Ignoring the Good News?

When headlines and commentary from main stream media seems obsessed with the negative and sensational---“falling off the fiscal cliff” and “collapse of Europe” for example, a careful review of all sources of NEWS gives a different picture with headlines from different sources:

11/9 “Wholesale sales up in USA more than 4.4% YOY”

11/21 “HSBC China PMI at 13-month high of 50.4 in Nov”

11/21 “Housing starts in America rose by 3.6% to 894,000 in October, the highest in over four years”

11/22 “Mark Hulbert: Insider behavior points to imminent rally”

11/29 “World Economy in Best Shape for 18 Months, Poll Shows”

11/30 “Corporate Profits highest in History”

Link to FRED

As I’ve indicated previously, be prepared for markets to move up and down a lot as headlines focus on comments from political figures prognosticating about the Fiscal Cliff and the European Economy.  But also as I’ve mentioned previously, stock markets are ultimately driven by corporate profits and as can be seen in the chart above---the trend is UP, UP, and UP.  Certainly that trend will reverse at some point—that is what is behind the fear of the Fiscal Cliff and the situation in Europe—the fear that this upward trend will turn downward.  But considering that profits are up 300% over the past 10 years and the S&P500 is up only 50%, it is highly probable that markets are presently undervalued and that we have a ways to go before we see a major drop in markets.

We all know that sooner or later, taxes are going up and the growth of government spending will be restrained.  Government deficits cannot go on forever. The situation in Europe and political struggles in the US are all about this process.  While in the short term, the implementation of actions to reduce those deficits may restrain economic growth—in the long run, these actions are positive. The size of the Fiscal Cliff and European Austerity do not make me fearful--they only bring attention to the enormity of the real problem--continuing large government deficits that cannot be sustained. Big Government is scary, but Big Government running on borrowed money is terrifying.

The real potential economic pain over the long term will not come from actions that reduce government deficits, but rather from political inaction that allows these deficits to continue unabated. I pray for the wisdom and courage of our elected leaders.

For now, I'm still indicating that for long term investors, staying the course for now is probably the best course of action.

This paper is for educational purposes and for the sake of discussion. It is not a sales presentation and not a recommendation or personal investment advice. Opinions provided are exclusively those of Wayne Strout and are not the opinions by any financial institution. All investing involves significant risk of loss and there is no proven method to eliminate that risk. No investment should be made without a complete due diligence process, fundamental analysis and a discussion with your personal financial advisor.

As a service to my clients, links to articles that go with the headlines are available at my “with permission only” Twitter site:  @waynestrout  https://twitter.com/waynestrout  When encountering any comments there thought to be political, please consider I am a politically conservative Independent. I believe in small government strong enough to protect individual liberty and active enough to promote general prosperity; personal responsibility and personal liberty; a strong defense but with a reluctance to make war; and a compassionate Christian based (Love thy Neighbor) charity toward the disadvantaged.

Deja Vu All Over Again?

As I write this today, I’m looking at my computer telling me that from 11:30 AM to 12:30PM, the S&P500 has risen almost 1.5%, from 1340 to 1360 (Dow up 126 points) in one hour! All because of a statement from John Boehner, that his meeting today with President Obama and others was “constructive”.  

One should keep in mind that the Fiscal Cliff is not 2008 all over again---it is more like 2011 all over again.  A review of events last year leading up to the deadlock regarding the debt ceiling and resulting credit downgrade provides some possible insight into the present situation.  Remarkably it involves all the same players—the major difference being that today, we are not in a pre-election year. Keep in mind, the uncertainty regarding Europe’s economic problems remains about the same now as it was last year. Between May and the end of June in 2011, the S&P500 fell about 7% as it appeared that there was major disagreement between the House and the President. Then, once it was clear that negotiations had failed and the unexpected worst case (credit downgrade) in fact occurred, the S&P500 fell another 11% to 1123.  Seven months later, it had risen 25% to 1408.

Between September 2012 and now, the S&P500 has fallen about 7% as it became clear there was a possibility that the Fiscal Cliff would not be resolved---especially after Obama’s unproductive “dig in his heels” speech/press conference on Wednesday of this week. Most probably, worst case is the remote possibility of another 11% drop, like in August-October 2011. Some investors will attempt to avoid this drop and time the market by selling good investments. This is a very dangerous strategy because they would likely be caught flat footed when/if a settlement is reached with markets rising rapidly. Wharton’s Jeremy Siegel has predicted the possibility of a 1000 point gain in the DOW in one day!

Another major difference between 2011 and now, is that the VIX index, a proxy for “fear” in the markets was an elevated 40+ last year and has remained a relatively low 18 or so over the past few weeks.  Importantly, the another difference is that last year, no significant fiscal tightening occurred--fears about the Fiscal Cliff have to do with substantial fiscal tightening. What history teaches us is that the “players” in this drama, have probably learned that deadlock is not a good outcome for them.  Also, they have never shown a willingness to allow higher taxes on lower income citizens or to knowingly allow circumstances to increase unemployment in the short term. For this reason, the likelihood of some form of negotiated settlement is high. (They are not prone to committing political suicide.)

The reality is that the settlement most probably will involve significantly higher taxes on higher income investors.  Hence, we have seen selling of even good quality stocks over the past two weeks—mostly to harvest capital gains but with some foolish attempts to avoid paying higher taxes on dividends.  Polls indicate that more than 74% of investors plan on buying in the dip or holding. Still the small percentage that have been selling into a market with few buyers has caused the market to fall. When sellers outnumber buyers, markets fall—and few, even the most optimistic investors, have been buying recently.  The “stay the course” strategy is what the vast majority of investors are following.

