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Profitable Investing Tips has been a member since April 20th 2008, and has created 155 posts from scratch.

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Should You Be Investing Offshore?

The US stock market rally may have run its course. But the old saying is that there is always a bull market somewhere. Should you be investing in foreign stocks? Money Watch writes about why foreign stocks are beckoning US investors.

Investors in Wall Street’s long-running bull market are obviously a very happy bunch. But many who now question just how long the party will hold up have started looking elsewhere to move at least part of their money. And these days, the international equity markets are beckoning – enticingly so.

Indeed, recent trends have fueled rallies in Europe and the emerging markets, analysts point out, although the US equity market continues to have an enormous lead on the rest of the world after the financial crisis. Many global market analysts note that prices are no longer cheap by historical standards, but even so, international stocks look more favorable compared with US stocks.

As earnings continue to drive growth the best places to be may well be Europe or in emerging markets. Further down the list is China where there is still great promise but also increasing risk based on excess manufacturing capacity and an awful lot of debt that just keeps increasing.

The underlying risk in investing in China is still that the government controls the economy. An example is the recent shadow bank clampdown that briefly drove Chinese stocks higher. Bloomberg writes about how investors drove stocks higher in the belief that the government will move in to cover bad debts.

Chinese stocks rallied in late trade as markets took a closer look at the nation’s new plans to rein in shadow banks and some traders speculated that state funds would act to stem excessive losses.

While analysts applauded the plan as an important step toward curbing risk in China’s financial system, they also warned of turbulence as markets adjust to outflows from popular shadow-banking products. The government directives, set to take effect in 2019, are the latest in a series of moves to reduce financial risk that have whipsawed financial markets this year.

China is trying to change its economy from a borrow, produce, export and grow model based on increasing markets when markets are not going to keep increasing forever. Likewise many emerging markets show promise but investors need to be aware of the resource curse of boom and bust cycles in economies that depend so heavily on selling the raw materials used by more advanced economies.

Brazil rode high during its commodity boom and has been licking its wounds ever since. Venezuela bought friends in the Caribbean with discounted oil and now its citizens cannot find milk, diapers or toilet paper in the stores. Beware of the resource curse of boom and bust cycles in commodity dependent economies.

However, these economies have gone bust with the onset of the Great Recession and are growing again. Look at the World Bank information on foreign direct investment to see where the smart money is going. Then consider US multinationals that do business in these regions or funds that invest in the region and help you diversify your risk. Last of all consider ADRs of individual companies if you are investing offshore.

Should Investors Be Scared as Markets Cool Off?

Did you lose a lot of money in the 2008 stock market and real estate market crashes? If so you probably wish you had listened to that little voice in your head that said it was time to take profits and sit on cash for a while. It was not like there was no warning. Look at Google Finance and you can see how the SPDR S&P 500 ETF Trust peaked in late 2007! For the next twelve months the market was in an ever-steeper decline.

SPDR S&P 500 ETF Trust

Anyone who listened to that little voice and got out saved of money and had more to re-invest after the market bottomed out. Which brings us to the point of this article, should investors be scared as markets cool off today?

Every Rally Eventually Corrects

Whenever the markets in stocks, bonds or real estate get overpriced there is eventually a correction. Strong earnings have been keeping this one alive but so has the hope and expectation of substantial tax cuts. Most recently the stock market is off because the long hoped for tax relief may be longer in coming than expected. Reuters writes that global stocks fall on U.S. tax reform doubts.

Uncertainty over a U.S. tax reform deal pushed world stock markets further away from recent record highs on Monday.

There was caution as investors waited to see whether a U.S. tax deal would be hammered out soon. U.S. Senate Republicans have unveiled a new plan that differs from the House of Representatives’ version and there are few signs of a compromise.

“All eyes are on what the Senate and the House of Representatives will do on their tax bills,” said Nobuhiko Kuramochi, chief strategist at Mizuho Securities. “That there is debate is not surprising at all. Still, it is an uphill moment for markets.”

The immediate concern of the markets is whether we see US taxes cut next year, the year after or not at all. The concern for long term investors is whether or not tax cuts are such a good idea. We wrote about this in our article about Republicans, Economists and tax cuts.

As congressional action progresses so will the belief that tax cuts are in the wings. And thus the market may reignite and continue to go up. But eventually, what drives stock prices is the strength of the economy and one of the factors that drives or impedes the US economy is the cost of the nearly $18 Trillion US debt. In the end the issue comes down to who is right about tax cuts, the Republicans or the economists.

