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What Can You Invest in and Not Get Hurt by a Trade War?

Of late we have written about switching investment focus from growth to value as we have been ruminating about the possibility of a stock market crash, economic recession, and collapse of the real estate market, all caused by a trade war. Materials stocks have been hurt by Trump’s announcement of tariffs on steel and aluminum. The bull market has been historic and is likely to cool off if we are lucky and collapse if we are not. How can you invest and not get hurt by a trade war? Our sister site, Profitable Trading Tips, provided a few ideas in their article about trade war-proof stocks.

When Trump announced increased tariffs on imported steel and aluminum the markets fell. A trade war would be the nail in the coffin for an already-aging bull market.
To be protected from a trade war with China these companies need to be ones that do not do a lot of business in or with China. It turns out that the FANG tech darlings that have helped drive the US market higher and higher are somewhat trade war-proof stocks at least when it comes to China.

It turns out that Facebook, Amazon, Netflix, and Google (Alphabet) either do not do business in China or have a very limited presence. Even though these stocks have become somewhat pricey in the current market they could not be directly hurt in a trade war with China. Other choices might be totally domestic companies but they could get hurt by high material costs. But, what are some other choices that you can invest in and not get hurt by a trade war?

Entertainment and Biotech

The Motley Food suggests 3 stocks you can buy on sale. Their thesis is that these are fundamentally strong stocks with low P/E ratios.

With the bull market in its ninth year, you might think it’s hard to find high-quality stocks that aren’t expensive. But that’s not the case at all. And you can find such stocks in several sectors.

Their suggestions are AbbVie, Disney, and Micron Technology. The two that mostly catch our eye are the biotech stock AbbVie and entertainment giant Disney. The value of biotech stocks is that these companies invent new treatments for diseases. AbbVie makes Humira which is a drug for autoimmune diseases and at $14.8 Billion in sales was the world leader. The pipeline for potential cures for everything from diabetes to various forms of cancer is full and as these come on line the companies that invent and market them will have cash cows that provide income streams into the indefinite future. And, it is unlikely that any nation on earth will block the entry of these miracles cures with punitive tariffs when their presence could cure diseases.

Disney entertains. They have been at this since Walt Disney helped invent animated pictures with Steamboat Willy whom became Mickey Mouse. A key to Disney’s success is the ability to make money on an idea several times over with trademarked products and theme parks based on blockbuster films. Disney will not go away in a trade war or recession and will keep making money year in and year out no matter what Trump does to tariffs.

Large, Medium, or Small Cap Investments

This has been a historic stock market rally. And, all bull markets correct or crash in the end. With this bit of truth in mind we have been writing about how to deal with your investments before there are substantial corrections or even crashes of the stock and real estate markets. A good choice is to switch your investment focus from growth to value.

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. But, what is a value stock?

In the article we revisited the concept of intrinsic value and how to calculate it. But, if you want to move into different investments what do you pick? The value of an investment in this regard is its forward looking income stream. Here we might consider looking at large, medium, or small cap investments. How have they done as groups and how are they doing now? As a group large caps provided more profits than medium and small caps in the last decade and as a group they are less likely to generate similar gains compared to medium and small caps today.

Large Cap Stocks

The most commonly watched indexes are the S&P 500 and the Dow Jones Industrial Average. These are both collections of large cap stocks. The S&P 500 has come from its lowest of 683 in March of 2009 to 2785 right now. That has been a spectacular rise. But, in the last three months the index has come from 2664 with a dip to 2581 in February. The Dow Jones was at 6626 in March 2009 and is 25,250 right now. In the last 3 months it went up to 26,616 and fell to 23,860. The point being that large cap stocks may have run their course and may be due for more of a correction. At this moment both the Dow and the S&P 500 are down about half a percent on the day.

From their lows in 2009 the large cap stocks have come up more than fourfold and they have showed signs of correction in the last 1 to 3 months.

