The 4 Fundamentals: Part One

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There’s a lot of “static” competing for your investment attention. You have all of the talking heads on t.v. and YouTube, magazines, newspapers, blogs, websites, social media, apps–the list seems to always be growing.

What about unemployment? Who’s in the White House? What are interest rates at? How many homes are being built? Is China slowing down?

You can answer all of these questions and more and still end up with bad investing information. In this blog series, I’m going to share with you the two major fundamentals and the two minor fundamentals. When you pay attention to the important factors you’ll stay on track, avoiding emotional investing and hopefully making some money, too.

THE FIRST FUNDAMENTAL

The first, and possibly most important, thing to look at is gross domestic product. This is also referred to as GDP, which is simply the overall size of our economy. Up is good and down is bad.

The last time it was down was during the Great Recession. Compared to other drops this one was surprisingly tame, down about 3.5 percent. Of course, we didn’t want it down at all but it wasn’t a devastating drop. This move down in GDP is a big cause of the stock market eventually dropping by about 50 percent.

GDP drops then the market drops. The market follows the fundamentals.

Another time GDP dropped was the Great Depression. The size of our economy sunk about 25 percent! Now that’s a big one. We saw the results of that significant drop: massive unemployment, widespread financial pain, breadlines, suicides–that was a Great Depression, indeed.

But again, the market followed the fundamentals: GDP drops big then the market drops big, too. See, we’ve just decluttered the financial noise you receive daily.

Here’s a good video and description of the importance of GDP on my favorite financial site, Investopedia.com

“I had to spend countless hours, above and beyond the basic time, to try and perfect the fundamentals.” — Julius Erving

 

1999 Again?

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I read an article explaining the similarities of the recent “four-fecta”: the Dow Jones, the Nasdaq, the S&P 500 and the Russell 2000 all hitting record new highs on the same day! Yes, in that respect, it is like the last time this happened in 1999. But the similarities end there, in my opinion.

LONG-TERM CYCLES

The difference between now and the 1999 bull market is that we are not in a tech bubble. Every major index was overpriced when compared to earnings. Now we’re at the beginning of slight overpricing. But when projected out on future earnings, the broad-based S&P 500 is fairly-priced for 2017 and under-priced for 2018.

According to Yardeni.com, earnings for the index will $132.61 in 2017 and then $148.11 the next year. This puts the P/E ratio at 16.52 and 14.79, for each respective year. The 2018 number is below the historic average. That’s why it’s under-valued for that year’s estimate.

We’re actually at the beginning of what I think is a long-term bull market that began in 2013. Here’s an article I wrote then expressing that opinion:  reprint-superbullmarket-senior-beacon-2013-sept-doc

MOVIE REVIEW: “The Big Short”

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If you haven’t seen this movie. Check it out. It stars some big hitters like Christian Bale, Brad Pitt, Steve Carell and a host of other familiar faces. I found it on Netflix and was reminded of this gem by a student in my recent investing class.

For a movie about investing and the housing bubble they actually made it very edge-of-your-seats exciting.

WHAT I LEARNED FROM “THE BIG SHORT”

1. The Value of Short Sellers

The whole basis of the movie is the strategy of short selling. Ultimately, this is profiting from an investment that goes down. What this strategy leads to is a sort of investigative journalism in the investing markets. These short sellers are trying to find the dirty truth of what’s going on with particular companies, industries or entire economies.

When things are being covered up and colluded upon, short sellers will dig for the facts. Like the journalists of old.

2. Don’t Trust Wall Street

They’re always looking out for their fees and commissions. You need to get an expert that profits when you profit and loses when you lose.

3. We’ll Make It Through the Bad Times

Despite massive losses or faults in the system, we will make it to the next stage of growth. The Great Recession was a bleak time. The pessimism was profound. You could feel it in the air.

And then…we made it out the other side.

4. You Need to Diversify

I sound like a broken record on this one. I say it everywhere and to anyone: get into unique asset categories. Not ten mutual funds that sound different. Ten funds that are different. Do your homework. Study up on what your money is in.

5. Most Importantly, Don’t Think You Can Short

You might be able to. You might do it a few times and make some money. But always remember the potential of a short gone bad: you can have unlimited losses.

Just be a “long” investor. If you believe the U.S. and world economy is going to go up, then buy solid, global investments and hang on. If you can get significant income from the investments then that’s even better for you.

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There’s a lot more to learn from this movie. And there’re some fun cameos, too. Take a look.

A Little Bit of Shock Value…

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I just published an article titled “Welcome to 2026.” It showcased my new-found optimism about the future of our economy and our markets. And, admittedly, I was going for a little bit of shock value when, near the end of the article, I declared the Dow Jones could hit 44,000 in ten years. The DJIA is currently around 18,500.

Here’s a link to the article in the local seniors’ paper, The Senior Beacon (article on page 24).

A FEW WARNINGS

After reading some scary articles about the very near-term, I wanted to repeat my warnings. We will absolutely have recessions, bear markets, catastrophes and other bad and volatile events. BUT…those things have never stopped the market in a super-bull cycle.

LOTS OF BAD THINGS

The world’s a total mess: there’s record-high government debt, record-low U.S. interest rates (indicating a weak economy), wars, invasions, bombings, negative global interest rates, worldwide growth slowdowns, Brexit–whoa, gotta wipe the sweat from my brow. Are you optimistic yet?

I’m aware of these major issues. They are important. But they’re not devastating.

WHAT WE’VE TRIUMPHED THROUGH

For example, the U.S. has survived most of those things before, including bigger trials like assassinations, Great Depressions, multiple World Wars, etc. You get the idea. All through this, the markets have reached new highs, generating new wealth.

