Posts filed under ‘Financial Planning’
This article is an excerpt from a previously released Sidoxia Capital Management complementary newsletter (August 3, 2015). Subscribe on the right side of the page for the complete text.
It’s summertime and the stock market has taken a vacation, and it’s unclear when prices will return from a seven month break. It may seem like a calm sunset walk along the beach now that Greek worries have temporarily subsided, but concerns have shifted to an impending Federal Reserve interest rate hike, declining commodity prices, and a Chinese stock market crash, which could lead to a painful sunburn.
If you think about it, stock investors have basically been on unpaid vacation since the beginning of the year, with the Dow Jones Industrial Index (17,690) down -0.7% for 2015 and the S&P 500 (2,104) up + 2.2% over the same time period (see chart below). Despite mixed results for the year, all three main stock indexes rebounded in July (including the tech-heavy NASDAQ +2.8% for the month) after posting negative returns in June. Overall for 2015, sector performance has been muddled. There has been plenty of sunshine on the Healthcare sector (+11.7%), but Energy stocks have been stuck in the doldrums (-13.4%), over the same timeframe.
Source: Yahoo! Finance
Chinese Investors Suffer Heat Stroke
Despite gains for U.S. stocks in July, the overheated Chinese stock marketcaused some heat stroke for global investors with the Shanghai Composite index posting its worst one month loss (-15%) in six years, wiping out about $4 trillion in market value. Before coming back down to earth, the Chinese stock market inflated by more than +150% from 2014.
Driving the speculative fervor were an unprecedented opening of 12 million monthly accounts during spring, according to Steven Rattner, a seasoned financier, investor, and a New York Times journalist. Margin accounts operate much like a credit card for individuals, which allowed these investors to aggressively gamble on the China market upswing, but during the downdraft investors were forced to sell stocks to generate proceeds for outstanding loan repayments. It’s estimated that 25% of these investors only have an elementary education and a significant number of them are illiterate. Further exacerbating the sell-off were Chinese regulators artificially intervening by halting trading in about 500 companies on the Shanghai and Shenzhen exchanges last Friday, equivalent to approximately 18% of all listings.
Although China, as the second largest economy on the globe, is much more economically important than a country like Greece, recent events should be placed into proper context. For starters, as you can see from the chart below, the Chinese stock market is no stranger to volatility. According to Fundstrat Global Advisors, the Shanghai composite index has experienced 10 bear markets over the last 25 years, and the recent downdraft doesn’t compare to the roughly -75% decline we saw in 2007-2008. Moreover, there is no strong correlation between the Chinese stock market. Only 15% of Chinese households own stocks, or measured differently, only 6% of household assets are held in stocks, says economic-consulting firm IHS Global Insight. More important than the question, “What will happen to the Chinese stock market?,” is the question, “What will happen to the Chinese stock economy?,” which has been on a perennial slowdown of late. Nevertheless, China has a 7%+ economic growth rate and the highest savings rate of any major country, both factors for which the U.S. economy would kill.
Don’t Take a Financial Planning Vacation
While the financial markets continue to bounce around and interest rates oscillate based on guesswork of a Federal Reserve interest rate hike in September, many families are now returning from vacations, or squeezing one in before the back-to-school period. The sad but true fact is many Americans spend more time planning their family vacation than they do planning for their financial futures. Unfortunately, individuals cannot afford to take a vacation from their investment and financial planning. At the risk of stating the obvious, planning for retirement will have a much more profound impact on your future years than a well-planned trip to Hawaii or the Bahamas.
We live in an instant gratification society where “spend now, save later” is a mantra followed by many. There’s nothing wrong with splurging on a vacation, and to maintain sanity and family cohesion it is almost a necessity. However, this objective does not have to come at the expense of compromising financial responsibility – or in other words spending within your means. Investing is a lot like consistent dieting and exercising…it’s easy to understand, but difficult to sustainably execute. Vacations, on the other hand, are easy to understand, and easy to execute, especially if you have a credit card with an available balance.
It’s never too late to work on your financial planning muscle. As I discuss in a previous article (Getting to Your Number) , one of the first key steps is to calculate an annual budget relative to your income, so one can somewhat accurately determine how much money can be saved/invested for retirement. Circumstances always change, but having a base-case scenario will help determine whether your retirement goals are achievable. If expectations are overly optimistic, spending cuts, revenue enhancing adjustments, and/or retirement date changes can still be made.
