When we watch the news, we hear how every day events are "drastically shaping" the market, and on a day-to-day scale, the market seems volatile. How does anyone invest for the long-term? Mike uses several big ideas to shape the way he puts his portfolios together. While not every investment is right for you, Mike thinks that arming yourself with knowledge and perspective can help you make the right choices.
We invite you to take a look at some of our blogs on Mile High Investing for some big ideas, long term investments, and a new perspective on creating a portfolio that is "ahead of the curve."
The Economist recently compared watching the market in 2018 to watching a horror movie. There is the character that walks out into the dark, the floor boards creaking and the swell of haunting music to build the tension. Is it Freddy Krueger or only the wind? In response to the drama of the market, the so-called “bond vigilantes” have reappeared. I have not heard mention of the bond vigilantes in over a decade, maybe two. My family sometimes questions my taste in novels, specifically when I started The History of Interest Rates by Sidney Homer. It goes back to 1988-89, when I was first in the business; I moved out of the bull pen where all rookie brokers began and into an office complex. The two brokers sitting on either side of me had been retail bond brokers for over 20 years and we were located close to the institutional bond trading desk and the municipal bond trading area. I was immersed in the bond side of the business, and discovered just how much there was to learn. I started by reading Eugene Fama’s Municipal Bond Handbook, a two volume set, which tops out at over 1,700 pages. (Fama, you might recall shared the Nobel Prize in Economics in 2013 for showing that only 7% of professional money mangers do well enough to earn their benchmark plus their fees.) When I had gone through training as a rookie I had learned about building bond ladders, a simple concept. What the Municipal Bond Handbook had to say went far beyond simplicity. Total yield in a bond portfolio has three components: (1) the coupon interest rates paid by the bonds in the portfolio, (2) the reinvestment of the interest payments, and (3) capital appreciation. Capital appreciation was capturing price movements, pricing disparities, and other characteristics of bonds that added to the total value. The value added by each component was roughly 1/3. Bond ladders capture the interest rate and reinvest the earnings in new bonds. That amounts to 2/3 of the return, but bond ladders capture little if any of the capital appreciation from the last third, which means the investor doesn’t capitalize on 1/3 of their potential earnings. Of the Municipal Bond Handbook about 1,600 of the 1,700 pages were devoted to that last 1/3. Sitting next to bond brokers, not only did I get to read about capital appreciation, but I also got to experience and learn it firsthand. For me it was the difference between average or mediocre and superior. I also learned about the “bond vigilantes”. There is no real group of vigilantes; they are simply bond traders – all those people I sat with as a fledgling broker. They focus on finding capital appreciation and understanding economic conditions that will impact bond prices so they can buy low and sell high. They watch economic conditions to find the anomalies that will add value to their portfolios. Long time stock market players listen to them because the same economic conditions they watch impact the stock market as well. Something happened last November that stirred the bond vigilantes. The yield curve began to flatten. Normally short-term rates on US Treasury bills run about the same rate as inflation. This is to be expected. Investing money short-term you would expect to stay up with inflation. But there is very little risk, so no real premium to the rate of inflation. Longer-term bonds like 10 to 30 year US Treasuries pay the buyer about 1 ½ to 2 ½ percent more for the additional risk of holding the bonds for a longer period of time with less certainty of what inflation and the economy will do. The Federal Reserve has considerable sway over short-term interest rates. They set a target “fed funds” rate and will buy and sell short-term bonds to hold that rate. However, the Federal Reserve does not have much control over longer-term rates. Those rates are set by what price market buyers and sellers are willing to pay. Since the Great Recession, short-term rates on US Treasuries were around 0.25% and 10 year bonds were 2 – 2.5%. In November the yield curve started to flatten. The Federal Reserve began pushing up short-term rates. Instead of following short-term rates up in lock step, longer-term rates moved up more slowly. Short-term rates today are 1.5% – 1.75% and 10 year bond rates are 2.8% to 3.0%. For the bond vigilantes a flat yield curve can imply that inflation is picking up because short-term rates are up. In fact, the CPI index has been increasing over the last 12 months. The bond vigilantes see the longer-term rates failing to keeping pace with short-term rates as an indication that the economy will be slowing down later this year or next. When the economy slows down longer-term prices on bonds increase and yields drop. If the bond vigilantes are correct and the economy is in fact going to slow down later in the next 12 months or so, that will also impact stock prices. This is what the fuss is about. That is why for the first time in over a decade we are hearing about the bond vigilantes. They could be right or they could be wrong. The Federal Reserve in this country and central banks around the world are raising short-term interest rates to return to normal levels. Longer-term rates at current levels may simply be a function of instability in the world and money seeking a safe harbor in the US. In summary, my guess is the economy is not going to slow later this year or next but instability in the world is going to keep foreigners buying our treasuries and holding the rates low. Like the bond vigilantes I have a spreadsheet I have been updating monthly since the late 1980s with the statistics and data pertinent to bond brokers. I have and will continue to monitor it to stay alert should the bond vigilantes be correct about the economy.Read More
