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Do Events in Countries Like Spain Really Affect Your Investments?

Separatist movements in Europe threaten the stability of the second largest economy in the world, that of the European Union. The most recent issue is a vote for independence from Spain by people in Barcelona and the province of Catalonia. But, do events in countries like Spain really affect your investments? There are two factors here. One is that if you have foreign direct investments in nations like Spain you should pay attention. And if you are invested in European stocks you should care also. But what if your investments are entirely onshore? Then do events in countries like Spain really affect your investments?

Direct Investment Offshore

We have written about foreign direct investment.

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.

Fundamental analysis of these investments is essential and when voters in Barcelona want to opt out of Spain you need to know how that might, or might not, affect your investments.

European Stocks

Stocks in Europe have done well lately and we wrote about whether or not European stocks are set to boom.

A lot of money is moving out of US stocks and into European stocks simply because the US market is priced too high and European stocks are comparatively cheap. The Brexit hurt European markets but investors have adjusted and the EU does not appear to be going away. And Europe has not had to deal with the hype of a return to Reaganomics that has been inflicted on US markets.

When investments in Europe appear more stable and more profitable money will flow into those markets. However, the separatists in Britain won with the Brexit and that has encouraged others including Spanish subcultures such as the Catalan and Basque to seek their own niche. The EU is the other biggest economy in the world roughly equal to that of North America. The original purpose of an economic union was to prevent yet another war in Europe but the result has been a large free trade zone. That free trade zone will but hurt if successive sub groups exit from the whole. If you are invested in European stocks you should be concerned about what happens in Spain.

An Interconnected World

The USA and EU are each other’s largest trading partners and according to Eurostat, the EU and US form the largest trade and investment relationship in the world. The USA runs a surplus of exports over imports with the EU so US companies should be interested in a healthy EU economy and a stable euro. Thus for American investors, events in countries like Spain do really affect our investments.

Do Events in Countries Like Spain Really Affect Your Investments? DOC

Do Events in Countries Like Spain Really Affect Your Investments? PDF

Do Events in Countries Like Spain Really Affect Your Investments? PPT


Who Is Right about Tax Cuts, Republicans or Economists?

The same folks who jumped on the stock market bandwagon the day after Trump’s election are excited again. Bloomberg writes that the possibility of tax cuts is making waves in the stock market.

Amid FANG flu and another trash rally, a trade tied to Donald Trump has come quietly back into vogue with U.S. equity investors.

The rally reincarnates a trade that ascended after the November election and then died. Arousing interest is Trump’s focus on one of his signature campaign promises to domestic businesses. He and Republican congressional leaders plan to preview their bill on Wednesday and the president said he expects the House will approve a version in October and the Senate by year’s end.

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. The New York Times looks at the battle over tax cuts.

Republican lawmakers are gearing up to battle a powerful force in the coming skirmish over a $1.5 trillion tax cut: Economists.

Party leaders are rejecting criticism that their yet-to-be-unveiled tax plan will add to the ballooning federal deficit, saying the tax cuts will essentially pay for themselves by generating robust economic growth. And they are determined to secure economic assessments that prove those optimistic assumptions.

Their position is setting the stage for a fight with Washington’s economic scorekeepers – such as the Joint Committee on Taxation and the Congressional Budget Office – who are required to assess the cost of tax legislation and its impact on the federal deficit. Those assessments – a so-called budget score – could ultimately determine the scope and permanence of any tax overhaul because of budget rules limiting legislation that adds to the long-term deficit.

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.

Real Economists

Senator Corker of Tennessee sits on the budget committee and says that he cannot trust government economists in the Congressional Budget Office and wants real economists from outside the government. The point, of course, is that he wants someone to validate his trickle-down economics model in order to promote tax cuts. Corker wants folks to believe that three percent growth is attainable but the Fed and others disagree.

Yet economists also have concerns about that 3 percent growth number. The Federal Reserve this week said the economy is continuing to grow at a moderate pace and signaled it will likely raise interest rates in December. In March, the Fed estimated that the maximum sustainable pace of economic growth is around 1.8 percent and the Congressional Budget Office puts the ceiling at 1.9 percent. While low by historical standards, economic growth is determined by expansion of the work force and improvement in the amount that workers can produce, both of which have slowed in recent years as a result of an aging work force and lower productivity.

Who is right about tax cuts, Republicans or the economists?

