Author: Team Editor

Economy

Retail Sales Raise Flags for Investors

Posted on by Team Editor

Many investors and analysts closely watch economic data. The most recent data on retail sales caused many to question the health of the economy.

Investopedia explains what the report is and why it is important:

“The Retail Sales Report, released monthly by the U.S. Census Bureau, is very closely watched by both economists and investors. The Census Bureau has been releasing the report since 1951 and they adjust the sample of retail outlets used every five years to stay current.

retail report

Source: Federal Reserve

This indicator tracks the dollar value of merchandise sold within the retail trade by taking a sampling of companies engaged in the business of selling end products to consumers. Both fixed point-of-sale businesses and non-store retailers (such as online sellers) are used in the data sample.

Companies of all sizes are used in the survey, from Wal-Mart to independent, small-town businesses. These companies provide data including retail sales and month-end inventories.

The data from the Retail Sales Report is widely used by various government agencies, academic analysts and researchers, economists, businesses and investors. It is a component in the calculation of Gross Domestic Product, a key economic indicator.

The Fed uses this data to analyze recent trends in consumer purchases as part of their overall analysis of the economy and recent trends. The results of the report are widely reported by the financial media.

Investors use the data to measure trends in consumer spending as part of their overall analysis of business and economic trends, and of industries impacted more directly by this data.

The release of the Retail Sales Report can cause above-average volatility in the stock market. Its clarity as a predictor of inflationary pressure can cause investors to rethink the likelihood of Fed rate cuts or hikes, depending on the direction of the underlying trend.

If retail sales growth is stalled or slowing, this means consumers are not spending at previous levels, and could signal a possible recession due to the significant role personal consumption plays in the health of the economy.

One of the most important factors investors should note when viewing the indicator is how far off the reported figure is from the so-called consensus number, or “street number.”

In general, the stock market does not like surprises, so a figure that is higher than expected could trigger selling of stocks and bonds, as inflationary fears would be deemed higher than expected.”

The Latest Data

MarketWatch summarized the  most recent report and highlighted a potential problem in the data:

“The Commerce Department on Thursday said retail sales slumped 1.2% at the end of 2018, marking the biggest decline in nine years. Virtually every retail segment suffered, including high-flying internet retailers.

At least that’s what the initial government estimate showed. Many economists don’t believe it.

“There’s no denying retail sales are weaker, but they are not this weak,” asserted chief economist Richard Moody of Regions Financial. Moody regularly tells investors to ignore preliminary retail sales figures because they are so often heavily revised.

He is far from alone. Most economists say investors should treat the December retail report cautiously.

“This release is such an outlier and so incongruous with the general trend in consumer spending, holiday consumer sales reports and holiday seasons consumer credit data that it does raise suspicions of data reliability,” said Ward McCarthy, chief financial economist at Jefferies LLC.

One big red flag, for example, was a reported 3.9% decline in sales among internet retailers. The last time internet sales fell that much was in 2008 at the height of the last recession.”

red flag retail report

Source: Federal Reserve

Yet by all accounts, Amazon and other internet retailers posted very strong sales and had one of the best holiday seasons in years.

What Gives?

Moody points to the government’s effort to “adjust” sales figures for season variations . The goal is to smoothen out the retail numbers so they don’t show huge changes from one month to the next, giving investors a clearer idea of sales trends in the economy.

Seasonal adjustments are used in most government reports and widely accepted by the economics profession, but sometimes they can throw a report out of whack. Many economists think that’s what happened in December.

Consider internet retailers. Their sales actually rose 10% in December, the government’s raw or unadjusted numbers show. Yet they had been rising in December in recent years at a 25% rate.

Nonstore retail sales growth

Source: MarketWatch.com

When the government applied its seasonal adjustments, the increase in internet sales became a decrease. That happened throughout the report.

Other factors may have also been at work.

The stock market plunged in December and sparked fresh talk of a recession. The partial government shutdown began a few days before Christmas. And an unusual bout of cold weather struck large swaths of the country.

There’s little doubt, economists say, the U.S. economy slowed toward the end of 2018. They just don’t think retail sales truly cratered and took the economy with it.

“Before succumbing to panic and despair, we would suggest waiting to see what the January and February data have to say about the state of the consumer,” wrote chief economist Joshua Shapiro of MFR Inc. in New York.”

Barron’s also cited a problem with the report, “Philippa Dunne and Doug Henwood, who pen the TLR on the Economy advisory, point out the monthly retail sales release is perhaps the most revised report to come out of the government’s statistics mill. Even so, it was a shocker.

Previously, Barron’s had cited the importance of retail sales:

“According to a recent research note from Goldman Sachs , the wealth of, and spending by, not just the very wealthiest Americans but also middle- and upper-middle-income households have become tied more closely to the stock market.

That’s contrary to the standard economic assumption that the “wealth effect” from moves in stock prices should be diminished since so much equity wealth is now in the hands of the tippy-top, who can readily absorb a hit from a bear market without cutting back.

The wealthiest 0.1% of households account for 17% of the stockholdings of all households, while the top 1% own 50%, according to Goldman’s parsing of Fed data on consumer finances. Those percentages are up from 13% and 39%, respectively, in the late 1980s.

Relative to their incomes, all households’ stockholdings have tripled. As a result, for the top 10%, the impact of a 1% drop in equity prices is now three times as large as it was in the late 1980s, according to Goldman.

Even for the upper middle-class (those in the 50th-90th percentiles), the impact of stock price declines is one-third greater. As a result of an 11% decline in equities from their September peak until Jan. 15 (the date of the report), Goldman economists expect 2019 gross-domestic-product growth to decline by 0.5 of a percentage point.”

Because retail is so important to the economy and the stock market, investors will be watching revisions to the data closely.

 

Did you know that dividends have rewarded investors for at least 100 years, at least since John D. Rockefeller said, “Do you know the only thing that gives me pleasure? It’s to see my dividends coming in.”

We have prepared a special report about dividends that you can access right here.

Passive Income

There’s a New Investment Opportunity. But Should You Take It?

Posted on by Team Editor

Jumpstart Our Business Startups Act, or JOBS Act. While having many different functions, the one that has captured the most attention is the area surrounding crowdfunding.

crowdfunding

Source: SEC.gov

The JOBS Act allows companies to raise an unlimited amount of funds from accredited investors. It also allows smaller companies to raise up to $1.07 million from both accredited and non accredited investors.

There are limits on the deals that smaller investors can participate in. The offers must follow a highly prescriptive set of rules. The offer must be listed on a FINRA approved funding portal or with a Broker Dealer. Investors are limited in the amount they may invest.

Jobs Act

Source: GovInfo.gov

But, even with restrictions, this is a new asset class that every investor should consider. Before getting into the details, it’s important to remember that this investment, like all others, combines the ideas of risks and rewards. High rewards require accepting high degrees of risk, and both are available in this investment category.

A recent Forbes article summarized the performance of one crowdfunding web site:

“Does the potential for a 40 per cent plus returns over three-and-a-half years or so offer sufficient incentive for a 40 per cent failure rate? Those are the numbers that jump out of the report published today by Seedrs, one of the UK’s big three equity crowdfunding platforms, into the performance of companies that have raised money with it.”

