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Wed, Jul 27, 2011, 2:16 PM EDT - U.S. Markets close in 1 hr 44 mins
Todd Petzel, the Chief Investment Officer at Offit Capital Advisors thinks America is headed for stagflation along the lines of the Carter administration. He believes an intentionally weak dollar is going to import massive inflation adding the dual, somewhat conflicting fear that the Fed will raise rates way too quickly if and when the economy recovers. He suggests staying away, far away, from U.S. Treasuries and buying foreign debt from the likes of Brazil. Seriously, Brazil.
Given these chilling observations there's only one thing to do: buy U.S. equities for the second half of the year. Just a little bit confused, Breakout invited Todd to explain his thinking. He gave us three pretty decent reasons for his strategy.
1) The markets are fearful making this a time to be greedy. "Most investors are underweight stocks today," says Petzel. Well, yeah, for pretty good reasons, most of which Petzel himself outlined in his first paragraph. While conceding the validity of investor concerns, Petzel suggests any alleviation of the headwinds could lead to stock market gains too fast to catch. He compares the current market to that of the early 90's when what would become Gulf War 1 loomed. Stocks got crushed before the invasion and investors had a hard time changing their minds in time to take part in the ensuing bull rush.
2) Corporations have tremendous balance sheets. It's impossible to argue this point even if you don't agree with the conclusion. U.S. companies are sitting on dumptrucks full of cash. After stripping down their debt burdens in the wake of the financial crisis CEOs have been loathe to let it go by investing in a slowing economy. This can't last. "Return on Equity is getting creamed, CEOS are going to be looking for things to buy," Petzel remarks, adding that acquisitive CEOs will give a bid to stocks overall.
3) Money remains free. Interest rates are virtually nil and "even bad companies can get financing today on the high-yield market." While point 2 regarding liquidity is true, not every company is spending its time lolling about in piles full of money. Corporations still, in what used to be quaintly referred to as a growth phrase, need to fund their expansion somehow. If they don't have cash on hand they can IPO or issue more debt. Either way it leads to economic investment which, again theoretically, should lead to bullish markets. Petzel thinks many companies will be borrowing here and investing overseas. That builds jobs where we don't want them (i.e. "not here") but works for the stocks.
Petzel's way to play is through high dividend multinationals with some degree of growth. It's a somewhat tired point but multinationals are killing it overseas and many of the stocks look great both fundamentally as charts. McDonald's (MCD), which I mention because I'm long, would be exhibit A.
Other ideas are "acting like a bank" by lending money to people who don't need it. Countries such as Australia, Canada and Brazil fall into that camp. All three are exporting like crazy to China which could be problematic for those nations, but Petzel offers, is equally difficult for everyone else. Inasmuch as lunar futures are an illiquid market and NASA is dead, relative value is good enough.
Finally Petzel likes gold. Let's be honest, we've discussed gold quite enough. Suffice it to say Todd likes it and I'm long it through the (GLD) causing me to like Todd just a little bit more than I did before he talked my book.
As always viewers are more than welcomed to disagree and invited to do so in the space below.
Have a suggestion, comment or tip? Let us know!
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