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Why Is There a Flight to Quality Investments?

The US stock market is down a bit as investors are flocking to quality stocks, as reported by CNBC. What is going on? Why is there a flight to quality investments?

Both before the market’s October sell-off and in the two-week bounce, investors have shown a clear preference for “quality” stocks.

Not the same as cheap “value” stocks, these are companies with less debt, stable businesses and some defensive characteristics in a tougher market or economy.

A grouping of such companies by Citi surfaced the likes of Walmart, McDonald’s, Pfizer, Procter & Gamble, Amgen and Quest Diagnostics.

While not predictive in itself, this pattern is one seen in the run-up to a bear market.

So, what is a quality stock? CNBC notes this.

Quality has no single, strict definition. But the common traits are a sturdy business not reliant on a strong economy; high and resilient profitability; and a strong balance sheet unburdened by much debt.

The point is that many investors are hedging their investment risk as the bull market gets older and older, the trade war does not appear to be going away, and a House of Representatives controlled by Democrats may be a thorn in the side of the Trump administration.

Does a Quality Investment Need to Be a Stock?

An investment that is highly likely or even guaranteed to make a profit and is very unlikely to or guaranteed not to produce a loss should be considered a quality investment. When the risk of an economic downturn or market collapse rears its ugly head, you might just want to choose an investment that will not lose money no matter what happens. In our article we noted that bank deposits are protected by Federal Deposit Insurance. US Treasuries are protected by the credit of the US government. High grade corporate bonds are quite safe. And, long term investing in value (quality) stocks is a way to preserve capital during a downturn and a experience gains as the economy and market improve.

Why Is This Happening Now?

Every investment niche has a cycle. Gold, real estate, agricultural commodities, stocks and any others, all go up and then come down. A steadily growing economy, low interest rates, vibrant global trade, and stability in the social and political arenas lead to higher values in all of these investment niches. But, it would appear that many investors think that the cycle is running its course. As an example, the S&P 500 is up only 4% this year despite the Trump tax cuts, repatriation of billions in offshore cash, a twenty percent increase in earnings, and about a trillion in stock buybacks. What happens in the coming months when the Fed continues to raise rates and a trade war with China starts to damage US agriculture? Folks may not be leaving the stock market, but a lot of them are repositioning themselves with expectations of a different looking investment scene in the coming months and perhaps years.

Is This an Investment Sea Change or a Just a Bump in the Road?

If you are a passive investor and only put your money in index funds, you need only pay attention to the general health of the economy and the sector in which you are invested. But, if you are heavily invested in individual stocks, you need to understand how that company makes its money and how it will continue to do so into the future. Years ago Kodak was a secure investment. It had invented the personal camera and dominated the production of camera film and its processing for photos. Then digital came along and Kodak’s business plan did not work anymore.
Apple stock dropped a few percent just this morning. One of their suppliers, Lumentum, reported that a large customer was reducing orders. The “bump in the road” interpretation is that Apple is just adjusting for a slower part of their business cycle. The “sea change” interpretation is that there is not much more room for Apple to expand their market share and that technological innovation elsewhere in the tech world will start doing damage to their business plan.

Why Is There a Flight to Quality Investments? PPT


Reward and Risk in Alternative Investments

The point of investing is to make a profit. Some folks are happy to stay a percent or two ahead of inflation and simply not lose any of their hard-earned money. And others would prefer to multiply their holding every few years. How do you find success in making more money and not taking on more risk? One of the approaches that have worked is to pool assets and then invest in a broad range of more risky but better paying alternative investments. In regard to reward and risk in alternative investments, we would like to look back a few years to Michael Milken and junk bonds and then fast forward to today and a company that is selling alternative investments and wants sell them to masses.

Michael Milken and Junk Bonds

When he was only a 20-year-old student at the Wharton School of Business, Michael Milken read something written by a member of the Federal Reserve Board and over the years put the idea into action. Companies that were poor investment risks had to pay much higher rates of interest in order to sell their bonds. Investors demanded a higher return because of the increased risk that the company would default on its debt. But, if an investor purchases a wide range of these bonds, the rate of return was such that, even with defaults, the total investment made a better return than high grade bonds.

Business Insider wrote an article about Milken that included his conviction for securities fraud and time in prison followed by a life of philanthropy. They describe the invention of the modern junk bond as the best thing to come to the world of finance in recent memory.

