The Biggest Risk - And Greatest Reward - Facing Your Portfolio Today

Alexander Green
by Alexander Green, Chief Investment Strategist, The Oxford Club

Virtually every American knows Uncle Sam is carrying a gargantuan debt and that we face sharply higher deficits in the future. What you may not know is how bad the situation really is, how much worse it will soon become, how widespread the problem around the world, and how little will be done about it anytime soon.

The consequences are substantial. Everyone knows what eventually happens to an individual who takes on more debt than he can afford: personal bankruptcy. We also know what happens when a company takes on more debt than it can service: corporate bankruptcy. But in the years ahead, we are going to see something most Americans have never experienced or imagined: national bankruptcies.

Greece is at the front of the line. But there are other countries hobbling along behind them and some of the names may surprise you.

This will have far-ranging consequences for global economic growth and the performance of world financial markets. Indeed, this crisis of spending in the public sector of the world's leading democracies is the single greatest threat facing your portfolio today.

In the next few minutes, you may find my depiction of the problem more than a little depressing. But stick with me. I am not a gloom-and-doomer. Indeed, I intend to reveal something in my next few columns that trumps our ailing public sector problems and represents a titanic investment opportunity. So hear me out.

The Tip of the Iceberg

Let's start at the beginning…

The U.S. national debt is currently $16.5 trillion. (Both political parties concede it will grow by trillions more over the next few years.) The current debt is so large it doesn't mean much to the average citizen. So let me put it in perspective. Today's debt is equal to $145,875 per taxpayer.

Unfortunately, this is only the tip of the iceberg. U.S. unfunded liabilities for Social Security, Medicare, Medicaid and the Prescription Drug Benefit are more than $122.4 trillion. That is equal to $1,084,065 per taxpayer. In other words, if you are an American taxpayer, your personal share of the national debt and current unfunded entitlement liabilities amounts to over $1.2 million.

(Will that be check or cash?)

And you will owe more tomorrow... and the day after. That is why some of us snicker when well-meaning but uninformed folks say we just need to chip in and pay a little more in taxes and everything will be ok.

Republicans can blame Obama and Democrats can blame George W. all they want. The truth is both parties have acted with gross irresponsibility and while whoever is president is complicit - since he signs legislation into law - the real blame falls on Congress. It is the first branch of government and the center of real power. Congress writes the laws, levies taxes, and authorizes the borrowing of money.

Not surprisingly, surveys show that Americans are deeply dissatisfied with Congress. The Gallup organization recently found that 90% of us disapprove of the way Congress is handling its job. (No word what planet the other 10% are living on.) A New York Times/CBS News poll found that 80% of Americans believe members of Congress are more interested in serving special interests than the people they represent.

Yet senators and House members know something most Americans don't: It doesn't matter what voters say, or how long they vent, or how much they curse, or what they tell pollsters. It only matters whether and how they vote.

Forty percent of eligible voters in the United States don't cast a ballot. According to a 2012 study from the Institute for Democracy and Electoral Assistance, the United States ranks No. 120 of the 169 countries for which data exists for voter turnout. That puts us just beneath the Dominican Republic, where the annual GDP per capita is $9,450.

If just a small percentage of these Americans exercised their right to vote, election results might be dramatically affected. But they don't vote, can't be bothered, and most of them never will. This is a long-standing reality, not a new one.

But let's also look at the folks who do turn out, the angry 90% who are disgusted with how Congress is handling its business. Turns out that - for all their huffing and puffing - they mellow out considerably when they get to the polls. Even in 2012 - when our approval of Congress was near an all-time low - 91% of incumbents were re-elected.

This is no anomaly. Only rarely are less than 90% of House members or 80% of senators re-elected. Despite their abysmal record, members of Congress enjoy some of the best job security in America. Apparently, most Americans loathe Congress but believe their guy (or gal) is doing a swell job.

We can yack all day about the advantages of incumbency: money, power, name recognition, etc. But that's mostly a bunch of hooey. Surveys regularly show that less than a third of citizens can recall the name of their representative and even fewer remember anything he or she has done for the district.

So the first thing to tell voters incensed about the job Congress is doing is this: Despite their negligence and fiscal irresponsibility, we keep sending the same clowns back to the Hill.

This is only the first part of the problem, however. In my next three columns, I'll outline why this won't change, how this increases the chances of financial instability in the future and, perhaps most surprising of all, why this is actually creating one of the biggest investment opportunities of your lifetime.

Stay tuned…

Good Investing,

Alex

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Opportunities Abound in the Private Sector

As you’ve seen over the past month, the government’s ineptitude hasn’t gotten in the way of private sector gains.

There are still great, profitable businesses that are increasing earnings and cash flow.

Take Chemtura (NYSE: CHMT). Alex recommended the company to his Insider Alert subscribers back on November 27, and since its gained 19%. But Alex thinks there’s plenty more on the horizon in 2013. In fact, he sees a $25 price target (about 5% from where the stock is now) as conservative, considering he expects earnings to increase by 45% this year.

Here’s what he told us:

“Based in Philadelphia, Chemtura is a global leader in specialty chemicals. It builds the chemistry that makes other companies’ products safer, cleaner, more durable and more efficient. Its major customers are in the transportation, energy, agriculture and electronics industries.

“Chemtura is well diversified. It is one of the two largest global marketers of recreational water products used in pools and spas. It is a leading developer and manufacturer of seed treatments, fungicides, insecticides and herbicides. It is one of the three largest manufacturers of bromine-based products. It is one of the three largest developers of organometallic compounds used in catalysts and pharmaceuticals. It is a global manufacturer of high-performance additive components, building blocks for synthetic lubricants. It is a world leader in high-performing specialty greases. It is a global leader in the development and manufacture of hot cast elastomers (primarily rubber). And it is a global leader in the development and production of additives for engineered plastics.

“Exciting? No. Profitable? Yes. Chemtura manufactures products in 14 countries and sells in over 100 countries. Total sales over the past 12 months totaled nearly $3 billion.

“Yet the company currently sells for just two-thirds of annual sales. That’s cheap, especially since I estimate earnings are likely to rise 45% from $1.44 a share this year to more than $2 in 2013.

“One person who realizes how inexpensive the stock is right now is Director Alan Cooper. He has purchased 220,000 shares this month alone, an investment of more than $3.9 million. This was not his first purchase. He began buying the stock 15 months ago at $13 - and has kept buying since. As someone who has access to plenty of material, non-public information, he knows what he’s doing.

“Look at its chart and you’ll see that Chemtura is in a pronounced uptrend. Even this month’s market volatility has had no dampening effect on its climb.

“KeyBanc Capital Markets recently initiated coverage of the stock with a $25 price target. That looks conservative to me.”

After such a move since November, you’ll want to protect any position with a trailing stop. But if Alex’s calculations are right, there’s still plenty of steam left in the play.

- Justin Dove with Alexander Green

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