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Soft Underbelly of Bull Market Is Too Much Debt

According to Warren Buffett the first rule of successful investing in not to lose money and the second rule is not to forget the first rule. With this sage advice in mind, what are the risks in today’s aging stock rally, both in the USA and abroad? Our considered opinion is that the soft underbelly of the bull market is too much debt. This debt excess includes that held by consumers, governments, and businesses.

Business Debt and Margin of Safety

When Steve Jobs came back to Apple he reinvigorated the company and generated lots of profits. He also built up a huge stash of cash so that the company would have a margin of safety in case of a business downturn.

Successful long term investors look for stocks that are likely to provide strong cash flow, return on investment, and a degree of security over the years. The security in owning a good stock comes from its margin of safety. The official definition of margin of safety is that it is the difference between the market price of a stock and its intrinsic value. However, there is more to the intrinsic value of a stock than a quick look at expected financial over the years. Finding the margin of safety of a stock may be easy and finding the margin of safety of a stock may take a little research and thought.

Money in the bank instead of excessive debt is a comfortable margin of safety. Netflix has been in the news again as its stock price keeps going up but Netflix is not making a profit even though they are increasing their market throughout the world. And Netflix repeatedly takes on debt to fund movie production and other costs. Amazon.com is another case in point as they borrowed in order to take over Whole Foods. The stock price is up on growth but their ratio of debt to cash on hand is going up. On the other hand Apple ended 2017 with a quarter of trillion dollars in cash reserves and Microsoft has about $125 billion in reserve. When considering how to prepare for a market correction remember that the soft underbelly of the bull market is too much debt and look for a margin of safety when you invest.

China

China has experienced economic growth over the last decades similar to what the USA saw from the years after the Civil War and again in the mid-20th century. They have been able to take on both business and consumer debt because the economy has continued to grow. But, all good things come to an end. China’s debt is not worrying investors both at home and abroad. The soft underbelly of Chinese debt is a risk to Chinese businesses and consumers and to a world full of commodity exporters who rely on China to buy their raw materials.

The Economic Times provides an example of a Chinese port with few ships that is not making money and a debt burden.

Each year roughly 60,000 ships vital to the global economy sail through the Indian Ocean past a Chinese-operated port on the southern tip of Sri Lanka. Almost none of them stop to unload cargo.

The eight-year-old Hambantota port – with almost no container traffic and trampled fences that elephants traverse with ease – has become a prime example of what can go wrong for countries involved in President Xi Jinping’s “Belt and Road” trade and infrastructure initiative.

Total Chinese debt has gone from 140% of GDP in 2007 to 256% today. This sort of debt increase invariably ends up causing severe economic damage.

US Tax Cut

The USA has cut taxes, which is probably going to help the economy in the short term, unless a trade war torpedoes the economy. But over the long haul this is another nail in the debt coffin.


Where Should You Invest Your Tax Refund?

Are you getting money back on your taxes this year? If so, are you taking a trip, going on a shopping spree, or hopefully putting something away for retirement or a rainy day? If you are taking the latter course where should you invest your tax refund? Investing excess cash such as a tax refund should be routine for every investor. This money will stay put until you are no longer working or when you really need it. Here is where you need to apply the principles of value investing. The skill of long term investing is more in the process than in picking today’s bright shiny stock tip. Intrinsic value is the valuation that successful long term investors use to pick profitable long term investments. We wrote about this concept as it applies to stocks.

Benjamin Graham presented investors with a formula for calculating intrinsic stock value in 1962 and modified it in 1974. The 1974 version considers the following:

  • Earnings per share, EPS, for the preceding twelve months
  • A constant of 8.5 representing an expected price to earnings ratio, P/E ratio, for a company that is not growing
  • An estimate of long term growth, five years = g
  • A constant of 4.4 which was the average yield of high grade corporate bonds in the early 1960 decade
  • The current yield of AAA corporate bonds = Y
  • Where V = intrinsic value

The formula is as follows:

V = (EPS x (8.5 + 2g) x 4.4)/Y

The way the investors were encouraged to use intrinsic value was to derive what is referred to as a Relative Graham Value, RGV. This is to divide the calculated intrinsic value of the stock by its current price. If the result, the RGV, is less than one the stock is overvalued and a bad investment and if the ratio is above one it is undervalued and may be a good investment.

