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

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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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.

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.

 

How To Profit From Davos, 2016, Part 2

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Recently at The World Economic Forum in Davos, the CEO of PayPal said you can “have the power of a bank branch in the palm of your hand.” I thought that was pretty amazing, if true, and set out to figure out if he was really accurate.

Just poring over my memory of recent commercials, I figured if you had a Samsung (SSNLF 1025.oo, in local currency) smartphone and a Wells Fargo (WFC, $48.56) bank account you could, indeed, have “the power of a bank branch” in your mitts. Wow! You can get a check from a customer, take a picture and deposit it; you could transfer money from account to account and then back again; you could “withdraw” at a store, using your smartphone payment or shop from your phone; you could check balances and transactions, all with an app! This is amazing technology. Unheard of two or three decades ago. Real Star Trek stuff here.

*       *       *

While Samsung is very tough to buy directly for an American investor (I checked into it for a client and, if that same ol’ memory serves, you would need to be a citizen of some European country to get it done). The next best thing is to buy a U.S.-based mutual fund that holds a large position in Samsung. Does such a fund exist? Sure does.

The iShares MSCI South Korea ETF (EWY, $46.77) holds almost 20% of it’s funds in Samsung Electronics. This would probably be the easiest way to get significant exposure to the stock. As a bonus, an investor would also get diversification, liquidity and over 2% in annual dividend income.

Despite the exciting possibility, despite the source of the idea don’t invest a lot into trends. Rarely does it end well going “all in” following an amazing idea. Maybe for a time but not long-term. Yet these industries and ideas can make investors money.

My point here is that following hot ideas is usually a fun way to play with a small bit of money. For consistent wealth-building, though, you want to stick with the very boring approach of asset allocation, true diversification, buying low and time in the market. Sure, play around with 5% of your money but be ready for any result, good or bad.

Here’s the Bloomberg Davos video that got the juices flowing for this article.

For my popular report “10 Investor Oversights” visit RetireIQ.com, enter your info and mention the name of the report to receive a free copy. Also, if you wrangle a new sign-up to this e-letter I’ll give you a $5 Starbucks card. Just direct ’em to the above website. Thanks.

 

 

“Wow,” was All I Could Muster For a Shocked Response

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The other day I picked up a copy of the Wall Street Journal. There was an article about The Great Depression by Morgan Housel. He mentioned a big hedge fund manager thinking that today’s economy is like the 1930s.

The two times are hugely different!

“Let me count the ways”:

1. Today’s economy: Up over 2% versus down 45% then

2. Today’s economy: 89% private and 11% government vs. about three percent federal government spending in The Great Depression (government spending = more diverse economy and on-going stimulus)(also, this doesn’t include current government payouts like Social Security, Medicare, etc. and their impact in the economy)

3. Today’s economy: internet, smart phones, apps, technology, biotechnology, alternative energies vs. none of that (in other words, we have a much-stronger, more-diverse economy)

4. Today’s unemployment: 5.5% vs. 25%

5. Today’s stock market: near historic highs vs. Dow Jones down 89% (and the current market is at an historically average price, when looking at forward 12-month earnings)

6. Today’s banking: FDIC insurance covering $250,000 per account vs. no bank insurance

7. Today’s brokerage: SIPC insurance covering $500,000 per account vs. no brokerage insurance during the 1930s

8. Today’s brokerage: margin limits of $1 equity to $1 debt vs. $1 equity and up to $9 debt! (this made the stock bubble and crash of the 1930s significantly worse and is even blamed for starting the depression)

9. Today’s retirement: Social Security income vs. none

10. Today’s retirement: Medicare coverage vs. none

(Both of these programs create an on-going stimulus from government dollars and a more-stable economy)

11. Today’s liquidity: corporate and personal cash of over $4.148 trillion vs. ??? (I really don’t know how much cash was around back then. I’m pretty sure that it was less than trillions, even adjusted for inflation)

12. Today’s Federal Reserve: experienced and aware of volatility caused by rate moves vs. inexperienced and short-sighted in The Great Depression

This list could be longer but you get the idea.

What was the hedge fund guru, Ray Dalio’s point? That the Federal Reserve is ready to raise rates and this could cause a market panic and drop. So have a lot of cash.

I agree with the “have cash” idea but that’s pretty well covered with over $4 trillion in cash.

Mr. Dalio’s other point was that the Fed Reserve was going to raise rates (like in the 1930s). That’s absolutely true. Rates are at zero. Most likely, there’s only one way to go with them…up. See my post for my predictions for 2015, including rate moves.

So worry not, dear investors, we will have stock market volatility. Probably a correction. Maybe even a moderate bear market. But we may also have a near-repeat of the record gains started in the late 1980s and running all the way through the 1990s.

You don’t want to miss a “super bull market.” Have cash but own a lot of equity….