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What Happens to Your Investments if the Trade War Becomes Permanent?

What is going to happen with US Chinese tariffs? The consensus of the stock market seems to be that an amicable agreement will be reached and all will be well. That may not be the case. What happens to your investments if the trade war becomes permanent? We are not the only ones to be concerned. CNBC reports that Moody’s believes the stock market is getting it wrong and that the trade war could be prolonged and cause lasting damage to the world economy. So far the USA has put tariffs on $200 Billion in Chinese goods and the Chinese have put tariffs on $60 Billion in US goods.

“It’s a very modest response,” said Edward Alden, a senior fellow at the Council on Foreign Relations, of China’s reaction. “There’s no question China’s hurting and they may want to negotiate. The problem is the Trump administration may be overplaying its hand. The harder they push, they may push the Chinese into a corner where politically and for just reasons of saving face, they can’t negotiate with the administration, and secondly the administration hasn’t established a negotiating process. There’s a real divide between the trade hawks and doves.”

Moody’s is predicting that US growth will slow to 2.3% next year and China’s to 6.4%. Why is this happening and why is there a danger of a prolonged trade war and diminution of the global economy?

The Rise and Predictable Slow Decline of US Economic Power

The USA became the dominant global power at the end of World War II. War had ravaged Europe and Asia. In the years after the war Japan and Germany rose from the ashes of defeat to become major manufacturing and global powers. India became a country instead of a British colony. Brazil started seriously developing its industry. The USSR rose and fell to be followed by the rise of the Russian Federation as a dominant producer of raw materials, especially oil and natural gas. As Europe, Asia, and other parts of the world gained economic ground they cut into the dominance of American industry and even science. This would have been easy to predict given that another global war did not occur. Nevertheless, many in the USA long for the “good old days” of American dominance. Those days occurred because WWII destroyed so much of the global economy and left the US economy intact. Nevertheless, many Americans are really angry and thus elected Donald Trump. Trump is under pressure to “get a better deal” for his constituents and is not known for backing off. And, even when Trump is no longer in office, US leaders will need to address the trade imbalance with China in order to preserve a strong US economy, manufacturing base, and defense.

The Rise of China

China was the “middle kingdom” in Eastern Asia for centuries. Then the European Colonial powers ringed them in. When the Communists defeated the Nationalists in the late 1940’s they became an enemy of the USA. And, the USA developed alliances that ringed in both the USSR and China. China was an isolated nation with a huge army and nuclear missiles.

In the 1970’s US President Nixon decided that bringing China into the community of nations was a better idea than leaving them as a dangerous outsider. The Nixon visit to China led to opening up of the world to Chinese manufacturing and a huge amount of investment in China. The result has been that China is the largest exporter in the world and has a trillion dollar foreign currency reserve. AND, the Chinese have a trade surplus with the USA in the hundreds of billions of dollars each and every year.

China does not want to go back to its period of isolation and has global ambitions as seen in its Silk Road project to create rail and sea links to markets across Eurasia. China needs to sell it products to the world in order to further its global ambitions. There will be a level of tariffs and loss of markets that China will not be able to agree to in their leadership wants to maintain control of the country. Meanwhile wealth Chinese are causing a flight of capital from the new Middle Kingdom.

Automation and Outsourcing

Throughout the world manufacturers are using more and more automation. Robots may cost more than people but they don’t get sick, don’t need pensions, and can be “retrained” with a few lines of computer code. The result has been fewer jobs in many industries. Then, companies in developed economies like Europe, North America, and even Japan outsourced their “easier” work to countries like China to get the work done for less. And, by outsourcing they bypassed labor issues and did not need to buy health insurance or pay pensions for those foreign workers. The net results was fewer jobs in the American Industrial Heartland and in similar areas in Japan and Europe.

Fewer Jobs, Lower Pay, and Angry People

You do not need to be a university-trained economist to drive through Gary, Indiana and notice that all the steel mills are gone. This picture has been duplicated across American and Europe as well. There certainly are good jobs in new industries but many of the good new jobs require a college or university education. And then there are all of those foreigners who can write computer code as well as a home-grown American. And they are willing to work for less! People are making less money and for the first time in American history do not believe that the country is getting better or that their lives will get better.