Medium Cap Stocks

The S&P 400 is a medium cap index. It bottomed out at 406 in March of 2009 and stands at 1952 right now. A month ago it stood at 1839. The index is up a fraction of a percent on the day. This group is up nearly fourfold since its lows. And as a group medium caps look stronger than large caps in the short term.

Small Cap Stocks

The S&P 600 is an index of small cap stocks. It stood at 225 in March of 2009 and stands at 975 today. In the last month it has risen from 911 to its current level. Small caps have come up fourfold since their lows and like the midcaps they are doing better than large caps in the short term.

Penny Stocks

Investing in penny stocks can be tricky. First there is the question of knowing what penny stocks to watch. We have also written that it is wise to beware of penny stocks if you are not willing to do your homework, pay attention and accept the risk. The issue with penny stocks is that you basically need inside information in order to pick the winners and then you typically need impeccable market timing to gain your profits.

Learn How to Invest Your Money When Markets Are Uncertain

The financial meltdown of 2008 was devastating for the majority of home owners and investors. How is it that when the real estate and stock markets were overbought and became volatile in 2007 and 2008 that investors did not take their profits and find safe investments or simply hold cash? At the start of 2009 Business Insider wrote that America lost $10.2 Trillion in 2008.

U.S. homeowners lost a cumulative $3.3 trillion in home equity during 2008, according to a report from Zillow. (MortgageWire.)

One in six homeowners is now underwater on their mortgage.

The stock market erased $6.9 trillion in shareholder wealth in 2008.

Add together the loss of housing equity of $3.3 trillion and the stock market loss of $6.9 trillion, and you’ve got a historic loss of wealth of $10.2 trillion.

To put that number in perspective, it’s almost one fifth of the GDP of the entire world. It’s about the size of the US Debt at the end 2008, meaning we could have paid off the entire debt of our government with the money we lost last year.

Is this going to happen again? As the bull market ages and shows signs of significant corrections, perhaps it is time to learn how to invest your money when markets are uncertain.

Growth versus Value

We recently wrote about the need to switch your investment focus from growth to value.

Unless the stock market stages an unexpected late rally, the month of February 2018 will be the first February since the 2008 market crash where stocks have gone down instead of up. Inflation is gaining momentum and interest rates are about to go up from years of historic lows. 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. But, what is a value stock?

The Dow Jones Industrial Average is down about 8% since we wrote that but the S&P 500 is virtually unchanged.

Listen to the Voice of Experience

On these pages we like to quote Warren Buffett. He is one of the three richest men in the world and often is number one depending on how Bill Gates and Carlos Slim are doing. And that is despite giving away several billion each year to charity. Buffett famously said that the first rule of investing is not to lose money and the second rule is not to forget the first rule. If you have made money on growth stocks in the bull market now may be a good time to take some of your money “off the table” because you indeed do not have a profit until you have taken a profit. Aside from cashing out of the market how can you learn how to invest your money when markets are uncertain? The key is to learn how to calculate the intrinsic value of an investment. Benjamin Graham showed us how to calculate intrinsic stock value in the years after the 1929 crash and Great Depression. This approach works for other assets such as real estate as well. Investors like Buffett have accumulated great wealth over the years by using this approach and never investing in something that they did not understand. If you do not understand how a company you are invested in is making its money then it is time to get out and take your profits.

What Will Buybacks Do to Your Investments?

The rationale for offering multinationals a tax break on repatriation of offshore cash was that they would bring the cash back to the USA, expand their businesses at home, create jobs and stimulate the economy. Apple was in the news for bringing back money in order to pay a $38 Billion tax bill. And other companies are also taking advantage of the changes in the tax law. But, instead of investing to create jobs, they are buying back shares of their stocks. Our question is, what will buybacks do to your investments? Business Insider writes that a record number of stock buybacks could save the market from disaster.

Recent turbulence has derailed the US stock market’s quest to set repeated all-time highs. But equities look headed for a new record of sorts – one that could ultimately be their saving grace.