One of the things that I believe sets me apart from other talking heads commenting on the state of the markets is that I hold myself accountable for my predictions. 2017 is over now, and that means that most people are talking about 2018, and prepared to let bygones be bygones – whether they were right or wrong. I think it is important to take stock of what I said back in 2016 about the year just passed, and critique myself. I said at the end of 2016 that I believed 2017 would see the stock market continue to grow, not from any short-term political ramifications, but because we are in the middle of a secular bull market. These bulls do not die of old age; in fact the last began in 1982 and went on until 2000 – more than eighteen years! It’s said that bulls are born on pessimism, grow on skepticism, mature on optimism, and die on euphemism, and while many investors seem to worry that this bull is getting too old, I think we are still in the second stage. This is something I’ve been saying since 2009, and that was the basis for my 2016 predictions. Tied into my prediction regarding the Super Cycle, we saw almost all countries showing positive GDP growth in 2017. More specifically, I expressed weariness over the new Administration providing an economic stimulus, which has never been done while the country wasn’t in a recession, and I didn’t know what ramifications we could see. In the end, what was passed was Tax Reform, which I don’t believe will have anything near the effect a full stimulus would have. This tax cut, from most of the math-based research I’ve seen, will largely benefit the wealthy and corporations, whereas a stimulus package is generally beneficial for lower income levels. The impact of the tax reform will in my opinion be positive for corporate earnings and thereby for stock market, at least for 2018. I predicted that the economy would do well – not a 4% GDP rise, but no less than 3%. What we saw was that the economy did hit 3% in the last two quarters but did not hit 4%. I believe the Tax Cut was a gamble that the GDP would reach 5%, which I would like to believe will happen, but realistically doubt will happen. I also stated that I believed that we would see record profits, and in that I was correct. I believe that we’ll see even more in 2018, too. Profits drive the market, that’s the reality. It is numbers and not administrations that make the market move. I’ll talk more about that in the coming weeks as I give my 2018 predictions. We also saw record cash levels, consumer debt levels lower than the long-term average, and consumers benefiting from lower oil prices (and therefore having more money to spend driving up demand) – all things I predicted back in 2016. I predicted unemployment to be at 5% and was thrilled to see it even lower, at 4.1% as the low! I thought we would see housing not only recovering, but heating up as well. While the reality was regional and not country-wide, it is generally improving. I said that I believed that 2017 would be a good year for the S&P 500 and when the final results were in, they proved to be even better than I expected. Back to math for a moment, we know that tax cuts for corporations are, fundamentally, very good for company profitability. When tax rates are going to be cut by up to 14% (as they will be in this tax bill), we will see increased profitability which will, in my opinion, in turn increase stock prices and the S&P 500. Again, that’s just math. In the end, I believed – and continue to believe as I look forward into 2018 – that the economy would be good in 2017 and the years to come. I believe that the actions the government is taking will lead to a good today and good things in the next few years, but my concern is in the long-term. Thanks, MikeRead More
Watching the reports on Irma and Harvey, rubbing my eyes from the haze that covered much of Seattle, and having the wettest winter in Seattle’s recorded history to this summer’s longest period without rain all feels like climate change to me. Yet we seem to be plunging forward into a future which will require more natural resources and more energy than ever. I am an optimist, and am confident that we will solve the problem – we will find a way to produce more energy with less damage to the climate. There will be investment opportunities on both sides (energy needs and climate change), and that is what I wanted to discuss today. On the radio program, I have illustrated the impact of greenhouse gases by relating an analogy. Think about when the outside temperature is 75⁰ and you drive to the mall to do some shopping. You have the air conditioning on in the car set at 69⁰. You park the car and go