2018 Forecast

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

Politics, Religion, Sex, and Money

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

Crypto Mania

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

Growth vrs Value

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

You Can Do It

     In our society, self-help is becoming increasingly rare. Most people don't believe that they can do auto or home repairs themselves. Calling a repairman for everything can get very expensive pretty quickly. The pros who perform the work can often go right to the source of the problem and get it fixed because they see the same problems every day. It would be bad for business if they told their clients just how easily and cheaply the washer, dryer, stove or air conditioner can be fixed. Some things are better left for the pros, but many things are doable with a little education. Recently, my daughter was having trouble with her washing machine. She told me how it wasn't pumping all the water out of the tub and leaving her clothes with a funky smell. I have repaired many washers with the same problem and knew with a 90% certainty just what the problem was. It usually takes me about 30 minutes and a $10.00 part to fix the condition. For my daughter, who hasn't ever done this repair before, this was a huge job. With limited tools and limited mechanical knowledge, she overcame her fear of failure and tackled the job, saving her family $175 in the process. Such tenacity can and should be applied toward your investing activity. Why should you pay for the services of  a financial advisor to manage a modest retirement account when a little knowledge can save hundreds or thousands in fees? The fact is that about 80% of professional money managers cannot beat the unmanaged index of stocks that they compete against. That makes a case for just buying an unmanaged index fund that tracks the market, like the S&P 500 index. Most mutual fund companies like Vanguard and Fidelity have such funds. The fees are low and you aren't paying someone to underperform with your hard earned money. Investing is not rocket science. I have laid-out some commonsense rules to guide you toward financial independence. As you become more comfortable with investing, try your hand at buying individual stocks to complement your mutual fund portfolio. I personally get bored with mutual funds and enjoy buying and following stocks. Just like fixing the washer, the hardest part is to get started.

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.