When it comes to the stock market, there are never a shortage of concerns. Today, worries include a Greek eurozone exit (“Grexit”); decelerating China economic growth and a declining Chinese stock market; and the viability of Donald’s Trump’s presidential campaign (or lack thereof). While it may be true that stock prices are on a temporary vacation, your financial and investment planning strategies cannot afford to go on vacation.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in certain exchange traded funds (ETFs), but at the time of publishing, SCM had no direct position in any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.
This article is an excerpt from a previously released Sidoxia Capital Management complementary newsletter (February 2, 2015). Subscribe on the right side of the page for the complete text.
In the weeks building up to Super Bowl XLIX (New England Patriots vs. Seattle Seahawks) much of the media hype was focused on the controversial alleged “Deflategate”, or the discovery of deflated Patriot footballs, which theoretically could have been used for an unfair advantage by New England’s quarterback Tom Brady. While Brady ended up winning his record-tying 4th Super Bowl ring for the Patriots by defeating the Seahawks 28-24, the stock market deflated during the first month of 2015 as well. Similar to last year, the stock market has temporarily declined last January before surging ahead +11.4% for the full year of 2014. It’s early in 2015, and investors chose to lock-in a small portion of the hefty, multi-year bull market gains. The S&P 500 was sacked for a loss of -3.1% and the Dow Jones Industrial index by -3.7%.
Despite some early performance headwinds, the U.S. economy kicked off the year with the wind behind its back in the form of deflating oil prices. Specifically, West Texas Intermediate (WTI) crude oil prices declined -9.4% last month to $48.24, and over -51.0% over the last six months. Like a fresh set of substitute legs coming off the bench to support the team, the oil price decline represents an effective $125 billion tax cut for consumers in the form of lower gasoline prices (average $2.03 per gallon nationally) – see chart below. The gasoline relief will allow consumers more discretionary spending money, so football fans, for example, can buy more hot dogs, beer, and souvenirs at the Super Bowl. The cause for the recent price bust? The primary reasons are three-fold: 1) Sluggish oil demand from developed markets like Europe and Japan coupled with slowing consumption growth in some emerging markets like China; 2) Growing supply in various U.S. fracking regions has created a temporary global oil glut; and 3) Uncertainty surrounding OPEC (Organization of Petroleum Exporting Countries) supply/production policies, which became even more unclear with the recent announced death of Saudi Arabia’s King Abdullah.
More deflating than the NFL football’s “Deflategate” is the approximate -17% collapse in the value of the euro currency (see chart below). Euro currency matters were made worse in response to European Central Bank’s (ECB) President Mario Draghi’s announcement that the eurozone would commence its own $67 billion monthly Quantitative Easing (QE) program (very similar to the QE program that Federal Reserve Chairwoman Janet Yellen halted last year). In total, if carried out to its full design, the euro QE version should amount to about $1.3 trillion. The depreciating effect on the euro (and appreciating value of the euro) should help stimulate European exports, while lowering the cost of U.S. imports – you may now be able to afford that new Rolls-Royce purchase you’ve been putting off. What’s more, the rising dollar is beneficial for Americans who are planning to vacation abroad…Paris here we come!
Another fumble suffered by the global currency markets was introduced with the unexpected announcement by the Swiss National Bank (SNB) that decided to remove its artificial currency peg to the euro. Effectively, the SNB had been purchased and accumulated a $490 billion war-chest reserve (Supply & Demand Lessons) to artificially depress the value of the Swiss franc, thereby allowing the country to sell more Swiss army knives and watches abroad. When the SNB could no longer afford to prop up the value of the franc, the currency value spiked +20% against the euro in a single day…ouch! In addition to making its exports more expensive for foreigners, the central bank’s move also pushed long-term Swiss Treasury bond yields negative. No, you don’t need to check your vision – investors are indeed paying Switzerland to hold investor money (i.e., interest rates are at an unprecedented negative level).
In addition to some of the previously mentioned setbacks, financial markets suffered another penalty flag. Last month, multiple deadly terrorist acts were carried out at a satirical magazine headquarters and a Jewish supermarket – both in Paris. Combined, there were 16 people who lost their lives in these senseless acts of violence. Unfortunately, we don’t live in a Utopian world, so with seven billion people in this world there will continue to be pointless incidences like these. However, the good news is the economic game always goes on in spite of terrorism.
