2019 FORCAST

     2019 will be a difficult year for investors. The huge tax cuts which propelled earnings for 2018 are wearing off. Corporations will still enjoy the lower tax rates, but earnings comparisons with previous periods will be muted. Higher interest rates combined with higher levels of debt will further crimp earnings. Trade tensions with China will continue to be a drag on market sentiment and cause preemptive price increases to consumers. Turmoil in the White House from the Mueller investigation is another worry for U.S. markets. The impeachment or resignation of Trump could trigger a massive sell-off. Wage growth should continue at a modest pace but unemployment will creep up as economic growth slows. The Federal Reserve is expected to increase rates 2x in 2019 but I believe the 25bp raise in Dec is the last for the immediate future. The Fed can further slow the economy with its quantitative tightening without interest rate increases. The price of crude oil has been very weak at the end of 2018 due to a glut of supply. This could slow exploration of shale oil in the U.S. The resulting decline in profits and employment will be an additional drag on our economy. One reliable indicator of a coming recession is an inverted yield curve. This is when short term treasuries yield more than long dated treasuries. Recently, the difference between the 10 year treasury and the 2 year treasury was only 14 basis points, which is close to inverting. The 5 year vrs the 2 year treasuries have already inverted. I am inclined to take a defensive stand considering all the possible negative events that could occur in 2019. Over the past 12 months, I have been increasing my purchases of laddered CD's to provide income and the safety of deposit insurance. I have also maintained substantial cash balances in money market funds. Due to the Fed rate increases over the past several years, money markets are offering rates in the 2.37% range. Having liquid assets also allows you to pick-up bargains in stocks as the market declines. During difficult times, I like defensive stocks-those that hold up in down markets. Examples of defensive issues include: consumer discressionary companies like Procter and Gamble (PG), drug companies like Pfizer (PFE) and utilities like Next Era Energy (NEE). Diversification can be achieved by buying ETF's in these sectors. Finally, there is one sector picking-up steam and could be recession-proof: the cannabis trade. The excitement around legalization for recreational use and the known benefits of medical use could propel the Canadian stocks like Canopy Growth (CGS) and Cronos (CRON). An added benefit of these two is the large stakes taken by deep pocketed companies wanting a piece of the action. Their capital may be necessary for the rapid growth expected in the future.

A BAD REACTION

     Sometimes two different things just don't mix. This recent market action reminds me of the time I went camping down in Kentucky with disastrous results. I had taken a prescription medicine for my stomach problems before I left the house. When I got to camp, I started drinking wine instead of eating any supper. About 2:30 am I stood-up to get some wood for the campfire and did a face-plant right into the fire. After rolling out of the fire, I fell flat on my face, breaking my glasses and my nose. The next morning I woke-up with black eyes, a burned face and a pounding headache. Alcohol and drugs are a volatile combination. After yesterday's 600 point drop in the Dow industrial average, my take is there were a couple of things that caused this nasty reaction. First up is the uncertainty of the results of the mid-term elections. As expected, the House of Congress has a new Democratic majority. Wall Street is nervous about how this will effect Donald Trump's agenda. A divided government may result in grid-lock which means little can be achieved. Another ingredient for market unrest is increasing interest rates. Higher rates is not a new story, but at some point the market will react badly when the higher rates are perceived as a detriment to stocks. Not only do higher rates increase borrowing cost to corporations, they also give investors an alternative to stocks in the form of fixed income investments. Any reductions to earnings is considered a threat to stocks. If those two factors weren't enough, a third ingredient has roiled this market-the trade war with China will hurt many multinational corporations, especially technology companies. At the same time these factors were weighing on investors nerves, oil was doing its own face-plant into the fire. Add it all up and the market reacted by puking-up half it's gain for the year, leaving the Dow up only 2.7%. Now for some good news: corporate earnings are up this year by some 30% year over year thanks to the Trump tax cuts, consumers are generally in good financial shape, interest rates are still relatively low, and I'm waiting for the annual Santa Claus rally. Bottom line, stocks are still the best option for long term investors especially now that they are even more reasonably priced.

