MONEY 168 - THINGS

THIS IS MY 168^TH BLOG ON UNDERSTANDING MONEY TOOLS

June, 2019

www.understandingmoneytools.blogspot.com

This blog will be called “things” again, as I will skip around with various “things” I deem of material interest.

First, a lovely neighbor lady, and good parent mentioned to me this week that she has such great teenagers because she drums into them the value of “hard work”.  I brought into context that “working smart” is equally important and not to be overlooked.  I view working smart probably more importantly than working hard, and the higher you go on the education ladder the more important it is, in school or in the work place.

Next, in my last couple of blogs someone mentioned that I didn’t discuss capitalization much in regard to stocks and companies.  Let’s take a look. (I have covered the topic several times in past blogs.)  Capitalization can be used in many contexts.  One is “how to capitalize a company”.  That means to raise money for your endeavor.  Best to check with a lawyer or expert as you could be crossing over into Securities violations with severe penalties.  Rule of thumb, stay with sophisticated millionaires, and stay far away from naïve, little old ladies!

Another use of the term is the capitalization rate, or what you will earn from your investment.  This is mostly used in real estate, however can be used elsewhere as well.  It is found by dividing the net income of an investment by the market price.  The higher the cap rate, the lower the risk: the lower the cap rate, the higher the risk.

The stock markets are driving the rational mind into a state of delusion.  Every day the markets are being driven further upward without reason, except too much money chasing any product and companies buying their stock back with either borrowed money or earnings. There are two very concerning issues.  One, is the lack of profitability of corporations today, and two is the ever increasing debt of most of these companies.  I hope these companies don’t come to me and other taxpayers to bail them out during the next recession as they did in 2008 and 2009!  Wall Street is taking companies public with initial public offerings.   If you use standard “capitalization rate” to figure your investment you can’t as these companies of late don’t make money, but have huge losses.  Let’s take my favorite to beat upon, Uber.  They lost $3 billion dollars in 2018, made the original people very wealthy and may never produce a profit.  Excuse the pun, but Uber is nothing more than a “vehicle” for trading a stock, not investing.

Let’s take a look at our prime company composite, the Dow Industrial Average.  I get current updates on the exchanges via my phone and a subscription to a service that brings it to me every 15 minutes.  A few weeks ago the Dow Industrials stood at about 23,000 which equated to a price to earnings (P/E) of about 26 to 1.  (Once again, the historical 135 year average for this exchange has been about 15 to 1.  This ratio can calculate your rate of return. You merely divide the price into 1.  This will give you a percentage return on investment to earnings either in a stock or index fund, the ROI.)  In the example of a couple weeks ago, the dividend yield from the composite was about 2.7%.  Let’s take a look at today, June 20.  The Dow Industrials closed at 26,753.  The P/E is now up to 28.34 and the yield is down to 2.07%.  What this tells me, and you, is that the price has been irrationally driven up while earnings and dividends have not increased at all, thus risk has increased, and your return on investment has decreased.  Very dangerous territory!  Everything into the future, and now so high that the market is priced decades in advance of rational investing theories.

The last use of capitalization for today’s blog is for depreciation in terms of accounting and taxes.  Many assets in a business can be capitalized on a company’s balance sheet over its life.  Typically you will either expense an item if it is a short-term item, or capitalize and depreciate the item out over a period of years if it is an asset that has a longer-term life.  Your accountant can tell you what the IRS will permit.  Some assets like real estate can be held to an accelerated depreciation; perhaps good, perhaps not.  You may have to “recapture” depreciation in assets such a real estate.

Hope you learned something in this blog.

MONEY 167 - MONEY

THIS IS MY 167^TH BLOG ON UNDERSTANDING MONEY TOOLS

June, 2019

www.understandingmoneytools.blogspot.com.

I’m going to open this blog with a couple of sayings, “if it’s too good to be true, chances are it’s too good to be true.” The second is the well known saying by Sherlock Holmes, “when you have eliminated the impossible, whatever remains, however impossible, must be the truth.”

We are going to tie this in to what I see in the markets this past year, month and week.  First, smart money has been fleeing equities (stocks) and moving money to bonds to a greater extent not seen in 10 years, since the Great Recession.  The “inversion curve” with bond margins became greater. (The short-term interest rates grew, and the long-term interest rates dropped. The interest rate on 3 month Bills was higher than 5 year Notes and 10 year Bonds.  This historically has been an indicator of oncoming recession.)  Now, the gurus say, this inversion curve no longer holds weight.  Everything being stated these days is to prop up the equities markets, so that it appears economies worldwide are great and people have more optimism and borrowing ability.

To note, the value of bonds in the secondary market is always inverse to the yield of a bond (or interest rate).  If interest rates drop on longer-term bonds the value of your bond goes up.  Conversely, if interests go up, your bond value will go down.  If money is seeking safety in bonds, Wall Street can  offer less in interest rates...same holds true with Uncle Sam and US Bonds.

