Low Risk High Return Investments
You invest for two reasons. First of all, you want to put money aside for some future need instead of immediately spending it. Secondly, you want that money to make money over the years. You obviously don’t want to get into dumb investments and lose your invested money or you would have had a better time spending it! And, because there are things you want to do with that money eventually, you would prefer to see a healthy return on that invested capital. Many investors choose to split their investments into those with more growth potential but not a lot of safety and those with lower growth prospects but a lot of safety. The ideal portfolio contains low risk high return investments that both safety and growth.
Lowest Risk Investments
Some time ago we wrote about how to invest without losing any money.
Yes, there are ways that you can do this. You will have to settle for lower returns, but for a person nearing retirement, for example, this is a safe way to preserve capital and see and earn a little extra as well. These are the four categories we listed with the addition of dividend stocks.
Bank deposits with Federal Deposit Insurance
US Treasury Bills, Notes, and Bonds
Investment Grade AAA and AA Bonds
Long term value investing, intrinsic value including high-value dividend stocks
Bank Deposits with Federal Deposit Insurance
Every time that we write something about how to start investing, we note that your first task is paying off the credit cards and putting enough money in the bank to cover several months of expenses. This is a great idea at any stage of your investing career. And, bank deposits are covered by federal deposit insurance. According to the FCIC, you get $250,000 of insurance for each deposit category.
Single accounts (accounts not falling into any other category)
Certain retirement accounts (including Individual Retirement Accounts (IRAs))
Joint accounts (accounts with more than one owner with equal rights to withdraw)
Revocable trust accounts (containing the words “Payable on death”, “In trust for”, etc.)
Irrevocable trust accounts
Employee Benefit Plan accounts (deposits of a pension plan)
Corporation/Partnership/Unincorporated Association accounts
Government accounts
And, this insurance is good for each bank at which you have deposits.
(Wikipedia, Federal Deposit Insurance Corporation)
US Treasury Bills, Notes, and Bonds
Interest rates have been historically low ever since the Financial Crisis. And, the Fed may again lower rates. Nevertheless, the next safest investments, after your bank deposits, are US Treasuries. Bonds mature in 30 years. Notes mature in two to ten years. Bills mature in a year or less. Any of these, when held to maturity, is about as safe an investment as you can make. As with your bank CDs, these are for absolute security and for money that you will need in a few years.
AA and AAA Bonds
There are only two US companies these days that have AAA bonds. They are Microsoft and Johnson and Johnson. Both of these are very solid companies that are leaders in their fields. As with US Treasuries, the best way to guarantee safety is to purchase one of these bonds and hold it to maturity. Of course, if interest rates fall, you can sell the bond for a higher price, but what do you invest in then?
There are a lot more AA bonds available and many are nearly as secure and the AAA ones. They typically have a little bit higher return as well.
Stocks Chosen Using the Intrinsic Value Calculation
The concept of intrinsic stock value goes back more than 80 years to the era following the Great Depression. The first part of this approach is that you will select investments with the potential for excellent cash flow and thus stock appreciation. If they are dividend stocks, so much the better! The second part is that you will only purchase these investments when they are underpriced by the market and not when they are overpriced. Thus, you will be making low risk high return investments. Read our article about intrinsic stock value to get you started in this direction. The reason to include dividend stocks in this grouping is that many have excellent intrinsic value and when you use dividend reinvestment plans, you bypass the broker and don’t pay any commissions on reinvested dividends or on new stock purchases.
Investing in Your Home
The Federal tax deduction for mortgage interest makes investing in your home a sweetheart deal that no one should pass up. However, as many learned to their dismay a decade ago, you need to look at the market, interest rates, resale value, and the stability of your employment. Here is also where having enough money in the bank to cover expenses, like your mortgage, for a few months is so important. But, the bottom line is that you want your monthly payment to be going toward creating long term value for you and your family and not for the person from whom you are renting!
Tax-Deferred Investments
IRAs and 401 Ks are excellent ways to get low risk high return investments. You can choose investment vehicles with lower risk because of the spectacular advantage of not having to pay taxes on dividends, capital gains and the rest during the time your retirement investment is within its plan.
Investing in What You Know and Understand
No less of an authority than Warren Buffett, one of the outstanding investors of all time, only invests in companies when he understands their business plan and how that business plan will make money over the years.
None of us are necessarily the next Warren Buffett, but we all have areas of expertise. This can come from our education and work or from other life experiences. The point is that computer techies are more likely to spot the next Microsoft or Apple and folks in the medical profession are more likely to recognize a good opportunity in the medical products or services sector. The list obviously gets quite long when you look at all combinations of experience and study. The point is that you can find higher returns on your investments by investing in things that you know about and reduce your risk as well.
Is Ford a Good or a Bad Investment?
Henry Ford invented the automobile assembly line a century ago and his company has been a major automaker ever since. But, how about today? Is Ford a good or bad investment as carmakers need to invest hundreds of millions in new technologies or fall by the wayside? This thought came to mind as we read an article in The New York Times about how Ford and VW are set to cooperate in developing both electric and self-driving cars.
Battery powered, self-driving cars have the potential to eliminate tailpipe emissions and avoid accidents caused by human error. But a rapid shift toward these technologies could be perilous for established carmakers like Ford and Volkswagen.
They must invest hundreds of billions of dollars in coming years or risk becoming irrelevant. And they face new competitors like Google and Uber with access to enormous financial resources. Investors have been much more willing to back Silicon Valley companies than the dinosaurs of Detroit or Wolfsburg, where Volkswagen is based.