Who Is Right about Tax Cuts, Republicans or Economists? DOC

Who Is Right about Tax Cuts, Republicans or Economists? PDF

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Does Following Warren Buffett’s Investments Really Do Any Good?

Every so often we read an article about how you should invest like Warren Buffett in order to achieve success in the stock market. But, does following Warren Buffett’s investments really do any good or is it simply better to imitate his approach? After all when Buffett invests a few billion in a company its price commonly goes up. And, investing just after the stock price goes up is not an especially good idea. The Street just published an article about how to invest like Warren Buffett.

In a letter to his Berkshire Hathaway (BRK.A – Get Report) (BRK.B – Get Report) shareholders in 2013, Buffett said his advice for the average investor “could not be more simple.” He suggested putting 10% of cash in short-term government bonds and 90% in a “very low-cost” S&P 500 Index fund. In that letter, Buffett suggested Vanguard’s variety of funds.

If index funds aren’t for you, look out for some of Buffett’s “moats” — as in the water-filled ditch that keeps a castle safe from attack. Buffett has called positive free cash flows, good return on capital and strong competitive advantages within an industry “moats” for companies.

Investors can flock to those moated names by investing in a basket of Buffett-like stocks through Motif automated investing service for $10 a trade. Although Buffett hasn’t approved any himself, the Motif fund focuses on similar investing techniques.

The point is not necessarily to buy what the Oracle of Omaha just bought but to follow his suggested approaches of either using an index fund or looking for solid companies with a strong competitive advantage, high cash flow and low debt. Additionally, Buffett says he does not invest in a company unless he can see how it will be making money five or ten years from now. He has said that he is not sure how a tech product will be doing in a few years but has a fair idea that Snickers bars and Coke will be popular and profitable.

Matching the Market Instead of Beating It

Buffett is famous for saying that anyone who bets against the American economy and American industry is crazy. He has also said that by the year 2100 the S&P 500 will be a million. For those willing to stay the course and trust the market there are profits to be made. FT Advisor discusses passive strategies for long term gains.

Passive investing has become the strategy of choice for thousands of investors. Satisfied with duplicating market returns instead of beating them, these investors buy index trackers or the like and own tiny pieces of thousands of stocks, earning returns from the upward trajectory of corporate profits over time via the stock market.

Observers need only to look at the industry flows of the past few years to judge how significant index investing has become. Yet by definition these strategies will only ever perform in line with their index, minus the small cost of investing.

Are you a passive or active investor? Read our article and see if you should follow Buffett’s investments or his advice.

Does Following Warren Buffett’s Investments Really Do Any Good? DOC

Does Following Warren Buffett’s Investments Really Do Any Good? PDF

Does Following Warren Buffett’s Investments Really Do Any Good? PPT


What Companies Will Do Better for You than Amazon or Netflix?

As an overpriced market shows signs of a correction where can you put your money next? What companies will do better for you than Amazon or Netflix? We recently wrote about if there are any investment bargains these days and looked at small cap stocks, offshore investing and little-followed stocks where you can be ahead of the pack. CNBC looks at life sciences stocks that could make Amazon and Netflix look dull.

The obscure S&P life sciences subsector is up 41 percent this year compared to the less than 36 percent gain in Facebook, Amazon, Netflix and Alphabet, on an equal-weighted basis.

These companies profit from the volume of new-drug investigations and lab tests and favorable demographics without the direct risk of drug-price controls or an Obamacare repeal.

It’s a dream growth-investor sector but valuations are at the very high end of the stocks’ own historical range.

While high tech has the FANG stocks the life sciences sector has TAMP which stands for Thermo Fisher Scientific, Agilent, Mettler-Toledo and PerkinElmer. These stocks as a group have a lot going for them.

More drug investigations and approved treatments, of increasing complexity, are expected. The booming field of immunotherapy development is a growth engine in itself, requiring complex material-handling and storage processes.

It all nets out to a dream growth-investor arrangement: Long-lived demographic forces, resistance to the economic cycle, stable business-to-business supply relationships, global distribution, and a “razors and blades” recurring-sales model.

The Street lists its top 10 life sciences stocks.