As I mentioned in my last post—long term investors should focus on the long term, and in this case, other than some “temporary” risk in the short term—the most likely outcome 6 months out is a substantial rise from here. Best guess—an S&P500 level likely above 1500 before March 30.

This paper is for educational purposes and for the sake of discussion. It is not a sales presentation and not a recommendation or personal investment advice. Opinions provided are exclusively those of Wayne Strout and are not the opinions by any financial institution. All investing involves significant risk of loss and there is no proven method to eliminate that risk. No investment should be made without a complete due diligence process, fundamental analysis and a discussion with your personal financial advisor.

Afraid of the Fiscal Cliff ?

Go to Turner Classic Movies--click on this link.

The phrase "FISCAL CLIFF" was coined in early 2012 by Fed Chairman Ben Bernanke.  One would not have expected an economist to be so artful in his presentation, but it shows just how masterful Mr. Bernanke is as a politician.

The video clip above is from the classic 1951 film, African Queen. Specifically the scene as the boat is approaching and navigating the first set of rapids.  It is a useful metaphor as the true risks of the fiscal cliff are more like shooting river rapids than falling off a cliff. (Video courtesy of TCM for non-commercial use. (http://www.tcm.turner.com/mediaroom/) Plays well on your smart phone.)

For the record, although the explanation wasn’t reported or repeated as much as the catchphrase itself, Bernanke actually said the fiscal cliff was about the large spending cuts and tax increases already scheduled to occur being far too big for the current U.S. economy to handle at one time. “I hope that Congress will look at [the spending cuts and revenue increases] and figure out ways to achieve the same long-run fiscal improvement without having it all happen at one date,” he told the committee.

Bernanke indicated that all of the upcoming taxes and spending cuts were probably good for the country and the economy (i.e. "long-run fiscal improvement") in the long run, but he was concerned about the changes all happening "at one date".

There is in fact many moving parts of this issue.  Politicians have procrastinated and put off decisions for so long, the list has become quite long.  Changes to Federal Estate Taxes could have big effects on those with estates greater than $1 million.  Changes to Alternative Income Tax rules could subject a surprisingly large number of people to much higher income tax rates.  Going back to the 2010 payroll tax rates would reduce take home pay of nearly the entire population and probably would reduce consumer spending.  Expiration of the Bush Tax Rates could significantly raise taxes on dividends and capital gains.  And, then the new taxes related to Obamacare take effect.  On the spending side, there are big cuts in Defense Spending--large enough that a lot of people employed by government contractors will lose their jobs.

If Congress does nothing and everything scheduled to change, does in fact change all at once, the effect on the economy would be large and potentially dangerous--sort of like shooting the rapids.   Nobody and I mean NOBODY knows the actual effects or outcome, for sure.  So this is an event made for the media. Who needs the Mayan 2012 end of the world story when we have the Fiscal Cliff to scare everyone who shakes at the thought of potential danger!  What you are hearing on TV and reading about now is like the movie trailer for African Queen---intentionally sensational to get your attention.

I use the term potentially dangerous in that even though it would definitely cause a short term slowdown, it would definitely move us toward the dramatic "long-run fiscal improvement" that we all know must happen, sooner or later.  So don't be surprised if some very intelligent people seem to be quite nonchalant about the possibility of complete deadlock in Washington.  It is the "long-run fiscal improvement" that is the most important to our future economic prosperity.  Sort of like going on a diet to lose weight---the benefits of the weight loss are known---the discomfort from being hungry and doing without will simply determine the length of time it takes to achieve the goal.

Having lived through many election and economic cycles, I've learned that usually the actual outcome is never as bad as feared by the pessimists and never as good as hoped by the optimists.  I've also learned that politicians seldom will intentionally approve an action that is generally feared and unpopular with their "constituents".  So, the most prudent expectation is that some sort of compromise will be found and the Fiscal Cliff will be more like a Fiscal Step.

On the other hand, this is a very divided country. President Obama was re-elected by only a 51% majority and he LOST 24 of the 50 states. Despite claims of great victory and a "mandate", this one was a very close election and the politicians' "constituents" still have very different opinions about tax and spending policy.  A "deadlock" like the 2011 debt ceiling debacle is unlikely, but possible.

Then, one must remember that even though January 1 is a "deadline", there is a long history of tax policy being changed "retroactively".  So a "deadlock" might be followed by a "compromise".

As markets wrestle with that possibility of "deadlock" and "compromise", they will fluctuate significantly.  Hence, the next 60-90 days is full of short term risk and opportunity. 

One example is the discussion about changes in taxes on dividends--a very large portion of stocks are held in IRA's and 401K's where a change in the tax rate on dividends will have not effect at all.  And, the "alternative" to dividends is interest that is already taxed at a high rate.  Any drop in prices because of people selling dividend paying stocks should be seen as a buying opportunity. Another example is the effect of changes in Capital Gains and Health Care Excise tax rates. For the most part, this change will most effect those with incomes over $250,000 and securities like Apple where capital gains have been and are likely to be a large part of the total return.  Prices on these stocks may fall more than others.

Should one be a buyer or a seller in this environment?   I think gambling and trying to predict the outcome and timing of complex political negotiations in the short run is unwise for a true long term investor.