Trick or Tweet

     It's the day before Halloween and it has been two months since my last post. The stock market has managed to drop about 9% in that time as measured by the S&P 500 ETF (SPY). While a drop in stock prices is always painful, this is a healthy and normal correction. Is there more pain to come? My guess is yes, stocks will move lower before slowly moving higher. Since I haven't sold anything lately, I haven't realized any losses on my holdings. Valuations of the S&P 500 index based on expected earnings have returned to a more normal 15.6x, down from a lofty 18.8x. I have explained the P/E ratio or "valuation" in my previous post "Exploiting the P/E Ratio", from 11/19/2016. So what should the investor do now? I still think stocks are the best game in town. While I have hedged my bets by buying a laddered portfolio of Federally insured CD's, I am not willing to give-up on stocks at this time. Some good companies are paying attractive dividend yields while trading at very reasonable valuations. One example is AT&T (T) which pays a 6.9% dividend and trades at only 5x earnings. I also like its competitor- Verizon which pays a 4.3% dividend and trades at 7x earnings. Both of those yields beat anything I can get at my local bank or credit union and the stocks offer the potential for capital appreciation over time. While I can't control the next tweet coming from the White House and the market's reaction to it, I sleep better knowing my stocks are actually paying me a return for using my money. One other interesting investing opportunity is playing out in the stock market now-legislation legalizing medical and recreational marijuana in Canada and some states in the USA. So far 9 states have legalized recreational pot and 30 states have legalized medical marijuana. I have been watching 3 stocks that supply the Canadian market-Tilray (TLRY), Cronos Group (CRON), and Canopy Growth (CGC). While I don't own any of these currently, I would consider the last two because of their capital structure and the medical benefits their products offer to patients. I tend to avoid "sin" stocks in my portfolio but I view these companies more like pharmaceuticals that help people who suffer from disease.

Wag the Dog

     Two days from this post, the current President of the United States is going to visit my home town of Evansville,In. This political rally will take place before a packed house at our new arena in the downtown and there will also be a huge crowd of protesters outside carrying signs rallying against Donald Trump. Here is a president who has had two of his campaign organizers convicted of crimes, who has routinely lied to the American public, who has been caught having an affair with a porn actress and a playboy model, then caught buying their silence for the purpose of winning the presidential election and currently is embroiled in an investigation that he colluded with the Russians to influence our election. In spite of all this, he still has the support of millions of voters and can attract thousands of supporters at every event. How can this be? Here's my take; it's the stock market that is the tail that wags the dog. The juice that the Donald has harnessed is the unrivaled ascent of our US stock market since his election. His support is based on bloated retirement accounts, jobs that a healthy economy can support, businessmen who are making fortunes running factories, wall street pros who manage our markets, and wealthy individuals who are getting wealthier by being invested in stocks. The recent tax cut enacted by Congress has given new life to our stock market by increasing the earnings of most American companies. Another powerful force unleashed by Trump is the deregulation of many industries. The combination of deregulation and tax cuts for businesses will prop-up earnings for the duration of his presidency assuming that it goes full term. Forget morality, forget human decency,and the dignity of the presidential office, it all comes down to money and the stock market at this time. On Thursday of this week, the Haves will be inside cheering on their hero and all others will be outside carrying signs of protest. What will change things besides a new chief executive? In my opinion, interest rates. When interest rates get to a level that causes investors to lose interest in stocks and choose safe but attractive alternatives, then some of the steam will escape from Trump's boilers. Right now the Stock Market has little competition for those seeking yield, price appreciation, and the safety of numbers. Our president has recently chastised his Federal Reserve Chairman for his intention to raise rates-a threat to Trumps powers. Further evidence is that Trump routinely uses the Dow Industrial Index as a metric for his performance as president. Someone recently told me that the stock market isn't everything. It is to the Donald.

Change

 One thing is certain in investing in stocks of companies and that is change. Change in the business of the company, change in the valuation, and change of management. I can't think of a single industry that isn't undergoing tremendous change right now. The computer industry is a perfect example. Back in the early 1980's, Apple computers were the rage. They had 64k of RAM and no hard drive. If you wanted to store your work, you bought an external 5 1/4 floppy drive. The whole outfit with a dot matrix printer cost well over $5000. Suddenly, IBM came out with the PC, causing the Apple 2E and 2C sales to plummet. I used to buy Apple computers at yard sales cheap and clean them up, add some software games, then resell them to people who thought they were left-out of the computer age. Then along came the Internet and some internet provider companies started offering  a free computer for signing a 2 year contract for dial-up internet.That ended my little enterprise abruptly.  Most midsize and large companies used to have what they called a"mini"computer to run their operations. It took up a huge air-conditioned room and cost hundreds of thousands of dollars. Now days, companies just contract with "cloud"providers who run the operations in huge data centers for a monthly fee. The makers of mainframes and minis had to scramble to find new businesses to keep the doors open. Any technology company that can't constantly reinvent itself will either be bought-out or die. Currently, some of the biggest names in tech are trying to stay pertinent by transitioning from a manufacturer or software provider to service providers. Microsoft, IBM, Hewett Packard,Cisco, Xerox and many others are searching for new sources of revenue. The auto industry is also undergoing a huge change. Soon, the autonomous car will be commonplace. It will run on batteries and get recharged from household current. Successsful investors of the future will have to determine which companies will benefit from the new products and changing consumer behavior. I have no idea who the winners will be but I will be watching to see how the established companies compete with nimble upstarts who will try to unseat them. Instead of trying to predict the eventual dominate player in a new technology, I would rather invest in the component supplier who makes a "must have" part that is critical to the technology. At the current time these component makers for cell phones are out of favor due to slowing growth in smartphone sales which has investors spooked. I don't see any alternatives to smart phones at this time so I will be adding to my positions of MU, LAM, and possibly NVDA for AI exposure and autonomous technology.

