Posts filed under ‘Politics’

Markets Fly as Media Noise Goes By

This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (November 1, 2017). Subscribe on the right side of the page for the complete text.

That loud pitched noise is not a frightening scream from Halloween, but rather what you are likely hearing is the deafening noise coming from Washington D.C or cries from concerned Americans watching senseless acts of terrorism. Thanks to the explosion of real-time social media and smart phones, coupled with the divisive politics and depressing headlines blasted across all media outlets, it is almost impossible to ignore the daily avalanche of informational irrelevance.

As I have been writing for some time, the good news for long-term investors is the financial markets continue to plug their ears and ignore poisonous politics and the spread of F.U.D. (Fear, Uncertainty & Doubt). There is a financial benefit to turning off the TV and disregarding political rants over your Facebook feed. Regardless of your political views, President Trump’s approval ratings have objectively been going down, but that really doesn’t matter…the stock market keeps going up (see chart below).

Source: Bespoke

While politicians on both sides scream at each other, investment portfolios have been more focused on the items that really matter to stock prices, which include corporate profits, interest rates, valuations (price levels), and sentiment (i.e., determining whether investors are too optimistic or too pessimistic). The proof is in the pudding. Stock prices continue to set new records, as witnessed by the 7th consecutive monthly high registered by the Dow Jones Industrial Average to a level of 23,377. For the month, these results translate into an astonishing +4.3% gain. For the year, this outcome equates to an even more impressive +18.3% return. This definitely beats the near-0% rate earned on your checking account and cash stuffed under the mattress.

On the surface, 2017 has been quite remarkable, but over the last decade, stock market returns have proved to be even more extraordinary. Bolstering my contention that politics rarely matter to your long-term pocketbook, one can simply observe history. We are now approaching the 10-year anniversary of the 2008-2009 Financial Crisis – arguably the worst recession experienced in a generation. Over the last decade, despite political power in Washington bouncing around like a hot potato, stock performance has skyrocketed. From early 2009, when the Dow briefly touched a low of 6,470, the index has almost quadrupled above the 23,000 threshold (see chart below).

Source: Barchart.com

To place this spectacular period into better context, one should look at the political control dynamics across Congress and the White House over the same time frame (see the right side of the chart below). Whether you can decipher the chart or not, anyone can recognize that the colors consistently change from red (Republican) to blue (Democrat), and then from blue to red.

More specifically, since the end of 2007, the Democrats have controlled the Senate for approximately 80% of the time; the Republicans have controlled the House of Representatives for 60% of the time; and the Oval Office has switched between three different presidents (two Republicans and one Democrat). And if that is not enough diversity for you, we have also had two Federal Reserve Chairs (Ben Bernanke and Janet Yellen) who controlled the world’s most powerful monetary system, and a Congressional mid-term election taking place in twelve short months. There are two morals to this story: 1) No matter how sad or excited you are about your candidate/political party, you can bank on the control eventually changing; and 2) One person alone cannot save the economy, nor can that same person singlehandedly crater the economy.

Source: Wikipedia

Waterfall of Worries

If you simply read the newspapers and watched the news on TV all day, you would be shocked to learn about the magnificent magnitude of this equity bull market. Reaching these new highs has not been a walk in the park for most investors. There certainly has been no shortage of issues to worry about, including the following:

  • Special Counsel Indictments: After the abrupt firing of former FBI Director James Comey by President Donald Trump, Deputy Attorney General Rod Rosenstein established a special counsel in May and appointed ex-FBI official and attorney Robert Mueller to investigate potential Russian meddling into the 2016 presidential elections. Just this week, Mueller indicted Paul Manafort, the former Trump campaign chairman, and Manafort’s business partner and Trump campaign volunteer, Rick Gates. The special counsel also announced the guilty plea of George Papadopoulos, a former foreign policy adviser for the Trump campaign who admitted lying to the FBI regarding interactions between Russian officials and the Trump campaign.
  • Terrorist Attacks: Senseless murders of eight people in New York  by a 29-year-old man from Uzbekistan, and 59 people shot dead by a 64-year-old shooter from a Las Vegas casino  have created a chilling blanket of concern over American psyches.
  • New Money Chief? The term of current Federal Reserve Chair, Janet Yellen, ends this February. President Trump has fueled speculation he will announce the appointment of a new Fed chief as early as this week. Although the president has recently praised Yellen, a registered Democrat, many pundits believe Trump wants to select Jerome Powell, a Republican, who currently sits on the Federal Board of Governors.
  • North Korea Rocket Launches: So far in 2017, North Korea has launched 22 missiles and tested a hydrogen bomb, while simultaneously threatening to fire missiles over the US territory of Guam and conduct an atmospheric nuclear test. Saber rattling has diminished somewhat in recent weeks since the last North Korean missile launch took place on September 15th. Nevertheless, tensions could rise at any moment, if missile launches resume.

Although media headlines are often depressing, F.U.D. will never go away – it’s only the list of worries that change over time. As noted earlier, the entrepreneurial DNA of the financial markets is focused on more important economic factors like the economy, rather than politics or terrorism. One barometer of economic health can be gauged by the chart below – Consumer Confidence is at the highest level since 2000.

