Trump rally hitting a dead end?

The financial markets showed enormous faith in the governing skills of Donald Trump in recent weeks, believing he would usher in a new era of economic growth. It’s very hard to see that faith remaining intact in the coming weeks.

In the lead up to his taking office, Trump has shown very little interest in doing any of the actual work required to implement tax cuts and fiscal stimulus. Instead of preparing his team, drafting policy specifics and making friends in Congress, he has obsessed about foreign policy and ranted against his enemies.

He has embraced Russia and attacked European nations and China, a fixation that has no logical place in a pro-growth economic agenda.  Making friend with Russia and alienating everyone else will certainly not benefit American companies.

What’s more, Steven Mnuchin, Trump’s pick for treasury secretary, will face intense political opposition in the Senate when he finally gets his confirmation hearing. His role in questionable foreclosures conducted by a bank he ran could generate enough trouble to make him ineffective in office or even to block his confirmation.

In short, Trump has picked fights he did not need to pick and burned through whatever political capital and credibility he enjoyed back in November.  He is the most unpopular new president in the modern age, according to polls. Even the Republican-controlled Congress may not find it easy to work with him.

The market’s favorable reaction to his election cannot last.  Trading in precious metals reveals that sentiment is already changing. The price of gold and gold mining stocks dropped after the election but have started rising again as the reality of Trump’s presidency began to emerge.  GLD was at $107.34 on Dec. 15 and had risen to $114.21 on Jan. 13. Spot gold per ounce rose from a low of $1130 to $1195 in roughly the same 30-day period.  Silver prices have also been rising.

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The case for emerging markets

Over three and five year periods, the annualized price change chart for emerging market stock indexes shows a lot of red.  But there has been a recovery in the last year.  These stocks are a bargain now with great potential, says Krishna Memani, Chief Investment Officer at Oppenheimer Funds. “From a long-term perspective, emerging markets are going to be the primary source of global growth for the future.  Plus they happen to be very cheap now,” Memani said.  I have 10% of my stock portfolio in emerging markets and recommend that all of our clients give this sector consideration. However, I am very cautious about China.

Andre Shashaty

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Post-election really fades; worst yet to come

The post-election rally in stocks appears to be over.  The S&P has kept some of the gains it made, but has been flat since Dec. 9.  Could the flat spell become a downtrend?  Yes.  More and more analysts think sales will accelerate and stocks will dip substantially in January, when people will start taking gains in hopes of lower 2017 tax rates (and the fact that gains won’t get taxed at all until April 2018).   They say Trump’s economic policy initiatives may not be nearly as beneficial to the economy as quickly as initially hoped.  Finally, Trump will take office under an enormous cloud of suspicion about his ties to Russia and the conflicts of interest posed by his business holdings. Anything could happen.   The markets hate uncertainty but made a gigantic exception for the past several weeks. Don’t be surprised if the wake-up call comes very soon.  Fortune Magazine (Dec 15, 2016) was notably downbeat in its recent cover story on the 2017 investment outlook: “the biggest fallacy is highly inflated expectations for earnings.” It says S&P 500 profits peaked in 2014 and are down 15% since. Fortune also cited the fact that the price to earnings ratio for the index as whole is at very high level historically.   Bottom line: Stocks are now very high-priced, suggesting caution in buying at present prices in most cases.

By Andre F. Shshaty

 

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Post-election Investing Insights: What next for stocks?

The financial press is anticipating that the so-called Trump Bump in stock values will fizzle in the trading days leading up to New Year’s Eve as fund managers lock in gains for 2016 by selling into strength. There is much speculation that sales will accelerate and stocks will dip substantially in January, when people will start taking gains in hopes of lower 2017 tax rates (and the fact that gains won’t get taxed at all until April 2018). Then there’s the fact that the things about the incoming president’s economic policy initiatives the market likes will take a year or longer to come to fruition, if they survive Congress at all, and may not be nearly as beneficial as investors are hoping. Finally, there’s this: Trump will take office under an enormous cloud of suspicion about his ties to Russia and the conflicts of interest posed by his business holdings. Anything is possible, including global military conflict. The markets hate uncertainty, but they have yet to fully awaken to the terrible risks posed by the coming change in the occupant of the White House. Don’t be at all surprised if the wake-up call comes very, very soon.

