Stick with cash generating stocks, bonds and gold

Covestor models: Global Diversified Conservative, Global Diversified Moderate, Global Diversified Aggressive

As I usually do, I waited until the monthly unemployment number was released to see what guidance it was going to offer us for the weeks ahead. Were things truly getting significantly better, positioning us for stage two of 2012 lift off? I had my doubts.

That said, strength in jobs has been part of the driver behind the Dow Jones Industrial Average having reached a 9% gain year-to-date as of early April. This type of return would have been graciously accepted for the entire year!

In any case, I did wander into the office on Good Friday (April 6), a bit curious as to how things would turn out. I certainly didn't have to fight for a seat on the ferry, nor worry too much about where to park, or wait very long for my breakfast. So far so good.

At the trading desk I noticed the long bond price off about ¾ point, and all I had read that morning seemed to have been quite bullish. The ADP job numbers had been strong, as well the Canadian employments, and all thought those two were precursors to a rosy US jobs number as well. So was I surprised by the March jobs data?

Not so much, although the net revisions for the previous two months didn't really amount to much, the non-farm payroll numbers had about 85,000 fewer jobs being created than the Street survey by Bloomberg had been expecting.

The the price of 30-year US Treasury bond quickly perked up (like the perverse thing that it is) and increased by two percentage points, ultimately settling for the day at 98.25 for a closing yield of 3.21% having been yielding as high as 3.35% earlier in the day.

I am certain more than one analyst had to fight off his urge to sharpen his pencil after the ADP and Canadian jobs report, just chomping at the bit to be the one who correctly predicted a blowout number to the upside. I don't know what is worse; the media attention this number draws, the revisions it is frequently subject to, or the fact that so many rocket scientists on Wall Street, and elsewhere, spend so much time analyzing, predicting, estimating, and frankly guessing how it will print.

Afterwards we all act as if it should somehow all be taken at face value and change our perspective on things going forward. Frankly I am just not satisfied that the data collection strategies are so effective, that the actual collectors of the data give a hoot, and the whole predicting of  the “Birth-Death” rate of new business,  this just seems more like guesswork than anything else.

Frankly I think we should be stepping away from this number, like we did with the money supply data in the 1990's.  Look, we get that this is an important number for politicos, but with all the monthly adjustments, fluctuations and Bureau of Labor Statistics guesswork, it may not be the “killer app” of economic recovery that we have been playing it for.

The Dow Jones index has broken down significantly through its 50-day moving average (technically not good news) but things have snapped back a bit on the favorable Alcoa (AA) earnings reports.

Officially we are in earnings season, and this is perhaps another idea we should lose our micro focus on. (Here at Oceanic Capital, we believe that it is near illogical for shareholders to focus so sharply on the question, “What have you done for me lately?” but that's a topic for another day.)

The US Treasury 10-year note – a benchmark for interest rates – did fall back through the 2% yield level, despite literally everyone's call to contrary. The Bonds have now given a little back but overall they have been holding steady whereas stocks have been giving it up.

The see-saw action between bonds and stocks is just another clear example of why a long term investor needs to pick a comfortable allocation that includes both assets.

Credit quality, liquidity, and maturity should be the major questions--not timing, nor stock picking. We are staying with the highest quality, dividend paying, cash generating companies we can find; these have the modern day equivalent of the biggest and widest moat. These names have the staying power needed to survive pain and grow dividends over the longer term and as such we can leave them off the day-to-day worry list.

They may hit some hooks or slices now and again but with histories of solid results and growing payouts, they are an absolute cornerstone of a well-designed portfolio.

Take a look at a company like Caterpillar (CAT).  It recently had its rating reaffirmed after the acquisition of Bucyrus.

Construction spending may not be robust here in the U.S. but mining (a strong suit of the Bucyrus) is kicking it in Asia, giving CAT strong cash flows and positioning it for more broad-based growth globally.  Plus the deal brings cost efficiencies with CAT now supplying its homemade engines and replacement parts to Bucyrus equipment.

As far as gold, we consider this an insurance policy (given the global proclivity to run the printing presses) and as “melt-down” protection for your portfolio. Any remotely casual glance at the purchasing power of the U.S. dollar and its decline over the last 100 years should cause a great deal of concern as how badly it's evaporated.

According to The Casey Report: (subscription required)  “Since the inception of the Federal Reserve in 1913, the greenback has lost about 95% of its purchasing power. Since 1971 – when President Nixon ended the last brittle connection between the dollar and gold – value destruction of the US currency has accelerated to an average loss in purchasing power of 4.4% per year.”Additionally they point out that, “The Consumer Price Index (CPI) has risen from 9.8 in January 1913 to 224.906 in April 2011... In other words, something that cost $9.80 in 1913 would cost $224.91 in 2011.”

So is gold an asset class that we are trying to time?  Not really, we position it according to the longer term aims of our three portfolios, ranging from defensive (Conservative) to less defensive (Aggressive or Moderate). Frankly we just have a hard time believing our  politicians in Washington are going to get a sudden burst of religion and become card carrying deficit busters.

They just  recently agreed to hold themselves to the same standard of insider trading rules that have sent many a “regular” trader to jail for decades. Not surprisingly they had the nerve to make a big deal out of it. Even in this day and age it's sickening how many Senators and Congressman leave Washington far wealthier than when they arrived. Coincidence? We think not.  

Like everyone else, we hate the volatility in the gold market, but we still think the asset serves a much greater good longer term not only an insurance policy for a decades old program of dollar devaluation, but also safeguards us against any Black Swan events, like rioting in the streets during the summer months when things aren't going so well. Say for instance in Greece, Spain, or don't forget the occupy Wall Street crowd here stateside!

Quick recap:

• We do not view job growth as synonymous with equal economic growth; it is merely one component.
• We see bonds as a fixture in sensible portfolios.
• We are favoring strong names with solid cash flows; we want “staying power.”
• We do not believe the Europe is as soundly repaired as the level of media quietness would imply.
• For that reason (and one hundred years of other), we see gold as effective insurance with the bonus of an upside play.

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