If You Want It Done Right............

      Maybe I am just getting grouchy and particular in my old age, but sometimes when I get "help" out in the garden, I am never satisfied with the results. My fellow gardener, who is 15 years older than me, feels the same way when I help him. Everybody has their own ideas about the way things should be done. I feel the same way when it comes to my investments. Nowdays, people have choices about how they go about tending to their nest-egg. One option is to have a "guy" who is supposed to act in your best interest and make you money. The fact is that this guy will make money regardless of whether you do. If you don't have the knowledge to invest yourself, how do you know he is selecting appropriate investments for you? Another option is to buy all mutual funds. Most mutual fund families actually hire an outside firm as advisor to select the investments for the fund. So your actually hiring a company who hires a company who hires some people to manage your money. Another choice is to buy a passive investment which tracks an index like the S&P 500. This can be a mutual fund or an ETF which simply buys the stocks contained within the index. When the market goes up you might make money and when the market goes down you lose. Your only decision is whether you should be in stocks or not. Another mutual fund option is the "fund of funds" portfolio. This is where your advisor sells you a mutual fund that contains other mutual funds, usually within the same family of funds. I believe in diversification but this is simply dilution and usually a losing position. My last option is to just do it yourself. It takes a little conviction and some homework but the rewards can be worth it. Picking your own investments can be profitable in both up and down markets. Selecting undervalued stocks when the overall market is high can limit your risk and provide income when the averages are declining. Knowing when to lighten up on stocks and select alternatives is something passive investing doesn't do. Most mutual funds are required by charter to have a certain level of stocks in their portfolio. I own some mutual funds, ETF's, passive investments, and even have a "guy" or two to lean on but I like the control I have by owning stocks that I selected myself. Tending to my portfolio is a lot like gardening. If you plan your garden carefully, buy good seeds and stock, then keep it weeded, it should produce good yields. Likewise, buy good stocks, monitor their progress, weed-out the losers, and reap the rewards.

2018 Mid Year Review

     It's that time of year again for me to review the picks made in the 2018 Forecast. Even though I did mention some individual stocks, I now use ETF's and some sector mutual funds to indicate my favorite sectors. The first sector I recommended was the Financial sector and I used the XLF as my benchmark. This ETF is off about 2.25% so far this year. I still like this sector for all the reasons stated in my forecast but the fact is that overall loan demand is low at this time and the fundamentals of the business is in question. To compensate for the slow growth, big banks are planning to return record amounts of capital to investors through stock buy-backs and increased dividends. My second choice was in the energy sector. I  referred to two investments: VDE which is a Vanguard mutual fund and XLE which is an ETF. VDE is up about 7% this year and XLE is up 6%. As expected, energy has stabilized this year and I expect this to continue for the foreseeable future. Another oil related investment was the Alerian master limited partnership ETF symbol (AMLP). This investment has a yield of about 8% but has not appreciated this year so far due to some technical issues within the MLP space. My last recommendation was the XLK, which is the S&P ETF invested in Technology. This fund returned over 9% so far this year. Some analysts  believe that there is some trouble coming to the technology area for the short term. If a trade war breaks out- and it looks like it will, then the global supply chain for many technology companies will be interrupted.
     I am still comfortable with all my recommendations but I am getting a little nervous about the market as a whole. My reasoning is that we are in a historically long bull market and something is bound to end it soon. The old saying that bull markets don't die of old age is true-some catalyst will cause a reversal in stocks and a trade war may be it. There is also the possibility that the Fed will raise rates to a point that causes earnings to decline and investors to jump into fixed income investments like CD's or bonds. Some of my retirement funds have already been moved into the best yielding CD's that I could find through my brokerage account. These CD's are federally insured but don't yield a lot, however, if the market sells-off I will sleep better knowing that my retirement is still on track.

Passing The Torch

    Something profound happened on Friday night June 22 at about 10:30 pm. The person who initiated this blog passed away at age 93. She had suffered from dementia for about 10 years and God finally called her home. This was my mother, Ella Mae Sheets. She would have liked for me to be a good student in school, but I wasn't. She would have liked for me to become a professional like a doctor or a lawyer, but I didn't. But something happened about when I turned 20 years old that created a bond between us that lasted for the rest of our lives.We began a dialogue about investing that created a spark in me that still burns hot. Our first investments were in South African gold mining stocks. I took time out from my partying ways every week to corroborate with her on the progress of our investments and to discuss other stocks for further research. This dialogue continued for many decades. It was our common bond. I seldom bought or sold a stock without informing or conferring with her. She often consulted me about what she was buying or selling. Something amazing happened during this partnership-we were making money! Not always of course, but over time, our gains exceeded our losses. Our disagreements were mostly just challenges to force a defense of a stated position. Over time, our separate portfolios grew, not because we traded often, but because we let our profits grow. After Mom became unable to manage her accounts due to the dementia, I assumed the management of her portfolio. I was surprised to see that many of the stocks that I had mentioned to her were positions she had taken. She was actually listening to me all those years! Neither my father or mother made much money during their working lives, but because my mother took a keen interest in her personal finances, she was able to retire comfortably and live out her life with the best care possible. I owe much to this woman for instilling in me the notion of saving for retirement, investing wisely and controlling my expenses. I just hope that the torch passes to future generations.