Term of the month: Animal Spirits

You may have read investment pundits talking about the “animal spirits” that are driving the upsurge in stocks like the winds used to drive sailing ships across the ocean. Here’s the passage from Economist John Maynard Keynes that first put the term in the investment lexicon to explain seemingly irrational investor behavour:

“… There is the instability due to the characteristic of human nature that a large proportion of our positive activities depend on spontaneous optimism rather than mathematical expectations…. Most of our decisions to do something positive, the full consequences of which will be drawn out over many days to come, can only be taken as the result of animal spirits—a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities.”

So, when pundits refer to “animal spirits,” they are saying there’s no sound reason for the boom. Like winds on the ocean, this force could stop at any moment, and suddenly, stocks will drop like an anchor.

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Investor’s Tip Sheet

Actionable news for investors from 360 Investment Advisors         •       Nov. 15, 2016

Wall Street’s buzzing over where to invest after the presidential election.  Consensus says several sectors stand to gain from changes in federal spending and tax policy, including tax cuts, increased spending on infrastructure, and a roll back in regulations enacted under the Obama administration.

1.      Infrastructure

2.      Pharmaceuticals and biotech

3.      Fossil fuels energy firms

4.      Banks

5.      Cyber security

Among the biggest early winners were Fannie Mae and Freddie Mac.  Early indications were that new leadership of the Trump transition MAY support an end to the conservatorship in which all profits have gone to the government instead of stockholders. Fannie stock was up 104% from Nov. 9 to Nov. 15.

 Meanwhile, gold and bonds suffered.  iShares Barclays 20+ Yr Treasury Bond ETF was down 7.5% due to the potentially inflationary impact of the new president’s policies. The SPDR gold trust was down about 6%.

 There is thought to be potential for a “tax holiday” to allow multinational corporations to repatriate cash they hold overseas.  This would be good news for Apple, Cisco and many others. The financial press speculates that the repatriated funds could be used for stock buybacks.

 The biggest unknown is whether the political rhetoric about stifling free trade will lead to new trade barriers and stop implementation of the The Trans-Pacific Partnership (TPP).

* * *

A little known option for fixed income investing is explained by Barron’s columnistAmey Stone.  They are called interval funds. A type of closed-end fund, they cope with liquidity risk by allowing withdrawals only at set times, typically just once a quarter. This reduces the risk of losses in value (or suspension of trading) due to an unpredie ctablsurge in redemptions. Stone’s piece is worth a read.

* * *

           Fund of the Week

VanEck Vectors Morningstar Wide Moat ETF (MOAT®) aims to invest in companies that have the greatest possible long-term competitive advantage over similar companies.  Morningstar refers to such advantage as a “wide moat” as in the medieval practice of digging a waterway around one’s castle to keep out marauders.

Unlike the vast majority of funds, VanEck doesn’t cherry pick the performance data in its ads.   It presents a graph comparing cumulative returns for the fund and the S&P Index  from inception of the fund in February 2007 through the current quarter. The performance speaks for itself, and that’s powerful advertising.

[The foregoing is not meant to recommend purchasing the fund, only to say it’s worth evaluating for your portfolio.  Be sure to read the prospectus before you invest.]

* * *

Attention Northern Californians:

Investment discussion groups and seminars are now being held under the auspices of the American Assoc. of Individual Investors in Marin County. Normally, they will be held in San Rafael.  If you are interested in participating, contact Wendy Chaney, 216 906 7861 or by email at wendy@360investmentadvice.com.  Get in touch soon to learn about upcoming meetings.

Market Snapshot

Best performing stock market sectors for 2016  to date are as follows:

• Mid Cap Value

• Small Cap Value

• U.S. value

S&P 400 Mid Cap Value ETF [MDYV) was up 19.4%

S&P as a whole was up 6.7%.

Worst performing were the growth stocks, including all ranges of capitalization:  small, medium and large cap.

Source:  Morningstar

Pearls from the Pros:

“To invest successfully over a lifetime does not require a stratospheric IQ, unusual business insights, or inside information. What’s needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding that framework.”

Source: The Intelligent Investor, by Benjamin Graham

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September 2016 An anniversary worth remembering

September 2016

An anniversary worth remembering

It has been only eight years since the start of the financial crisis that nearly drove the American economy into a depression. Lehman Brothers filed for Chapter 11 bankruptcy protection on September 15, 2008. The filing remains the largest bankruptcy filing in U.S. history, with Lehman holding over $600 billion in assets.