Source: Bespoke

This trend is important because consumers make up approximately 70% of our nation’s economic output. Therefore, it should come as no surprise that Americans are feeling considerably better due to the following factors:

  • Strong Job Market: The 4.2% unemployment rate is at the lowest level in 16 years.
  • Strong Economy: Despite the dampening effect of the hurricanes, the economy is poised to register its best six-month performance of at least 3% growth in three years.
  • Strong Housing Market: Just-released data shows an acceleration in national home price appreciation by +6.1% compared to a year ago.
  • Low Interest Rates: Inflation has been low, credit has been cheap, and the Federal Reserve has been cautious in raising interest rates. These low rates have improved the affordability of credit, which has been stimulative for the economy.

Tax Reform Could be the Norm

The icing on the stock market cake has been the optimism surrounding the potential passage of tax reform, likely in the shape of corporate & personal tax cuts, foreign profit repatriation, and tax simplification. The process has been slow, but by passing a budget, the Republican-led Congress was able to pave the way for substantive new tax reform, something not seen since the Ronald Reagan administration, some 30-years ago. Everybody loves paying lower taxes, but victory cannot be claimed yet. Democrats and some fiscally conservative Republicans are not interested in exploding our country’s already-large deficits and debt levels. In order to achieve responsible tax legislation, Congress is looking to remove certain tax loopholes and is negotiating precious tax breaks such as mortgage interest deductibility, state/local tax deductibility, 401(k) tax incentives, and corporate interest expense deductibility, among many other possible iterations. Although corporate tax discussions have been heated, the chart below demonstrates individual income tax legislation is much more important for tax reform legislation because the government collects a much larger share of taxes from individuals vs. corporations.

Source: Calafia Beach Pundit

In spite of all the deafening political noise heard over social media and traditional media, it’s important to block out all the F.U.D. and concentrate on how to achieve your long-term financial goals. If you don’t have the time, energy, or emotional fortitude to follow a disciplined financial plan, I urge you to find an experienced investment advisor who is also a fiduciary. If you need assistance finding one, I am confident Sidoxia Capital Management can help you with this endeavor.

www.Sidoxia.com

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) and FB, but at the time of publishing 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.

November 1, 2017 at 4:57 pm 1 comment

The Summer Heats Up

This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (August 1, 2017). Subscribe on the right side of the page for the complete text.

The temperature in the stock market heated up again this month. Like a hot day at the beach, the Dow Jones Industrial Average stock index burned +542 points higher this month (+2.5%), while scorching +2,129 points ahead in 2017 (or +10.8%).

Despite these impressive gains (see 2009-2017 chart below), overall, investors remain concerned. Rather than stock participants calmly enjoying the sun, breeze, and refreshingly cool waters of the current markets, many investors have been more concerned about getting sunburned to a geopolitical crisp; overwhelmed by an unexpected economic tsunami; and/or drowned by a global central bank-induced interest rate crisis.

Stock market concerns rise, but so do stock prices.

The most recent cautionary warnings have come to the forefront by noted value investor Howard Marks, who grabbed headlines with last week’s forewarning memo, “Here They Go Again…Again.” The thoughtful, 23-page document is definitely worth reading, but like any prediction, it should be taken with a pound of salt, as I point out in my recent article Predictions – A Fool’s Errand. The reality is nobody has been able to consistently predict the future.

If you don’t believe my skepticism about crystal balls and palm readers, just listen to the author of the cautionary article himself. Like many other market soothsayers, Marks is forced to provide a mea culpa on the first page in which he admits his predictions have been wrong for the last six years. His dour but provocative position also faces another uphill battle, given that Marks’s conclusion flies in the face of value investing god, Warren Buffett, who was quoted this year as saying:

“Measured against interest rates, stocks actually are on the cheap side compared to historic valuations.”

Rather than crucify him, Marks should not be singled out for this commonly cautious view. In fact, most value investors are born with the gloom gene in their DNA, given the value mandate to discover and exploit distressed assets. This value-based endeavor has become increasingly difficult as the economy gains steam in this slow but sustainably long economic recovery. As I’ve mentioned on numerous occasions, bull markets don’t die of old age, but rather they die from excesses. So far the key components of the economy, the banking system and consumers, have yet to participate in euphoric excesses like previous economic cycles due to risk aversion caused by the last financial crisis.

Making matters worse for value investors, the value style of investing has underperformed since 2006 alongside other apocalyptic predictions from revered value peers like Seth Klarman and Ray Dalio, who have also been proved wrong over recent years.

However, worth stating, is experienced, long-term investors like Marks, Klarman, and Dalio deserve much more attention than the empty predictions spewed from the endless number of non-investing strategists and economists who I specifically reference in A Fool’s Errand.

Beach Cleanup in Washington

While beach conditions may be sunny, and stock market geeks like me continue debating future market weather conditions, media broadcasters and bloggers have been focused elsewhere – primarily the nasty political mess littered broadly across our American shores.

Lack of Congressional legislation progress relating to healthcare, tax reform, and infrastructure, coupled with a nagging investigation into potential Russian interference into U.S. elections, have caused the White House to finally lose its patience. The end result? A swift cleanup of the political hierarchy. After deciding to tidy up the White House, President Trump’s first priority was to remove Sean Spicer, the former White House Press Secretary and add the controversial Wall Street executive Anthony Scaramucci as the new White House Communications Chief. Shortly thereafter, White House Chief of Staff Reince Priebus was pushed to resign, and he was replaced by Secretary of Homeland Security, John F. Kelly. If this was not enough drama, after Scaramucci conducted a vulgar-laced tirade against Priebus in a New Yorker magazine interview, newly minted Chief of Staff Kelly felt compelled to quickly fire Scaramucci.