If you have a bond index fund you will see “NAV”, that is the “net asset value” of the fund.  As interest rates decline it is best to be in a “closed end” fund for market value, as they aren’t buying newly issued bonds at a lower interest rate.  It’s just the opposite if interest rates are going up, invest in an “open end” bond fund.  Most of this is just good common sense.

During the last week in May, the stock markets weakened, as they should.  GDP is projected to be a bit over 1%, and added to that car and home sales are down.  Retailers were hammered in May.  Retailer’s stocks like J. Jill was down over 70%, Abercrombie and Fitch down 42%, The Gap down 27%, and so on.

Now, with that said, let’s continue and relate to my opening statements.  Through May economic stats looked sad.  Tariffs with Chinese and Mexican goods are some of the issues adding a further burden for more costly goods as a pass-through to middle America.  Sunday, June 2^nd, Scott Pelley, with 60 Minutes had a good interview with the Chairman of the Federal Reserve, Jerome Powell.  Mr. Powell needed to be very careful what and how he stated things about the economy, as Wall Street and investors quickly pick at the underpinnings.  His comments lead us to believe the economy is quite good and stable, with no recession and significant downturn in sight.  If you haven’t read my blog on the “who, what, where, when” of the Federal Reserve in Blog 164, I would recommend the reading.  A miniscule re-cap. The Federal Reserve was enacted in 1913.  It is a private bank, not held to authority of the US Government, but to assist investment and commercial banks and stabilize our economy and US dollar.  My old theory stands, “don’t trust any banks, they are not your friends!”  The Federal Reserve Bank has investors, and they would be some of the wealthiest people in the world; these people are not disclosed.  I assume the Rothschild family to be amongst those investing in most of the “world banks”.  Everything said and meaning from these banks would be for their best interests and to make money.

On June 3^rd, the Feds indicated that they may soften lending, and if needed drop interest rates.  They would only do this if they were quite concerned about an economic downturn.  This led the DOW Index up over 500 points in one day, June 3^rd.  Volume of stocks traded on the DOW Index was about average at $281 million shares.  Just the rumor that maybe a slight adjustment in interest rates may be forthcoming could take the DOW to an extreme is unusual.  Can’t realistically happen.  With smart money exiting to bonds where did this money come from so quickly?  Again, my assumptions are that the Plunge Protection Team (Act of March, 1988) entered the game infusing millions from our large banks and perhaps the Federal Reserve.  This Team is also called the “Working Group on Financial Markets.”  Things look good to Americans and their retirement plans, but are they in reality?

Mr. Powell stated that our commercial banks are in much better shape now than in the times of the Great Recession, and with implemented restrictions I believe they are.  A big question comes from the amount of bonds/debt these banks lent to large corporations with the Quantitative Easing money; a portion of about $4 trillion.  Large corporations have used this money to buy their own stocks, driving up the markets, versus spending on infrastructure and new equipment and manufacturing plants.  What happens to the price of their stock when, and if, a free market ever returns?  They bought in way too high, and America will have to bail them out.

I think the next recession is going to be a “doozy”.  Debt all over the place, and much of it has no collateral behind it.  This includes things like:

-       US debt at $22.35 trillion with only the faith of our country behind it.

-       Government pension debt at over $6 trillion, and underfunded.

-       Credit card debt over $1 trillion.

-       Student loan debt at $1.6 trillion.

-       Auto loans at over $1 trillion, and autos depreciate in value below amount of money owed.

Another type of debt and concern the country should have and Mr. Pelley and Mr. Powell never addressed is debt in the secondary market, and mezzanine debt.  This now accountants for over $1 trillion.  As said, after the Great Recession banks took on more restrictions and regulations from the Federal Government.  There was a need for loans that are sub-prime, and with smaller companies that could not get loans from banks.  This is where “secondary and mezzanine” financing comes into play.  The money comes from sources like private hedge funds, wealthy people and lending companies that get around banking laws and regulations.  With an economic downturn these smaller and fragile companies will not be able to maintain payment on loans.  The interest on loans, including mortgages in this secondary market are usually 2% to 3 % or more higher than a standard bank loan increasing the problems.

Labor/job creation.  Pretty solid for the first part of the year, but weakening and currently flat .  Private payrolls added a mere 27,000 jobs in May.

Here is another bit of government information not totally clear.  Manufacturing numbers were up the second quarter of the year, however the government only states that number, not how much of the manufactured goods went into inventory and not sold.  That is another picture.

Would dropping the interest rate 25 or 50 basis points really help in the whole picture?  I doubt it.  Everything cycles and we are way overdue.  Can the government and Mr. Trump hold this cycle at bay until after the next elections?  That is a good question.