  • Thermo Fisher Scientific Inc
  • Waters Corp
  • Charles River Labs Intl Inc
  • Icon PLC
  • VWR Corp
  • Agilent Technologies Inc
  • Mettler-Toledo Intl Inc
  • Cambrex Corp
  • Quintiles IMS Holdings Inc

Life sciences are the sciences concerned with the study of living organisms, including biology, botany, zoology, microbiology, physiology, biochemistry, and related subjects. The field is more than pharmacology and new drugs and includes things like stem cell cloning for organ repair and replacement and the testing and delivery systems needed to make these new technologies work. This branch of science may deliver a way to replace damaged insulin secreting cells of the pancreas and thus cure diabetes or repair damaged heart muscle after heart attacks. Joint replacement could become a thing of the past as stem cell injection causes hips and knees to repair themselves back to the state of a young person.

How Do You Invest in These Companies?

The problem for an investor in the life sciences is that no one knows which discovery will turn into a successful and profitable treatment. To the extent that you possess unique knowledge in this area you may wish to pick and choose individual stocks. The alternative is to invest in an ETF that tracks S&P 500’s life sciences tools & services subsector.

As the 5 year graph of this sector in Google Finance shows these stocks as a group have tripled in value over the last five years. Considering the virtually unlimited promise of new scientific discovery there is no reason to doubt a similar growth in the next five years.

What Companies Will Do Better for You than Amazon or Netflix? DOC

What Companies Will Do Better for You than Amazon or Netflix? PDF

What Companies Will Do Better for You than Amazon or Netflix? PPT

Are You a Passive or Active Investor?

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. Are you a passive or active investor? Do you just let the market do your thinking or do you do intrinsic stock value analysis of the items in your portfolio? According to CNBC active is now outpacing passive investing.

In the perennial race between active and passive investment management, there are signs of a shift. After several years of bringing up the rear, active performance has outpaced passive so far in 2017. Various factors suggest that it could stay out front for a few years.

This year has been the best for active fund performance since the bull market began, as it has bested passive more than half the time. About 54 percent of active managers have beaten their benchmarks overall so far in 2017; about 60 percent did so in July.

The longest bull market since World War II has been driven by these big cap stocks: Facebook, Apple, Amazon, Microsoft, Google and Johnson & Johnson. When the time comes for a correction involving these market leaders investors will look elsewhere for profits and that will be the work of active investing and use of fundamental analysis of individual stocks. Active investing is more work than passive but when passive investing loses money active is your only choice.

Mid Cap Stocks Make Money Too

When the big cap stocks rally they are a great place to be but mid cap stock investing can be profitable too.

We suggest that you think of mid cap stock investing as the Goldilocks approach to investing. To a degree large cap stocks may be too large and done with rapid growth. Small cap stocks may be too risky. And mid cap stock investing may be just right. Before looking more closely at mid-cap stock investing, what is market capitalization and how is this categorization useful to investors? Market capitalization (market cap) is the total value of shares of a publicly traded company. Multiply share value times number of shares and you get the market cap of the company. A mid cap company has a market capitalization of between two and ten billion by most definitions.

Passive investors might consider a fund that tracks the Russell Mid Cap stock index. Alternatively an active investor can invest in a handful of well-chosen mid cap stocks and do just fine. US News lists their 7 best mid-cap stocks. Here are their suggestions.

  • Take Two Interactive Software (TTWO)
  • National Beverage Corp. (FIZZ)
  • PRA Health Sciences (PRAH)
  • Stamps.com (STMP)
  • Dave & Buster’s Entertainment (PLAY)
  • J2 Global (JCOM)
  • Match Group (MTCH)

Few analysts cover these stocks than cover the high tech large cap darlings. That gives you the active investor the opportunity to spot bargains before the rest of the market and profit before everyone else catches on.

Are You a Passive or Active Investor? DOC

Are You a Passive or Active Investor? PDF

Are You a Passive or Active Investor? PPT

Weakening Dollar Makes Some Investments Attractive

The US dollar is on a persistent downward slide. Investopedia notes that the greenback has broken a technical support level and could fall a lot more. The dollar’s plunge is, however, good for other investment opportunities.

The U.S. dollar Index has broken a critical technical support level that could lead to a sharp decline, according to a technical analysis, falling as much as 13 percent from current levels. That retreat promises to boost stocks, oil, gold and affect other asset classes.

This is a dramatic turnaround from a few months ago when U.S. Treasury yields and the dollar jumped following the election of Donald Trump as President on November 8. Back then, investors anticipated an accelerated expansion of the economy at a pace of 3-to-4 percent yearly. But optimism has faded that Trump can achieve this goal anytime soon, if at all. [You can] couple that with the Fed’s plans to scale back the pace and size of rate hikes, which has caused yields, and therefore the dollar, to reverse.