Where Should You Invest Your Tax Refund

If You Want to Reduce Your Tax Burden

When you invest your tax refund you want to put it in something that will appreciate over the years. This is accomplished by picking an investment that is likely to provide a healthy return on investment year after year. And it is accomplished by reducing the overhead of investing. This means minimizing fees and commissions and minimizing taxes as well. In this regard consider an IRA or 401K. Years ago we looked a traditional IRA versus a Roth IRA.

In general one can invest IRA assets in common stocks, bonds, mutual funds, bank certificates of deposit, or real estate. All such investments through a Roth IRA versus a traditional IRA must meet the specific requirements of the Internal Revenue Service. As a rule there are more types of investments that can be made in a Roth IRA than in other types of tax advantaged retirement plans such as pensions, profit sharing accounts, 401Ks, etc. What is available may depend on the trustee of the account. For example, a bank may only offer CDs. A stock broker may only offer stocks. And, mutual funds will obviously only offer mutual funds.

This is where you want to choose a profitable investment, invest one time, and leave it alone to appreciate over the years, tax free, and then pay your taxes after retirement when you are in a lower tax bracket.


How Are Volatility and Risk Related in an Investment?

The stock market is very volatile this year. In fact, we have not seen this much volatility since the days running up to the financial crisis that ushered in the Great Recession. Investors and traders seem to be of two minds. First, many are worried and are getting out of investments that have been very profitable over the last few years. Second, many see the market correction as an opportunity to buy and gain profits, at least in the short term. Who is right and how should you proceed in the face of increasing volatility? In this regard, how are volatility and risk related in an investment?

The Current Situation

CNBC writes that stocks have not seen this much volatility since the financial crisis.

The S&P 500 has moved by at least 1 percent around 40 percent of the time so far this year. When annualized, that rate translates to the most moves of that degree since 2009.

Stock Market Volatility Courtesy of CNBC

Investors have been happy with steadily increasing earnings, especially in the tech sector which have made stocks like Apple such profitable investments.

Obviously, picking a successful company like Apple worked out better than diversifying across the US economy with an S&P 500 index fund. But with Apple just like the S&P 500 you could have bought at the high point before the crash and still have gained after the recovery. The key is the concept we often mention, intrinsic stock value. How does the company make its money and how will that work out in years to come?

But there are red flags that investors need to watch. These are 1) the risk of a Trump trade war, 2) military adventurism in places like Syria and North Korea, 3) the steady ramping up of investigations into Trump and associates starting with Russian meddling in the US electoral process and spreading out from there. And on top of this is the risk of a meltdown at the presidential level of the US government as Trump uses “reality show” tactics to deal with escalating problems.

Volatility, Risk, and Investment Horizon

There were people were wiped out in the 2008 market crash. And there were those who made fortunes in the market meltdown by shorting various investments. And there were people who simply kept their investments and are just fine today as we noted in recent article about profitable investments. Obviously, the most profitable approach is to buy when prices are low and sell when they are high but market timing can be chancy. Warren Buffett had something to say about volatility versus risk in a newsletter a couple of years ago. Business Insider quotes Buffett in saying that volatility is not the same thing as risk.

The unconventional, but inescapable, conclusion to be drawn from the past fifty years is that it has been far safer to invest in a diversified collection of American businesses than to invest in securities – Treasuries, for example – whose values have been tied to American currency.