shopping for an hour or two, and when you get back to your car and open the door. The temperature is not 69⁰ or even 75⁰; it is boiling in the 90s. What happened? The sun rays shined into the car turning to heat when it hit the seats and interior of the car. Some of the energy bounced back, but was blocked by the roof of the car. If you have a convertible with the top down, none of that happens. The heat from the sun escapes. That is similar to what happens with greenhouse gases. The sun rays hit the earth and without the greenhouse gas, would bounce back. But the greenhouse gas acts like the roof of your car, keeping the heat of the sun from escaping. I’ve written about the impact emerging markets are having on the market and the middle class before – that by 2030, 93% of the world’s middle class will be in countries like China, Brazil, and Russia. As affluence around the world increases, logically, energy use per capita grows. China alone, for example, is currently responsible for approximately 23% of global energy use compared to the US’s 17%. By 2035, the world energy demand is estimated to increase by 30%. That is the repercussion of “First World” technology and comforts becoming common worldwide. Our current response, burning coal, oil, and natural gas, will continue to wreak havoc on the planet; it is estimated by the International Energy Agency that by 2025 it will take $45 trillion invested in global energy to meet the necessary levels of greenhouse gas reduction. In my opinion, $45 trillion may be too high and does not take into account the changes in technology we will see over the next ten years. In any case, there will be significant capital directed toward energy producers and that creates opportunities for investors if they choose the right opportunities. Although climate change has found its way into the realm of political controversy, the reality is that 99% of scientists who have spent time on the problem agree it exists. In the end, I believe that climate change is not about political stances, but about fact and scientific study. Climate change began with the Industrial Revolution, when humans began using coal, oil, and natural gases to power their innovative new technologies. The CO2 concentration at the beginning of the Industrial Revolution was 280 ppm – we know this because scientists are able to drill into ice caps and measure time and carbon content. In 2011, the CO2 in the atmosphere was measured at 402 ppm. The CO2 traps the heat inside the atmosphere (hence the title “Greenhouse Gas”) and slowly heats the earth. We have seen that between 1880 and 1970 that the average temperature increase was only about 0.03⁰C each decade (which means about 1⁰F over 190 years). But since 1970, the average temperature has increased 0.13⁰C (meaning 1⁰F every 40 years)! The global temperature increase is responsible for dangerous storms like Hurricanes Harvey and Katrina, the wildfires, melting ice caps, and dozens of other symptoms. If we look at coal, which represented a full third of US electricity generation in 2016, we find that our coal plants are only on average 37.4% efficient. That means that our current technology is only able to capture and use a certain percentage of the kinetic energy available in the fuel source. We are outpaced by Japan, China, and the EU. To compare, the most efficient power station is the Nordjylland Power Station in Denmark, which clocks in at 47% efficiency. I doubt that any other industry would boast about efficiency under 50%; all the more reason to rethink how we approach energy production, and perhaps there will be investment opportunities Oil and natural gas will have their place in energy production. But demand growth will probably slow down. Clean energy, for all the political babble surrounding its implementation, is well on its way to being the most practical means of production. You have likely already heard that in 2016, solar became “cheaper” than fossil fuels; the situation itself is not so simple that it can be calculated out “apples to apples” because government subsidies and location must be factored in as well. Even without the subsidies, the payback for solar is equitable in 46 of the 50 US states. Estimates are that solar will grow at 30% annually. That said, that the debate even exists gives valuable insight into solar’s growing competitiveness. Likewise, wind and hydro energy have become more efficient. Even nuclear is becoming more and more viable. The area I find most exciting is bioengineering – companies which are altering bacteria to create the compounds found in fossil fuels in a fraction of the centuries it takes for them to be produced naturally. It is in these alternative energy producers that I believe the key to future investments lie. Many US Corporations committed to the Paris Accords even after the US officially pulled out, and will be investing heavily over the next decade in renewable energy. Ford has announced that they intend to up their production of electric cars to 50% by 2020. California hopes to be run by 60% renewable sources by 2030, and Hawaii, which is currently the most oil-dependent state in the US, wants to be 100% dependent on renewable energy by 2050. Remember, $7 trillion USD has been spent annually worldwide on energy. It is an industry that, by necessity, will see enormous growth, although with changes almost certain, previously unknown investment opportunities may present themselves.  