I believe we’re on the cusp of another super-bull market. We had the latest in the ’80’s and ’90’s. Then we had the worst decade in the stock market. Ever. The worst ever. Even worse than the decade that includes the Depression.

That was the major down cycle. Now I think it’s time for the markets to move even higher up. Get ready for Dow 44,000…

Here’s a link to the article again. Check it out on page twenty-four.

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This report can help you minimize risk, save you $1,000’s in unnecessary fees, protect you and your loved ones from financial devastation, and minimize or even eliminate your taxes on investments. Pull up your email program, put “ten” in the subject line, send to RonPhillipsAdvisor@gmail.com and sit back and wait for the most important free report you’ll ever read on your investments.

Elon Musk: Big and Small Revolutions

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Years ago I knew Mr. Musk would be big–would be a billionaire. The guy was planning on disrupting several industries. He and partners already disrupted the payment industry with PayPal. Now he’s starting to deliver.

MUSKS’ MANY CONTROVERSIES

Now, I’m aware that the billionaire has received a lot of money from the government (billions?), his businesses haven’t made much, if any, money and that some people just don’t like him, his companies or his politics. I understand.

But…

WHAT THE GUY HAS ACHIEVED

…is so significant that it’s now hard to ignore. Here’s a list of some of Musk’s work that is sure to get longer:

  • Co-founded Zip2 at about 24 years old, sells for $341 million
  • Co-founded X.com, turned into PayPal, sold for $1.5 billion
  • Founded SpaceX private space company
  • Space X successfully, privately and profitably supplies International Space Station
  • Invests in and now runs & controls Tesla Motors (TSLA, $195.64)
  • Tesla grows from $204 million in revenue (2011) to $4.046 billion in 2015
  • Tesla sales estimates are $8.56 billion (2016) and $11.71 billion for 2017
  • Essentially co-founds SolarCity (SCTY, $22.24) by supplying the concept and money
  • Went from non-billionaire to $2 billion net  worth (2012) and currently $11.5 billion net worth

Those are some pretty big successes. I know I can learn a lot from him. I hope he writes a book soon.

SO, WHAT’S THE GUY DOING NOW?

Musk and his companies are busy revolutionizing the way we drive, store solar power, interact with power company monopolies, delivering record-busting sales growth, delivering billions of dollars in cars, privatizing space travel and supply, changing commuting patterns and probably a dozen more things I forgot to mention.

So, yeah, are his stocks risky? Sure. I wouldn’t recommend them. Is he controversial? At times, definitely. Has he taken a lot of money from the government? Yep. Have other wealthy billionaires taken money and breaks? More times than we’ll ever know. But I sure wouldn’t bet against this new titan and his concepts.

Romantic Brazil…

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HOME TO THE OLYMPICS, RAMPANT CORRUPTION, A RECESSION & MAYBE THE BEST OPPORTUNITY THIS YEAR

The Olympic Games are close. Brazil and the rest of the world are getting excited. The country has poured billions of dollars into getting ready. It’s sure to be a beautiful event. And, seemingly from Mount Olympus, a lightning bolt has struck Brazilian politics and economics.

They’re experiencing a 5-quarter recession…so far. The government is so crooked that 6 of 10 Congress members are facing corruption charges. The stock market is in the dumps.

SEEING THROUGH THE SMOKE

My favorite investing quote and strategy is to “buy when there’s blood in the street.” Very graphic but very helpful. We want opportunities that are cheap and beat-up. We want discounted assets.

The way I look at Brazil is the country is trading at 2005 prices. At that time, their economy was at about $882 billion. The 2016 estimate is for them to hit $1.53 trillion. That’s an increase of 73 percent! We’re buying a much bigger economy at half the price….

PLAYING THIS OLYMPIC-SIZED TRAGEDY

The largest ETF for Brazilian stocks is the iShares MSCI Brazil Fund ($28.15; symbol: EWZ). It has a 12-month yield of 3.3 percent and a low expense of 0.62 percent per year. The fund has over 60 different investments and over $3 billion in assets.

A warning: the top two stocks make up over 20 percent of the portfolio. So it’s both a concentrated and diverse fund. Yep. Sounds strange but they’ve achieved it. This can be good if you want exposure to Brazil and you have faith in these two companies.

The largest is Itau Unibanco. According to Wikipedia, it’s “the largest financial conglomerate in the Southern Hemisphere.” That’s usually a great way to get exposure to an economy. Banks lend the growth money, profit from upswings and are a good representation of the overall market. Buying a bank is like buying the lifeblood of a nation.

The second-largest holding is Ambev SA. They’re based in Sao Paulo and controlled by Anheuser-Busch InBev. This parent company is the maker of Budweiser, Corona, Stella Artois and over 200 brands. It’s also the world’s largest brewer.

These two concentrated positions look pretty stable and may juice-up the portfolio volatility. Both upward and downward. Yet the downward movement may have largely already happened.

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Political Fighting is Sorta Good…For the Markets

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Yep. That’s about the only thing our political strife produces: solid stock performance. According to S&P Capital IQ research, a mix of a Democratic president and Republican Congress produces the highest annual returns for the Standard and Poor 500 Index (over 15 percent annually).

Also, when there’s a Democratic president and Congress/Senate are both Republican, the performance is over 13 percent.

Not all gridlock is good, though. There are some scenarios where a mix of the three produces underperformance. One scenario is a Republican president and Democratic Congress/Senate, producing only about 5 percent yearly gains.

For this entire time period, starting in 1945, the S&P 500 averages 8.8% per year.

Here’s a link to the article I found explaining this phenomenon. Most articles and research look only at which party controls the presidency. This research is pretty unique in that it covers who controls both houses and the presidency.