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

 

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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

How To Profit From Davos, 2016, Part 1

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World Economic Forum logo.svg                        

Many of the greatest economic thinkers, managers and superstars attended this year. There were billionaires, heads-of-state, CEOs, money managers, professors and more billionaires. Did I mention there were billionaires there? This was the place to be.

I ran across this great “highlights” video from Bloomberg.com and was happy to see that the “smart money” confirmed my thoughts: this correction is no big deal. I’ve thought, for two years now, that the U.S. market had been up for 6 years straight and needed to correct. Since we didn’t have a significant, or long, contraction, I thought when it finally hit (now) that it could turn into a small bear market. Thankfully I’ve been wrong on this last point.

But I digress. How can you profit from this correction and multiple global bears and how does it tie into Davos?

Answer: Christine Lagarde, the head of the International Monetary Fund, said in the previous video that “we will have volatility” in 2016. And she’s absolutely right. I’ll take it a step further: We will have volatility every day of every year into the indefinite future! That’s the market. And market participants get rewarded for this volatility and patience. So you, as a brave, courageous & profitable investor, need to buy this volatility. Either in a retirement plan on a monthly basis (best) or making calls on an undervalued sector (maybe even better).

I have an answer for the undervalued sector. To me this is a no-brainer. Find a solid asset in the energy sector. I’m going to repeat a drawing of mine about a specific fund. This is not a recommendation only a vivid example of a cheap asset. I’m actually recommending mid-stream MLP mutual funds. I’m using one now that has a TTM (trailing twelve month) yield of 11.54%.

OIL

Visit my website at RetireIQ.com to request a one-page info sheet on that MLP fund, yielding over 11 percent. Just type in “MLP info” when signing up.

So back to volatility. We, as smart investors, have to have the chutzpah to buy these down times. We get rewarded for buying risk assets at low prices. Assets like stocks, businesses, real estate, even bonds at certain times.

I just finished an article for the local paper The Senior Beacon. Take a look in February when it gets posted (online or in most grocery stores). I go into the recent correction, various international bears and how you could further profit from declines.

 

 

World’s Most-Traded Commodity on fire sale, selling at 64% discount

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OIL

A POPULAR OIL-BASED ETF (symbol: OIL)

A ONCE-HOT MARKET COOLS DOWN TO SUB-ZERO TEMPERATURES

The above picture is an extreme example of the bargains available in the energy sector. I don’t necessarily recommend that ETF but it shows how hard oil has been hit in the marketplace.

The commodity is suffering short-term and long-term issues. According to Nasdaq.com, the 2008 price of crude oil was about $140 per barrel and is now not quite 50 dollars.

WHAT’S THE MATTER WITH OIL?

First, the short-term problem. There’s a global growth slowdown, excluding the U.S., fortunately. The biggest lame duck is China. The fastest-growing economy losing their momentum spells big trouble for all sorts of commodities, ranging from copper and lumber to energy.

Another very short-term, seasonal issue is winter. We just use less gas, and oil, in the winter. We’re not running around having fun in the sun. We’re stuck in the house and at work, using natural gas and electricity.

LONG-TERM, SYSTEMIC OIL PROBLEMS

The major problem: technology, in the form of fracking and horizontal drilling. These two methods are smothering long-term high oil prices. They’re responsible for the U.S. turning around a 60-year (!) trend of fuel importing and turning into a fuel exporter.

That’s huge news. A systemic problem. We’re now in the league of Saudi Arabia and other major oil reservists. This change will have lasting impact in the industry and market.

That being said, is the world going to abandon oil use? Not any time soon. That’s why I’m optimistic about the price of oil coming back. I even made a prediction, earlier in the year, that oil would be 50% higher by the end of December. We’ll know very soon if I made a foolish prediction.

*       *       *

A few widely-held ETFs that are oil plays (and year-to-date performance*):

  • USO: Unites States Oil Fund (-27.90%)
  • DBO: DB Oil Fund (-27.71)
  • IEO: iShares U.S. Oil/Gas Exploration & Production (-21.40)
  • XLE: Energy Select Sector SPDR (-21.06)

And a few popular oil-based stocks (with year-to-date performance*):

  • XOM: Exxon Mobile (-17.25%)
  • CVX: Chevron (26.82)
  • BHI: Baker Hughes (-6.28)

* Data sourced from Morningstar.com

Carl Icahn is worried…Should You be, too?

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Carl Icahn In His Latest Video: "Danger Ahead"

Carl Icahn In His Latest Video: “Danger Ahead”

For those of you who don’t know, Carl Icahn is a famous, “shareholder activist” billionaire. He’s even been called a corporate raider for those wanting to insult him.