Stock prices will always be far more volatile than cash-equivalent holdings. Over the long term, however, currency-denominated instruments are riskier investments – far riskier investments – than widely-diversified stock portfolios that are bought over time and that are owned in a manner invoking only token fees and commissions. That lesson has not customarily been taught in business schools, where volatility is almost universally used as a proxy for risk. Though this pedagogic assumption makes for easy teaching, it is dead wrong: Volatility is far from synonymous with risk.

These are words of the world’s most famous and successful long term investor (and the richest man in the world despite giving away several billion dollars a year). For the short term investor and stock trader volatility and risk are closely related. In our article about how many years are needed to make an investment long term we noted that 5 and more likely 10 years is correct. Anyone who invests with this time horizon can be less worried about the risk of short term volatility.


What Are the Most Profitable Investments?

The stock market has had a good run and the real estate market has largely recovered from the damage of the Great Recession. But the stock market is flirting with a correction and who knows how long real estate prices will stay up. What are the most profitable investment today and going forward? Our focus here is long term appreciation of your net assets and not on a short term uptick in stock prices. Last year we looked at value investing in our article How many Years Are Required to Make an Investment Long Term?

People like Warren Buffett have made substantial profits from smart long term investing. Just how many years are required to make an investment long term? We can get a hint from the so-called Oracle of Omaha who says that he cannot outguess the market in the short term but has a pretty good idea of what will sell well ten years hence. Thus we should not be surprised that the long run for investing is longer than you think.

The general consensus is that you need to stay in an investment at least five years and probably ten to see the benefits of long term investing. The S&P 500 peaked at 1509 in November of 2007 and bottomed out at 683 in March of 2009. Ideally you would have purchased shares in an ETF that tracks the S&P 500 and done so in March of 2009. But a long term investor would have purchased in 2007 as well. Today the S&P 500 is at 2600 after peaking above 2800 in January of this year. Successful market timing can help but it is difficult to carry off time and time again. The point is that if you had bought the S&P 500 at its high point before the crash and held on you would be up around 80% today. If you had added to your portfolio as the market went down in 2007 and 2008 you would have done even better.

Individual Stocks

Buying into the US economy can be beneficial over the years as our S&P 500 example shows. But what if you had purchased Apple (AAPL) at its high just before the crash? Apple sold for $28.55 a share in December of 2007 and fell to $12.88 by January. And it is selling for $172 today. Obviously, picking a successful company like Apple worked out better than diversifying across the US economy with an S&P 500 index fund. But with Apple just like the S&P 500 you could have bought at the high point before the crash and still have gained after the recovery. The key is the concept we often mention, intrinsic stock value. How does the company make its money and how will that work out in years to come?

When the Game Plan No Longer Works

Eastman Kodak was founded in 1888 and George Eastman was responsible for introducing the camera into everyday life. A business plan based on making film for cameras, chemicals for developing that film and paper for printing finished photos was a money maker for Kodak for decades. In 1976 Kodak stock sold for $106 a share. By 1991 it was down to $41 a share. Stock buybacks and divestitures kept the company alive for another 22 years as the share price dwindled and then Kodak filed for bankruptcy protection in 2013.

The death of Kodak’s business model was the digital camera. Today one sees some of the same in General Electric which has been at the pinnacle of American engineering excellence for decades but not returning value to its shareholders.

The most profitable investments are those that both track the strength of the American economy and profit from new and profitable ideas, like the smart phone in the case of Apple. Looking to the future niches like gene editing show promise for long term and increasing profits so long as you either pick the eventual winners or invest in a fund that tracks a basket of these stocks.

Are There Any Safe Investment Niches Today?

The long expected Trump trade war is beginning and the markets are barely containing their anxiety. Both the Dow Jones and the S&P 500 are down for the month. As we wrote our article about should you buy gold today, the S&P 500 had its worst 2nd quarter opening in 89 years. That was the year of the crash that ushered in the Great Depression.

The markets have continued trending upward despite seeming to be overpriced. That is because earnings keep increasing. But, what happens in a trade war is that earnings take a big hit. CNBC talks about a bear market before the current correction is over with.