The Next Big Thing

     Everybody wants to be invested in the next blockbuster stock. Once the future craze is identified, an investor must figure what company(s) will benefit the most from it. Based on what I've been reading in Barrons and other financial publications, I have decided that artificial intelligence (AI) will be huge in the years to come. AI can be used for almost any application where large amounts of data must be analyzed and conclusions reached for efficiencies and problem solving. One easy example laid-out in Barrons uses two similar large retail banks- Bank (X) and Bank (Y).  They both notice that their delinquencies and charge-offs due to bad loans are increasing at an alarming rate. Bank X contracts with an outside firm who uses AI to analyze their data. Bank Y uses "In house analysis" and no AI. The Board of Directors at Bank Y decides to lower the credit limit by 50% for all credit card holders to control the bad debt losses. This also costs them millions in interest payments and lost accounts. However, Bank X has discovered through their analysis that most of the charged-off debts came from customers who had their direct deposits halted within the past 3 months. Yup, the direct deposits were paychecks and those customers had lost their jobs recently and were living on credit that they couldn't pay-off. Therefore, the Board of Directors of Bank X just had to get a list of the accounts with a stop on the direct deposit and act on only them. This is the power of AI. The way I see it , in the future, it's a must have for all successful companies. Not only that, but also consider autonomous cars and the massive amount of data that will use. The Internet of Things (IOT) is another huge developing technology where all new appliances will be wired to the Internet for monitoring and auto diagnosis.
     There are several stocks which are trading near their all-time highs because they enable these new technologies to function. I have owned several of them for a while and was tempted to sell this morning for some quick profits. However, I decided that the potential of these stocks far exceeds their current price, so I still hold them. There is no guarantee that these companies will be the ultimate winners in the technology space because there is always the potential for an upstart to unseat them with a better product. At the current time I just have to go with what I know. My picks include Micron Technology (MU), Xilinx (XLNX), Lam Reasearch (LRCX), and Nvidia (NVDA). As always I like to buy on dips, especially with high valuation stocks like NVDA but when the next correction comes, I'll be looking to add to my AI portfolio.

The Rollover

     At almost 66 years old, I decided to perform a rollover of my 401k retirement savings into an IRA at my discount brokerage account. According to the plan rules set-up by my former employer for the 401k, I would have to do this by age 69 1/2 anyway. My reasons for doing this were many, I didn't like the limited choices offered by the old plan, the customer service was sketchy, the website was clunky, and I wanted to derisk my portfolio by putting a substantial amount into federally insured CD's. I will still hold some stocks, mutual funds and ETF's in my rollover account but having guaranteed income without any loss of principle is attractive to me at my age. When it comes to customer service, my broker, TD Ameritrade, really impresses me. They answer the phone 24/7 and are knowledgeable and helpful. Sometimes in life, things happen during non-business hours that need attention immediately so it's good to know they have my back. Most employers contract-out the administration of their retirement plans to the lowest cost contractor. Your calls for assistance are often directed to third world countries. The people who answer the phone are trained to speak English and read the plan rules from a manual. They often have several companies to service thus several manuals to refer to. This can be confusing to them when trying to read and understand all the complex rules regarding rollovers and nuances of each particular plan. I also have trouble understanding some of these folks because I have poor hearing and they have heavy accents. What I have learned is that they can often give wrong advice which can cause major problems when trying to perform a rollover according to IRS rules. The last thing I need is a very large tax liability because someone in Malaysia or India gave me a bum steer. Over the years, I have challenged their instructions when what they were telling me really just didn't make sense or differed from what I read in the same manual they have. My advice is to question them if something just doesn't seem right. Plan participants of any age can elect to rollover into an IRA. My only warning is to check the rollover account for fees which can eat into your returns.  Anyone who is not happy with their current plan should consider the rollover option. The receiving firm should be able to walk you through the steps to complete the transaction.

