Tag Archives: investment advice

Opinion: This Market Bubble is About to Burst

bear-market-bearMy Comments: Yesterday, I decided it was time to think about moving my clients out of cash and back into the markets. At least with some of their money. Now, once again, I’m not so sure.

If you are retired, or about to be retired, and have the ability to control the investments made inside your retirement accounts, it’s a time to be very cautious. Missing a little upside to protect yourself against a serious downside is, I think, a smart move.

Published: Feb 8, 2017 | Mark D. Cook | Moneywatch

The U.S. stock market at this level reflects a combination of great demand, great complacency, and great greed. Stocks are clearly in a bubble, and like all bubbles, this one is about to burst.

What do previous financial bubbles have in common with this one? There are many similarities, but one in particular is the real estate bubble of the mid-2000s that led to the 2008 global financial crisis. Then, extensive real estate buying overwhelmed supply. People were borrowing even more than 100% of the cost of the real estate, using creative means of financing never seen before in U. S. credit markets.

But debt is debt, which means it is a liability that someone is responsible to repay. That obligation was totally absent in the minds of borrowers and lenders alike — until demand dried up and reality hit.

How is this similar to the market now? The Federal Reserve has created an environment of low- to almost non-existent returns on bank saving accounts, and in the process it ruptured the savings mentality that had been a foundation of American society. People once could live within their means and make a habit of saving some of their income for retirement. They expected banks to pay a rate of interest to savers that was fair and consistent.

When this was no longer the case, people with savings chased returns in riskier areas including stocks, as well as not saving as much. Indeed, the saving generation has been forced into stocks, in which they do not have deep-seated faith. They will take the first opportunity to return to their savings ways again.

Three factors substantiate the view that this market is in a bubble. Each factor warns that stocks are in extremely overbought territory.

The first factor is the CCT indicator. This indicator is a proprietary internal measurement of the general volume of the New York Stock Exchange. The measurements take into account the institutional participation as a ratio of the overall volume. Also measured is the duration of heavy block buying in rallies.

The sum total of all the measurements now shows the lowest bullish energy ever — even lower than in 2008, just before the market crash.

The second factor is the sluggish VIX  (S&P Volatility Index) and the persistence of readings just above 10. These overbought readings indicate a pressure to return to higher levels, thus requiring downside volatility to neutralize the pressure. The longer this persists, the greater the downside pressure.

The third factor is a short-term daily indicator called the 1.5% one-day decline, which signals a pending environment change in chart patterns. The U.S. market has now gone three months without a 1.5% one-day decline. This is the longest period in the record-keeping history of this indicator — and a sign of imminent danger. Bubbles burst.

Investment Strategies for Your Retirement Accounts

InvestMy Comments: A phrase I’m known to use from time to time is that ‘life in this country is better with more money than it is with less money.” While this might seem too obvious for you, there are many people whose efforts to have more money have fallen flat. Here’s a few ideas that might help you.

Michelle Mabry, CFP®, AIF® January 26, 2017

With interest rates coming off a 36-year low and expected to rise, most investors expect to see bond prices fall and consequently deliver a negative return in what is considered a low-risk asset. We have seen a rebound in equities, and with the S&P 500 and Dow at all-time highs, some say the stock market is richly valued. As a retiree seeking income from your investments and looking to preserve your principal, where can you turn? What are ways retirees can invest for income and still minimize risk?

You have always heard you need a diversified portfolio and that has not changed, but what has changed is how you diversify it. Retirees need to determine the proper asset allocation of stocks, bonds, cash and alternatives based on income needs, time frame, and tolerance for risk.

How to Diversify Investments in Retirement

Let’s look at bonds first. If you invest in a traditional bond portfolio you are exposing yourself to interest-rate risk as rates rise and bond prices fall. You need to understand the average duration of the bond investments you hold. For example, a typical intermediate-term bond fund will have a duration of 5-10 years. If the average duration is eight years, then a 1% increase in rates will result in an 8% decrease in the net asset value (NAV). This would wipe out all the interest gains and then some. The shorter the duration, the less the potential loss.

So it is important to look for other assets that have low-risk characteristics or standard deviation similar to bonds but produce absolute returns, that is, a positive return regardless of which way rates are moving. Floating rate income, TIPs and some market neutral funds can be a good way to diversify your fixed-income portfolio. You may also want to look at structured notes as a way to produce yield and protect your downside.

Dividends as Equity

For the equity portion of your retirement portfolio, consider blue chip dividend-paying stocks or dividend growth strategies. Many large-cap funds pay dividends in excess of 2.5%, plus you have the upside appreciation potential over time to keep pace with inflation during your retirement years. Remember to keep focused on the longer term and not be too concerned with short-term volatility. Dividend-paying stocks have outperformed most other asset classes over time. Small-cap stocks have been one of the best-performing asset classes, so it would make sense to find dividend-paying small- and mid-cap equities as well.