To this day, high-yield bonds, as they are now more genteelly known, remain a brilliant innovation because they elegantly solve a simple yet ubiquitous problem: They give companies with less than stellar credit ratings access to capital.

These bonds created and grew entire industries, such as wireless communications and cable television, just as they created and grew immense pools of wealth. Their invention combined with the packaging of credit card receivables, mortgage payments, and car loans into securitized products that loosened lending for individuals has done nothing less than bring about the democratization of finance.

In the case of high yield bonds, it turned out that by packaging them in large and diverse groups that the risk was simply part of the cost of doing business and these investments were more profitable than bonds issued by healthy blue chip companies. This idea has reemerged and brings us to a look at reward and risk in alternative investments today.

Is It Investor Populism or a Con Job?

Bloomberg just published an article entitled Populism Comes to Wall Street. The article is about a company named YieldStreet, their investment products and how they would prefer that the SEC relaxed its definition of a “qualified investor.”

One of YieldStreet’s founder, Milind Mehere is quoted as saying this.

“If we don’t change fundamentally how we save, invest, and actually make money as a society, there will be anarchy in 20 or 30 years,” he says.

The company says that they will democratize high finance and bring investment opportunities usually reserved for billionaires and hedge funds to the average investor. One of the keys would be to use a crowdfunding approach.

How do this company and its investment ideas compare to Milken’s development of the junk (high yield) bond industry that revolutionized finance? We know from hindsight that the junk bond idea works. What YieldStreet wants to do is in its early years.

Founded in 2015 by Mehere and two other Wall Street entrepreneurs, YieldStreet has allowed investors to put more than half a billion dollars into exotic debt securities. More than 80,000 people have signed up to receive its offering notices. Since inception, the investments have an expected internal rate of return of almost 13 percent and to date haven’t lost any principal. In the same period, the S&P 500 appreciated an annualized 9.3 percent. With many individual investors eager to juice their returns, some YieldStreet offerings sell out in seconds.

The thing that is holding this company back from expanding is the Security and Exchange Commission or more specifically its accredited investor rule. Investopedia defines accredited investor.

An accredited investor is a person or a business entity who is allowed to deal in securities that may not be registered with financial authorities. They are entitled to such privileged access if they satisfy one (or more) requirements regarding income, net worth, asset size, governance status or professional experience.

The point of the law is to protect naïve investors from losing their money. A rich investor may be naïve but has the protection of abundant wealth. And, a professional investor will have knowledge and experience needed to sort out and avoid dangerous investments.

To the extent that this sort of investment parallels junk bond funds, then excluding regular investors seems undemocratic and exclusive. But to the extent that investors need to have more information and expertise to invest in such a vehicle, the accredited investor rule is protective.

What Kinds of Investments Does YieldStreet Offer?

This gets to the important part of the discussion of reward and risk in alternative investments. Can you package them in such a way that the sheer earning power of a bunch of them offset an occasional loss?

Mehere says YieldStreet has its legal team looking at a fund structure in which nonaccredited investors may participate.

This all makes some people nervous, because what YieldStreet sells is unusual. Many of its offerings involve litigation finance, in which investors front money to law firms or plaintiffs hoping for a big settlement. More recently the company has moved into marine finance, allowing investors to participate in loans for cargo vessels that transport dry-bulk goods such as coal or grain. Or they could jump into a deal in which vessels are acquired and sold for scrap. Each offering is backed by collateral, but sometimes that’s a litigant’s contractual obligation to pay investors back-if there is a settlement-or the scrap value of a ship.

A bit of investigation by Bloomberg reveals a concern. In at least one instance, the guarantee of a borrower paying on the debt is said to be backed by their substantial wealth. But, there is no proof of any wealth!

Another issue seems to be that the company’s owners are using this vehicle do business with separately owned businesses that they (the YieldStreet owners) own or control. There is an issue of how they track and control any conflict of interest.

Not everyone is excited about this opportunity.

“The percentage of accredited investors for whom they are appropriate is quite small,” says Barbara Roper, director of investor protection at the Consumer Federation of America. “They like to make it sound like it’s populist,” she adds, “but this doesn’t belong anywhere in the portfolio of the typical retail investor.”

It is our opinion that this may be a way for the average investor to make more money on his investment. The proof will be in how it does over the years and in how well the company avoids using itself as a cash cow for its individual owners and their business interests.