Stock Splits, Stock Dividends, and Reverse Splits

     Seasoned investors have noticed something about the stock market that has evolved over the last 20 years or so: stocks just don't seem to split anymore. In the old days, when a stock approached the $100 mark, the board of directors would often approve a stock split to lower the price to a more affordable level. Retail investors like a lower stock price so they can buy a "round lot" which is 100 shares. Anything less than 100 shares was called an "odd lot" and the broker charged more for it in commissions. Nowadays, with all the discount brokerages offering cheap commissions, trading in odd lots is not expensive anymore. One example of a common split would be the 2for1 split. If you held 100 shares before the split, you would own 200 shares after. For every one share you owned, they gave you an additional share, thus 2for1. A look at the stock market page today shows more stocks over $100 than under. Some stocks are even trading over $1000 and have no plans to split. So why don't stocks split anymore? One reason may be that companies don't care if retail investors are buying their shares directly. With the popularity of mutual funds and ETF's, a lower stock price is irrelevant. Companies can still have a widely-owned stock and not incur the cost of sending every holder annual reports. The fact is that an investor makes no money in a split. Even though the number of shares held increases, the price is adjusted down to make the holding in dollars unchanged. Stock dividends are also a rare occurrence these days. It used to be that when a rapidly growing company needed to reward investors, they could issue additional shares instead of cash which was needed to fund their growth. A stock dividend would not result in the repricing of the shares and it usually was expressed as a percentage of shares owned.  A reverse split has the opposite effect as a forward split. It is used as a tool to increase the stock price and reduce the shares outstanding. An example would be if you owned 100 shares of XYZ corp and they declared a 1 for 50 reverse split, you would end up with 2 shares. Of coarse, the stock price would increase by a factor of 50 but your holdings in dollars will not change. Companies use reverse splits to boost their stock price when it gets so low that they are in danger of being removed from the index or exchange where they are trading. Another result of a reverse split is that many investors are forced out because their holdings are reduced to a fraction of a share which is automatically sold. This reduces costs for the obviously troubled company. Bottom line, healthy companies are reluctant to split their stock anymore.  In 2017 the total number of splits numbered in the single digits. So if you are hoping for a split of one or more of your holdings-don't hold your breath.

Risk

    After having served on the Board of Directors for a local credit union for the past few years, I have learned much more about risk and how to manage it. Financial Institutions are in the business of risk, so they must be able to effectively identify and manage many different types of risk. Loaning money to strangers is about the riskiest business I can think of, so lenders must have a whole department devoted to mitigating risk. The recent increase in volatility in the stock market has also increased the risk of holding stocks. This is true even if you hold mutual funds or annuities that have a stock component. Since I am no longer in the accumulation stage of my life, I am more sensitive to the market risk than I used to be when I was working. I can no longer afford to have such a long term perspective as a younger person would. One type of risk that I am currently attending to is concentration risk. Even though I happen to like the prospects of the financial sector, I have come to realize that I am too heavily concentrated in bank stocks and other financial companies. I have taken steps to reduce my exposure to this sector by placing some sell orders (limit) just this morning. Just because this market is in correction mode doesn't mean that there aren't days of strength that I can sell into. In order to be tax efficient, I have also placed some sell orders of some positions that just aren't working out. Remember, any capital gains taken in a given year can be offset with capital losses to minimize your tax burden. Any excess capital loss over $3.000.00 must be carried-over to following tax years, where it can be used to offset gains and income. I try to match any gains with losses to achieve a near zero reportable gain where possible. The proceeds of these sales will be split between safe fixed income investments like CD's and some stocks on my wish list. I still like some technology stocks and also some defense related issues. There are currently some very attractive valuations on leading chip stocks due to the market sell-off. In conclusion, check your portfolio for excess concentration in any sector, diversification is the key for mitigating risk.

RIDIN THE STORM OUT

    Reo Speedwagon recorded this song in 1981 and the tune is still bouncing around in my head. With the volatility that we've seen lately in the stock market, many investors are wondering where they can hide to ride out the coming storms in financial markets. The answer is that it depends on many things like: your age, your risk tolerance, where your money is located ie. IRA, 401K, your tax situation, and so on. If you are 20 years away from retirement and are still building up your retirement account in an IRA or other retirement account, you should do almost nothing. Think of the increased volatility as a chance to buy good stocks a little cheaper. I doubt that the current economic climate will affect your portfolio 20+ years from now. If you're closer to retirement, like 5 years or so, then you should be thinking of derisking your portfolio by adding safe income producing assets like Cd's to the mix. I still don't like bonds because the increasing interest rate environment will create a capital loss if a sale is necessary. Most retirement plans within 401K's have a fixed income option, it doesn't pay much but it does provide safety during market downturns. Given the current level of interest rates paid to investors for fixed income products, dividend-paying stocks with reasonable valuations are still the best choice for most investors. A dividend yield of 4-6% is available on some blue chip companies in the utility sector, communications sector and some mature tech names. For those who are already retired, income often trumps growth as an investment objective. Building a laddered CD portfolio that is FDIC insured can create income and provide peace of mind. As rates increase, maturing CD's are reinvested at higher rates. I have just completed my taxes for 2017 and am reminded what a pain the K1 tax reporting for MLP's can be. Even tax software doesn't handle this task very well. After over 10 years of doing this, I still feel incompetent. That being said, MLP's provide excellent income, sometime tax-free, and are an excellent estate planning tool. I won't go into details here but most brokers can explain how they work. Another option is REITS this stands for RealEstate Investment Trusts. They are stocks that hold realestate assets that produce income. The income is then distributed to investors at a rate established by statute. Exposure to both REITS and MLPs can be achieved through ETF's and mutual funds. Finally, market volatility gives investors a chance to buy some stocks that are currently being taken to the woodshed.and whooped like Facebook is currently. I have recently placed a limit order for FB that is much lower than the current price. I believe that a P/E ratio of 17x is reasonable for the stock after the breach of trust and the mismanagement of the scandal. The limit price is easily calculated by using the methods described in my post from 11/19/2016 "More on the P/E ratio".

