Thoughts after the RNC and the DNC

(Disclaimer – I am a moderate, centrist Democrat; seemingly an endangered species.)

The parties are over in Cleveland and Philadelphia as both the Republican and Democratic National Conventions have have packed up and gone home. The cameras are gone, the balloons and confetti have been swept away and the placards have been sent out on the campaign trail. All that’s left now is the sprint to election day. Each side has their passionate  and detractors, whose votes are unlikely to be swayed, no matter what is said or done in the next three months. As a result, both candidates must now search in the middle for enough votes to put them over the top.

Before the conventions began I already knew that I would be voting for Hillary, which was as much a vote against Trump as for Hillary, but I still wanted to hear what the candidates and their supporters had to say, and to get a feel for the mood of each party. I believe you can glean a lot about a candidate, and what type of president they will be, by the agenda they lay out in their stump speeches, assuming of course, that anything they say can be believed. Like him or not, agree with him or not, President Obama laid out the objectives for his candidacy at the convention, and that’s basically what’s he’s attempted to accomplish over the past eight years. It has been similar for past presidents. So what do we make of Donald Trump and Hillary Clinton after the conventions?

I watched the speeches by all of the main players on both sides of the aisle, including, obviously, the candidates themselves. My overriding impression from the RNC was one of hate, ugliness, divisiveness and fear. Without being able to present any record of achievement in governance, or public service of any kind, Trump and his supporters chose to appeal to the lowest, most primal instincts of the disaffected members of our society. Rabid dog snarling fits from Rudy Giuliani and non-stop nastiness from pit-bull Chris Christie set the negative tone for the entire convention. Only the speeches from Trump’s wife and children leavened the proceedings at all. And while I thought that his children all did a very good job, it did not alter my perception of the man or his supporters.

Then there was Trump’s long-winded homage to himself. I think it’s pretty amazing that he plans to solve all of the world’s problems all by himself. He is so delusional, and egotistical, that he appears to truly believe that he, and he alone, has all of the answers to all of the problems that we face. If it weren’t so scary it would be laughable. And yet his supporters, some of whom are good friends of mine, eat it up. And I just can’t understand it. Are they not listening to the same words, spewing forth from that same orange face, that I am? Do they not hear the bile, the anger, the hatred, the intolerance, and the extravagant love of self in everything that he says? It’s a good thing we have a First Amendment to protect freedom of speech, at least until Trump sues someone for saying something negative about him. Even now. Trump has gone on the attack against Michael Bloomberg, a former mayor of New York that Trump formerly supported, for having the audacity to speak ill of The Donald at the convention. Never before has a candidate slung so much mud at his detractors.

After all the yelling, pontificating, name-calling and finger-pointing during the RNC, dispensed with almost a complete lack of any substantive proposals for how to fix all of the problems they decried, I was ready for a change of pace from the DNC, and they did not disappoint. I found the speeches, particularly those of Cory Booker, Michelle Obama, Joe Biden, Bill Clinton and President Obama, to be positive, inclusive, empowering and uplifting. The messages were forward-looking and upbeat, which was in severe contrast to the dire, negative and often hateful words being shouted at us in Cleveland. In truth, after four days in Philadelphia, I found myself feeling much more positive about voting for Hillary than I did before the convention began. And even more convinced, if that is possible, that electing Donald Trump, would be an unmitigated disaster for our country.

Trump has made a career out of self-promotion, flouting the rules whenever possible, looking out only for himself and showing interest only in his net worth. He has driven numerous businesses into bankruptcy. In fact, his entire empire teetered on the verge of collapse before being saved by some sympathetic lenders. He has also attempted to cheat on his taxes here in Westchester Country by claiming that his golf courses are worth almost nothing for property tax purposes, while at the same time lauding their tremendous value when boasting about his net worth. All this does is hurt the communities in which those properties reside by withholding necessary funds that would otherwise go to social services or school programs.If he’s so proud of the billions that he claims that he’s worth, he shouldn’t be so callous as to skim needed funds from the towns and cities that he works with. And speaking of his purported billions, when is he going to make his tax return public, like all the other candidates?