Reward and Risk in Alternative Investments PPT


Trade War Damages Investments in Agriculture

Over the years much of American agriculture has become a highly leveraged and high cost of entry business. How the trade war damages investments in agriculture is compounded by these facts. A recent article in The New York Times focuses on the loss of soybean markets in China due to the trade war and the damage that is doing to North Dakota soybean growers. Many investors have never visited, much less worked on, a farm or have any idea about how US agriculture has changed over the recent decades.

Mechanization and Consolidation of US Farms

The Midwestern USA is one of the breadbaskets of the world. The climate and soil are ideal for growing things and the USA is a major producer of corn, soybeans, wheat, cattle, pork, and poultry. Over the decades, starting with farm implement inventions in the 19th century, farming has become increasingly mechanized. A farmer with more farmland and the equipment to cultivate, plant, fertilize, deal with weeds, and harvest more efficiently makes a better profit. Since a big tractor can just as easily be used to plow and plant 320 acres instead of 160 acres (half a square mile versus a quarter of a square mile), a farmer with more farmland can be more efficient and more profitable than a smaller farmer. This has led to bigger farms, more investment, and greater investment risk in American agriculture. Here are just a couple of examples.

Bigger Farms and More Investment Required

In Iowa the average farm size in 1950 was 169 acres. By 2002 the average farm size was 350 acres. (Iowa State University)

The average price per acre of medium quality farmland in Iowa in 1950 was $300 and by 2010 an acre sold for just over $8,000.

In North Dakota the number of farms was reduced by half between 1950 and the average farm size increased by 647 acres to 1241 acres. (SoyTransportation.org-Rural Infrastructure)
North Dakota farmland sold for less than $100 an acre in 1950 and now the price is around $1,900 an acre.

The cost of running a farm is demonstrated by this graph from SoyTransportation.org-Rural Infrastructure.

 

To understand how the trade war damages investments in agriculture, look at the costs agricultural production.

Farm Costs by Year North Dakota

 

This is a composite of all farm expenses for the years 1949 to 2010. The “bottom line” is that total costs of operation across the state went from around $300 million in 1950 to the $6 billion to $7 billion range by 2010.

Crop Prices, Markets, and Farm Survival

When the price of corn, soybeans, or wheat goes up dramatically, farmers tend to plant more of that crop the next year. The law of supply and demand being what it is, when there is more corn, soybeans, or wheat produced the next year, the price does down. And, since other nations like Brazil, Argentina, Ukraine, China, Australia, and nations in Europe all grow these crops, their production has be taken into account as well.

The ideal situation is that you own your farmland, buildings, and equipment without any debt. So, you “only” need a crop price that is high enough to cover your production costs and then you have a profit. Unfortunately, crop prices go up and down and they can do so dramatically. A good many farmers have been ruined by a bad year with low prices and high production costs. Those with money or credit survive, buy more farmland, and thus farms get bigger while there are fewer farmers. But, how is it that the trade war damages investments in agriculture?

Will the Trade War End or Will the Soybeans Rot?

The New York Times published an informative article about the dilemma of North Dakota soybean farms and the associated businesses that support soybean production, storage, shipping, and sales. The bottom line is these farmers need to trade war to end before their soybeans rot because it has been a great production year that has outstripped storage capacity.

Farmers here in Cass County have prospered over the last two decades by growing more soybeans than any other county in the United States, and by shipping most of those beans across the Pacific Ocean to feed Chinese pigs and chickens.

But this year, the Chinese have all but stopped buying. The largest market for one of America’s largest exports has shut its doors. The Chinese government imposed a tariff on American soybeans in response to the Trump administration’s tariffs on Chinese goods. The latest federal data, through mid-October, shows American soybean sales to China have declined by 94 percent from last year’s harvest.

In the last 20 years North Dakota farmers have increased acreage devoted to planting soybeans from 450,000 to 6,400,000. Along with this increase in production has come the construction of millions of dollars-worth of grain elevators (huge buildings for storage), more loading facilities, more hundred-car-trains to carry the soybeans, and more farm implements used plant and harvest soybeans.

If you look at the graph from SoyTransportation.Org, you can appreciate how the total costs that go into modern agricultural production have led to a very high cost of entry and very leveraged business. A young farmer simply cannot afford to buy the land and equipment to start in a business like soybean farming. And, if he does have some capital, he runs the risk of two three bad years when he starts out and being ruined essentially before he starts. There is an old joke in farm country.

