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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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.

 

 

Billionaires John Paulson, Buffett & Trump: Their Money Secrets

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money bags

The ultra-wealthy move markets, news cycles, politics and policy with equal aplomb.

THERE’S LESS GOLD IN THEM THAR HILLS

Let me introduce you to the world’s highest earner. John Paulson started Paulson & Company, a preeminent hedge fund shop. He lucratively bet against the subprime bubble in 2006 and won big.

His latest bet was a little too big, a little too bold. He started his Gold Fund in January of 2010. It hasn’t done too well. Paulson & Co. went from $36 billion in assets down to $19 billion, due in large part to the gold drop.

Paulson’s bet is even bigger, and more unique, because he created gold-denominated shares in his funds. This way you get gold exposure even on more traditionally invested hedge funds.

“We view gold as a currency, not a commodity. It’s importance as a currency will continue to increase,” said the Queens, New York native who earned nearly $5 billion in a single year.

Here’s how well that “currency” has performed since he started. Using the SPDR Gold Trust (GLD; $111.73) as a proxy for gold, it’s been flat since Paulson’s fund was created. GLD traded at $109.80 in January of 2010 and is a couple of dollars higher, as of this writing. Also, the SPDR fund was as high as $185 during that time and is now 40 percent lower.

Take-away: beware of too much exposure to a single asset class.

THE REAL-ESTATE-TURNED-POLITICAL MOGUL

“It’s tangible, it’s solid, it’s beautiful,” so says Donald Trump about his cherished real estate. But is it really that great?

Short answer: pretty much. Longer answer: The Donald is actually invested into quite a few different asset categories. Things like aircraft, licensing businesses and alternative real estate, such as gold courses. He also has about a third of a billion dollars in cash. These other areas produce a disproportionate amount of his cash flow.

The Forbes 400 magazine just had a 15-page expose on “The Maned One,” revealing his ups and downs. Trump was on the inaugural rich list, dropped from it for several years and has been back for two decades.

Take-away: real estate can juice up returns (and risk), help protect against inflation and provide growth, income and diversification.

THE FRUGAL BILLIONAIRE

It’s hard to find much bad to say about our last “big dog”. Investment-wise he is arguably history’s most successful. Although politically he’s gotten a bit controversial, especially regarding taxation and social causes.

I’m talking about The Oracle of Omaha, Warren Buffett.

Buffett’s approach has been the most prudent of the three. His approach is an extreme in diversification. His empire spans hundreds of companies, and stocks, in dozens of countries and industries, churning out billions in new wealth and income on a regular basis. He’s gone a long way since buying a “cigar butt” textile company named Berkshire Hathaway.

Take-away: diversification really does work. For the short-haul and the long haul.

“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….

The Outlandish Prediction by Bill Gross

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Bill Gross is know as “The Bond King.” And with good reason: he co-founded PIMCO and helped grow it to almost $2 trillion in assets. Two trillion! He’s recently left the company, headed to Janus and he always has strong opinions.

A recent Bloomberg headline read: “Bill Gross Says the Good Times Are Over”. Is this really so?

I’ve written about Mr. Gross in the past. He’s also well-known for creating/popularizing the term “new normal.” Basically, new normal means the U.S. will experience a European-style economy: regular high-unemployment and stagnant/low GDP growth in the area of 1-2 percent yearly. My previous article disagreed with this notion. We were simply experiencing multiple bubbles popping over the last full decade (Tech Bubble, Housing Bubble, Commodities Bubble, Credit Bubble, etc. from 1999-2009).

With unemployment steadily dropping and GDP growing 4 and 5 percent in the most recent quarters, The Bond King is being proven very wrong.

But is he right about the current stock market party being over? Yes and no.

I completely agree that we’ll have a market correction (10-20% drop in stock prices) at any time. The U.S. markets have made record new highs and been up for six years straight. So, yes, the party’s over…in the short term.

