Posted on 03/09/2008 6:11:04 PM PDT by BenLurkin
Food and drink: two things we just can't live without. When tough economic times arrive, these two items stay in the budget while others disappear. It's a matter of priorities for most, and consumer staples almost always come out at the top of the list.
In recent months, there has been increasing focus on the possibility of an impending food shortage. This would force prices upward as supply diminishes and demand continues unabated. In similar fashion to rising oil prices, most will grin and bear it. Gas retailers have been very quick to pass on any increases in costs and most food and beverage manufacturers now face the same dilemma. Grocers can only absorb these increases for so long. The buck will eventually pass to the consumer. (For more on the effects a food shortage could have on the market, see Starvation's Wages.)
The Best Offense is a Good Defense In the first two months of the year, stocks are broadly down, with the Dow Jones Wilshire 5000 declining 10% so far in 2008. It's no secret we're in a difficult investment environment. Some pundits suggest going defensive in 2008, either by sitting on the sidelines in cash or taking positions in companies not as likely to be hurt by economic recession.
Those that choose the latter option must decipher which companies fit this criterion. As mentioned earlier, consumer staples tend to do well in poor economic conditions, and thus, are an obvious place to start looking. In addition to the defensive nature of their businesses, some of these companies are among the ranks of the large-cap giants of the market, giving their investors safety through both the type and size of their business model.
Some of the top defensive names include Pepsi (NYSE:PEP), General Mills (NYSE:GIS), Anheuser Busch (NYSE:BUD) and McDonald's (NYSE:MCD). Each is well known and likely able to absorb even the most punishing economic blows. Their performance at a time when the markets are swooning is commendable. However, while purchasing any of these individual stocks would be a reasonable move, investors might do even better by buying a particular ETF that trades on the American Stock Exchange. (For other examples of bear-proof stocks, see Guard Your Portfolio With Defensive Stocks.)
Power Shares Dynamic Food & Beverage Portfolio (AMEX:PBJ) Based on the Dynamic Food & Beverage Intellidex index, this ETF holds the common stock of 30 leading food and beverage companies in the U.S. The average market cap is $19.34 billion, with half of the portfolio represented by large-cap stocks. Less than 15% of the fund's holdings are in small-caps, providing even the most skittish investor with a reasonable level of comfort. Top holdings in addition to the four listed previously include global brands such as Wrigley (NYSE:WWY), Kellogg (NYSE:K) and Fresh Del Monte Produce (NYSE:FDP). It's a who's who of food and beverage.
Year-to-date, it's down 7.1% which might sound bad, but it's a full four percentage points better than the S&P 500. If you look at the five-year comparison (pdf) between the Intellidex index and the S&P 500, you'll notice that both produced annual returns greater than 12%. In fact, they were almost identical. If both were to equal or better the returns of the previous five-year period over the next five years, given the Intellidex index's head start, it's likely to meet or exceed the returns of the S&P 500.
Bottom Line Where the markets go from here is anyone's guess. What we do know is that it's unlikely any of the major indexes will be above water at the end of 2008. If I'm wrong, that's great. But I doubt I will be. Where does this leave those interested in investing in the Power Shares Food & Beverage Portfolio? My suggestion is to consider dollar-cost averaging for the remainder of the year. If things get worse rather than better, you'll be buying more shares in some great companies.
The government has ruined our dollar by borrowing and spending. As long as I am paying close to $4 a gallon for gas, I won’t be buying anything but absolute essentials.
I plan on buying less stuff from McDonalds, Pepsi, GF, etc, as I move toward heavy discount stores or do without.
Dollar stores and “broken food” grocery outlets are those that could do well, I suspect, though dollar stores are impacted by fuel costs more, since their model makes it hard to pass along expenses.
Also, Ross Stores has an incredibly diverse chain now, at many levels of discount under multiple brands.
The minimum wages just went up in California the first of the year, and now it’s all for naught. Sometimes I think these things are planned well in advance.
Quick, what’s the primary reason food costs are soaring?
“Quick, what’s the primary reason food costs are soaring?”
Hmmmmm, PRIMARY? I can think of 3 reasons.
#1 - As the dollar falls in value, things get more expensive. I think it’s called inflation? (Thank you Ben Bernanke)
#2 - Fuel prices. Farmers use a lot of gas and diesel, and truckers use a lot of diesel to get the stuff to us.
#3 - We’re burning our food in cars! E85. Stupid, stupid, stupid.
If I had to guess, I’d say #2 has the most impact.
(I just moved a big chunk of my 401k to cash, I think it’s going to get lots worse before it gets better).
Invest in Hillary’s ass. That’s one damned thing that grows every day!
“Quick, what’s the primary reason food costs are soaring?”
Because Bush hates the poor! (learned that one after Katrina)
It's not just E85. I just heard today that Minnesota has a new law that by 2012 ethanol content of all gas must go from 10% to 20%, and manufactures are being strong armed into agreeing that this will cause no problem for existing vehicles. I used to think that Islam was the primary insanity on the planet. It surely still is, but not the only contender anymore. Ethanolism and Global Warmingism are giving it a run for it's money.
How much of the world relies on the U.S. for food? Are we still a big supplier? Maybe we need to play the OPEC game with food.
Nothing like a great garden to help in costs. And the food is fresh and tasty.
During a recent trip to Super Target, instead of buying a 4-pack of blades for my Gillette Super-Duper Power Core Technology Fusion/Fission Xtreme Duty II cartridges that come equipped with 29 titanium-edged shaving blades per cartridge all for $14.00 + tax!, I opted for a 20-pack of disposables for $4.00 that work great.
My wife and I are also started to buy store brands for just about everything we can. I suspect we are not alone.
“I used to think that Islam was the primary insanity on the planet. It surely still is, but not the only contender anymore. Ethanolism and Global Warmingism are giving it a run for it’s money.”
Islam is only different in that it is overtly violent and hostile. But islam by no means has cornered the market on insanity.
I pity you living in Minnesota. Beautiful place, I could even tolerate the winters, but I don’t think I could handle the liberal climate.
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