What would you go if you inherited a million dollars?
Well, I guess I would go into farming until the money was all gone.

It is a measure of the risk of investments in farming today that many that grew up on farms did not stay there. However, they kept the land. The ideal situation for these folks is that they receive a rent check in the mail every March 1 while the farmer working their works the land and either profits from a good year or sees losses when a trade war takes away markets that took decades to gain access to.

According to the Times, the trade war may do lasting damage to soybean growers.

“I’ve been to China 25 times in the last decade talking about the dependability of U.S. soybeans,” said Kirk Leeds, the chief executive of the Iowa Soybean Association. By undermining that reputation, he said, “We have done long-term damage to the industry.”

Although the last couple of years were very profitable, younger farmers with more debt are in trouble.

But the mood is souring quickly. Mr. Gebeke’s wife, Debra, a retired psychologist, has returned to work at North Dakota State University, to counsel distraught farmers. Public health officials in North Dakota, already confronting a recent rise in suicides, are concerned about the impact of falling prices, particularly on younger farmers with high levels of debt.

Investments in agriculture can be very profitable over the years but typically one needs to have sufficient capital to ride out down markets. And, American agriculture needs to be able to keep the markets that it has cultivated over time.

Trade War Damages Investments in Agriculture PPT


Are Buybacks Keeping the Bull Market Alive?

The bull market has had a historic run. And, even as it ages and becomes more volatile, the S&P 500 has still not had the substantial correction that has been predicted by many. One factor that keeps stock prices from falling too far is stock buybacks. We are wondering, are buybacks keeping the bull market alive? And, what else are they doing?

Stock Buybacks

Just a couple of months ago Forbes wrote about stock buybacks by Apple and other companies. The article is informative and helps shed light on one of the reasons that the market and especially the FANG stocks have not had a significant correction.

Stock buybacks were outlawed until 1982, when the SEC changed its rules to allow companies to repurchase shares on the open market, although doing so can artificially boost the stock price. CEOs and other corporate executives benefit the most from this behavior because their compensation, unlike that of rank-and-file workers, is closely tied to stock performance.

Between 2015 and 2017, U.S. publicly traded companies across all industries spent three-fifths of their profits on buybacks. The low-wage restaurant, retail, and food manufacturing industries spent 137%, 79%, and 58%, respectively. The restaurant industry borrowed money or used cash on its balance sheet to exceed the amount of its bottom line.

The argument that Forbes makes is that money which could have gone to higher wages or other employee benefits has gone to propping up stock prices. This disproportionately benefits upper levels of management. Our take on the practice is that buybacks are keeping the bull market alive by artificially inflating stock prices.

Stock Price versus Market Cap

When the market would normally take the price of a stock downward, stock buybacks prop up the stock price. However, this practice reduces the number of shares of stock available. Thus, if a company buys back 10% of its shares in order to increase the stock price by 9%, the market capitalization of the company, its total worth, is unchanged. If the company buys back 10% of its shares just to keep the stock price the same, the market cap of the company falls by 10%. If you have kept your shares in that company you now own a larger proportion of a company that is worth less than before. Stock buybacks are a common tactic used by old and successful companies with lots of cash that are now failing as their business plans become dated or simply because the economy is taking a downturn.

Buybacks and the Economy

The Forbes article goes on to note that when companies use buybacks to prop up stock prices and compensation for upper management the same buybacks rob workers of the pay increases or bonuses that otherwise would funnel into the economy and help everyone.

How Long Can Buybacks Prop Up a Stock Price?

Buybacks will continue so long as a company has the cash or credit to buy back its own stocks. How long that lasts is also determined by the needs of the company to simply run its business. As profits sag, a company will eventually need to use its resources to run the business and not prop up the stock price. At that time one might expect a more substantial correction than might normally have happened because the market forces poised to take the stock price down will be unopposed by the artificial action of buying back stocks. In other words, we might expect a stock to crash instead of correct when it has been supported artificially by buybacks for an extended period. Investors who are now leaving various stocks are likely looking at intrinsic stock value and not stock price to make their decisions.

Bad Technicals

Market Watch adds to the concern about a pending market correction or worse with an article about damage done to the stock market in recent weeks.

Acampora said he believed that the entire stock market itself would go into a bear market and said the current dynamic in the market was eerily similar to the stock-market crash of 1987, when the Dow slide a historic 22.6% in a single day on Oct. 19 of that year.