So, What Happens to Your Investments if the Trade War Becomes Permanent?

Both the USA and China see the trade war as “zero sum” game. A zero sum game is a situation in which the losses by one side are the gains of another and vice versa. China sees is place in the world as the dominant global economic and political power, which are positions now held by the USA. The USA sees itself as maintaining its place in the world and is justifiably fearful of a world controlled by China.

There may be a point at which neither side will back off of its demands. When that happens, trade between the USA and China will diminish. There is a chance that trade between China and Europe could also suffer is Europe adopts the view of the USA. This would result in different global trade patterns and diminished global trade.

How are your investments going to do if Caterpillar, Boeing, 3M, Microsoft, Apple, Harley Davidson, and other US companies lose foreign sales?

Can the USA bring industry back to the Industrial Heartland? What will happen to the USA dollar if the global economy shrinks? Right now, investors are pulling money out of developing economy and into dollars. Forex traders are waiting for that trend to reverse. Domestic businesses like utilities, railroads, and others whose businesses are limited to the USA may be a hedge against a permanent trade war.

Who Wins if Coca Cola Adds Cannabis to Soft Drinks

As more and more states legalize medical and even recreational marijuana, Coca Cola is talking to Aurora Cannabis about putting non-psychoactive cannabis in beverages. Who wins if Coca Cola adds cannabis to soft drinks? We recently posed the question, are marijuana companies good investments.

Tilray is the second largest publicly traded marijuana company. Their sales have doubled in the last year and the stock recently went up 17%. With more and more states legalizing marijuana for medical or even recreational purposes, are marijuana companies good investments?

Our opinion as expressed at the end of the article:

In the end, the marijuana companies that will be good investments will be those which manage their cost of production, compete well on quality and price, and market most effectively. Right now, it is not clear who that will be!

Well, the business of effective marketing may be taken care of for Aurora Cannabis if they team up with the largest soft drink maker, Coca Cola. According to CNBC, the marijuana infused drinks will contain non-psychoactive cannabis and not the stuff that creates a “high.”

The companies would likely develop health-focused beverages that will ease inflammation, pain, and cramping, the report said.

The health market is full of drinks, pills, and foods offering health benefits. According to Allied Market Research, the natural food and drinks market had a value of $79 billion in 2016 and is expected to hit $191 billion by 2023. This is three-fold growth in just 7 years.

Non-psychoactive Cannabis

There is always lots of hype about the benefits of health foods and drinks, most of which is not supported by hard facts. However, in the case of cannabis products, real scientists are doing real research and reporting the results. And, it turns out that the constituent cannabidiol (CBD) can be used to successfully treat a real inflammatory process, acute contact dermatitis (think poison ivy!).

When cannabis (the marijuana plant) is processed for its various constituents, there are lots of different chemicals. Several of them appear to provide health benefits without producing the “high” for which marijuana is known. Researchers are now tracking down specific uses for these. The Journal of Pharmacological Therapeutics (2018; Jun; 365(3):652-663) reports that one cannabis compound, cannabidiol (CBD), effectively treated acute contact dermatitis.

This was the first demonstration of the anti-inflammatory properties of CBD in an experimental model of ACD.

Don’t for a second believe that if Coca Cola teams up with Aurora Cannabis that the advertising machine at Coke will not make the anti-inflammatory benefits of a cannabis-infused “health drink” perfectly clear.

Cannabis: More than the “High” and Relaxation

There is another set of neurological and psychological health benefits from cannabis-derived compounds. And these, are not related to the parts of marijuana that create the “high.”

Surgical Neurology International (2018; 9: 91.) reports on the wide range of conditions for which the compounds phytocannabinoids, cannabidiol (CBD), and delta-9-tetrahydrocannabinol (Δ9-THC) are being studied and actively used in treatment.

Recent neurological uses include adjunctive treatment for malignant brain tumors, Parkinson’s disease, Alzheimer’s disease, multiple sclerosis, neuropathic pain, and the childhood seizure disorders Lennox-Gastaut and Dravet syndromes. In addition, psychiatric and mood disorders, such as schizophrenia, anxiety, depression, addiction, postconcussion syndrome, and posttraumatic stress disorders are being studied using phytocannabinoids.