On the other hand, there is almost universal agreement that whatever the outcome, economic growth and prosperity at some higher level than now is coming--sooner or later. Higher taxes will slow down consumer and business spending--but a lower deficit may make the climate for long term investment more attractive.  Keeping taxes low may force lower levels of government spending,  but will encourage higher levels of consumer and business spending and may also reduce the deficit, making the climate for long term investment more attractive.  One should remember that while consumer spending is 70% of the economy, much that is spent drives up imports without really improving our economic long term welfare and domestic employment.

The worst possible outcome--not expected by many--would be some sort of compromise where the deficit does not get smaller any time in the near future.  A bad outcome for investors would be where taxes don't go up and spending does not go down over time.  This would make the general public happy in the short term, but the likelihood of high levels of inflation would be almost inevitable.

We can argue about whether we would be better off with one outcome than another.  I have personal convictions that big government will generally make most investors less wealthy. So for my own sake and the sake of my investor clients, I am an advocate for government being as "small" as possible. (Sort of "A government big enough to do things for you is big enough to take things from you" philosophy.)  But, I also have strong convictions that wise, patient and prudent people can do well over the long run, even in less than optimum situations.  Good quality investments, chosen because of their ability to prosper in a given environment will do well. Wherever there is risk, there is opportunity, and whenever a trend is identified, you can make it your friend. Because of the election, government over the next two years will get bigger. But do not forget that we still have a divided government, so government growth will be constrained.

So for long term investors already invested--staying the course makes sense. For long term investors with new funds--entering the market as a buyer when the market dips may be wise.  When the outcome is known with certainty in January or February, it may then be wise to make adjustments to be sure your investment strategy is optimum given the known landscape--not exiting the market but rather a consideration toward changing the allocation. All of this of course depends on your tolerance for risk---investing is never an activity whose outcome can be predicted with 100% certainty.

Be sure you have sufficient liquidity to ride out these storms and stay focused on investing for the long term. Be diversified.

Most likely, like in the movie, we'll make it thru the rapids just fine---I'm sure that for most of us, unlike Rose (Katherine Hepburn in the movie), we will not find the experience and drama to be "invigorating".  Times like these are very difficult for investors and I for one am looking forward to less drama.

This paper is for non-commercial educational purposes and for the sake of discussion. It is not a sales presentation and not a recommendation or personal investment advice. Opinions provided are exclusively those of Wayne Strout and are not the opinions by any financial institution. All investing involves significant risk of loss and there is no proven method to eliminate that risk. No investment should be made without a complete due diligence process, fundamental analysis and a discussion with your personal financial advisor.

Don't Oversimplify

Reading the headlines one could conclude that markets are “plummeting” as a reaction to the election last night.   That conclusion would be an oversimplification and generally wrong.

Without taking sides in the political discourse, in my professional role as an “investment economist” I can tell you that today’s market action probably has more to do with Europe than the election in the US.  

After being fixated on our election for the past few days, this morning, traders focused attention on Europe and did not like what they heard---the head of the ECB indicating that inflation was not a risk because the economy in Europe was so bad and likely to be bad for a long time!   Yes, the Dow fell more than 2.5% in the morning, but dollars flowed from Europe and the stock market into US Treasuries. If you don’t have confidence in the leadership of the US government—it is not logical to buy IOU’s from the US government.  At about 11 AM, the DOW began rising steadily.

No doubt, a certain portion of the nearly half of the electorate who voted against the incumbent have sold stocks this morning—sort of a vote of “no-confidence”.   But, in fact, the election has essentially changed nothing—we have the same political situation that we had a week ago, and I would argue, the markets have essentially expected this very outcome. (With one exception—namely that coal and energy stocks had risen in anticipation or hope of a Republican victory and they have fallen back considerably today.)  As I write this, the DOW is essentially close to the August 30, 2012 level. 

Framing (many times influenced by media headlines) is a nasty behavioral bias that pre-disposes humans to certain behaviors—a desire to simplify a very complicated world using certain pre-conceived notions.  Oversimplification is dangerous. Concluding that all rich investors are unhappy with the outcome of the election and are selling their stocks would be wrong.  Data shows that the 10 richest counties in the US voted overwhelmingly for the incumbent—more than 60%!  (My take is that the election results are not related to a struggle of haves against have nots, but rather “traditional” values against secularism.)   

As I have stated, we are in a period of great uncertainty about Europe, China, Middle East Geopolitics, and US Monetary/Fiscal/Tax Policy.  Any of these could and probably will affect markets in the short term. But it is precisely because of this short term uncertainty, stock prices are depressed—providing very good long term opportunity in many cases, for specific investments. In addition, history teaches (since 1950-13 out of 15 quarters following a presidential election) that there is an 86% probability that markets will be higher on 12/31/2012 than they are today.

While there seems to be a lot of risks affecting short term global growth---there is growing evidence, barring any unexpected global shock, that robust global growth is on the longer term horizon. Beware, when robust global growth returns, it will probably bring along it’s pesky friend—inflation.

The only thing that I see that is more dangerous than oversimplifying is paying too much attention to media sources whose main goal is to entertain and to sell advertising rather than to inform.

This paper is for educational purposes and for the sake of discussion. It is not a sales presentation and not a recommendation or personal investment advice. Opinions provided are exclusively those of Wayne Strout and are not the opinions by any financial institution. All investing involves significant risk of loss and there is no proven method to eliminate that risk. No investment should be made without a complete due diligence process, fundamental analysis and a discussion with your personal financial advisor.