When we see the market fall on day and recover the next, one might think that solid long term investors are stepping in to take advantage of lower prices. However, it would appear that companies are using the downturns to buy back stocks at a lower price and especially to prop up the stock price. In this sense it would appear that buybacks are truly keeping the bull market alive and the time will come when sellers overwhelm the ability of the Apples of the world to buy back and prop up stock prices.

Are Buybacks Keeping the Bull Market Alive? PPT

Is IBM a Good Long Term Investment?

IBM just used part of its cash hoard plus a lot of debt to buy Red Hat which is a Linux software and cloud computing company. The purchase comes on the heels of a weak quarterly report due to soft software and server sales. And, news of the purchase drove the stock a bit lower. We have ask, is IBM a good long term investment?

International Business Machines

IBM has been around since 1911 and took the name International Business Machines in 1924. The company has been a dominant presence in the world of computing and basic research for decades. Over that time its employees have earns five national medals of science, 10 National Medal of Technology, 6 Turing awards, and 5 Nobel prizes. Inventions from IBM include the SQL programming the language, automatic teller machines, bar codes, DRAM (dynamic random access memory), and many others. The company holds the most US patents for any business.

Through the middle of the 20th century IBM dominated the marker for the large main frame computers that were necessary for large businesses and governmental organization. But, the company was caught napping by the advent of the personal computer and faster and more efficient computer chips and programming. In its attempt to catch up with Apple computer it gave Bill Gates and Microsoft a start by using its operating system for their computers. Gates was quoted as saying that many billionaires were created by the need to fix various inadequacies in the IBM personal computer design.

IBM lost its dominant position in the computing world is the need for its huge mainframe computers diminished. Smaller and networked computers took over the work of large mainframes and then cloud computing took away the need for mainframes in the office. Part of IBM’s purchase of Red Hat is to strengthen its position in the world of cloud computing.

Although IBM with its huge research base and cadre of brilliant scientists was well-positioned to develop things like smart phones and search engine software, they never did and the lead in these areas went to companies like Google, Apple, and not-so-little-any-more Microsoft.

IBM is still an impressive company but does it have a strong future or is the tech world passing it by? Is IBM a good long term investment with is more than 5% dividend?

IBM Shares

Five years ago in 2013, IBM peaked above $200 a share. Today, after a weak quarter and the Red Hat purchase, it is down to $125 a share. The company has had its ups and down over the years but does it have the intrinsic value to justify long term, buy and hold investment?

Over the last thirty years, IBM has steadily rotated out of non-profitable products and services and into products and services where it retains dominance and profitability. But, there is a sense that it is chasing an ever-shrinking set of market niches instead of using its robust research base to create new niches in which it could reassert its old dominance.

What Does Warren Buffett See in This Company?

A major shareholder in IBM is the all-time king of long term investing, Warren Buffett. Forbes looks at Buffett, IBM and long term investing.

There are those that think Buffett’s stake in IBM is curious, not only because of his openly cautious approach to tech over the years but also because of the world’s continuing shift toward cloud computing–and the threat it represents to the makers of computing devices. But Buffett doesn’t make investments without having a concrete reasons for doing so. In his 2011 letter to Berkshire Hathaway shareholders, Buffett explained his foray into IBM as founded on the belief that the company would deliver benefits in the form of billions of dollars in dividends and repurchases over time.

It is useful to recall that when Buffett started out his investment strategy was picking companies that were doing poorly, fixing them up, and then selling after the stock price went up and before the company headed downward again. The strategy was known as the “last puff from the cigar.” If this is what Buffett is doing here, we should watch for when he decides to get out and then all head for the exit.

The long term problem with IBM is that it has not used its brain power to develop new and profitable product lines. For IBM to be a good long term investment, this needs to change.

Is IBM a Good Long Term Investment? PPT

Should You Invest in the FANG on the Correction?

The long-running bull market is starting to correct. We, and many others, have suggested that investors may want to get out of growth stocks and switch to value stocks in preparation for a market crash or at least a painful correction. The rationale is that value stocks are companies with low debt, cash in the bank, and property unencumbered by excessive debt. However, the basis of intrinsic stock value is forward looking earnings. And, the best earnings in recent years have come from tech stocks like the FANG (Facebook, Amazon, Netflix, and Google-Alphabet).

Protected from a Trade War with China

One of the expected contributors to a market correction, or worse, is the evolving trade war with China. We looked at what you can invest in and not get hurt by a trade war.