Companies in the benchmark S&P 500 are on pace to execute more than $800 billion in gross share buybacks in 2018, which would shatter the previous annual record, according to JPMorgan estimates. As a result, the firm says investors should respond by employing a strategy of adding to existing positions during times of market weakness.

The reason is simple: Buybacks have been a safety net of sorts for the stock market through the almost nine-year bull market. Their accretive effect on share prices is a crucial upward catalyst for equities during periods devoid of other positive drivers.

In the short term company buybacks drive share prices higher. This can be a bonus for you the investor. But, the market is otherwise overbought and has just corrected with perhaps more corrections to come. Trump seems intent on starting a trade war. The Wall Street Journal writes that trade concerns are weighing on stocks.

U.S. stocks edged lower Monday, as investors continued to worry that the Trump administration’s plan to impose stiff import tariffs could spark an all-out trade war.
The Dow Jones Industrial Average declined 77 points, or 0.3%, to 24463 in morning trading, while the S&P 500 was down 0.3%. The Nasdaq Composite fell 0.4%.

Investors were trying to gauge the impact of President Donald Trump’s protectionist trade agenda and whether planned tariffs on steel and aluminum imports are the start of a broader policy that could eventually include levies on other products and commodities.

Thus, aside from stock buybacks, there is little to drive the market still higher. What buybacks will do to your investments in the short term is protect you from loss. But, the bull market is wearing thin. We have written about how to protect your investments before the US economy implodes again, three ways to protect your investments in a bear market, and how now is good time to switch your investment focus from growth to value. Buybacks will help you preserve gains for a while but smart investors will see the handwriting on the wall and adjust their investment portfolios by selling part of their holdings on the next uptick caused by a stock buyback and then adjust their investments  with an eye toward weathering the coming economic storm.

Switch Your Investment Focus from Growth to Value

Unless the stock market stages an unexpected late rally, the month of February 2018 will be the first February since the 2008 market crash where stocks have gone down instead of up. Inflation is gaining momentum and interest rates are about to go up from years of historic lows. 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. But, what is a value stock?

Value Stocks

Investing in value stocks tends to be the most profitable approach over time.

Investing in value stocks is not just investing in cheap stocks. Good value stocks pay dividends and/or have high growth potential. These stocks commonly have a very sound business plan and return profits year after year. When there is a market rally value stocks often get left behind as investors follow rapidly growing stocks. However, when the rally corrects or the market reverses value stocks do, in fact, retain their value. Value stocks tend to outperform the overall market over the long term.

Long term investors look for intrinsic stock value. This is a value calculation based on projected returns on an investment over the next several years.

In the aftermath of the stock market crash of 1929 in the early days of the Great Depression Benjamin Graham introduced the concept of value investing.
Mr. 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.

Value stocks are often not ones favored by current market sentiment. Investing novices too often look at what has appreciated recently and assume that the same stock or other investment will continue on its upward course. The history of market bubbles and collapses over the decades is clear proof that this approach does not work. If you are a student of the markets and want to both make a profit and sleep soundly at night, switch your investment focus from growth to value before the market teaches you a painful lesson.

Will You Lose Money When the Interest Rate Goes Up?

The investor community is fretting over interest rates. Inflation is creeping up and the US Federal Reserve is likely to keep raising rates. When rates creep up, the stock market heads down. And if you hold long term bonds they will continue to pay the current low rate even as new bonds pay more. That means you will either sell them at a loss or hold them with their low yield until maturity. Depending on the positioning of your investment portfolio, will you lose money when interest rates to up?

Short versus Long Term Bonds

We recently wrote about tax free municipal bonds because of the possibility of US infrastructure spending. We noted the risk of getting stuck with a long term bond at a low rate.

Municipal bonds are long term instruments. If you put all of you investment into a bond today and interest rates go up you will be stuck with an interest rate that is less than the current market and that will last for years. An approach that long term bond investors take is to create a bond ladder. They invest a set amount each year in bonds, hold to maturity, and reinvest when the bonds mature.