Mixed Messages

After a nice 6% gain in the S&P500 from August 1 thru mid October, the S&P500 has gone back to the level of August 7. (Down 2% this week.)  Still, that’s a 12.7% gain since October 26 of last year.

Things seem to be getting better, slowly.  But, nobody is quite sure what the short term future holds.

Up until recently, consumers seemed to be a bit in a funk, worried about unemployment and falling housing prices. Today, however, Consumer Sentiment rose to a level higher than any level since 2007. Unemployment and housing seem to be improving.

Presently, the worry seems to be concentrated in the upper levels of management in the business community.  Corporate Earnings, that seemed to be growing, despite or even perhaps because of high unemployment in the past, have now stopped growing in the aggregate. (They’ve fallen in the important Tech Sector.) Most companies are still doing quite well, but warnings from pessimistic CEO’s about the future has created some pause on the part of institutional investors and speculating short term traders.  (Keep in mind that CEO’s love to “sandbag” and lower expectations as they generally look smarter if they beat estimates about the future rather than fail to meet them. That is why I always take “forward guidance” and “analyst expectations” with a grain of salt.)

Seems like consumers are not too worried about the heralded “fiscal cliff” of rising taxes and lower defense spending—figuring that no matter who gets elected this year, for the most part, individual taxes for most people will not be going up very much.  Business leaders on the other hand are saying that they are very worried. 

Consumer Sentiment and Business Sentiment are both important. Consumer Sentiment (presently up) determines consumer spending—around 70% of the economy. Business Sentiment (presently down) determines business investment and employment decisions---which tend to affect Consumer Sentiment in the future.

All that this situation tells us is what should already be obvious---in order for corporate profits to rise and the stock market to rise in response---we need growth in global demand.  Trust me---every politician and government in the world knows their job depends on robust global growth resuming and they are doing everything they know to do, to make it happen.

Markets are still wary of uncertainty about Europe, China, Middle East Geopolitics, and US Monetary/Fiscal/Tax Policy.  Any of these could affect markets in the short term. But it is precisely because of this short term uncertainty, stock prices are depressed—providing very good long term opportunity in many cases, for specific investments.

While there seems to be a lot of risks affecting short term global growth---there is growing evidence, barring any unexpected global shock, that robust global growth is on the longer term horizon. Beware, when robust global growth returns, it will probably bring along it’s pesky friend—inflation.

This paper is for educational purposes and for the sake of discussion. It is not a sales presentation and not a recommendation or personal investment advice. Opinions provided are exclusively those of Wayne Strout and are not the opinions by any financial institution. All investing involves significant risk of loss and there is no proven method to eliminate that risk. No investment should be made without a complete due diligence process, fundamental analysis and a discussion with your personal financial advisor.

WS Wealth Managers Ranked #1

Money Manage Review, a national publication, recently ranked WS Wealth Managers Inc. as the top US money manager for “Balanced” investment portfolio strategies (out of 77 managers) based on Performance, Risk and Efficiency over five years  (June 2007-2012) with their WS Classic Defensive FOLIO.  The WS Classic Defensive FOLIO is a part of the WS Managed FOLIO Program, managed by Wayne Strout, with assets held at FOLIOfn Investments Inc.

According to MMR’s rankings:  Performance, the higher,  the more money earned for clients;  Risk is variability, the lower being a more reliable performance over time; and  Efficiency,  a measure of how much Performance the manager has achieved per unit of risk assumed.  Achieving higher relative Performance with a lower relative Risk is considered good.  Every quarter MMR averages these measures to yield a total score used in their ranking process.

A “Balanced” investment portfolio, according to Investopedia  is  “A portfolio allocation and management method aimed at balancing risk and return.” suitable for investors with a longer time horizon (generally over five years), that have some risk tolerance.

Call Wayne Strout at 800-425-1978 for more explanation and/or a discussion regarding your own portfolio.

Don't be a Financial Hypochondriac

Excess of Pessimism, Don’t be a Financial Hypochondriac

"In the United States today, we have more than our share of nattering nabobs of negativism. They have formed their own 4-H club -- the hopeless, hysterical hypochondriacs of history."  The above is a famous quote from 1970, an excerpt from a speech written by then Nixon speechwriter William Safire, spoken by Vice President, Spiro Agnew about the media.

“If its individual citizens, to a man, are to be believed, [America] always is depressed, and always is stagnated, and always is at an alarming crisis, and never was otherwise.”
-Charles Dickens in 1844.

Is there really a valid reason to be pessimistic, or is it just a normal state of human nature?   Is our current situation really that bad?  Is the world really facing impending doom? Or have we become a nation/world of financial Hypochondriacs.

In his book, “Upside: Surprising Good News About The State Of The World.", Bradley Wright tells us that while we are generally optimistic about our individual futures, we are bombarded with “news” from “prophets of doom” about the world in general. “Forecasting doom is a viable career strategy, complete with strong book sales, frequent media appearances, and the occasional Nobel Prize.”, he says.  Such “prophets of doom” have been at it for hundreds of years. For example, in 1766, Malthus predicted that the human population would continue to grow until it exceeded the availability of natural resources needed to keep humans alive—in other words, we would run out of food.  Instead, the world is getting more obese every year—despite there being more than 6 billion of us, we have too much food! Remember that it was predicted that all the computers would stop at the Y2K date—it did not happen. We were told the world would end if S&P downgraded the US’s credit rating—interest rates did not rise—they went down to record levels as people all over the world want to lend money to the “downgraded” US Treasury!

