Now that the election celebration and commiseration parties are over – you need to keep your portfolio profitable regardless of any new direction government takes.
by Neil George
The seemingly never-ending election season provides a prime time soapbox for both stock pitchmen and market curmudgeons alike to blather on about how to either cash in or sidestep another slide.
Despite the billions of dollars spent campaigning, complete with incessant advertisements and massive protest marches – now that the final tallies are taken – how much will really change come January?
We’ll still have a US economy with steadier to stronger growth – now running at 2.0%. We still have plenty of government deficits and debt. And we’ll still have plenty of uncertainty as to what Washington will do next.
Those pitching a massive change will likely be disappointed – but so will those who warn that it’s all just for naught.
The key goal of my Pay Me Strategy is to empower you to make your portfolio actually make money regardless of the multiple possibilities arising from events like over-hyped elections – instead focusing on the more likely of outcomes.
Then look at the investments that will make the most of the probable and not just the possible.
By just about anyone’s account on either side of the political aisle come January – there will be a change hitting Capitol Hill as well as in statehouses around the nation. That change will come in the form of a reversal of fortune for the incumbent party’s control over government.
But the change won’t be overwhelming – and thus neither will the results for investors wishing to place bets on story stocks.
It will most likely end up merely locking down further political action through the next two years until yet another general election.
Elections Have Consequences for Investors
While historical look-backs are rife with correlation issues – if we do take a look at the mid-term elections of 1994 and 2006 when incumbent parties gave up some power in Congress – there is some comfort for those seeking market improvements in 2010-2011.
In November 1994, after an anemic performance of the S&P 500, including a price loss and a meager 2 plus percent total return over the prior 12 months – after the changeup from Democratic control to Republican in Congress and with continuing Democratic control of the White House – the S&P 500 surged some 28 percent.
And for the same period of time – US intermediate Treasuries went from a loss of nearly 7 percent, to gains of over 20 percent.
Then in November of 2006, with the shift from incumbent party control to the opposition – the S&P 500 continued to perform from the prior 12 months, with post electoral gains of over 12 percent. Treasuries fared similarly, going from a positive performance of nearly 5 percent to nearly 7 percent in the 12 months after the election.
So as the polls suggest, the following 12 months post the election might well continue to support generally higher stock and bond markets. And the reasons might upset folks on both sides of the political aisle – any improvement might well be explained not by better policy – but rather just a lockup of government that lends a hand to the markets.
But, should you just hold and hope that history repeats itself? Or – given plenty of other issues remaining in the economy and market – wouldn’t it be a much safer bet to focus on the ongoing developments beyond just the post electoral marketscape?
Let’s look at a series of continuing developments that likely won’t change despite the election results.
First, taxes are a certainty of course, and continue to be part of the investment gauntlet. While many might hope that hikes in Federal tax rates for income, qualified dividends and capital gains will be nixed – don’t completely rely on it.
It’s hard not to see at least some compromise on tax rates given both political parties’ rhetoric over fiscal needs and wants. And even if we do get lucky and sidestep any Federal tax hikes, there’s still plenty of damage coming from the state and local level.
And as I’ve been writing in both By George and The Pay Me Strategy – tax receipts for state and local authorities are strongly on the rise. In fact, just in 2010, 29 states have hiked tax rates – amounting to more than 24 billion dollars. And nationwide – with states’ budget gap estimated to be running at over 136 billion dollars – increased taxes and fees are almost a bankable certainty.
Add in the public pension deficits on the state and local level, which according to two recent studies by professors at the University of Rochester and Northwestern University are running at more than 5.3 trillion dollars – and along with the reality of death – higher taxes are looking like a done deal.
So let’s talk about some prudent and profitable trades that will not only perform along with an expected post-electoral stock and bond boost – but will also counter higher taxes.
Income Investments That Sail Past Higher Taxes
Start with muni bonds. Yes, muni bonds – but not to buy willy-nilly. Rather, focus on three closed-end investment funds that I’ve recommended throughout the past several years that continue to sidestep so-called insured munis in favor of known quality bonds.
Buy the AllianceBernstein National (AFB), Blackrock Muni II (BLE) and the Nuveen Quality (NQU) funds. Each are trading around book value or at small discount or premium for their assets and management. And like the closed-end global bond funds inside The Pay Me Strategy – these should be bought together as a group.