As is always the case, there will always be concerns in the marketplace, whether it is worries about inflation, geopolitics, the economy, Federal Reserve policy, or other factors like a potential exit of Greece out of the eurozone. These concerns have remained in place over the last six years and the stock market has about tripled. The fact remains that interest rates are at a generational low (see also Stretching the High Yield Rubber Band), thereby supplying a scarcity of opportunities in the fixed income space. Diversification remains important, but regardless of your time horizon and risk tolerance, attractively valued equities, including high-quality, dividend-paying stocks should account for a certain portion of your portfolio. Any winning retirement playbook understands a low-cost, globally diversified portfolio, integrating a broad set of asset classes is the best way of preventing a “deflating” outcome in your long-term finances.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in certain exchange traded funds (ETFs), but at the time of publishing SCM had no direct position in any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.
This article is an excerpt from a previously released Sidoxia Capital Management complementary newsletter (December 1, 2014). Subscribe on the right side of the page for the complete text.
I’ve fulfilled my American Thanksgiving duty by gorging myself on multiple helpings of turkey, mash potatoes, and pumpkin pie. Now that I have loosened my belt a few notches, I have had time to reflect on the generous servings of stock returns this year (S&P 500 index up +11.9%), on top of the whopping +104.6% gains from previous 5 years (2009-2013).
Conventional wisdom believes the Federal Reserve has artificially inflated the stock market. Given the perceived sky-high record stock prices, many investors are biting their nails in anticipation of an impending crash. The evidence behind the nagging investor skepticism can be found in the near-record low stock ownership statistics; dismal domestic equity fund purchases; and apathetic investor survey data (see Market Champagne Sits on Ice).
Turkey-lovers are in a great position to understand the predicted stock crash expected by many of the naysayers. As you can see from the chart below, the size of turkeys over the last 50+ years has reached a record weight – and therefore record prices per turkey:
Does a record size in turkeys mean turkey meat prices are doomed for an imminent price collapse? Absolutely not. A key reason turkey prices have hit record levels is because Thanksgiving stomachs have been buying fatter and fatter turkeys every year. The same phenomenon is happening in the stock market. The reason stock prices have continued to move higher and higher is because profits have grown fatter and fatter every year (see chart below). Profits in corporate America have never been higher. CEOs are sitting on trillions of dollars of cash, and providing stock-investors with growing plump dividends (see also The Gift that Keeps on Giving), $100s of billions in shareholder friendly stock buybacks, while increasingly taking leftover profits to invest in growth initiatives (e.g., technology investments, international expansion, and job hiring).
Despite record turkey prices, I will make the bold prediction that hungry Americans will continue to buy turkey. More important than the overall price paid per turkey, the statistic that consumers should be paying more attention to is the turkey price paid per pound. Based on that more relevant metric, the data on turkey prices is less conclusive. In fact, turkey prices are estimated to be -13% cheaper this year on a per pound basis compared to last year ($1.58/lb vs. $1.82/lb).
The equivalent price per pound metric in the stock market is called the Price-Earnings (P/E) ratio, which is the price paid by a stock investor per $1 of profits (or earnings). Today that P/E ratio sits at approximately 17.5x. As you can see from the chart below, the current P/E ratio is reasonably near historical averages experienced over the last 50+ years. While, all else equal, anyone would prefer paying a lower price per pound (or price per $1 in earnings), any objective person looking at the current P/E ratio would have difficulty concluding recent stock prices are in “bubble” territory.
However, investor doubters who have missed the record bull run in stock market prices over the last five years (+210% since early 2009) have clung to a distorted, overpriced measurement called the CAPE or Shiller P/E ratio. Readers of my Investing Caffeine blog or newsletters know why this metric is misleading and inaccurate (see also Shiller CAPE Peaches Smell).
Don’t Be an Ostrich
While prices of stocks arguably remain reasonably priced for many Baby Boomers and retirees, the conclusion should not be to gorge 100% of investment portfolios into stocks. Quite the contrary. Everyone’s situation is unique, and every investor should customize a globally diversified portfolio beyond just stocks, including areas like fixed income, real estate, alternative investments, and commodities. But the exposures don’t stop there, because in order to truly have the diversified shock absorbers in your portfolio necessary for a bumpy long-term ride, investors need exposure to other areas. Such areas should include international and emerging market geographies; a diverse set of styles (e.g., Value, Growth, Blue Chip dividend-payers); and a healthy ownership across small, medium, and large equities. The same principles apply to your bond portfolio. Steps need to be taken to control credit risk and interest rate risk in a globally diversified fashion, while also providing adequate income (yield) in an environment of generationally low interest rates.
