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The Big Con in Stocks and the Big Blue Chips to Hide Behind

If you’re running a giant scheme to transfer wealth from the middle class to the financial class, the trick is not to scare people too much. If the punters give up on stocks altogether, the game is up. In order for a broad-based Big Con to work, investors have to believe in ‘stocks for the long run’. If that belief goes, the whole thing falls apart.

Thus stocks in the US rallied on Tuesday after an unnerving few days. The Dow Jones Industrials were up 1.1%, the S&P 500 up 1.4% and even poor, beleaguered gold rallied 1.9% in US dollar terms. The big winners were consumer non-cyclical stocks like Coca Cola (NYSE:KO), up 5.69%, and Johnson and Johnson (NYSE:JNJ), up 2.12%.

Those are the types of companies we’ve referred to as ‘Citadels of Civilisation,’ in The Denning Report. By that, we mean multi-national blue chip stocks whose businesses are able to generate a lot of regular cash flow in the real economy no matter what Ben Bernanke and Goldman Sachs are up to. Investors fleeing from fixed income markets might be looking for big strong blue chip walls to hide behind.

These stocks aren’t ‘safe’ in the sense that you can’t lose money. The uncomfortable truth is that there is no perfectly safe asset class where you can’t lose money, especially in a real crisis. But if you’re looking for stocks to beat inflation and that are real businesses not dependent on credit expansion, you could do worse than these global blue chips.

Australia doesn’t really have any global blue chip stocks like this. The closest you get – at least in terms of stocks whose earnings are not dependent on credit expansion – are companies like Wesfarmers (ASX:WES) and Woolworths (ASX:WOW). You can see from the chart below that both stocks have had great runs year-to-date.

Neither company is a pure consumer cyclical play. Both have multiple operating divisions that expose you to things like oil and gas, coal, and building materials. All of those operating segments are a lot more dependent on an expanding economy to deliver earnings growth. This presents Australian investors with a bit of a problem: if you want truly global blue chip brands, you have to leave the country.

By ‘leave the country,’ we mean you have to be willing to take the risk of adding foreign shares to your portfolio. Most investors in any country are loath to do this. It’s called ‘home country bias.’ You tend to be comfortable buying what you understand and not complicating matters with things like currency risk. It’s true in Australia and everywhere else around the world.

What makes ‘home country bias’ so dangerous for Australian investors is that the local share market has so few strong blue-chip stocks to pick from outside the ones mentioned above, and perhaps Telstra (ASX:TLS). Australian big caps are heavy on materials and finance and light on consumer non-cyclicals. An easy rotation is not so easy.

We have Nick Hubble and Callum Newman on the case on how to solve this problem. Stay tuned for details. And no discussion of the right sectors to invest in would be complete without energy. Speaking of which, we’ll be speaking on Australia’s national energy strategy (or lack thereof) at the Broken Hill Resources and Energy Investment Symposium.

Our friend Kerry Stevens organised the inaugural event three years ago. This year’s event has a lot to talk about. The next sixty days are key for the budding Australian shale gas industry. But with costs rising in the conventional off-shore LNG industry, and political opposition to coal-seam-gas on the rise in New South Wales and Queensland, investors have to tread carefully. The symposium takes place from May 19th to May 22nd. You can view the agenda and speaker line-up here.

Regards,
Dan Denning
for The Daily Reckoning Australia

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