Stock Moats

Morningstar describes wide moat businesses as those that can't be hurt even if you allegorically shoot, strangle, poison and drop them off a tall building. Wide moat firms are those that enjoy an almost monopoly in their field.

No moat firms, on the other hand, are those that have an almost impossible time getting an edge over their competition. That doesn't mean that they're not profitable or bad companies it's just that they are in a highly competitive sector with lots of other firms fighting for the same consumer.

For example if ten years ago you were looking to invest in a software company the name Microsoft would spring to mind as a wide moat firm. It still enjoys a strong monopoly today.

On the flip side is DuPont, a giant in the chemical and just about everything else or what I call the kitchen-sink business. It makes a bunch of stuff from radiator coolant, seeds, plastics and bulletproof vests. It has a no moat rating because all the businesses it is involved in are loaded with fierce competition.

Bringing this to an investment perspective is that in 2009 investors are ignoring the wide moat businesses and are favoring the no moat firms. This is also being reflected in mutual funds that own wide moat companies and seeing less than stellar returns so far in 2009.

No moat firms are being well rewarded in 2009, as are their investors and the mutual funds that own them.

Which brings me to my point, or better yet to the point Morningstar made when they wrote about firms with wide and no moats.

Many investors who study this bit of arcane information will ignore firms that have a no moat rating. But, as you can see from my example of two quality companies with great products they operate in different markets. One enjoys a wide moat and the other no moat. Owning either one could possibly enhance your portfolio and over time both have returned value to investors. But, from an asset allocation viewpoint they perform differently during certain economic periods because of their different moat status.

We've been taught that to have a pure asset allocation we should buy investments hugely different from each other, such as foreign and domestic or bonds versus common stocks. Now here is something much more subtle and we can create an allocation simply by buying either a wide moat or a no moat stock, or both or finding mutual funds that do.

The next time you review your mutual fund or stock portfolio you may want to double check some of those holdings to see what moat-category they fall into if their lagging the market, What you may find is that you do not own a bad stock or mutual fund but one with a moat rating that is currently out of favor. You can use this to your advantage with both domestic and foreign stocks and be assured of identical results.

You learn something new every day.

What's Holding Back the Recovery?

Germany and France have emerged from the global depression faster and in better shape than Great Britain and the United States, according to the WSJ August 14Th. The biggest reason is consumers are spending in those countries something the Brits and Americans seem loath to do. Fear still grips us as home foreclosures keep rolling right along even as the Federal Reserve stated this week that the recession is near the end. July was another record month for people losing their homes with the Sun Belt leading the way and rust belt states Illinois and Michigan also in the mix. Unemployment continues its slowdown, and we're in double digit territory not counting folks who have given up looking for work. There are a lot of unemployed who've simply said, 'enough is enough' and retired or resigned themselves to odd jobs or off the books part time employment. Even illegal immigrants have tossed in the towel and stayed home.

If you're an investor who's bailed and put your retirement and investment money into Treasuries you're probably as nervous as a pickpocket at a police convention. You know what you want and have to do is to get back in to the market only you don't like your chances of getting caught if the stock market decides to suddenly reverse direction. You don't care what the Fed, your broker, the New York Times or your crazy aunt's tea leaves say, you don't want to chance losing your hard earned savings by moving into the stock market too soon. There is still a chance of a substantial sell-off such as what we experienced Friday as the markets dropped during the trading day triple digits and closed almost 80 points down on fear of deflation.

To be fair there are a lot of smart people on your side of the fence. The other's are on the other side waving you over and telling you things are fine and now is the time to be making some money.

Who do you listen to?

The best thing I can think of is to start dollar cost averaging into the market. Take your money and divide it into 1/12Th's and simple start buying what you once owned. Over the next 12 months you'll catch different prices both high and low but it'll be a comfortable way to get back in without the shock of diving in all at once and then maybe seeing the markets move back to their lows and laughing at you.

Finally, get more aggressive with your money. If you were invested in balanced or Target funds look for growth, growth-income or world funds to get more bang for your money. Those funds were hit hard and off some 40% and not because they were poorly managed, they just didn't expect the huge sell off that drove all prices down.

Getting back into the market is tougher than getting out. Any excuse is good enough for you to sell; you need some compelling reasons to venture back into the unknown.

Dow Theory

If you're an average investor you probably haven't heard of it but it's been around for over 100 years and is the basis of technical analysis in use today.

Charles H. Dow started publishing his theories on how the stock market behaved beginning in 1900 until his death in 1902. He never completed his work but others have stepped in to polish and finish what Dow started.