It seems like it was much longer than just eight years ago, given how completely most individual investors have forgotten the horror of those times, and how the economy and stock prices slumped.

It’s understandable if people want to forget about that ugly episode, given that stock prices have recovered. The major stock indexes have stayed at or near record highs (on a nominal basis), lulling many into thinking that all is well. But investors must always be realistic about risk, and the eighth anniversary of Lehman’s failure is a good time to look carefully at your portfolio’s risk profile.

Those who are inclined to the long view may also remember what stocks were doing roughly 15 years ago. Anyone out there old enough to remember the dot com bust?

The bottom line is that we have had two very major setbacks in financial markets since the turn of the century. There is no way to time earthquakes or stock market slumps, but it is always wise to be prepared as the years pile up after the last one.

I think it was summed up best in “Where Have All the Small Investors Gone?” an article by Ben Levisohn published in Barron’s August 27, 2016:

“Investors have plenty of reasons for their lukewarm embrace of the current rally. During the past 15-plus years, they’ve seen their stock portfolios lose half their value not once, but twice. And in just the past 12 months, there have been two corrections—drops of 10% or more—that sure felt like the beginning of something far worse. With those memories still vivid, investors can’t be blamed for seeking safer investments, especially baby boomers with an eye on retirement, who would naturally be easing out of stocks anyway as a way to protect their nest eggs.”

— Andre Shashaty, principal, 360 Investment Advisors

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Fannie, Freddie investors may find all is not yet lost

By Andre Shashaty

The mortgage market-makers Fannie Mae and Freddie Mac were in the news again Jan. 8, when President Obama talked about his efforts to boost the housing market by helping more people buy homes. The only news value in the announcement was a cut in premiums for FHA mortgage insurance. But a careful reading between the lines suggests that those of us owning stock in Fannie Mae and Freddie Mac may soon see an end to the federal conservatorship of the two companies.

The White House announcement to accompany the president’s speech DOES say he still  wants to see “the end of the duopoly” Fannie and Freddie have held on the home mortgage business.  But this language is buried way down in the document and, taken in context of the new political outlook in Washington, it suggests a distinct lack of emphasis on the goal of dismantling Fannie and Freddie as they exist today.

When you look at all the recent developments regarding Fannie and Freddie, it seems more likely than not that the conservatorship will end, possibly in 2015, and that stock holders will once again be able to share in the profits of these companies, instead of seeing every dollar of profit go to the U.S. Treasury, as is currently the case.

The most obvious and important evidence supporting this outlook is that Congress and the White House have screwed around with “housing finance reform” for seven years now.  They have NOTHING to show for it, since the only serious legislative effort petered out in the Senate many months ago.  Even politicians sometimes break down and smell the coffee:  Agreement cannot be reached on a new structure for federal support for a secondary mortgage market.  And if enough people understand that, the only alternative is to let Fannie and Freddie live on in their current form, albeit probably with much tighter oversight.

Finally, my guess (and it IS only a guess) is that Mel Watt, the man who oversees Fannie and Freddie for our government, will act before Obama’s term ends to liberate the two firms from federal control.  He tipped his hand on that, I believe, when he instructed the two companies to start funding the National Housing Trust Fund.  I doubt he’d have done that if he expected the companies to disappear anytime soon.

Finally, there is the clear lack of legal justification for taking profits and possibly ownership away from shareholders.  One never knows what a judge will decide on the cases asking that Treasury give shareholders back their rights.  But I think courts DO reflect the economic and political reality of the times in cases like these, and I am optimistic shareholder rights will be eventually upheld.  I also think that Watt and the Dept. of the Treasury may well decide they would rather act on their own than face a prospect of a court order.

In short, the hatred for Fannie and Freddie what burned so hot for the years since the mortgage meltdown may finally have run its course.

 

 

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Hits and Misses (but mostly misses)

By Andre F. Shashaty

When 2014 ended a short while ago, investors finally learned who’s crystal ball was foggy and who’s was clear — or at least who avoided climbing out too far on a limb.

The biggest miss in the world of high-powered market prognostication probably had to be that of Gina Martin Adams, a stop investment strategist for Wells Fargo.  She started out the year with the lowest S&P 500 target on the street, at 1,850.  At one point last fall, she said it could be even worse than that.