Car sales are going down everywhere. This is because cars are more complicated to make and thus more costly to produce than even. Even streamlined assembly processes with lots of robots cannot make automobiles affordable for many people. Detroit’s first response was to lease cars which they have been doing for years. But, now it is so easy to rent a vehicle, even for a few hours, that many folks in cities only use an auto for family vacations and pay for the use of a car for a few hours for weekend shopping.
The end result, if nothing else were going on in the auto industry, would be fewer cars being sold. But, the story is more complicated. Self-driving cars and electric cars are truly the wave of the automobile future. Those who get there first with the best technology will win and others will, painfully, fade away. We recently asked if it is time to invest in GM as they seem to be coping with the issue. But, how about Ford. Is Ford a good or bad investment today?
Investing in Ford
Today Ford stock trades for just over a dollar a share. If you bought a share 40 years ago in 1979 you paid about $1.79 and you purchased that share in 1981 you paid about $0.81 so today looks pretty good. On the other hand, Ford traded for $34.79 in May of 1999 and traded in the $17 range as recently as the summer of 2014. Then, your $10 for a share does not look so good. Ford, like GM, has thrived over the last decades when gasoline prices were low and they could sell lots and lots of high-end pickups and SUVs. Those vehicles with their healthy profit margins were life-savers. But, when times change, profits go away. And, now the world is changing.
Earlier this year we asked how to invest in artificial intelligence. In that article we looked at how AI can be applied to products that we use in the real world. Self-driving cars are a prime example but companies like Waymo (Alphabet subsidiary) are more likely to attract investment capital than the “Detroit Dinosaurs” like Ford, GM, or Chrysler.
A serious problem for Ford, as well as other large automakers, is that they will need to find the capital to continue funding research in high tech vehicles at a time when more and more people are just using Uber or renting cars by the hour.
We leave it for you to decide is Ford a good or bad investment but from our perspective, the venerable automaker has its work cut out for itself.
Investing During a Protracted Trade War
China and the USA have both hardened their positions to protect their national interests in the ongoing trade war. China is increasingly talking about not being humiliated as during the European Colonial Era and the USA is increasingly talking about China as a threat to US technological and economic leadership. What you need to consider is how to go about investing during a protracted trade war.
How Will the Trade War Affect Investments?
To the extent that you are invested in China, you may need to worry about the companies that will be sanctioned or cut off from high tech American products. The New York Times writes that the USA blacklists more Chinese tech companies over security concerns.
The Trump administration added five Chinese entities to a United States blacklist on Friday, further restricting China’s access to American technology and stoking already high tensions before a planned meeting between President Trump and President Xi Jinping of China in Japan next week.
The Commerce Department announced that it would add four Chinese companies and one Chinese institute to an “entity list,” saying they posed risks to American national security or foreign policy interests. The move essentially bars them from buying American technology and components without a waiver from the United States government, which could all but cripple them because of their reliance on American chips and other technology to make advanced electronics.
The entities are one of China’s leading supercomputer makers, Sugon; three subsidiaries set up to design microchips, Higon, Chengdu Haiguang Integrated Circuit and Chengdu Haiguang Microelectronics Technology; and the Wuxi Jiangnan Institute of Computing Technology.
US policy makers have worried for years about China moving past the mass production of products to becoming dominant in ultra high tech. This is seen as a concern for US national security seems to have been the red line that China crosses when it set its sights on dominating supercomputing, artificial intelligence, and other ultra high tech areas.
For investing during a protracted trade way you will need to look at who loses markets and sales because of these restrictions. US chip makers are still at the forefront of manufacturing the highest quality of the fastest and most powerful chips. To the extent that they lose their markets, it will hurt anyone invested in these companies. To the extent that you are invested in a company like Huawei which seeks to dominate the newest and highest tech levels of telecommunications, you need to be concerned about the US and perhaps the Europeans banning their products and technology outright and continuing to do so for years. Then, a smart investor will look around to see who else is working in these echelons of high tech to see where to invest next.
The Trade War and Investment in Raw Materials for High Tech
We recently wrote about investing in non-Chinese rare earth producers. As we noted, the rare earth minerals that go into computer chips and other high tech products are not really rare. But they don’t exist in concentrated amounts that make mining economically feasible in most areas. China has invested in mining these minerals because it can do so cheaper than companies working in the West. And, they are doing it to control the market. To the extent that mining rare earth minerals outside of China because a defined national security concern, look to see government subsidies and support for these types of operations and more profits for investors.
Investing and Manufacturing Anywhere But China
There is a belief now that ABC is the best place for supply chains. “ABC” means anywhere but China. However, much of the manufacturing in Asian nations outside of China is taking place by Chinese companies setting up shop in places like Vietnam. Beware of investments in these countries if the USA starts looking closer at who owns a company, where the profits are going, and how much control the Chinese government is still exerting. To the extent that manufacturing is taking place in countries like Mexico, and the Trump administration is not applying punitive tariffs, these might be safer investments.
As you will note, we have not made any specific investment recommendations, which we rarely do. But, we hope this article has provided “food for thought” as the trade war goes forward and even lasts for another generation or two. We suggest that you read an article in the South Morning China Post about prolonged tensions with the US. A better way to view this subject is perhaps not to think in terms of trade but to look at who wants to dominate the planet for centuries to come and how much suffering they will inflict on their own people in order to achieve that goal.