Amid sharp sell-offs and quick rebounds, one strategist forecasts a possible bear market for Wall Street before all is said and done.

“I wouldn’t be surprised if we saw a 15 percent or even a 20 percent move off the highs before this thing finally bottoms out,” Matt Maley, equity strategist at Miller Tabak, told CNBC’s “Trading Nation” on Tuesday.

So, if the market is heading south, are there any safe investing niches today? Consumer stocks like Clorox and Procter & Gamble are relatively flat but have not performed all that well on the year. Utilities like Southern Company may not see direct effects of a trade war with China but as interest rates go up their dividend will look less attractive and the stock price will adjust. Where else can you look for safe investments today?

Biotechnology

At the start of the year we wrote to invest in gene editing companies.

The world of medicine is about to change. Diseases that had no treatment and conditions that cause lifelong suffering may well be cured at the source. Biotechnology has advanced to the point where the human genome can be edited and fixed! Companies that are on the leading edge of this new technology will not only change the world of medicine and your life. They can be profitable as well.

Learning to read the human genome has unlocked virtually unlimited possibilities for the treatment and cure of diseases. The companies that learn to harness this knowledge have a shot at riches beyond imagining. But, the  key to success in this realm is to do so efficiently and promptly before competitors come along with competing treatments.

Because picking winners in the world of biotech can be a gamble, it is wise to invest in several startups or in a biotech ETF in order hedge your risk and increase your chances of picking a winner. ETFdb.com provides a biotechnology ETF list that you might consider reading.

Biotech ETFs invest in stocks of companies in the biotechnology industry, many of which are involved in the use of biological processes such as recombinant DNA technology, molecular biology, genetic engineering, and genomics.

The current value of many of these companies lies in the promise of a profitable set of products. Thus they are not affected by the immediate swings of the economy or the markets. This makes them a safe investing niche in regard to a developing trade war or economic downswing. They do, however, have their own set of risks and the way to manage risk in this sector is to diversify with several well-chosen companies or an ETF or two.

Why You Might Want to Buy Gold Today

As the trade war with China begins and the dollar continues its decline, gold is going up in price. At this moment an ounce of gold is worth $1338. GoldPrice.org shows us how gold has done against the dollar in the last minutes, hours, days, months and years in this chart.

Obviously gold is going up in price as the Chinese slap tariffs on pork, fruit, and ethanol in retaliation for US tariffs on steel and aluminum. The Trump administration is looking at tariffs on Chinese tech products and the long-feared trade war is probably upon us. Add the economic damage of a trade war to an already-falling US dollar and you have an ideal scenario for why you might want to buy gold today.

Timing Is the Key

When investing in gold, timing is all important. Anyone who bought gold in the early 1970s when Nixon took the US dollar off the gold standard made out like a bandit. And anyone who stayed in gold until it fell off in 1980 lost part of their gains, or all of their investment if they had just purchased the shiny stuff. Then as the long economic and market rally of the 1980s and 90s took place, gold went to sleep arriving at 2001 at around $275 an ounce. Then the dot com bubble burst, interest rates fell, and gold went on a tear again right into the Great Recession. In 2011 gold briefly traded at $1,900 an ounce and was selling for $1,600 in 2012 before in fell back to the $1,060 range by the end of 2015.

As the Gold Price chart shows, gold is down nearly 15% from 5 years ago and up 335% from 16 years ago. Anyone who timed the gold market correctly has made money in the process. And, why might you want to buy gold today? Gold is an ideal refuge in times of political, economic, and social uncertainty.

How to Invest in Gold

We looked at investing in gold in an article published 8 years ago.