Change The World

     In past posts,I have described how investing is highly individualized. Every investor has unique needs that can be met by using a targeted approach with their asset allocation. There is also a way to achieve your investment goals while supporting your environmental, social and governance (ESG) agenda. I personally feel that tobacco is one of the most damaging products openly sold to American citizens. Tobacco related illnesses cost all tax payers millions of dollars each year not to mention the people who die from smoking every year. My solution to the problem of big tobacco companies who knowingly sell death is to avoid buying their stocks. I could have profited handsomely over the past 40 years by holding Phillip Morris but I decided to stick to my convictions by investing elsewhere. I also include producers of alcoholic beverages in my list of sin stocks to avoid. I realize that I look like a hypocrite because I enjoy my cocktails and an occasional cigar as much as anybody but I refuse to profit from the sale of these products. Recently, the worlds largest asset manager, Blockrock, has taken steps to address the problem of gun violence after the slaughter of 17 kids in Parkland Florida. Blackrock holds a significant stake in several major gun makers. With already distressed stock prices, the gun makers cannot afford to ignore such a major stock holder. Other asset managers have also joined the effort to reform the gun industry by threatening to divest their holdings unless action is taken to reduce violence. Unlike my puny effort to reform big tobacco, I'm sure that the large asset managers have the attention of the gun industry. How can the individual small investor aid in the effort to improve society? Pay attention to the holdings in your mutual funds and ETF's. Most financial sites post a list of the top 10 holdings of each fund. If you see any stocks that produce products that you find offensive, then don't buy. It can take a lot of time and trouble to research your retirement accounts and other investments but there is an easier way. Most large asset managers now offer some socially responsible investments (SRI) for clients. The long term performance is pretty good also; the MSCI KLD index for socially responsible investing has returned 10.46% per year vrs 9.93% for the S&P500 index since 1990. Money talks so when large asset managers and pension fund managers hear from participants that they care about (ESG) investing, then we can change the world.

Why Dividends Are Important

     Here we are in the midst of a stock market correction. It's a scary time for working people who are worried about their retirement funds. For nine years we have gotten used to seeing steady gains in the value of our 401k's and IRA's. The next statement from your broker may shock many savers into panic selling or even a more disastrous move into the bond market via bond mutual funds. I believe in a "buy and hold" strategy for stocks for the most part. The stocks I want to hold for the long term are companies that have strong, established businesses that pay an attractive dividend. A dividend of only 2-3% may not seem too impressive now, but in the long run it can be a significant portion of your total return. If you look back at the total return of the Dow Jones' 30 stocks for 100 years, the total  return is 9.4%. Of that, about half is price appreciation and about half is dividend yield. Therefore, without dividends, your return would be about half as much. When a company increases it's dividend on a regular basis, your investment yield increases as you hold the shares. Remember, your investment yield is based on the amount you have invested and not the current price of the shares. Market pundits call a 10% decline in stocks a correction and a 20% drop is a bear market. We are not in a bear market yet. The average bear market lasts about 10 months but several have lasted over 20 months, one in 1973 and another in 1980. It's not likely that during these down markets that you will see any price appreciation of your portfolio but that portion of total return from your dividend is likely to be intact. Many companies are loathe to cut a dividend that has been paid to shareholders for many consecutive years. When I look at the fixed income universe for attractive and safe places to put my money, I don't see anything that compares to dividend-paying stocks with good long-term records of paying dividends.

What Goes Up....