How Could War with Iran Affect Your Investments?
Depending on whom you talk to we are at the brink of war with Iran in the last few weeks or have been at war with the Islamic Republic for several years. Most recently the U.S. president ordered an air strike in retaliation for Iran shooting down a U.S. spy drone. He allegedly called it off at the last minute because of not wanting to kill 150 people and said that such a response would have been out of proportion. As the world frets of a possible war with Iran, we are concerned about the flow of oil coming out of the Persian Gulf being shut off, Saudi oil fields and others in the area being damaged as well as shipping and storage facilities. The question for an investor is, how could war with Iran affect your investments?
Your Investments in the Stock Market Could Suffer
Forbes suggests that an all-out Iranian conflict could torpedo the stock market.
Aside from the perfectly reasonable fear that a raging (and possibly radioactive) regional conflict with a rabid and likely already nuclear-armed foe should inspire, the economic risks – unlike those engendered by the tanking Chinese economy – are fairly limited to oil price effects.
Not to discount the damage an intense war in the tightly-wound Middle East that could ensnare arch-enemies Iran (and satellites like Syria and Lebanon) on one side, and major non-US players like Israel and Saudi Arabia on the other.
Such a flashpoint could engender untold and unholy consequences that might poison human culture for decades, or longer.
They note the problems that conflict in the region might cause if the flow of oil is interrupted and, even worse, if the infrastructure is damaged for years to come.
On the other hand, both the USA and Russia are bigger oil and gas producers than all of the Persian Gulf. Perhaps, investing in oil companies that work outside of the Middle East could lead to substantial profits.
War, Recession, and Your Investments
The Post Millennial writes that war with Iran will sink Canada into a recession.
Canada still buys a bulk of its oil from Saudi Arabia and doesn’t have enough capacity to be self-sufficient. If Iran’s navy shuts down the Strait of Hormuz, through which ⅙ of the world’s oil and gas trade occurs, it would spell disaster for not just Canada, but the entire world.
The price of oil would explode. Gas prices, already at a high due to Trudeau’s carbon tax, will skyrocket. It is highly likely that Canada, currently only growing at a meager 0.1%, will enter into a major recession.
While the oil shock may help in Canada’s oil exports, it could reduce demand and dampen the effect of the price surge.
While Canadian oil producers would do well, the Canadian economy would tank if Persian Gulf oil were cut off. And, the Millennial has a lot of other concerns about Canada being dragged into such a conflict, such as Canadians dying in combat.
Our opinion is that the US economy may be ready to cool off a bit and an armed conflict anywhere would not help. The US stock market is still overbought and does not need one more dose of uncertainty. And, while the US is juggling a trade war with China, picking fights with everyone else, and locked in a red state blue state fight to the political death, this may not be the best time to go to war. The problem is that governments have long used foreign adventures to distract from their problems (and inadequacies) at home. As such, take a close look at your investments and consider what happens if fighting breaks out in the Persian Gulf.
How Politics Will Affect Your Investments
The trade skirmish between the U.S.A. and China threatens to become a permanent trade war. Many investors have come to realize that the trade war is really not about the balance of trade but rather about global economic and technological leadership. We discussed this issue in our article about the trade war becoming permanent. The decline of U.S. power after the post-World War II era was predictable as the Japanese and European economies mended. And, it was hastened by ill-advised military involvement from Southeast Asia to the Middle East. Along the way, the “Asian Tigers” became technological and economic powerhouses throughout Asia and then there was the rise of China. The Americans and the Europeans were naïve in believing that if they gave China greater access to global markets that the country would gradually liberalize and the Communist Party would give way to a mixture of Capitalism and Socialism. That did not happen. And, as we noted in our permanent trade war article, China is aiming for global dominance on all fronts and does not intend to return to the “turning inward” of the European Colonial Era. Political concerns are now dominant both with the U.S.A. and China. So you need to wonder, how will politics affect your investments?
Best Places to Invest Money in a Prolonged Trade War
Market Watch suggests which stocks to buy if the trade war worsens and becomes permanent.
Goldman’s analysts, led by chief equity strategist David Kostin, are recommending that investors target services firms, which they describe as less exposed to trade policy (including retaliatory moves) and have better corporate fundamentals, as a group that could help to insulate investors from tariff-fueled volatility.
Goldman expects companies within services to outperform those that provide goods, including consumer products and hardware, like iPhone maker Apple Inc. AAPL, +0.88% and Johnson & Johnson JNJ, +0.64% for example. Shares of Apple have gained nearly 30% this year, while those for J&J are up 8.8%.
In addition, they suggest Microsoft, Alphabet, and Amazon as good choices.
Although the big tech companies that have led the market since the Financial Crisis would seem to have over-extended their rallies, their strength in services, as opposed to products (think of Boeing, Caterpillar, and Deere), is a reason to stay with these investments. Good returns on investments will be more likely to come from the services sector as the trade war drags on and gets worse.
In regard to national defense and reducing American dependence on Chinese products we might consider the ABC (anywhere but China) movement of production facilities to continue. We recently wrote about investing in non-Chinese rare earth producers as such businesses may end up benefiting from subsidies or other forms of government support to avoid a Chinese embargo on the elements so critical to high tech these days. This sort of niche investment may be particularly vulnerable to how politics will affect your investments.
What Happens to Your Investments if the U.S.A. Caves in and Makes a Bad Deal?