There is no question that Donald has done a great job creating the “Trump” brand, building golf courses around the world and developing and branding luxury properties. And while not all of his ventures have succeeded, that shouldn’t be held against him as failure is often the result of entrepreneurial effort. Unfortunately, none of his successes in business, such as they are, qualify him to be the President of the United States. The truth is that he is short-tempered, mean-spirited, thin-skinned and ego-maniacal. None of these characteristics are what you want in a president.

Can you imagine him trying to negotiate a bill with Congress, or a treaty with Mexico or China? What rapport do you think a man born into significant wealth, who hasn’t done anything for anyone other than himself his entire life, has with the middle-class or Middle America? What has he done to support workers, people of color, or those without enough education to apply for a job at a Trump construction site, or enough to eat to afford a phony Trump education? What kind of man says the misogynistic, racist, ugly and bullying things he says, then threatens to sue anyone who confronts him? Again, is that really who we want to lead our nation for the next four years?

Contrast all of this with Hillary Clinton, who is by no means a perfect candidate. And for some reason, many people (myself included, to some extent), just dislike her. I can’t put my finger on exactly why that’s the case, but it seems to be true. Could it be the qualities in her that we don’t like would otherwise be acceptable if she was a man? Or perhaps it’s that she has simply been in the public eye for so long and it’s easier to find fault with her than appreciate her good qualities. Either way, her seeming lack of “likability” certainly doesn’t disqualify her from the job as there have been many highly unlikable people that have held elected office and done a very good job. And she has certainly made her fair share of mistakes over the past few years, most notably with Benghazi and her emails. But let’s put that aside for a moment as the issues have been beaten to death. And remember, show me any public figure who has not made decisions, or taken actions, that they would later regret. That’s simply the nature of the beast. I believe candidates should be viewed not for a single event, but for the totality of their service.

So let’s put aside the negatives and instead consider a woman who has dedicated her entire adult life, more than 40 years, to selfless public service. Ponder that for a moment, and contrast it with a lifetime of self-promotion for Donald Trump. She has battled to give a voice to the voiceless and to help the helpless. She has fought for education, healthcare, women, children, minorities and virtually every other citizen of our country. She has worked with our military as well as the leaders of almost every country in the world. Is she perfect – no. But I would take her 40+ years of service against his 40+ years of self-aggrandizement any day.

So who do you want negotiating trade deals on our behalf? Who do you want working with Congress (notice I said “working with Congress”, rather than trying to do it all by himself) to create more jobs? Who do you want with their finger on the trigger of our nuclear arsenal? Who do you want to speak for your daughters, sisters, wives and mothers? Who do you want to protect your right to love whoever you want? Who do you want to fight for some reasonable, enforceable gun legislation, so that we can begin to minimize the almost daily occurrences of horrific mass shootings?

The Democrats do not have all the answers, and I don’t agree with all of the planks of their platform. I would prefer a different approach to taxes and business, but I can live with it as Congress will prevent anything too extreme from being passed. I also don’t agree with a free education; there should be some cost involved so each student feels accountable for their efforts and actions. But there’s no question that higher education should be more affordable and shouldn’t leave student deep in debt upon graduation. But looking at the big picture – climate, Supreme Court, women’s rights, human rights and more – I believe Hillary and the Democrats are on the correct side of the key issues that transcend the individual; that affect all of humanity.

Finally, I strongly believe that we must vote for Hillary Clinton in the upcoming election. There is simply no justification for a Trump presidency. He is not a symbol for change. He is a vote for division, isolation, bullying, chaos and nastiness. And that is not an environment in which I want to live, or raise my family. I hope that, over the course of the next three months, the majority of Americans will really listen to what Trump has to say, and how he says it, so that they will wake up and see him for who he truly is. If they do, then his candidacy is doomed and Hillary Clinton will be our next president.

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I’m Back – Time To Speak Some Truth

After a long absence from blogging, it’s time for me to return to writing more frequently. Between the upcoming election and the turmoil in the stock market, there is plenty to write about. So let’s get to it.

To start things off, I’d like to comment briefly on the election. I will certainly be writing at greater length and frequency in the coming months.(Disclaimer: I am a registered Democrat with fiscally conservative leanings, so nobody is speaking for me in this process.)

