One Size Fits All?

A one size -fits -all concept almost never works for the consumer. This is especially true for investors. What is the right financial strategy for a retiree may not be appropiate for the younger person who is supporting a family and saving for an eventual retirement. Investments must be highly personalized and tailored to the goals and needs of each individual. For many years, financial planners have advocated for a 60/40 mix of stocks to bonds, which is basically a one-size-fits-all financial plan. Sometimes it works and sometimes, like now, it dosen't. The current market environment is a very tough one. We are on an upward trajectory for interest rates because of unusually high inflation which causes stocks to fall and bond yields to increase with declining bond prices. Bond prices and bond yields move in opposite directions. So what is an investor to do? The answer really depends on your personal situation in life. For the young family man, stocks may still be the best place to ride out this storm as long as he holds a healthy amount of emergency cash or liquid assets. Dividend stocks can still beat the return of even the longest dated Treasury Securities. The key for the younger crowd is that they have plenty of time to make-up for market losses incurred during a market downturn. There is nothing wrong with adjusting a retirement portfolio to lock in some gains and reposition into some safer investments like brokerage CD's or short dated Treasuries. I would avoid holding much in the local banks and credit unions because they will be the last to raise their rates on deposits but some of the first to raise rates on loans. For the soon to be retired and the already retired like me, I don't really have the long term perspective as the young working person. My personal strategy has been to deploy capital into the fixed income markets to generate income in retirement plans and taxable accounts. Treasurys and brokerage CDs are now paying yields not seen for several years which is interesting to me. Knowing that interest rates are going to continue up, I am only buying terms of 2 years or less. As rates climb, I will take advantage of the higher rate with additional purchases of higher duration. This is called laddering and takes advantage of the higher rates by locking-in the higher rates for longer and the shorter durations will mature and roll-over into higher rates at that time. I still have most of my stocks even though they are causing great pain now, however I believe most are great companies and will recover when this interest rate cycle reverses. My goal is to live long enough to see this happen. I also have bought my quota of US Tresuury ibonds which are indexed to inflation and are currently paying over 9.5% interest for the rest of this year. If you are adventureous and like scary roller coasters (I dont), there are some compelling stocks that could reward you in the next few years. The electric car industry is going to change how we comute in the future and is an unstoppable trend. Tesla has been beaten-up recently and trades at an attractive level now. EVs will create new demand for computer chips and raw materials for battery production. Lithium and copper are just two commodities which are increasing in damand and price. The shop from home is a trend that grew during the pandemic and will continue due to the convienience and price advantage. Companies in this space are also at attractive entry points. Finally, my thoughts on the market is that there is more pain for holders of equities. The Federal Reserve is intent on curbing inflation and will continue to aggressivly raise the overnight rate to combat high prices. The whole idea is to drain liquidity from the economy. I believe it will take over a year to achieve this goal and it will likely end in a recession. If the recession is not too steep and long lived, then we could return to a bull market in stocks and bonds due to a decreasing interest rate cycle. Changes in the political climate, ongoing military action, additional pandemics, shortages in labor and energy, and economic disasters could all change my forcast.

Lean on Me

      In 1972 Bill Withers recorded "Lean on Me" and it became the #1 single for both soul and the Billboard Hot 100 chart for 3 weeks in July of that year. Bill wrote this song as a reference to his childhood experiences growing up in poverty in West Virginia. It was ranked 208th in the All Time Top 500 singles by Rolling Stone magazine. 

     These days I find myself doing a little leaning also. With everything going on in the world and our financial system, I'm leaning into a little cautiousness. The risks to the stock market are at a very high level given the fact that interest rates are on the rise, war has broken out in Europe, inflation is raging, the pandemic is ongoing, and oil is in short supply with high demand. If that's not enough, Russia has declared that the sanctions we have imposed on them is an act of war. They have already alluded to the use of nuclear weapons. I trust that our government will do everything to avert a nuclear war because no winners will emerge from that scenario and our retirement accounts will not even matter.