This is a lot of science and most laypersons do not need to know the specifics. What is important for investors is to know that the science behind this is real and not just health product industry hype. With the “real science” in mind, who wins if Coca Cola adds cannabis to soft drinks? Aurora ought to win by teaming up with the Coca Cola Empire. And, a lot of folks who derive real health benefits from their products may do pretty well too.

Will There Be a Recreational Coca Cola-Cannabis?

We mentioned at the start that more and more states are not only legalizing medical marijuana but recreational marijuana as well. In that case, there is nothing to keep Coca Cola and Aurora Cannabis from partnering on a Coca Cola soft drink that creates a bit of a “high” and provides health benefits!

Why Are Investors Leaving Emerging Markets?

Remember when the BRICS nations were all set to surge into the forefront of the global economy? Brazil, Russia, India, China, and South Africa were all seeing spectacular economic growth and attracting huge amounts of foreign direct investment. These nations are still substantial actors on the world stage but their growth has slowed and in some cases reversed course. Investors have been pulling their money out of these markets and putting it into the USA, Europe, and Japan. So, what happened? Why are investors leaving emerging markets?

China Moves to Adjust Its Economy

China helped lead the way out of the financial crisis and the Great Recession by doubling down on their investments in both infrastructure and industrial capacity. Nations, like Brazil, saw huge benefits as China’s industrial machine consumed more and more raw materials. The price of oil skyrocketed making not only OPEC happy but also Russia and Brazil. China had been expanding its state-run economy for years and steadily increasing its customer base to span the globe.

But, as large as the world economy is, it is finite. And, the industrialized economies of the world got tired of seeing jobs and whole industries pivot to China. China had over-built its industrial base and now saw a substantial slowdown in growth, closing factories, and even labor unrest. A slower Chinese economy needed fewer raw materials and the emerging markets suffered.
Rich Chinese saw the slowing of China’s miracle expansion and started a capital flight that still threatens the country’s economy. China’s economy is now under pressure due to a trade war with the USA.

Russian Adventurism Brings Sanctions

In 2014 we wrote about investing in Russia after the annexation of Crimea and support of separatists in Ukraine in parts one, two, and three. Russia was hurt by the fall in oil prices that year and is still hurting. Then, the EU and USA levied economic sanctions that greatly reduced investment in Russia and the ability of Russians to use the international banking system. With Russia meddling directly in elections in Europe and the USA, it is unlikely that these sanctions will be lifted any time soon.

Political and Economic Chaos in both Brazil and South Africa

When the BRICS first met officially in 2009 the Brazilian president, Lula de Silva, was commonly called the most popular politician on the planet. Today he is due to start serving a 12 year prison term for his involvement in governmental corruption. Jacob Zuma was the president of South Africa and was recently forced out of office by his own political party. Along the way the focus was no longer the spectacular growth of Brazil but Brazilian bankruptcy. South Africa’s GDP was $400 Billion in 2011 and $295 Billion in 2017.

Trade War and a Strengthening US Dollar

Trump did not start a trade war with nations like Brazil. But, if and when a trade war slows economic production in China, Europe, or anywhere, the emerging markets get hurt. A couple of years ago we wrote about the resource curse of boom and bust cycles. Nations like Brazil, Russia, and South Africa are rich in natural resources. When demand goes up they prosper and when demand goes down they suffer. And, another result of the trade war ramping up is that the US dollar is getting stronger. The dollar is perceived to be a safe haven currency and the US Federal Reserve is steadily raising interest rates. Investors are leaving emerging markets to flee to dollar-denominated assets, and to flee to the USA where markets are still healthy.

Which Growth Stocks Are Really Value Investments?

The failure of many so-called “growth stocks” to surge ahead in today’s stock market has puzzled value investors. After all, the traditional use of measures, such as price to earnings ratio and price to asset ratio, has served many investors well over the years. But for many investments in the stock market, it is not working today! Growth stocks keep forging ahead while stocks with low price to asset ratios are lagging. The questions we want to bring up are which growth stocks are really value investments in disguise? And, which value stocks are really not so valuable?

