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How to Invest When Cash Pays Nothing, Dollar Is Strong and Oil Prices Are Sagging

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The financial markets of today are among the most challenging I’ve faced in my career. Cash is paying next to nothing, bonds with any length of maturity are risky and the high-yield and short-term maturity market is overcrowded. That leaves stocks, and perhaps more specifically, U.S. stocks. Foreign stocks, you see, are less attractive partly due to the rising U.S. dollar. Actually, the supermarket of financial goodies appears to be less stocked, at least on the surface. What to do? In this post, I’ll discuss a few alternative ideas I’m considering. 

Over the past few years, I’ve been buying stock ETFs on dips and backstopping them with trailing stop orders. That’s worked well, but is it enough? For example, unless you have a decent allocation to stocks, other holdings in the portfolio may be a drag on returns. I believe the answer may be found in the details.

I just finished reading a good piece from Porter Stansberry of Stansberry & Associates Investment Research LLC. In it, he discusses the “oily banks” which are banks with a large exposure to the oil fields, most of which are in Texas. He writes that although oil prices have plummeted lately, the stock prices of these banks has not yet adjusted. In short, if oil prices remain low for much longer, the loans of these banks will be in trouble. His suggestion? Short these banks. I mention this only as an example of theme investing, something I am seriously considering. It seems as though we have to look deeper into the fabric of America and the world to find investable ideas. With this as a backdrop, here’s what I’m considering. 

The New Portfolio Allocation

To find alpha in a crowded world, I am considering a portfolio allocation with a core, a few themes, and a purely tactical portion. For example, perhaps 75% of the portfolio will be the core with a predetermined allocation to stocks, bonds, and cash. Beyond this, there are three portions of the portfolio which will be invested in certain themes. One theme may be the above mentioned idea. Another theme is the strong dollar play with the ETF UUP. Another theme may be small cap domestic stocks which are less sensitive to the rising dollar (e.g., exports). Another theme could be rising interest rates, although this one is more difficult.

The purely tactical portion of the portfolio would be invested in individual stocks of U.S. mega-cap companies which have fallen in price and are very oversold. For instance, I bought Halliburton (HAL) recently at $39. 

I will continue to use trailing stops to protect the downside as you never know when the next bubble-bust will occur. It also appears that one has to be more tactical these days than in the past.