In a nutshell Dow believed that by analyzing the overall market an investor could accurately identify the direction of not only the market but of individual stocks. His theory was based not in individual securities but the movement of the broader markets.

Several problems have emerged over the years with the Dow Theory. One is that by its conservative analysis investors who follow may miss out on significant gains. The other is that the indices that Dow used to base his calculations have changed significantly.

That being said the Dow is again sending buy signals on August 11th based on Charles' Theory. One correlation is that as industrial firms profits increase so their output. And, because goods need to be transported to the marketplace the transport index must also rise. In other words for a bull market confirmation with the increase of one so should the other index rise.

The problem is that today not everyone is buying the Dow Theory. While some economists point to a definite buy others are not only skeptical but also worried the markets are due for a sell off. Skeptics argue that rather than using the Dow transport index as a confirmation analysts should be using the Baltic Dry index, which tracks international shipping rates of dry cargo. That index is falling like a stone.

So while the Dow industrial and the Dow transports have indicated the confirmation of a Bull market many economists believe much of the market's energy has been used up.

There is just enough bad and good news to confuse the best analyst and most cautious long-term investor. Making this not a market for the faint of heart.

China '09'

If you have China anything on your investment wish list you may want to wait a bit. So far the Asian giant's stock market has soared some 80% because the Chinese government has thrown everything including the kitchen sink, at stimulating an already hot economy. Beijing has shoveled so much money into businesses that it has artificially propped up employment and manufacturing. According to Time Magazine so much money has been poured into Chinese companies that they have invested some of those proceeds into the equity market for lack of better alternatives causing the markets to skyrocket.

Americans, on the other hand, have closed their wallets to spending and instead have increased their savings from virtually zero to 7% of gross income. The Chinese consumer is on a spending spree. But, and there is always a but, the Chinese remain a relatively poor people with an average per capita income of $6,000 compared with $39,000 in the U.S. Even middle managers in downtown Beijing average at best $12,000 a year. So the Chinese are unable, as yet, to pull the world economies out of the current economic recession by the sheer force of their consumer spending; something the United States consumer can and used to do without half trying.

So while China is building and experiencing its own bubble, of a sort, it has not become a dominating world player that can uplift the world's economies like the United States once did and still can. The Chinese are more like the French, and no one looks to the French to do much economically.

The Chinese were caught in the middle of a massive infrastructure buildup when the 2008 depression hit. Those projects could have been shut down or continued, which is what Beijing did to stimulate the economy and keep it growing.

Spending continues to grow even as corporate profits are shrinking, which leads some economists to think that the Chinese may be seeing the beginning of the end once the stimulus of their spending wears thin.

The question I have is what happens when the economy really sours in China? Will the Chinese government continue to buy our debt or will they sell what they already own and to whom?

Or, am I needlessly worrying and by the time the Chinese economy sours the United States consumer will ride to the rescue and spend again like nobodies business?

Recession End Game

'I said it! I predicted it! I was first. Not you, me!'

Yes, it's the old who predicted the end of the recession first game. Pundits and so-called financial experts are queing for the front of the line to get credit for seeing the recession horizon. Forget that just about everyone missed predicting the meltdown, except for Jimmy Cramer who showed up on the Today show and started one of the largest mass exoduses in modern investment history. Some 7 trillion dollars evaporated by the time markets closed that day October 6, 2008 when earlier Cramer urged anyone who needed money over the next five years to get out of the market. He predicted that stocks would fall by 20%. In typical Cramer-like fashion he was wrong.

Cramer said he thought long and hard before opening his mouth on national television. Obviously he didn't think long or hard enough. Too many people were and are tied to stock investment income for college and retirement; millions of investors were crushed minutes after Cramer finished his warning.

Markets are still substantially off their highs (Can I write substantially one more time just so dear reader gets it?) In my lifetime I probably will never see the NASDAQ get back to where it was in March 2000.

It really doesn't matter much if the recession ends today or next Thursday, or if it really ended in June 2009. Unemployment is not going to snap back in a nanosecond, nor is housing going to immediately get back to where it was before the meltdown. Manufacturing is being artificially stimulated with 'Cash for Clunkers', and banks are still hoarding cash as if auditioning for Scrooge. The good news is now being prefaced with 'not as bad as the previous quarter', or 'we're not losing as much money as we were'. In other words, if this were a normal economy things would really be bad but since this is such a terrible economy the bad news is not as bad as it could be.

If you've been out of the market you may want to start doing some serious thinking about getting some assets back in. If you have extra cash on the sidelines you may want to do some homework and think about buying some stocks that are severely discounted and will make money once the recovery is humming along.

I don't care who takes credit for predicting the end of the recession. I do know it is going to be a long recovery and with special problems all its own.