Successful Investing by Seeing the Future

We commonly use intrinsic stock value as a guide to successful investing. This approach assumes that you can successfully predict the income stream that an investment will generate in the coming years. Then, you look at the current stock price as well as the financial condition of the company. Here is where the Generally Accepted Accounting Practice that is used to do the books may not serve a modern investor very well. There are factors that may overstate the value of a so-called “value stock” and understate the value of a so-called “growth stock”. The Wall Street Journal looks at the traditional way of measuring value stocks and offers some advice to investors.

Is “value” dead? Or have we just been measuring it in the wrong way?

It’s an urgent question, because value stocks-when defined according to the traditional criterion, low price-to-book-value ratios-have lagged behind growth stocks for at least a decade now. And though value stocks in the past have come roaring back after going through similarly long periods of lagging, some researchers are questioning whether they will do so again.

The point that the WSJ makes hinges of how “intangible assets” are treated in the world of accounting.  What is important when predicting the future of a stock is being badly represented in financial statements.

That’s because a growing percentage of companies’ market value now comes from intangible assets-things like patents, trademarks and research-and-development expenditures-that are either ignored in the book-value calculation or reflected inconsistently. Therefore, the researchers say, the price-to-book ratio has lost its relevance.

If they are right, we can’t expect stocks with the lowest such ratios to reassert their historical dominance over stocks with the highest ratios.

Stocks that keep going up are those that keep increasing their earnings. The value of many of these companies lies in their names, trademarks, and patents. The money that they pour into R&D comes back as new products, more efficient ways to produce their products, dominance of their market niche, and creation of totally new market niches. The market keeps rewarding the companies that are following this path because their earnings are steadily increasing. Which growth stocks are really value investments? The first trillion dollar company, Apple, fits the mold of a company that is steadily growing based on continual product improvement, strong R&D, and lots of patents. Johnson & Johnson and Microsoft, the only two companies with AAA corporate bonds as mentioned in our article about how to invest without losing money, also fit the mold. Until they change the way that “intangibles” are reported by the accountants, earnings may be the best guide to picking “value stocks.”

Which Growth Stocks Are Really Value Investments? PPT

Smart Ways to Predict a Correction and Protect Your Investments

Over the last few years you have ignored the nay-sayers who incessantly predicted stock market, real estate market, and economic crashes. You stayed in the market and have seen a rather nice increase in the value of your investments. However, all good things come to an end and those things include bull markets. But, after every stock market correction there will be a rebound. What are some smart ways to predict a correction and protect your investments in order to profit from the next upswing?

Market Corrections and Recoveries

Is There a Correction around the Corner?

There are signs of a market correction that you can watch for.

When the market keeps going up too many investors become impatient, looking for more and more profits. They forget risk management. An old piece of investing advice is that you do not have a profit until you take a profit. If you have done well with a volatile stock there is nothing wrong with taking a little profit, paying long term capital gains and holding on to cash until the market offers great deals again. Prior to the burst of the dot com bubble several well-known investors stated that they were essentially cashing out of the stock market because it made no sense. These folks were able to re-invest at very attractive prices a year or so later.

Today, according to CNBC, Deutsche Bank is cautious for the near term and expects a 3 percent to 5 percent pullback but a rebound later in the year.

Citigroup makes a similar prediction as reported in the same article. They use a proprietary formula that takes into account a brewing trade war, geopolitical uncertainty, Federal Reserve policies, and spreading weakness in emerging markets as part of a creeping economic weakness internationally.

There Is Always a Recovery, Somewhere

After all stock market crashes in recent memory there has been a market recovery. The S&P 500 fell from 1500 to 900 between September of 2000 and the beginning of 2003. Then it steadily rose again to a peak of 1560 before the financial crisis. At that time it fell to 680 by March of 2009. And, from there the index has climbed steadily for nearly a decade to 2870 today.
As we noted in our “signs of a market correction” article, smart investors decided that the market made no sense in the run-up to the dot com crash. And, smart investors saw the dangers of over-leveraged investments going into the financial crisis and got out. These folks all re-invested after the crash and resumed earning profits.

If you are a passive investor and just invest in index funds that track the S & P 500, you can expect the results like we just showed you. But, there were a lot of weak stocks with really poor intrinsic value going into both the dot com and financial crisis crashes. These stocks inflated the prices of index funds going into a crash. And these companies commonly went bankrupt and disappeared from the index after the crash.