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.

CNBC quote Cramer of Mad Money who is saying basically the same thing as he suggests that investors buy given-up-on FANG stocks.

The FANG cohort benefits from having very few ties to the Chinese market, Cramer said, with the use of Facebook, Netflix and Google’s services almost entirely blocked by the government and Amazon facing a sprawling competitor in Alibaba.

Second, “the Federal Reserve is bent on squelching inflation wherever it can find it, ” the “Mad Money” host said, referring to the central bank’s rate hike agenda.

“When that happens, the companies with the highest price-to-earnings multiples are the ones that benefit,” he said.

Thus, the growth stocks that had become very pricey will look very attractive after a reasonable correction.

Slowing US and Global Growth

The stock market recently fell on news that both Caterpillar and 3M projected slower growth. Both of these companies have a huge international presence and are bellwethers of the world and US economies. Both of these companies easily qualify as value stocks but both will suffer a bit as a trade war and excessive debt affect economies around the world. In the meantime, people still watch home movies from Netflix, incessantly use Facebook, “Google” information, and buy everything including the kitchen sink via Amazon.com. These companies will be hurt less or not at all as the US-China trade relationship changes significantly.

Is It Time to Buy Facebook?

After years of stellar growth, Facebook is down 10% this year. There are regulatory issues that could affect the stock but it is still a broadly used platform and a money maker. CNBC’s Trading Nation notes that Facebook has probably hit bottom and is a strong buy.

Facebook is the only stock of the group negative for the year. It has dropped 10 percent in 2018, the bulk of those losses sustained after its notorious $120 billion drop in market cap in late July after its worrisome second-quarter earnings statement.

“If the market begins to roll over, you’re actually going to see the Googles and the Netflixes, some of that fast money, the momentum money, start to sell in a little bit of a panic move, but that money has already disappeared from Facebook,” said Maley.

Thus, it may be a good idea to invest in FANG on the correction with the first target being Facebook which may have already hit its bottom.

Should You Invest in the FANG on the Correction? PPT

Defense Stocks for a New Nuclear Era

The USA is about to exit a Reagan Era nuclear weapons treaty with the Russians. This could set off another arms race in weapons of mass destruction. It could also provide profitable investments for defense stocks in a new nuclear era. Zacks suggests two defense stocks to buy if we end up in another nuclear arms race with the Russians and Chinese.

President Donald Trump has decided to withdraw the United States from the landmark nuclear weapons deal signed with Russia in 1987 that banned both nations from owning, producing and test-flying nuclear missiles.

While Trump’s recent decision may not be a welcome move for Russia, it could be a new chapter for domestic defense companies in terms of developing nuclear weapons. Therefore, it might be a good idea to invest in some defense stocks that stand to benefit the most.

The basis of Trump’s move is that Russia appears to be violating the agreement and China is not part of it. Like the prospect of a permanent trade war, this move may have more to do with national defense than with anything else.

The stocks that Zacks suggests are Northrup Grumman and Raytheon.

Northrup Grumman makes advanced products and provides high tech services for intelligence, logistics, reconnaissance, cyber operations, and autonomous systems. They produce, upgrade, and maintain the country’s Minuteman III ICBM force. Their stock is likely to grow 27% by the end of 2018.

Raytheon also has a strong foothold in the high tech world of products and services with military applications. Their focus is largely on integrating high tech solutions and providing advanced services. They are currently partnering with Lockheed Martin to upgrade US nuclear deterrent capabilities with more advanced designs and capabilities. Their earnings will grow by about 30% during 2018.

US Missile Defense Capabilities

The risk of a new nuclear era did not just pop up in the last few weeks. When the USSR was falling apart the concern was that they could not secure their nuclear arsenal against theft or purchase by rogue nations. Ukraine totally removed their nuclear arsenal and had their security guaranteed in a treaty signed by the USA, England, and Russia. Today Russia has annexed Crimea, part of Ukraine, and is supporting separatists in Ukraine’s eastern region. Russian adventurism and secret programs to upgrade their nuclear capabilities have been advancing for several years. Meanwhile, China is flexing its muscles with annexation of islands in the South China Sea and claiming those international waters as their sovereign territory. Meanwhile, the USA has continued to abide by the 1980’s nuclear agreement signed by Reagan and Gorbachev.

