We're in Loss-Acceptance Mode

 | Jul 24, 2012 | 1:02 PM EDT
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Sometimes you just have to let it come down. There's no sin to it. When the powers that be, all of the politicians, are aligned against you, when the consumer is tired, when earnings estimates haven't come down enough, you just have to accept a short-term defeat and recognize that only yield and truly special situations are going to save you.

You can game yield. We know that Eaton (ETN) bottomed because of yield, not necessarily what the company said. You simply discovered that this terrific industrial with an electrical bent is doing better than it should be and is going to close on an acquisition that will make it even better.

I think that many of the oils share that characteristic. The ones that yield 4%, whether they be Conoco (COP) or Encana (ECA) or Kinder Morgan Energy Partners (KMP) can be gamed. You can accept that you are going to lose some money, but not a lot of money as you wait for things to sort themselves out. You are betting that Europe's not suicidal and that a solution for the dissolution of one of the largest and most important countries on earth will occur. It's pretty clear that we may actually have a bottom in natural gas as it has held the $2 level and bounced to $3 because of a huge number of shut-ins and a dramatic decline in drilling. That's what a bottom looks like. Supply is no longer exceeding demand. 

You can do the same with high-yielding pharma. One of the most important drug studies out there, a drug that was meant to combat alzheimers disease, failed its endpoint last night. Pfizer's (PFE) the leader on the drug. It's barely down. Johnson & Johnson's (JNJ) got a stake in the drug and it's being hit, but to me that just makes it even better.

Heaven forbid you do it, but you can game the yield in Altria (MO). So many things are going right with that tobacco company courtesy the Marlboro brand that the yield's going to go higher not because the stock's going lower, but because the dividend will be raised.

And you can game it with the phone companies. Yes, AT&T (T) and Verizon (VZ) went down today. Yes, Verizon had a great number but it wasn't great enough given the run. Same with AT&T, but you know what? As long as that 10-year Treasury stays so low, then you can afford to not be right on the initial buy. But the initial buy must be made. And may I just add that the trends for AT&T, higher consumer use, expanded data use, less churn or people leaving the AT&T network, these are all in their infancy. No, it is not a super growth stock. But it is also a company that is cheap on a yield basis and I want to own it badly.  

You can afford to hold on to the soda companies and the snack companies despite the food chain commodity inflation. Heinz (HNZ), Conagra (CAG) even Kellogg (K) can be owned and they don't even have the momentum we would like to see.

Procter's (PG) no different. That yield is too juicy. Can't be abandoned because something good can happen, even with a strong dollar.

And of course there are the utilities themselves. Think Duke (DUK), the most hated of all, which, as despised as it is, gives you good, All-American yield.

In every single case you are not able to say "I won't lose money with these recession-resistant stocks with good yields." What you have to accept is that right now things have gotten a little out of control with Europe for the moment and the dollar gotten way too strong and you need more than just a good story to do some buying.

We have had multiple moments like this, although this potential collapse in Spain is looming larger and can be as horrible for Europe as the near-collapse of many of our banks that we got in 2008-2009.

It's a defensive moment. There's nothing wrong with owning that concept. There's nothing wrong with having something special, but we are in loss-acceptance mode and that's a very important mode for those who want to make longer-term money.

If I were at my old hedge fund, I wouldn't be able to be in loss-acceptance mode. That's not what my partners paid for. I understand anyone who is a pro who doesn't want to be in that mode. You would have to be short the euro or against the commodity plays or shorting some higher-growth stocks or deep cyclicals that are overvalued on the basis of earnings cuts.

But for me, for someone who runs a charitable trust? You get some yield. You can have a few special situations, not many. And you accept that you could be in for a beatdown for the moment until Europe, once again, comes up with a solution that pushes back the apocalypse and we get the Chinese to move more aggressively to get things going so the collapse, not a beating but a collapse, is averted.

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