While the political beach party and soap opera have been entertaining to watch from the sidelines, I continue to remind observers that politics have little, if any, impact on the long-term direction of the financial markets. There have been much more important factors contributing to the nine-year bull market advance other than politics. For example, interest rates, corporate profits, valuations, and investor sentiment have been much more impactful forces behind the new record stock market highs.

Federal Reserve Chair Janet Yellen may not wear a bikini at the beach, but nevertheless she has become quite the spectacle in Washington, as investors speculate on the future direction of interest rates and other Fed monetary policies (i.e., unwinding the $4.5 trillion Fed balance sheet). In the hopes of not exhausting your patience too heavily, let’s briefly review interest rates, so they can be placed in the proper context. Specifically, it’s worth noting the spotlighted Federal Funds Rate target is sitting at enormously depressed levels (1.00% – 1.25%), despite the fact the Fed has increased the target four times within the last two years. How low has the Fed Funds rate been historically? As you can see from the historical chart below (1970 – 2017), this key benchmark rate reached a level as high as 20.00% in the early 1980s – a far cry from today’s 1.00% – 1.25% rate.

There are two crucial points to make here. First, even at 1.25%, interest rates are at extremely low levels, and this is significantly stimulative to our economy, even after considering the scenario of future interest rate hikes. The second main point is that that Federal Reserve Chair Janet Yellen has been exceedingly cautious about her careful, data-dependent intentions of increasing interest rates. As a matter of fact, the CME Fed Funds futures market currently indicates a 99% probability the Fed will maintain interest rates at this low level when the Federal Open Market Committee (FOMC) meets in September.

Responsibly Have Fun but Use Protection

It’s imperative to remain vigilantly prudent with your investments because weather conditions will not always remain calm in the financial markets. You do not want to get burned by overheated markets or caught off guard by an unexpected economic storm. Blindly buying tech stocks exclusively without a systematic disciplined approach to valuation is a sure-fire way to lose money over the long-run. Instead, protection must be implemented across multiple vectors.

From a broader perspective, at Sidoxia we believe it’s essential to follow a low-cost, diversified, tax-efficient, strategy with a long-term time horizon. Rebalancing your portfolio as markets continue to appreciate will keep your investment portfolio balanced as financial markets gyrate. These investment basics have produced a winning formula for many investors, including some very satisfying long-term results at Sidoxia, which is quickly approaching its 10-year anniversary. You can have fun at the beach, just remember to bring sunscreen and a windbreaker, in case conditions change.

www.Sidoxia.com

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 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.

August 1, 2017 at 12:16 pm Leave a comment

Hot Dogs, Political Fireworks, and Our Nation’s Birthday

This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (July 3, 2017). Subscribe on the right side of the page for the complete text.

The 4th of July has arrived once again as we celebrate our country’s 241st birthday of independence. Besides being a time to binge on hot dogs, apple pie, fireworks, and baseball, this national holiday allows Americans to also reflect on the greatness created by our nation’s separation from the British Empire.

As our Founding Fathers fought for freedom and believed in a more prosperous future, I’m not sure if the signers of our Declaration of Independence (Below [left to right]: Roger Sherman, Benjamin Franklin, Thomas Jefferson, John Adams, and Robert Livingston) envisioned a world with tweeting Presidents, driverless Uber taxis, internet dating, biotechnology medical breakthroughs, cloud storage, and countless other innovations that have raised the standard of living for billions of people around the world.

(These Founding Fathers may use different pictures for their Facebook profile, if they were alive today.)

I tend to agree with the wealthiest billionaire investor on the planet, Warren Buffett, that being born in the United States is the equivalent of winning the “Ovarian Lottery.” The opportunities for finding success are exponentially higher, if you were born in America vs. Bangladesh, for example. Surprisingly, the U.S. only accounts for about 4% of the global population (325 million out of 7.5 billion world total). However, even though we Americans make up such a small portion of the of the people on the planet, we still manage to generate over $18 trillion in goods and services, which makes us the world’s largest economy. As the #1 economy, we account for almost 25% of the world’s total economic output (see table & graphic below).

Rank Country GDP (Nominal, 2015) Share of Global Economy (%)
#1 United States $18.0 trillion 24.3%
#2 China $11.0 trillion 14.8%
#3 Japan $4.4 trillion 5.9%
#4 Germany $3.4 trillion 4.5%
#5 United Kingdom $2.9 trillion 3.9%

Source: Visual Capitalist

How do we create six times the output of our population (i.e., 4% of world’s population producing 25% of the world’s output)? Despite the nasty, imperfect, mudslinging politics we live through daily, the U.S. has perfected the art of capitalism, which has landed us on top of the economic Mt. Everest. Although, there is always room for improvement, culturally, the winning “entrepreneurial” strain is born into our American DNA. The recent merger announcement between Amazon.com Inc. (AMZN) and Whole Foods (WFM), the leading natural and organic foods supermarket, is evidence of this entrepreneurial strain. Amazon has come a long way and gained significant steam since its founding in July 1994 by CEO Jeff Bezos. Consequently, the momentum of this internet giant has it steamrolling the entire retail industry, which has led to a flood of store closings, including department store chains, Macy’s, J.C. Penney, Sears and Kmart. The Amazon-Whole Foods merger announcement was not a huge surprise to my family because we actually order more than half of our groceries from AmazonFresh (Amazon’s food delivery program). What’s more, since I despise shopping, I continually find myself taking advantage of Amazon’s “Prime Now” 2-hour delivery option to my office, which is free to all Prime subscribers. It won’t be long before Amazon’s multi-channel strategy will allow me to make same-day orders for groceries, electronics, and general merchandise from my office, then pick up those items on my way home from work at the local Whole Foods store.