Over the long term it is financially dangerous to follow the “rising tide raises all ships” method of investing. The stocks of strong companies go up because of strong earnings, strong products, and a margin of safety in the form of money in the bank and minimal debt. A company selling in the same market niche may see its stock go up based more on optimism than a fundamental-based promise of growth. Two stocks today that raise concerns are Facebook and Tesla. Facebook is looking at more regulation due to its prominent communication role in modern society and Tesla needs to start producing profits for investor get tired and start selling. Smart ways to predict a correction and protect your investments include culling out potentially dangerous investments, like Facebook and Tesla.

Smart Ways to Predict a Correction and Protect Your Investments PPT

Do Your Canadian Investments Depend on NAFTA?

Trump decided to renegotiate the 24-year-old North American Free Trade Agreement. This agreement created a free trade zone including Canada, the USA, and Mexico. NAFTA re-negotiations between Canada and the USA have stalled. Pundits see an “investment hesitancy” as investors wait to see how things will work out and what a new deal will look like. The question for those with investments north of border is, do your Canadian investments depend on NAFTA?

Is There a Problem with NAFTA and, If So, Whose Problem Is It?

Economic analysis indicates that the net result of NAFTA has been to improve the economies of the three nations involved. However, during the quarter of a century that the trade deal has been in effect, many workers have been displaced while others have gained new jobs. A large part of Trump’s appeal to his supporters is that he sees NAFTA as having been a big mistake for the USA and having hurt US workers.

Since the start of NAFTA, trade between the USA and Canada increased from $199 Billion USD a year to $518 USD a year. According to Investopedia in their article on the economics of NAFTA, the US per-capita GDP went up 39% while that of Canada went up 40%.

It would seem that the net result was about equal for the two nations. Nevertheless, negotiations are going forward albeit slowly. If negotiators cannot come to an agreement, or if they come to an agreement that hurts Canada, which investments will get hurt and which investments will see no adverse effect?

The Office of the US Trade Representative has data relating to imports from Canada.

  • Canada was the United States’ 3rd largest supplier of goods imports in 2017.
  • U.S. goods imports from Canada totaled $299.3 billion in 2017, up 7.8% ($21.5 billion) from 2016, but down 5.6% from 2007. U.S. imports from Canada are up 169% from 1993 (pre-NAFTA). U.S. imports from Canada account for 12.8% of overall U.S. imports in 2017.
  • The top import categories (2-digit HS) in 2017 were: mineral fuels ($73 billion), vehicles ($56 billion), machinery ($21 billion), special other (returns) ($14 billion), and plastics ($11 billion).
  • U.S. total imports of agricultural products from Canada totaled $22 billion in 2017, our 2nd largest supplier of agricultural imports. Leading categories include: snack foods ($4.2 billion), red meats, fr/ch/fr ($2.3 billion), other vegetable oils ($2.0 billion), processed fruit & vegetables ($1.5 billion), and fresh vegetables ($1.4 billion).

The biggest categories of Canadian imports into the USA are fuels (oil), vehicles, agricultural products (wheat), machinery, and plastics. These are the investment areas that stand to lose if NAFTA goes away or is drastically redrawn.

Other Options for Canada

An item in the Globe and Mail caught our eye. It says a Chinese group is buying up bankrupt oil sands operations in Alberta. Canada is rich in raw materials and it can sell its agricultural and processed food products anywhere on earth. Your Canadian investments might take a hit due to NAFTA changes, but one can expect any and all affected industries to find new markets and  start to recover.

Do Your Canadian Investments Depend on NAFTA? PPT

Are Marijuana Companies Good Investments?

Tilray is the second largest publicly traded marijuana company. Their sales have doubled in the last year and the stock recently went up 17%. With more and more states legalizing marijuana for medical or even recreational purposes, are marijuana companies good investments? Business Insider writes that weed stocks are surging.

Shares of Tilray – the second-largest publicly traded marijuana stock – were up more than 17% Wednesday after the Canadian company posted quarterly sales nearly double a year ago.

But, is it the growth of sales that drives the stock price up, or something else?