When political decisions are so critical to your investments, you need to worry about when the politicians will do things simply to get themselves re-elected. This fact has been a huge contributor to the ever-expanding U.S. budget deficit. Politicians know that when the economy is doing well and employment is strong that people are happy and that they, the politicians, are more likely to remain in office. So, they pass bills to increase spending, putting off things like repaying the national debt to the next generation. If Trump believes that he needs a “trade war victory” to get reelected, will he cave in and let the Chinese win? If that is the case, the stock market will be happy, stocks will go up, and U.S. economic and technological leadership will gradually dwindle over the years. It that is the case, you need to start looking at long term investments in China in hopes that the Chinese Communist party will throw a few scraps your way.
When you find yourself looking at the front page headlines more than at the business pages, you are wondering how politics will affect your investments. Good luck.
Deere Combine Harvesting Soybeans
FANG Investments at Risk
Government regulators are taking a look at FANG stocks in regard to monopolistic and anti-competitive practices. This realization just took the stocks down by several percent each. In fact, all of the FANG darlings are substantially off from their highs a year ago. Are your FANG investments at risk? If so, what are the factors to consider when deciding to ride it out, sell to lock in some of your gains, or buy more shares in hopes of a comeback? CNBC looks at FANG stocks, their recent losses, and what is in store for them.
Fears of increased government scrutiny just crushed FANG stocks.
Facebook, Amazon, Netflix and Alphabet tanked Monday, shedding nearly $130 billion in market cap collectively. Those losses sent Facebook, Netflix and Alphabet into a bear market, having dropped at least 20% from recent records.
The drop came on the first trading day after The Wall Street Journal reported that the Justice Department is readying an antitrust investigation against Google over its search practices and other issues. Alphabet declined to comment.
They go on to say that having to deal with regulators takes management away from making effective decisions for company growth and, by itself, could be damaging.
Gina Sanchez, CEO of Chantico Global, says just the threat of increased regulatory oversight could stymie the FANG trade for some time.
“These companies will be very, very mired in the process of being scrutinized,” Sanchez said during the same segment. “They could actually keep these companies so involved in this process over the next two years that they won’t be able to effectively run and do the things that growth companies do.”
And, of course, the look at anti-competitive practices could end up with any of these companies getting broken up as happened to the venerable AT&T in the 1980s.
Are Your FANG Investments at Risk for Other Reasons?
Regulatory concerns are not the only reason that the FANG stocks have cooled off. The group has led the bull market to higher and higher levels since the economy emerged from the financial crisis and Great Recession. There is always a point at which the market price of a stock exceeds its intrinsic value so much that even the most optimistic investor will sell a few shares. The trade war with China affects some of these stocks but not others. And, there is no guarantee that their prices will continue to rise as they may not continue to buy back shares indefinitely.
Are All FANG Stocks in the Same Boat?
To the extent that passive investors are investing in FANG stocks through an ETF, it makes no difference which FANG stock is most strongly threatened by the risk of government regulation. However, Alphabet (Google) is a different business than Netflix and Amazon.com is different than either. Facebook is a totally different animal as well. However, all of these companies have grown large and have the capacity to limit competition in various ways. As such, they become targets for regulators. It seemed such a shame when the old AT&T was broken up but, in fact, the breakup ushered in a great new era of telecommunication in which the better companies with better ideas succeeded and the one who continued in the staid ways of AT&T failed and were absorbed by the competition.
FANG Stocks
Google is far and away the leading internet search engine. Because of the importance of internet searches in an era where no one used the yellow pages or phone book anymore, it is a major concern for society that this system be fair to all users and not meant to manipulate to hide information.
Facebook has become a major social force and also a hiding place for terrorists and crazy people. This will be regulated at some point as we discussed in our article about FANG regulatory risk.
Netflix is essentially a monopoly but always runs the risk of a newer technology passing it by. Just think of how video cassettes were such a big deal and how Blockbuster controlled the content on movies that it rented. Then everything went to disk and then it was downloaded and then Blockbuster just went away. We are not sure what technology might make Netflix obsolete but there is probably one out there. To give Netflix credit, they have become a movie production and content generator which will always give them something to sell even if they are not the major viewing platform.
Amazon.com is unique in how they have displaced so many brick and mortar businesses but they have also followed the John D. Rockefeller approach of undercutting competition until there is none and then they have the capacity to raise prices. At some point, this behavior will be broken up or regulated.
In the end, we think the FANG investments at risk include all of them. This is a doomsday scenario of these great companies going out of business but the world changes and that simply makes yesterday’s winners change or fade.
Waymo Self-driving Car
Investing in Non-Chinese Rare Earth Producers
The trade war shows more and more signs of becoming a permanent fixture in our lives and especially in the world of investments. In our article about the possibility of the trade war becoming permanent, we discussed how both China and the U.S.A. view this issue in the broader scope of global power and homeland security. As such, both sides are ramping up their tariffs and making no-so-hidden threats about what comes next. One of the things that especially caught our attention was the Chinese threat to cut off the export of rare earth metals to the U.S.A. At this point, investing in non-Chinese rare earth producers might be a really good idea. The Street’s Real Money has an informative article about how rare-earth stocks strike gold at the prospect of a Chinese rare earth export cutoff.
Rare-earth miners toil in obscurity, operating a fancy-sounding but grungy business. They have hit pay dirt on the stock markets late this month, with it looking increasingly likely that China will restrict U.S. supply of the minerals they produce.