Leading the Pack

Replicating this competitive advantage around the world is a challenge for competing countries, and our nation remains leap years ahead of others, regardless of their efforts. However, the United States does not have a monopoly on capitalism. We are slowly exporting our entrepreneurial secret sauce abroad with the help of technology and globalization. Just consider these three Chinese companies alone are valued at almost $1 trillion (Alibaba Group $360B [BABA]; Tencent Holdings $340B [TCEHY]; and China Mobile $220B [CHL]), and the largest expected IPO (Initial Public Offering) in the world could be a Saudi Arabian company valued at $2 trillion (Saudi Aramco). When 96% of the world’s population lies outside of the U.S., this reality helps explain why exporting our advancements should not be considered a bad thing. In fact, a growing international pie means more American jobs and more dollars will flow back to the U.S., as we export more value-added products and services abroad.

Even if other countries are narrowing the entrepreneurial competitive gap with the United States, we still remain a beacon of light for others to follow. Despite what you may read in the newspaper or hear on the TV, Americans are dramatically better off financially over the last 20 years. Not only has net worth increased spectacularly, but consumers have also responsibly reduced debt leverage ratios (see chart below).

Source: Calafia Beach Pundit

If you were a bright CEO working for an innovative new start-up company, would you choose to launch your company in a closed, censored society like China? How about a fractured Britain that is pushing to break away from the European Union? Better yet, how about Japan with its exploding debt levels, a declining population, and a stock market that is about half the level it peaked at 28 years ago? Do emerging markets like Brazil with widespread corruption scandals blanketing a new president (after a recently impeached president) seem like the best location for a hot new venture? The answer to all these questions is a resounding “no”, even when compared to the warts and flaws that come with our durable democracy.

Political Pyrotechnics

Besides the bombs bursting in air during the 4th of July celebration, there were plenty of political fireworks blasting in our nation’s capital last month. No matter what side of the political fence you stand on, last month was explosive. Consider ousted FBI Director Jim Comey’s impassioned testimony relating to his firing by President Donald Trump; the contentious Attorney General Jeff Sessions Senate Intelligence Committee interview; the politically driven Republican baseball shooting; and the Special Counsel leader Robert Mueller’s investigation into Russian interference and potential Trump administration collusion into the 2016 elections.

Despite the combative atmosphere in Washington D.C., the stock market managed to notch another record high last month, with the Dow Jones Industrial Average index advancing another 340.98 points (+1.6%) for the month, and +8.0% for the first half of 2017. As I have written numerous times, the scary headlines accumulating since 2009 have prevented investors, strategists, economists, and even professionals from adequately participating in the almost quadrupling in stock prices since early 2009. Unfortunately, to the detriment of many, large swaths of investors who were burned by the 2008-2009 Financial Crisis have been scarred to almost permanent risk aversion. The fact of the matter is stock prices care more about economic factors than political / news headlines (see Moving on Beyond Politics).

The bitter, vitriolic political discourse is unlikely to disappear anytime soon, so do yourself a favor, and focus on the more important factors driving financial markets to new record highs – mainly corporate profits, interest rates, valuations, and sentiment (see Don’t Be a Fool). During this year’s 4th of July, partaking in hot dogs, apple pie, fireworks, and baseball are wholly encouraged, but please also take the time to celebrate and acknowledge the magnitude of our country’s greatness. That’s a birthday wish, I think we can all agree upon.

 

 

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper.

www.Sidoxia.com

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in AMZN and certain exchange traded funds (ETFs), but at the time of publishing had no direct position in WFM, BABA, TCEHY, CHL, 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.

July 3, 2017 at 12:24 pm Leave a comment

Political Showers Bring Record May Stock Flowers

This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (June 1, 2017). Subscribe on the right side of the page for the complete text.

There has been a massive storm of political rain that has blanketed the media airwaves and internet last month, however, the stock market ignored the deluge of headlines and focused on more important factors, as prices once again pushed to new record highs. Over the eight-year bull market, the old adage to “sell in May, and go away,” once again was not a very successful strategy. Had investors heeded this advice, they would have missed out on a +1.2% gain in the S&P 500 index during May (up +7.7% for 2017) and a +2.5% surge in the technology-driven NASDAQ index (+15.1% in 2017).

Keeping track of the relentless political storm of new headlines and tweets almost requires a full-time staff person, but nevertheless we have summarized some of the political downpour here:

French Elections: In the wake of last year’s U.K. “Brexit”, fears of an imminent “Frexit” (French Exit) resurfaced ahead of the French presidential. Emmanuel Macron, a 39-year-old former investment banker, swept to a decisive victory over National Front candidate Marine Le Pen by a margin of 66% to 34%.