Investments that go up in dollar value in this case are ADRs (American Depositary Receipts), gold and other precious metals, oil and oil stocks and US multinationals who gain much of their income from sales offshore. And for those with the capital and know how foreign direct investment becomes attractive.

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.

The article is from 2014 but the World Bank has a current version.

Foreign direct investment, net inflows (BoP, current US$)

International Monetary Fund, Balance of Payments database, supplemented by data from the United Nations Conference on Trade and Development and official national sources.

You can invest offshore and simply take advantage of business opportunities in a growing economy or you can take advantage of exchange rates. Years ago we suggested that one might invest in Colombia and the peso. What we wrote then is still true today as the dollar weakens.

If ever the famous Baron Rothschild “blood in the streets” quotation about investing were to apply in the later 20 th and early 21 st century, it would apply in Colombia. Colombia is emerging from a three generation long period of civil strife. The civil war in Colombia began in the 1950’s. Rebels demanded land reform and the return of confiscated property to poor farmers. In more recent years surviving rebel groups had been linked to cocaine trafficking and kidnapping. In the last decade or so rebels have been largely driven from the cities and peace talks have started. It could be that the time has come to invest in Colombia and the peso.

Since we wrote this article in 2012 two things have happened. First, and most important for the people of Colombia, peace between the government and rebel groups has been achieved. Secondly the price of oil has fallen. The Colombian peso is closely tied to the price of oil. Thus the peso trades at about 60% of its usual value versus the dollar. If you invest in a country like Colombia when its currency is weak you can sell your investment when the currency is strong and profit first and foremost on the improved exchange rate!

Weakening Dollar Makes Some Investments Attractive DOC

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Nothing Seems to Scare Investors These Days

The market has been going up and many stocks seem overpriced. Then back to back hurricanes hit Texas and Florida as the crazy dictator in North Korea develops nuclear weapons and threatens his neighbors. One might expect one of more of these issues to be the straw that breaks the camel’s back and sends the market into correction. But nothing seems to scare investors these days. The Guardian notes that markets hit record highs after short lived concern about hurricanes and nukes. All of the details of damage from storms and potential war on the Korean peninsula do not seem to stack up to continued earnings progress. Business Insider writes that Goldman Sacks offers two reasons why the market is safe from a correction.

Goldman says fear not, for a couple of key factors are still working in favor of a prolonged stock market expansion.

The first is a lack of investor euphoria – the type of unabashed confidence that has historically left bull markets vulnerable to sharp downturns. Goldman cites cash positions of 3.2% for mutual funds, which is in line with the historical average. If there were an overabundance of confidence, this measure would be far lower, with more capital in play.

A second factor that should keep the stock market afloat is persistent US economic expansion, Goldman says. The firm specifically cites strong monthly job growth, rising wages, confidence at its highest level since 2001, and household balance sheets that are their strongest since 1980.

In addition earnings are expected to go up again next year and companies themselves don’t see their stocks as overvalued as they are busy repurchasing shares.

How about Offshore?

CNBC reports that there are buying opportunities in European stocks after a 10% rise in the value of the euro.

A recent correction in European stocks due to the strength of the euro is a buying opportunity for investors, according to a new report from Barclays.

The research states that the 5 percent decline in European stocks driven by the 10 percent appreciation in the euro may appear justified. The pan-European Stoxx 600 hit a two-year high in May but saw losses as risk sentiment turned sour on geopolitical tensions. The index is down nearly 5 percent over the last three months.

So, if you still have doubts about the strength of the US market you may want to gaze across the pond and take advantage of stocks in Europe that have fallen 5% or more due to a stronger euro.

Asian markets are closer to the threat of North Korea and respond more strongly to threats from the crazy dictator than markets in North America or Europe. Nevertheless Southeast Asian stocks were mostly higher as North Korea was quiet according to Reuters.

Most Southeast Asian stock markets ended higher on Monday on relief that North Korea did not conduct further missile tests when it celebrated its founding anniversary on Saturday.

The United States and its allies had been bracing for another long-range missile launch following multiple such launches in recent weeks that heightened tensions globally.

“With North Korea seemingly holding back on its ICBM test for now, there is a small degree of risk relief in the market, resulting in the paring of long positions in safe havens,” Mizuho Bank said in a note.

Despite various threats to the markets stocks are still going up as the economy moves forward and earnings support valuations.