The average returns worked out to 14.4% a year for deals on the site. But, investors in this field will pick and choose which deals they participate in. It’s unlikely they will achieve average returns unless they invest in a very large number of deals.

Since the investor will be selecting individual deals, there is another important piece of information to keep in mind from that article. That is the fact that 41% of the deals lost money. Some lost 100% of investors’ money while others suffered smaller losses.

Finding Deals

Several web sites allow small investors to participate in this opportunity. While the goal will be to create passive income, the investor may need to be patient and expect money to be tied up for some time before returns are seen.

Among the sites offering deals is CircleUp which has raised over $300 million since the site began operating in 2012.

CircleUp also has a $125 million growth fund to invest in companies directly. Using machine learning technology called Helio, CircleUp Growth Partners says it will be able to identify potential investments using data about companies to predict success.

CircleUp co-founder and COO Rory Eakin said that he believes the company will be able to “find patterns and signals” and is “pioneering the advent of data and analytics.”

While CircleUp is using technology to make its investments, the investments themselves will not be in the technology category. Instead, CircleUp is looking at categories like food and beverage, and personal care. Eakin says CircleUp’s strategy is “companies that produce something that sit on a shelf.”

The companies that they’ll be looking at have $1 million to $10 million in revenue. Eakin says that they’ll be co-investing with others in the CircleUp community.

Fundable has raised over $411 million for startup companies. LocalStake allows investors to focus on the communities they want to buy into. That could be their local community or a community an investor believes is growing and could provide diversification.

Wefunder is designed to be a platform connecting investors with startup founders. It highlights the source of “information regarding companies on Wefunder is provided by the companies themselves. Wefunder may assist a company in presenting this information, but we don’t verify its accuracy or endorse the company.”

That is an important factor to consider in the investment. There is a great deal of research required to verify information since it will be initially provided by the company.

It is important to remember that these are long term investments. LocalStake notes, “If you decide that you no longer wish to remain invested during the fundraise, you can cancel your investment for any reason up to 48 hours after the business countersigns your investment documents at no charge.”

After 48 hours, you are committed to what could be an illiquid investment that could take years to recover. Or could result in a complete loss.

While there are risks to crowdfunding small businesses, there are also potential rewards. Passive income from business startups is possible for investors who can accept the risks.

The University of Chicago recently asked, “Does equity crowdfunding increase the odds of success?”

Their answer may be illuminating:

“The early days of equity crowdfunding have yielded mediocre results compared to VC and angel investing.

Equity crowdfunding has been in active use in the United Kingdom since 2011 and is supported by government initiatives including the Seed Enterprise Investment Scheme, which gives investors tax breaks on early-stage investing. But early results appear to be mixed.

A headline from this past September in the London Telegraph read: “First crowdfunding results: 70 go bust, one makes money.”

According to the article, which cites research from finance data provider AltFi Data and law firm Nabarro, of 367 companies funded via top crowdfunding websites in the UK between 2011 and 2013, nearly 20 percent went out of business, while only 16 percent went on to raise additional capital at higher valuations.

Only one, or 0.2 percent, exited—and it is estimated that its investors received a modest 2.5 times their money back.

Compare these results to those of a 2015 study by data analytics company CB Insights that looked at a cohort of 1,027 start-ups initially funded in 2009 and 2010 by venture capitalists.

In that group, 40 percent raised a next round of capital, 22 percent exited, and 1 percent reached valuations of over $1 billion. And according to a 2017 report commissioned by the Angel Capital Association, 11 percent of angel portfolio companies had a positive exit.

survival rates for start-ups

Source: University of Chicago

Granted, equity crowdfunding is very new, so the early results may not be indicative of future performance.

However, additional research is turning up some possible reasons companies choosing to go the equity-crowdfunding route may continue to underperform compared with those that receive venture capital and angel backing.

An analysis by law firm Millyard Tech Law of the first 100 US-based crowdfunding campaigns launched after the SEC rules were first published finds that 50 percent of the campaigns were for equity while the others sought debt.

Of the companies that chose equity-based campaigns, 60 percent had been in business for less than one year at the time of their fundraising. It is rare for companies this young to qualify for angel funding, much less venture capital.

Also, equity crowdfunding may not be an entrepreneur’s first choice for funding.

A July 2018 study by Ghent University’s Xavier Walthoff-Borm and Tom Vanacker and University of Côte d’Azur’s Armin Schwienbacher finds that the 277 firms that sought funding between 2012 and 2015 on Crowdcube, a leading UK crowdfunding platform, were less profitable and carried more debt than similar firms that didn’t seek crowdfunding.

Further, the failure rate for the companies that successfully completed a funding campaign was similar to or higher than for those studied that did not seek this kind of funding. Meanwhile, more than 40 percent of the start-ups that didn’t raise the desired capital on Crowdcube failed.”

This study might indicate investors should consider the wisdom of Groucho Marx when offered an opportunity to invest in a small business. Groucho supposedly said, “I don’t care to belong to any club that will have me as a member.”

 

 

Did you know that dividends have rewarded investors for at least 100 years, at least since John D. Rockefeller said, “Do you know the only thing that gives me pleasure? It’s to see my dividends coming in.”

We have prepared a special report about dividends that you can access right here.

 

Stock market

Here’s What Berkshire’s Oracle Buy Really Means

Posted on by Team Editor

For at least some Berkshire Hathaway (NYSE: BRKB) watchers, the recent news from the company might have been surprising. Like all large investors, Berkshire is required to report on its portfolio holding every three months.

These reports are filed with the Securities and Exchange Commission (SEC) and some are closely watched. In particular, Berkshire’s have been closely watched to see what the company’s chairman Warren Buffett, has been buying and selling.

Buffett is perhaps the world’s greatest value investor and also may be the world’s best known long term value investor. Buffett has traditionally bought companies with businesses that are relatively easy to understand. As CNBC has noted, Buffett has long said that technology is outside his expertise.

Uncharacteristic Moves Show What’s Going on Behind the Scenes

Barron’s recently highlighted changes in the Berkshire portfolio that offer insights into what could be happening behind the scenes at the firm. The site noted,

“Warren Buffett’s Berkshire Hathaway appears to have a complicated relationship with technology stocks.

The Oracle of Omaha’s conglomerate dropped Oracle (NYSE: ORCL) from its investment portfolio in the fourth quarter, according to a form Berkshire filed Thursday with the Securities and Exchange Commission. Berkshire exited its $2.1 billion stake in the tech company, acquired only a quarter ago.”

The chart below shows there has been little movement in ORCL.

ORCL daily stock chart

Barron’s continued, “Berkshire also trimmed back in Apple (Nasdaq: AAPL), which still represents its most valuable individual stock investment. Buffett missed out on the tech-stock boom, but seemed to come around to the sector when he added Apple to Berkshire’s portfolio in 2016.

Lately, Apple’s stock has suffered as investors worried about slowing iPhone demand.

AAPL daily stock chart

Barron’s said in a December story that Apple’s selloff could be a drag on Berkshire’s profits.

Charlie Munger, Buffett’s longtime partner at Berkshire, was asked at the Daily Journal (DJCO) annual meeting Thursday why he thinks Apple’s stock has been hard hit lately.

