The Fed’s (Gold) Chain Reaction
- Beating the Dow: The “Dow Dogs” do it
- Mike Burnick on the strategy that’s outperformed 7 of 10 years
- Why Fed chair Jerome Powell’s fixated on the word “patience”
- Zach Scheidt: Fed tends to bond portfolio, sets off (gold) chain reaction
- (Wisconsin’s folly) Foxconn? More like FoxCON!
- A longtime reader says, “You don’t need a weatherman…”
“One of the most successful investing strategies of all time is to follow the Dogs of the Dow,” says our income and retirement specialist Mike Burnick.
The investment strategy was popularized in 1991 by Michael B. O’Higgins in his book Beating the Dow. “It’s a classic value investing strategy that could be primed to work even better this year if the market remains shaky in the face of a slowing global economy and trade battles,” says CNBC.
Here’s how it works: At the closing bell of the stock market on the last day of the year, pick the 10 highest dividend-yielding Dow index stocks. Then — on the first trading day of the new year — invest equally in each. Hold these 10 stocks for the year… and repeat the process each following year.
Mike says: “By targeting the highest-yielding Dow stocks, you are essentially buying the dip. And the high dividend yields indicate compelling values and often result in market-beating capital appreciation as well.
“In fact, the Dow Dogs have beaten the overall DJIA returns seven of the last 10 years. That includes 2018 — the strategy managed to curb losses to 1.5% versus 6% losses for the broader Dow index.
“That’s an incredibly consistent track record of outperformance,” says Mike. And the Dow Dogs are so well liked they have their own index — the Dow Jones High Yield Select 10 Total Return Index.
As for the index’s performance against the S&P 500…
“The Dow Dogs have beaten the pants off the S&P 500 Index by gaining 291.4% since  compared with a return of 179% for the S&P. That’s an average annual return of 10.1% for the Dogs compared with just 8.0% for the S&P 500 Index.”
Mike says: “The stocks that make up the Dogs of the Dow tend to change every year.
“That’s because the best-performing stocks move off the Dogs list and are replaced by stocks that have lagged or fallen in value.”
Just one stock was swapped out in 2019, however: “The only change was… the removal of General Electric from the Dow Jones industrial average, which made room for a new stock — JPMorgan Chase.”
To Mike’s way of thinking: “You could buy all 10 of the Dogs of the Dow or an ETF that mirrors them” — it’s not a bad strategy — but it’s a long-term portfolio strategy.
Instead, if you want to see how you could be a millionaire retiree this time tomorrow, you’ll want to check this out right away…
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Starting as early as TODAY, Jan. 31.
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To the markets… where the glow from this year’s model of Federal Reserve policy is carrying into a new day.
The S&P 500 is up more than three-quarters of a percent and the Nasdaq is up nearly 1.5%. Only the Dow is lagging, down fractionally.
The Fed left interest rates alone after its latest meeting yesterday. That part was no surprise. What had traders on pins and needles was whether the Fed would stick with its new “patience” policy.
Back on Jan. 4, Fed Chairman Jerome Powell let it drop that the Fed would be “patient” in deciding on the pace of interest rate increases this year — a major departure from stated Fed policy only a couple of weeks earlier.
“Patient” is a word pregnant with meaning in the Fed’s lexicon — it sent a major signal to markets at a crucial juncture in early 2015, for instance. So the big question was whether Powell would stick to the revived “patience” script during his press conference yesterday.
Our unofficial count shows four uses of “patient” or a variation thereof in his opening statement… and six more during the Q&A. As they say in D.C., Powell stayed “on message.”
With that, the market turned in its best one-day performance yesterday since… well, since Powell first trotted out the word on Jan 4.
Meanwhile, another revised plank of Fed policy is propelling gold to an eight-month high at $1,320.
“Since October 2017,” says Zach Scheidt, “the Fed has been slowly reducing the amount of [Treasuries and mortgage-backed securities] it holds. This ‘runoff’ in the Fed’s balance sheet has naturally helped to prop up market interest rates.”
But Jerome Powell alarmed investors in December “when he told us that the Fed’s balance sheet ‘runoff’ would be on autopilot for the foreseeable future” (emphasis added).
Investors took that to mean the Fed would continue to drive interest rates higher — economy be damned.
“Of course, in hindsight this was a poor choice of words.” says Zach. “Using the term ‘autopilot’ caused investors to panic and drove stocks sharply lower in December.”
