Dumb Luck

     I recently decided that with interest rates nearing record lows and could possibly could go lower, I should invest in a home building company. After doing a little research, I decided that KB Homes (KBH) would be a good choice. I placed the limit order on an aging computer with a faulty keyboard. Within a week or so, I received a confirmation that my order had been executed. When I finally got around to reviewing my portfolio, I realized that I had not actually bought KB Homes, instead, I bought a Korean bank holding company (KB). Oops. Apparently, the keyboard did not connect on the letter "H" and the symbol (KB) was purchased erroneously. By coincidence, the stock prices of the two companies were very similar. While researching my new holding, I realized that it had some features that fit my criteria for investment and the stock has actually gone up since purchase. This is not the first time that I have screwed-up an order and probably won't be the last. The first lesson here is to be careful when placing on-line orders, this could have been a costly mistake. The second point I would make is that good things usually happen when investing in the stock market. Over the long term, stocks of high quality companies will produce above average returns for investors, assuming a diverse portfolio. I never know for sure if the stocks I buy will be winners or losers but I do know that if I was not in the market that I would have no chance to participate in its gains. Just like buying a lottery ticket does not guarantee a win, not buying a ticket guarantees you will not win. A third and final point is to review your holdings on a regular basis to identify any dramatic changes to your portfolio. This morning, I noticed one of my holdings was up 40% in pre-market trading. I would be lying if I said I expected such a move in Biogen, I just liked the company's prospects and valuation. A recent half pot lottery conducted by the West Side Nut Club sold over 1.2 million tickets, resulting in a prize of over $600,000 for some lucky winner. Unfortunately, the holder of the lucky number, has failed to check their ticket and the money will soon be donated to charity. Talk about dumb luck!

Negative Interest Rates?

     At the time of this writing, I have read that there is about 15 trillion dollars worth of bonds issued worldwide that yield less than zero percent. This means that the borrower gets paid to use someone else's money. It shouldn't be like that. Just for clarity, if I borrow $1000 from you and promise to pay back $900 at a later date, that is a negative interest rate. How did it get like this? Many foreign countries are desperately trying to goose their economies by lowering interest rates. Each time rates are lowered, the effect is just not enough stimulus. Eventually the central banks of these countries reached zero rates and even lower in an attempt to ward-off a recession. Who is crazy enough to lend money that is sure to result in a loss? Apparently, lots of bond market professionals. When the price of a bond goes up, the yield automatically goes down, therefore, lots of people think that bond prices are still going to rise even though the yield is less than zero. Prices can continue going up because there is just too much money sloshing around in the world these days looking for a place to land. One systemic problem in countries like Japan, Germany, and France is that they have an aging population with lots of retirement savings and little need for consumer products like furniture, cars, electronics and appliances. Demand for these items keep factories busy. Currently many countries produce more than they consume, resulting in the need to export products to other markets. Without markets for these goods, factories will shut down and workers will be laid-off, possibly causing recession. I don't know how this will all end but I know it will end badly. Eventually all the tools in the Central Bankers' toolbox will fail to work and the world will slide into recession. Hopefully, the black hole of negative interest rates will not reach the shores of the United States, but some pundits are already predicting it will. I have disliked bonds for a very long time and like them even less now. I would rather be an owner than a loaner, that is why I prefer stocks to bonds. Stocks represent ownership in some of the healthiest companies in the world. When I see things get dicey, I like to buy stocks that are defensive in nature-like drug companies, utilities, and consumer necessities. People will continue to take their medicines, cool and heat their homes, and buy toothpaste and toilet paper until their out of money.