Bloomberg wrote an opinion piece earlier this year saying that the US needs a better missile defense. They look at the inadequacy of the US missile defense system.

America’s primary domestic defense system against a nuclear-missile attack is the Ground-Based Midcourse Defense, or GMD, with bases in Alaska and California. More than $40 billion has been spent on this successor to Ronald Reagan’s so-called Star Wars project. Yet it has only 44 “kill vehicles” intended to defend against a small-scale intercontinental attack of the sort North Korea might attempt, and its success rate in testing is only about 50 percent.

During the Cold War, the deterrent used by both the USSR and the USA was that of mutual assured destruction. Both sides had more than enough nuclear weapons to destroy military targets and population centers on the other side, several times over. During the Reagan years the USA started the so-called “Star Wars” program in which the USA developed a missile defense system meant to intercept incoming missiles and destroy them. That system has advanced but is far from fool proof. It did, however, cause the USSR to bankrupt itself trying to keep up and resulted in the fall of the USSR.

Today, it would appear that both Russia and China want to assume more dominant roles in the world and are beefing up their militaries and advanced capabilities. Investors will be smart to look at defense stocks for a new nuclear era as this struggle of global dominance resumes.

Defense Stocks for a New Nuclear Era PPT

How Long into the Selloff Should You Wait to Pick Up Bargains?

The S&P 500 is down 7% within the last month and was down 9% before recovering slightly. Many bears are now convinced that the end of the bull market is upon us and that the market is due for a more significant downturn. Our question is how long into the selloff should you wait to pick up bargains? CNBC writes that the selloff is not over.

“This is the second decline of this year of 5 percent or more and two out of every time we had more than one decline in a year, the second decline was sharper than the first,” Stovall said. The S&P 500 dipped to 2,710 last week, a 7.8 percent decline from its all-time high in late September. In February, the S&P was down nearly 12 percent at its low. “There could be a test of the lows.

Successful long term investors stay in the market through its ups and downs. And successful long term investors are sure to buy at the low points. The point of value investing is based largely in assessment of intrinsic stock value. And, the intrinsic value of an investment is based on its forward-looking earnings potential, not its lowest price as investors pile out of the market to avoid more losses.

How Long Should You Wait?

The market keeps rising and falling. This sort of volatility tells us that many investors are getting out because they think that the bull market has run its course and is ready to crash. And, many investors think the market still has room to run so they are buying on the down-swings. Seeking Alpha writes about whether or not this is the start of a bear market.

This is still a bull market.

The bull market doesn’t have a lot of room left, probably 1 more year.

Leading economic indicators continue to improve, which is long term bullish for the stock market & economy.

The Freight Transportation Services Index is still trending higher. Historically, this leading indicator tanked or swung sideways for many years before bear markets and recessions began.

That having been said, if you believe what these folks are saying, stay in the market a little longer and don’t start looking to see bargains until sometime in 2019. But, is this the only opinion?

Forbes writes about what to do after a stock market crash, so they are thinking this could happen in the near future. They suggest that you consider what will be good long term investments and then pick up bargains when the market tanks.

Think about the products and services you spend your money on. They may be a place to start looking for potential investments. What are the trends today that will continue for years? For example, are health care companies something that could have strong sales for years to come? Perhaps they are worthy of further investment research. For instance, are they undervalued or overvalued? What is their earnings growth rate? Is it sustainable? Is it steady? What is their relative strength compared to their competitors? Are insiders buying?

This is the long term, value investor, intrinsic value approach that has served many so well over the years. If you believe what Seeking Alpha has to say, you have a few more months until there will be bargains available and if you believe Forbes, you should start thinking about long term investments to make when the big correction finally happens.

How Long into the Selloff Should You Wait to Pick Up Bargains? PPT

How to Minimize Your Investment Losses in the Next Recession

The current volatility in the US stock market is reminiscent of the days preceding both the dot com crash and the 2008 market crash that ushered in the Great Recession. It may well be time to consider how to minimize your investment losses in the next recession. The 2008 crash destroyed about $7 trillion in equity value. A crash today might destroy as much as $20 trillion in equity value according to Investopedia.

The recent stock market retreat, which has sent the S&P 500 Index (SPX) down by 5.9% from its intraday high on Oct. 3, has intensified the debate between the bulls and the bears. Outspoken economist, hedge fund manager and market analyst John Hussman is renewing his prediction of a severe market crash that would send major U.S. stock market indices plummeting by 60% or more. He has been warning that stock valuations have been extreme for years, and long overdue for a return to historical norms. Putting this in dollar terms, Hussman recently said that the crash will wipe out $20 trillion of stock market value, Business Insider reports.

