2017 Dogs of the Dow*

*Honorable Mention: Altria (MO): 3.61% Yield (But Not A Member of the 30 Stock Dow Jones Industrial Average.) "Dogs of the Dow" is an investment strategy that picks the highest yielding 10 Dow components from the previous year-end to comprise next year's investment portfolio. It is theorized that the Dogs of the Dow, via their high yields, are by definition under-valued as an asset class to their peer group and may offer superior returns over the coming year.

Waterfall Decline

Surviving a waterfall decline requires fortitude and patience, both of which are usually in short supply after a dramatic fall from a seemingly placid market. A 2,000 point drop on the Dow Jones Industrial Average over the past 2 weeks has been brutal, there's nothing quite like seeing hard-earned money getting vaporized for seemingly no fundamental reason. The question naturally arises, now what?

Frequent readers of this blog are well aware of the Invest Like A Farmer mentality; we're buying shares (small pieces) in a business, and we prefer highly profitable, monopolistic companies with a steadily increasing left to right chart. We value boring here. By definition, most monopolies are resistant to sudden economic swings. An entire farm planted with the seeds of multiple monopolies is an even better position to be in, as it is extremely unlikely, barring an astroid impact, that all business on Earth will cease.

The major change after a waterfall decline is that a company's dividend yield is now higher since the share price has fallen and financial farmers can now pick up more shares at a lower cost basis. All things being equal, consumers will most likely continue to drink coffee, smoke cigarettes, buy smartphones, wear sneakers, take medicine, drive cars, fix the shed, user their credit cards, and see a movie. Indeed, prevailing monopolies often have the ability due to their strong balance sheets of further consolidating their respective industries.

On August 9th (check out the posting to verify!) I suggested that the dollar was king and a good 401K would be $401,000…given the fall we've seen over the past two weeks, and the past week in particular, it makes sense to review your holdings and identify promising candidates for additional seed capital.

Goldman Sachs had a great article this morning in the Wall Street Journal comparing this correction to 1998 rather than 2008 and the Bespoke Investment Group also had a very interesting piece identifying just how rare true waterfall declines are (this is the sharpest in 75 years!)

My advice remains constant; have a healthy cash reserve at all times, build a portfolio of boring monopolies (i.e. highly profitable companies that pay consistently higher dividends with strong left to right charts), and continually focus on the long-term objective of creating sustainable, generational wealth. Opportunities like this don't come along too often and it is important to seize them when they do.

Double V is a W!

Like Halley's Comet, investors were recently treated to a surprisingly rare event--two sharply defined "V" patterns. I consider this oddity to be a "W" (WIN!) for investors. If the existing trend line stays in place we should see Dow 18,000 prior to the end of the year.

As the investing season grows long in the tooth, and with the S&P 500 and Dow at record highs, those who Invest Like A Farmer should consider any tax-loss selling in the coming days as well as rebalancing portfolios to established benchmark allocations.

Cash on hand (seed capital) has proven to be a valuable resource over the past year, with spurts of sell-offs proving to be excellent times to deploy new funds.

Remember, Investing Like A Farmer is simply the sum of short term successes (additive wins) that are harvested throughout the year in terms of capital gains, seasonal crop sales (dividends), and holding the plow steady in turbulent conditions (long-term, unrealized gains.) 

It's all about the epsilon.

Splitsville?

Follow the dancing ball…and three 2-1 splits later and you now have 8 times the number of shares originally owned! As a quick, and hopefully meaningful post, I have noticed a significant bullish trend developing. There are now a tremendous number of S&P 500 companies approaching levels where they have historically either performed a 2:1 or 3:2 split. This seems to lend credence to my hypothesis of hitting Dow 20,000 by December 31st, 2016. It is time for investors to embrace Log Base 2 (chart above.)

A quick review of the S&P 500 component list will quickly identify multiple candidates for potential splits, the vast majority of which haven't had a stock split in 10-14 years. Along with higher profits and increasing quarterly dividends, a great additional barometer is an equity's share price in relation to its last split. As many equities hit or are near their all-time highs, this litmus test should prove profitable to financial farmers.

If history is any indicator, those who wish to Invest Like A Farmer should see considerable split action in many of their high-quality, high-priced stocks in the next 18-24 months as the Dow Jones Industrial Average is driven higher due to continued easy money, increased corporate earnings, and stabilization of the housing market. Couple all of this with a backdrop of a considerably stronger employment picture, and I think Dow 20,000 should become a reality by the end of 2016.

Dow 20,000 by December 31st, 2016

At some point during the next 3 years, the Dow Jones Industrial Average should hit 20,000 assuming even moderate growth of about 8% per year.

Although it has proven almost impossible to precisely forecast the financial future, and investors know that markets rarely act with linear frequency, I believe the stage is set for Dow 20,000 based on three factors; compelling strength in corporate earnings, sustained low interest rates, and a marked improvement in the employment picture. Even assuming Washington, D.C. continues in a state of relative gridlock and political angst, investors should still be on solid ground.

We are currently in the midst of the 4th or 5th (depending on how you calculate it) best bull market since the 1920s and, surprisingly, we're not too long in the tooth on a relative duration basis.  There is a distinct possibility that this rally continues and becomes one of the ALL-TIME best bull markets. Given the relative political stability for the next 3 years, systemic changes in the banking sector that have been implemented, and finally a surging "IPO 2.0" environment, this current bull market has many good things going for it.  

With easy money still flowing from the Federal Reserve, I see two industries in particular generating significant growth; technology and medicine. From a technology perspective, many companies are laser-focused on the fast-growing mobile sector. With a worldwide population approaching 7 billion, mobile technology is at the forefront of capturing users and revenue. The same can be said of the pharmaceutical industry that has successfully prolonged lifespans throughout the world. Additionally, there are many, many exciting nascent sectors in the economy such as 3-D printing which may lead to a fundamental paradigm change in manufacturing. Finally, as the economy further improves, there is a distinct domino effect on employment; as more workers simultaneously enter the work force (new college grads, the "re-skilled" unemployed, laid-off employees) AND leave the workforce (starting up new companies.) Both of these scenarios should fuel further growth.

What could possibly spoil the farmer's harvest? I see two things on the horizon that are very troubling; the first is the growth of unfunded pension obligations and the mother of all sociopolitical wrangling, the health care system in this country. Unless we can adequately address both of these topics, they stand to possibly derail this rally and cause lasting damage to our great nation.

The Federal Reserve will probably continue to inject billions into the bond market well into 2014 and beyond. There is little doubt this country will have sustained low or very low interest rates well past 2016; the consequences of making any preemptive moves prior to a sustained recovery in the housing, employment, and manufacturing base would be disastrous. I suspect that rates will remain artificially low until a significant inflationary target is exceeded. With that said, the only other major concerns that arise are geopolitical; those are by definition almost impossible to predict and typically have fracking effects throughout the world (Chinese airspace, Iranian enrichment, and the rise of conflict in Africa for example.)

Those hoping to Invest Like A Farmer should absolutely expect at least a dozen or so 3-5% corrections and most likely a pair of 10% drops along the way to Dow 20,000; as mentioned previously, the market rarely follows a linear path. If you plan to buy and hold, it would serve you well to have adequate seed capital in reserve as it has proven fruitful in the past to add to quality positions when there are inevitable dips. Invest accordingly, and as always, it behooves the prudent financial farmer not to get in the way of this "compounding machine" known as the stock market. Let Mr. Market do his thing.