“I don’t know why Apple’s stock is going up or down. I know enough about it that I admire the place, but I don’t know enough to have an opinion why it’s going up or down,” said Munger, who is the chairman of Daily Journal.

”Part of our secret is we don’t attempt to know a lot of things.” Munger also mentioned that he has a pile on his desk of issues that he considers to be “too hard” to figure out.

Berkshire did add one new tech position: Red Hat (NYSE: RHT).”

RHT daily stock chart

What’s unusual about all of this activity is the fact that Berkshire is taking positions in tech and that Berkshire is selling more quickly than is commonly associated with the company. This could all indicate that Buffett is no longer making all of the investment decisions.

Changes at Berkshire

Last year, The Wall Street Journal reported,

“At Berkshire’s annual meeting this weekend, Mr. Buffett said four executives—Greg Abel, Ajit Jain, Ted Weschler and Todd Combs—are already handling many of the day-to-day responsibilities of running Berkshire.

Mr. Buffett remains chairman, chief executive and chief investment officer, but “‘semiretired’ probably catches me at my most active point,” he joked in front of thousands of shareholders at the CenturyLink Center in Omaha on Saturday.

In January, Mr. Buffett promoted Messrs. Jain and Abel to vice chairmen. The managers of Berkshire’s 60-odd businesses now report to one of the two executives, not to Mr. Buffett.

In interviews this weekend, several Berkshire subsidiary CEOs said the new leaders have touched base, though they foresee little change, especially because both men were promoted from within the company and understand its culture.

By starting the management transition while he is still in charge, Mr. Buffett hopes to instill shareholder confidence in the next generation of Berkshire leaders, said Thomas Russo, partner at Gardner Russo & Gardner, a longtime holder of Berkshire shares.

“This is a very serious transitional year,” Mr. Russo said. On Mr. Buffett’s part, “I think there’s a real sense of willingness to let go of things.”

Fortune has offered brief profiles of the two new investment managers:

Todd Combs is one of two investment managers at Berkshire often mentioned as potential successors to Buffett. A former hedge fund manager, Combs arranged Berkshire’s largest acquisition. In 2016, he was invited to join the board of JP Morgan Chase & Co. after impressing Jamie Dimon.

He’s credited with working behind the scenes to spearhead a health care joint venture between Buffett, Dimon, and Jeff Bezos and has been praised for his “indifference” to attention—a trait one Berkshire investor said one would want to see in Buffett’s successor.

Another Berkshire investment manager in the running is Ted Weschler. Combs and Weschler have had nearly identical performance since they each joined the company in 2010 and 2011, respectively.

They have both out-performed the S&P 500 in the course of their tenure at Berkshire, which is better than Buffett himself has done. Still, Weschler is most often mentioned as an also-ran to Combs’s rising star.”

The Journal had noted, “Messrs. Combs and Weschler, manage about $25 billion in stock investments and take on other projects. Mr. Weschler arranged Berkshire’s 2017 investments in Home Capital Group Inc. and Store Capital Corp., and he has scouted out opportunities for Berkshire in Germany.

Mr. Combs is overseeing Berkshire’s role in the health-care initiative with Amazon and JPMorgan.

Because the two managers have already arranged deals for Berkshire, Mr. Buffett said shareholders shouldn’t worry about lucrative investment opportunities drying up for the company in the future.

Either Mr. Combs or Mr. Weschler was also the first to buy Apple Inc. for Berkshire’s portfolio. The company is now one of Berkshire’s top holdings, as Mr. Buffett started buying the stock as well.”

What this is all means is Buffett watchers can not count on portfolio changes at Berkshire to tell them what Buffett is thinking. Even large deals could be the work of one of the other managers at the firm. While Buffett is still engaged, outsiders have no way of knowing how engaged he is on any decision.

 

 

Did you know that dividends have rewarded investors for at least 100 years, at least since John D. Rockefeller said, “Do you know the only thing that gives me pleasure? It’s to see my dividends coming in.”

We have prepared a special report about dividends that you can access right here.

 

Economy

Now Is the Time to Prepare for the Fed’s Next Move

Posted on by Team Editor

Traders are pricing in a dramatic shift in Federal Reserve policy. Market expectations of Fed policy can be easily determined and are available to traders free on line. The CME maintains a site showing what current expectations are for each of the Fed’s meetings over the next year.

The CME FedWatch Tool “analyzes the probability of FOMC rate moves for upcoming meetings.

Using 30-Day Fed Fund futures pricing data, which have long been relied upon to express the market’s views on the likelihood of changes in U.S. monetary policy, the tool visualizes both current and historical probabilities of various FOMC rate change outcomes for a given meeting date.

The tool also shows the Fed’s “Dot Plot,” which reflects FOMC members’ expectations for the Fed target rate over time.”

Changes in expectations for the Fed’s next meeting are shown in the chart below.

Changes in expectations for the Fed’s next meeting

Source: CME

Barron’s recently addressed this,

“The betting in the financial markets has shifted from further interest-rate hikes by the Federal Reserve to a possible cut by early 2020. That’s the message from the futures and options markets for short-term interest rates, where wagers on lower rates have increased recently.

The monetary authorities’ pivot, initially articulated in early January by Fed Chairman Jerome Powell and confirmed after the Jan. 29-30 meeting of the Federal Open Market Committee, touched off a steep rebound in stocks and other risky assets.

But some observers in the credit market worry that about rising recession risks. Traders in interest-rate instruments appear to be anticipating that the Fed will be actively easing policy early in 2020 to counter a downturn.”

Trading the New Environment

The news site also addressed potential trading opportunities based on this change in probabilities.

“The high-yield bond market, for now, appears rather blasé about the prospects for a downturn in the economy, as our colleague Alexandra Scaggs wrote [recently].

According to longtime junk market maven Marty Fridson, chief investment officer of Lehmann Livian Fridson Advisors, speculative-grade debt’s yield premium over comparable Treasuries ought to be two full percentage points higher to provide adequate compensation for their risk.

By contrast, at the other end of the lending market, bankers are tightening their credit standards, according to Steven Blitz, chief U.S. economist at TS Lombard.

This is a response to the Fed’s previous rate hikes, which have boosted the central bank’s target range for federal funds to 2.25%-2.50%, as well as narrowing the spread versus the two-year Treasury note, which yielded 2.533% [recently].

TUX weekly chart

The Fed sets the overnight fed-funds rate, while two-year note yield reflects expected future rates.

When the gap between these rates narrows, bankers slow credit extensions or even throw them into reverse, Blitz writes a client note.

That was apparent in the Fed’s Senior Loan Officer Survey, which also showed a slackening in the demand for loans across virtually all categories—commercial and industrial, mortgages, commercial real estate, consumer loans—adds David Rosenberg, chief economist at Gluskin Sheff.

The tightening of credit always affects the real economy with a lag, which Blitz explains is behind the Fed’s recent shift in rhetoric.

He thinks the central bank next will slow the pace of the reduction in its balance sheet as an initial step. (When the Fed sells assets, it effectively extinguishes cash from the banking system.) The earliest Blitz looks for a rate cut would be in the third quarter.

According to the CME Group’s FedWatch, the odds favor the Fed standing pat with its current fed-funds rate with outside chances of either a hike or a cut of one-quarter percentage point at each FOMC meeting in 2019.