Nothing Seems to Scare Investors These Days DOC

Nothing Seems to Scare Investors These Days PDF

Nothing Seems to Scare Investors These Days PPT

What Should You Invest in After Hurricanes Harvey and Irma?

As hurricane Irma bears down on the Caribbean with Florida in its sights are there stocks you should be selling and are there stocks you should buy? The Washington Post writes that Korea and back to back major hurricanes have driven the market down. As stocks skid over worries what should you invest in after hurricanes Harvey and Irma?

Major stock indices closed down more than 1 percent Tuesday as traders worldwide reacted to a rapid escalation of the North Korean nuclear crisis, a second powerful hurricane barreling toward U.S. shores in as many weeks and a looming political fight over the increase in the national debt ceiling.

Financial stocks and insurance companies whose balance sheet could be bludgeoned by another hurricane were among the hardest hit.  Conglomerate Berkshire Hathaway, which is heavily bent toward insurance revenues, was down nearly 2 percent. Goldman Sachs Group and JPMorgan were down 3 percent and 2 percent respectively. Bank of America was down more than 3 percent as well.

Many investors are investing in gold as a hedge against risk but US treasuries are also up as others flee the stock market. Regarding the hurricanes many stocks will do well because of rebuilding and reinvestment related to hurricane damage. Those in the path of the storms who suffer damage are exceptions. CNBC and Cramer’s Mad Money notes that as Texas rebuilds after Harvey certain stocks will do well.

Cramer expects potentially tens of billions of federal dollars to flood Texas as the waters recede, especially because it is such a largely Republican state.

The massive reclamation project in Houston will likely deliver a boost to an array of companies related to rebuilding, the “Mad Money” host said.

From companies dealing in homebuilding materials – think Weyerhaeuser, Louisiana-Pacific and USG – to road aggregates – Martin Marietta Materials’ wheelhouse – to roofing – the specialty of Owens Corning and Beacon Roofing – Cramer is anticipating a lift across the board.

While large construction and supply companies will benefit across the board so will the likes of Home Depot and Lowe’s for do it yourselfers who are fixing up lesser damage. Also Houston the flooding damaged as many as half a million cars and trucks. That will be a lot of sales for local dealers and for the auto industry.

Big Oil

How about oil stocks? After all it was Houston that got hit by Harvey. The Motley Fool speculates on what hurricane Harvey means for oil stocks.

As Harvey approached the Gulf Coast, companies were forced to take immediate preventative measures. These included shutting down refineries on the Texas Gulf Coast, where more than 25% of the nation’s refining capacity is located.

Overall, Harvey knocked out more than 10% of the country’s refining capacity.

Besides refineries, many offshore oil platforms in the Gulf of Mexico had to be evacuated to ensure worker safety or shut down due to pipeline issues. Anadarko, for example, had to evacuate four of its 10 Gulf platforms and shut down four more. As of Friday, the U.S. Bureau of Safety and Environmental Enforcement said workers had been removed from 86 of the 737 manned oil and gas platforms in the Gulf. Onshore operations were also affected: ConocoPhillips ceased all of its operations in the inland Eagle Ford Shale.

Many companies will lose revenue on a temporary basis but will recover. Refiners will see better profits during the temporary rise in the price of gasoline.

What Should You Invest in After Hurricanes Harvey and Irma? DOC

What Should You Invest in After Hurricanes Harvey and Irma? PDF

What Should You Invest in After Hurricanes Harvey and Irma? PPT

How Much of a Threat is North Korea to Your Investments?

The North Korean nuclear threat is in the news again with more testing of bombs and launching of missiles. The leader of North Korea seems bent on developing these weapons and no one wants to call his bluff for fear of starting a war on the Korean Peninsula. Meanwhile how much of a threat is North Korea to your investments? The Telegraph writes about how this situation affects financial markets.

Rising tensions around North Korea after it announced its sixth test of a hydrogen bomb has sent investors switching out of equities and searching for safe havens in the form of gold and the yen.

In South Korea, where Boris Johnson has warned that the capital Seoul will be “vaporized” by a nuclear threat, the Kopsi index fell by 1.19pc, or 28.04 points, to end at 2,329.65 points.

Supposedly North Korea’s leader wants to stay in power and sees a nuclear arsenal deliverable by ICBMs as his protection. However, some military analysts now are saying that he may want more. Where is this going and how will North Korea affect your investments?

“Like a bad horror movie, the North Korea saga intersperses moments of calm, with occasional action to jolt you out of your chair,” said ING’s head of Asian research than Rob Carnell.