The average tax-free yield for the group is running near 6.5 percent – which, grossed up for most investors, equates to a taxable equivalent of nearly 10 percent. And during the past 5 years of turmoil – they’ve managed to deliver an average return of 35 percent.
Any rising taxes will only strengthen issuers, while also goosing demand for quality tax-free bonds.
Then, move on to tax-advantaged stocks – many of which have continued to perform inside my Pay Me Strategy for many years.
Passthrough securities come in various flavors and acronyms including Master Limited Partnerships (MLPs), Limited Partnerships (LPs), General Partnerships (GPs), Limited Liability Companies (LLCs) and other structures.
But what they all have in common is that they avoid double taxation of dividends. All profits are paid out and thus passed through to shareholders – who then are liable for taxes.
In addition to the profits passed through are many of the writedowns – including depreciation costs – which are referred to as return of capital. This means that for just about all passthroughs – the dividends are sheltered either fully or in part when it comes to investors’ tax liabilities.
The market for these stocks has continued to crush the general S&P. During the past 5 years, the Alerian MLP Index is up nearly 100 percent – while the S&P has lost another 1 plus percent in price.
There are a growing collection of ETFs and funds beginning to take notice of various sectors within this group. But they tend to underperform the group – even those supposedly tracking the index. This is yet another reason why I tend to side-step ETFs for most market opportunities other than for near term trading strategies.
But that doesn’t mean that there aren’t some easy individual passthroughs to buy to help pay for your retirement.
I’ll mention three that not only perform – but outgun the index and every passthrough ETF while also paying well enough to deliver high returns with or without probable higher tax rates.
On the petrol side – there’s a producer and a distributor. Linn Energy (LINE) is a quality liability-averse passthrough paying over 7.5 percent. It focuses on established fields in the south-central US as well as in Southern California. Its return since coming to the market in 2006 is more than 130 percent.
Then on the less price-sensitive distribution market is Enterprise Products (EPD). This is a pipe and processing partnership paying a bit less with a dividend yield in the mid-5 percent range – but performs with a five year return again in the 130 percent range.
One newer passthrough to buy is a dry-bulk shipping company focusing on high-contract demand routes in the Pacific. Navios Maritime (NMM) pays nearly 9 percent and, since coming to the market in late 2007, has delivered a return in excess of 40 percent.
Boost Your Own Retirement Income with Pension Managers
The next group on my list of post-election investments involves pensions. As noted above, public sector pensions on the state and local level are huge – and hugely underfunded. Add in the Federal retirement system, including the Federal Thrift Savings program, and the market for managing retirement pension assets is gargantuan and only getting bigger.
The way to cash in on this is to go for the companies running the pension assets.
The key with this market segment is that the companies managing the pensions don’t have to perform – only continue to hold and gather assets. The more the assets – the more the fee income.
One of the biggest public pension managers is Blackrock (BLK) which runs the core of the Federal Thrift program’s funds. Assets under management have continued to soar by more than 800 percent – and BLK should only keep growing as pension funds begin to address lagging contributions.
Then there’s another successful manager – Pimco, which is owned by the German financial giant Allianz (AZ). While the company also has a host of insurance business lines – Pimco continues to pull-in ever higher amounts of pension assets. This is primarily due to the tidal shift in public and private pension funds away from stocks and back to bonds as the core of their assets.
Pimco being one of the largest bond managers should continue to pump up Allianz in the coming year. And a general positive post-electoral market won’t hurt either. Buy Both Blackrock and Allianz.
Profit from Renewed Offshore Drilling
A third and last post-electoral development worth buying into is offshore drilling.
With the exception of Florida, most of the the nation – regardless of political party – is demanding more petrol production and that means resuming offshore drilling. As a result, what will be happening post election is a new series of Federal regulations focused on at least appearing to try to avoid another disaster.
One of the best drill rig contractors that’s used to working in hostile waters – both political and natural – is Seadrill (SDRL). With management focused on liability management – it has an admirable track record of drilling and budget safety. And not only does it satisfy the politicos – it also more than satisfies shareholders. Its dividends are solid and heavy – climbing strongly to a current rate of over 8 percent.
And the market is beginning to notice as SDRL’s shares are performing much like its rigs – with gains over the past year of more than 50 percent. Buy SDRL for yield and gains.
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