          It's happening. This stock market is finally correcting. Everyone knew it would, we just didn't know when. At the time of this post, the Dow Jones Industrial index is off about 8%. I personally think there is more pain to come, possibly up to a 20% haircut or more. At times like this, all stocks are at risk of being punished. The latest good earnings report is ignored, the future expected earnings are ignored, rational decisions are not being made. Just like leaving a crowded movie theater, everyone wants to get to the exit at the same time. What should the long term investor do at a time like this? I am looking over my portfolio for positions that I want to add to. As my readers should know by now is that when I have bought shares recently, I have only bought 1/3 to 1/2 of what I wanted. That way I can take advantage of lower prices to fill out my positions. It's also a good time to consult your annual forecast and begin to position yourself according to your prognostications. You DID make a forecast didn't you? If not, it's not too late. It only takes about an hour and could make you thousands of dollars. Some of the new positions that I want to add to my portfolio includes at least one FANG stock and one defense related company like Lockheed Martin. These issues have been just too rich for my blood so I'm looking for a more attractive entry price. Having cash on the sidelines at a time like this gives me peace of mind and ammo to gun for bargains. There is one group of investors who are dancing in the streets right now- they are the short sellers. As described in my post "the short sale", these guys profit from a declining market. They have had a long dry spell so I hope they are happy now. At some point, short sellers will have to "cover" their positions which will help end the slide. That means that they will have to buy the shares that they had borrowed and sold. This short covering plus bargain hunters, will eventually put a floor under stock prices. In my opinion, what really spooked this market is the fact that the yield on the 10 year treasury bill got too close the that 3% point. It reached about 2.84% before the sell-off. One major fear of wall street professionals is what is called an inverted yield curve. It almost always predicts a recession. Basically, an inverted yield curve is when short term rates are higher than long term rates. Buying a 30 year bond is riskier than buying a 10 year instrument and thus should yield more. In conclusion, this sell-off is long overdue and actually healthy for the market. Stocks had simply gotten ahead of themselves and this shake-out will help determine their fair value.

Stocks, Bonds, and Interest Rates

     I should have posted this a long time ago. I want  to explain what a stock is and how it is different from a bond and how interest rates affect both. First, a share of stock is actually ownership in a company. If you have one share of Intel, you own the company along with 6.8 billion other shares. Your percentage of ownership is so small, I don't even have a calculator to figure it, but that dosen't mean you won't make money by holding the stock. In contrast, owning a bond issued by Intel, is simply you making a loan to the company for a predetermined amount of interest paid to you. Which investment is better? The answer is dependent on many factors including your investment objectives. Regular readers of this blog know that I am not recommending the purchase of bonds at this time. The reason is that in a period of increasing interest rates, the principle of your bond investment WILL decrease in value if you sell it before maturity. Just like stocks, bonds offer investors the opportunity to lose their investment dollars. FYI, the total value of the U.S. bond market is about 40 trillion dollars, in contrast, the total value of the U.S. stock market is just 20 trillion dollars give or take a trillion or two. So the bond market is twice as big as the stock market. On a daily basis, bonds trade about 700 billion dollars a day while stocks only trade about 200 billion dollars. Bonds come in all shapes,sizes, and flavors: Muni bonds-issued by states, cities and counties (these are free from federal taxation), corporate bonds-issued by companies to raise money for operations, government bonds-issued by Uncle Sam to finance the huge budget deficit, and individual agencies of the U.S. government to finance operations. There are too many details of each type for this forum, but I would be glad to answer any questions on any if I can. There is a time for stocks and a time for bonds, and a time for safe investments that avoid them both. I still like stocks at this point for reasons explained in previous posts. Bonds had a long and profitable run for about 20 years but that ended after the financial crisis in 2008. I want to hold bonds during a period of DECREASING interest rates which we are not in now. Therefore, I have sold most of my bonds except the ones that I plan to hold to maturity. I have also sold any mutual funds that are "balanced" because they have a bond component which could cause losses in the future. As for interest rates, I only keep a close eye on the 10 year treasury, it is currently at 2.74%. The stock market is getting jittery because this rate is increasing rapidly. In my opinion, the 3% range will spell trouble for stocks because it makes fixed income investments like CD's attractive to investors. That's why I own both CD's and stocks. I sleep better knowing I have deposits in the local Credit Union that are safe and sound and also have stocks that can benefit from Trump's tax cuts to corporations.

HASH

     I used to eat a lot of hash as a kid. It was leftover meat diced up with some potatoes, carrots and onions added and heated up. We added some ketchup to get it down and keep it down. I have some leftover crap on my mind that I wanted to lump together just to get it out of the way. First of all, some people have called and expressed disbelief at how fast this stock market is going up. The worry is that it will turn suddenly and create losses fast. My take is that there are valid reasons for the rapid run-up in stocks. The new tax package is the main reason for an overall repricing of stocks. The tax reduction to 21% for most companies will flow right to the bottom line, increasing earnings. Higher earnings means a higher stock price may be justified. What will the companies do with this windfall? Many have already given employees bonuses and hourly wage increases, but that is just a drop in the bucket compared with the large increases in earnings yet to come. The really big deal is that many companies will increase their already large stock buy-back programs. This is where they go to the market and buy their own shares, thus reducing the number of outstanding shares available to investors. The net effect is that the fewer shares will have a higher EPS (earnings per share), AND like any commodity, there will be a shortage of shares for investors. When the supply goes down, the price goes up, that's just econ 101. Jim Crammer is already hammering on this point on his tv show Mad Money, especially concerning the large bank stocks, which have been buying back their shares by the billions of shares for years. Some high quality industrial companies also have restricted the supply of their stocks, like Caterpillar, 3M, Honeywell, and Ingersoll Rand. Some people, like my wife, thinks this whole thing will end badly. This is why we are moving her retirement accounts into one rollover account where we can react quickly in case we want to bale out. Money moved out of the traditional retirement accounts is usually liquidated upon transfer, so that gives us an opportunity to take a more conservative position with her money, like buying some CD's which have yields approaching 3%. I also wanted to comment on the types of stocks that people ought to be buying now. As I confessed in my last blog, I have held on to some "buggy whip" type companies hoping that they would come back,(ain't going to happen). Look to the future for your new investments with an eye for value. I just read Barons magazine's Roundtable discussion and saw several stocks recommended that I had previously mentioned in my blog. Micron Technology (MU) has a bright future, Lam Research (LRCX) makes the equipment that Micron and others use, so does Applied Materials (AMAT). The future is digital, so that is where your investments should be too. For reasons discussed earlier, Financials are also on my buy list. If individual stocks are not your thing, consider using ETF's (exchange traded funds) for diversification and sector exposure. I like the (XLE), (XLF) and the (XLK). I'll let my readers hash out the details.