But by next January, the probability of a cut of at least a quarter-point was a nontrivial 14.5%, as of Wednesday’s close. By contrast, the probability of a hike of a quarter point or more was 9.0%.

At the same time, traders in options on Eurodollar futures also have been ramping up bets on a Fed easing move later in 2019, according to a note to clients of R.J. O’Brien & Associates, a Chicago futures broker. (Eurodollar futures are based on the three-month Libor, or London interbank offered rate. Options on Eurodollar futures provide another derivative bet on anticipated short-term rates.)

An easier way for most Barron’s readers to benefit from an anticipated Fed ease would be in a class of real estate investment trusts that invest in mortgages and related investments rather than the typical malls, office buildings, or apartment buildings. That’s the view of Harley Bassman, a former head Wall Street derivatives pro who pens the Convexity Maven blog.”

Mortgage REITs borrow short-term and invest longer-term to earn a spread. That spread has been compressed as the Fed has hiked the funds rate nine times in the past three years, hurting the mREITs earnings and dividends.

Bassman opines this is the bottom of the cycle and the yield curve should steepen, benefiting their income and dividends. “I suspect I am a tad early, but I have never been a ‘bottom picker,’” he writes. That said, he advises investors to be careful with the size of the bet in order to survive a few bumps.

Bassman doesn’t name any mREITs, but the iShares Mortgage Real Estate Capped exchange-traded fund (NYSE: REM) provides broad exposure to the group. The ETF yields about 9%.

REM weekly stock chart

From here, however, how the stock market fares will depend on more than interest rates, notably other factors such as trade and tariffs as well as growth in the U.S. and abroad. That makes betting on interest rates seem almost simple by comparison.”

Investors could consider bond funds or ETFs also since prices of bonds rise when interest rates fall. The largest changes in price occur for bonds with longer maturities so longer term bond funds could be the most aggressive strategy and offer the greatest potential gains. However, longer term funds also carry the largest amount of risk.

However, traders cannot ignore the possibility of a shift in Fed policy and should make plans for lower rates now.

 

Did you know that dividends have rewarded investors for at least 100 years, at least since John D. Rockefeller said, “Do you know the only thing that gives me pleasure? It’s to see my dividends coming in.”

We have prepared a special report about dividends that you can access right here.

Stock market

This Billionaire Likes Garbage

Posted on by Team Editor

Billionaire investors can provide useful information to individual investors. As an example of that, we can consider a recent news story from Barron’s:

“Bill Gates has signaled that he may be in Waste Management (NYSE: WM) stock for the long haul.

His investment vehicle Cascade Investment LLC bought 1.22 million more shares of the trash and recycling firm in 2018. The disclosure was made in a form Cascade filed to the Securities and Exchange Commission Wednesday night. As of Dec. 31, Gates’s firm owned 14.5 million Waste Management shares, up from 13.3 million shares at the end of 2015.

Cascade didn’t respond to a request for comment on the transaction.

When, exactly, Cascade bought the additional Waste Management shares is unclear. Apparently, Cascade could have bought the stock at any point in 2018, as SEC guidelines only provide for an amended filing within 45 days after the end of a calendar year to report changes in holdings.

Waste Management stock had a lackluster 2018, only bagging a 3% gain. But shares have gone through a renewal this year. Waste Management stock has surged 12.4% year to date to $100 in intraday trading Thursday, helped by strong earnings. That is a new high for the stock price.

Gates, a co-founder of Microsoft (Nasdaq: MSFT), along with his wife Melinda Gates, also own Waste Management stock through the Bill & Melinda Gates Foundation Trust, which they serve as co-trustees.

At Dec. 31, the trust owned 18.6 million Waste Management shares, a figure unchanged from the end of 2015. Overall, Bill Gates owns 33.1 million shares, a stake of 7.8% in Waste Management.”

WM has been a solid performer in a persistent up trend for some time as the chart below shows.

WM weekly chart

Why Gates Matters

Bill Gates is one of the richest individuals in the world. Forbes recently noted that he was the second richest individual in the world with a fortune estimated to be worth almost $97 billion.

Bill Gates Photo

Source: Forbes

Although the Microsoft founder made his fortune in the software industry, he certainly has a wealth of knowledge and his wealth also gives him access to the best investment research. Gates manages much of his fortune through Cascade Investment, L.L.C.

The Financial Times notes that Cascade is managed by Michael Larson, its chief investment officer. The article added, “Bill Gates hired Larson 22 years ago to take over the investment of his personal wealth, which was about $5bn at the time.

 Since then Gates’s fortune has grown to around $90bn (of which he has given away around half) after Larson diversified the funds out of Microsoft, Gates’s software company, and into a broad range of investments.

Cascade does not publicly disclose its performance results but it has been reported that because of Larson’s relatively conservative strategy, Cascade’s losses in the 2008 financial crisis were smaller than the industry average for the full year.

Since 1995, Larson has delivered a compound annual return of around 11 per cent.”

Cascade’s investment portfolio, according to Wikipedia, includes:

Cascade investment portfolio

Source: Wikipedia

Wikipedia is, perhaps, not the best source of this information. There are a number of other sites that show the portfolio of Gates and other rich individual investors. These sites all gather information from the Securities and Exchange Commission and the raw data is available to anyone, for free.

How We Can Follow Great Investors

Among the filings large investors must make is SEC Form 13F, more formally called the Information Required of Institutional Investment Managers Form. 13Fs must be filed once a quarter by any investment manager with at least $100 million in assets under management.

By law, 13Fs must be filed with the SEC within 45 days of the end of a quarter. For example, forms must be filed by February 15 for the quarter which ends December 31 each year.

By itself, the 13F filing can be confusing. An extract of one of Cascade’s filings is shown below:

Cascade filing

Source: SEC

In order to be useful, the information from the 13F needs to be collected and analyzed in some way. When the information is moved into a sortable database, we can determine what the filer is buying and selling.

We can even combine the filings to see which stocks are favored by hedge fund managers as a group. This information can be used to develop a trading strategy that follows the funds, but without the steep fees.

These forms can be used to find the best ideas of the world’s greatest investors. In addition to Gates and other individuals, large hedge funds are also required to file these forms.

As a group, hedge funds tend to underperform the market. But the fifty largest funds, for example, are successful in the long run, a fact proven by the large amount of assets they control.

On the other hand, smaller funds are often struggling to deliver performance so they can earn rich fees but the established funds are generally proven top performers which is why they control billions of dollars.

This could be a useful insight into how 13fs could be used. For example, an investor could follow the filings of just a few large and successful investors. Or, an individual investor could develop a group of funds that they want to follow.

As changes to the forms are made, the investor could see what the funds are buying and selling. This could lead to an investment strategy. The strategy could be as simple buying the companies that represent the largest recent purchases of funds and selling when the funds sell.

It could be important to keep in mind that a sell rule should not be violated. If an investor decides to buy when funds buy a company, they should close the position when the funds close their positions. The funds might be relying on important information they uncovered in their research.

However, the funds could simply be selling because they need to raise cash for some reason or because they see other opportunities and are reallocating limited capital. Although there is no way to know, the strategy of following funds would include selling even when the reason isn’t well understood.

