Best Opportunity for Remainder of 2012
June 2012
Since January 1, 2012 the stock market is now up 2.67% [Dow Jones Industrial Average:
December 31, 2011 = 12,217 – May 31, 2012 = 12,393]. However, this has not been a straight-line
advance and volatility has returned to stock markets as a result of:
1. Ongoing Greek financial weakness and the European Union response
2. Slow growth in domestic economic growth
3. Lack of conviction among investors that a positive growth bias in financial markets
remains in place
4. A perception of heighted risk in global financial service and banking firms
5. An unemployment rate in the United States above 8.0%
With all that has transpired during the first 152 days of 2011 it may be difficult uncover the investment opportunities that have emerged as a result of the events listed above. Here are DCM LLC’s best ideas for the final 214 days of 2012:
California Municipal Bonds – Dividend Producing Stocks – Stock Market
1. Municipal Bonds– For investors not satisfied with low bank rates, the municipal bond market currently represents an opportunity for income seekers and institutions with high cash balances.
• Historically municipal bonds yield 75% to 80% of similar maturing U.S. Treasury bonds but now California bonds yield 125% to 150% more than these treasuries (Bloomberg, LLP)
• Portfolio of laddered California municipal bonds can yield 3% to 5% (7 – 10 average maturity)
• All interest received is tax-free of federal taxes and can be state tax exempt as well
• Municipalities are doing an excellent job of balancing local budgets and prioritizing debt service
2. Dividend Paying Large Capitalization Stocks – For investors who need a single solution to income and growth.
• A portfolio of dividend paying stocks will now yield 3% to 4%
• The dividend income currently is taxed at a qualified tax rate (15% Federal Rate)
• Stocks are inexpensive versus historical measurements
• Large-cap stocks can provide capital appreciation in addition to current income
• Stock price growth can help to protect against inflation
3. Diversified Stock Market Portfolio – For investors with longer-term goals, sufficient time horizons, and who can experience some volatility for higher long-term growth rates.
• Stocks are currently below their historical valuation averages based on price-to-earnings ratios
o The current p/e ratio of the Standard and Poor’s 500 Index is 13.36 times
o The 25 year average p/e ratio of the Stand and Poor’s 500 Index is 19.45 times (Bloomberg, LLP)
• U.S. companies are announcing strong first quarter earnings
• Stocks can provide long-term appreciation and tax favorable rates (unrealized gains and long-term capital gains treatments)
• Stock prices can adjust better to inflationary environments than bonds