Liquidity

     Many years ago, when I worked on the factory floor of a filthy aluminum smelting facility, a fellow worker came in with some exciting news for his close friends. It seems that his wife worked for a life insurance company across the river and they were willing to sell company stock to willing investors. Several of my co-workers bought considerable amounts of stock based on the bullish comments of their friend. They bought the stock directly from the Chief Financial Officer (CFO) of the company, thereby eliminating the need for a stockbroker. Sounds great, right? Inside information about a small and growing company that someday may become another Prudential or Mass Mutual. Not exactly! The main problem with this investment is that the stock was not listed on any public exchange. In order to sell these shares, the holder would have to find a willing buyer himself, maybe even by placing an ad in the newspaper. In other words, the stock was illiquid. When things go bad or when I want to cash-out I like a nice easy way to exit a position. When a company has to sell its stock by solicitation, it usually means that they cannot or will not comply with the listing requirements of the exchange. Not all illiquid investments are bad, assets like precious metals, real estate, even CD's are designed to be held long-term. Scamsters often prey on unsophisticated investors with "private equity" and the results are usually a disaster for the holder of such stock. A better way to play this game is to buy an experienced company that invests in startups. These are called Business Development Companies or (BDC). This gives you the benefit of owning a piece of many small and growing companies, giving diversification, and liquidity by owning a publicly traded stock. Concerning the life insurance company- they were not required to provide investors with any financial statements that were audited by GAAP standards. There also was no analysts who covered the company and rendered an opinion about its investability. Basically your flying blind, handcuffed and upside down. Needless to say, many of my co-workers lost their entire investment in this company, but the lessons they learned lasted a lifetime.

A Lesson from Aunt Helen

     Sometimes investing lessons come from unlikely places. This one dates back to 1976 when I had purchased my first home and needed to furnish it with modern conveniences. I was lucky enough to buy a TV from my aunt, whose husband ran a Zenith cabinet factory here in town. He received a new TV every year and was allowed to sell his old one and I jumped at the chance. The TV was delivered by two hung-over flunkies who were supervised by Aunt Helen. She wanted to make sure that: 1. I paid her and 2. that I understood how to use the new technology called remote control. Her words are as clear in my head today as they were that day in 1976. She said "Once you get used to a modern convenience, you will never go back to the old way".  I know it sounds too simplistic but the fact is that I haven't had to get off my butt to change channels since that day. So how does that apply to investing? Any company that brings to market a product that offers an easier, cheaper, or even better way of living has a pretty good chance of success. Just look at Amazon. Now you don't even have to get out of your recliner to shop for your favorite clothes, furniture, toys, or whatever. Most groceries, including Walmart will bring your food right to your door. Netflix has eliminated the need to drive to a video store for renting a movie, even porn is served-up at the touch of a button. So what's next for the laziest generation the world has ever known? My guess is dining on restaurant- prepared food in your own home. Some restaurants such as pizza parlors have offered home delivery for many years but the scale of this trend is about to explode. Who will use this service? Just about everybody, busy mothers, tired workers, hungry stoners with the munchies, and the elderly who don't want to get out and drive. You can bet that this industry will have many challenges like heavy competition, shortage of drivers, safety issues, and low profit margins but it is unlikely to go away once it catches on in a big way. I don't know who will emerge as the winner in this industry but I have already decided to place my bet on (GRUB) Grubhub because they have a dominant position already and are actually profitable. There is no way I would pay the current ask price, so I have placed a limit order for Grub for a lower entry price even though the valuation is sky-high.  The beauty of Aunt Helen's wisdom is that it can be applied to any product, service, or technology that may come our way.

Dog Days

      As I write this, southern Indiana is suffering through a stifling heat wave. With mid nineties temps and very high humidity, any outside work results in sweat-soaked clothes in just minutes. Another guy who is sweating it out is Jerome Powell, the Chair of the Federal Reserve Open Market Committee. He is being grilled by Congress about monetary policy which directly affects our economy and capital markets including the stock market. Jerome is under pressure by our President to cut interest rates because that might cause stocks to rise which is how the Donald gauges his performance as President. I say "might" because a rate cut may signal to Wall Street that the economy is weaker than thought and could actually cause panic selling, an unintended consequence. Even though the President appoints the Federal Reserve Chairman and the Board of Governors, the Fed is supposed to be independent from any political influence. Trump has recently been bashing Powell in tweets and has even threatened to demote or fire him. When asked what would he do if Trump fired him, Powell answered that he would stay on the job because the President did not have the authority to fire him. Stay tuned because this could get very interesting and messy. Typically interest rate cuts are designed to ward-off recessions or even to soften a financial crisis, neither of which is happening. You can bet that Wall Street traders are hanging on every word of Powell's testimony and placing trades based on their interpretation of his answers to questions. Since I consider myself an investor and not a trader, I will do nothing about today's testimony to Congress. In fact I consider myself to be in a pretty good place. I have lightened-up on some stocks as they rocketed-up in June and built myself a war chest of capital for bargain hunting when a downturn does occur. I have built a fixed income portfolio of CD's that don't have a high return but are safe from market swings. The June brokerage statements just came in the mail yesterday and were surprisingly strong. Another plus is that many brokerages have increased their money market returns to the 2% range which actually generates some return for a change. Looking forward, I am interested in snagging some of the "post IPO" stocks which usually sag after the lock-up period has expired and investor enthusiasm wanes. Just because I missed out on past blockbusters doesn't mean I can't get lucky for once. As for today, I will stay indoors and hope my 25 year old air conditioner keeps working.

