I Hope You Listened

My last two blogs were written on February 13 and February 29. In the former I wrote:

“It is not time to panic. Things are not nearly as dire as they were leading up to the crash in 2008. Outside of the negative consequences of a too-strong dollar, corporate revenues, profits and balance sheets are in very good shape. It is part of the normal and natural part of the stock market cycle that after a prolonged period of gains that we must experience a year or two of negative returns. Then, when the gloom and despair have peaked, it will be time for the next rally to begin.

So stick with your plan. In the world of virtually zero interest rates, owning a diverse basket of blue-chip, dividend-paying stocks, returning an average yield of at least 2%, is your best way to secure your financial future. So buckle up and prepare for a bumpy ride. I’ll try my best to guide you along the way.”

As it turned out, my message was particularly well-timed as the market had hit bottom only two days earlier. Since closing at 15,660.18 on the 11th, the #DJIA has surged 12.4% in only 25 trading days. Over the same period, the #S&P500 has gained a similar 12.0%. Even better, the Dow Jones Transportation Average (#DJTA), which suffered mightily on the way down, has jumped a stellar 17.3%, leading the way for the rest of the market.

On the 29th, I wrote the following two points (out of a much larger blog):

  • I would substantially overweight, or even limit, your investments to blue-chip, dividend paying, U.S.-based equities as most of the rest of the world is a mess and income is at a premium.
  • When times get scary, and you aren’t sure what to do, it’s ok to do nothing. Outside of some family accounts, in which I bought some stocks during the downturn in January (which proved too early), I have made next to no trades in 2016. And that’s just fine. Sometimes the best trades are the ones you don’t make.

Again, I believe these suggestions had, and still have, a lot of merit. I basically have done next to nothing so far this year, other than make a few acquisitions to round up existing positions that had been unfairly beaten down during the correction. More to the point; I sold nothing! Now, virtually every stock that had been down has rallied and recouped most, if not all, of the earlier losses. By doing nothing, buy ignoring the noise from the media and the panic of traders and nervous investors, we experienced no losses and have been made whole again. And the stocks we sat with continued to pay us a steady stream of above-average dividends while we waited.

So where are we today and what’s my current thinking? The #DJIA remains 750 points below the high of 18,312 set almost exactly 10 months ago, so there is still room for growth. The central bankers of the world, including our own Federal Reserve, remain highly accommodative, lowering rates to at, or in some cases even below, zero. These policies basically force investors into equities as investing in government bonds guarantees little or no income whatsoever.

I would continue to overweight your investments in primarily blue-chip, dividend-paying, quality U.S.-based companies. Look for businesses with strong brands, pricing power and competitive advantages and a history of paying dividends through good times and bad.

I believe that market will remain positive for at least the next two months, before we head into the traditional summer selling season, and into the Republican and Democratic conventions. I’ll comment more on the election cycle later. For now, let’s rejoice that Spring has arrived and, at least for now, the market is coming up roses.

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Don’t Succumb To Blind Fear

The past week has been a very turbulent, and nerve-wracking, time for investors. Stock markets around the world have been rocked by massive losses. In just the seven trading sessions, the Dow Jones Industrial Average (#DJIA) has fallen about 850 points, or 5%. By comparison, the S&P 500 has fallen 5.2%, the UK FTSE a slightly better 4.8% while the German DAX has dropped a whopping 6.9%. These are significant losses in only seven trading days.

Today was a microcosm of the past few weeks as the major averages were whipsawed all day long. At one point, the #DJIA was down 2.8%, before finishing down 1%. Similarly, the Dow Jones Transportation Average (#DJTA) was also down 2.8% before actually ending the day 18 points higher. The S&P 500 dropped 3% before winding up down only 0.9%. Investors who panicked today and sold at the bottom will likely regret that when the market inevitably recovers and they find themselves sitting in cash on the sidelines, missing the large gains.

So what are the reasons for the big declines and the crazy volatility? They include (just to name a few): a growing economic malaise in Europe, concerns about a continued economic slowdown in China, fears on an expanding Ebola outbreak, continued trouble in the Middle East thanks to ISIS and other terrorists, plunging oil prices thanks to the dollar surging in value against most other currencies and horrible policy decisions within OPEC. You could probably add concerns over social unrest in Hong Kong. Don’t forget natural disasters like cyclones, hurricanes and typhoons that are growing in frequency and magnitude. And that doesn’t even count worries about economic slowdown in this country, anticipation about future rate increases by the Federal Reserve and uncertainty about the upcoming mid-term elections. Phew, did I miss anything?

Given all the ills that I enumerated above, we should all dump everything, build a bomb shelter and stick all of our money under our mattress, right? WRONG!! Succumbing to fear, acquiescing to panic and abandoning your financial plan is exactly the opposite of what you should be doing.

First of all, in my opinion, you shouldn’t be investing any money that needs to be spent in the next two years. So if we take that as a given, and if we assume (yes, I know what happens when we assume, but that’s the only way I can continue this narrative) that the money you have invested is for some future purpose (of at least five years), than weekly volatility is really irrelevant. In fact, it is normal and present opportunities.