U.S. Energy Information Administration. Annual Energy Outlook 2016 with Projections to 2040. August 2016. https://www.eia.gov/outlooks/aeo/pdf/0383(2016).pdf  U.S. Energy Information Administration.  International Energy Agency. https://www.iea.org/. Accessed on 9/5/2017.  Global Climate Change: Evidence. (2008, June 15). Retrieved September 5, 2017, from http://climate.nasa.gov/evidence/  Global Climate Change: Evidence.  “What is US electricity generation by energy source?” US Energy Information Administration. April 18.2017. Accessed on September 5, 2017. https://www.eia.gov/tools/faqs/faq.php?id=427&t=3  “How Does US Coal Power Plan Efficiency Stack Up?” Process Barron. March 2, 2017. Accessed on September 5, 2017. http://processbarron.com/news/u-s-coal-power-plant-efficiency-stack/  Process Barron.  Richardson, Luke. “Solar energy vs. fossil fules: how do they compare?” EnergySage. December 29, 2016. http://news.energysage.com/solar-energy-vs-fossil-fuels/Read More
Howard Marks, investor and writer, said “you can’t predict but you can prepare.” So, today I’m taking a mile-high view of the supercycle (what’s a supercycle? Read more about it in “The Third Supercycle Is Now”) and how I believe it will end, so that we can all be prepared. I believe that we will be able to speculate on how this supercycle will end by looking at previous cycles and the way they ended. By doing so, we’ll have the knowledge we need to prepare for whatever comes. Mind you – I believe that we still have a number of years left in this secular bull market, but it never hurts to start trying to educate yourself early. The first cycle lasted 43 years from 1870 to 1913; driven by the industrialization of the United States, it was a time that set the stage not only for the World Wars, but also for modern living. Model T Fords, railroads, telegraphs and telephones, electricity, and an abundance of clean water gave birth to the kind of technology we still make use of today. The loser was agriculture – in 1874, over 50% of the US population was employed on farms, but the 1874 Financial Crisis saw thirty painful years and the unemployed left for the cities, to find work there. A rapid movement into industrialization saw the US emerge as a world leader in time for WWII. And yet, the first super cycle collapsed into the Great Depression in 1929. The second supercycle, lasting from 1945 to 1970, was driven by the rebuilding of Europe after World War Two, the DOW grew from 150 to 1,000, for the first time reaching that threshold. With the housing and schooling offered by the GI Bill following the war, the Middle Class began to emerge, and with it a massive increase in disposable income that saw the popularization of 2-car families, fast food, and, of course, the television. Meanwhile, the intellectual battle between the USA and the USSR, known as the Cold War, saw the downfall of the Colonial System, which had been in place for centuries. African and Asian countries, like South Africa, India, and China were, for the first time, given control of their own fates. Those children who grew up knowing the Great Depression feared seeing it repeat itself and so, when recession times hit, not only did the second super cycle end after 35 years, those in power took the risk of inflating themselves out of another depression. These emerging markets, which are only now gaining real economic ground, are what is driving today’s supercycle, which began following the Great Recession in 2008/2009, and could last through 2030. We should spend a moment looking at the Great Recession, and how those who lived through the 1970s inflation reacted the opposite of their ‘70s counterparts, and were willing to risk that recession in order to avoid potential inflation. I believe that today the supercycle is growing more rapid, and it will be a time both of rapid growth and rapid decay: companies that made up the S&P 500 in the 1990s have fallen by the wayside – companies like Kodak have made way for Apple and Netflix – and the lifespans of these companies could be as short as 15 years. So, if we are like our past counterparts, and react to the opposite of the Great Recession, I foresee this super cycle ending with inflation. The Millennials, who came to maturity during the recession will work desperately to avoid another Great Recession or Depression. When the economy begins to sink, remembering TARP and money printing by the Fed as “cures” for 2008-09, those in power will apply the same. They will choose to inflate their way out, as did the generation who grew up during the Great Depression. While we may not be able to predict exactly how this will happen, keeping our eyes open and preparing may give us the opportunity to avoid some of our predecessors’ mistakes. The chances are inflation will increase gradually as it did beginning in 1962 (see the graph below). Remember the classic story of the frog: if you put it straight into boiling water, it will jump out. But put the frog in water and slowly heat the water up, the frog will sit until the water boils. Inflation boils us like water does the frog. It was the early 1970s, when the oil embargo hit, that most people – and our nation’s leaders – recognized inflation, but by that time it had been increasing for a decade. I believe that this supercycle will end similarly.Read More