When searching the universe of mutual funds and ETFs, there are not many of these, but a couple that have attracted our attention are WisdomTree Midcap Dividend Fund and WisdomTree Small Cap Dividend Fund with yields of 2.63% and 3.03% respectively as of December 30, 2016. Of close to 2,000 ETFs available in the U.S., a search revealed only four that are exclusively dividend-driven and which also hold just domestic small- or mid-cap stocks. Two of the portfolios feature issues that have exhibited dividend growth while the other two ETFs (the WisdomTree funds) include all dividend payers in their capitalization range.

Include Alternative Assets for Diversification

Also important in developing a portfolio for retirement is a focus on absolute return strategies, and many of these fall into the alternative asset class. Alternatives are anything that is not a stock, bond or cash. Alternatives have no correlation or negative correlation to other asset classes so they are great diversifiers. Our retired clients typically have one-third of their portfolio in alternatives. Examples include managed futures and long/short strategies as well as volatility strategies using options. An example is LJM Preservation and Growth which has shown a positive return every year since its inception 10 years ago with the exception of one year, 2013, when the stock market went straight up and there really was no volatility. The fund was up in 2008 when stocks and bonds were not, and therein lies the importance of a diversified portfolio to manage risk.

By rebalancing your investments quarterly or semi-annually back to the original investment allocations you can create the cash needed to sustain your monthly withdrawals in retirement until the next rebalance. We do not recommend a withdrawal rate in excess of 4% in light of current market and economic conditions.

Last seen in 1929, in 2000, and 2008

Stocks have only been this expensive during the crash of 1929, the tech bubble of 2000, and the last financial crisis in 2008-09

My Comments: Economics 101 teaches us that owning shares of a stock means you own a piece of the company that issued the shares. It’s value on any given day is what someone else will pay you for those shares. That an offer by someone to buy your shares is based on what they think the shares will be worth in the future.

A way to measure the relative value of those shares to calculate the Price/Earnings ratio or P/E. This simply means that if I can buy another share for $20, and the earnings attributable to that share last year was $1, then the P/E ratio is 20:1. Simple isn’t it?

When you add in the historical norms for the industry to which your company belongs, and the general economic outlook going forward, you can make a decision whether to keep your shares, sell your shares or buy some more. Right now we are in deep water, far from land, and the boat is leaking.

by Bob Bryan | December 9, 2016

Stocks are getting a bit pricey.

All three major indexes break though their all-time highs on a seemingly daily basis, and this has pushed earnings multiples higher and higher.
The current 12-month trailing price-to-earnings ratio of the S&P 500 sits at 25.95x, while the forward 12-month price-to-earnings is roughly 17.1x, according to FactSet data. Each of these is higher than its long-term average.

In fact, based on one measure of valuation, the market hasn’t been this expensive anytime other than before a massive crash.

The cyclical adjusted price-to-earnings ratio, better known as Shiller P/E, which adjusts the price-to-earnings ratio for cyclical factors such as inflation, stands at 27.86 as of Friday. There have only been a few instances in history when stocks have been this expensive: just before the crash of 1929, the years leading up to the tech bubble and its bursting, and around the financial crisis of 2007-09.

This does not necessarily mean that a crash is imminent — during the tech bubble, the Shiller P/E made it well into the 30s before coming back down. Additionally, there are some criticisms that Shiller P/E is generally more backward-looking since it adjusts for the cycle, so it may not be as accurate.

Another caveat is that, during the three previous instances, investors have been incredibly bullish on stocks (there’s a reason Robert Shiller’s book is titled “Irrational Exuberance”) and most indicators of sentiment — from the American Association of Individual Investors to Bank of America Merrill Lynch’s sell-side sentiment indicator — are still depressed.

Still, an elevated level for the Shiller P/E certainly isn’t going to make it any easier to sleep at night.

A Mind-melting Number of Galaxies in the Universe

My Comments: Now that Matthew has taken his wind and rain to bother someone else, I can focus my time and energy on less earth-shattering thoughts. I  am very thankful we were spared what happened in Haiti; I can’t imagine the agony those people are living with.

And speaking of not being able to imagine, this post is about the world out there that I’ve been interested in for decades. Perhaps because there is no rational answer to the mystery.

I’ve included the first few paragraphs and hopefully a .gif that if you watch the few seconds shown, will make your understanding of our role in this whole exercise we call life a little clearer. My take is that since I have but a few years left, I better make the most of it.

7 OCT 2016

Of the thousands of photos taken by the Hubble Space Telescope, one stands out as the shot that changed astronomy forever. Called the 1995 Hubble Deep Field, it captures thousands of galaxies in a single shot, and was the first photo of its kind ever taken.