If you go out today and buy long term bonds you will lose money when the interest rate goes up. Either you will receive less than the prevailing interest rate for years and years or you will sell for a loss in the near term. A bond ladder makes sense today when rates are likely to go up.

The Stock Market

When we wrote about how to protect your retirement savings before the US economy implodes again, one of our concerns was inflation and subsequently higher interest rates.

High interest rates will choke off the US economy even as tax cuts may be providing a temporary boost.

The cost of credit has been at historically low levels ever since the start of the Great Recession even though we are well into the recovery. Long term investors are rotating their portfolios out of growth stocks and into defensive positions as the 10 year Treasury interest rate approaches 3%.

Tax Code Overhaul

But, won’t the tax code overhaul help your investments?

Real estate developers like the family of the president will make out well and perhaps the likes of Apple will get help in the event of a fading product cycle. Important parts of the tax code overhaul are the reduction of the corporate tax rate and the significant reduction of the tax on repatriated corporate profits. Shareholders of companies with billions of dollars stashed offshore may see increased dividends and soaring share prices as corporations take advantage of the new tax code and bring money back home to the USA.

But, the consensus is that beneficial effects of the tax code will be short term for the general economy and over the next few years the effects of an ever-increasing US debt will be felt and will drive the economy down. As the government sells treasuries to cover the US debt, rates will go up and you will lose money in your bond portfolio, many of your stocks, and even your cash reserves as the value of the US dollar continues its downward march.

Are There Too Many High Tech Stocks in the S&P 500?

Last year we asked if you were an active or passive investor. As the stock market approaches or perhaps has reached a turning point is there a problem with passive investing in index funds that track the S&P 500?

As the stock market rally grows older the time will come when the high tech and large cap stocks that are leading will have problems. Then passive investors who simply put money in a fund that tracks the S&P 500 will be in trouble.

Solid fundamental analysis will tell today’s investor to diversify his or her portfolio and look for investments like consumer stocks that will more easily weather the storm of a market meltdown. But if you are a passive investor and you money is in an index fund that tracks the S&P 500 are there too many high tech stocks in the S&P 500 and that will spell trouble when the market turns? CNBC writes that the high concentration of tech stocks is a danger sign.

“The excesses of this bull market are in the glam techs,” Smead said on CNBC’s “Closing Bell,” referring to names like Amazon, Tesla and Netflix.

Currently, 25 percent of the S&P 500 is composed of tech stocks and large cap stocks like Amazon and Netflix. His investment firm, based in Seattle, is the owner of long-duration common stocks.

“It was a danger signal for RCA stock in 1929, the Nifty Fifty stocks in the 1960s, oils in 1981, tech stocks in 1999 and banks in 2005,” he said.

Smead argued that in each era, the large concentration of stock in a particular sector helped propel the bull market, but was followed by a crash made significantly worse because of the losses.

Those who buy into this argument may wish to rebalance their portfolio. Investopedia writes about how to do this.

Rebalancing is the process of buying and selling portions of your portfolio in order to set the weight of each asset class back to its original state. In addition, if an investor’s investment strategy or tolerance for risk has changed, she can use rebalancing to readjust the weightings of each security or asset class in the portfolio to fulfill a newly devised asset allocation.

The asset mix originally created by an investor inevitably changes as a result of differing returns among various securities and asset classes. As a result, the percentage that you’ve allocated to different asset classes will change.

The point of doing this in today’s market is to reduce your risk as the market softens and the risk of a large correction or crash looms. If you want to continue passive investing you may wish to pick another index fund that is not so top-heavy with tech to balance the current S&P 500 or you may wish to pick a handful of consumer, utility or other non-tech stocks as the counterweight to balance your investments. At the current time the problem with holding cash is that the dollar is falling in relation to other currencies and the interest rate is likely to rise which will reduce the value of any bond that you buy.

