Question:
Does Europe have the potential to have a domino effect, turning their debt into a global economic crisis that will leak back to the United States?
Answer:
We believe what we are dealing with now is not nearly as big as what the world experienced in 2008, i.e., a global systemic crisis that affected the entire planet and questioned the foundations of the world’s financial system. Approximately 50%, if not more, of the mortgage backed securities were considered toxic for the banks that were holding them.
Greece is the domino now. If the country falters, all the banks will have to take a haircut. The fear is that the other PIIGS nations—Portugal, Italy, Ireland and Spain—will falter too and that will wreak havoc on the balance sheets of the other European banks. We think the way that Europe handles this crisis will be important. If one bank that holds this debt is allowed to fail, it will likely cause runs on the banks that hold assets of other nations. This is why we are seeing so many nations willing to come to the rescue. It is mostly from fear.
Greece’s national GDP is around $318 billion in dollar terms, but we have seen small nations cause a crisis before. In 1997, Thailand started the Asian contagion, which spread to bordering Southeast Asian countries, and then, eventually, spilled over to Latin America. It caused a 7% decline in the S&P 500 in one day, but it never caused a long-term situation, as our markets corrected within a few weeks.
We are dealing with uncertainty. The less certain an investment is, the higher the demand is for return, which in turn drives the price of the asset down. Right now we are seeing a lot of uncertainty in our own economy, in politics, in regulations, taxes, etc. To say that the European debt crisis doesn’t have an impact on the markets would be a lie. However, it doesn’t have an impact our country’s GDP.
Question:
Are we in a recession?
Answer:
Technically, we are not in a recession, as that requires two consecutive quarters of negative GDP. We are still growing, and third quarter looks to be shaping up with a positive number. Leading indicators in the Manufacturing and Services Indices this week indicate our economy is still expanding. It is the unemployment situation and housing market that remain our economy’s “fly in the ointment.” When people are unemployed for long periods of time—or know of people who are unemployed—that makes people feel like we are in a recession.
Question:
Did I hear Dr. Gene say, “If I had money that I didn’t need immediately, I’d put it in the Henssler Income Portfolio?” So, Dr. Gene is recommending that you fund your 10-year liquidity needs via the Henssler Income Portfolio, rather than zero-coupon Treasury bonds? Am I misunderstanding something?
Answer:
In last week’s show, we were discussing how many investors have more than 10 years’ worth of liquidity. With the uncertain environment, many individuals are choosing to save their current liquidity as it matures. For our clients, this need of liquidity was provided for nearly 10 years ago. Now that they have it, they are choosing not to spend it.
Rather than leave 14 years of liquidity in a money market account paying 0.01%, we suggest taking the extra four years of liquidity and invest it in top quality companies with dividend yields of more than 4%. Many investors have rightly become skittish about the market, They are parking their extra cash in low interest accounts. We feel, if you have the extra money lying around, it would be better to invest it. We believe in 10 years the market will be higher than it is today.
This is still long-term money. We do not suggest having anything more than 10 years’ of liquidity, especially with interest rates as low as they are. Why keep long-term money in 10-year Treasury bonds paying 1.94%, when H.J. Heinz Company (NYSE: HNZ) is paying 3.81% in dividend yield? We prefer that you have the dividend payments in pocket, with the possibility of price appreciation of the stock.
At Henssler Financial, we have two internal dividend portfolios we suggest to our clients who are seeking income. As part of the screening metrics for these portfolios, all companies must have maintained their dividends during the last three recessions. Many of them have grown their dividends through recessions. We also closely watch the companies’ net income and positive cash flow to cover the dividends. Many companies have increased their cash reserves in recent years. There is a lot of pressure to pay that cash back to the shareholders, which is why we feel that these dividends are largely very safe.
At Henssler Financial, we believe you should Live Ready. If you have questions regarding your investments, the experts at Henssler Financial will be glad to help. You may call our experts at 770-429-9166 or e-mail at experts@henssler.com.
Disclosures
This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
