Best deflation stocks and sectors

What are the best deflation stocks? Where should I put my money when the value of the dollar or commodities are falling?

As the pendulum swings from fear of inflation to fear of deflation, investors will begin reassessing their portfolios to find good deflationary hedges. In general, dividend paying stocks are safest place to be – particularly since you’ll be earning relatively more on your dividends than you would if the inflation rate was normal or high.

Here are a few high-yielding dividend stocks (REITs) that could be of interest as deflationary plays:

  • Chimera Investment Corporation (NYSE:CIM), Current Yield: 18.53%
  • American Capital Agency Corp. (NASDAQ:AGNC), Current Yield: 20.79%

Disclosure: I’m currently invested in both of the above stocks.

Since deflation slowly erodes a company’s earnings power, it often creates a tepid environment for stocks. Inverse ETFs give investors a quick and dirty way to profit from down markets. Here are a few to research more when things get hairy:

  • ProShares UltraShort Russell2000 (NYSE:TWM), seeks twice the inverse of the daily performance of the Russell 2000 Index
  • ProShares UltraShort Dow30 (NYSE:DXD), seeks twice the inverse of the daily performance of the Dow Jones Industrial Average
  • ProShares UltraShort S&P500 (NYSE:SDS), seeks twice the inverse of the daily performance of the S&P 500 Index
  • ProShares UltraShort Financials (NYSE:SKF), seeks twice the inverse daily performance of the Dow Jones U.S. Financials Index
  • ProShares UltraShort Real Estate (NYSE:SRS), seeks twice the inverse daily performance of the Dow Jones U.S. Real Estate Index
  • ProShares UltraShort QQQ (NYSE:QID), seeks twice the inverse of the daily performance of the NASDAQ-100 Index

Note: All of the above are 2X ETFs, which mean they’re leveraged 200 percent. Small changes in the market can create huge swings in the above stocks. That could mean large profits, but it could also mean enormous lossses. Always consult a qualified professional before investing.

Earning future looks dim for Goldman (GS) and Morgan Stanley (MS)

If the earnings results from commercial banks are any indication, the investment banking sector could get hammered this week with reports from Goldman and Morgan Stanley.

After some unimpressive earnings from the commercial banking giants, things don’t look great for the upcoming earnings releases from investment banks Goldman Sachs Group, Inc. (NYSE:GS) and Morgan Stanley (NYSE:MS).

On the commercial side, revenues were down at all three of the biggest banks:

  • Bank of America Corporation (NYSE:BAC): Revenue -40 percent
  • Citigroup Inc. (Public, NYSE:C): Revenue -26 percent
  • JPMorgan Chase & Co. (NYSE:JPM): Revenue -24 percent

The good news? The three commercial banks generally beat analysts estimates, but they did it on lower credit losses as consumers hunker down to pay off their debts (another factor that could slow the economy at large).

If the commercial banks are any indication, earnings from the biggest investment banks will be unimpressive, too. Be wary of a sell-off in shares of Goldman and Morgan Stanley. Goldman is slated to report their earnings on Tuesday, July 20, before the market open. Analysts are calling for earnings of $2.04 per share, down $2.89 from a year ago. Morgan Stanley will report earnings Wednesday, July 21, before the market open. Analysts are anticipating earnings of $0.46 per share, up $1.83 from a year ago’s loss of $1.37 per share.

Top 5 effects of the Financial Reform Bill

A quick and dirty run-down of the top 5 effects of the brand new financial reform bill that passed earlier today.

1) The establishment of an independent consumer bureau intended to protect borrowers against mortgage, credit card and other lending abuses.

2) The establishment of new powers for the government to shut down troubled financial companies – no matter how large or small.

3) The creation of a council of federal regulators who will be tasked with watching for threats to the financial system.

4) New governmental oversight for derivatives (including mortgage-backed derivatives, which helped contribute to the collapse of Lehman Brothers and Bear Stearns).

5) The ability for shareholders to have a bigger say in compensation for executives at public companies.

The impacts of the bill will likely impact the economy in unforeseen ways. That’s typically the way these things work. On the face of it, everything looks like it’s good for investors and bad for banks – that said, I’d be cautious of a drop in financial ETFs today; double- and triple-long financial ETFs could be significantly impacted, stocks like the 2X ProShares Ultra Financials ETF (NYSE:UYG) and Direxion Daily Financial Bull 3X Shares (NYSE:FAS).

Despite all the bills intentions, I have faith (is that the right word?) that the world’s largest and most powerful banks will find creative new ways to circumvent the Financial Reform Bill. I also believe that these new financial regulators will find creative ways to abuse the bill. Intentions and actions are two very different things.

Benjamin Graham’s Principles in The Intelligent Investor

There are five key principles that recur again and again in The Intelligent Investor. To echo Warren Buffet, here are the key elements of Benjamin Graham’s approach to investing.

The Intelligent Investor by Benjamin GrahamAmong the first value investors in modern trading history, Benjamin Graham’s concepts are so fundamental to the views of most stock investors that they don’t even realize the ideas once had to be codified! Slowly and surely, Graham took a lot of the emotion out of investing in stocks, and, of course, his ideas helped spawn some of the greatest investors of all time including Warren Buffet (CEO of Berkshire Hathaway, Inc., NYSE:BRK.A).

There are five key principles that recur again and again in The Intelligent Investor. To echo Warren Buffet, here are the key elements of Benjamin Graham’s approach to investing:

1) When you buy a stock, you’re not buying a symbol or a price movement; you’re buying a stake in a real live company.

2) The market makes steady swings from overvalued to undervalued. Intelligent investors sell when the market has overvalued specific stocks and the buy when stocks are undervalued.

3) Pay attention to a stock’s current price. Future stock values are relative. If you get in when the price is high, your return will be low.

4) Give yourself a “margin of safety” when you invest. Because all stocks carry risk of loss, you can only minimize that risk by buying when prices are low, thereby creating that safety net.

5) You must invest on a principled foundation. If you can control your emotions in bear and bull markets, you can profit in either one.

Get The Intelligent Investor on Amazon.

Related Posts

Things looking up for SPDR Gold Trust (NYSE:GLD)?

A mid-day pop in the SPDR Gold Trust (NYSE:GLD) could have been pointing to a good day today.

After the close of the New York NYMEX last night, the price of spot gold started a slow climb that might have been hinted at in yesterday’s mid-day pop in gold prices. The pop is evident in this five-day SPDR Gold Trust (NYSE:GLD) chart:

The jump in pricing occurred around the time the June retail sales numbers came in. The news was bad, of course, with a 0.5% decline. Negative sentiment in Asia seemed to be pushing gold prices higher.

“I’m bullish for gold, with the metal seen attempting to rise as far as $1,240 in the coming week,” Hong Kong’s director of Asia commodities Wallace Ng told Bloomberg Business Week. “Still, a major breakout to another record may be difficult for the present.”

Around 11:30 p.m. last night, the metal was trading at $1,211 up from an intraday NYMEX low below $1,205. A bevy of bad economic news may put further upward pressure on gold prices. The central tendency growth forecast was lowered to a range of 3 percent to 3.5 percent, U.S. industrial production will post a drop and China’s GDP is showing signs of slowing as the government there tries to rein in growth.

All that paints a gloomy picture for stocks and a rosy one for gold. If the stimulus isn’t working, after all, we’ll likely see a bit of deflation before governments are forced to inflate currencies in a malingering economic environment.