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Do You Have Any Confidence In Corporate America?

1 December 2008 No Comment

The image of Corporate America has surely taken a beating in the past decade. A few years ago, we had the debacle with companies such as Enron, Tyco, Worldcom, etc. where they participated in accounting fraud which left many shareholders and employees with worthless brokerage and retirement accounts. Now, in the past few years, we have had the financial system utterly collapse due to over leveraging, a bunch of greed and even fraud. With that said, do you have any trust left in Corporate America?

A related and interesting point, in my opinion, is the level of confidence you have in Corporate America with regards to investing. We’ve seen flagship financial institutions get driven into the ground recently. Dividends have been slashed. Are there any solid American companies out there to invest in anymore?

The Collapse Of The Financial System

We have seen the utter collapse of the American financial system which basically was the leader of the global financial system. The last few years and maybe even decades of the rise of Wall St. can be categorized by the following words, complex, risky, and cloudy. Basically, the financial instruments that were being sold everywhere became so complex, it took a PhD to understand them. The risk that even the “conservative” financial institutions took on was so high due to such high levels of leverage that any downturn became an absolute disaster. Lastly, the financial institutions had practically zero transparency where it became increasingly impossible to determine true valuations of assets that backed various securities. Once the system began to unravel, the snowball effect was enormous. We’re still in the midst of the unraveling of this system. We’ll see how big the snowball gets as it drives downhill.

I am being continually amazed how the supposedly smartest people in the world that are leading these companies such as Citi, Lehman Brothers, Bear Stearns, Wachovia, and others could do nothing to stop these companies from getting driven into the ground. Do you have any confidence in CEOs anymore?

Recent comments by regulators and politicians such as Alan Greenspan (former Fed Chairman) indicate a surprise that the markets were unable to “self-regulate” as in not end up in a disaster. I would respond to that by saying these companies going under is, in fact, a form of self-regulation. A company takes a high level of risk, things don’t pan out, they get hurt due to the high level of risk. Pure capitalism is a self-regulating mechanism. When we interfere and do not let institutions fail, then we are not letting capitalism play out and thus, do not let our economy “self-regulate”.

Extending the regulation issue, we are definitely heading into a severe increase in government regulation. My thoughts on government regulation are that usually it doesn’t work because it is backwards-looking and that it simply makes Corporations more cumbersome. Did Sarbanes Oxley prevent the current crisis? No, and the regulation that gets inacted as a result of the current crisis will not do anything to prevent the next crisis. If Corporations are competent at one thing, it is creating a whole new batch of problems each time things get ugly.

So, with Corporations seeming more incompetent and government interfering in the economy more and more, where are the opportunities for investment? Do you dare put new money into the stock of a Corporation? Would you even touch a financial institution again? Let’s look at some ways to invest and protect yourself.

The Beauty Of Dividends

Dividends offer a great way to reduce risk in investing in stocks. By getting a constant cash flow from your investment, you are getting constant return regardless of share price. Simply crossing your fingers and hoping for appreciation in a stock price is a tough game to play, especially considering you might be buying in at a high. Look for high dividend yield stocks with strong balance sheets (so there is no risk of dividends getting slashed). One of my favorites is Philip Morris International (PM).

One exception to my dividend rule is Apple (AAPL) since I do have supreme confidence in their leadership, their vision, and their balance sheet.

Can We Expect Growth In Any Sector Going Forward?

Many people think that much of the past growth has been fabricated by a financial system and a fiscal policy that continued to artificially prop up asset prices and thus creating false growth or wealth. Whether this is true or not, growth going forward will need to be real growth based on facts and fundamentals since the financial bubble is no more.

Alternative energy is a sector many would consider to be a future growth area of our economy, but the problem there is that there is so much uncertainty regarding various alternative energy technologies. For example, your investment in solar energy might pan out but your wind energy investment might die. Who is to say where the future is in energy? I might even been in a technology not created yet.

My opinion is that your best growth bet is international. I think China and other Asian markets represent serious long term growth based on a growing middle class, high levels of production and high levels of savings. The stock market was definitely due for a serious correction after it got so inflated, and now is a decent time to begin accumulating positions exposed to the Chinese market. Many would say to stay away from China because it is a Communist government, but the reality is that they are a more business friendly, pro-growth government than that of the Democratic United States of America. China will grow for years and years and their government will become more open as they do.

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