On the Republican side, I must admit that I’m surprised that The Donald has made it this far. I completely discounted, and underestimated, the appeal of this loudmouthed buffoon. That being said, it looks like he’ll stick around for a while. I’m also surprised by the appeal of the religious zealot, Ted Cruz. There is very little hope for a centrist candidate in this field of “how far right can we lean” candidates. Iowa and New Hampshire managed to winnow away almost all of the pretenders; Ben Carson remains the only Walking Dead remaining in the Republican Field. I imagine he will be gone by the end of the month. That will leave Trump, Cruz, Rubio, Kasich and maybe Bush to wage battle into March. My intuition says the Bush will be the next one to go, leaving the Final Four to duke it out over the remaining few months until the nomination.

The picture on the Democratic side isn’t much better. All of the pretenders have already dropped out of the race, leaving the equally unappealing Hillary and Bernie. Notwithstanding his big win in New Hampshire, I still don’t think Bernie has any chance of getting the nomination. Which means a very flawed Hillary Clinton will likely oppose an equally flawed (and potentially very scary) Donald Trump or Ted Cruz in the general election. The prospect of having to choose between either one, knowing that the winner will become President of the United States has me rethinking my citizenship.

So what is a fiscally conservative, socially liberal voter to do? Well, outside of the slim possibility that Michael Bloomberg will run, I honestly don’t know. I’m not optimistic. And I believe that collectively, the stock market feels like I do. I think a lot of the poor stock market action can be attributed to the uncertainty surrounding a presidential election with no good candidates. And if that’s true, we could be faced with months of market turmoil ahead. Add to that the slowing growth in China, the plunging price of oil, currency devaluation around the globe and a relatively weak domestic economy and you have a recipe for stock market disaster.

That being said, I want to be clear about something. 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.

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. 

2014 Fearless Forecasts – Looking Back and Gazing Ahead

Each year in my January newsletter (“News and Views”) I make a number of predictions about the stock market, the domestic economy and maybe a few key trends. At the same time, review the accuracy, or lack thereof, of my Fearless Forecasts from the prior year. So let’s first see how my prognostications from last year panned out before I make this year’s prognostications. The forecasts are in black and the actual results are in red.

  1. I think the broad markets will be only modestly higher in 2013. Put me down for an 8% gain for the Dow Jones Industrial Average, which means a closing price of 14,156. That, coincidentally, would be six points below the all time high of 14,164.53 from October 9, 2007. I think the S&P 500 will lag the Dow this year, limiting the S&P to a gain of only 6%, which means a closing price of 1,508. As usual, the market will not rise in a straight line. Indeed, there will likely be two corrections of between 5 – 10%. But again, investors who hold tight will be rewarded. I was right about the direction of the market, but not the magnitude. The DJIA finished up 26.5% and the S&P 500 ended up 29.6%. There were three corrections of between 5 – 10% (they were each around 6%). Buy and hold was definitely the way to go.
  2. I’m confident the Fed will leave short term rates unchanged for the entire year; they’ve already declared as much. I also believe that there will be no more “quantitative easing” plans as the risks of inflation outweigh the concerns about deflation. I think the yield on the 10-year Treasury will stay in a range of 1.50% – 2.00% and the 30-year bond will remain roughly 1.00% higher than the 10-year. Mixed result here. I was correct that the Fed would leave short term rates unchanged and that there would be no more QE. The 10-year Treasury broke above 2% in June, establishing a new trading range between 2.5% – 3.0%. The 30-year bond yield did indeed remain about 1% higher than the 10-year. 
  3. I think the value of the dollar will be lower by the end of the year, after finishing 2012 around 80. Countries all over the world are attempting to devalue their currency in order to bolster their exports and the U.S. is no exception. I expect the dollar index to trade between 73 – 83. I wasn’t too far off. The dollar finished the year right where it started, around 80, after trading as high as 85 and as low as 89 with a primary trading range between 79 and 83. 
  4. I think slower global economic growth this year will limit demand for West Texas Crude, thereby keeping the price down a bit. That being said, I think the price of WTIC will stay for much of the year between $80 – $100, although it wouldn’t surprise me to see it briefly drift as low as $70. This prediction was reasonably accurate as the price traded between $90 – $100 for much of the year, with a three month spike during the summer. There was very little downside movement.
  5. The price of gold has moved higher in each of the last 12 years, even as the rate of growth slowed a bit last year, and I’m confident it will go higher again this year. My upside target is about $1,850 per ounce while the downside is about $1,600. The primary trading range will probably be something like $1,650 – $1,750. I think the price of silver could test $40 per ounce again, but will likely remain in a tight trading range between $26 – $36. I don’t see silver going much lower than $25. Unfortunately, I could not have been more wrong with my predictions for the precious metals sector, which completely tanked last year, as the price of gold plunged almost 30%. Silver fared even worse, finishing the year down about 40% from the high. This one hurt.
  6. The housing market will continue to rally in 2013. Average prices will slowly rise throughout the year as inventory remains very tight. Interest rates will remain historically low, although they will likely be higher by the end of the year. This was mostly correct. The housing market, as represented by the HGX housing index rose 23% in the year. Housing starts increased 11%. New home sales rose 17% but existing home sales were flat. Prices in both new and existing markets rose nicely. Interest rates, although higher than 2012, did remain historically low in 2013.
  7. I think the average rate of GDP growth over the next four quarters will be around 2.0%, which is slightly lower than 2012. Q4 2012 may be the high water mark as the first half of 2013 could struggle to reach 1.75%. The average rate of growth of GDP for the last four quarters was exactly 2.0%, although the good news was that the rate of growth increased all four quarters, accelerating nicely in the second half of the year after a very laggard first half. 
  8. For the third year in a row, job growth, or the lack thereof, will continue to be one the most important domestic stories of the year. The unemployment rate will likely top out around 8.0% and will fall to only 7.5%. The U-6 measure for unemployment, a more accurate gauge of the true unemployment situation, will likely remain in the 14%-15% range. The other big story will of course be the federal deficit. There was solid improvement on the employment front last year. The unemployment rate fell from a high of 7.9% to a low of 7.0% in November, while the U-6 fell from 14.4% to 12.7% over the same period. And the fight over the deficit caused a government shutdown. 