Note to future Fed chairman: Strike autopilot from the Fed lexicon; patience is so much better…
Zach says: “A decision by the Fed to take more time with its bond portfolio sets off a chain reaction in the markets.” The good kind of reaction… particularly for gold investors.
“We’re already seeing this chain reaction affect the gold market,” Zach continues. “Just this week, gold prices pushed definitively above the $1,300-per-ounce level. Gold is now trading at its highest point since mid-2018.”
Here’s how Zach says it works:
- Holding more bonds helps keep interest rates low
- Low interest rates drive the U.S. dollar lower
- With a low dollar, gold prices naturally rise
- Higher gold prices mean bigger profits for gold miners
- And an increase in profits drives gold miner stocks higher!
“Best of all,” he says, “gold has plenty of room to run. After all, gold futures hit a peak above $2,000 per ounce in the years following the financial crisis.
“And with the Fed keeping interest rates low and sending a major signal to investors… we could see gold make a beeline toward that level over the next few months.”
“Foxconn is reconsidering its plans to build a manufacturing facility that was supposed to create 13,000 blue-collar jobs,” according to an article at Reason.
Not just “reconsidering”… the company’s all but sh*tcanned the entire Wisconsin folly.
As we reported here at The 5 in June 2018: “Foxconn, the Taiwanese electronics giant, will build a factory in Racine County making TV and computer screens.
“When the plant was first announced, we took note that Foxconn was lured with $3 billion in state and local ‘incentives.’ By last January, the tab… swelled by 50%, to $4.5 billion…”
At least it made for a nice photo-op…
“President Donald Trump flew to Wisconsin last June to participate in a ceremonial groundbreaking for the plant,” Reason says. “Former Republican Gov. Scott Walker promised that ‘working families would reap the benefits’ of the giveaway.”
Now? Not so much… And the state of Wisconsin should’ve seen the handwriting on the wall.
Foxconn has already bowed out of similar agreements to build plants in India, Vietnam and Brazil. Closer to home? “A planned manufacturing facility in Harrisburg, Pennsylvania, was supposed to employ 500 people and come with a $30 million investment, but it never materialized.”
Now Louis Woo — assistant to Foxconn’s chairman — says: “In Wisconsin we’re not building a factory.” Blunt enough for ya?
Rather, Foxconn has tentative plans to devote a Wisconsin facility to research and development. “The jobs created are likely to be ‘knowledge’ positions — in other words, not blue-collar jobs,” Reason says.
It gets better, folks… Foxconn plans to hire workers from Taiwan and China.
(How’s your blood pressure? You good?)
“Foxconn will receive more than 1,000 acres of land for free,” says Reason. “Eminent domain will be used to remove residents of Mt. Pleasant, Wisconsin, where the new facility is to be built.”
“It was always pretty unlikely that the Foxconn deal would live up to the promises made by the company, Walker and Trump,” Reason concludes.
“That it is failing so spectacularly, and so early, should serve as a stern warning to the next politician who considers a similar scheme.”
*Sigh* They never learn…
In response to Monday’s mailbag, referencing Scandinavian socialism, a longtime reader says: “Despite what many on Wall Street and Washington, D.C., think, poverty is rampant in the U.S.…
“… and there are tens of millions of ‘working poor.’
“A single woman with two kids (husband skipped out) working 50 hours per week, 52 weeks per year at $7.75 per hour will take home (after Social Security and Medicare) $1,550 per month plus $40 in food stamps (in Georgia).
“After apartment $800 (if very lucky), $400 (day care), electricity/water ($300) and car insurance ($100) there is nothing left for medical/dental, gas, clothes, shoes, TV, phone or even groceries.
“Rents are increasing nationwide at 4–7% per year, wages 2–3%. (Read at least some of Matthew Desmond’s award-winning, eye-opening Evicted.) For the lower and some ‘middle’ class, there no longer is an American dream.
“And speaking of eye-opening: On an airport shuttle eight months ago I overheard three TSA agents talking about their own personal ‘working poor’ economics. As they parted, one of them said to the others, and they all nodded, ‘Hang in there, the revolution is coming.’ It was said out loud, clearly…
“They may not know what socialism actually is or what Scandinavian economics are, but they do know that something must change.
“As said by a rock songwriter many years ago: ‘You don’t need a weatherman to know which way the wind blows.’”
The 5: If those TSA agents were talking revolution eight months ago, imagine what they’re saying after the government shutdown… Or how about those 13,000 Wisconsinites hoping for blue-collar jobs…
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