Firing of FBI Director: President Trump fired FBI Director James Comey based on the recommendation of deputy attorney general Rod Rosenstein, who cited Comey’s mishandling of Hillary Clinton’s private email server investigation. The president’s critics claim Trump was frustrated with the FBI’s investigation into the administration’s potential ties with Russian officials in relation to the 2016 presidential elections. Comey is expected to testify next week to Congress, where he will likely address reports that President Trump asked him to drop the FBI’s investigation into former National Security Advisor Michael Flynn during a February meeting.

Trump Classified Leak to Russians: Reports show that President Trump revealed classified information regarding the Islamic State (ISIS) to the Russian foreign minister during an Oval Office meeting. The ISIS related information emanating from Syria reportedly had been passed to the U.S. from Israel, with the provision that it not be shared.

Impeachment Talk and Appointment of Independent Special Prosecutor: Heightened reports of Russian intervention coupled with impeachment cries from the Democratic opposition coincided with Deputy Attorney General Rod Rosenstein’s announcement that former FBI director Robert Mueller III would take on the role as an independent special counsel in the investigation of Russian interference in the 2016 election. Rosenstein had the authority to make the appointment after Attorney General Jeff Sessions recused himself after admitting contacts with Russian officials. The White House, which has denied colluding with the Russians, issued a statement from President Donald Trump looking forward “to this matter concluding quickly.”

Kushner Under Back Channel Investigation: President Trump’s son-in-law and senior advisor, Jared Kushner, is under investigation over discussions to set up a back channel of communication with Russian officials. At the heart of the probe is a December meeting Kushner held with Sergey Gorkov, an associate of Russian President Vladimir Putin and the head of the state-owned Vnesheconombank, a Russian bank subject to sanctions imposed by President Obama. Back channels have been legally implemented by other administrations, but the timing and nature of the discussions could make the legal interpretation more difficult.

Trump’s First Foreign Trip: A whirlwind trip by President Trump through the Middle East and Europe, resulted in commitments to Middle East peace, multi-billion contract signings with the Saudis, pledges to fight Muslims extremism, calls for NATO members to pay their “fair share,” and demands for German President Angela Merkel to address the elevated trade deficit with the U.S.

Subpoenas Issued to Trump Advisors: The House Intelligence Committee issued subpoenas to ousted National Security Adviser Michael Flynn and President Trump’s personal attorney, Michael Cohen, as it relates to potential Russian interference in the presidential campaign. Flynn reportedly plans to invoke his Fifth Amendment rights in response to a separate subpoena issued by the Senate Intelligence Committee.

Repeal and Replace Healthcare: The Republican-controlled House of Representatives narrowly passed a vote to repeal and replace the Affordable Care Act after prior failed attempts. The bill, which allows states to apply for a waiver on certain aspects of coverage, including pre-existing conditions, received no Democratic votes. While the House passage represents a legislative victory for President Trump, Senate Republicans must now take up the legislation that addresses conclusions by the nonpartisan Congressional Budget Office (CBO). More specifically, the CBO found the revised House health care bill could leave 23 million more Americans uninsured while reducing the federal deficit by $119 billion in the next decade.

North Korea Missile Tests: If domestic political turmoil wasn’t enough, North Korea conducted an unprecedented number of medium-to-long-range missile tests in an effort to develop an intercontinental ballistic missile (ICBM) capable of hitting the mainland United States. Due to the rising tensions, the U.S. and South Korea have been planning nuclear carrier drills off the coast of the Korean peninsula.

Wow, that was a mouthful. While all these politics may be provocative and stimulating, long-time followers of mine understand my position…politics are meaningless (see Politics-Schmolitics). While a terrorist or military attack on U.S. soil would undoubtedly have an immediate and negative impact, 99% of daily politics should be ignored by investors. If you don’t believe me, just take a look at the stock market, which continues to make new record highs in the face of a hurricane of negative political headlines. What the stock market really cares most about are profits, interest rates, and valuations:

  • Record Profits: Stock prices follow the direction of earnings over the long-run. As you can see below, profits vacillate year-to-year. However, profits are currently surging, and therefore, so are stock prices – despite the negative political headlines.

Source: Dr. Ed’s Blog

  • Near Generationally Low Interest Rates: Generally speaking, most asset classes, including real estate, commodities, and stock prices are worth more when interest rates are low. When you could earn 15% on a bank CD in the early 1980s, stocks were much less attractive. Currently, bank CDs almost pay nothing, and as you can see from the chart below, interest rates are near a generational low – this makes stock prices more attractive.
  • Attractive Valuations: The price you pay for an asset is always an important factor, and the same principle applies to your investments. If you can buy a $1.00 for $0.90, you want to take advantage of that opportunity. Unfortunately, the value of stocks is not measured by a simple explicit price, like you see at a grocery store. Rather, stock values are measured by a ratio (comparing an investment’s price relative to profits/cash flows generated). Even though the stock market has surged this year, stock values have gotten cheaper. How is that possible? Stock prices have risen about +8% in the first quarter, while profits have jumped +15%. When profits rise faster than prices appreciate, that means stocks have gotten cheaper. From a multi-year standpoint, I agree with Warren Buffett that prices remain attractive given the current interest rate environment. To read more about valuations, check out Ed Yardeni’s recent article on valuations.
Overall, the political showers continue to come pouring down, but the economic flowers have been blooming. Politics are fun to talk about, but when it comes to your investments, do yourself a favor and pull out your umbrella, turn off the politics, and take advantage of the sweet smell of the flowers.