In 1958, Harvard economist John Kenneth Galbraith published The Affluent Society, in which he outlined his belief that the US had reached the pinnacle of affluence – that American standards of living had risen as high as they ever would. Most families owned a car, their own 1,100 ft2 (on average) home, and even had refrigerators and telephones in those homes. This, Galbraith said, was as high as affluence in the US would rise. But we know that his assumption was wrong. Look at where we are today – smartphones and PCs and bigger houses and 3-car families, all concepts that Galbraith couldn’t predict. Society did not stagnate in the 1950s, it only continued to grow, and not just in the US, but around the globe. In 1946 George Doriot founded American Research and Development Corporation (ARDC), raising money from friends and associates. Prior to then start-up companies relied on angel investing or bootstrapping to get going. ARDC made a $70,000 investment in a small computer company, Digital Equipment Company (DEC). When DEC came public that investment was worth $35 million. Venture capital was born. The statistics of venture capitalism are staggering: in 2007 alone, US companies founded by entrepreneurs and backed by venture capitalism represented 10.4 million jobs, and those companies generated $2.3 trillion in revenues, 18% of US GDP. Silicon Valley alone is worth $3 trillion in 2016. And I believe it is these companies that are driving the current supercycle with their innovative and disruptive technology. Whether you like President Obama or not, I believe that in the longer-term what his administration will most be credited with will not be healthcare, but the JOBS Act passed in 2012. Jump Start Our Business Start-ups (JOBS) authorized Crowdfunding. Venture capital has grown to the point it funds the big start-ups but leaves behind many of the small ones. Crowdfunding allows companies to source funds from a large number of people. The source of funds can be worldwide and in smaller amounts. But through 2015 estimates are that $34 Billion was raised worldwide through crowdfunding. I believe we entered a supercycle (Wonder what a supercycle is? Check it out in this blog post.) The funding of the new companies that will drive growth for the next several decades will be the start-ups and many of those start-ups will be capitalized by crowdfunding. Just as venture capital furnished the start-up monies for the second supercycle, so will crowdfunding furnish the capital for the third supercycle we are in today.Read More
I’ve been talking about how companies are seeing their lifespans shrinking – particularly how short the lifecycles of companies in the S&P500 have become. If you’re an investor that favors the buy-and-hold strategy, this is an intimidating prospect. The days of finding that perfect company, buying it, and tucking it away in the proverbial sock drawer are coming to an end. The average lifespan of a company in the S&P500, a study by Yale Professor Richard Foster found, was only 18 years!1 With such a daunting new world for investors to face, I’ve been studying good business practice, and found myself agreeing with some of the points made by Fred Crawford and Ryan Mathews in their book The Myth of Excellence: Why Great Companies Never Try to Be the Best at Everything. They found that quality companies are defined by five attributes: Price, Service, Access, Experience, and Product (which I laid out in more detail in last week’s blog: Five Attributes: How To Spot A Solid Business Part 1). In order to stand out as a company and still be economically viable, a company needed to “dominate” in one of these five, “differentiate” in a second, and be adequate in the other three. I believe that it is a good way to begin looking at potential stocks to buy – do they meet these standards? Knowing the most about running a financial advisory, I thought I would compare my company, Adams Financial Concepts (see the AFC Difference) and Edelman Financial Services, LLC, Ric Edelman’s financial advisory, and a company with a very difference focus than AFC. Edelman is generating over 25,000 leads each year through his radio show, TV appearances and ads, books, and around 800 seminars. He employs more than 113 advisors and has a number of offices around the country, and each is created with the same “cookie cutter” template – from the books laid out in the waiting room to the offered plans, they are identical across the country. Interestingly, 75% of clients say that Edelman’s is the best company they have ever worked with – among all companies, beating out Nordstrom, Starbucks, and the like. If we look at Edelman’s in terms of the five attributes, it’s obvious that Access dominates their methodology: there is nothing confusing or elaborate about the company’s approach to working with their clients. Their tactics are consistent across the board, and it is comforting to their clients to have this straightforward product laid before them. They differentiate themselves with the Experience they provide; clients are treated well on a consistent basis and know what they are getting themselves into. Regarding the final three, their Service, Price, and Product are all average. They do what they do reliably, the price has been dropping, and they create dependably good financial plans, although, I believe, without a real focus on being the best. I disagree with their model, and I believe that this shows in the attributes we see in AFC. I want to dominate in Product by offering product objectives and risks, and my own management has been proven to beat the market in the long-term. Although, past performance is no guarantee of future