There are a number of attractive options for investing in gold and there are pitfalls. Gold stock investing includes mining companies and derivatives. Many gold bugs will say that how to invest in the stock market during hard economic times is to invest in gold. However, the true gold bug will advise that you buy and hoard gold bullion or rare gold coins. A current scare tactic in the gold coin market is that “the government will come again for your gold.” Roosevelt signing his executive order to prevent gold hoarding is rewritten as the confiscation of gold. Gold peaked in 1980 after a decade of inflation and promptly dropped. Gold bullion has not made it back to 1980 prices adjusted for inflation despite a fourfold increase in value in the last decade.

We noted that gold mining stocks often go up in price farther and faster than gold itself as a gold rally starts. And these same stocks go down faster and farther when gold loses its luster. There are gold ETFs in which you can invest and not have to worry about secure storage of your gold coins and bars.

Within Reason

Portfolio diversification should apply to when you buy gold as an investment, or bitcoins, or any investment. If you pull all of your money from all other investments and buy gold you had better be right. The better choice is to treat gold like the purchase of a single stock as part of your portfolio. This approach will lessen your gains in a gold rally and protect you from disaster if you timing of the gold rally is incorrect.

Are Amazon and Facebook in Trouble?

Our first thought in regard to how far high tech will fall is that the stocks are overpriced. And, passive investors are pouring money into index funds that do nothing but bid up the prices of the FANG darlings. The market has started to correct and, based on earnings reports, tech stocks will either continue to fade or will recover a bit. But, there are a couple of other issues that bear consideration in regard specifically to Amazon.com and Facebook. There is the possibility that Trump will want to go after Amazon in order to protect and bring back small businesses in the retail sector. And congress is looking into the use of personal data of up to 50 million Facebook users by a market firm working to get Trump elected. Are Amazon and Facebook in trouble? In the case of Amazon its problems are brought on by its success. People are happy going online to buy things for less and not having to go to the store. A billion people around the world love the use Facebook making it perhaps the most influential social platform in history. These two companies have changed the way society operates and may be hit by a backlash.

Facebook

The founder of Facebook, Mark Zuckerberg, is going to testify before congress according to US News.

Facebook CEO Mark Zuckerberg plans to testify before Congress about the company’s privacy practices in coming weeks, according to a person familiar with the matter.

Wednesday’s announcement follows revelations that a Trump-affiliated consulting firm got data on millions of unsuspecting Facebook users. Facebook is also facing criticism for collecting years of data on call and text histories from Android users.

In response to the bad press, Facebook is making it easier for users to see their personal data and to delete it. The issue for most folks is one of privacy although for the government is may be one of helping the Russians tamper with the American political process. This is an unforeseen outcome of people posting photos of their kids and cats for friends to see. Six years ago we asked is Facebook a good investment? A major issue was how Facebook could monetize its social media following. Facebook earned just under $40 billion in advertising revenue in 2017. They have learned how to monetize their product. But, have they done this while going against their social goals? This quote is from Facebook’s year end report.

“2017 was a strong year for Facebook, but it was also a hard one,” said Mark Zuckerberg, Facebook founder and CEO. “In 2018, we’re focused on making sure Facebook isn’t just fun to use, but also good for people’s well-being and for society. We’re doing this by encouraging meaningful connections between people rather than passive consumption of content. Already last quarter, we made changes to show fewer viral videos to make sure people’s time is well spent. In total, we made changes that reduced time spent on Facebook by roughly 50 million hours every day. By focusing on meaningful connections, our community and business will be stronger over the long term.”

If the government comes to believe that Facebook represents a threat to privacy and to our electoral system instead of a social positive, they could be in trouble and it would hurt their bottom line.

Amazon.com

The issue with Amazon.com is pretty straightforward. They have been extremely successful and are becoming a monopoly. This has had huge societal effects and might not be tolerated in the long run. The best example going forward might be the court ordered breakup of AT&T or the trust busting of Standard Oil and the railroad, coal, and steel giants at the beginning of the 20th century. The question if you own Amazon.com is if you will do better selling before or after a breakup.

How Can You Invest in Foreign Companies?