 

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper.

www.Sidoxia.com

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds, 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.

June 3, 2017 at 4:52 pm Leave a comment

March Madness or Retirement Sadness?

bball

This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (March 1, 2017). Subscribe on the right side of the page for the complete text.

“March Madness” begins in a few weeks with a start of the 68-team NCAA college basketball tournament, but there has also been plenty of other economic and political madness going on in the background. As it relates to the stock market, the Dow Jones Industrial Average index reached a new, all-time record high last month, exceeding the psychologically prominent level of 20,000 (closing the month at 20,812). For the month, the Dow rose an impressive +4.8%, and since November’s presidential election it catapulted an even more remarkable +13.5%.

Despite our 45th president just completing his first State of the Union address to the nation, American voters remain sharply divided across political lines, and that bias is not likely to change any time soon. Fortunately, as I’ve written on numerous occasions (see Politics & Your Money), politics have no long-term impact on your finances and retirement. Sure, in the short-run, legislative policies can create winners and losers across particular companies and industries, but history is firmly on your side if you consider the positive track record of stocks over the last couple of centuries. As the chart below demonstrates, over the last 150 years or so, stock performance is roughly the same across parties (up +11% annually), whether you identify with a red elephant or a blue donkey.

dem-v-rep

Nevertheless, political rants flooding our Facebook news feeds can confuse investors and scare people into inaction. Pervasive fake news stories regarding the supposed policy benefits and shortcomings of immigration, tax reform, terrorism, entitlements, foreign policy, and economic issues often result in heightened misperception and anxiety.

More important than reading Facebook political rants, watching March Madness basketball, or drinking green beer on St. Patrick’s Day, is saving money for retirement. While some of these diversions can be temporarily satisfying and entertaining, lost in the daily shuffle is the retirement epidemic quietly lurking in the background. Managing money makes people nervous even though it is an essential part of life. Retirement planning is critical because a mountain of the 76 million Baby Boomers born between 1946 – 1964 have already reached retirement age and are not ready (see chart below).

eld-pop-growth

The critical problem is most Americans are ill-prepared financially for retirement, and many of them run the risk of outliving their savings. A recent study conducted by the Economic Policy Institute (EPI) shows that nearly half of families have no retirement account savings at all. The findings go on to highlight that the median U.S. family only has $5,000 in savings (see also Getting to Your Number). Even after considering my tight-fisted habits, that kind of money wouldn’t be enough cash for me to survive on.

Saving and investing have never been more important. It doesn’t take a genius to understand that government entitlements like Social Security and Medicare are at risk for millions of Americans. While I am definitely not sounding the alarm for current retirees who have secure benefits, there are millions of others whose retirement benefits are in jeopardy.

Missing the 20,000 Point Boat? Dow 100,000

Making matters worse, saving and investing has never been more challenging. If you thought handling all of life’s responsibilities was tough enough already, try the impossible task of interpreting the avalanche of instantaneous political and economic headlines pouring over our electronic devices at lighting speed.

Knee-jerk reactions to headlines might give investors a false sense of security, but the near-impossibility of consistently timing the stock market has not stopped people from attempting to do so. For example, recently I have been bombarded with the same question, “Wade, don’t you think the stock market is overpriced now that we have eclipsed 20,000?” The short answer is “no,” given the current factors (see Don’t Be a Fool). Thankfully, I’m not alone in this response. Warren Buffett, the wealthiest billionaire investor on the planet, answered the same question this week after investing $20,000,000,000 more in stocks post the election:

“People talk about 20,000 being high. Well, I remember when it hit 200 and that was supposedly high….You know, you’re going to see a Dow [in your lifetime] that certainly approaches 100,000 and that doesn’t require any miracles, that just requires the American system continuing to function pretty much as it has.”

Like a deer in headlights, many Americans have been scared into complacency. To their detriment, many savers have sat silently on the sidelines earning near-0% returns on their savings, while the stock market has reached new all-time record highs. While Dow 20,000 might be new news for some, the reality is new all-time record highs have repeatedly been achieved in 2013, 2014, 2015, 2016, and now 2017 (see chart below).

record-highs

While I am not advocating for all people to throw their entire savings into stocks, it is vitally important for individuals to construct diversified portfolios across a wide range of asset classes, subject to each person’s unique objectives, constraints, risk tolerance, and time horizon. The risk of outliving your savings is real, so if you need assistance, seek out an experienced professional. March Madness may be here, but don’t get distracted. Make investing a priority, so your daily madness doesn’t turn into retirement sadness.

investment-questions-border

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper.

www.Sidoxia.com

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in FB and certain exchange traded funds (ETFs), but at the time of publishing 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.

March 4, 2017 at 11:04 am 1 comment

Super Bowl Blitz – Dow 20,000

team

This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (February 3, 2017). Subscribe on the right side of the page for the complete text.