 

 

Did you know that dividends have rewarded investors for at least 100 years, at least since John D. Rockefeller said, “Do you know the only thing that gives me pleasure? It’s to see my dividends coming in.”

We have prepared a special report about dividends that you can access right here.

Economy

What’s the Fed Put and Does It Mean the Stock Market Will Rally?

Posted on by Team Editor

Traders and analysts are once again wondering if the Federal Reserve will provide the “Fed put” that can potentially limit the down side of a stock market sell off.

In this case, the term “put” refers to a put option, which is an option that increases in value when prices fall. The idea of a Fed put dates back to the chairmanship of Alan Greenspan who sat at the top of the Fed from 1987 to 2000.

“During Greenspan’s chairmanship, when a crisis arose and the stock market fell more than about 20%, the Fed would lower the Fed Funds rate, often resulting in a negative real yield.

In essence, the Fed added monetary liquidity and encouraged risk-taking in the financial markets to avert further deterioration.

The Fed did so after the 1987 stock market crash, which prompted traders to coin the term Greenspan Put, later termed moral hazard. In 2000, Greenspan raised interest rates several times. These actions were believed by some to have caused the bursting of the dot-com bubble.

The Fed also injected funds to avert further market declines associated with the savings and loan crisis and Gulf War, the Mexican crisis, the Asian financial crisis, the LTCM crisis, Y2K, the burst of the internet bubble, the 9/11 attacks, and repeatedly from the early stages of the Global Financial Crisis to the present.

The Fed’s pattern of providing ample liquidity resulted in the investor perception of put protection on asset prices. Investors increasingly believed that in a crisis or downturn, the Fed would step in and inject liquidity until the problem got better.

Invariably, the Fed did so each time, and the perception became firmly embedded in asset pricing in the form of higher valuation, narrower credit spreads, and excess risk taking.

[Nobel Prize winning economist] Joseph Stiglitz criticized the put as privatizing profits and socializing losses and implicates it in inflating a speculative bubble in the lead-up to the 2008 financial crisis.

In 2007 and early 2008, the financial press had begun discussing the Bernanke Put as new Federal Reserve Board chairman, Ben Bernanke continued the practice of reducing interest rates to fight market falls.

The decision by the Fed to lower short-term interest rates to 50 basis points (0.5%) on October 8, 2008, and thereafter a range from 0.00-0.25% rate in December 2008 suggests attempts to create a Bernanke put similar to the Greenspan put.”

Proof of a Fed Put

Economists at the University of California considered the question of whether or not the put exists or simply a legend created by Wall street traders. In a paper called “The Economics of the Fed Put,”

Anna Cieslak and Annette Vissing-Jorgensen noted:

“We document that low stock market returns predict accommodating monetary policy by the Federal Reserve. Negative stock returns realized between FOMC meetings are a more powerful predictor of subsequent federal funds target rate changes than almost all macroeconomic news releases.

Using textual analysis of FOMC minutes and transcripts, we argue that stock returns cause Fed policy and document the mechanism underlying the relation.

Consistent with a causal effect of stock returns on policy, FOMC participants are more likely to mention the stock market after market declines—a pattern that arises from the mid-1990s—and the frequency of negative stock market mentions in FOMC documents predicts target rate cuts.

The FOMC discusses the stock market mostly as a driver of consumption and, to a lesser extent, investment and broader financial conditions. Less attention is focused on the stock market simply predicting (as opposed to driving) the economy.

In a Taylor rule framework, about 80% of the Fed’s reaction to the stock market can be explained by the Fed revising its expectations of economic activity down following stock market declines.

The Fed’s expectations updating is roughly in line with that of private sector forecasters and with the stock market’s predictive power for growth and unemployment.”

The stock market does appear to be a popular topic of discussion at Fed meetings.

economics of the Fed put

Source: The Economics of the Fed Put

“Over the 1994–2016 period, there are 983 references to stock market conditions in FOMC minutes. This number represents 14% of times that minutes mention inflation, and 31% of times they mention (un)employment.”

The authors also looked at other factors to determine what seemed to be the largest influence on the Fed. The stock market is among the most important influences.

estimates of regressions chart

Source: The Economics of the Fed Put

Is There a Powell Put?

MarketWatch recently noted that the current Fed Chair, Jerome Powell, seems to be following a similar policy.

“The Federal Reserve’s decision last week to signal a pause in the rate-hike cycle, adopting a wait-and-see approach just six weeks after delivering its fourth rate increase of 2018, took investors by surprise.

For one analyst, the move has echoes of the late 1990s, when a nimble Fed led by Alan Greenspan arguably set the table for a final stock-market “meltup” ahead of the bursting of the tech bubble in 2000.

Dario Perkins, managing director for global macro at TS Lombard, finds himself in the middle. The Fed could cut rates by the second half of 2019 as exports weaken and the economy begins to feel the delayed, full effects of the previous tightening in financial conditions, he said, in a [recent] note.”

But he doesn’t expect the U.S. economy to fall into a recession, which means that the Fed could resume hiking rates as the global economy strengthens into 2020.

He believes the Fed followed this pattern before:

Fed pattern chart

Source: MarketWatch.com

The first time was in 1995, a year after the Fed caused a lot of carnage in the bond market — that reverberated unpleasantly in emerging markets and elsewhere — with an aggressive round of rate increases that ultimately took interest rates above the level at which they neither boost nor slow the economy.

That year, the impact of all that Fed tightening was being felt at home. That led policy makers to reverse course and cut rates three times, in 25 basis-point increments, between July 1995 and January 1996 — a move that simply got rates back to neutral. In March 1997, the Fed shifted back into tightening mode with a quarter-point rate rise.

He’s certain that another round of market turbulence would lead the Fed to cut rates even before any tangible impact on the U.S. economy materializes.

Given the market’s bullish reaction to the Fed’s about-face last week, it is apparent that investors “realize the importance of the ‘Powell put,’” Perkins said, referring to the notion that the Fed will respond by loosening policy and providing liquidity in the wake of market turmoil.

“It even raises the possibility of a late-90s-style ‘meltup,” he said. “The only question is whether we need another December-style meltdown and Fed rate cuts before markets get bubbly, or whether the policy shift announced so far is already sufficient.”

Investors need to keep an eye on the Fed since that could provide a source of gains in the coming months.

 

Did you know that dividends have rewarded investors for at least 100 years, at least since John D. Rockefeller said, “Do you know the only thing that gives me pleasure? It’s to see my dividends coming in.”

We have prepared a special report about dividends that you can access right here.

Stock market

Stocks Under $15 With Growth and Income

Posted on by Team Editor

Low priced stocks can deliver large gains, if the company can be successful. When considering what makes a company successful, many investors turn to earnings. They might believe that increases in earnings per share (EPS) are the key to success.

But, for low priced stocks, that might not be true. EPS would, of course, be nice. But, there are many items that come before earnings on the income statement, a summary of a company’s financial operations.

At the top of the income statement is sales. This could be the most important factor to success for a low priced stock. Sales are necessary to produce earnings. Sales are needed to generate cash flow from operations. In short, sales are a critical component of success for a company.

This week, we focused on sales, requiring companies to have reported sales growth of at least 25% over the past five years.