This is not an esoteric argument. Stock traders may make short term profits from the enthusiasm generated by the possibility of tax cuts. And short term investors may do well from stimulated business activity. But long term investors like the Warren Buffetts of the world are essentially betting on the US economy and too much debt will kill any benefits of tax cuts on economic growth and on stock prices. In short congress needs to get this right.

So, should investors be scared as markets cool off? The old saying is that you do not have a profit until you have taken a profit because any hot market be it real estate, stocks, gold or bitcoin can cool off in a hurry. Anyone with an eye toward a successful and secure future will hedge their bets at some point, diversify and hold a bit more cash.

What Are Some Safe Investment Options Today?

Where should you invest today as the stock market reaches new highs and vehicles like bitcoin sky rocket? Are you into market timing or long term investment? Either way the best advice comes from legendary investor, Warren Buffett. His two rules for investment are these. Rule one: Do not lose money. Rule two: Remember rule number one! If you have made some money in the market in the last few years or if you have sat on the sidelines and want to get in, what are some safe investment options today?

The Promise of Trump or Not

The shock of Trump winning the presidency wore off very fast and a market that tanked overnight has grown steadily ever since. Pundits have assumed that the promise of Trump to lower taxes, deregulate, bring offshore corporate cash back home and stimulate the economy with massive infrastructure spending have been the drivers of the market. But very little of the Trump promise has come to pass. Bloomberg writes that Trump policies have done nothing for stocks and it has been strong corporate earnings that have sustained the market rally.

Decomposing stock returns over the last year, our analysis shows that earnings growth is responsible for most of the appreciation in equities. While analysts assessed the potential impact on earnings from potential corporate tax changes, the recovery in corporate earnings was underway well before the election. The S&P 500 has posted an average gain of 1.6 percent a month over the last 12 months. The contribution from earnings has been 1.5 percent on average a month. Treasury yields have climbed, acting as a drag on stock prices. However, this drag has been largely offset by a lower risk premium. That’s not especially surprising given stronger investor optimism.

If earnings are the key to stock market performance the question is how long will earnings last? And what happens when the economy slows and earnings drop? The Trump administration and Republicans say that a healthy tax cut will drive economic growth higher but most economists disagree with Republicans.

Assuming that earnings drive the value of investments what are some safe investment options today? Take a look at our article about how to invest $10,000. Please note that we suggest that you first pay off credit card debt and put enough money to pay the bills for several months in the bank. Then considering buying your own home and taking advantage of the deduction on mortgage interest payments. And finally use IRAs and 401Ks to take advantage of tax deferred savings vehicles.

Investing in companies with cash is always a means of obtaining a margin of safety in a stock portfolio. A company like Microsoft has gone through its incredible growth phase and is sort of hung up the high twenties. However, it pays about a 2.5% dividend and typically has billions of dollars in cash at its disposal. This cash reserve allows a company to weather economic storms without going into bankruptcy and allows it to take advantage of potentially profitable takeover opportunities.

Since we wrote this, 7 years ago Microsoft has tripled in value and trades at more than $80 a share while paying a 2% dividend. The key to determining what is a safe long term investment is calculation of intrinsic value whether it is in stocks, real estate or bonds. And be sure to diversify in order to reduce the risk of one bad decision and increase your chances of finding the next Microsoft just at it goes public.

Is It Time to Sell GM?

GM was the biggest corporation in the world back in its heyday. And then, decades later, it went into bankruptcy during the first days of the Great Recession. GM is back on its feet but what is its future? We asked is GM a good investment in an article 7 years ago.

Despite expectations of an opening stock price for the GM IPO of $33 the stock opened at nearly $35.50. The question, “is GM a good investment,” seemed to be answered with a resounding, “yes.” The stock rose to nearly $36 within minutes until profit taking took the new General Motors stock down to below $35 by 10 am EST. The stock recovered to near $36 again before starting a steady decline throughout the day. So much for the first day after GM stock returned from the dead. For the long term investor the question is not such much the hoopla of first day IPO sales and day traders taking profits.

The question had to do with making a profit and steadily increasing intrinsic stock value for GM investors. In the days of GM dominance this had to do with making an attractive and reliable car at a time when Detroit could expect to sell more cars each and every year. Now with electric cars, self-driving cars and fewer cars in future the question is who can make this work, make a profit and return that profit to investors? In that light we asked a couple of years ago is GM back?