Let’s put things in perspective. On October 9, 2007, almost exactly seven years ago, the #DJIA was 14,164.53. From there it proceeded to go down for the next year and a half, finally hitting bottom on March 9, 2009 at 6,547.05, for a loss of 53.8%. From that low, the market hurtled forward for the next five and a half years, erasing all of those losses before peaking on September 19 at 17,279.74, a gain of 163.9%! Today the #DJIA closed at 16,141.74, which means we’ve fallen 6.6% from the high. Is that really so bad? In the grand scheme of things is that likely to derail your future plans?

The truth about the stock market is that it goes up and it goes down. And after a prolonged period of going up, with only a few very short down periods, we were due for a correction of sorts. Now, I don’t know either the depth or duration of this correction, but I’m confident it won’t be nearly as bad as 2008/2009. Global economic conditions are MUCH better today, even with all of our problems, than they were back then. So relax, have a nice glass of wine (or whatever your drinking pleasure is), take stock of your portfolio and look at your “wish list” of stocks that you’d like to buy. Perhaps now is the tie to use some discretionary cash to pick up one or two of them on the cheap. Then sit back, wait for the rebound and congratulate yourself for remaining calm and sticking with your plan.

Full disclosure: I purchased one new position last week, and another one this afternoon, totaling about $600,000. So I’m putting my money where my mouth is. I’m very confident those will be very opportunistic and profitable purchases, creating solid profits for me and my clients for years to come.

 

Have You Taken My Advice?

This year I’ve written blogs entitled “Don’t Panic”, “I Hope You Didn’t Sell”, “It’s Still Not Time To Panic”, “Tech Stocks On Sale” and “The Market Continues To Climb A Wall Of Worry”, to name a few. Do you see the trend? Throughout the year I’ve urged my newsletter and blog readers, as well as my clients, to simply sit tight, ignore the pundits, and maintain their equity positions. There has been nothing to dissuade me that domestic equities are the best investment category for most investors this year.

And as I sit here moments after the market opened, the #DJIA is trading just over 17,000, again within spitting distance of its all time closing high of 17,138.20 set on July 16. Even better, the #S&P500 is less than two points from its closing high of 1,988.31 set on July 23. The tech heavy #NASDAQ is over 4,500, its highest level in 14 years, and approaching the all time high closing price of 5,048.62 set at the height of the tech bubble on March 10, 2000. Without question, the bull market remains in force.

Why have I been so sure about my position to remain fully invested in the face every foreign and domestic problem, both economic and political? It’s very simple: the Federal Reserve and its easy money policy. As long as their accommodative monetary remains in place, there is no reason to contemplate selling. And I believe there will be no policy changes until the second quarter of next year, at the earliest. They will err on the side of waiting too long to raise rates, and possibly allow inflation to grow more rapidly than they would prefer, rather than risk putting the brakes on economic growth.

Even when they do begin to raise rates, which they will likely do in a VERY measured fashion, I believe the market can continue to rise, because it will be confirmation that the economy is improving, and that is good for business, which is good for stocks. But that will be an argument for next year. For now, my advice remains the same: stay the course. Ignore the Talking Heads and tune out the blather. Buy the dips. Own quality stocks and reinvest your dividends. This is the best way to save an invest for your future.

The Market Continues To Climb A Wall Of Worry

As I write this 10 minutes before the market opens after the Memorial Day weekend, the Dow Jones Industrial Average stands at 16,606, down a mere 110 points from the record high established on May 13. On the other hand, the Dow Jones Transportation Average registered a new high of 7,986 on Friday, the same day the S&P 500 closed over 1,900 for the first time. So as you can see, things are remarkably good. Yet if you listen to the news or watch the TV, the mood does not match the reality. It appears to me that the majority of market observers are negative on the market. The commentary continues along the themes of fear and caution with many “experts” suggesting that the market is primed for a collapse. In the face of all this general pessimism, the market continues to gain ground, or “climb a wall of worry”. If sentiment remains this gloomy while the market remains at such lofty levels, I believe the market will continue to rally to ever higher levels.

Indeed, I believe that the market should end the year higher than it began, perhaps by as much as 10%. With that overarching belief in mind, I remain fully invested in my own accounts and on behalf of my clients. I don’t attempt to trade the short-term movements; rather, I look to buy the securities I want when opportunities present themselves. And I only buy things I believe will out perform the broad market for at least the next three- to five years. If I don’t have that confidence, I don’t buy it.

I also think that the battering endured by the biotech and high growth technology sectors may be over, suggesting that it could be time to nibble at some stocks in those sectors. Many prior high-flyers dropped between 25% and 50%, or more in a very short period of time. It also may be time to look at some downtrodden housing stocks as the housing numbers are expected to perk up over the next few months. Finally, as a core holding, the value sector, as represented by dividend-paying, blue chip stocks continues to be a smart place to put your money for excellent long-term returns. Indeed, that’s where the bulk of my own money is invested.