If you have been following the sports headlines, then you know the Super Bowl 51 NFL football championship game between the four-time champion New England Patriots and the zero-time champion Atlanta Falcons is upon us. It’s that time of the year when more than 100 million people will congregate in front of big screen TVs across our nation and stare at ludicrous commercials (costing $5 million each); watch a semi-entertaining halftime show; and gorge on thousands of calories until stomachs bloat painfully.

The other headlines blasting across the media airwaves relate to the new all-time record milestone of 20,000 achieved by the Dow Jones Industrials Average (a.k.a., “The Dow”). For those people who are not glued to CNBC business television all day, the Dow is a basket of 30 large company stocks subjectively selected by the editors of the Wall Street Journal with the intent of creating an index that can mimic the overall economy. A lot of dynamics in our economy have transformed over the Dow’s 132 year history (1885), so it should come as no surprise that the index’s stock components have changed 51 times since 1896 – the most recent change occurred in March 2015 when Apple Inc. (AAPL) was added to the Dow and AT&T Inc. (T) was dropped.

20,000 Big Deal?

The last time the Dow closed above 10,000 was on March 29, 1999, so it has taken almost 18 years to double to 20,000. Is the Dow reaching the 20,000 landmark level a big deal in the whole scheme of things? The short answer is “No”. It is true the Dow can act as a fairly good barometer of the economy over longer periods of time. Over the 1998 – 2017 timeframe, economic activity has almost doubled to about $18 trillion (as measured by Gross Domestic Product – GDP) with the added help of a declining interest rate tailwind.

In the short-run, stock indexes like the Dow have a spottier record in correlating with economic variables. At the root of short-term stock price distortions are human behavioral biases and emotions, such as fear and greed. Investor panic and euphoria ultimately have a way of causing wild stock price overreactions, which in turn leads to poor decisions and results. We saw this firsthand during the inflation and subsequent bursting of the 2000 technology bubble. If that volatility wasn’t painful enough, last decade’s housing collapse, which resulted in the 2008-2009 financial crisis, is a constant reminder of how extreme emotions can lead to poor decision-making. For professionals, short-term volatility and overreactions provide lucrative opportunities, but casual investors and novices left to their own devices generally destroy wealth.

As I have discussed on my Investing Caffeine blog on numerous occasions, the march towards 20,000 occurred in the middle of arguably the most hated bull market in a generation or two (see The Most Hated Bull Market). It wasn’t until recently that the media began fixating on this arbitrary new all-time record high of 20,000. My frustration with the coverage is that the impressive phenomenon of this multi-year bull market advance has been largely ignored, in favor of gloom and doom, which sells more advertising – Madison Avenue execs enthusiastically say, “Thank you.” While the media hypes these stock records as new, this phenomenon is actually old news. In fact, stocks have been hitting new highs over the last five years (see chart below).

dji-07-17

More specifically, the Dow has hit consecutive, new all-time record highs in each year since 2013. This ignored bull market (see Gallup survey) may not be good for the investment industry, but it can be good for shrewd long-term investors, who react patiently and opportunistically.

Political Football

In Washington, there’s a different game currently going on, and it’s a game of political football. With a hotly contentious 2016 election still fresh in the minds of many voters, a subset of unsatisfied Americans are closely scrutinizing every move of the new administration. Love him or hate him, it is difficult for observers to accuse President Trump of sitting on his hands. In the first 11 days of his presidential term alone, Trump has been very active in enacting almost 20 Executive Orders and Memoranda (see the definitional difference here), as he tries to make supporters whole with his many previous campaign trail promises. The persistently increasing number of policies is rising by the day (…and tweet), and here’s a summarizing list of Trump’s executive actions so far:

  • Refugee Travel Ban
  • Keystone & Dakota Pipelines
  • Border Wall
  • Deportations/Sanctuary Cities
  • Manufacturing Regulation Relief
  • American Steel
  • Environmental Reviews
  • Affordable Care Act Requirements
  • Border Wall
  • Exit TPP Trade Deal
  • Federal Hiring Freeze
  • Federal Abortion Freeze
  • Regulation Freeze
  • Military Review
  • ISIS Fight Plan
  • Reorganization of Security Councils
  • Lobbyist Bans
  • Deregulation for Small Businesses

President Trump has thrown another political football bomb with his recent nomination of Judge Neil Gorsuch (age 49) to the Supreme Court in the hopes that no penalty flags will be thrown by the opposition. Gorsuch, the youngest nominee in 25 years, is a conservative federal appeals judge from Colorado who is looking to fill the seat left open by last year’s death of Justice Antonin Scalia at the age 79.

Politics – Schmolitics

When it comes to the stock market and the economy, many people like to make the president the hero or the scapegoat. Like a quarterback on the football field, the president certainly has influence in shaping the political and economic game plan, but he is not the only player. There is an infinite number of other factors that can (and do) contribute to our country’s success (or lack thereof).

Those economic game-changing factors include, but are not limited to: Congress, the Federal Reserve, Supreme Court, consumer sentiment, trade policy, demographics, regulations, tax policy, business confidence, interest rates, technology proliferation, inflation, capital investment, geopolitics, terrorism, environmental disruptions, immigration, rate of productivity, fiscal policy, foreign relations, sanctions, entitlements, debt levels, bank lending, mergers and acquisitions, labor rules, IPOs (Initial Public Offerings), stock buybacks, foreign exchange rates, local/state/national elections, and many, many, many other factors.

