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.

If you’d like a free report that took 17 years to build, highlighting the ten most-repeated mistakes I’ve seen dozens of investors make, just email the word “ten” in the subject line to RonPhillipsAdvisor@gmail.com

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.

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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.

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

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.

HOW TO GUARANTEE A LOSS: Buy 5-Year CDs

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With interest rates being low for over a decade, it’s tempting to buy long-term products that pay better interest. A lot of investors will look at 30-year Treasury bonds, 5-year CDs or even long-lock-up fixed annuities.

Most of those actions are just about the worst thing you can do with Fed rates being near zero. You’ve probably heard of the seesaw relationship between interest rates and bond prices. One’s up, the other’s down. And vice versa. If you buy a 30-year T-bond, or other long-term bond, at low rates then the chances are very big that you’ll lose principal value when rates move up. Bad timing and low or negative returns.

With the CD or fixed annuity options you probably won’t get hurt. You’re not going to lose principal but you will be locked into rates that likely won’t meet or beat inflation. That means you have a real loss due to a consistently weakening dollar (inflation). A guaranteed loss.

Specifically, if you buy a 5-year certificate, with the current average yield of 1.56 percent, then you’ve lost ground to the average 3% inflation we’ve experienced. And that’s just the government figure for inflation. We all know, when you include food and fuels, real inflation is commonly believed to be even higher. So an investor needs to earn even more to really keep up and grow. But it’s possible.

Also, the fixed annuity could lock you into fees that last 4-7 years or longer. Beware of the exit details.

What’s one solution to low interest rates? Buy “alternative” bonds that have minor impact from rising rates. There’s a lot of different types out there. Also, invest overseas, add more risk categories (like real estate) and seek out sustainable, high-yield investments. Visit my site, RetireIQ.com, and request an appointment. We’ll talk about the details.

 

Will a Dollar Crash Cause a “25 Year Depression”?

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I was on a website last Friday and saw an ad. I rarely click on ads but I couldn’t resist. The headline mentioned something about a 25-year depression. That’s a pretty bold claim. And I know there’s about a million of these outrageous claims on the internet. But what if??

So I clicked on it and started watching a video by Jim Rickards. He sounded pretty qualified despite the puffed-up claims to expertise. And he mentioned something I had read about before that really could be catastrophic: the world going off of the U.S. dollar.

I had worried about this for my kids and future grand kids. But I didn’t think it would happen too soon. Yet it could happen and it wouldn’t be good for America.

To oversimplify the issue, when the world completely drops the U.S. dollar as a reserve currency it will make the price of what we consume at home hugely more expensive. So we can then either consume less or finally start selling more. Or both.

The consume less part would happen right away. We would be forced to do that. Our weak dollar simply wouldn’t buy as much imported stuff (apologies to my high school teacher for using ‘stuff’ as an actual noun).

And we are, thankfully, already starting to sell a little more. Mainly fuels due to the dynamic oil/energy sector.

So it’s a worrisome problem. And it got me thinking: would the world just drop our currency overnight? Unlikely. It’s similar to the holding of our Treasury bonds by foreign investors. They wouldn’t want to sell these bonds all at once, dumping us. That would be horrendous for the values of the bonds. They would all lose billions & billions of dollars. Similarly, dumping the U.S. dollar would hurt the countries importing to America, namely China and other low-cost producers. Not to mention all of the European importing countries and Japan.

Would you harm your biggest client? I don’t think they would either. Everyone sells to everyone in this global mix. So the international community has a vested interest in seeing a slow removal from the dollar. If there’s a removal at all.

What can an investor do? You can increase your international exposure. If you use mutual funds you can get many that are denominated in those foreign currencies. Not only would you be diversifying your portfolio you’d be creating some “currency insurance” within it, too.

Check out this article for another way to diversify out of the U.S. market and dollar: Investing In Stuff