It’s Still Not Time To Panic

Even though the market has dropped for four straight days, with losses on the Dow Jones Industrial Average (#DJIA) yesterday exceeding 200 points, it still isn’t time to panic. It would appear that, once again, the turmoil is principally related to the unrest in the Ukraine, with additional worries about stagnating growth in China.

The bottom line to me is that all of this is simply noise. What investors should must focus on is that economic growth in this country is modest but stable. The Federal Reserve remains committed to a slow and steady program of tapering their bond buying program while maintaining low interest rates well into 2015. And the federal government has managed to create a budget compromise that means stability for the next two years. All of this suggests that the market should continue to move generally higher, albeit in fits and starts.

So what should investors be doing? You should be maintaining whatever allocation you have to equities, and buying quality positions on dips. Look to add to the defense, transportation, technology and medical sectors. I would also look at industrials, agriculture and banking as well. Bond-like investments in REITs, BDCs and even utilities can add additional yield to certain portfolios.

I’m not suggesting that anyone take on more risk than they’re comfortable with. Everyone should be invested such that they can sleep at night. That being said, I believe that this is still a good time to be invested in the stock market; it’s not time to sell.

I Hope You Didn’t Sell Last Month

Last month I wrote a blog entitled “Don’t Panic” on February 5 in which I stated that “I believe that this is simply a long overdue correction in a bull market that began in March 2009 and remains in place today.” As it turns out I was fortunate enough to have written this the day that the correction ended. Since that time, the Dow Jones Industrial Average has risen by 6.2% to within a scant 200 points of its all time closing high. At the same time, the S&P 500, the Wilshire 5000 and the Russell 2000 have all exceeded their old records. Clearly, the Bull Market remains in force and that the modest correction has ended.

So where do things stand now? At this moment, the market is still in a clear uptrend. Almost every major stock average is at or near record levels. Treasury yields have stabilized in the range of 2.60 – 2.80%. The value of the dollar index has fallen about 5% since last July and is currently trading near its low. This is helping to increase the relative prices of gold and silver, as well as other commodities, like crude oil.

So what should we be doing? All things considered, we sit tight but remain vigilant. There will likely be more one-off events like what’s going on in the Ukraine that will cause the market to slide. I believe that one- or two-day events like that can create short-term buying opportunities. Unless there is a fundamental and abrupt change in Federal Reserve policy with regards to interest rates, or if our economy were to quickly worsen, or should there be a major conflagration somewhere in the world, then the stock market should continue to work its way higher.

As for me and my clients, we remain fully invested in companies that are participating in this bull market. We didn’t sell last month and we won’t panic the next time the market drops a little because we understand that markets go up and down in the normal course of things. We are patient investors with the courage of our convictions. That’s how you build true wealth.

Don’t Panic

As of the close of business yesterday, the Dow Jones Industrial Average was down 1,136 points, or 6.8%, since the end of 2013. The venerable average was down 5.3% in January, which lead many seers to warn that the market would therefore be down for the full year. I’m here to disagree with that sentiment. I believe that this is simply a long overdue correction in a bull market that began in March 2009 and remains in place today.

Quite simply, the fundamentals underpinning this bull market remain in place. Corporate balance sheets remain pristine and profits continue to grow. The Federal Reserve remains committed to keeping interest rates artificially low and will inject liquidity into the system at the first sign of danger. Congress has already passed a budget deal and is likely to approve an amendment to the debt ceiling without a protracted fight. And finally, the economy continues to grow, albeit at a somewhat modest pace. All of this suggests that the stock market should again move higher.

Keep in mind that there are relatively few alternatives to an intelligently constructed stock portfolio when it comes to saving for your future. Interest rates at the bank are actually negative when viewed after taxes and inflation. Government debt is not much better. Corporate debt generally has positive yields, but you’d have to extend the maturities too far into the future to reap any reasonable yields, and in doing so you would incur significant interest rate risk. On the other hand, there are many solid, blue-chip stocks that pay annual dividends of 3% or better and are increasing those payments at rates far better than inflation. Good examples include Pfizer (PFE), Verizon (VZ), Proctor and Gamble (PG) and Chevron (CVX). [Disclosure: All four stocks are among the Top 25 positions held by Werlinich Asset Management] And while you enjoy those dividends, you also have the possibility of long-term capital growth.

For example, defense giant Lockheed Martin (LMT) pays a dividend that yields 3.5% at the current price. And the stock has tripled over the past ten years, which represents an average annual growth of about 12% per year for the past decade. While there is no guarantee the stock will continue that rate of growth for the next ten years, if it only grows at half that rate, the stock could double over the next decade, not including the dividend payments. What bond can give you the same growth potential? [Disclosure: LMT is the 3rd largest position held by Werlinich Asset Management.]

When looked at through a longer term prism, an intelligently managed stock market portfolio remains the best option available in order to save and invest for long-term growth and future financial security.