Then, we limited our search to low priced stocks.

Individual investors understand that low priced stocks could be appealing for two reasons. One reason is that the low price means they have little down side risk in dollar terms. The second reason is that low priced stocks are generally the ones that deliver the largest short term gains.

One study looked at how low priced, or cheap, stocks performed relative to more expensive stocks. The study found that cheap stocks delivered more than six times the average return of the more expensive stocks in a typical quarter.

That’s why we limited our search for potential bargains by focusing on stocks priced at less than $15 per share. While we would like to see stocks at even lower prices, there just weren’t many that passed our stringent screening criteria so we had to use a cut off value of $15 to ensure some degree of diversification in this screen.

Finally, we required the stock to offer a dividend that is higher than the risk free rate of return of less than 3% available on Treasury notes maturing in ten years.

One way to find stocks meeting these requirements is with the free stock screening tool available at FinViz.com. At this site, you could screen for a variety of fundamental factors, high levels of institutional ownership and bullish institutional transactions. An example is shown below.

FINVIZ stock screening tool

Source: FinViz.com

Five Stocks Meet Our Strict Requirements

Remember, there is no guarantee any stock will increase in value. Also, it is important to remember when we search for stocks using quantitative measures, our goal is to identify stocks that meet those criteria. The screens we develop could be used as the cornerstone of long term investment strategies but any individual stock in the list could be a winner or loser.

Ellington Residential Mortgage REIT (NYSE: EARN) is a real estate investment trust. It specializes in acquiring, investing in and managing residential mortgage and real estate related assets.

It constructs and managing a portfolio consisting of residential mortgage-backed securities (RMBS) for which the principal and interest payments are guaranteed by the United States Government agency or the United States Government-sponsored entity (Agency RMBS) and, to a lesser extent, RMBS backed by prime jumbo, Alternative A-paper manufactured housing, and subprime residential mortgage loans (non-Agency RMBS).

Its Agency RMBS include residential mortgage pass-through certificates, collateralized mortgage obligations (CMOs) and to-be-announced mortgage pass-through certificates (TBAs). Its non-agency RMBS include investment grade and non-investment grade classes.

EARN weekly stock chart

Infosys Limited (NYSE: INFY) provides business information technology services comprising application development and maintenance, independent validation, infrastructure management, engineering services comprising product engineering and life cycle solutions and business process management.

It also performs consulting and systems integration services comprising consulting, enterprise solutions, systems integration and advanced technologies; products, business platforms and solutions to accelerate intellectual property-led innovation, including Finacle, its banking solution, and offerings in the areas of Analytics, Cloud and Digital Transformation.

Its segments are Financial Services and Insurance, Manufacturing and Hi-tech, Energy & utilities, Communication and Services, Retail, Consumer packaged goods and Logistics, and Life Sciences and Healthcare.

INFY stock chart

Jupai Holdings Limited (NYSE: JP) is a third-party wealth management service provider. The company focuses on distributing wealth management products and providing advisory services to individuals in People’s Republic of China (PRC).

JP serves as a one-stop wealth management product aggregator and is engaged in developing and managing in-house and third party products. It provides asset management services in the management and advisory of real estate or related funds, other fund products and funds of funds.

It offers its services to entrepreneurs, corporate executives, professionals and other investors through a network of 72 client centers in 46 cities of China.

JP stock chart

Orchid Island Capital, Inc. (NYSE: ORC) is a specialty finance company that invests in residential mortgage-backed securities.

The company’s business objective is to provide attractive risk-adjusted total returns to its investors over the long term through a combination of capital appreciation and the payment of regular monthly distributions. Its portfolio consists of two categories of Agency RMBS: pass-through Agency RMBS and structured Agency RMBS.

ORC invests in pass-through securities, which are securities secured by residential real property in which payments of both interest and principal on the securities are generally made monthly. The mortgage loans underlying pass-through certificates include fixed-rate mortgages, adjustable-rate mortgages (ARMs) and Hybrid ARMs.

ORC stock chart

Tarena International, Inc. (Nasdaq: TEDU) provides professional education services, including professional information technology (IT) training courses and non-IT training courses across the People’s Republic of China.

TEDU offers courses in various IT subjects and several non-IT subjects. It also operates two children education programs. It offers an education platform that combines live distance instruction, classroom-based tutoring and online learning modules.

The company complements the live instruction and tutoring with its learning management system, Tarena Teaching System (TTS). TTS has over five core functions, featuring course content, self-assessment exams, student and teaching staff interaction tools, student management tools and an online student community.

TEDU weekly stock chart

Any of these stocks could be a potential winner and all worth further research. However, each of these stocks also carries a degree of risk and that should also be considered. Based on the charts, momentum investors may find EARN and INFY most appealing.

 

Did you know that dividends have rewarded investors for at least 100 years, at least since John D. Rockefeller said, “Do you know the only thing that gives me pleasure? It’s to see my dividends coming in.”

We have prepared a special report about dividends that you can access right here.

 

Stock market

Potential Stock Market Winners Under the Green New Deal

Posted on by Team Editor

Recently, New York Democratic Rep. Alexandria Ocasio-Cortez and Massachusetts Democratic Sen. Ed Markey introduced a nonbinding resolution that calls for the U.S. to generate 100% of its electricity from zero-emission sources in 10 years.

According to MarketWatch, “The wide-ranging measure also backs investment in “smart” power grids and zero-emission vehicles, along with the elimination of greenhouse gases and the cleanup of hazardous-waste sites.

There is not a lot of detail on particular technologies or how to pay for the proposed changes, but long-term investors nonetheless may want to pay attention to the Green New Deal,” said Josh Price, an energy analyst at Height Capital Markets.

“If you start to see some more of these ground shifts in politics — veering toward renewables, veering toward addressing climate change — it’s definitely bullish for these renewable energy companies and power providers,” Price told MarketWatch.

“This isn’t a near-term catalyst for us by any means, but for some of those slow-money, long-time-horizon guys, the biofuels space and the renewables space are definitely interesting places to look,” he also said.

Specific Trades to Consider

NRG Energy, AES, Xcel Energy and other “more-forward-looking utilities” that are shifting away from fossil fuels could be winners if there is a continued focus on limiting climate change, according to the Height analyst.

NRG Energy, Inc. (NYSE: NRG) is an integrated power company. The company is engaged in producing, selling and delivering electricity and related products and services in various markets in the United States.

The stock has been in an uptrend for some time and this news could push the stock to even more gains.

NRG weekly stock chart

The AES Corporation (NYSE: AES) is a holding company that, through its subsidiaries and affiliates, operates a diversified portfolio of electricity generation and distribution businesses.

It is organized into six strategic business units (SBUs): the United States; Andes; Brazil; Mexico, Central America and the Caribbean (MCAC); Europe, and Asia. According to recent regulatory filings, its United States SBU had 18 generation facilities and two integrated utilities in the United States.

The Andes SBU had generation facilities in three countries. Its Brazil SBU has generation and distribution businesses, Eletropaulo and Tiete. The MCAC SBU had a portfolio of distribution businesses and generation facilities, including renewable energy, in five countries.

The Europe SBU also had generation facilities in five countries and the Asia SBU had generation facilities in three countries.

The stock has been in an up trend for most of the past year.

