Mistaken Profits

     Years ago, when I had a job, I would often have free time to do some Internet research of  potential investments. I would also keep a close eye on my current portfolio in case something was happening to a position. By using yahoo finance or my discount broker's website, I could type in symbols of any company that I owned or had read about. One day I made a mistake when typing-in the symbol of Intel which is INTC , instead, I typed-in INT, which is a company called World Fuel Services. Instead of backing out  and correcting my error, I read about this company to find out what they were about. Turns out that I was fascinated by their business. They would provide any kind of fuel to any company or government anywhere in the world-for a hefty price. This means that if a government was waging a war somewhere in the world and needed aviation fuel, diesel fuel, gasoline or anything else, WFS was johnny on the spot. If an ocean-going freighter needed fuel on the high seas, WFS was there also. This company had been in business for many years and even paid a dividend. I was looking for potential investments and I found one entirely by accident. I pulled the trigger on ITC because it fit my criteria for a new addition to the portfolio: Stable management, reasonable valuation (PE ratio), good business model, regular dividends, reasonable debt ratio, WTH I'm in. I had a good run with INT for about 2 years, then I sold it for a nice gain which was long term to ease my tax burden. The reason I sold it was that fuel prices were starting to decline because new supplies of crude were coming on line due to hydraulic fracking in the USA. Fuel prices alone should not have hurt their business because they were basically a service business but investors don't always see it that way. Sometimes stocks fall because they are too close to a declining commodity. Anyway, I made a profit from a mistake. Why am I telling you this? Good things happen when you do your research-even if you make a mistake.

It's Different This Time

     Have you ever heard that before? How about "There's nothing new under the sun" or "The check's in the mail". Here's another one "Buy in May and go away". My point here is that cliche's have no place in investing. Every period in the investing timeline is unique. The "dotcom" era ended in 2000 with a severe correction in the new technology companies, most of whom had no earnings and little revenue. They were cash rich from selling stock to investors who bought the IPO (initial public offering). These companies were often analyzed by such measures as their "burn rate" which measured when they would run out of money. Another measure of a dotcom company was "eyeballs". This was a measure of how many people simply looked at the web site of the company. The theory was that eventually, those visits would produce revenue for the company, but it usually never happened. Just before all this nonsense came to a screeching halt in 2000, people were saying "It's different this time". Fact is that eventually investors came to their senses and stopped feeding money to these scammers. There is no substitute for a thorough analysis of an investment, which includes an examination of the balance sheet, income statement, and ratio analysis, including price to earnings, price to sales, price earnings to growth, and an understanding of the business you are about to fund.
     As I write this post, the average P/E of a stock in the S&P 500 stock average stands at about 20X earnings, historically, 15X is the norm. This means that stocks are expensive on a relative basis. Why is this? Well, interest rates are at a historically low level. That means that CD's, bonds, and other fixed income investments have really low yields. Investors are finding the best returns in the stock market. Many blue chip stocks have a dividend yield of over 3%. This beats a 5 year CD that yields 2% at best. The stock also has capital gain potential and is very liquid, meaning it can be sold at any time without incurring a penalty. Is it different this time? Is is safe to pay-up for a company to get a reasonable return? The answer is maybe. There are a few game changers in the universe of stocks such as Amazon, Facebook, Alibaba, Netflix, and Google (now called Alphabet). I just listed what is commonly called FANG stocks, they have rewarded investors for having the foresight of recognizing game changers. I would also include Tesla in this group. Do I currently have any of these stocks? No. My bad. I just own stocks that produce gas for your car, produce blockbuster drugs for disease, manufacture vehicles, write security software code, and manage the financial system of our country. Is it different this time? Not for me.

Debt

     I have always considered debt to be a four letter word. It is something that I avoided at all costs. My philosophy has always been that debt was the bane of the working class. Getting out of debt is the single most financially liberating experience of my life. I am proud to say that I have never financed a car and made my last mortgage payment in 1986. Just these two things have saved me many thousands of dollars over the years. These are dollars that I have and can invest, or use to fund my retirement or other cash purchases. Taking out a mortgage on a home that fits your lifestyle and is within your budget is something that is reasonable and often necessary. The difference between a mortgage and financing a new car is that the house you buy is usually going to hold its value or increase in value over the years. Financing a car is an automatic money loser. The value of that car, boat , ATV, camper, or any other toy is going to start depreciating as soon as it is driven or pulled off the lot. This means that you are making payments on the full value of an asset but you actually own something of lesser value. Not my idea of a good investment! Even banks that make a lot of auto loans are suffering now. Why? Every time large purchase incentives are offered for a model or make of a new car, the value of recently sold cars of the same model declines. Those cars are often held as collateral on the loans and the bank has less collateral in case of a default. When the default occurs and the bank has to repossess the vehicle and sell it at auction, there is usually a capital loss. Unlike a house, which often times holds its value, cars are usually an automatic loss. Housing is not always in a bull market but autos never are. If I could buy a new truck every year and drive it for 12 months, then sell it for a profit, I probably would. This is why I drive a 15 year old Chevy truck. A program of  "deferred gratification" will keep a person out of hoc and allow any new purchases to be made in cash. Make payments to yourself and earn interest on the money until you spend it, instead of paying interest on a loan for an asset that declines in value. You will find it harder to justify that new purchase if your hard earned cash is on the line.