But if all those dots represent entire galaxies – and the Milky Way alone is a whopping 100,000 light-years across – how gigantic must a photo be to fit thousands of them in?

Well, it depends on how you define gigantic.

If you’re comparing it to a selfie, it’s pretty freaking huge. But if you’re comparing it to the Universe itself, even a cluster of thousands of galaxies – each hundreds of thousands of light-years across – is minuscule.

More than a decade ago, astronomers at NASA made the incredibly controversial decision to point the Hubble Space Telescope at nothing in particular for a while.

Fortunately, that expensive gamble paid off, and we now have an entire series of Deep Field photos showing so many galaxies in the one shot, they look like stars.

Each of these Deep Field photos were taken over a period of 10 days, and had exposure times of more than 100 hours.

Read more HERE!

We’re Issuing a Formal Alert: Something Major is Coming in the Markets

My Comments: I know, I know, I said the worm had turned. Well, maybe not.

Phoenix Capital Research/Sep 29, 2016

Time for a reality check.

The market has had nothing but positives for three months now. BREXIT was contained. The Fed failed to raise rates again. The Bank of Japan and European Central Bank are printing a combined ~$180 billion per month (a record pace) and using it to prop the markets up.

And stocks are DOWN. While the bulls and CNBC shills talk about the markets like they’re in some incredible rally, the fact is that the S&P 500 peaked in mid-August. And if you want to go back further it’s gone absolutely NOWHERE since July 9th.

Seriously, if you cannot manufacture a roaring rally with follow through on the last three months’ worth of news, you’re not going to manufacture one ever.

Indeed, Central Banks have never been more aggressive in their easing.

1. Two of world’s FIVE major Central Banks (ECB and BoJ) are printing $180 billion per month and giving it to the banks.

2. One of the FIVE (the Swiss National Bank) is openly BUYING stocks outright.

3. Another of the FIVE (the Bank of England) just cut rates and announce a new QE program.

4. The last of the FIVE, and the only one that is supposed to be tightening policy (the Fed) hasn’t raised rates in nine months and will not do so until December at the earliest.

And the bulls can’t get it done. So… what do you think is coming next?

Invest or Die

My Comments: This reminds me of an old gag by Jack Benny. Well known for being cheap, he was confronted by someone with a gun who said, “Your money or your life!”. Jack took his time and when pressed for an answer, replied “I’m thinking”.

I’m slowly re-evaluating my focus on not losing money, to a reluctant, let’s have more exposure to equities and bonds. But only for those funds that are not critical to your ability to pay your normal, every day bills. For that money, I have another solution.

By Investing Caffeine on September 24, 2016

Seventy-six million Baby Boomers are earning near 0% (or negative rates) and aren’t getting any younger in the process, which is forcing them and others to decide…invest or die. The risk of outliving your savings is becoming a larger reality these days. Demographics and economics are dictating that our aging population is living longer and earning less due to generationally low interest rates.

Richard Fisher, the former Dallas Federal Reserve president, understands these looming dynamics. Fisher has identified how low-interest rates are increasing investor discontent by pushing consumers to save more in order to meet retirement needs. The unintended consequence from low rates, he said, is “you’re going to have to save a hell of a lot more before you consume.”

Besides saving, the other option investors have is to lower your standard of living. For example, you could continually eat mac & cheese and sleep in a tent – that is indeed one way you could save money. However, your kids and/or desired lifestyle may make this way of life unpalatable for all. Rather, the proper approach to achieving a comfortable standard of living requires you to invest more efficiently and prudently.

What a lot of individuals fail to understand is that accepting too much risk can be just as dangerous as being too conservative, over the long run. Case in point, depositing your savings into a CD at current interest rates (near 0%) is the equivalent of burning your cash, as any income produced is overwhelmed by the deleterious effects of inflation. It would take more than a lifetime of CD interest income to equal equity returns earned over the last seven years. Since early 2009, stocks have more than tripled in value.

Given the prevailing economic and demographic trends, investors are slowly realizing the attractive income-producing nature of stocks relative to bonds. It has been a rare occurrence, but stocks, as measured by the S&P 500, continue to yield more than 10-Year Treasury Notes (2.0% vs. 1.6%, respectively). The picture for bonds looks even worse in many international markets, where $13 trillion in bonds are yielding negative interest rates. Unlike bonds, which generally pay fixed coupon payments for years at a time, stocks overall have historically increased their dividend payouts by approximately 6% annually.

With a scarcity of attractive investment alternatives available, investors will eventually be forced to adopt higher levels of equity risk, like it or not. However, this dynamic has yet to happen. Currently, actions are speaking louder than words; risk aversion reigns supreme with Americans tucking over $8 trillion dollars under their mattress, in the form of savings accounts, earning next to nothing and jeopardizing retirements.