While I’ve spent a decent amount of time talking about eating fat turkeys, don’t let your investment portfolio become stuffed. The year-end time period is always a good time, after recovering from a food coma, to proactively review your investments. While most non-vegetarians love eating turkey, don’t be an investment ostrich with your head in the sand – now is the time to take actions into your own hands and make sure your investments are properly allocated.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own a range of positions in certain exchange traded fund positions, but at the time of publishing SCM had no direct position in any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.
This article is an excerpt from a previously released Sidoxia Capital Management complementary newsletter (October 1, 2014). Subscribe on the right side of the page for the complete text.
As a middle-aged man, I’ve learned the importance of getting my annual physical to improve my longevity. The same principle applies to the longevity of your retirement account. With the fourth quarter of the calendar year officially underway, there is no better time to probe your investment portfolio and prescribe some recommendations relating to your financial goals.
A physical is especially relevant given all the hypertension raising events transpiring in the financial markets during the third quarter. Although the large cap biased indexes (Dow Jones Industrials and S&P 500) were up modestly for the quarter (+1.3% and +0.6%, respectively), the small and mid-cap stock indexes underperformed significantly (-8.0% [IWM] and -4.2% [SPMIX], respectively). What’s more, all the daunting geopolitical headlines and uncertain macroeconomic data catapulted the Volatility Index (VIX – aka, “Fear Gauge”) higher by a whopping +40.0% over the same period.
- What caused all the recent heartburn? Pick your choice and/or combine the following:
- ISIS in Iraq
- Bombings in Syria
- End of Quantitative Easing (QE) – Impending Interest Rate Hikes
- Mid-Term Elections
- Hong Kong Protests
- Tax Inversions
- Security Hacks
- Rising U.S. Dollar
- PIMCO’s Bill Gross Departure
(See Hot News Bites in Newsletter for more details)
As I’ve pointed out on numerous occasions, there is never a shortage of issues to worry about (see Series of Unfortunate Events), and contrary to what you see on TV, not everything is destruction and despair. In fact, as I’ve discussed before, corporate profits are at record levels (see Retail Profits chart below), companies are sitting on trillions of dollars in cash, the employment picture is improving (albeit slowly), and companies are finally beginning to spend (see Capital Spending chart below):
Source: Dr. Ed’s Blog
Source: Calafia Beach Pundit
Even during prosperous times, you can’t escape the dooms-dayers because too much of a good thing can also be bad (i.e., inflation). Rather than getting caught up in the day-to-day headlines, like many of us investment nerds, it is better to focus on your long-term financial goals, diversification, and objective financial metrics. Even us professionals become challenged by sifting through the never-ending avalanche of news headlines. It’s better to stick with a disciplined, systematic approach that functions as shock absorbers for all the inevitable potholes and speed bumps. Investment guru Peter Lynch said it best, “Assume the market is going nowhere and invest accordingly.” Everyone’s situation and risk tolerance is different and changing, which is why it’s important to give your financial plan a recurring physical.
Vacation or Retirement?
Keeping up with the Joneses in our instant gratification society can be a taxing endeavor, but ultimately investors must decide between 1) Spend now, save later; or 2) Save now, spend later. Most people prefer the more enjoyable option (#1), however these individuals also want to retire at a young age. Often, these competing goals are in conflict. Unless, you are Oprah or Bill Gates (or have rich relatives), chances are you must get into the practice of saving, if you want a sizeable nest egg…before age 85. The problem is Americans typically spend more time planning their vacation than they do planning for retirement. Talking about finances with an advisor, spouse, or partner can feel about as comfortable as walking into a cold doctor’s office while naked under a thin gown. Vulnerability may be an undesirable emotion, but often it is a necessity to reach a desired goal.
