Acrophobia

     Acrophobia is a big word meaning "fear of heights".  I am beginning to suffer from this disease. It usually affects me when I research stocks that I might be interested in adding to my portfolio. The PE ratios of many stocks are at unsustainable levels currently. What is driving this unusual level of interest in common stocks? Several factors have contributed to these high valuations. First, extremely low interest rates for fixed income investments like bonds and CD's have steered investors to the equity (stock) market for dividend yield and capital appreciation. The second factor is simply supply and demand. There are too many dollars chasing too few stocks, creating an imbalance and causing stock prices to rise.When interest rates start to normalize (return to historic levels) , stock valuations should moderate. Currently, the Federal Open Market Committee (FOMC) is expected to raise rates again this June. Any weakness in the stock market or economy in general may delay this move. I recently looked at a chart of the Dow Industrial Average from 1980 to present. The upward slope is staggering. The only real deviation occurred in 2008-2009 during a severe recession. Interest rates were slashed during the recession to stimulate the economy which was on the brink of collapse In addition to already low interest rates, the FOMC began a program of Quantitative Easing. This flooded the capital markets with liquidity so loans could continue to be made and businesses would stay open. Now the Feds would like to unwind all this stimulus and return to normal. My fear is that stock valuations have been propped-up by all this artificial stimulus and may react badly to any attempt to normalize interest rates. Hopefully the transition will be gradual enough to avoid any severe repricing of stocks in general.. Therapy for my Acrophobia includes raising cash by selling some positions that appear to be richly valued and making a list of potential buys in case the market corrects in a meaningful way. I also am watching local CD rates and buying into a laddered CD strategy which is what a retired guy my age should do. I still hold plenty of stocks and a few bonds,  which I will hold to maturity, but my cash and fixed assets will help insulate me in a market downturn.

Panic Mode

     Today the Dow Industrial Index is down over 370 points. There are three things an investor can do in this situation: 1 Sell in a panic, 2 Buy more stocks at a discount, 3 Relax and have a glass of your favorite beverage. I chose option #3. My preference is Wild Turkey bourbon on the rocks with a slice of lemon garnish. Institutional investors and market makers on Wall Street would like for you to choose option #1. Why? Because panic selling by retail investors cause prices to fall on good stocks, giving the Pros a bargain price. The Pros on Wall Street are always looking for a way to generate short term gains for their clients. It's the client who is responsible for the tax on these gains. To sell into a panic means that I have lost control of my long term strategy and that I am willing to sell at any price just to exit a position. Readers of my last post will remember that I was selling (with limit orders) some of my big pharma (drug) stocks last month. All of those orders were filled at the price I specified. I wish I could say that I knew The Donald was going to do something stupid and cause a panic, but the truth is that the drug stocks just got pricey as expressed by the PE ratio. I like to sell into strength while the market is going up instead of weakness (when people are panic selling). Since this blog is about finance and not politics, I only have one thing to say about the events this week at the White House: Trump's outrageous behavior is not accepted in government like it was in the business world. End of political analysis. Now about option #2-buy more stocks at a discount. Let's put today's action into perspective- the Dow only fell 1.78% today, hardly a huge discount to previous levels. I don't know if there is more pain to come or not so I am not willing to catch a "falling knife" by buying a stock on its way to lower levels. When Richard Nixon was caught breaking the law and lying about it in 1973, the Dow fell 50% in about a year. Funny thing is this country, the economy, and the stock market all survived the resignation of Nixon. If this is what happens to Trump, I suspect my long term strategy to survive also.