performance. There is an 11 year track record that is published for all to see, and it is a composite of all clients with no carve outs. AFC differentiates in Service, creating individualized portfolios and knowing every one of our clients as complete people, not just another set of numbers. Regarding Price, Access, and Experience, we do nothing unique or world-altering, but we work hard to recognize the needs of our clients and create a welcoming environment. As Myth says, it’s impossible to dominate or even differentiate in every single category. I believe this model places the value on the longer-term of compounding. $100,000 invested over 25 years at 7% will yield $507,000. $100,000 invested at 15% will yield $2,862,518. While there is no assurance of achieving 15%, I do believe the emphasis on product and returns will be to the client’s advantage. Footnotes Foster, Richard. Innosight.com. Creative Destruction Whips though Corporate America. 2012. Found: http://www.innosight.com/innovation-resources/strategy-innovation/upload/creative-destruction-whips-through-corporate-america_final2015.pdfRead More
Buy and Hold was (and sometimes still is) a strategy to find great companies: purchase their stock and put it away to hold for decades. I still believe in buy and hold, but the timeline for the holding period has significantly shortened. I recently read a book by Fred Crawford and Ryan Mathews called The Myth of Excellence: Why Great Companies Never Try to Be the Best at Everything, and it got me thinking. In the 2010s, the lifespan of a dominating company is shrinking at a rate that CEOs find alarming. Today, the average lifespan of a company in the S&P 500 is only 18 years1. That is an incredibly short amount of time when we compare it to the lifespans of companies that have come and gone in the previous decades. If we look back to June of 2001, some of the biggest companies in the S&P 500 were Walmart, AOL, LUV, Lexus, Eddie Bauer, Citibank, and even Dell. Now think of how many of those companies carry the same power today as they did fifteen years ago. Think too of how commonplace newspapers and record stores and travel agencies were only fifteen years ago, all three of which were essentially replaced by the smart phone and the digitalization of media. So how, with this daunting reality, does a company stand a chance at maintaining relevancy? The Myth of Excellence has a few ideas that I think have value in finding companies that investors can buy and hold for a number of years The Myth of Excellence approaches business through the lens of five attributes: Price, Service, Access, Experience, and Product. Price: a survey mentioned by Myth states that Price, for most respondents, is not finding the service or product at the cheapest, but an “honest and fair price.” Price has become less about getting the cheapest option that does the job and more about finding quality and fairness. Striking that balance is what is important. Service: the authors of Myth found that the surveyed were most impressed when they were treated well – “like an individual” on a day-to-day basis. When you order your coffee from your favorite joint, do they spell your name right? Are you told about the day’s specials? Or are you rushed out the door and treated like just another skinny venti cappuccino with sugar-free vanilla that has to get spun out? Access: more than just physical location, access is the ability for customers to understand and feel comfortable with a service or product. There is a psychological aspect; is a product or service being sold with an honest, straightforward campaign? Experience: it isn’t about being entertained, but experience is about, as with service, being treated like an individual – having questions answered correctly and interactions personalized. When you call the “help” line, is there a recording on the other end, or a person? Does the design of the store or website stand out and make you feel comfortable and want to go back? Product: not necessarily about having the “best” product, but one that customers prefer, product focuses on creating a brand that is trusted, that has a culture that customers prefer, and that they will consistently choose over alternatives. Consider your relationship with your favorite brand of smart phone or cereal: what draws you to them above all others? In order to stand out as a company and still maintain an economically viable company, a great company is one that truly “dominates” in one attribute, “differentiates” in another, and is adequate in the other three. It is not realistic, in most cases, to dominate or even differentiate in every single one. Finding what a company is good at and focusing on those areas is the most efficient and cost-effective way to stand apart in a world with massive competition and short lifespans. Finding a company which is aware and capable of attributes and is able to use them to their advantage makes a decent contender for your buy-and-hold stock option. Footnotes Foster, Richard. Innosight.com. Creative Destruction Whips though Corporate America. Found: http://www.innosight.com/innovation-resources/strategy-innovation/upload/creative-destruction-whips-through-corporate-america_final2015.pdfRead More