Ignorance is Not Bliss – Avoid Procrastination
Many people believe “ignorance is bliss” when it comes to healthcare and finance, which we all know is the worst possible strategy. Normally, individuals have multiple IRA, 401(k), 529, savings, joint, trust, checking and other accounts scattered around with no rhyme or reason. As with healthcare, reviewing finances most often takes place whenever there is a serious problem or need, which is usually at a point when it’s too late. Unfortunately, procrastination typically wins out over proactiveness. Just because you may feel good, or just because you are contributing to your employer’s 401(k), doesn’t mean you shouldn’t get an annual physical for your health and finances. I’m the perfect example. While I feel great on the outside, ignoring my high cholesterol lab results would be a bad idea.
And even for the DIY-ers (Do-It-Yourself-ers), rebalancing your portfolio is critical. In the last fifteen years, overexposure to technology, real estate, financials, and emerging markets at the wrong times had the potential of creating financial ruin. Like a boat, your investment portfolio needs to remain balanced in conjunction with your goals and risk tolerance, or your savings might tip over and sink.
Financial markets go up and down, but your long-term financial well-being does not have to become hostage to the daily vicissitudes. With the fourth quarter now upon us, take control of your financial future and schedule your retirement physical.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in certain exchange traded funds (ETFs), but at the time of publishing SCM had no direct position in IWM, SPMIX, or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.
With the World Cup in full swing and rabid fans rooting for their home teams, one may notice the many similarities between investing in stocks and handicapping in sports betting. For example, investors (bettors) have opposing views on whether a particular stock (team) will go up or down (win or lose), and determine if the valuation (point spread) is reflective of the proper equilibrium (supply & demand). And just like the stock market, virtually anybody off the street can place a sports bet – assuming one is of legal age and in a legal betting jurisdiction.
Soon investors will be poring over data as part of the critical, quarterly earnings ritual. With some unsteady GDP data as of late, all eyes will be focused on this earnings reporting season to reassure market observers the bull advance can maintain its momentum. However, even positive reports may lead to unexpected investor reactions.
So how and why can market prices go down on good news? There are many reasons that short-term price trends can diverge from short-run fundamentals. One major reason for the price-fundamental gap is this key factor: “expectations”. With such a large run-up in the equity markets (up approx. +195% from March 2009) come loftier expectations for both the economy and individual companies. For instance, just because corporate earnings unveiled from companies like Google (GOOG/GOOGL), J.P. Morgan (JPM), and Intel (INTC) exceed Wall Street analyst forecasts does not mean stock prices automatically go up. In many cases a stock price correction occurs due to a large group of investors who expected even stronger profit results (i.e., “good results, but not good enough”). In sports betting lingo, the sports team may have won the game this week, but they did not win by enough points (“cover the spread”).
Some other reasons stock prices move lower on good news:
- Market Direction: Regardless of the underlying trends, if the market is moving lower, in many instances the market dip can overwhelm any positive, stock- specific factors.
- Profit Taking: Many times investors holding a long position will have price targets or levels, if achieved, that will trigger selling whether positive elements are in place or not.
- Interest Rates: Certain valuation techniques (e.g. Discounted Cash Flow and Dividend Discount Model) integrate interest rates into the value calculation. Therefore, a climb in interest rates has the potential of lowering stock prices – even if the dynamics surrounding a particular security are excellent.
- Quality of Earnings: Sometimes producing winning results is not enough (see also Tricks of the Trade article). On occasion, items such as one-time gains, aggressive revenue recognition, and lower than average tax rates assist a company in getting over a profit hurdle. Investors value quality in addition to quantity.
- Outlook: Even if current period results may be strong, on some occasions a company’s outlook regarding future prospects may be worse than expected. A dark or worsening outlook can pressure security prices.
- Politics & Taxes: These factors may prove especially important to the market this year, since this is a mid-term election year. Political and tax policy changes today may have negative impacts on future profits, thereby impacting stock prices.
- Other Exogenous Items: Natural disasters and security attacks are examples of negative shocks that could damage price values, irrespective of fundamentals.
Certainly these previously mentioned issues do not cover the full gamut of explanations for temporary price-fundamental gaps. Moreover, many of these factors could be used in reverse to explain market price increases in the face of weaker than anticipated results.
If you’re traveling to Las Vegas to place a wager on the World Cup, betting on winning favorites like Germany and Argentina may not be enough. If expectations are not met and the hot team wins by less than the point spread, don’t be surprised to see a decline in the value of your bet.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds, GOOG, and GOOGL, but at the time of publishing had no direct positions in JPM and INTC. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.