The Global Times, a mouthpiece for the Communist Party on foreign affairs, has run an article stating that it’s only a matter of time before China will “weaponize” its rare-earth exports in the trade war.
The shares of the listed miners operating in this space have surged. The CSI Rare Earth Industry Index (index code 930598) tracks 50 of these stocks, companies that mine, extract, process, trade or apply the minerals. The index is up 45.4% so far this year.
Real Money goes on to state this.
There are 17 rare-earth elements, metals used to make magnets for electric cars, earphones and computer hard drives. China accounts for 90% of global production and 80% of worldwide export shipments.
They go on to talk about a Chinese rare earth producer whose stock trades on the Hong Kong Exchange. We don’t think that Chinese producers will be a good investment choice in this situation because they stand to lose if 1) they cannot export to the U.S.A. and 2) if more and more companies follow the ABC (anywhere but China) course for outsourcing their manufacturing. We think that investing in non-Chinese rare earth producers may be a better idea in case Chinese exports get cut off. And, if the trade war becomes even uglier, we may see countries like the U.S.A. find ways to subsidize rare earth producers through tax incentives and more.
Investing in Rare Earth Mining Operations
There are rare earth mining operations scattered across the globe. Here are the companies in the U.S.A, Australia, and Canada that mine rare earth elements and produce rare earth metals.
Rare Earth Producers in the U.S.A.
The one active rare earth mining operation in the U.S.A. is Alkane Resources Limited. (Mining Feeds Rare Earth U.S.A.)
This company has been a penny stock for the last twenty years with the exception of 2011 and 2012 when it “surged” as high as $2.52 a share before falling back. Its mining operation was shut down for a while about a year ago but is open and producing again.
Rare Earth Producers in Australia
Australia has seventeen companies that do rare earth mining as part of their operations. (Mining Feeds Rare Earth Australia)
Rare Earth Mining Operations Australian Companies
The list of Australian stocks is a better place to look for investing in non-Chinese rare earth producers because it includes mature and strong mining operations that are not totally dependent on profitable rare earth extraction and processing for their survival.
Rare Earth Producers in Canada
There are seventeen Canadian mining companies that extract and process rare earth elements as part of their operations. (Mining Feeds Rare Earth Canada)
Canada Rare Earth Mining Companies
As with the Australian companies, investing in non-Chinese rare earth producers will work better with Canadian companies that are large, have been in business for years, and have operations in numerous countries extracting numerous metals.
Rare Earth Elements Are Not Really Rare
Rare earth elements are not rare. They simply don’t occur in the kinds of concentrations seen for copper, gold, silver, and other minable metals. This makes them more expensive to mine because a lot more ore needs to be extracted and processed than with other metals.
For more insight into Australian rare earth elements and rare earth production, you can look at information about rare earths published by the Government of South Australia.
Rare earths were named by Johann Gadolin in 1974 for a group of chemically similar, metallic elements with atomic numbers 57 through to 71.
In order, these are lanthanum (La), cerium (Ce), praseodymium (Pr), neodymium (Nd), promethium (Pm), samarium (Sm), europium (Eu), gadolinium (Gd), terbium (Tb), dysprosium (Dy), holmium (Ho), erbium (Er), thulium (Tm), ytterbium (Yb) and lutetium (Lu).
These elements are commonly known as the lanthanide series and are divided into light rare earths (lanthanum–gadolinium) and heavy rare earths (terbium–lutetium). Scandium (Sc, atomic number 21), yttrium (Y, atomic number 39) and thorium (Th, atomic number 90) are also generally included in the rare earth group because of their similar chemical properties.
The rare earths were originally thought to be rare in crustal abundance but this is now recognised not to be the case and they have a similar crustal abundance to elements such as nickel, copper, silver, lead and tin. However, mineable concentrations are less common than for most other ores.
And, the lack of easily minable concentrations is what has hindered mining operations outside of China. China still has a lower wage scale than countries like Australia, Canada, or the U.S.A. And, the government heavily subsidizes these operations in various ways, not all of them plainly visible from outside the country.
Investing in Non-Chinese Rare Earth Producers
Our considered belief is that threats of cutting off rare earth exports by China will at least temporarily drive up stock prices and make investing in non-Chinese rare earth producers more profitable. Over the longer term, governments in countries like the U.S.A., Australia, and Canada will be able to mine these elements because they are common and can be extracted from things like coal deposits. Higher prices will make these operations more profitable and to the extent that their production is seen as critical to national economies and national defense, governments will find ways to subsidize such operations to ensure their long term survival and success.
Swine Fever Risks to Investment in U.S. Agriculture
African swine fever has killed about 200 million pigs in China and U.S. hog and soybean farmers are worried. A good measure of the swine fever risks to investment in U.S. agriculture is the fact that local news outlets are featuring this story in farm country. The Herald Sun, published in Durham, North Carolina writes about the spread of African swine fever in China.
It first appeared in China last August and since then it has spread like wildfire, decimating China’s pork industry and affecting millions of pigs across that entire country.
From there, African swine fever has spread to Vietnam and crept into Cambodia, killing even more pigs.
Now, farmers in North Carolina watch nervously, hoping the disease doesn’t make it across the Pacific Ocean.
“I am terrified. Every pig farmer I know is terrified,” said Jan Archer, an owner of Archer Farms in Goldsboro, which has more than a thousand pigs.