Is GM back? Reuters reports that GM profit tops estimates with an improved profit margin in China and strong truck sales.

And then there was the ignition switch scandal in which GM was aware for years that if someone hung a heavy key chain from the ignition switch of their cars the car could shut off while moving. There were accidents and deaths and subsequently calls of criminal charges against the GM hierarchy. That issue has blended into the background and has cost GM a pretty penny. But the long term issue is if GM can be the car maker of the future and just what the car maker of the future will look like.

CNBC notes that GM stock just took a hit.

The automaker’s stock was downgraded to “sell” from “neutral” at Goldman Sachs, which points to the current valuation and the likelihood of a downward inflection for GM earnings in 2018.

The bottom line, as always, is if the company will be making money and returning value to shareholders into the long term future. Our sister site, looked at GM after a recent analyst upgrade and asked should you buy General Motors stock.

The world of automobiles is changing. More and more folks in cities take public transportation and rent a car for the day or even a few hours when needed. Electric cars may be the only models available in a decade and self-driving cars are on the way. Who is going to thrive in this environment and who is going to disappear? In the glory years for cars in the 1950s common names like Studebaker, Packard and American Motors vanished as the Big Three automakers dominated. Then foreign imports prospered and eventually contributed to bankruptcy of Chrysler two times around and finally GM. There is no promise that large American car makers or any current car makers will succeed in business as the world of cars changes.

That is the bottom line for the car industry. Car makers like GM are where carriage makers, saddle makers and wagon makers were at the beginning the era of the internal combustion engine. Some, like Studebaker, adapted and lasted for half a century but otherwise they become a foot note in history. Is it time to sell GM? It may be too early to tell but anyone with investments in the auto industry needs to pay attention and have a solid game plan or they might just wake up one morning to find that their stock has gone the way of the industries that supported the horse as the preferred mode of transportation.

How Do Events in Japan Help or Hurt Your Investments?

In the investing world it helps to pay attention to what is going on throughout the world. When Japan was the economic powerhouse of the 1980s they were buying up properties in the USA and their stock market threatened to eclipse that of the USA. Even after the economic collapse caused by hidden debt and subsequent deflation Japan´s currency has remained a safe haven and events in Japan still affect Asia, Europe and North America. How do events in Japan help or hurt your investments today? Reuters provides a small example after a victory of Prime Minister Abe´s ruling party in Japan. The Abe approach to the Japanese economy is to stimulate it with an inflationary policies. This is referred to as Abenomics and a victory for Abenomics lifts world stocks as well as the dollar.

Japanese Prime Minister Shinzo Abe’s election victory lifted world stocks and the dollar on Monday, relegating concerns about Spain’s escalating political crisis to little more than a blip on the market radar.

Abe’s emphatic win, which heralds a continuation of Japan’s hyper-easy monetary policy, kept risk-on bets in play after fresh optimism about tax cuts in the United States had pushed Wall Street to a new record on Friday.

U.S. stock index futures pointed to a higher open for Wall Street, tracking gains for other major stock markets.

The spillover from the Abe victory and promise of more easy money in Japan is not just limited to the USA.

Also trading on Abe’s big win, euro zone borrowing costs fell, as bond markets ready for the European Central Bank to signal baby steps away from its ultra-easy policy stance on Thursday and for the U.S. Federal Reserve to hike rates in December.

German Bund futures FGBLc1 were up 0.1 percent.

“Now there’s a renewed mandate for quantitative easing, which means a weaker yen and stronger Japanese government bond prices. It also has a significant spillover for other developed markets,” said Peter Chatwell, head of euro rates strategy at Mizuho.

Events in Japan do not play out all by themselves. Rather they play off of issues such as possible large tax cuts in the USA.

As congressional action progresses so will the belief that tax cuts are in the wings. And thus the market may reignite and continue to go up. But eventually, what drives stock prices is the strength of the economy and one of the factors that drives or impedes the US economy is the cost of the nearly $18 Trillion US debt. In the end the issue comes down to who is right about tax cuts, the Republicans or the economists.

Economists may be concerned about economic policy in Japan or excessive tax cuts in the USA but the markets are excited about potentially higher stock prices based on at least temporary earnings increases. To the extent that events in Japan and elsewhere drive up stock prices you should play attention and to the extent that such policies in Japan or in the USA drive up debt you should beware.

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