With the explosion of media sources, it has only gotten worse as one way to gain attention is to exaggerate the negative.  We have little “news” today from the media and way too much opinion.  Pundits don’t report that markets fell, instead they tell us they plunged.   Instead of opinions of what is most likely—we get a steady stream of what extreme negative outcomes might be possible. We don’t talk about a debate and conflict about tax policy—we are told there is a fiscal “cliff” that we might fall off of.  Every organization or government that has excess debt is a potential “Lehman Moment” likely to escalate into worldwide financial ruin. (An interesting fact is that if you simply ignored the real “Lehman Moment”; Lehman Brothers bankruptcy on 9/15/2008, and owned the S&P500, your investment would today be 9.4% HIGHER. If you had bought the S&P500 the day before the TARP bailout was approved in October 2008, your investment would today be 25% higher.)

The media pundits throw out outrageous headlines so we pay attention to the advertising that follows and don’t change the channel. The average person just does not have the time to sift through this hyperbole to get the real facts. (I now have to spend a lot more time sifting through “information” sources to make any sense from it. There is a lot more “noise”. )  With so many terrible outcomes “possible” many people conclude maybe “where there’s smoke there’s probably fire—so I’ll just do nothing and sit this one out”. Indeed, that seems to be the most common reaction as people and corporations hoard cash and “conservative” investments like T-Bills paying less than 1%. (“I’m not making anything but it’s not going down” is a common thought.) Earlier, I mentioned Bradley Wright’s conclusion that people are generally optimistic about their individual futures—but it turns out there is a paradoxical “optimism gap”. Most people are generally pessimistic about other people’s future and the world in general.

Admittedly, there is a clear economic slowdown occurring in parts of Europe.  This will and does effect the US and Chinese economies by reducing exports to Europe.  The falling Euro currency exchange rate does in fact make US based global businesses less profitable.  Admittedly, there is political turmoil in the US regarding taxes and government spending.  While there is a potential for real drama, the worst case scenario is so improbable, worrying about it is like worrying about a global pandemic or a massive life-extinction asteroid strike.   Yet, an unhealthy obsession on low probability events is what markets have succumbed to over the last three years.  Good news is being dismissed as irrelevant and bad news gets most of the attention.  If we let such negativity affect other parts of our lives, we would become agoraphobic, never venturing out into the “risky” world.  

Let’s focus on just a few bits of good news:  This quarter, ATT reported best profits from wireless phones—ever. Boeing increased its guidance for future earnings from airplane sales. Caterpillar raised its guidance with revenues up 21% year over year. Amazon intends to open 12-18 new fulfillment centers over the next year—almost doubling their present number. These companies are financial bell-weathers.   Mortgage rates are lower than ever and home sales are rising so fast that sales are constrained by low inventory! We are on pace to produce and sell 81 million cars and trucks worldwide—a new record.  (More in China than in the US.)  I agree with Caterpillar’s CEO who said, “It does not feel like 2008”.

Excess pessimism causes stock markets to be undervalued and creates big opportunities for investors.  Over the past year international stocks (EAFE) are down 18.74%.  The broad range of US equities, including Mid and Small Cap US stocks (Russell 2000) is down 6.73%.  The Global Developed World Index is down 11.62% Only large cap US stock indexes are up for the last 12 months—but not by much with the S&P500 up 0.45% and the DOW 30 up 1.4%.  Yet during this same period, Caterpillar experienced a 21% increase in revenue and Boeing got lots of orders for new planes.

I do see great risks regarding short term market levels. But, I also see a more likely scenario of time proving that stock markets are presently undervalued significantly.  Energy, Health Care, and Necessities are the themes for future growth.   Do not underestimate the fact that the number of “middle income” consumers worldwide is growing rapidly.

I think the most likely scenario in Europe is that they will do the very least that is necessary—but still they will do what is necessary to avoid the worst case. The ECB has the ability to solve the crisis—only political haggling over political philosophy delays the final solution. (It is highly likely that Greece will exit the Euro Zone with a great deal of teeth gnashing and hand wringing, but what is necessary to stabilize Spain and Italy will be done with a high degree of certainty.)  Europe will continue to prosper and will become significantly more competitive with a weaker currency and lower cost labor from their southern tier countries—Italy, Spain and even Greece. (It may turn out that the lower cost labor results from a mass migration of unemployed labor from the south taking jobs in the north—it is already happening for white collared professionals.)

I think that transportation costs will likely rise and there will be sufficient automation improvements to cause a great deal of manufacturing to return to the US—causing a substantial expansion. I think the US housing situation has bottomed and will begin to expand faster (no longer slower) than the rate of new household creation. I think taxes and interest rates will rise.  I don’t think that these trends will be affected by who controls the White House or Congress.  Who controls the White House and Congress will not determine a positive or negative outcome—simply the magnitude of the positive outcome—and which part of the population gets the most benefit from growth.

I think US politicians of both parties will do the very least that is necessary to compromise—but will still do what is necessary to avoid the worst case. Sooner or later taxes will go up and deficits will go down as the cost of servicing debt with rising interest rates will become more significant.  As interest rates rise, more US debt will be held by US citizens, many of who are retired who will plow the income back into the economy.

Political haggling in Europe and the US has been going on for hundreds of years—you can’t sit on the sidelines just because politicians are fighting and haggling. Capitalism has and will continue to prosper, despite politics.

I think that the growth of the middle income population in the emerging markets of Brazil, China and India will be phenomenal. Along with improvements in communication technology, this theme is probably more significant and will affect us more than the industrial revolution and railroads affected the world in the 1800’s.