African swine fever isn’t harmful to humans, but it is especially fatal to pigs and spreads quickly. Rabobank, a Dutch bank, estimated the disease will affect 150 million to 200 million pigs in China, the biggest pork producer in the world, this year.
One side of the coin is that China’s loss could be a huge gain for U.S. pork producers as they could export massive quantities of pork to China to make up for their production shortfalls. The other side of the coin is that this disease could spread to the USA to hog producing areas and devastate herds just like is happening in China.
Even if just a few cases occur in the USA and the disease is otherwise contained, it would kill U.S. hog exports. That is because African swine fever is a “trade-limiting” disease.
If just one outbreak were reported in the nation, then exports of that product from anywhere in the nation would halt, until further studies could be done or the disease is cleared. Concern is so high that the disease could travel to the U.S. that the World Pork Expo in Iowa was canceled for just the second time in its history.
North Carolina hog producers export about 25% of their product. Having to store instead of export hog products would drive many farmers and meat packers out of business. Farmers are gearing up for strict quarantines where anyone coming onto a farm will need to strip, shower, and change clothes. They won’t even be able to bring their glasses onto the farm.
Soybean Farmers and Others Are Hurt by African Swine Fever in China
Pigs need to eat and soybeans are a major part of a hog’s diet. Because China has (or had) three times as many pigs as the USA, they need to import soybeans to feed their herds. The reduction in the pig population in China translates into a lesser demand for soybeans and reduced U.S. soybean exports. This means that U.S. soybean farmers will be hurt but so will allied industries. CNN reports that Wall Street fears could hit Deere and other stocks.
A trade fight with the U.S. isn’t the only war China is fighting. African swine flu has decimated the pig population in China and sent pork prices soaring. As many as up to 200 million Chinese pigs have reportedly been lost due to the disease.
Now, Wall Street analysts are scrambling to assess the fallout from the fast spreading illness and how to invest around it.
J.P. Morgan has downgraded Deere to underweight on concerns about the “rapidly deteriorating fundamentals in U.S. agriculture.” This is due not only to the trade war, but also the decline in soybean demand in China as a result of the reduction in the hog herd due to the outbreak of the African swine flu.
Swine fever risks to investment in U.S. agriculture include companies like Deere. Deere makes tractors, combines, and other farm machinery. If U.S. soybean farmers lose customers in China because they have fewer pigs, they will buy less equipment from Deere. If U.S. pig farmers are hit with the swine fever and have to cull their herds, the results for companies like Deere will be even worse.
Deere Combine Harvesting Soybeans
Other companies mentioned in the CNN article include the venerable meat packer, Hormel as well as Philbro, Darling Ingredients, and Blooming Brands.
Trump Trade War Multiplies Risks for U.S. Agriculture
Forbes writes that handouts from Trump won’t save soybean farmers. The swine fever epidemic in China is not the first problem for American soybean farmers. But, it may be the nail in the coffin for many.
The price of soybeans has plummeted over the past year since Trump started putting tariffs on Chinese products and China retaliated. The USDA estimates that the average price per bushel fell from $9.33 in 2017 to $8.60 last year. At 4.54 billion bushels that was a $3.3 billion impact to soybean farmers. However, the shortfall should be worse this year since last year farmers were able to forward sell a portion of their crops at $10 per bushel.
As the chart shows below shows with a per bushel price in the low $8 area, unless prices turn up soon 2019 will be a disastrous year for soybean farmers. For a business that runs on low margins losing over 20% of revenue with high fixed costs is a recipe for bankruptcies.
Here is their chart.
Soybean Prices Fall
The key to understanding this problem for soybean farmers is that soybean farming works on margin. When there are heavy rains, like this year in the Midwest, farmers plant later and get less of a yield. When the price falls because demand is less, they make less even with a bumper crop. And, when a trade war cuts off their largest foreign customer, many soybean operations working on margin go bankrupt.
Investments in U.S. Agriculture and Tracking Bankruptcies in Farm Country
American Banker writes about soaring bankruptcies in Farm Belt and how banks need to become more defensive or get dragged down by debt defaults.
Banks that serve U.S. farmers are increasingly restructuring existing loans and boosting the collateral needed for new ones as the numbers of late and missed payments have risen.
While regional banks are healthy, they’re clearly boosting their defenses against the risks they face. In March, a report by First Midwest Bank in Chicago showed past-due agricultural loans up 287% in 2018 over the previous year. Meanwhile, cases handled by the Iowa Mediation Service involving farmers unable to make payments rose 20%.
Farmer bankruptcies in six Midwest states rose 30% to 103 in 2018, according to the Federal Reserve Bank of Minneapolis. To hold back the tide, Farmers National Bank in Prophetstown, Illinois, is restructuring more and more loans to keep growers solvent while trimming the bank’s own risk.
The point here is that this situation is a threat to the banking industry as well. This problem for investment in U.S. agriculture predated even the Trump trade war. But, reducing orders from the largest market for U.S. farm exports like soybeans made things worse. Now the swing fever risks to investment in U.S. agriculture have compounded the dilemma along with an unusually wet spring, late planting, and a smaller-than-hoped-for crop. The swine fever risks to investments in U.S. agriculture may be felt very widely and bear close attention.
FANG Regulatory Risk
One of the many concerns in today’s stock market has to do with potential regulation of FANG stocks. Facebook has come under heavy criticism for not policing its social media against Russians interfering in the US elections, data privacy breaches, and terrorists posting videos murdering innocent people. Now Market Watch believes that FANG stocks are going to be “smacked down” by regulators.