AES weekly stock chart

Xcel Energy Inc. (Nasdaq: XEL) is a public utility holding company whose operations include the activity of four utility subsidiaries that serve electric and natural gas customers in eight states.

The company’s segments include regulated electric utility, regulated natural gas utility and other activities. Its utility subsidiaries include NSP-Minnesota, NSP-Wisconsin, Public Service Company of Colorado (PSCo) and Southwestern Public Service Co. (SPS), which serve customers in portions of Colorado, Michigan, Minnesota, New Mexico, North Dakota, South Dakota, Texas and Wisconsin.

Other operations include WYCO Development LLC (WYCO), a joint venture formed with Colorado Interstate Gas Company, LLC (CIG) to develop and lease natural gas pipelines storage and compression facilities, and WestGas InterState, Inc. (WGI), an interstate natural gas pipeline company.

This stock has been in a consolidation after a rapid up move.

XEL weekly stock chart

Additional Opportunities

Action at the state level is key, Price told MarketWatch. The Green New Deal is likely to influence California, New York and other blue states, especially those that already have aggressive targets for their use of renewable energy.

California, for example, aims to get 60% of its electricity from renewable sources by 2030. So investors in companies tied to renewable energy could feel increasingly bullish because it could help ensure state action and then eventually lead to future nationwide legislation.

The resolution’s backers want to ensure that climate-change issues remain a priority as Democratic presidential candidates ramp up their 2020 campaigns, Price also said.

Contenders for the Democratic nomination who are co-sponsors include Cory Booker, Kamala Harris, Elizabeth Warren and Kirsten Gillibrand. Investors should be aware that there could be a political imperative to act on climate change if a Democrat wins the White House race next year, Price said.

While the resolution didn’t mention biofuels specifically, companies focused on these alternative fuels for cars appear set to benefit from the Green New Deal and related efforts, according to the Height analyst. Players in this area include Renewable Energy Group (REGI), Darling Ingredients (DAR), and Finland-based Neste.

“Between full electrification and what we have now, there’s space for these biofuels with low-carbon intensities to gain ground,” Price said.

Nuclear power initially looked like a Green New Deal loser, as a fact sheet for the plan that was circulated by Ocasio-Cortez’s office reportedly called for transitioning away from such plants.

Among those expressing concerns was Matthew Wald, a senior communications adviser for the Nuclear Energy Institute, an industry group whose board includes executives from American Electric Power (AEP), Duke Energy (DUK) and other companies with nuclear power plants.

“Is the #GreenNewDeal meant to stop #climatechange, or simply support natural gas and renewables?” Wald said in a tweet. “We need to use every tool that works, including #nuclear, our largest source of #carbon-free energy.”

But unlike the fact sheet, the Green New Deal resolution didn’t single out nuclear power. “The resolution is silent on any individual technology,” Markey said at a press conference, when asked about that particular industry.

The Green New Deal is far from legislation, but it could provide traders with opportunities. If it does nothing else, it could increase the attention of analysts and investors in the utility sector. That could be bullish for a conservative sector that, at times, garners little attention.

While there will be opportunities related to this news, there will also be risks.

This news could also add to the boom and bust tendency of emerging companies in the alternative energy space. This could mean biofuel stocks, for example, could become momentum trades and quickly lose their luster if news becomes less promising.

Whether investors agree or disagree with the politics of the Green New Deal, they should consider the investment implications of the news.

 

 

Did you know that dividends have rewarded investors for at least 100 years, at least since John D. Rockefeller said, “Do you know the only thing that gives me pleasure? It’s to see my dividends coming in.”

We have prepared a special report about dividends that you can access right here.

Stock market strategies

Trade the Dogs of the Dow Strategy for 2019

Posted on by Team Editor

You might be familiar with the Dogs of the Dow, a popular investment strategy that identifies stocks in the Dow Jones Industrial Average offering the best value. The strategy was first detailed in a 1991 book, Beating the Dow by Michael B. O’Higgins.

The strategy buys the ten highest yielding stocks from the thirty stocks that are included in the DJIA and trades just once a year. These ten stocks are known as the Dogs of the Dow.

Theoretically, high dividend yields are a sign of value in stocks as long as the dividend is safe. Large caps stocks included in the Dow are most likely safe and the committee that selects stocks for the index would almost certainly remove stocks before they fell into severe financial distress.

Dividend yields are usually viewed as providing information about income and most investors view them as an income screening tool. But in this strategy, dividend yields are identifying value just like the price-to-earnings (P/E) ratio or other popular ratios would.

When yields are used for valuation, the idea of relative valuation is being applied. We are not concerned with whether the yield is 1% or 10%. We are looking for the highest yields in a group of stocks that all pay a dividend.

Since each of the Dow stocks is an income stock, the dividend yield is a way to sort them and identify the most undervalued or overvalued stocks. This approach only works when applied to groups of stocks that all pay a dividend that is reasonably safe so yields have limited use in valuation screens.

Under the Dogs of the Dow strategy, in any given year some of the stocks should deliver market-beating gains, some will provide an average return and some will experience losses. Big winners are expected to significantly outweigh the losses. In the long run, the Dogs of the Dow strategy is expected to outperform the index.

The Data Supports the Theory

Results presented in the book showed simply buying ten stocks and trading once a year did in fact significantly outperform the market. Following the strategy from 1973 to June 1991 when the book was published would have resulted in a total return of 1,753%, more than three times better than the gains of the Dow which returned 559% over that same time.

That’s an annualized rate of return of 16.61% for the Dogs and 10.43% for the index. In the years since publication, the strategy has remained popular even though it has not really delivered the same types of gains.

In some years, the strategy outperforms and in other years the average does better than the Dogs. Since 2000, the Dogs have slightly outperformed the Dow, gaining an average of 8.6% a year while the Dow is up an average of 6.9% a year. Over other time periods, the track record is mixed.

Dogs of the Dow strategy chart

Source: DogsOfTheDow.com

Given the fact that the performance is so similar to the index in many years, some investors have looked for variations on the idea. Their thinking seems to be that the Dogs did so well in the original test there must be a way to succeed in the future.

One popular variation of the strategy is to buy only the five lowest priced stocks from the list of the ten high yielding stocks. This variation is sometimes called the Small Dogs of the Dow and after delivering great returns in the initial test period, it has also delivered mixed returns since publication, beating the Dow in some years and lagging in others.

Following the basic strategy involves investing an equal amount of money in each of these 10 stocks, or 5 stocks in the case of the Small Dogs, once a year and holding them for one year.

You can buy the Dogs or the Small Dogs anytime during the year and hold for one year before rebalancing or you can even rebalance two or four times a year.

In the long run, the results are about the same no matter when in the year when you start or how many times you rebalance the portfolio.

It is also possible to use options with the strategy to lower the costs. Long term call options could be used to implement the strategy.

Dogs for 2019

Barron’s recently updated the strategy performance. “Last year, the Dogs of the Dow beat the market. If you bought the 10 highest-yielding stocks in the Dow at the beginning of 2018, then your total return for the year was just over zero. Not great, but better than the Dow overall, which returned minus 3.5%.

Zero is also better than the S&P 500 which returned minus 4.4%, including dividends.