Keep in mind that investing requires patience and a focus on long term value.  And, without income over the long term from investing, it takes a lot more money to support a comfortable retirement. Also keep in mind that your investment portfolio is always subject to short term risks and fluctuations.

Always remember that on any given day, half the participants engaged in short term stock market transactions are wrong as the market moves the next day in the opposite direction they expected. It is those that predict the long term direction of stock markets that have a much higher probability of being right.

My advice—be cautiously optimistic and take advantage of price levels of great, well capitalized companies that seem quite attractive. My long term indicators are 80% green. (They have not been this high since 2010.) The higher your tolerance for short term risk and fluctuation, the more patience you have, the higher your exposure to global stock markets should be. (Heed all the warnings in the disclosure below.)

I wrote this in 2010—it is on our website, www.waynestrout.com. It is still valid.

“Ever since Adam and Eve were cast out of Eden, Life has been uncertain, difficult and dangerous. Uncertainty, difficulty and danger will continue to exist. Some will be able to recognize opportunities despite such danger and difficulty and will prosper mightily. Others will simply adopt proven strategies to survive and prosper reasonably in a changing world where the future will always be uncertain. In the longer run, the future is seldom as bad as the pessimist believes, nor as good as the optimist predicts.”

------ Wayne Strout, 2010

This paper is for educational purposes and for the sake of discussion. It is not a sales presentation and not a recommendation or personal investment advice. Opinions provided are exclusively those of Wayne Strout and are not the opinions by any financial institution. All investing involves significant risk of loss and there is no proven method to eliminate that risk. No investment should be made without a complete due diligence process, fundamental analysis and a discussion with your personal financial advisor.

Uncertainty and Short Term Foolishness

Last week in my article, “Should we really be that worried?”  I indicated that all of the media and market hype about the election in Greece would probably turn out to be a bit overdone—and I was right—the Greeks made the right choice and markets sort of yawned.  Then the hype turned to anticipation that the Fed was soon about to institute QE3 stimulus—they didn’t—they did however continue Operation Twist, a form of stimulus, not quite as powerful as QE3.  Piling on, Goldman Sachs issued a report that the market was headed for a fall, and Moody’s downgraded 15 banks---markets did not yawn about this—we had a 2% drop on Thursday—heralded by the media as the second worst day in the market this year.

Bottom line—on Friday we are almost at the same market level we were last week (Thursday close).  Five days of drama---not much change.  Five days of drama—convincing many that it might just be smart to “wait” before doing anything. Considering the US Election, Supreme Court Ruling on ObamaCare, Europe, a possible slowdown in China, and what has been referred to as the “Fiscal Cliff” (yikes!) coming up, it is certainly true that there is a high level of perceived uncertainty.

How much is the uncertainty costing us? Nick Bloom and Scott Baker of Stanford University and Steve Davis of the University of Chicago constructed an Uncertainty Index, concluding that the rise in uncertainty between 2006 and 2011 reduced real GDP by 3.2% and cost 2.3 million jobs. Investors and CEO’s are all doing the same thing—holding back on action—keeping too much cash on the sidelines and not making commitments that might be risky in the short term—no matter how good they look for the long term. (This will change—we just don’t know when. My opinion is that in times of “normal” confidence levels, the market would be at least 20% higher than it is today.)

Do you think the “experts” have less uncertainty.  Like I said, Goldman Sachs,’s Noah Weisberger, the Head of Goldman's Macro Equity team, yesterday cited evidence of economic weakness as the catalyst for an expected drop of 5% from the then current S&P500 level of 1351. But, in March, with the S&P500 at above 1400, Goldman's Chief Global Equity strategist Peter Oppenheimer made the case that stocks were historically cheap relative to bonds and the anticipated growth rate. Their report was titled “The Long Good Buy: the Case for Equities”. Abbey Joseph Cohen, Goldman’s well respected Senior Investment Strategist said yesterday, “With the global economy expected to expand 3.2 percent this year, "our intermediate and long-term view on U.S. equities is positive.” 

The perceived confusion and inconsistent positions of Goldman’s star fortune tellers is really not inconsistent---it describes the “normal” situation for investors----SHORT TERM RISK and LONG TERM OPPORTUNITY.   Stocks are cheap. Could they get cheaper?  Yes. Should you care?  Maybe not—as long as you are not cashing in all your investments next week or next year. Are you trading for short term profit or investing for long term gain and income to secure a comfortable 20” year retirement? It is hard to be a long term investor in a world dominated by media and speculators who are foolishly  obsessed with what might happen tomorrow or in the next few weeks.  Remember the quote, “When others are greedy, be fearful but when others are fearful—be greedy”. Sitting it out on the sidelines, being overly cautious just might not be as smart as you think.

This paper is for educational purposes and for the sake of discussion. It is not a sales presentation and not a recommendation or personal investment advice. Opinions provided are exclusively those of Wayne Strout and are not the opinions by any financial institution. All investing involves significant risk of loss and there is no proven method to eliminate that risk. No investment should be made without a complete due diligence process, fundamental analysis and a discussion with your personal financial advisor.

Should we really be that worried?

Like the famous Yogi Berra quote, “it’s like déjà-vu all over again” or the movie “Ground Hog Day”, we seem to be seeing a repeating pattern of extreme worry and hope.  Although the facts indicate we are in an economic recovery, and corporate profits are setting new records, fears that “it’s only temporary” or “bad is coming back anytime” seem to permeate the psyche of many.