There are several good reasons to make investments outside of the USA. If the USA gets involved in a trade war you might want to have assets in other nations. And, of course, the US stock market has had a great run but is well past over-priced and already starting to correct. The old saying is that there is always a bull market somewhere and investing offshore is one way to make sure that you do not miss out.

An excellent idea and the first of our three reasons to diversify your investments offshore is to avoid having all your investment denominated in US dollars.

The second of our three reasons to diversify your investments offshore is that, if you are from North America, Europe, or Japan, there are faster growing economies and faster growing markets than back home.

The third of our three reasons to diversify your investments offshore is to look for a tax haven or two. It is certainly possible to bank, set up a business, have a retirement, and/or retire offshore. There are many so called tax havens in the world. The term, tax haven, means that a country offers a set of tax advantages. Not all are alike.

With the dollar on the decline, the US stock market weakening and a trade war looming, how can you investing foreign companies or other foreign assets in order to diversify your investment portfolio?

Multinationals

The easiest way to get a piece of the action offshore and never leave the US market is to invest in multinational companies like 3M, Procter & Gamble, or Coca Cola. By investing in highly diversified companies like 3M, consumer goods companies like P&G, or a beverage giant like Coca Cola you also can avoid the pain awaiting the high tech darlings as the market corrects.

Direct Investment in Foreign Companies

The big money goes for foreign direct investment. Even if you do not have the capital to invest directly in projects offshore it is instructive to see where the smart money is going.

Follow the money is age old advice for knowing why something is happening. In this case we would like to follow the money that goes into foreign direct investment. Foreign direct investment is done by folks with lots of money and the intention to stay a course and make a profit. If you are looking for offshore investment ideas, take a look at where foreign direct investment goes year after year after year. There have been changes afoot regarding where foreign direct investment is going. A very useful reference in this regard is the just published United Nations study, World Investment Report 2013. We have used 2007 and 2012 as bookend comparison years as 2007 was just before the onset of the worst recession in three quarters of a century and 2012 is the most recent year reported.

The most recent report is 2017. Take a look to see where people in the know are investing offshore.

American Depositary Receipts

You probably do not speak Portuguese, German, or Japanese. And you probably are not going to fly to another country to check out the investment opportunities. Likewise, you are not going to be able to deal directly with a stock broker who does not speak your language. But, there is a solution for how you can invest in foreign companies and that is to use American depositary receipts. These are negotiable certificates issued by US banks. Each certificate represents shares in a foreign company. The beauty of using this vehicle to invest in foreign companies is that they are like buying US stocks and provide the same sort of information that you expect from a US company listed on the NYSE or NASDAQ.

Volatility Makes Closed End Funds Cheaper

Successful long term investors make money because they do two things. They pick investments that are likely to provide a healthy return and they wait to buy until that investment is selling at a discount to its long term value. This is the concept of intrinsic value that we have so often discussed. An investment that may be attractive today is a closed end fund because the volatile market is making many closed end funds cheaper.

What Is a Closed End Fund?

Investopedia explains closed end funds.

A closed-end fund is organized as a publicly traded investment company by the Securities and Exchange Commission (SEC). Like a mutual fund, a closed-end fund is a pooled investment fund with a manager overseeing the portfolio; it raises a fixed amount of capital through an initial public offering (IPO). The fund is then structured, listed and traded like a stock on a stock exchange.

A problem with closed end funds is that they often sell at a price in excess of their net asset value.

One of the unique features of a closed-end fund is how it is priced. The net asset value (NAV) of the fund is calculated regularly. However, the price that it trades for on the exchange is determined entirely by supply and demand. This can lead to a closed-end fund trading at a premium of a discount to its NAV.

Funds can trade at premiums and discounts for a number of reasons. Closed-end funds focused on a popular sector at the time may trade at a premium. These funds may also trade at a premium if the fund is managed by a historically successful stock picker.

Conversely, a lack of investor demand or a poor risk and return profile of the fund can lead to it trading at a discount to its NAV.