Even if you fall into the camp that believes rates are artificially low by central bank printing presses, that doesn’t mean every company is recklessly leveraging their balance sheets up to the hilt. Many companies are still scared silly from the financial crisis and conservatively managing every penny of expense, like a stingy retiree living on a fixed income. Thanks to this reluctance to spend and hire aggressively, profit margins are at/near record highs. This financial stewardship has freed up corporations’ ability to pay higher dividends and implement discretionary stock buybacks as means to return capital to shareholders.

With the dovish Fed judiciously raising interest rates – only one rate hike of 0.25% over a decade (2006 – 2016) – there are no signs this ultra-low interest rate environment is going to turn aggressively higher anytime soon. Until economic growth, inflation, and interest rates return with a vengeance, and the persistent investor risk aversion abates, it behooves all the cash hoarders to….invest or die!

Here’s how bruised bears should approach this resilient stock market

bear-market-bearMy Comments: I’m facing increased criticism for preaching woe and gloom. In spite of a 24 month rain dance to herald the start of a storm, the sky is still clear, if a little overcast. Maybe it is different this time.

That being said, it’s time to stop with the woe and gloom and focus instead on steps to take advantage of the situation. As a friend pointed out yesterday, this stuff cycles and, yes, there will come a bad downturn, and you will be declared right. Meantime, you miss out on all the good stuff and end up stiffing your clients.

So… how do we set ourselves up to be successful? Here’s a start.

by Anora Mahmudova | Published: Sept 27, 2016

It is perfectly fine to be pessimistic about future stock market returns, as long as you’re prepared to think outside the box when it comes to seeking out safe investments, analysts said.

There is no shortage of scary charts and lousy fundamentals that point to equities being risky. But they rarely, if ever, can be used to pinpoint a market top. Indeed, bold bearish calls continue to get rebuffed in this long-running bull market.

Recall that in early January, RBS analysts made their highly publicized call to “sell everything except high quality bonds”.

Barely a month later, when the S&P 500 SPX, +0.64%  dropped to multiyear lows to mark a third correction in less than two years, it seemed the call would be vindicated. But after nine months, it is apparent that heeding it would have been costly as markets soon rebounded and then rallied to records.

Valuations are above historical averages and earnings growth has deteriorated over the past two years—all suggesting that, in the long term, returns are going to be low.

Wouter Sturkenboom, senior investment strategist at Russell Investments, said the current environment has been among the most trying he can recall for market bears.

“Normally, if you feel bearish about the stock market you would be looking for safe bets but right now, all the traditional safe bets are no longer safe,” Sturkenboom said, in an interview.

Even bonds, which tend to rally when things get gloomy, aren’t a reliable wager.

“Bonds are overvalued, which makes exposure to duration risky if inflation rises even by a bit,” he said.

Duration is a measure of the sensitivity of a bond’s price to a change in interest rates. Bonds with higher duration carry more risk.

The first step investors should take now is to accept that future returns will be low, said Michael Batnick, director of research at Ritholtz Wealth Management.

“Stocks are expensive on every metric you take and that means that future returns will be lower. Investors should simply accept it and act accordingly, which means saving more,” he said in an interview..

“The idea you can take lower returns and turn them to get higher returns by timing is ruinous for average investors. It doesn’t work for the vast majority of investors. Even if you knew with precision how much earnings will be next year, you won’t know what multiple millions of investors are going to pay,” he said.

While pessimism about returns is pervasive, there are still ways to invest and build wealth.

Both Batnick and Sturkenboom advocate adding assets with lower valuations while trimming exposure to expensive U.S. large-cap equities.

“For investors looking for safety bets, they should think outside of the box. Safety now comes in cheap valuations and there are several assets that could fit the bill out there,” Sturkenboom said.

Among assets that Sturkenboom prefers are Spanish and German real-estate investment trusts, gold ETFs, Treasury inflation-protected securities, or TIPS, and cash.

While cash gives investors the option to swoop in and sweep up bargains when the market tanks, it requires patience as big drawdowns are rare events, Sturkenboom said.

“Cash is good if you are tracking markets and can deploy it quickly. The past three years have been disappointing for those who held cash and were unable to buy at corrections, because they were very short-lived,” he said.

“But in the current environment it is still worth it to keep cash for the eventual 30%-40% drawdown, the likelihood of which is pretty high over the next three years,” he said.

Batnick is a fan of rules-based planning: “You have to have a plan and stick to it. Allocate to markets that are cheap on relative and absolute terms, but don’t try to wing it,” he said.

“Building wealth through investing in the stock market requires a lot of pain. There will be big drawdowns. But more money has been lost by trying to avoid drawdowns than by staying invested,” Batnick said.