The Past, Future and Present

     First. I look back at 2019 and how the financial markets treated me. It was a very good year to be a stock investor. The S&P index has returned over 28% year to date. Information Technology has led the way with a whooping 47% return. Communication Services was also unusually strong at 31% as this is usually a boring sector with a rich dividend. The laggard in the group was Energy with only a 10% gain on the year. What created such a great environment for stocks? In two words: Interest Rates. I remember exactly one year ago today, on Christmas Eve, the market reacted badly to the 25 basis point increase in the fed funds rates by sending the averages sharply lower. December of 2018 was a correction that literally was a Christmas gift to anyone who had the nerve to buy at a discount. Investors who picked-up these bargains were richly rewarded throughout 2019. During the past year, rates have been cut 3 times, creating a perfect scenario for stock gains. Looking forward to 2020, the Fed has indicated that interest rates should remain stable, another positive for stocks. What could derail this rally? First, trade tensions escalate, secondly, and unexpected increase in inflation and interest rates, third, an unexpected outcome in the presidential election or impeachment proceedings. I recently attended a convention for Credit Union volunteers and was taught how to predict the future. It involves looking at what is trending at the present and assuming that the trend will continue. Recent performance has worked for horse racing, so why not stocks? I predict that energy stocks which have suffered for a very long time will be strong in the new year. Even though tech companies have gotten a little ahead of themselves, I think they will also do well. I expect stable interest rates at least through the first half of the year so Home Builders should do well also. Let's not forget that this economic expansion is in its eleventh year, a record. What often works late in a bull market is small cap stocks. The best way to invest in small caps is through a managed mutual fund that has a good track record and low fees. Finally, its time to do a little year-end tax planning by looking for losing stocks that could offset gainers sold during the year.

Minorities are Welcome

      Unlike the big garden that I grow each summer, this blog is not targeted towards minorities. Most of my garden is devoted to vegetables that local people in my area shun. If I want to sell Collard Greens, I must find a market in the Black Community. Eggplant is a big hit with the Orientals who have located in this area. Europeans love my tomatoes, eggplant, and sweet potatoes. If it wasn't for these folks, I would waste more food than I use. However, this blog is targeted towards the 75% of people who own no stocks or financial assets at all. Becoming a member of the minority who own stocks is the best way to secure a comfortable retirement and achieve your financial goals.  In this era of ultra-low interest rates, stocks are one of the very few investments that can actually produce a positive return after taxes and inflation. For a young working person, putting aside a modest amount in a retirement account each week makes a lot of sense, especially if your employer offers a match on your contributions. In the old days, just saving money in a savings account produced out-sized returns over time due to the power of compounding interest, but that is not true today. In order to achieve positive returns over a lifetime now, a saver needs the premium that stocks offer in the dividend and appreciation in stock price. Buying a low cost mutual fund within your employer's plan offers diversification and the opportunity to participate in the stock market. I also recommend buying stocks outside of any retirement plan as a hedge against any of life's unexpected surprises. There is even a well discussed acronym that describes today's investing environment: TINA. This stands for "There Is No Alternative" to stocks. I  must admit that as a member of the minority who owns stocks and financial assets, I sometimes feel some discrimination against us in the 25%. Taxes on interest, taxes on dividends, taxes on capital gains and increased record-keeping to track my basis and performance, are all distractions. There are even discussions from left-leaning politicians to tax the amount of your net worth. In the end, the positives far outweigh the negatives and I am happy to be a minority.

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.