Safe Plays for Dangerous Days

October 1, 2008 at 4:59 pm
Contributed by: Chris

In my Energy and Capital article for this week, I considered some insight from my Depression era daddy, and devised a “Depression Portfolio” to help weather the stormy markets.

–C

Safe Plays for Dangerous Days

Investing Lessons from the Depression

By Chris Nelder
Wednesday, October 1st, 2008

Are we having fun yet?

The largest bank failure in history… The worst one day point drop in the Dow in history… the third-largest point gain for the Dow in history… The biggest (proposed) bailout in history… Rumors of panicking customers taking large sums of cash out of their banks… And that’s in less than a week!

Consequently, I’m feeling pretty good about my advice of a few weeks ago (see “Surviving the Financial Tsunami“). The best place to be in this market has been “out.” All the seasoned investors I know are mostly or all in cash right now.

You don’t try to surf 40-foot swells, and you don’t try to trade a market that’s flying up and down 8% in a day, for the same reason: it’s a good way to get your head pounded into the sand.

That has been especially true for investors in energy and commodities, where the volatility has been absolutely wicked. For those of you who have been riding it out, you have my sympathy.

I won’t recite the numbers now, because who needs another sour stomach after the last few days? Suffice to say that the exodus of money from the market that I have been chronicling in these pages has continued, and almost everything has been sold rapidly and indiscriminately.

Almost.

In Monday’s bloodbath, there was exactly one stock in the S&P 500 that was up on the day. It was just barely in the black, but compared to the rest of the market, it was Mm-Mm-Good. Do you know what that stock was?

That’s right: Campbell’s Soup (NYSE: CPB).

The Depression Portfolio

My father, who was born into a subsistence farming life during the Depression, taught me many years ago that in hard times, the staples are always good solid investments: food, beverages and alcohol. (Later I learned that tobacco and firearms also belong in that group, but I don’t like investing in those sectors for personal reasons, and I suspect he doesn’t either. That said, I think it’s a fine time to own a gun, and know how to use it.)

The cataclysms of the market have had me searching for safer havens, so I had to give his thesis a whirl. And what do you know, the S&P 500 (.INX) has lost about 20% year to date (yellow line in the chart), while some major names in food and beverages have gained 10-20%.

I picked some obvious choices for my “Depression Portfolio”: Campbell’s Soup (NYSE: CPB), General Mills (NYSE: GIS), and Anheuser-Busch (NYSE: BUD):

20081001 chart2

Note that while the broader market has been sold hard in recent weeks, and some of our favorite names in commodities and energy got whacked, these staple stalwarts didn’t even shrug…proving once again the value of having a diversified portfolio.

You Can’t Beat Energy Trust Distributions

I had to add one more line to that chart though: the one at the top, in red. That’s one of the “energy trusts” we have selected for the $20 Trillion Report. That position is up 34% since we bought it in February of this year.

It’s a conventional oil and gas play, with assets located in Central and Southern Alberta as well as southeast Saskatchewan, including the Bakken Formation. The trust’s strategy is to go after lower risk plays with predictable production and strong reserve base, which makes it an excellent blue chip type of investment, and a welcome relief from the current volatility.

But what made me revisit this trust today is the distributions. In a market like this, a nice, safe, regular 8.4% distribution from an oil and gas company—an investment that would have seemed positively pedestrian just six months ago, when energy names were going vertical—is hard to beat.

So if you have a taste for adventure on the high seas of financial tsunami—rather than just sitting this one out altogether, which I still recommend—then take a lesson from my Depression daddy. And take a subscription to the $20 Trillion Report.

Until next time,

Chris

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