There has been no new market high since May 21st, 2015. That’s a reality that has some investors panicking; some are even dubbing this the “Twilight Zone” (do do do do). And yet – and yet, if we ignore the preemptive panic, we can see that for all the threat a flat market can present, there’s good news. If we look at global stocks, we find that as of the end of May they were off by 8%. Commodities have lost 22.8%. European bank stocks are back to 2008 Lehman Brothers lows; Japanese bank stocks are down 30% and Chinese bank stocks down 40%. Oil is down 60% and gold is down 35%. Hedge and mutual funds have lost and are continuing to lose money, as are junk bonds and emerging markets. Are you pushing the panic button yet? But the overall market is only down 2% overall. For all that we could interpret the state of the commodities and the banks as negative, the market itself is, from my perspective, actually encouraging. I believe that history doesn’t repeat; it rhymes. We saw a similar market back in 1995. The market had been flat for a year, and in January 1995 the New York Times posted an article titled “Prepare for a BIG, DEEP BEAR MARKET.” People were genuinely preparing for a market downturn that we could compare to the Great Recession. Never happened. There are more parallels: talk of reforming the healthcare system (Hilary Clinton in the conversation, no less) had the pharmaceuticals up in arms, Orange County California filed for bankruptcy, Mexico had devalued the Peso, and the market was a very old secular bull. What happened instead of that deep bear market the New York Times article forecast was that the S&P rose from 487 to 1,366 in just five years – a 280% increase; ours would go from 2,090 to 5,890. If our DOW increased at the same rate, we would see it explode from 17,820 to 49,840. I’ve been predicting for several years now that we will see the DOW reach 100,000 in the coming years – could it be in the next five? It’s unlikely, but not out of the question if these numbers hold true. To quote another old adage, “the market climbs a wall of worry.” At the end of the day, I believe that, if we are holding onto the right stock, it is better to ride out the bad times.Read More
2016 has been off to a rough start – in fact it is the worst start in history – and for many, 2016 is stirring up memories of 2008. I believe that this fear is unfounded and stemming from misinterpreting the oil and commodities drop. They are symptoms, I believe, of overproduction that stemmed from futures contracts made in the 1990s and 2000s, and the resulting credit bubble burst. Despite this, I still believe that we are in a super cycle, and as with previous super cycles, there will be some winners and some losers. We wouldn’t be in a super cycle if everything was going smoothly. Where oil and other commodities are concerned, there is an excess of supply compared to demand. Oil production in 2015 was at 96.3 million barrels per day but demand was just 94.5 million barrels per day, and the excess went into storage. Demand has not dropped off; it was a record high in 2015. During the 1990s and 2000s, it was believed that the price of oil would only continue to rise and so many futures contracts were taken. Airlines and other real consumers took out contracts with the intention of taking delivery but hedging against future price increases. Yet, as many as 50% of the contracts taken were speculative, and had no intention of ever taking possession. These were simply initiated as speculation on the price of oil increasing. Simultaneously, it became common for commodities to be treated as an asset class, and more investors joined the speculative boom through those means. Futures contracts make sense if the prices continues to climb, but if the price drops, not only do you lose your investment, but you can owe additional money as well (as these contracts are usually highly leveraged with borrowed money). In this way, I believe that the drop in oil prices was also the catalyst for other commodity prices to fall when the bubble popped. The speculation that prices were only going to increase also saw trillions invested into factories, plants, and drilling to keep up with the false demand. $2 trillion was invested into factories in India and China alone, and $6 trillion was invested into oil drilling in the Brazilian coast, Australia outback, and South Dakota. The additional investment helped create the oversupply. China’s steel production quadrupled between 2000 and 2015. At the end of 2015 there was an excess of 600,000,000 tons, and across the globe in Scotland, steel factories are closing – and we are likely to see them closing in the US as well. A lot of money went into factories, as during the housing market when a great deal of building resulted in many empty homes. In 2015, 25 energy companies defaulted on their loans and I suspect there will be more than 150 additional bankruptcies to come. Despite the drop in oil, the oil companies the S&P book value have continued to grow. I think this is because oil companies saw the drop as very temporary and continue to carry reserves at full value ($100 to $110), and this spring auditors will force them to write them down with a mark-to-market value. I believe this will result in significant defaults and bankruptcies which will affect the market and earnings. There is good news for the American companies and consumers looking to purchase steel, oil, and other commodities. The price drop will make raw materials cheaper to purchase. I also believe that outside of energy and commodities there will be real growth coming in the market. But as I have said before, to quote Richard Bernstein, it will be a tough year for investors, but perhaps not for investing.Read More