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.