In this regard Forbes writes about how to buy your favorite stocks at a discount.

One of the greatest things about closed-end funds (CEFs) is that they often cost less than they’re really worth.

Even after the recent volatility, these funds are up around 15% from a year ago. The best news is that there are still a lot of discounted CEFs floating around.

The point is that in the current volatile market many closed end funds are selling at less than their net asset value. This is an intrinsic value investor’s dream come true. But, knowing when to buy and when to avoid closed end funds is important.

Pros and Cons

US News writes about the pros and cons of closed end funds.

A closed-end fund produces a finite number of shares at the start. After the initial public offering, shares are traded on the stock market with prices rising and falling with investors’ views about the assets in the fund and the fund manager’s skill. CEFs are sometimes described as ancestors to exchange-traded funds, but CEFs have a fixed number of shares while ETFs can raise or lower the figure as demand changes.

That means the CEF share price is set by supply and demand, adding a layer of risk and opportunity.

“The price of the fund can vary far from the fund’s net asset value,” Vogel says. “Since the fund is closed, no new shares are created when an investor purchases them, allowing the price the ability to float to a premium or discount to the fund’s NAV.”

Supply and demand control prices of closed end funds. But the supply in a closed end fund is unchanging and so when the fund is popular it tends to be overpriced. And when investors get cold feet in a volatile market a closed end fund is often underpriced as is the case today. Investors in closed end funds need to keep track of the net asset value of the fund and invest only when the fund in underpriced in regard to its current and projected future value.

How Far Will High Tech Fall?

Our concern about high tech stocks has been that they seem overvalued as the bull market ages. The market seems to have taken notice of this concern as the FANG stocks corrected and have not recovered their losses. And now a Facebook data breach has scared the market. US News reports that Facebook and other tech stocks are falling.

A sharp loss for Facebook is dragging technology companies lower Monday as U.S. stock indexes skid. The social media company is facing new criticism related to privacy issues following reports a data mining firm working for the Trump campaign improperly obtained and then kept data on tens of millions of users. The stock is on pace for its biggest loss since 2012.

How far will tech stocks fall? Is it time to rebalance your investment portfolio with more weight given to value investments and less to growth?

The unique financial conditions of the last several years have been ideal for high tech growth stocks, the FANG group especially. But, now that conditions are changing, growth stocks are overpriced and at risk for a major correction. The better choice for many investors is to move into value stocks and other investments.

Or is it time to get out of the high tech sector while there is still time? There are a couple of issues that bear consideration in this regard. History buffs will remember that a bit more than a century ago there were a handful of companies that dominated American industry. Standard Oil was the most prominent as it controlled 90% of the oil and natural gas industry. But railroads, meat packing, steel, and even tobacco were controlled by a few. The point of breaking up these monopolies was to bring competition back into the market place and to reduce prices. The end result was that the great business empires built over the previous years were broken up during the Roosevelt and Taft administrations. It took another 80 years to see the Bell Telephone company monopoly broken up by the courts in the 1980s. An issue for today’s tech giants is that as they become too large and too controlling they risk being broken up and that would be a factor in how fall tech might fall.

Big Data and Big Brother

A current issue with Facebook is that they have allowed a huge data breach. According to the US News article the personal profiles of more than 50,000,000 Facebook users were used without the users’ permission. This was done by an outside research firm working to elect Donald Trump. It has been said that the most influential person on the planet is Mark Zuckerberg who founded Facebook and is by far the largest shareholder at about 29%. In the end Facebook may be broken up or severely regulated simply because of its power in the world of social media and the threat that it could be to governments and societies across the globe. In regard to how far tech stocks might fall it might be instructive to look at the breakup of “Ma Bell.” The AT&T system kept the company’s legacy products, did not do all that well and was eventually taken over. With the regional “baby bells,” some prospered and some were taken over. The same sort of risk might come out of a breakup of today’s tech giants.


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