     My strategy for dealing with these conditions is to just lean into some defensive positions like pharma, some utilities, and staples. Since I already have a very diverse portfolio, this is not a big move on my part. My reasoning is that even in trying times, people will still take their medicine, buy gas and electric to light and heat their homes, and buy food. It may also be a good time to lighten-up on some of the winners of the past few years. Even though higher interest rates are generally a plus for financial stocks, I am concerned about the prospect of a flatter yield curve in the near future. A flat yield curve means that the 10 year treasury bond and the 2 year treasury bond yield about the same. Banks have a hard time making money on loans in that scenario. When the 2 yr bond yields more than the 10 yr, that is called an inverted yield curve and usually precedes a recession. 

     A recent scan of my portfolio revealed some stocks that are doing well in these tough times: pharma stocks like Pfizer and Merck, energy stocks like Marathon Petroleum, old tech stocks like Cisco Systems and IBM, cybersecurity ETF like HACK, agricultural stocks like ADM, and drugstore chain CVS. As interest rates rise, I will be looking to take profits in some bank stocks and buy into a ladder of CD's which are federally insured deposits, this will lower my risk and still provide income.

     In conclusion, we are in for a tough 2022 for the stock market. Bonds do not interest me in the face of rising rates. I am not making any rash moves, however some adjustment is in order just to mitigate some risk. There will be some days and even weeks where the stock market will rally during a bear market and that is when I plan to raise cash. One thing I have noticed about the stocks I mentioned is that they all trade at reasonable valuations and pay dividends. What more can you ask for?

Told Ya So!

      In my post last year on 4/21/2021, titled "Walk on Hot Coals", I warned about holding high valuation growth stocks. Many of those companies had little or no earnings, causing the P/E ratio to soar sky high. I also stated that with the pandemic slowing,  the "stay at home" stocks will fall out of favor and value investing would come back. Well, it's happening as I write this blog post. That's not all that's happening either. We also have high inflation, a more hawkish Fed, political gridlock, supply chain issues, a labor shortage, world tensions over Russian aggression, and a rotation from growth stocks to value stocks.  They say that the stock market climbs a wall of worry but sometimes worry causes a great fall. 

     The way I see it, an investor can do one of two things when corrections happen: 1. You can panic and sell everything, causing losses. 2. Hold tight, take some gains in a few stocks that are showing stress from a high valuation and ride this out. I choose option 2 because I've seen this show many times before. Yes, the stock market got ahead of itself because the Fed kept interest rates too low for too long. The FOMC needs a reason to raise rates and now they have one in the inflation numbers. Some pundits are calling for the Fed to raise 4 or more times this year, but I just don't agree. I think that much tightening could cause a recession which would be politically damaging to the current Administration. 

     The massive amount of liquidity that the Economic Stimulus Payments have created in our economy has caused an inflationary spiral. There is just too much money chasing too few goods which causes prices to rise. Add in supply constraints and shortages of semiconductor chips and we have a situation similar to the 1970's. It may not be well known at this time but Congress has created some very generous tax credits and loan forgiveness laws for this year. When those refunds start hitting bank accounts, it will be like another round of stimulus payments. Fighting inflation on one hand, while handing out money with the other is a losing proposition.

     As an investor, I am not giving up yet and here's why; even after a year of interest rate hikes and an unwinding of the Fed bond buying spree, interest rates still won't generate a decent return in safe fixed income deposits like CD"s. I bet that at the end of 2022, good dividend payers will still provide a better return than bonds or bank deposits. I still like bank stocks, energy stocks, materials companies, and some select tech companies that trade at reasonable valuations.

2022 Forcast: "Turn!, Turn!, Turn!"

       In 1965 The Byrds recorded this song which went to #1 on the Billboard Hot 100 chart that same year. The song was written by Pete Seeger in the 1950's but not recorded until 1959 and later released in 1962 by The Limeliters. The song quotes bible verses found in Ecclesiastes' third chapter which says for everything there is a season. Many people find solice in these words, claiming they help to accept profound changes in their lives.