Tilray is now valued at $4.9 billion, despite its losses, and could keep growing thanks to investments from major players in other sectors, especially alcoholic beverages. Constellation Brands – which makes Corona and Modelo, among other popular drinks – catalyzed a huge rally in Canopy Growth’s stock through the announcement of two recent investments.

“We expect more alcoholic beverage companies to announce deals with Canadian LPs over the course of the year, and view Tilray as an attractive partner for an alcohol company looking for exposure to cannabis,” Vivien Azer, an analyst at Cowen, said in a note to clients on Wednesday.

Shares of Tilray are up 164% since the company’s IPO in July.

It would appear that companies in the alcoholic beverage business do not want to be left behind if the marijuana business really takes off. Or perhaps they are just hedging their bets. Either way, it appears that at least part of the run in price of Tilray is from investment by the folks who also sell alcohol.

Long Term Value of Marijuana Stocks

What is the intrinsic value of a marijuana stock? The value of a marijuana stock will go up as its sales increase. And, sales will go up as more and more jurisdictions legalize marijuana. Where is pot legal today and where might it be legal tomorrow?

Recreational Pot in Canada

Forbes reports that marijuana is now legal in Canada.

This fall, Canada is set to become the 2nd nation in the world to allow legal consumption of recreational marijuana. The Cannabis Act, passed by the Canadian Senate on June 21, controls and regulates the growth, distribution and sale of recreational marijuana in Canada. Prime Minister Justin Trudeau expects everything to be in place for consumption to begin on October 17.

The population of Canada is 36 million people, just a couple of million fewer than live in California.

Recreational Pot in the USA

Business Insider has a map showing where marijuana is legal for medical use and where marijuana is legal for recreational use in the USA.

Nine states and Washington, DC, have legalized marijuana for recreational use – no doctor’s letter required – for adults over the age of 21.

Legal marijuana sales exploded to $9.7 billion in North America in 2017, according to a report from Arcview Market Research and BDS Analytics. That represents a 33% increase over 2016, shattering previous expectations about how quickly the marijuana industry could grow in the face of federal prohibition.

The report also predicted the legal marijuana market will reach $24.5 billion in sales – a 28% annual compound growth rate – by 2021, as more state-legal markets come online.

It would appear that recreational marijuana is a growth industry, which explains why the folks who sell alcohol are buying a few shares of the competition just in case.
States where pot is legal for recreational use:

  • Alaska
  • California
  • Colorado
  • Maine
  • Massachusetts
  • Nevada
  • Oregon
  • Vermont
  • Washington
  • District of Colombia

Federal Law versus State Law

Federal law prohibits marijuana use for recreational purposes. But, in states where pot is legal, local law enforcement agencies do not arrest anyone and Federal Authorities have followed state procedures in these jurisdictions. As such it would appear that more and more states will legalize marijuana and increase the available market for marijuana companies.

In the end, the marijuana companies that will be good investments will be those which manage their cost of production, compete well on quality and price, and market most effectively. Right now, it is not clear who that will be!

Are Marijuana Companies Good Investments? PPT

Why Are Health Care Companies Good Investments Today?

As the bull market continues to age, many investors are re-balancing their investment portfolios. Some are buying bonds as a way to invest without losing any money. These folks are willing to accept safety in return for giving up the opportunity for more profits if the market keeps going up. Others are staying in the market but looking for safe investment niches. One such relatively safe investment niche is health care. Why are health care companies good investments today?

Signs That a Correction Is Getting Closer

Stock traders watch the market for technical signals and long term investors look at stock fundamentals. But, sometimes the proof is right in front of us in our everyday lives.

An old friend of mine, a native of the country of Panama, tells a story. His father was a farmer and an observer of nature as well as human nature. He said that a person did not have to read the business pages to know if there was a recession on the way. All that was necessary was to look at the mango trees in the park across from the church on a Sunday morning.

When times are good, no one bothers to climb the trees in the park to pick the mango fruit. But, when there is less work and less money in everyone’s pockets, the mango trees are picked bare because people need to eat.

You do not have to live in Panama and look at mango trees. When another mall closes in your town it is not necessarily because of bad management. People are simply buying less. And, the result is that weaker businesses fail, followed by the next weaker, and their employees start looking for work, and taking jobs that pay less.