Stock-market investors live by the FANGs, and they die by the FANGs.
That may be one takeaway from recent comments made by Savita Subramanian, head of US equity and quantitative strategy at Bank of America Merrill Lynch. The strategist said investors should wean themselves from off the handful of fast-growing techy companies known by the acronym FANG and sometimes FAANG that represent a cadre of highfliers that have helped to supercharge the current bull market run for equities.
The stocks in question are Facebook, Amazon.com, Netflix Inc., and Google’s parent company, Alphabet. Sometimes Apple is included in this bunch and the name is changed to FAANG. The companies are world leaders in technology and especially its application to social media. And, that is where the regulatory concern lies.
Have FANG Stocks Run Too Far and Too Fast?
The opinion of the analyst from BoA echoes that of many who believe that the rally of these stocks is not sustainable, purely on fundamental and technical grounds. Their prices have been bid up based on their being the best bets in an otherwise stagnant market. But, at some point, investors will start to get out and start a stampede. The best bet according to the analyst is to take a little off the table now.
The next step for these evolving companies and technologies will be government regulation. This is a natural step as no one regulates a brand new business but regulation occurs when a business becomes large and has strong effects on the lives and welfare of the citizens of the country.
FANG stocks may have run too far and too fast from a stock market pricing perspective but they have also done so in terms of their out-sized effects on society. Thus, regulation to some degree is a certainty. The question for an investor is how does this FANG regulation risk affect stock prices and investment opportunities.
FANG Stocks
Is It Time to Regulate FANG Social Media?
An interesting view of this subject comes from the oil and gas industry, which is highly regulated. Rigzone, a publication in that industry, asks if it is time to regulate social media’s FANG.
A number of newspapers have reported that policymakers are considering various options to regulate use of personal data by various social media and internet service providers. One of the options mentioned is that of treating the social media companies as “public utilities.” This leads to the question of what criteria has been used in the past to identify a private business as a “public utility” or using another historic term as a “public service” company. Could those criteria be applied to internet social media giants such as Facebook, Amazon, Netflix, and Google? These companies are sometimes collectively referred to as “FANG.”
This sort of useful, albeit boring, discussion of what constitutes a public utility and if that designation will be applied to the FANG is basic to understanding FANG regulatory risk. In their discussion, they quote for Principles of Public Utility Rates the two attributes of a company that typically lead to regulation.
Two attributes of public utility business have received emphasis in the literature. The first is the special public importance or necessity of the types of service supplied. The second is the possession of specific physical and human assets like utility plants, distribution networks and technical expertise that lead almost inevitably to monopoly or at least ineffective forms of competition.
Thus public importance and necessity are one factor and possession of specific and special assets making competition difficult is the other.
Some already believe that social media companies exhibit both “public utility” attributes thus leading to the “necessity of regulation”. The FANG companies clearly have “special public importance” and are considered by many, due to their high penetration rates, as “necessary.” They also own tangible and intangible “assets” hard to reproduce and “networks and technical expertise” difficult for competition to develop.
A basic concern is that these companies have become monopolies and their use (and misuse) of consumer data has become integral to their operations. This threatens to cross the threshold of what is acceptable in American society if it has not already. Thus, we may see regulation of FANG companies in the national interest. What does FANG regulatory risk do to the value of those investments, their ability to make profits?
Do Regulations Kill Growth?
Regulations in the extreme break up companies, like AT&T. However, the breakup of this monopolistic behemoth ushered in an era of fantastic growth and innovation in the communications sector. On a less aggressive level, regulations may or may not impede corporate profits and growth. Pitch Fork Economics asked the question, Do Regulations Kill Growth.
Deregulation for the powerful is a central tenet of the trickle-down myth, embraced by Democrats and Republican alike. Government regulations, we’re told, are costly and inefficient intrusions that slow grow and kill jobs. But Robert Reich explains that when thoughtfully applied, regulations are absolutely essential to growing a safe, secure, and broadly prosperous economy.
This is a forty-minute discussion of the issue in audio form with an attached transcript. The discussion is focused on deregulation but the argument works for supporting a degree of regulation. The basis of the discussion is that trickledown economics do not trickle down and help anyone except the very rich. And, the follow-up argument is that a reasonable degree of regulation results in an ordered society and a safer and more prosperous financial system.
Starting with the AT&T example, we can see that the extreme case of breaking up a monopoly results in financial and societal gains not previously envisioned. Like the banking rules that so long protected depositors and the financial system, rules that control information gathering, storage, transfer, and use will help stabilize society and protect both individuals and business. The result might be a loss of power and money for the FANG stocks but a greater benefit for society as a whole. As such, those investing in FANG stocks may be wise to hedge their risk a little with investments like those that don’t lose any money, ever.
AAA Bond Rating
Are There Safe Investments in China?
China has been the land of investment opportunity for decades with many investments in China doing very well. The benefits of investing in China came from its emergence as a developing economy, huge population and consumer base, and cheap workforce which attracted lots of foreign direct investment. Over the years China’s stock market matured, offering investment opportunities for average investors and many Chinese companies became listed in the USA as ADRs (American Depositary Receipts). Likewise, many mutual funds provided reasonably safe investment options by including Chinese stocks in their portfolios. There has always been risk associated with investments in China as they are believed to fudge their numbers from time to time but the situation may be more worrisome today as China’s debt increases, its economy levels off, and a trade war with its largest customer (the USA) threatens to become permanent. Are there safe investments in China today considering all of this, plus the likelihood that Chinese tech companies have become suspect of being pawns in the service of Chinese cyber warfare?
