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.

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.