Mid Year Report Card

     I would rather take the SAT test than back test my picks for 2017, There is little to crow about here. I wish I would have stuck with my conviction to not recommend any specific stocks and just stuck with the basics. Anyway, here I go:
     The Trump agenda has been a bust. The promised infrastructure build-out has been nonexistent. Last December, I mentioned four companies that could benefit from the increased spending on our infrastructure.
  1. ASTEC Industries- down 30% YTD
  2. JACOBS Engineering- down 10% YTD
  3. VULCAN Materials-flat YTD
  4. AECOM-down 15% YTD
The only bright spot in government spending has been in the defense issues which I will cover later in this post.
     I predicted that interest rates would go up this year and I was right about that. The FOMC raised rates twice this year for a total of 50 basis points (half of one percent). As predicted, bonds did poorly in this increasing rate environment. I had recommended a couple of financial stocks that benefit from rising rates. I will use an ETF as a benchmark for the financial sector-XLF- which holds many bank stocks and financial companies. XLF returned 6.9% so far this year. I expect the good performance to continue for the second half of the year.
     Energy did poorly for the first half of this year but I mentioned in December that I did not expect any large gains. I did mention that I thought crude would stay in the $50 range but instead, it has struggled to get there. I still believe it will end the year higher than it is now, and I still believe in the midstream MLP's which are not as dependent on crude pricing. The XLE which is a proxy for energy prices is down 12 3/4% this year.
     The Pot trade has been a bust too. The only stock I liked in the space was Scotts Miracle Grow, which is an indirect bet on marijuana, was flat on the year.
     The defense sector has remained hot this year for many reasons: Our military is overdue for increased spending on weapons, tensions from North Korea's missile testing, and Trump's campaign promise for increased defense spending . So far this year, Boeing is up 50% and Lockheed Martin is up 15%. Buying stocks with high multiples (P.E. ratios) makes me nervous, so I still don't hold these.
     In summary, I don't see the Trump agenda working for investors this year given the turmoil in the White House and both houses of Congress. However, even in this pricey market, I have bought a few value stocks that have been taken to the woodshed for missing their earnings call. Most recently I bought Goodyear Tire, symbol (GT). My reasoning is that no matter what the car of the future runs on, it will probably have wheels. I also liked the fact that it was trading at 7 times earnings-a huge discount to the market. I also bought McKesson because I thought this medical supply company was just too cheap. I don't know what my next post will be about but I hope that I don't have to mention the Donald.

On Vacation

     I recently returned from a vacation to Canada where I spent the week fishing and relaxing. I rarely worry about my investments while I am away from TVs and computers because summertime is also when money managers also are on vacation. Institutional money managers often trade in millions of shares of stock, sometimes moving markets. Between Memorial Day and Labor Day, the top brass of the big mutual funds turn over management of the funds to their subordinates  who have limited authority to make any large changes to the portfolio. This is why summer seems a little subdued for the stock market. The movers and shakers of the financial world are chilling out in Martha's Vineyard, enjoying the perks their incomes affords them. A major news story about politics or an individual stock can still roil the market, but generally, things are quiet. Summer is a good time to do some reading in financial publications for ideas that will help you build a list of investments to buy when the time is right. Some articles that I have read recently were about the emerging autonomous auto transformation. The implications of this technology are enormous. All these vehicles will also be electric powered and recharged by plugging into household current. I have heard it said that our existing electric grid is currently unable to handle the extra power demands of a large scale conversion to electric vehicles. If this is true, then the purchase of Solar City by Elon Musk was a stroke of genius. Elon is the CEO of Tesla motors, which plans to produce 1 million electric cars a year within 5 years. I don't know for sure if he can pull-off this feat but I wouldn't bet against a guy who routinely launches rockets into space and supplies the International Space Station. I have already been in Tesla stock and sold it for a quick profit but now I am looking for an entry point again. The transformation of the auto industry could be the biggest story of the last 100 years. Another point I would make about this is the technology required to make it happen. Computer chips that help the driverless cars navigate are being manufactured now by Micron Technology (MU). Lam Research makes the equipment which manufactures the memory needed by autonomous cars. Lam has been on a tear lately so buy it on a dip.

Acrophobia

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

Panic Mode

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