Investments in China
For the average investor, the best ways to invest in China are through a mutual fund or other stock fund that holds Chinese assets or by purchasing ADRs. You don’t need to speak Mandarin or deal with a foreign stock market and can let someone with the time and expertise pick the individual stocks. But, if you want to pick and choose the right individual stocks, you can buy ADRs of large Chinese companies who provide financial reports on a par with what US companies provide when they are listed on the US stock exchanges. In regard to our concern about safe investments in China, here is where our focus is. Investor Place looks at 3 Chinese stocks which they say you should buy and hold. Their article not only offers three stocks that may be safe investments with high returns over the years and therefore safe investments for retirement. They also give us some insight into the current state of the Chinese economy what the future holds for investing in China.
To say that Chinese stocks have been a roller coaster over the last year would be an understatement. Already, China has seen slower growth as it shifted from being a solely manufacturing-based economy to one based on services/consumerism. But with the trade war, Chinese stocks have been hit even harder, only to bounce back as a deal with the United States seemed to be within grasp.
Then, President Trump tweeted. With no deal in sight, tariffs rising and even lower growth on the horizon, Chinese stocks have continued to sink over the last week or so.
But this could be an interesting opportunity for long-term investors. China continues to dominate on the world stage and is arguably one of the most important economies. And while a deal may not be in sight today, there’s a good chance that one will be ironed out eventually. Meanwhile, with its huge and growing consumer base, domestic growth continues despite various trade pressures. In the end, Chinese stocks could be a wonderful long-term play. And the recent hiccups have provided a “reset” in valuations ripe for the picking.
At this point, we are looking for safe investments in China and investments with high return. As China’s foreign sales level off or are rolled back due to trade war and cybersecurity issues, they have a huge internal market to develop and that may well be where to invest in China. And, in that regard, the first Investor Place choice fits right in.
Investing in Alibaba
Alibaba is generally thought of as the Chinese Amazon.com. They serve as a marketplace for selling products online but do not hold any inventory. As such, they may be more similar to eBay. Either way, Alibaba is a huge and growing company in the huge and expanding Chinese market. And, like Google, Alibaba is not resting on its laurels but reinvesting its profits in a variety of other businesses such as social media, cloud computing, mobile devices, and peer-to-peer lending.
Alibaba Logo
In our article, Is There a Safe Fifty-year Investment, we noted that companies like AT&T, General Motors, Coca Cola, Kodak, and others were uniquely positioned to provide products and services to the growing US economy over much of the twentieth century. Their level of success and even dominance did not last forever, but it lasted for a long, long time. This is a good way to look at Alibaba. They are positioned very well in a very large and growing market. Their wide range of virtually recession-resistant products and services protects them again be totally devastated by a prolonged or permanent trade war.
Are there safe investments in China today? Yes, and Alibaba seems to be one.
Investing in Baidu
Baidu is often referred to as the Chinese Google. They control 80% of internet searches in China. Like Google, they make billions of dollars a year on selling ads. And, like Alphabet, Google’s parent company, Baidu has diversified into other tech areas such as autonomous vehicles, artificial intelligence, and video with its iQiyi subsidiary. Baidu’s growth is based on still-expanding use of the internet in China and not on exports to saturated and increasingly trade-protected North American and European markets.
Are there safe investments in China? Baidu is one and will likely be for a long time.
Investing in Ctrip.com
This is not a big company but rather a normal company that is well-positioned in a growing niche market. They run accommodation and travel booking sites. Airlines, hotels, cruises, and others use Ctrip.com to list their unsold services. This is an extremely low-overhead business in a growing market. As China shifts to a consumer-driven economy and focuses more on internal growth, this company has the potential to keep expanding the Chinese travel more and more. The risk of investing long term in these folks, like the rest, is that this is a business that competitors can mimic and take market share.
Safe Investments for Beginners in Chinese Stocks
Beginners at investing should typically stick with investments that they know and investment vehicles that protect them against undue risk. In regard to risks of investing in China, ADR’s of companies doing business solely in China, like Alibaba, Baidu, and Ctrip.com are a good idea. At this point, we prefer the few stocks mentioned because of their Chinese consumer focus. Our concern about Chinese tech companies and exporters is that the trade war with the US is not going to end soon and may spread to involve other nations. China has grown fast and is getting to a point where it wants to display regional and global dominance. This will meet resistance across the globe and make much of China’s export-driven growth slow even more.
Chinese Debt and Investment Safety in China
Much has been made of China’s increasing debt at a time when their economy is cooling off. Comparisons to Japan thirty years ago are appropriate and China seems to be concerned about following the same path into economic stagnation. There has been money flowing out of China for years is wealth investors there have been hedging their bets. Chinese banks and exporters in heavy industry are at substantial risk of a hard landing due to a debt collapse and loss of external markets. However, China has $3.25 trillion dollars in cash reserves which will provide a cushion if needed. It should be noted, however, that they had nearly $4 trillion in reserves just four years ago.
Closed Factory in China
To sum up, there are safe investments in China, safe investments for seniors and safe investments for beginners. The first trick will be to invest in companies you can track. This means investing via ADRs. And, the second is to pick companies with a strong consumer focus in the still-expanding Chinese economy.