“But we have been here now many, many times,” he added. “Unless this is the precursor to US military action, which we doubt, then in a little over a day or two, tensions will calm again, making this a good buying opportunity for investors with a strong enough nerve.”

How much of a threat North Korea is to your investments depends on what you are invested in.

US Stock Market

The US stock market is overbought and due for a correction. Add a ramping up of tensions in Korea to Hurricane Harvey and maybe hurricane Irma wreaking havoc somewhere on the US Eastern seaboard and the market could correct dramatically. On the other hand defense stocks would do rather well.

The ten largest US defense contractors account for 1 percent of the US domestic economy. Investing in defense stocks means buying stock in giants such as Lockheed Martin, Boeing with its Boeing Defense, Space and Security division, Northrop Grumman Corporation and, General Dynamics. It also can mean buying stock in Raytheon Company, the world’s largest producer of guided missiles or L-3 Communications Holdings, Inc. which provides the likes of NASA, intelligence agencies and the military with command, control, communications, intelligence, surveillance and reconnaissance (C3ISR).

Perhaps it is time to add a little defense to your portfolio.

Safe Havens

The Yen has gone up in value as it is considered a safe haven currency. This seems a little strange as Japan is right next door to Korea and would get involved if there were an armed conflict. Investing in gold is always popular when there are global tensions and today bitcoin will probably go up too. But be careful with cryptocurrencies when war breaks out in the cyber world as well as the real

How Much of a Threat is North Korea to Your Investments? DOC

How Much of a Threat is North Korea to Your Investments? PDF

How Much of a Threat is North Korea to Your Investments? PPT

How Much Should You Pay to Protect Your Portfolio?

The stock market seems to have peaked and may be ready for a substantial correction. How much should you pay in terms of lost opportunity in order to protect your portfolio? Bloomberg writes that many investors are moving from stocks to bonds which they describe as a bear market signal.

Risks are stacking up for markets attempting to recover from the latest provocation by North Korea and the mounting damage of Tropical Storm Harvey.

Citigroup Inc. strategists including Jeremy Hale cite “worrying developments” that may signal the approach of a correction in stocks, while Commerzbank AG finds growing evidence of bearish sentiment in bond funds.

They cite the increased number of puts versus calls in the options market, technical factors that typically precede market corrections and an increased appetite for bonds, especially government debt.

Equity investors are willing to pay more for protection against losses than gains. So-called equity implied volatility skews are above the 10-year average, according to the Commerzbank strategists. This implies they are willing to pay more for downside protection than upside potential compared to the last decade.

Investors have stayed in an overpriced market because they believed that economic conditions would improve and because earnings kept improving for stocks like the FANG tech darlings. But there comes a time when enough is enough. And those who are willing to forego that last iota of opportunity in exchange for portfolio protection typically preserve their gains and can reenter the market looking for bargains after a correction plays out. How much should you pay in terms of lost opportunity to protect your portfolio?

Sectors at Risk

Who would have thought that Hurricane Harvey would rise to a category 4 as it hit shore and that it would park itself over the Texas coast dropping several feet of rain on some areas? In an overpriced market it only takes an isolated but significant event to hurt stocks. The Los Angeles Times notes that insurers and energy stocks have been hit by the storm.

Insurance companies and oil drillers stumbled while refineries rose along with gasoline prices.

Investors mostly focused on Harvey, initially a hurricane before becoming a tropical storm, which continues to hit parts of the Gulf Coast with historically heavy rains. Large parts of the energy and petrochemical industries are based there, and companies with a lot of stores in the area stand to lose business. Although gas-price spikes will be temporary, other effects of the storm will last years.

“There will be ripple effects that everyone is going to feel,” said Jack Ablin, chief investment officer for BMO Capital Markets. He said that could include higher insurance premiums, as the storm is likely to cause tens of billions of dollars in flood damage. Ablin added that the storm might also affect interest rates, as the Federal Reserve might hesitate to raise rates if officials think the storm will slow the economy significantly.

Investing in a rising market becomes self-sustaining. Stocks go up because they went up and new buyers expect more of the same. So long as earnings are reasonable this can go on until the market is overpriced by measures of intrinsic stock value. Considering an already overpriced market there are two options to protect your portfolio. One is to buy put options at increasing prices as everyone is doing that now. The other is to buy secure bonds before the prices go up due to increased buying by those fleeing a collapsing stock market.

How Much Should You Pay to Protect Your Portfolio? DOC

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