Confessions of a Loser

     Just like some Catholics occasionally feel the need to go to confession, I now feel the need to come clean with my readers. I'm not a very good investor. I don't own Amazon, Google, Facebook, Netflix, Bitcoin, Apple, or any other superstocks that have made millionaires overnight. While doing my year-end tax planning, I had no trouble finding some embarrassing losses in my portfolio that I used to offset the gains that I realized during 2017. I also keep lousy records of my investing activity, especially concerning my total yield from holdings. I have been way too conservative with my money for way too long. This means that I have held too much in cash which has hardly paid anything for a long time. Over the past several years, I have used a couple of full service brokers who charged me an arm and leg to sell me some lousy mutual funds that under performed the market. I have also bought several pricey Unit Trusts that almost always lose money. I have even put a modest amount into an Annuity out of desperation just to get a slightly higher yield than banks offered. Needless to say I don't even understand everything about this Annuity that I should. I did own Facebook briefly but I sold it for a modest profit. If I just held it, I would have a very large gain. When it comes to Apple, I thought that the ipad was the stupidest thing I ever heard of. I could go on and on but you get the idea. You don't have to be a genius to be an investor. You don't even have to be above average in intelligence. You just have to follow a few simple rules that I have laid out in some previous posts to succeed as an investor. I hope others can learn from the mistakes that I have made, but the most important point I'd like to make is "Don't be afraid to make your own mistakes".  One other thing, even after all these blunders,  I still enjoy a pretty comfortable retirement. The fact is that only about 52% of Americans own stock. These are the people who are enjoying the huge gains that stocks are racking up right now. Without the dividends and growth that I have reaped from stocks, I would probably be working still, if an employer would even have me. The bottom line is that if an idiot like me can retire early, stay retired, be debt-free, and have a retirement income similar to my working years, you can too.

A Good Time To Buy

     Timing your purchase decisions for stocks can be a fools' game. Why do I say this? First of all, nobody knows when this market will stop going up and reverse course. Everybody knows that it will correct but we just don't know when. If we all just waited for a correction to invest, we may miss out on some substantial gains. Secondly, just like playing the powerball lottery, you probably won't win, but you certainly won't if you don't buy a ticket. Anyone who is not in this stock market yet has missed-out on some impressive gains but that should not keep them out of the market's future gains. Of course, any new money entering this pricey market will be at risk from an inevitable correction. So how can that risk be mitigated? The easy answer is to ease your way into the market by taking small bites of your favorite ETF's or mutual funds. By keeping cash on the sidelines, investors can "average down" on these investments by buying more when they go on sale. Anyone who is saving for retirement through a qualified plan at work should certainly keep up their contributions regardless of the current level of the market indexes. A long term perspective changes the complexion of market timing. Many years ago, I was working on the factory floor and had managed to accumulate some extra money that I wanted to invest. I picked out about six stocks that passed my criteria for growth and income. I was ready to buy those stocks no matter what the market averages were doing. I can remember being ridiculed by my co-workers because at that time, the Dow Jones Industrial Average was setting a new all time high. That was 32 years ago and the Dow was at the lofty level of 1265. By comparison, the Dow was recently off its high and settled at 25,383. Gee, I don't feel so silly now! Believe it or not, I still own some of those stocks from back then. Of the ones that did really well, I sold some shares to recoup my initial investment and redeployed the money into new ideas. Not all my picks were winners but over a long time, the winners should make-up for the losers. That is why diversification is so important. My final thought is about having the right temperament for long term investing. Last year, I was preparing a lady's tax return. When I got to her brokerage statement, she told me that she had to fire her broker and hire a new one because she had lost $500 in one day.  Since we are not allowed to offer financial advice, I just held my tongue. If I could have offered my advice, I would have told her that she had actually not lost anything if she didn't sell. I would have also pointed out that fluctuations in a portfolio is normal and part of stock investing. Additionally, anyone who cannot stand the volatility of stocks should be invested in C.D.'s at their local bank or Credit Union.