield over 20%. No tax advantage here, but in 4-5 years the dividends could recover the original investment. Plus there are many excellent companies with yields of 3-4% following the sharp fall in their stock prices. Yields will have increasing importance as thoughts of making money via capital appreciation have been dealt a severe blow.

I have talked a lot about the destruction in MLP land, but think it is a good metaphor for typical stocks. The Alerian MLP index, which measures the industry, peaked last year at 342 only to pull back sharply at the start of the credit crunch in the middle of last year. The index dropped 60 in just 3 weeks & that was eye popping! After a partial rebound, it kept slipping lower & lower this year to the 260s. Recently it dropped more than 100 from an already low starting point in roughly the same 3 weeks. Now the index has sunk to:

______AMZ____ AMZX___ yield

Oct 9...167½..... 397..... 13%

After almost 13 years, the basic index is up from the starting point at 100. However, when reinvestments are included (AMZX), the index is up 4 fold even after falling from a record of 750 last year. The current value of 397 equates to an average annual compounded growth rate of 13%. This comparison shows that reinvested high yields can produce good returns over the long run even when they end at a dreadful time such as now. The trick is selecting securities which will survive thru thick & then!