What Will People Still Buy When Times Are Difficult?

Health care companies are good investments today and always because people need their products and will buy them even when they cannot afford an IPod or need to cancel their Netflix subscription. Market Watch writes that the market is due for a hard landing and suggests health care companies as a safer investment option today.

Over the past 10 years it has not paid to be cautious. Low interest rates drove prices of almost all assets higher. Pricier assets made people feel wealthier and thus magically created economic growth. Low interest rates also pushed people into riskier assets, thus creating a mismatch between the assets people hold and their true risk affordability and appetite.

What is clear is that since interest rates are low and global economies are highly leveraged, central banks and governments will not have as much power to help.

This is one reason why my firm’s portfolio holds a lot of healthcare stocks. Healthcare companies have great balance sheets; their business is not cyclical (the demand for its products doesn’t fluctuate with the whims of the global economy); and there is a huge tailwind behind their backs in the form of the aging global population. Moreover, many of these stocks trade at highly attractive valuations.

Health care companies are not all the same. United Health Care is a health insurance company. Pfizer is a big pharmaceutical company that sells lots of medications that people need. Medtronic makes cardiac pacemakers and other equipment needed for health care. Johnson & Johnson sells everything from Band-Aids to advanced prescription medications. Johnson & Johnson was also mentioned in our article about investing without losing money. They and Microsoft are the only two US companies with AAA rated corporate bonds.

Health care companies are good investments today because they are not overpriced and have huge margins of safety with strong brand name products that will still sell when the economy weakens and the stock market corrects.

Why Are Health Care Companies Good Investments Today? PPT

Will Trump’s Problems Cause You to Lose Money?

No matter what is going on in the world of politics, the business of investing is to make money. Smart investors are apolitical. Their only concerns with politics have to do with the effects of laws and regulations on investing profits. We just wrote about whether or not the mid-term elections could cause you to lose money. But, now the question comes into closer focus with the legal troubles of those close to Donald Trump. What is going on and should you be concerned? In short, will Trump’s problems cause you to lose money?

Fraud Convictions for Manafort and Guilty Plea by Cohen

Just yesterday Trump’s former campaign manager was convicted of several counts of fraud and his former lawyer pled guilty to other crimes, while also implicating the President of the United States in a cover-up. The New York Times writes about all the President’s crooks.

On Tuesday afternoon, the American public was treated to an astonishing split-screen moment involving two of those people, as Mr. Trump’s former campaign chief was convicted by a federal jury in Virginia of multiple crimes carrying years in prison at the same time that his longtime personal lawyer pleaded guilty in federal court in New York to his own lengthy trail of criminality, and confessed that he had committed at least some of the crimes “at the direction of” Mr. Trump himself.

Let that sink in: Mr. Trump’s own lawyer has now accused him, under oath, of committing a felony.

Only a complete fantasist – that is, only President Trump and his cult – could continue to claim that this investigation of foreign subversion of an American election, which has already yielded dozens of other indictments and several guilty pleas, is a “hoax” or “scam” or “rigged witch hunt.”

To say the least, this could be bad news for Trump. But, back to the point, will Trump’s problems cause you to lose money?

For Now, Wall Street Does Not Care!

CNN Money reiterates what we said in our article about the mid-term elections. Smart investors are only interested in politics to the degree that governmental changes directly affect business. CNN writes about why Wall Street is unfazed by the Trump-related turmoil.

“The market has known there’s a political circus in DC for the entire time of the Trump presidency,” said Nicholas Colas, co-founder of DataTrek Research.
“Investors don’t really care who the president is. They care about earnings and interest rates,” said Colas.

Earnings are booming, thanks to an economy that grew at a four-year high of 4.1% last quarter. Unemployment dropped to 3.9% during July. This week’s turmoil does little to change that.

Is there any scenario in which an investor should be worried? We noted in our article about the mid-term elections that uncertainty tends to drive stock prices down prior to elections, but markets tend to recover nicely once the political dust has settled. Is there any reason to be more concerned this time around?