All in all, my forecasts were a bit of a mixed bag, but except for the horribly wrong forecast for gold  I wasn’t too far off last year. And remember, I have no formal training in economics. I’m just someone who closely observes what is happening in the world and tries to apply that knowledge to my investment management business. Anyway, last year is history now; it’s time to look forward, which means a new set of Fearless Forecasts. So without further ado, here we go:

  1. I think the broad markets will again finish higher in 2014. Put me down for a 12% gain for the Dow Jones Industrial Average, which means a closing price of 18,565. I think the S&P 500, with a greater emphasis on tech and growth, could do a little better, finishing up 14%, for a closing price of 2,106. As usual, the market will not rise in a straight line. I expect there will be two or three corrections of between 5 – 10%. One could even be worse than that. But investors who hold tight will be rewarded.
  2. For the second year in a row I believe the Fed will leave short term rates unchanged. I also think the Fed will reduce their bond buying program to at least $40 billion a month by year-end. If they economy is strong enough, they could have it down to zero. The yield on the 10-year Treasury will remain in a relatively tight range of 2.75% – 3.25%.
  3. For two years the dollar index has traded between 79 and 85 and closed the year around 81. Given the reduction in QE, a falling deficit and trade gap, I expect the dollar will be 5% higher, or about 85, by the end of the year.
  4. I think an improved global economy this year will increase demand for West Texas Crude, putting upward pressure on the price. On the other hand, increased supplies from shale drilling will be a drag on prices. Therefore, I expect the price for a barrel of oil to remain relatively range-bound in the $90s for most of the year, with a low of $85 and a high of $105.
  5. After 12 straight years of increases the price of gold fell last year, and fell hard, finishing around $1,200/oz. Longer term, meaning over the next few years, I think gold will move higher. Before that however I think gold will drop below support at $1,200, falling to as low as $1,000.The yearly high is tougher to judge, but I’ll estimate the high to be no better than $1,400.
  6. I expect the housing sector to continue to rally in 2014, albeit at a measured pace as slightly higher interest rates inhibit a faster rate of growth. The volume of new and existing home sales will rise by no more than 5% and average prices will gain slightly less as inventory rises.
  7. I think the average rate of GDP growth over the next four quarters will be around 3.0%, a marked increase from the prior four quarters. I expect the first two quarters to have a higher rate of growth than the second two.
  8. Real job growth, or the lack thereof, will continue to be one the most important domestic stories of the year. The headline unemployment rate could fall as low as 6%, and will likely be no higher than 7%. The U-6 measure for unemployment, a more accurate gauge of the true unemployment situation, will likely remain in the 12.5%-13.5% range. The bigger problem is the dismal labor participation rate, which has fallen to a thirty-five year low of 62.8. That measure must improve in 2014. 
  9. Finally, I don’t believe the mid-term elections will do much to change the political landscape. Congress will likely remain divided. I do expect the The Tea Party to be marginalized as the electorate realizes that a hyper-polarized Congress cannot govern at all.