How to Protect Your Retirement Savings before the US Economy Implodes Again

Far too many investors were essentially wiped out in the 2008 economic collapse. Those who got back into the stock market and invested well have ridden a historic bull market to impressive gains. The real estate market has also largely recovered and benefitted those who bought when prices were at a rock bottom. But, no bull market lasts forever. We saw a little bit of that prophecy come true in the last couple of weeks as stocks corrected impressively. In this article we are not so much concerned with how far the market will rise again or how quickly it will correct again. We are wondering how to protect your retirement savings before the US economy implodes again. Why are we asking this question?

Adding on to the US and Other National Debts

US News warns that a crisis is coming. They warn about asset price bubbles, mispriced credit and excessive debt on a global scale.

Another key ingredient for a global economic crisis is a very high debt level. Here too today’s situation has to be very concerning. According to IMF estimates, today the global debt-to-GDP level is significantly higher than it was in 2008. Particularly concerning has to be the fact that far from declining, over the past few years Italy’s public debt has risen now to 135 percent of GDP. That has to raise the real risk that we could have yet another round of the Eurozone debt crisis in the event that we were to have another global economic recession.

Today’s asset price bubbles have been created by many years of unusually easy global monetary policy. The persistence of those bubbles can only be rationalized on the assumption that interest rates will remain indefinitely at their currently very low levels. Sadly, there is every reason to believe that at least in the United States, the period of low interest rates is about to end abruptly due to an overheated economy.

High interest rates will choke off the US economy even as tax cuts may be providing a temporary boost. In addition, Seeking Alpha has a good article about America’s impending debt crisis and how it will end badly for stocks.

The U.S.’s enormous spending addiction has created a massive debt bubble that is going to lead the economy to its next financial crisis.

Consumer, government, credit card, auto loan, mortgage, student loan and just about any other debt you can think of is at a new record – and it won’t end well.

America’s impending debt crisis is likely to materialize within the next few years, and when it does, its destabilizing effects will be felt deep throughout the financial system.

So, how do you protect your retirement savings before the US economy implodes again?

Income versus Growth

Along the way to retirement you want to see your portfolio grow. Certainly if you invested in tech stocks like the FANG darlings in the last years you have been successful. However, with growth comes risk which is what you want to avoid when you are no longer drawing a paycheck. Dividend stocks with an unbroken history of payments are ideal. Utilities are an example of stocks that produce a steady and reliable source of income over the years. If interest rates go up the price of a utility stock will often fall but the dividend will typically remain the same and because you want income during retirement that is what is important.

Fundamental analysis is crucial to success in picking investments that will weather an economic storm. What can you expect from each and every investment in the case of a major economic downturn? And how can you prepare? Your home may have appreciated in value since the crash. If you are planning on downsizing for your retirement years it might be wise to make that move while the economy is still OK and then put your excess cash to work in a ladder of short term bonds or a well-chosen dividend stock.

Are Tax Free Municipal Bonds a Good Idea?

For years a tried and true investment was a tax free municipal bond. If you were in a high tax bracket you could write off your federal taxes and sometimes even your state and local taxes on the interest gained. With a carefully chosen bond you could get a better return than with a US Treasury. And in an era when the top tax rate was 89% it made perfect sense to go the tax free municipal bond route. Now there is talk of fixing America’s ailing infrastructure using seed money from the federal government and bonds issued by state and municipal governments. Are tax free municipal bonds a good idea today? Especially are they a good idea when interest rates may be going up while states are strapped with debt?

How to Invest in “Munis”

Years ago we wrote about how to invest in municipal bonds AKA “Munis”.

Municipal bonds are an attractive investment for many and can be invested in by buying individual bonds, shares of bond funds, or shares of unit investment trusts. How to invest in municipal bonds may vary with how much money the investor has to invest and his or her level of income. Tax free municipal bonds are typically more attractive to high income investors.

The two types of municipal bonds are general obligation bonds and revenue bonds. General obligation bonds are sold to cover expenses of states and municipalities. The taxing power of the issuing authority is your protection against default. Revenue bonds are what are issued for infrastructure projects. And revenue from the project such as tolls for roads or bridges provides the income stream to pay interest and eventually principle on the bonds.