The “I” Word and Increased Uncertainty

In our opinion, the main issues facing investors are a possible full-fledged trade war and a nine year bull market that will eventually correct strongly. Investors deal with these issues every day. Trump’s problems enter the mix because of his combative nature. Rather than just letting things run their course, the current President may well decide to pardon Manafort and attempt stop the Mueller investigation into Russian meddling in the US electoral process. If there is a Democratic majority in the House of Representatives next year, and especially if there is a Democratic majority in the US Senate, the specter arises of impeachment proceedings.

So, would impeachment of a sitting US President hurt your investments? Remember that Bill Clinton was impeached by a Republican House of Representatives in 1998 and in 1999 the Democratic controlled US Senate acquitted him of the charges. During the Clinton years, the stock market had one of its best 8 year runs ever!

If things go really badly for the sitting US President, the issue for investors will be uncertainty and not the specifics of what is going on in the world of politics and legal proceedings. Will Trump’s problems cause you to lose money? The answer is that if you lose money in your investments, it will probably not be the President’s fault!

Will Trump’s Problems Cause You to Lose Money? PPT

Could the Mid-Term Elections Cause You to Lose Money?

In just a couple of months the country will vote in the mid-term elections. This is the election that falls between presidential elections. On the Federal level, all seats in the US House of Representatives are up for election every two years and a third of US senate seats as well. There is a tendency for the party that did well in the presidential election to lose seats in this “off year” election. Because of the potential for a significant shift in political power on the Federal level, investors are wise to pay attention. Could the mid-term elections cause you to lose money? Here are some thoughts on the subject.

The Effect of Mid-Term Elections on Stocks

Zacks Investment Management has some useful things to say about how mid-term elections affect stocks.

Because midterm election years can mean a shift in the balance of power in Congress, it also means that there is an increased risk of one party enacting new laws and/or policies in the lead-up or once the power dynamic is set. Markets, in our view, do not like policy uncertainty.

This thought is supported by the figures they quote.

Going back to 1962, the average correction during a midterm election year was an eyebrow raising -19%.


Since 1962, the average bounce for stocks following the midterm correction was a sturdy +31%.

Their approach to politics is that they are only interested to the extent that what the government does has an effect on investing by way of “property rights, corporate profits, and economic growth.”

If you believe these folks, you could lose money going into the mid-term election and win even more back afterwards.

Many Factors Affect Your Investments

How well your investments do depends on how well you pick them. We have repeatedly mentioned the concept of intrinsic value to use as a guide for long term investing in stocks, although the concept applies to any investment. In order to accurately determine intrinsic value of an investment, you need to be able to predict the future. That works better with a stable economy, no extreme changes in the laws affecting investments, and no major crisis that throws everything into an uproar. Volatility in any factor makes investors nervous and tends to drive down stock prices. This is why the market tends to sag in the months coming up to the mid-term elections.

How about This Year?

Could the mid-term elections cause you to lose money this year more so than in other mid-term election years? The factors that concern us all revolve around the investigation into Russian meddling in the 2016 presidential election. And, could things get worse instead of better after the election?

The main cause of low stock prices going into the mid-terms is uncertainty. And, when the election is past, the uncertainty goes away. Thus, stock prices fall and then they rise. But, what happens this year if the Democrats reclaim both the US House of Representatives and the US Senate? And, what happens if the investigation into Russian meddling in US elections finally implicates the sitting US President? Clinton was impeached in the 1990s when the Republicans controlled the House of Representatives but the Democrats controlled the US Senate and Clinton remained in office. Nixon was likely be impeached by the House and convicted by the US Senate and agreed to resign.

Our take on Donald Trump is that he would never give up even if there were damming evidence of his complicity in Russian meddling or in orchestrating a cover up. The worst near-term case scenario for investors is that the Democrats take back the House and Senate. Then the House votes to impeach Donald Trump. The national anguish from such a drama played out on the talk show and news, repeated presidential tweets, and a high stakes game of chicken between the President and Congress would continue the uncertainty that investors hate and drive stocks down even further. Pay attention as this drama plays out and maybe consider looking at our article about how to invest without losing any money. For investors who like certainty, the potential upside to the worst case scenario is that Trump leaves office, the Tweet storms cease, we have a “ho hum” president in Pence, and four years of relative tranquility in Washington allow investors to plan, invest, and make profits.

Could the Mid-Term Elections Cause You to Lose Money? PPT

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