Don't Fight the Fed....Again

I was listening to Dennis Gartman, author of The Gartman Letter on Bloomberg which surprisingly I have started listening too more than CNBC.  For those that don't know Gartman, is a closely watched figure within the financial community.

In his interview with Tome Keene, Gartman touched on the fact that he wasn't bullish enough when it came to stocks this year.  And why was this, simply put "don't fight the fed".

As we have talked throughout the year, the Fed with it's easing monetary policy is crushing savers with low interest rates and pushing people into stocks or higher risk assets whether they want to or not.

One way we have advised people to address this issue is if you have to be in stocks, buy high quality stocks.  What do we mean by high quality stocks?  Let's review the following below

1. Debt, look for companies that have a low debt, either on an absolute term or as a % of capital or equity
2. Cash Flow, strong companies are able to generate enough operation cash flow to the point where it can cover capital expenses or dividends without having to borrow
3. Revenue, even in tough times can a firm take mark share away from competitors without giving up profits?  Look for smooth revenue up trends but beware of out of control growth which cannot be sustained.

What do all three of these metrics have in common?  Companies can not easily manipulate these figures with accounting adjustments that they can do with income.  Debt is debt, cash is cash, and Revenue while it can be affected is a little harder to adjust.

Companies that check all three of these boxes is a company that likely deserves further research and analysis as a potential buy.

Although some people may speculate that high quality especially dividend paying companies may be in a bubble after a year or so of running up in price, we disagree.  As the Fed continues to poor liquidity into the market and bonds prices escalate further, high quality stocks are likely the best way to beat the Fed at it's own game.

Go here for the full radio interview on Bloomberg