Then add the crazy scenario of Europe with a big election in Greece coming over this weekend (June 17).  Since the Euro Zone and the Euro as a currency are relatively new, nobody really knows what happens if Greece defaults on it’s massive debt, and what happens if they abandon the Euro currency.  The worst fear is always the fear of the unknown.  And…fear sells a lot of newspapers, tv and website ads—so be prepared for some really wild headlines. It is possible that we could see some movement in markets—up or down—but nobody knows what direction or amount—nobody.

Markets like certainty, so really, the worst outcome of the Greek election will be if it is an uncertain one.  But even if it is an uncertain one, history teaches us that those that are “in charge” are probably ready to take dramatic action to calm things down if they get too crazy.

So far, even the biggest pessimist must admit that somehow, over the past four years, the worst fears have generally been very exaggerated and wrong because for the most part, the people “in charge” have responded in a way that keeps the worst case from occurring---or the problems were not anywhere near as serious as reported.   I think my previous posts pretty much sum up how markets act---they are manic depressive and bi-polar to the extreme.  Smart “investors” take advantage of this fact. 

Despite all this fear of short term issues, to me and many others, it appears that bonds are getting very expensive and stocks seem very cheap.  Maybe bonds will continue to go up and many stock prices will continue to be depressed or even fall, but….it is really hard to imagine that stocks are not significantly higher five years from now.  It’s also hard to imagine that rising interest rates and rising inflation are not the most serious issues going forward.

It is hard to be a long term investor in a world dominated by media and speculators who are obsessed with what might happen tomorrow or in the next few weeks.  But history teaches that speculators are playing a zero sum game and long term investors generally become more wealthy by owning great companies during good times and bad.  Long term investors do especially well when they buy some stocks during periods when stock prices are low—like now and most probably next week.

Remember the quote, “When others are greedy, be fearful but when others are fearful—be greedy”.  

This paper is for educational purposes and for the sake of discussion. It is not a sales presentation and not a recommendation or personal investment advice. Opinions provided are exclusively those of Wayne Strout and are not the opinions by any financial institution. All investing involves significant risk of loss and there is no proven method to eliminate that risk. No investment should be made without a complete due diligence process, fundamental analysis and a discussion with your personal financial advisor.

Sell in May and “Go Away”?—Maybe, but Probably Not

For the past two years, we have been in an era plagued by major uncertainty. After a pretty disappointing 2011 where the only certainty was uncertainty, as we near the end of April, 2012, markets are almost at the same level as one year ago. The domestic large cap S&P500 is up 2.2%, but the Dow Jones Developed World ex US Index is down 15.7%. The Russell 2000 Index, a broad measure of the US market is down 6.4% over the past 12 months. So a lot of a portfolio’s performance was reliant on how much was allocated to domestic vs international and how much was allocated to large cap vs mid and small cap stocks.

To make things even more complicated, the performance of various sectors of the market was very different.  Despite high gasoline prices, the Energy sector is down 12%. At the same time Consumer Discretionary is up 11%.

As I wrote in January, “To many, the market is grossly undervalued.  To others, looking at the same data, the market is set for a fall.”  These are still valid comments in an era of uncertainty.  While corporate profits of large cap US companies seem to be quite strong, the risks associated with Europe, Iran, and China continue to loom large.  Then of course, we have the US deficit and the 2012 Presidential Election.

As we approach the month of May, because of the pattern in 2010 and 2011 being fresh in our minds, the old saw, “Sell in May and Go Away” will be in the press and on investor’s minds.  Here’s the facts:  A) If you sold everything on May 1 and bought the same investments back on October 31 for the past 60 years, you would have done much better than just “holding” through the Summer; BUT in those same 60 years; B) 59% of the time the stock market went up from May thru October; and C) Some summers like 2003 and 2009, markets have risen more than 15%.    The lesson: EACH YEAR IS DIFFERENT and you should act accordingly.

It is highly probable that there is now, and will continue to be some selling pressure thru the first days of May as proponents of the Sell in May and Go Away strategy execute their plans. (A self fulfilling prophesy) Added to this will be increased fears regarding Europe and China.  As I have said, there is likely to be a correction before we begin our rise to new permanent highs. (We have already seen a 4% fall from the 2012 highs—the “correction” might be as little as 5% or as high as 10%.)  

It is generally not wise to sell long term investments based on a strategy that is wrong 59% of the time. (59% of the time over the past 60 years the stock market went up from May thru October) On the other hand, it is probably wise to be cautious upon entry with new investments, using a proven “Dollar Cost Averaging” approach.

For those (and there are many) that are over-weighted in cash, remember that: 1) corporate earnings continue to be strong; and 2) price earnings ratios are relatively low. So, it is likely that sometime soon, in May or June, it is likely that we will see a long term buying opportunity that may prove to be better than most expect.

Dealing with uncertainty is a part of investing.  That is why diversification and choosing proven value oriented investments are always important strategies.  Own companies that are well capitalized, industry leaders in relatively stable markets.  Stick with segments where demand is likely to steadily increase over time.

This weblog is for educational purposes and for the sake of discussion. It is not a sales presentation and not a recommendation or personal investment advice. Opinions provided are exclusively those of Wayne Strout and are not the opinions by any financial institution. All investing involves significant risk of loss and there is no proven method to eliminate that risk. No investment should be made without a complete due diligence process, fundamental analysis and a discussion with your personal financial advisor.