Think LIke a Millionaire

     When I was younger and raising my family, I had the chance to go to lunch with a group of local multi-millionaires. Needless to say, I was pretty excited because this was my chance to listen and learn how to become one of them. We met at a local pub and after introductions, they began to talk. To my disappointment, the conversation was not about making money or lucrative investments. The entire time was spent on a discussion about how to grow your own potatoes. I came home angry and dejected.. Those guys could easily afford to buy every potato in the state of Indiana without making a dent in their net worth. It wasn't until years later that I realized the lessons to be learned from that meeting. First, these guys were just like anybody else. There was no one secret to their success. They worked hard at what they did for a living and invested their money in whatever they were comfortable with. Second, they were misers. They grew their own vegetables because they liked fresh produce, liked working the soil, and saved a little money in the process. By taking good care of their pennies, they racked-up dollars over time. Privately, they even talked about what tightasses the others were. I remember a story about one in the group, who reportedly was worth $10 million, how he anguished over the purchase of a johnboat for fishing. I seriously doubt that any one of them had any substantial debt. Why would a guy who grows his own potatoes want to pay interest? Another trait they all shared was that real estate was a considerable portion of their holdings. One was a developer and another was a large property manager and landlord.  None of them drove fancy cars or dressed like they were worth a lot of money. They all lived in comfortable but modest homes. The richest guy lived in a duplex and rented-out the other half for income. Bottom line is that most millionaires are not easily recognized. The only difference between them and everyone else is the peace of mind they have knowing they can handle any financial difficulties for them or their loved ones.

MID-YEAR TUNE-UP

     Last December, I wrote my forecast for the year 2019. It is now time to check the accuracy and substance of my comments. First on interest rates, I stated that the Fed would probably not raise interest rates for the immediate future. That was correct, the Fed is actually hinting at a rate cut this year if markets deteriorate. I also predicted a slower growth environment for earnings due to the rate increases last year. That also is proving accurate. I predicted that the trade war with China will drag-on, causing price increases on goods manufactured in China. So far this year, Chinese companies have absorbed some of the additional costs due to tariffs but that will not continue very long. Eventually, costs to US consumers will go up if this trade war with China continues. Higher costs means an increase in inflation which is exactly what the Feds want. I also mentioned that the world oil markets were weak which can hurt our export of gas and oil and reduce employment. The latest jobs report showed an anemic 27,000 new jobs created last month. Oil continues to be weak but I don't believe this is anything other than the dynamics of a the global market for oil. It would take many years for the electric car business to put a dent on world oil demand in my opinion. The electric car batteries will be recharged with household current generated mostly with natural gas and coal. Oil companies will continue to drill and I will continue to invest in them for the foreseeable future, My forecast mentioned the treasury yield curve and how it was inverted late last year. The inversion was between the 5yr and the 3mo notes. Recently long dated treasuries have dropped dramatically to where the 10yr note is very close to the 2% level. Currently many short term notes yield more than the 5yr note. When the yield on short rates exceed long rates, I get a little nervous. It shows a lack of confidence in our economy. Bond buyers should get rewarded with higher rates for buying longer term bonds due to many factors involving greater risk. I am currently selling some of my gainers into pockets of strength in this market and investing the proceeds into fixed income. When I look at my holdings, I consider dividend yield (can I get this from a CD?), market multiple (P/E ratio), political risks (heavy Chinese dependence), defensive posture (I like drugs, medical and health care), and finally analyst opinions. I am not giving up on stocks, just easing back and taking what the market has given me. If stocks do correct this year or next, I want plenty of dry powder to apply to my buy list.