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Weekend Edition

You could be completely ignoring this elite group of stocks
Saturday, July 20, 2013

 Ben Bernanke spoke again this week...
The Federal Reserve Chairman testified before Congress on Wednesday. Once again, he said nothing new. Bernanke reiterated that the Fed would taper its bond purchases at the end of the year. But everything still depends on how the economy performs.
A few sound bites from his testimony...
"With unemployment still high and declining only gradually, and with inflation running below the Committee's longer-run objective [of 2%]," he said, "a highly accommodative monetary policy will remain appropriate for the foreseeable future."
"We anticipated that it would be appropriate to begin to moderate the monthly pace of [bond] purchases later this year," Bernanke said. He said the plan is not "a preset course."
 The Fed's manipulation of the money supply has kept stocks in a bull market since 2009. Its actions have boosted stocks and bonds. (Never mind that the U.S. government essentially forced its own citizens out of cash and into riskier assets.)
Now the Fed's monetary experiment is getting long in the tooth... It has shown its hand. And we all know how it will end. We're just not sure when.
 Predicting this market is a fool's game. We enjoyed the recent comments from billionaire trader Stanley Druckenmiller. Druckenmiller used to work with legendary investor George Soros before founding his own firm, Duquesne Capital. And he recently spoke out about "fighting the Fed"...
It has become harder for me, because the importance of my skills is receding. Part of my advantage is that my strength is economic forecasting. But that only works in free markets, when markets are smarter than people. That's how I started.

I watched the stock market, how equities reacted to change in levels of economic activity, and I could understand how price signals worked and how to forecast them. Today, all these price signals are compromised, and I'm seriously questioning whether I have any competitive advantage left.

Ten years ago, if the stock market had done what it has just done now, I could practically guarantee you that growth was going to accelerate. Now, it's a possibility. But I would rather say that the market is rigged and people are chasing these assets, without growth necessarily backing confidence. It's not predicting anything the way it used to and that really makes me reconsider my ability to generate superior returns.

If the most important price in the most important economy in the world [the 10-year Treasury] is being rigged, and everything else is priced off it, what am I supposed to read into other price movements?
We agree with Druckenmiller. All we know is that an unprecedented amount of money has been pumped into the economy. In the meantime, we'll continue holding our higher-quality positions and minding our trailing stops.
 The Fed is targeting 7% unemployment. It currently sits at 7.6% (down from a high of 9.6% in 2010). But many folks question where those jobs are, including Mort Zuckerman, chairman and editor in chief of U.S. News & World Report.
Zuckerman recently wrote an op-ed in the Wall Street Journal titled "A Jobless Recovery is a Phony Recovery." Here's an excerpt from his piece...
The jobless nature of the recovery is particularly unsettling. In June, the government's Household Survey reported that since the start of the year, the number of people with jobs increased by 753,000 – but there are jobs and then there are "jobs." No fewer than 557,000 of these positions were only part-time.

The survey also reported that in June full-time jobs declined by 240,000, while part-time jobs soared by 360,000 and have now reached an all-time high of 28,059,000 – 3 million more part-time positions than when the recession began at the end of 2007.

That's just for starters. The survey includes part-time workers who want full-time work but can't get it, as well as those who want to work but have stopped looking. That puts the real unemployment rate for June at 14.3%, up from 13.8% in May.

The 7.6% unemployment figure so common in headlines these days is utterly misleading. An estimated 22 million Americans are unemployed or underemployed; they are virtually invisible and mostly excluded from unemployment calculations that garner headlines.
 When the future is uncertain, entrepreneurs and businesses pull back. The U.S. Chamber of Commerce recently surveyed small businesses to see how they're reacting to the news. According to the report...
Small businesses expect the requirement to negatively impact their employees. Twenty-seven percent say they will cut hours to reduce full-time employees, 24 percent will reduce hiring, and 23 percent plan to replace full-time employees with part-time workers to avoid triggering the mandate.
 One of the best ways to protect yourself – and profit – through any economic environment is to own shares of high-quality companies that pay large (and often increasing) dividends.
The world's largest asset manager, BlackRock, agrees this is a winning strategy. It just released a report showing the benefit of owning these types of companies...
Dividend-paying stocks in the S&P 500 returned 2.2% annualized during such times of tightening (increasing rates), while non-dividend stocks in the S&P gained 1.8%, according to Ned Davis Research. On the other end of the spectrum, during periods of easing (declining rates) by the Federal Reserve, dividend payers gained 10.2% annualized and non-dividend payers lost 1.3%.

During times of neutral Fed policy is when dividend payers have performed best, returning 12.3% versus 6.2% for non-dividend stocks. There is no guarantee that stocks will continue to pay dividends.

The bottom line is that despite the prevailing uncertainty and volatility in financial markets, investors still need growth in their portfolios. In the new world of investing, high-quality companies that pay and grow their dividends can be wise choices.
 In his 12% Letter newsletter, Dan Ferris calls these businesses World Dominating Dividend Growers (or "WDDGs"). But the market's rally has sent Dan's WDDG stocks out of buy range, and for good reason. Buying world-class companies at good prices is one of the best – and safest – ways to get rich in the stock market.
But our colleague Frank Curzio says that if you only focus on blue-chip companies, you'll miss out on a large group of elite, small-cap dividend-payers that boast many of the same characteristics as the WDDGs.
These small-cap companies have great brand names... strong competitive advantages... steady cash flows... and impressive track records of growing their dividends. And better still, they're cheaper than most blue-chip dividend-payers.
Over the past seven months, Frank has added three of these companies to his Small Stock Specialist portfolio. They're already up an average of 11%. And in the July issue, published earlier this week, he added another elite, small-cap dividend-payer to the portfolio.
Frank believes this company could double over the next seven years... And thanks to its growing dividend and the power of compounding, your returns could be much, much more than that over the next decade or two.
Learn how to gain access to Frank's latest pick – and get started with a risk-free subscription to Small Stock Specialist – by clicking here.
Sean Goldsmith

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