Here are a couple ideas to help you now:

-       Get another credit card or two with free interest on new purchases until 2021.  These are not collateralized loans.  With good credit you can usually get a $5-10,000 card.  Transfer in balances from your cards currently charging interest.  You will need to pay monthly principal on balances.  You have the card, you don’t necessarily need to use it….just in case.

-       I know people 55 years and older going back to college for the intent of getting a nice student loan paying out monthly.   If you want, be a professional student.  With no other income coming in the repayment fee is minimal.  I would not encourage this, but I know some people will never return the payment of loan, and become an “ex-pat” moving to Mexico or another country.

MONEY 166 - MARKETS

THIS IS MY 166^TH BLOG ON UNDERSTANDING MONEY TOOLS

June, 2019

www.understandingmoneytools.blogspot.com

With the markets recently trending down a couple of friends asked me for stock advice.  In my blogs I attempt to discuss “tools” for investing and from there you have a couple of options.  One would be to use these tools to do your own stock analysis.  The second option is to seek out professional advice, and this may include subscriptions to stock “gurus” and financial planners.  I don’t recommend any particular stocks or options, and do not stay on top of that to render any good advice.

If you select to go it on your own you may want to invest in trading software, lots on the market; seek out the best.  If you go with professionals, again go with the recommended best.  If it is a Certified Financial Planner they are most likely no better than the investment bank they work for telling them what to do.  Statistics have found that money managers in the long run are no better than an index or mutual fund.  They’ve even run stats against monkeys, and sometimes the monkeys do better on selecting stocks.

Subscribe to about 2 or 3 top financial stock reports.  Perhaps one who likes solid “blue chips”, another liking small cap NASDAQ or foreign exchanges.  Most of these “gurus” are great in “bull markets”, however lose money in “bear markets”.  You may do just as well going to casino!  I have either worked along side some of the best, or been associated with the following:

-       Tom Bailey who started Janus Capital Group in Denver, also worked for Vail Associates with me.

-       The guys who started Invesco Funds were classmates in college and friends.

-       Jim Galbreath, Managing Director of Nuveen Asset Management, roommate in college and one of my best friends.

-       Jeffrey Jennings, manger of investments with International Monetary Fund and subsequently manager of “long” investments with Whitehead Associates in NYC and Greenwich.

Even with all these contacts I still have lost a lot of money at times; win some years, lose some years.  I have never been a great one for timing the stock market, and few can time markets correctly.  A good example of market craziness was on May 30th when Uber announced their first quarter earnings after going public and they lost $1 billion.  Wall Street estimated losses at $1.1 billion, viewed this as good news, and their stock rose $2.; a company that may never produce a profit! This is considered “good news”?  We’ve run an enormous ride up in the stock markets, time to be careful. 

Here is a thought-provoking question for you.  Since 2009 when the DOW Jones Average was at 9,000 and today it is at 25,000 what is the justification as our GDP only rose between 1% and 3% during those years?  US companies working internationally also face a challenge as many of the world countries have faired no better, or worse, including Chile, Argentina, Brazil, Venezuela, France, Spain, Portugal, Italy and even Germany.  So what has driven the markets up from a normal 15:1 price to earnings ratio to 26.5 to 1?  Only 2 things:  too much capital for investments and companies buying their own stock back with debt (bonds).

Play it safe now for investing.  If you have a surplus of money, then gamble with it in investments like China or technology. 

Some people ask how Warren Buffett has done so well on investing in stocks over the 60 years, or so.  He started out, like most, analyzing and buying quality.  He has made his big money by either buying companies or buying substantial quantities of stock in a company placing one of “his people” on the Board and assisting in management or control of a company.  Buy some of his stock; just joking! His Class A stock is currently priced at $298,000 per share.  Warren hasn’t split his Class A stock, and wants only institutional or very wealthy investors.

This quarter’s US Gross Domestic Product should slide down to about 1%.  These tariffs that President Trump is placing on goods from China and Mexico are in the end paid by the American people.  It hurts us as much as the countries producing goods, just a pass through of cost, and will naturally slow our economy.

What would I do now?  Look at not losing money. 

-       Look for solid good A-rated municipal bonds, where you get a tax break, and a decent yield.

-       Look at “staple”, necessary product companies where even in a recession people will continue to buy product.

-       Seek out good companies with price to earnings ratios of 10-12, (lower the better) and paying a good dividend.  Don’t forget that if a company runs into financial trouble the Board of Directors can cut the dividend payout.  Past performance of dividends are not guaranteed in the future.

Gold just broke through $1300 an ounce as I write.  Perhaps a small amount of money in that might be a nice hedge.  It had remained stable under $1300 for quite some time.  Buying gold stocks is easier than buying bullion and storing it.

And lastly, if you have stocks that have risen significantly in price, and you have held them under 1 year (short term capital gains tax rate applies) get assistance on placing a hedge with put options.  (We have discussed the options markets and how they function in my past blogs.)