2018 Forecast

    My 2018 forecast will not be an attempt to predict what will happen in Washington D.C. but rather what has actually happened so far in the Trump Administration and how it should affect your investments. There are two important things that have changed in the last year. First is the passage of the Tax "Reform" bill. Secondly, the reduction of regulation of certain industries. When looking for sectors that benefit the most from both factors, I think that the Banking sector will be the biggest winner. One way to invest in banks and financials is to buy an ETF (exchange traded fund) like the Financial Select Sector Fund, symbol (XLF). This is an easy way to achieve diversification and also pay low fees while maintaining liquidity. The alternative is to select a few bank stocks and buy them individually. Banks should also benefit from higher interest rates which the Fed has signaled are comming next year. Higher rates should give banks better margins (the difference between what they pay on deposits and what they charge on loans). The combination of less regulation, lower taxes, and higher margins, could be a powerful stimulus during the coming year.
     Another sector that I like is energy. Oil stocks have underperformed for years. It's only the last few months that they have shown any momentum. I own an ETF issued by Vanguard simply called Vanguard energy ETF symbol (VDE). it lost about 7 1/2% in 2017 but I am sticking with it because the price of oil has climbed in recent weeks and I think that it will stabilize in 2018. Just like last year's forecast, I don't see oil returning to historical highs. Some domestic drillers can profit from $50 oil and above due to improved productivity. There are many companies to choose from such as EOG resources, Whiting Petroleum, and Concho Resources. Before buying any of these companies, investors should research their valuation (PE ratio), debt level, production levels, dividend yield, and many other factors. An easier way to invest in energy to buy an ETF like the Energy Select Sector Fund (symbol XLE). That way you get diversification and a 3 1/2% yield in one trade.
     Another undervalued play in the energy space is Master Limited Partnerships (MLP's). They often yield in the 6-8% range and are tax advantaged. I do not recommend them for retirement accounts because of this. Be aware that MLP's report earnings on form K1 which will complicate your tax preparation. One way around the form K1 tax reporting is to buy a mutual fund or ETF which holds MLP's. That way your distributions will be reported on form 1099 instead of form K1. One ETF that I own is the Alerian MLP ETF symbol (AMLP) The current yield is over 10%. The long term performance is lousy, but the hope here is the improved price of oil will also help the price of AMLP.
     My last sector of interest is technology. The recent pullback in names like Micron Technology (MU), Apple Computer (AAPL), Intel (INTC), Alphabet (GOOGL), and Facebook (FB), may continue and present a buying opportunity. Be cautious because these names have led the market in 2017. The SPDR Technology ETF (XLK) will provide exposure to these names with only one trade.

Politics, Religion, Sex, and Money

     I heard on the radio the other day that 10% of married couples get into an argument before breakfast on Christmas morning. If I had to guess, it was over one of the four topics mentioned in the subject line:PRSM. Politics first, couples who cohabitate tend to blend their political views after a few years. Most people realize that arguing over it will not solve anything anyway. Second, religion, couples with different religious views usually don't even survive the wedding. Third, sex, most couples figure out if they are sexually compatible before they even get married. After all, you wouldn't buy a car without a test drive would you? That brings me to money, I doubt that most couples have had serious talks about their views on earnings, savings, investing, and spending before they tie the knot. I suspect that differences about how finances are handled breaks-up more marriages that the other three combined. Parents of adolescent children seldom take the time to educate their kids about how to handle money, if any reader is the exception, I applaud you. High schools and colleges usually ignore this very important subject too. It's no wonder that financial incompatibility wrecks so many marriages. The sad fact is that most couples are on their own when it comes to the family budget. In my household, like most, the woman is the main spender. My wife buys nearly all the groceries and supplies to run the house. If I get nervous about how much she is spending, I will compensate by pinching a penny even harder. If that doesn't work, we have the TALK. It's important to not let emotion enter into any financial activity. A couple who share intimate details about their sexuality can surely have a frank discussion about money, right?  It's also important to deal with any financial problems in a timely manner. A problem that is ignored can fester like a cut from a rusty blade. When a person finances household expenditures with revolving credit (cards) and makes no effort to pay down the balance, there will be a day of reckoning. A spouse who hides these balances from the other spouse is cheating on their mate. I realize that bad things can happen to good people and that some large expenditures are unavoidable. In the absence of that unexpected expense, there are a few things that couples can do: 1. control your spending. sometimes a simpler life is a happier life. 2. Avoid unnecessary debt. Interest on accumulated debt can wreck a budget and marriage. 3. Develop a savings plan. Even modest amounts of savings can add-up over time and create a cushion in case of the unexpected.