But, in my opinion, he and his cohorts are a positive force in the market. When there’s an undervalued asset, bad management or other opportunity, these are the guys that shake things up. They own a lot of that particular corporate stock and if you do, too, then you’re in good company. And, most importantly, your stock may go up significantly.

With that said, I have to take his latest video with not a grain, but a wheelbarrow, of salt. I agree with about 90% of what he says except Icahn’s BIG PREDICTION: he thinks there will be a market crash soon that will make all crashes since the 1960’s look minor. I have to say: “Hogwash!”

For context, the worst crash since the 1960’s was The Great Recession we just endured from 2008-09. Very simply, the big fundamentals were going down. Both GDP (the size of our economy) and corporate earnings (the stock market’s major indicator of health or weakness) were going down. And we were at the end of a massive real estate/lending bubble. In other words, the market deserved to go down 50 percent. Which it did.

So, Mr. Icahn, where are GDP and corp. earnings now? Hitting new records. Like they’ve been doing for the last several years. Like they’re estimated to do for as far as can be forecast.

Just a side note: the wealthy and the politicians seem to have lost touch with Main Street. The video also mentioned various bubbles, one of which was an art bubble! Who cares about an art bubble except the ultra-wealthy? It certainly doesn’t cause a tumble in the U.S. economy….

Here’s a link to the complete video via The New York Times: video

Take a look at Icahn’s video. It is really worth watching. Let me know what you think about this billionaire’s thoughts. Please feel free to comment below or contact me any time at RonPhillipsAdvisor@gmail.com

Will China contagion infect the U.s.?

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china pic2

BIGGER NEWS THAN GREECE OR PUERTO RICO

The Chinese stock bubble popping, their economy slowing and China using less resources…that’s a pretty big deal. These things will impact economies, markets and companies.

HOW IMPORTANT IS THE CHINA BUBBLE?

It’s actually a lot less of an impact on U.S. investors than the media lets on. First of all, the major bubble is in “A” shares which American investors can’t even directly own. Those indexes have dropped over 40 percent.

As a comparison, the largest China ETF (exchange-traded fund), the one most U.S. investors would have, has only dropped about 20 percent. The fund is called iShares China Large-Cap (symbol: FXI). It dropped but only half as bad.

This stock run-up, and drop, was mainly caused by heavy margin buying. Chinese investors are accumulating shares with debt, encouraged by their government to do so. The government was still encouraging it during the plummet.

Leveraging like that can be very dangerous. Especially in an over-valued market. The price and euphoria reminds me a lot of the Tech Boom…and Bust. Even the P/E ratio is similar, a little over forty. This is very high for any major index. The higher this climb, the more over-valued the shares, the harder the drop will be.

CHINA IS BEGINNING TO EXPERIENCE AN ACTUAL “NEW NORMAL”

Bill Gross should be happy now. There is a dynamic economy experiencing his vaunted new normal. It’s just not the U.S. like he predicted. It’s China having the slow-down. The government even conceded, in their estimates, that the economy will “only” grow at 7.5% a year for the near future. This is lower than their previous double-digit GDP growth.

MORE AMERICAN COMPANIES EXPERIENCING REVENUE DECLINES

Besides the weakness in commodities like copper, which China is the largest user of, there are many drops in multi-national company sales. Not all of it’s caused by the overseas slowdown but it must be impacting revenue somewhat.

There could be opportunities in natural resources, China and other Chinese “plays” like Australia. I haven’t fully looked into these yet but, if the drop continues, it could make those investments more attractive. And I certainly wouldn’t bet against this giant economy for the long-term.

does greece matter?

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Greece flag

GETTING RID OF GREECE ANXIETY…

I recently wrote an article about the importance, or lack of importance, of Greece to the U.S. economy. First off, Greece is a wonderful country, having contributed a lot to modern life. Things like democracy, Western philosophy. Big things. But one stat I included in the article sums up their impact on the U.S.:

* Annual U.S. trade with Greece is about one day’s worth of China/U.S. trade

Total annual imports and exports between Greece and America are about $1.821 billion. Total annual trade! Total U.S./China trade for the same year, 2014, was $590 billion. Almost 324 times more trade activity with China!

So forget that anxiety being fed to us by the media. The worse it gets over in the Euro zone the better our economy and market looks to investors. And, since the markets are ultimately a popularity contest, their problems could boost our strength.

The bigger issue could be China’s current problems. I’ll leave that for another post.