What’s more, if you kicked out General Electric (GE) when it was removed from the Dow in June, then your return improved, to 3.5%. GE was unfortunately the worst-performing stock (that started out) in the Dow last year, losing about 55% of its value.

In 2018, the stocks (or the dogs) in this strategy were: Verizon, IBM, Pfizer, Exxon Mobil (XOM), Chevron (CVX), Merck (MRK), Coca-Cola (KO), Cisco Systems (CSCO), Procter & Gamble (PG) and GE.”

For 2019, Barron’s noted, “This year nine of the 10 remain. GE is out and JPMorgan Chase (JPM) is in. That is the only change to the portfolio.”

2019 Dogs of the Dow

Source: Barron’s

As noted, call options could also be used. The advantage of call options is that they would require less capital. The disadvantage of call options is that the investor will not receive any income and could face losses of up to 100% on each individual investment and for the total investment.

However, buying call options on the stocks, whether the investor is buying 5 or 10 call options, is likely to use 10% or less of the capital needed to buy the stocks. This means limited trading capital is not committed to a single strategy in a smaller account.

The capital not used for the strategy could then be applied to other strategies and potentially enhance returns of the overall account.

 

Did you know that dividends have rewarded investors for at least 100 years, at least since John D. Rockefeller said, “Do you know the only thing that gives me pleasure? It’s to see my dividends coming in.”

We have prepared a special report about dividends that you can access right here.

Economy

Now Could Be the Time for Gold

Posted on by Team Editor

The headlines are a cause for concern. This is honestly true at any news site. It can be market news, global headlines or even local news. It is true that news services have always focused on bad news but there certainly seems to be more bad news than ever right now.

Many investors believe gold performs well when uncertainty rises. The chart below shows that could be true right now.

Gold weekly stock chart

Analysts point to a number of reasons to consider gold right now.

The Fundamental Explanation for Investing in Gold

TradeStops.com recently explained why gold stocks could be an investment opportunity:

“Why are gold and gold stocks doing well in the midst of market turmoil?

In historic terms, it’s no surprise to see the yellow metal zig when everything else zags. Gold stocks performed quite well in the 1930s, for example, due to rising profit margins as operating costs declined and the price of gold stayed fixed.

Heading into 2019, gold and gold stocks are channeling investor worries around slowdown, debt, and inflation. These things are all connected: In the event of global slowdown, debt levels are likely to rise as governments borrow and central banks stimulate.

But with debt levels already high, more borrowing and stimulus could spark inflation and a loss of faith in paper currencies — which benefits both gold and gold stocks.

There are multiple flashing red lights warning of global slowdown right now. One of them is the price of crude oil, the world’s most important commodity. The price for the two major crude oil benchmarks, Brent and West Texas Intermediate, has declined roughly 40 percent since the beginning of October — a historic collapse in such a short space of time. This suggests global oil demand is in trouble.

Then too, bellwether companies like FedEx, who have a finger on the pulse of global business, are talking slowdown. In its latest earnings report — a disappointment — Alan Graf, FedEx’s executive vice president and chief financial officer, said the following: “Global trade has slowed in recent months and leading indicators point to ongoing deceleration in global trade near-term.”

This is a worry because the typical response to slowdown is piling on more debt. Governments step up spending to help the economies, and central banks revert to easy money policies and stimulus.

But the world is already awash in debt, and the debt hangover from the last round of central bank stimulus hasn’t yet passed. According to IMF data, global debt levels are more than $180 trillion. And central banks already have trillions of dollars on their balance sheets, with interest rates at historic lows.

So, it’s not clear governments can borrow more trillions to fight yet another slowdown, or whether central banks can add trillions more in stimulus to their balance sheets, without leading to a pick-up of inflation and a loss of faith in paper currencies.

If that happens, it will benefit gold and gold stocks — possibly in a major way.

The positive trend in gold and gold stocks, even as global stock markets see red, shows investors are giving more weight to this possibility now.

That makes gold stocks increasingly attractive, but it might not be what the rest of the market hopes to find in its stocking.”

Uncertainty Is Also Rising

Along with gold, uncertainty is increasing. This can be seen in the next chart.

Economic Policy Uncertainty Index Chart

Source: PolicyUncertainty.com

This is the World Uncertainty Index (WUI). The WUI is an index calculated “for 143 individual countries on a quarterly basis from 1996 onwards. This is defined using the frequency of the word “uncertainty” in the quarterly Economist Intelligence Unit country reports.

Globally, the Index spikes near the 9/11 attack, SARS outbreak, Gulf War II, Euro debt crisis, El Niño, European border crisis, UK Brexit vote and the 2016 US election. Uncertainty spikes tend to be more synchronized within advanced economies and between economies with tighter trade and financial linkages.

The level of uncertainty is significantly higher in developing countries and is positively associated with economic policy uncertainty and stock market volatility, and negatively with GDP growth. In a panel vector autoregressive setting, we find that innovations in the WUI foreshadow significant declines in output.”

Notice that the authors call attention to previous spikes which were associated with identifiable crises. Then, you can notice in the chart that the index is at an all time high, even without a single identifiable event to explain. That indicates we could expect increased market volatility and decreased GDP growth now.

Gold Could Be a Hedge Against Uncertainty

It’s possible to directly trade gold. This can be done with coins, ETFs or futures. Coins are collectibles and can have tax consequences that are different than investments in stocks.

Many investors are surprised to learn popular ETFs that back their shares with physical holdings of precious metals face taxes at the higher rate for collectibles. This includes SPDR Gold Shares (NYSE: GLD).

Futures carry their own tax consequences and risks and many individual investors avoid these markets.

Publicly- traded stocks of gold miners offer an indirect way to invest in gold. Mining companies are taxed at the same rate as stocks which can be lower than the rate for gains in GLD or other ETFs.

In addition to offering tax benefits, gold miners also offer the benefit of leverage. An example might be the best way to explain the leverage miners offer.

Let’s assume it costs a miner about $800 an ounce to produce gold and they mine 1 million ounces a year. If gold is at $1,000 an ounce, the company should generate a profit of about $200 an ounce or $200 million.

This is a simplified example so we will assume the company has no other costs and no additional revenue.

If the price of gold increase by 30%, to $1,300 an ounce, assuming the costs of production stayed the same, the miner’s profits would increase to $500 an ounce or $500 million for the company, an increase of 150%.

The miner is leveraged, in this example, 5 to 1, and benefits immensely from higher gold prices. Even smaller gains in the price of gold have a large impact on earnings. A 1% increase in gold prices (to $1,010 an ounce) results in a 5% jump in the earnings of this hypothetical mining company.

Remember, leverage can help increase investment returns on the upside but can cause significant losses on the downside.

A 1% decline in the price of gold could result in a 5% drop in earnings for this gold miner and we would expect the stock price to reflect the diminished earnings potential of the company. A 20% decline in gold would push the miner from a profit to a loss.

This leverage makes gold miners an excellent way to invest in gold. Buying miners while uncertainty is high could lead to gains in the short run and in the long term.

 

 

Did you know that dividends have rewarded investors for at least 100 years, at least since John D. Rockefeller said, “Do you know the only thing that gives me pleasure? It’s to see my dividends coming in.”

We have prepared a special report about dividends that you can access right here.