When Good News Is Really Good News

The Department of Labor today announced that the unemployment rate in October dropped to 7.0% as 203,000 new jobs were added in the month. Almost 300,000 fewer people were counted as unemployed while the labor force participation rate increased, both of which are good things. In addition, the average work week increased a bit, as did average wages. To sum it all up, this was probably the best employment report since the beginning of the financial crisis in 2008.

In recent months, this type of good economic news was often seen by the market as bad news because it suggested that it would force the Federal Reserve to accelerate its timetable to begin tapering QE. Following that logic, without QE to prop up the stock market, equity prices would fall. This convoluted thinking has left us with the backwards reality of “bad is good” and “good is bad” for the past few months.

So as an investor, where does today’s action leave us? At this moment, the Dow Jones Industrial Average (#DJIA) is up 193 points to 16,015. It could be that stock market participants finally understand that it’s good to have better employment; that it’s a good thing to have better than expected GDP growth (the second estimate for Q3 was 3.6%) and that the housing market should not collapse with the 10-year treasury around 3%. I believe that the Fed will not begin to ease before April. And if they do it right, they can reduce their monthly bond purchases slowly enough that it shouldn’t do any real harm to the economy. Indeed, if the economy is strong enough to stand on its own, that’s good for everyone, including the stock market.

Therefore, my clients and I remain fully invested in the market. I expect this rally to extend through the rest of this year and into 2014. And if the rumor is true that Congressional leaders are inching closer to a bi-partisan budget deal on the debt ceiling and the deficit which will include getting rid of the harsh sequester cuts, then we could really be looking at a very bright picture for the stock market for months to come.

The Market Still Doesn’t Care That The Government Is Closed

We are now in the third week of the government shutdown and we’re careening towards the first “deadline” of October 17 with no deal in sight. By that day the Treasury will reportedly have about $30 billion with which to pay its bills. That will leave less than two weeks to scrimp and scrounge before the next big deadline of November 1, at which time the government will no longer be able to make social security, Medicare, pension and other benefit payments. Then, on November 15, the government could default on about $30 billion worth of interest payments due to bondholders. Most rational market observers, meaning those not affiliated with the Tea Party, believe that defaulting on these obligations would be catastrophic to the market.

So why is the stock market within shouting distance of its all time high? Why is the VIX (volatility index) displaying nothing but complacency? To me, the answer is clear. Stock (and bond) market participants believe strongly that a deal of some kind will be reached sometime this month After that the government re-open for business, the debt ceiling will be raised and the Treasury will pays all its bills as promised. In all likelihood, this will be simply a short-term fix, meaning that in a few short months we could very well be right back in this perilous situation all over again. But that will be a story for another day. All traders care about is that the current crisis will very likely be averted.

So what does that mean to investors? It means you should remain invested. Now is not the time to bail on the market. In fact, you should use temporary market dips to add to your holdings. The Federal Reserve remains highly accommodative; and that means the party in the stock market is likely to continue for at least the rest of the year.

Personally, I put some money to work first thing Thursday morning, as the huge two day rally began. As word leaked that an accord could be forthcoming, the market soared. As it turned out, the rumors were just that, and there was no deal. Yet the rally demonstrated how much buying power is waiting on the sidelines, ready to jump in when an agreement is finally reached. Interestingly, the market opened down 100 points today as investors expressed their disappointment in the lack of progress over the weekend. Yet as trading closed ten minutes ago, the Dow Jones Industrial Average was up 64 points. This is simply a market that does not want to go down.

So if the market doesn’t care that the government is closed, you shouldn’t either. Surf’s up; time to ride the wave.