Be careful when investing in municipal bonds, tax free or not. Some municipalities and states are so strapped for cash that not only repayment of the principal but also payment of interest may be at risk. Standard & Poor’s and Moody’s provide credit ratings where Aaa and AAA are ideal ratings and D, DD or DDD are for bonds that are in default. Tax free municipals are not a good idea if the issuer is in default.

Where Are Interest Rates Going?

Municipal bonds are long term instruments. If you put all of you investment into a bond today and interest rates go up you will be stuck with an interest rate that is less than the current market and that will last for years. An approach that long term bond investors take is to create a bond ladder. They invest a set amount each year in bonds, hold to maturity, and reinvest when the bonds mature. This passive approach to bond investing provides a long term income stream and an average interest rate over time.

What Is Your Tax Bracket?

If you are in today’s top tax bracket you will pay 39.6% federal tax on the last dollar of adjusted gross income for a single person. In 1963 you would have paid 53%. But back in the 1960’s a person with an adjusted gross income of $10,000,000 would have paid 89% on the last dollar earned. Today the rate does not keep going up after a single person makes half a million. The point of these numbers is that tax free municipals were a great idea for folks in the really high income brackets for much of the 20th century up until the Reagan tax cuts in the 1980s. Today you need to take out paper and pencil and calculate how much of a benefit you will gain from having the last dollar you earn be tax free from federal taxes and perhaps from state taxes.

Three Ways to Protect Your Investments in a Bear Market

Stock markets across the globe plunged at the beginning of the week . They recovered somewhat and then resumed their slide today. More and more analysts are saying that a bear market is on the doorstep. CNBC warns of a big bear market.

The dramatic stock market sell-off earlier this week should be viewed as a turning point, according to analysts.

“Our ongoing concerns about the recovery’s tenure have been thrown into sharper focus by the steepest market sell-off since the credit crunch,” Eoin Murray, head of investment at Hermes Investment Management, said in a research note published Thursday.

On Monday, the Dow dropped 1,175.21 points, having briefly declined more than 1,500 points during the session. And while U.S. stocks have since pared some of the losses sustained during a cascading market plunge earlier this week, the Dow, S&P 500 and Nasdaq are all down more than 4 percent since Friday.

If indeed a bear market is about to take hold what should you do? We offer three ways to protect your investments in a bear market.

Be Happy with the Profits That You Have Made

As a bull market comes to its end there are always investors who want to eke out that last little bit of profit. Because a dying bull market is often volatile those investor will wait for one last upswing before getting out. The problem is that too many investors wait too long and then see their portfolios evaporate as they wait for one last rally. The old saying is that you do not have a profit until you have taken a profit. If you got in or back into the market after the 2008 crash you have probably seen a very nice profit on your investments. If you agree that a bear market is in the wings, one of the ways to protect your investments is simply to sell part of your portfolio and hold onto cash until the correction or crash occurs at which time you can reinvest.

Crash-Proof Investments

Years ago we wrote about investing in beer. When times are good people drink beer to celebrate and relax and when times are bad people drink beer to drown their sorrows. Companies that brew and distribute beer are like companies that make and sell soap, household cleaners and other basic household necessities. When a recession hits consumer goods companies continue to make money. And their stock prices often go up because investors move their money out of stocks that are hurt by a recession and into stocks that remain stable. Another way to protect your investments in a bear market is to find crash-proof and recession-proof stocks.

Beware of Bonds and Stay Short

US monetary policy is about to tighten. Quantitative easing is gone and quantitative tightening is on its way in. The Fed will be borrowing less money and it lets its bond portfolio expire and rates are likely to go up. If you sell stocks or real estate because you fear a crash you may want to make a little interest on the cash you are holding. The problem is that you might get trapped in a low yield bond as rates go up so stay with short term issues.

How about Offshore?

We wrote recently about investing offshore. There are good reasons to diversify outside of the USA, especially with ADRs. But all markets are likely to fall if the US market crashed. For now cash is your friend as you evaluate investment opportunities for after the market bottoms out.

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