Crypto Mania

     There is something going on in the world of Finance that just cannot be ignored. It's very confusing and most experts admit that they don't understand it either. I'm talking about cryptocurrencies like Bitcoin. I have to admit that I know almost nothing about the technology and the currency but I would feel remiss if I didn't at least address it in this blog. First of all, Bitcoin is just one of many cryptocurrencies out there. Another popular "token" is called Ethereum. I called it a token because that is the technology that allows them to be bought, sold, and traded. There are currently about 1200 cryptocurrencies out there in cyberspace with more offered everyday. They are being introduced by what is called an "initial coin offering". According to the current issue of Barron's magazine (Dec 4,2017), investors have bought 3.6 billion dollars worth of these tokens just in 2017 alone. That's why it shouldn't be ignored. I would highly recommend anyone who is interested in this "mania" to buy a copy of this weeks Barron's to get educated on what is happening. Just to be clear, I do not recommend putting any money into crypto's yet. However, some money managers who I know and respect have considerable amounts of their clients money in Bitcoin. The sheer rocket-like appreciation of Bitcoin is staggering-1000% since the start of the year. Just because there is no basis for this asset to appreciate does not mean that it will stop anytime soon. Sometimes these manias can carry on for years. Some pyramid schemes have been around for many years and are actually listed stocks on the NYSE. Cryptos have been the most popular in some third world countries where there is little confidence in the official currency of the government. But now the mania has overtaken Wall Street and the Chicago Board of Exchange has committed to offer futures trading in Bitcoin in the near future. This gives Bitcoin a small amount of legitimacy, but in no way lessens the risk. According to the Barron's article, $300 billion have poured into crypto market so far. With so many tokens available, no one really knows which cryptocurrency will emerge as the dominate player in this asset class, but Bitcoin looks to have the early lead. It is my belief that the world is heading toward a cashless society sometime in the future so it makes sense that a cryptocurrency will fill most peoples virtual wallet.but I doubt that will happen in my lifetime. In the near future there will be many ETF's, mutual funds, closed ended funds, and other products offered that will mitigate the risks of cryptos. Only then will I be willing to consider an investment in cryptos.

Growth vrs Value

     As a young man I took up the game of handball. We played outside at Wesselman Park almost every day. When I was first learning the game, I was practicing by myself when the best player in town showed up. He proceeded to teach me the finer points of the game. It seemed to him that I was playing the ball too close to him so we could volley longer. His advice was "hit it where I'm not". In other words, make him run for the ball. What's this got to do with investing in stocks? It seems that in today's stock market, everybody throws their money at just a few easy targets such as Amazon, Micron Technology, Alphabet, and so on. This is known as growth investing. The hope is that these stocks will just keep on going higher and higher and that the valuation doesn't matter. This trend has been going on for several years and lots of money has been made by doing what others do. But, some experts suggest that this style of investing is soon to go out of favor and that value investing is soon to be the rage. I believe in value investing for the most part. It's like hitting the ball where other investors aren't. The hope is that others will also discover these companies that successfully carry out their business plan every day and buy the stock which drives up the price. To be a value stock, the company must trade at a reasonable valuation as expressed by the P/E ratio, P/B ratio, PEG ratio and other measures of valuation. What really ices the cake is a good story about why the business is about to take off. Examples of this would be 1. Changing government regulation, 2. Changing consumer behavior, or 3. An exciting new product launch. Famous investors like Benjamin Graham and Warren Buffet are champions of the value style of investing. In today's schitzo market, what gets punished today is loved tomorrow and vise versa. This tells me that too much money is chasing too few stocks so the money makes quick circles around the growth stock names like a dog chasing his tail. Instead of focusing on the most recent quarter's earnings, value investors tend to have a longer view. When researching for my next value play I also look for a nice dividend that appears sustainable. The dividend payout ratio will tell you if the dividend is starving the company of necessary internal capital. In today's low interest environment, a 3% dividend will keep me interested until value investors wake-up.