The stock market is due for some profound changes in the coming year also. My feeling is that the unrealistic valuations awarded to some growth stocks may come back to earth. I can't predict how many interest rate hikes 2022 will bring, or what direction the pandemic will take. I don't know if the economy will grow in 2022. I don't even know if the stock market will end the year higher than it ended in 2021. What I do know is that stocks with nosebleed valuations usually don't stay high forever. Eventually, investors will expect earnings to grow into those lofty valuations. I still expect value stocks to come back into favor in 2022. There are plenty of stocks that did not participate in last year's rally. I like old school tech companies that trade at reasonable valuations (P/E) and pay a nice dividend. Stocks like Cisco Systems, IBM, Intel, and AMD are just a few examples. I still like some energy companies even though the long term looks cloudy, the current supply vrs demand is favorable. 

     If most pundits are correct about the Fed raising interest rates in the coming year, banks and financials should benefit the most. This is because they can raise rates for loans while keeping rates on deposits suppressed. Higher interest rates are generally not favorable for tech stocks, especially the ones with high valuations. That is why I favor the "left behind" stocks with real earnings and dividends. I expect lots of volatility in the stock market in 2022 because a rotation into value stocks means a sell-off of growth names. A meaningful correction in growth stocks can also create a buying opportunity in some select companies. Finally, the massive amount of liquidity pumped into the market over the last 2 years should be about over. This means the speculative excesses in cryptos and meme stocks will abate. 

     While I expect a wild ride in stocks in the new year, I plan to hold on for the ride and add to my positions when the market discounts them. I don't think the Fed can raise rates drastically because the market will signal its discontent with a massive sell-off. Inflation should abate when the supply chain issues resolve itself, giving Jay Powell an excuse to take his foot off the interest rate pedal. Interest rates for certificates of deposit and bonds will still be too low to interest me, making stocks the best place to invest.

 

 

    

Sow the Seeds of Profit

      There are so many similarities between gardening and investing that I can't resist writing about them. First, when I buy seeds for the garden, I expect to get what I ordered. This did not happen last season. The tomato seeds, which I bought online from a Chinese company, were not the variety they advertised. The green bean seeds which I thought were produced in the USA were mixed with an undesirable variety of half-runners. The half-runners are more of a vining variety instead of a bush bean variety. The result was that the half-runners choked-out my Blue Lake beans so I harvested only a fraction of what was expected. I believe, but can't prove, that these too were a product of China, where consumer protections are weak. What irks me is that I paid dearly for seeds that were falsely advertised.  

     When investing in stocks, the investor should expect to get what he pays for. Surprises are usually not pleasant when it comes to investing. The key is to know the company before hitting the buy button. Often the hype heard on TV from analysts is too optimistic for many reasons. These people are paid to appear and present stock recommendations regardless of the suitability for most investors. They often recommend Chinese stocks in the name of diversification.  Remember, the stocks you buy are your seed. In order for you to profit, you must buy quality seed (stocks). Before you invest in any one company, look at other alternatives within that sector. Use tools like ratio analysis, historic earnings and projected earnings to make an educated guess at what would be your best choice. An unusually high dividend yield is usually a red flag. As a company's stock sinks, the dividend yield goes up. More often than not, the dividend will be cut, further lowering demand for the stock, think (AT&T). I have learned to avoid foreign stocks just like I will avoid foreign seeds. My only Chinese stock was recently delisted by the New York Stock Exchange. The result is that I own a stock that I cannot sell. Imagine owning an asset that you can't sell, it virtually has no value. In the future, my only international exposure will involve US companies that do business in foreign countries.

     Gardening is hard work. Tilling, planting, fertilizing, mulching, weeding, and even harvesting is strenuous. If I didn't like doing it, I would take up a different hobby. The same goes for investing, if you have no stomach for it, better leave it to an adviser. Just remember that there is a significant cost for their services and you may not get the results you hoped for. Climate change, adverse weather, drought, pests, and plant disease can all contribute to failure in a garden. Changes in interest rates, tax law changes, government policy, and a declining economy can also derail an investment portfolio. Just like there is a time to plant and a time to harvest, there is a time to invest and a time to divest your holdings. Use all the tools listed in this and previous posts to make your best decision.