Timing a market correction is always difficult. Bears have been predicting this bull market’s demise for years! But all good things do come to an end and that includes rising stock market prices.

Steps to Take to Minimizes Losses when the Market Tanks

Investopedia offers advice from JPMorgan on how to avoid losses in the next recession.

They suggest that bonds will start outperforming stocks as much as a year before the market actually crashes. Rotating some of your profits out of stocks into bonds is their recommendation.
Cyclical stocks will take more of a hit than defensive stocks when the market heads south. Their suggestion is to start moving money out of some of your recent cyclical stock winners into long term growth stocks.

Growth stock prices are based on their earnings. When earnings drop off the stocks without a margin of safety will fall more rapidly than the general market. These folks suggest moving out of growth stocks and starting to buy value stocks.

And, things will get worse in developing markets, especially those economies afflicted by the “resource curse.”

Is This the Time to Buy Gold?

Investing in gold can be profitable if you pick and choose carefully when to buy and when to sell. We wrote about this in 2010.

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.

When we wrote this, gold was trading at about $1,400 an ounce. It rose for a couple of years to trade briefly in the $1,900 range before falling. Today gold trades at about $1,200 an ounce. The best time to buy gold was in the early 1970s during a period of historic inflation brought on by new social spending and the war in Vietnam. The next best time was in 2000 when interest rates plummeted and war raged in the Middle East. In each case, the price of gold steadily rose until economic conditions improved and it became contra productive to hold an asset that has quit appreciating and did not pay dividends or interest.

ow, however, might be a good time to balance your investment portfolio with a gold ETF or mining stock with the understanding that you will hold the investment for a few years and then rotate back to equities, bonds, or even cash.

How to Minimize Your Investment Losses in the Next Recession PPT

How Will the Election Affect Your Investments?

The mid-term elections are almost upon us. It is almost a certainty that there will be a substantial shift in the balance of power in congress. Although smart investors keep their politics and their investment strategies separate, it is still a good idea to consider how the election will affect your investments. In this regard, Forbes has some thoughts about the risk to stocks from the mid-term election.

We currently think there is only one scenario that has a reasonable probability of happening, looking at current political polling. (Yes, we get that polls are flawed but, in the aggregate, they do provide us insight). The highest probability scenario is the Democrats take the House, and Republicans retain the Senate.

Going back to 1934, the President’s party has lost seats in the House 86% of the time in midterm elections.

The bottom line to their argument is that a politically divided congress is worse for investors than when the same party controls both houses. All spending bills must, by law, start in the House of Representatives. But, both houses of congress and the president need to concur for a bill to become law. Divisive issues such as health care immigration will likely be hamstrung for the next two years. Issues such as infrastructure spending, trade, and antitrust law will have some hope of gathering a consensus and getting passed.

Will There Be A Correction and a Recovery?

A couple of months ago we asked if the mid-term elections would cause you to lose money. That analysis ignored who won or lost in mid-term elections and just looked at how the stock market fared afterwards. The insights came from Zack’s Investment Management.

Going back to 1962, the average correction during a midterm election year was an eyebrow raising -19%.
AND
Since 1962, the average bounce for stocks following the midterm correction was a sturdy +31%.

According to these folks, you may lose money going into the mid-term election but gain more afterwards.

What Other Factors Are in the Mix?

There are two issues this year that stand out as risks. The first is the trade war with China and the fact that it may become permanent.

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

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

The USA and EU have tiptoed around this China issue for years, taking advantage of cheap production costs while steadily losing manufacturing capacity and giving away trade secrets. That is likely to come to an end and the end may not be pretty. A well-functioning US government would be a positive factor in such a situation. But, that is not what we have today and there does not seem to be a remedy in sight no matter how the mid-term elections work out.

The other factor is the “elephant in the room” with the Mueller investigation into Russian meddling into the 2016 elections and how close that investigation will move toward the president himself. If the results of the investigation cast blame on the president and the Democrats take back the House of Representatives, impeachment is likely. Then the issues will be if the Democrats pick up seats in the Senate and if Republicans will follow party lines (the Trump Party or the Republican Party) with their votes.

How Will the Election Affect Your Investments? PPT


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