But long term I think the party’s just begun. If you look at the past 90 years of the market, we have long up and down cycles. They usually last 15-22 years. It’s very, very clear when you look at a chart of stock index prices for this 9-decade period.

Our latest down cycle started around the year 2000. I think the long term cycle, or secular bear market, ended in 2013 when the DJIA broke through to new records. That’s roughly fourteen years. Right on track with history.

Now, in my opinion, we’re starting a new secular (long term) bull market. The kind that can last 15-22 years. But it could be shorter. Things have sped up: information, investment trading, technology, product cycles, careers, etc. This could compress the current secular bull to a shorter time….

Why might we be in a super-bull market? The fundamentals. Michael Jordan said “You can have all the physical ability in the world, but you still have to know the fundamentals.” The fundamentals of the U.S. economy and stock market have never been better. We’re hitting new records in GDP and corporate earnings as far as estimates go into the future.

For example, GDP will go from $17.4 trillion in 2014 to $22.1 trillion in 2019, according to the IMF. And S&P 500 earnings have hit new records for the past four, or so, years and are estimated to hit new records this year and next.

Those are the big fundamentals. Add to that lowering unemployment, real estate sector growth, growing consumer wealth and saving, and lowering consumer and corporate debt and that equals a very positive future.

What Are the 3 Incredible Fed Reserve “Variables”?

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The Federal Reserve is being more transparent, trying to lead investors and the markets with better guidance on their potential actions.

They’ve now winded down their bond-buying program. Next in line is increasing the Fed interest rate. But what do they look at before they pull the trigger?

GDP, Unemployment and PCE Inflation

The brain trust looks at three different variables. Really its four but one is just two different, but very similar, inflation numbers. You can take a look at their latest projections in this PDF.

GDP is, of course, the biggie. If our economy is shrinking, slowing or growing that’s gonna make a huge difference to Fed behavior. Next year they predict a range of 2.1 to 3.2 percent growth. And we just got quarterly numbers saying GDP grew by 3.9 percent!

That’s good news and confirms the belief that they will raise rates in 2015. Fully fourteen, of seventeen, members think 2015 will be the right time to raise rates. Only two members think 2016 is the prime time. So its a good bet that next year we’ll see rates move up.

They also expect unemployment to drop to as low as 4.7% in 2017. Or as high as 5.8 percent, depending on which Fed member you believe. The lower number would be an even bigger improvement than we’ve already seen.

The inflation figure is based on Personal Consumption Expenditures, or PCE inflation. Here they project very moderate rates no higher than 2.4% and maybe as low as 1.5 percent. That’s very moderate and below the 3 percent historical average.

With inflation expectations low rates should move up pretty slowly. They don’t have to put on the brakes quickly to control runaway price increases.

What’s an investor to do? Make sure sure you have plenty of risk exposure, short-maturity bonds and alternative bonds that behave differently than traditional bonds. Also, make sure you’re long-term bond exposure is very light.

Unemployment Goes Down to 5.9%…Defies “The New Normal”

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The economy is chugging along. This drop in the unemployment rate is getting us back to a normalized economy. It was just a matter of time. I’ve been predicting this rate since 2010. In general, recovering from a harsh economy, the rate drops about 1% a year. So, not much of a prediction. More like a rule of thumb that most people didn’t believe any more.

Bill Gross, known as “The Bond King”, just left the company he co-founded, PIMCO. He and his company started this hogwash of a “new normal” economy. Basically, what they meant was the U.S. will be like Europe: regular high unemployment (e.g. 6-9% range) and slow GDP growth of, say, 1 percent annually. Before his departure, he and the company changed this idea to “new neutral”, a more optimistic view. I guess it was just a way of saying the economy is actually quite good and they may have been wrong.

So, yes, the labor participation rate hasn’t really moved. This rate could be considered a more accurate measure of unemployment. But there’s no denying we’ve catapulted out of the economic shed into our typical dynamic growth. When you look at GDP estimates and corporate profits estimates, we’ll hit new record highs for both as far into the future as there are estimates.

Bye bye New Normal.