Financial Porn

      OK, it's time to admit that I have an addiction to financial porn. My TV is permanently set to CNBC from early morning until after dinner time. Finporn stars such as Becky Quick, Melisa Lee, Joe Kernan, Andrew Ross Sorkin, Morgan Brennan and many others are like close friends of mine..I have never met any of them in person but they are in my family room every day. all day. Yes I have a problem but the first step in dealing with it is to admit that I DO have a problem. As far as I know there is no 12 step program available to help curb my addiction to finporn. If a program was available I would surely attend meetings so I could be with people who share my affinity to financial markets. We could sip bourbon (maybe) and talk about our favorite investments and the direction of interest rates. After a deep dive into my psychic, I have determined that the FOMO is at the root of my problem. Anyone who has visited the Reddit site of Wall Street Bets knows that FOMO means "Fear of missing out". Like any other pervert, I have a particular fetish, and that is common stocks. Oh I like fixed income, mutual funds, ETF's,  REIT's, and MLP's, but common stocks really turn my crank. My addiction started at an early age-around 18years old. I remember fantasizing about South African gold mining stocks and making a fortune through rich dividends and huge capital gains. From there my perversion branched out into a diversified portfolio of stocks, fixed income,  and ETF's. Sadly, my addiction has spread to other members of my family. I have come home unexpectedly to find my wife watching the financial news on CNBC. I fear that she has also become addicted to a growing retirement portfolio and financial security. My lust for financial knowledge is not limited to broadcast media. I always have the latest edition of Barons magazine in the bathroom. Every visit informs and educates me for potential investments. Unlike traditional porn, finporn may have actually strengthened my marriage, created a powerful  portfolio of earning assets, and hopefully boost the financial well-being of my heirs. Maybe finporn is my most productive vice.

   

.

   

 

 

    

 

Asleep At The Wheel

      The group Asleep at the Wheel may be the greatest band you never heard of. They formed in 1970 and have since released 20 albums and had 21 singles listed on the country music billboard charts. In 1975 "The Letter that Johnny Walker Read" peaked at #10 on the billboards charts. They had a clean, fresh sound that was a refreshing break from the hard rock I often listened to in my youth. There is also another group who have been asleep at the wheel for many decades; the Federal Trade Commission and their counterpart called The Antitrust Division of the US Dept of Justice. Their mission is to "Prohibit acquisitions that create or enhance market power". Does anyone actually think that Amazon does not have enhanced market power? Over the last 20 years, Amazon has taken over at least 128 other companies. Alphabet, formerly known as Google, has acquired at least 200 companies since 2016.  Facebook has acquired at least 85 companies during their rapid growth phase. So whats the problem? First of all, does anyone think the mentioned companies are not already monopolies? Why should they be allowed to buy-out their competition? Secondly, these smaller companies, if allowed to compete as separate concerns could possibly become powerful competitors themselves, giving consumers more choices. This concentration of market power also has the effect of increasing the wealth disparity often talked about by liberal politicians like Bernie Sanders and Elizabeth Warren. While I am not a Socialist or a liberal, they have data that gives their argument a lot of credibility. The risks to my diverse portfolio from these behemoths are great. For instance, just the rumor of Amazon going into the pharmacy business caused CVS to fall and stay at a depressed valuation due to the threat of a competitive price war. Yes, in the short run, lower prices for the consumer is welcome, but when one company dominates a market, prices are bound to rise in the long run. The whole concept of achieving market dominance is to control prices. It may seem like I am targeting just the FAANG stocks, but this has been going on in many industries for decades. Energy, Steel, Pharma, Communications, Banks, Rail, and Technology companies have grown their footprint through acquisition rather than through organic growth. The longer this unbridled consolidation occurs, the more painful the cure will be for stockholders and consumers. Maybe its time for the FTC to wake-up and say no.