Bull Market as 55-64 Age Group Doubles?

Financial Planning Article by Tom Steinhert-Threlkeld

Quote by Bill Dwyer of LPL Financial....

"In 1988, there were roughly 22 million Americans between the ages of 55 and 64. Those are the years when the amount of retirement funds in a household expand by 46 percent, Dwyer said.

By 2008, that was up to 33 million Americans and this will peak at 43 million in 2020. That means the numbers of Americans in the key age bracket will be twice as large as in 1988. And … these individuals will have three to four times the assets under their control than their parents did."

As the number of investors in this 55-64 "pre-retirement" age group grows in number, sooner or later, history teaches that a large portion of their funds go into equities.  When demand increases, usually prices rise as well. 

As I have stated previously, it is impossible to tell when sentiment changes from it's present pessimistic bent, but when it does, it is likely markets will be surprisingly strong.  It's looking a bit like the late 1970's, absent the inflation and high interest rates.

This information/opinion is for educational purposes and for the sake of discussion. It is not a sales presentation and not a recommendation or personal investment advice. Opinions provided are exclusively those of Wayne Strout and those quoted, and are not the opinions by any financial institution. All investing involves significant risk of loss and there is no proven method to eliminate that risk. No investment should be made without a complete due diligence process, fundamental analysis and a discussion with your personal financial advisor.

Europe? Maybe price of gasoline/diesel is more important?

Informative articles in Morningstar Advisor about Europe:

http://www.morningstar.com/advisor/morningstar-advisor-magazine.htm

How Europe is Making Its Crisis Worse

Impact on US Economy Will Be Minimal

Bottom line:

Bonds that were once thought as "safe" turned out not to be so safe.  And, with 14% of US GDP related to exports, and 22% of that to Europe--Exports to Europe are 3.1% of US GDP.  A 6% decline in sales to Europe would only be a 0.2 % change in US GDP.

While the market seems focused on Europe--watch out for inflating prices, particularly oil and gasoline.  A big rise in gasoline prices is thought by many to be the spark that led to the 2008 decline. People are better prepared today, but it could have a major impact on economic growth in 2012.

This information/opinion is for educational purposes and for the sake of discussion. It is not a sales presentation and not a recommendation or personal investment advice. Opinions provided are exclusively those of Wayne Strout and those quoted, and are not the opinions by any financial institution. All investing involves significant risk of loss and there is no proven method to eliminate that risk. No investment should be made without a complete due diligence process, fundamental analysis and a discussion with your personal financial advisor

Don't Fight the Last War

In November, I wrote that Stock and Bond markets around the world were then what I called “Fraidy Cat Markets” where every possible threat was thought by many to surely lead to economic catastrophe. On the other hand, there was fear that perhaps the pessimism was overdone and many had inordinate fear of “missing out” on a massive upturn. As I have said, “Mr. Market” suffers hopelessly from manic-depressive syndrome.  After a pretty disappointing 2011 where the only certainty was uncertainty, January’s “recovery from the depths” was being called a “rally”.  Then on January 25^th, worry took over and markets started to head down a little, again.

To put things in perspective, the S&P500 is around 4% LOWER than it’s 2011 peak, and it would have to rise 20% to reach it’s “all time high” last set in 2007, more than four years ago.

To many, the market is grossly undervalued.  To others, looking at the same data, the market is set for a fall.  My take on this is that we are in an age of pessimism, much like the 1970’s.  Bad, unexpected things have happened to us. Many of us fear that more bad things are coming…again.   Also, the whole world is still recovering from a huge “debt hangover”. History teaches such times when debts need to be repaid or excess capacity absorbed can be pretty depressing, psychologically, if not economically.  But, for the most part, economics and markets are affected by psychology.

Negative psychology or “pessimism” is a headwind causing caution and an undervalued market.  Anything bad that happens may make it worse—in the short run.  This is always a risk for investors. Anything bad that happens can make investments fall in value—in the short run.

I’m clearly one that believes markets are currently grossly undervalued.  Other than in the US, almost every country in the world has been fighting inflation. (Most governments and many investors tend use strategies of the “last war” until they realize they are wrong.)  Governments had been “tightening” by raising interest rates and/or restricting credit, and/or by raising bank capital requirements.  In late 2011, this situation completely reversed with now almost every country in the world “stimulating” by cutting interest rates and encouraging credit expansion. It’s as if the entire world took their foot off the brake and mashed the throttle down to wide open. 

For many years investors have been warned against “fighting the Fed” meaning, that when governments “stimulate” their money supply, economies tend to grow faster, not slower.  Assets tend to go up in value. The risk is not usually small growth, but rather big inflation.  Today the “Fed” is being joined by almost every other central bank in the whole world.

Only God knows the future. So be prepared for the unexpected. Be cautious and stay diversified. But, wisdom and history teaches us that asset prices and interest rates are probably headed up not down in the longer run—especially when government central banks are easing to this extent.  True, borrowing and printing money have ramifications---usually the biggest ramification is inflation.

For the long term investor, this time will probably prove to be an above average opportunity for growth in stock markets. The biggest risk I see being is what few are telling us about—namely inflation.  

This paper is for educational purposes and for the sake of discussion. It is not a sales presentation and not a recommendation or personal investment advice. Opinions provided are exclusively those of Wayne Strout and are not the opinions by any financial institution. All investing involves significant risk of loss and there is no proven method to eliminate that risk. No investment should be made without a complete due diligence process, fundamental analysis and a discussion with your personal financial advisor.