Like so many other strategists, she believed the economy would recover quickly enough to force the Federal Reserve to raise interest rates in 2014.  It did not happen.  Part of the general expectation was that as rates rose, bond yields would rise as prices dropped, including for Treasuries.  Oooops!  Twenty-year Treasuries climbed and climbed in price for most of the year, and those of us who invested in them despite the warnings did quite well.

So, how far off was Ms. Adams in her S&P target?

At year’s end, the S&P closed at 2,058.9.  That’s 200 points higher than she predicted.  This is not to pick on one person.  Not at all.  In future installments of Hits or Misses, I’ll pick on a lot more bad guessers.  The key point is that they all have one thing in common, they are guessing.

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The Flying Wallendas

By Andre Shashaty

October, 28, 2014 – Do you remember the German family that defied gravity time and time again, putting as many as seven people at a time on a high wire?  In 2013, Nik Wallenda walked 1,400 feet over the Little Colorado River Gorge in the Grand Canyon at a height of 1,500 feet on a wire just 2 inches thick. He did it without a harness or safety net.

That’s a lot like the investors driving the current short-term surge in stocks.  They might survive and they might even make a financial killing if the uptrend continues.  On the other hand, it could end very badly.

I don’t blame bullish investors for believing in the American economy and the long-term growth potential of companies like Twitter, Facebook and Amazon.  We’d all like to believe the rosy scenario of the U.S. economy outpacing the world and the supposedly unlimited potential of the tech stocks.  I’d also like to believe in Santa Claus.

The sharp drop in the major indexes in mid-October should not be dismissed as an aberration. It shows that powerful negative influences are definitely making their presence felt and are very likely to reassert themselves soon.

Even after the markets rebounded in late October, some analysts said it was temporary, as short sellers took the opportunity to buy up shares at lower prices.

The very recent big dips in Twitter and Amazon show that there are chinks in the armor of the optimists who believe that long-term growth potential trumps current financial performance and high valuations. It’s only a matter of time before people get impatient with the promise of profits which always remain in the future.

The disconnect between Wall Street and the economics of Main Street has never been greater. The ability of investors to deny the existence of massive global political instability and economic weakness is nothing short of astounding.

The world economy is threatened by a mediocre era of low growth for a long time, warned Christine Lagarde, managing director of the International Monetary Fund.  The global economic recovery is “brittle, uneven and beset by risks,” she said.

The risks and impacts of Ebola and a new war in Iraq and Syria are not gone. Wall Street is just whistling past them.

Meanwhile, the prospect of rising interest rates has not gone away.

There’s no way to rationalize market behavior.  Nor should you try.  Just focus on finding the right balance between your desire for gain vs. your prudent fear of loss. Your moves now depend on your time horizon and your tolerance for risk.

But remember the basics of asset allocation and money management:  Sell stocks and asset classes that have run up in value and buy those that have fallen and lock in profits to the extent that you will need cash in the next few years.

 

 

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Goldilocks on the tight rope

GoldilocksThis week’s economic news reminds me of the story of Goldilocks. The fictional character’s story has her entering the home of three bears and eating up the bowl of porridge that was neither too hot nor too cold.

Investors are in a similar position. They like the fact that our economy is weak enough to keep the Fed from tightening monetary policy and to avoid triggering inflation but strong enough to show modest corporate revenue growth and job creation.

Sounds reasonable, but now imagine Goldy balancing her porridge bowl as she walks across a circus tent on a tight rope.  The rope is wobbling and she could fall at any moment.

That may be the most apt analogy for where markets are now. The rally in stocks is due primarily to the easing of monetary policy all over the world. It is only tangentially connected to real economic growth.  Investors look at any signs of real economic strength with a telescope, so even very small signs are given huge importance.

That’s all good for some short-term gains.  The problem is no one knows how long this delicate balance will last. The whole thing is incredibly delicate.  It could come tumbling down at a moment’s notice.

Caution and diversification are the keys to navigating this market.  If you have gains, take some off the table.   If your portfolio is too heavily weighted in U.S. stocks, diversify internationally and into other asset classes.

Most Wall Streeters readily admitted the current rally is “liquidity based.”  That means it is based on loose monetary policy, not on solid economic growth.  In other words, it’s similar to the liquidity-fueled housing boom of 2005 to 2007, when easy credit drove up home prices. No one wanted to walk away from that party either, and you know how that turned out.

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