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.

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.

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.

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.

Thoughts on the 3rd Presidential Debate

I don’t know about you, but I’m glad that’s over with. We’re in the home stretch now with only two more weeks until the general election. Then we’ll have two whole years until the machinery cranks back up again for the next one.

Let me start by saying that sitting presidents have a major advantage when it comes to a debate on foreign policy because unlike their opponents, they can run on what they’ve actually done, rather than on what they say they’ll do. And as we all know, it’s much easier to be a Monday morning quarterback than to actually put troops in harm’s way. They also get to call themselves the Commander-in-Chief, as Obama did a few times.

That being said, I’d say President Obama had the slight edge although Mr. Romney didn’t cause himself any harm. I found that the candidates had shared much fundamental common ground and had to look for specific areas in which they differed. They also both spent a lot of time pandering to the Jewish/Israeli vote. Each one claimed to be Israel’s best friend. It got a little sickening after a while.

Romney started the debate trying to take the high road but Obama quickly went on the attack, after which Romney retorted that “attacking me is not an agenda”. I thought that was a good line on his part. I thought Romney also made a great statement when he said that it is America’s role in the world to defend freedom and promote the principle of rights, freedom, etc. and that we must be strong to lead. His other good soundbite came when he said “America has not dictated to other nations, it has freed nations from dictators”. I wonder who wrote that for him?

Obama blamed Romney for “wrong and reckless policies” and tried to associate him with Bush and Cheney, which is time we’d all like to forget.

Romney said he would pay for his increase in the defense budget by eliminating Obamacare and other (unnamed) unnecessary programs. Obama rightly pointed out that the math simply didn’t add up and that we’re already spending more than the next largest 10 countries combined and that he’s increased the budget every year in office. Obama kept pointing out that Romney wants to increase the budget when the military leaders haven’t even asked for the increase. Obama clearly won that argument.

Obama also scored points by rightly pointing out that Al Qaeda is weaker now than when he entered office. That is simply inarguable.

I also loved it when Obama quipped that Romney kept “trying to airbrush history” when referring to Romney’s position on letting Detroit go bankrupt during the financial collapse in 2008. The speechwriter who came up with that one should get a raise.

They each went on to talk tough about China and what they’re doing or what they’d do to bring big bad China to heel. The reality is that there is little they can do or will do. We cannot dictate economic policy to China as they are our largest creditor and our largest supplier of goods. We’re lucky China continues to trade their goods for our declining currency.

Again, no new policies or character traits were revealed. Each candidate stuck closely to their well rehearsed platforms and tried whenever possible to steer the discussion back to the domestic economy and their rivals failings. It was decent theater; nothing more.

Before I finish this I’d like to share an interesting theory being discussed today on CNBC as the market plunged almost 250 points. There is a thought floating around that a win by Romney would be bad for the stock market because he would likely replace Fed Chief Bernanke with someone less inclined to continue the current policy of quantitative easing. And if that’s the case, that could precipitate a dramatic plunge in the market as the punch bowl will have been taken away. I’m not sure if this is a valid premise or not, but it’s food for thought.