Thursday, July 28, 2011

How to take advantage of the U.S. debt circus


Well we seem to be nearing the climax of the debt ceiling circus. As mentioned earlier, this may be a major buying opportunity for Canadian investors with the loonie near the top of its trading range. The U.S. government is at the point to reduce its budget deficits one way or another. Today's struggle is probably the first of many to come about the deficit reduction strategy. In the end, it doesn't matter, because with resumed economic growth (no matter how weak) tax revenues will rise and neither will there be a need for major stimulus efforts such as TARP since U.S. corporations are stronger than they have been in years. In fact, a lot of TARP money may be recovered over time possibly at a profit to the U.S. tax payer.

Oil prices are capped by economic growth and vise versa as discussed in earlier postings. So Canada's upside is somewhat limited. This may sound strange, but really, how much higher do you think potash prices, base metal prices, gold and oil will go? One of the few laggards is natural gas, but that will come back sooner rather than later as well. What resource industries typically seem to do at this point in the cycle is that they'll see their operating costs and capital costs increase while profit margins decrease or stabilize.

With expectations too high in Asia, the big gains will be made in the U.S. and later possibly in Europe. There where the pain is greatest, the opportunity for gains will be the best. So let's look for dividend, large cap multinationals that have significant global income, that are U.S. dollar denominated and that we can buy with Canadian dollars. Here is a list of such companies:


These are the corporate crown jewels of the U.S., each a giant in their own right. These are the 30 companies that make up the Dow Jones index. You can buy them as an ETF through your discount brokerage with minimal commissions ($10 per transaction) and management expenses. The SPDR Dow Jones Industrial Average ETF (symbol DIA). This ETF provides an instant diversified portfolio with a dividend yield of 2.18% (better than a 1 year GIC), a very modest P/E of 12.5 and an annual earnings growth of 9.22% over the last 5 years. Below you can see the asset allocation of this ETF:


To top it off here is the SPDR DIA performance (all this data was honestly stolen from their website):



In fact most numbers are as of the end of June. Right now, the DIA's dividend yield is even better: 2.3% But with the current market volatility that may change rapidly: better or worse. So don't fret about individual companies, buy the entire Dow Jones and become an owner of the world's most powerful corporations at a big currency discount.

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