Regardless to which political team you affiliate, if you periodically flip through your social media stream (e.g., Facebook), or turn on the nightly news, you too have likely suffered some sort of political fatigue injury. As Winston Churchill famously stated, “Democracy is the worst form of government except for all the other forms that have been tried from time to time.”

When it comes to your finances, getting excited over Dow 20,000 or despondent over politics is not a useful or efficient strategy. Rather than becoming emotionally volatile, you will be better off by focusing on building (or executing) your long-term investment plan. Not much can be accomplished by yelling at a political charged Facebook rant or screaming at your TV during a football game, so why not calmly concentrate on ways to control your future (financial or otherwise). Actions, not fear, get results. Therefore, if this Super Bowl Sunday you’re not ready to review your asset allocation, budget your annual expenses, or contemplate your investment time horizon, then at least take control of your future by managing some nacho cheese dip and handling plenty of fried chicken.

investment-questions-border

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper.

www.Sidoxia.com

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in AAPL, T, FB and certain exchange traded funds (ETFs), but at the time of publishing 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.

February 4, 2017 at 8:02 am Leave a comment

Wiping Your Financial Slate Clean

slate

This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (January 3, 2017). Subscribe on the right side of the page for the complete text.

The page on the calendar has turned, and we now have a new year, and will shortly have a new president, and new economic policies. Although there is nothing magical about starting a fresh, new year, the annual rites of passage also allow investors to start with a clean slate again and reflect on their personal financial situation. Before you reach a desired destination (i.e., retirement), it is always helpful to know where you have been and where are you currently. Achieving this goal requires filtering through a never-ending avalanche of real-time data flooding through our cell phones, computers, TVs, radios, and Facebook accounts. This may seem like a daunting challenge, but that’s where I come in!

Distinguishing the signals from the noise is tough and there was plenty of noise in 2016 – just like there is every year. Before the S&P 500 stock index registered a +9.5% return in 2016, fears of a China slowdown blanketed headlines last January (the S&P 500 fell -15% from its highs and small cap stocks dropped -26%), and the Brexit (British exit) referendum caused a brief 48-hour -6% hiccup in June. Oil was also in the news as prices hit a low of $26 a barrel early in the year, before more than doubling by year-end to $54 per barrel (still well below the high exceeding $100 in 2014). On the interest rate front, 10-Year Treasury rates bottomed at 1.34% in July, while trillions of dollars in global bonds were incomprehensibly paying negative interest rates. However, fears of inflation rocked bond prices lower (prices move inversely to yields) and pushed bond yields up to 2.45% today. Along these lines, the Federal Reserve has turned the tide on its near-0% interest rate policy as evidenced by its second rate hike in December.

Despite the abbreviated volatility caused by the aforementioned factors, it was the U.S. elections and surprise victory of President-elect Donald Trump that dominated the media airwaves for most of 2016, and is likely to continue as we enter 2017. In hindsight, the amazing Twitter-led, Trump triumph was confirmation of the sweeping global populism trend that has also replaced establishment leaders in the U.K., France, and Italy. There are many explanations for the pervasive rise in populism, but meager global economic growth, globalization, and automation via technology are all contributing factors.

The Trump Bump

Even though Trump has yet to accept the oath of Commander-in-Chief, recent investor optimism has been fueled by expectations of a Republican president passing numerous pro-growth policies and legislation through a Republican majority-controlled Congress. Here are some of the expected changes:

  • Corporate/individual tax cuts and reform
  • Healthcare reform (i.e., Obamacare)
  • Proposed $1 trillion in infrastructure spending
  • Repatriation tax holiday for multinational corporate profits
  • Regulatory relief (e.g., Dodd-Frank banking and EPA environmental reform)

The chart below summarizes the major events of 2016, including the year-end “Trump Bump”:

16-sp-sum

While I too remain optimistic, I understand there is no free lunch as it relates to financial markets (see also Half Trump Full). While tax cuts, infrastructure spending, and regulatory relief should positively contribute to economic growth, these benefits will have to be weighed against the likely costs of higher inflation, debt, and deficits.

Over the 25+ years I have been investing, the nature of the stock market and economy hasn’t changed. The emotions of fear and greed rule the day just as much today as they did a century ago. What has changed today is the pace, quality, and sheer volume of news. In the end, my experience has taught me that 99% of what you read, see or hear at the office is irrelevant as it relates to your retirement and investments. What ultimately drives asset prices higher or lower are the four key factors of corporate profits, interest rates, valuations, and sentiment (contrarian indicator) . As you can see from the chart below, corporate profits are at record levels and forecast to accelerate in 2017 (up +11.9%). In addition, valuations remain very reasonable, given how low interest rates are (albeit less low), and skeptical investor sentiment augurs well in the short-run.

16-eps

Source: FactSet

Regardless of your economic or political views, this year is bound to have plenty of ups and downs, as is always the case. With a clean slate and fresh turn to the calendar, now is a perfect time to organize your finances and position yourself for a better retirement and 2017.

investment-questions-border

www.Sidoxia.com 

Wade W. Slome, CFA, CFP®

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in FB and certain exchange traded funds (ETFs), but at the time of publishing had no direct position in TWTR 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.

January 3, 2017 at 12:17 pm Leave a comment

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