MONEY 174 - STOCKS

THIS IS MY 174^TH BLOG ON UNDERSTANDING MONEY TOOLS

August, 2019

www.understandingmoneytools.blogspot.com

In this blog we are going to take another look at stocks.  I attempt to teach you to be more independent when it comes to financial and business decisions.  I am “not going to give you a fish, but will give you the rod, reel, line, hook and bate for you to catch fish.”  If you’ve referred to my past blogs on the economy and markets they should have left you with some thoughts:

-       President Trump will do all he can to prop up the stock market and avoid recession until he gets re-elected.

-       The stock markets are very manipulated with government and large banks intervening.

-       The stock market trends and erratic swings on a daily basis are not norms; there is not a 50, 100 or 200 day moving average to rely on.

-       The bond markets have been in an inversion curve for some time, and the government makes light of the historical reading on this.  Short term note yields are higher than the 10 and 30 year bond yields.  Increased demand for bonds. Interest rates (yield) come down and market value of existing bonds goes up.

-       The tremendous printing of money, debt (governmental and private) and the ignoring of warnings by the International Monetary Fund and World Bank about our fragile financial situation are not to take lightly as the world “works” around our currency.

-       Except for a couple times in history the unprecedented highs of the markets.

Let’s start by looking at the unrealistic highs of the stock markets, as I keep pointing out.  Are we in a new paradigm to evaluate stock prices? Some people say the new price to earnings ratios can be 20 to 25 to 1, versus the hundred year average of 14 or 15 to 1.  Is this excuse because financial people want to sell you more?  I want to ask you a question and we will  relate that to the stocks and funds you are buying.  Let’s assume I have a small retail business for sale that has some growth potential.  My bottom line pre-tax earnings are $100,000.  How much will an investor most likely offer for my business if I wanted to sell?  If you say about $250,000 to $300,000 plus inventory at cost it is realistic.  Let’s assume this small company is a public company in today’s market.  Taking the DOW P/E today at 27.5 to 1.  That would mean that you or someone else thinks your company is worth $2,750,000.  It’s not real nor are the stock markets today. 

We have helped you analyze stocks in past blogs.  We used price to earnings, projected price to earnings, book value and other terms.  I like to look at more tools.  How about the price to book value as a ratio?  Book value and break-up value are quite similar.  Take assets and remove intangibles and “blue sky” from the equation, then less a company’s  liabilities.

How about taking the capitalization in regard to price and earnings.  Capitalization is the value of a company’s value taking the price of the stock times the number of shares outstanding or “in the float”.  Some of these values are out of sight, and will come down.  The favorite 5, or “FAANG”, are already coming down or stable.  The real money has been made. Those stocks, if you don’t know, are Facebook, Amazon, Apple, Netflix and Google.

For stocks look at “insider” trading.  Insiders are the directors, officers, Board members, and top management.  Are they selling or buying?  From what Trim Tabs Investment Research states about $600 million of stock value is sold “each day” by insiders; tells me “watch out”!  Many companies  have completed initial public offerings the past few years.  Typically insiders and stock “option” people cannot sell for a period of 2 years unless they are defined as an institutional investor. (Ruling 144 of the Securities and Exchange Commission.)  Institutional investor designation is a bit of a misnomer.  An individual who makes himself wealthy like Bill Gates, Jeff Bezos or Jeff Zuckerberg can be declared institutional investors and sell large blocks of their stock through Wall Street banking firms within the two year time period.  This has to be applied for and approved by the SEC.

For stock stability, look at the “liquid asset test” or “quick ratio”.  This is the ratio between assets and total liabilities.  The ratio should be 2 assets for 1 liability, or 2:1.

Don’t just look at current earnings, look at track record of earnings growth.  What is the pattern? Volatile?  Is the Board of Directors continually increasing the dividend yield, or just hoarding money?

Strong or weak days on Wall Street?  Make sure you look at volume traded. One stronger day with weak volume says nothing.

There is a “Tracking P/E” and a “Forward P/E”.  Tracking P/E is the price to earnings in the past 4 quarters.  Forward P/E is the projected price to earnings ratio the next 4 quarters, (PP/E).

Where to invest?  Basically for funds there are 4 locations, the DOW Jones Industrials, the S&P 500, the NASDAQ and the Russell 2000.  The NASDAQ and Russell 2000 are more small-capitalized companies and technology oriented.  I would tend to invest, if at all, in quality, staple companies with low P/E’s around 10:1 paying good dividends.  Why take the risk in these economic times?

If I were buying bonds, I would “ladder” my bonds, meaning purchasing with various maturity dates.  I do think interest rates and yields will come down from here.  Many solid countries around the world like Germany, Switzerland and the Scandinavian countries have lower interest rates than we do.  All economies are slowing.

Gold?  Always a reason to keep a small amount in a good portfolio.  Buy a gold stock instead of bullion on the dips.  Analyze a gold company the same way you would analyze an oil/gas company: what are the reserves, what are the potential future reserves, good management in place, and history.  About 20 years ago when gold was going up I “played” a company called Randgold.  They met my criteria years ago.  I believe they merged and now under Barrick Gold.  Symbol on the NASDAQ exchange is GOLD.

If you’ve made money on growth stocks, this may be the time to re-evaluate your portfolio.  Long-term capital gains on stocks held longer than 12 months are 0%, 15% or 20% based upon your income tax bracket.  In the longer term I don’t see how the US can operate without increasing taxes, especially if a Democrat becomes president.  This may be good and needed for the younger generation of people.

Farcical.  Such a delightful word, that only brings up Uber in my mindset. A company with no assets to speak of, most likely will never see a profit and ran a $5 billion loss second quarter 2019.  I am not sure how many quarters they could sustain as such.

Again, I hope you got something out of this blog.

MONEY 173 - ECONOMICS

THIS IS MY 173^RD BLOG ON UNDERSTANDING MONEY TOOLS

August, 2019

www.understandingmoneytools.blogspot.com

We are going to discuss current economics.  Simply put, economics is the finance related to government bodies such as towns, cities, counties, states and countries.  It includes production of goods, consumption and distributions of money or wealth.

We have been manipulating our way around a normal free market downturn that should happen every 5 to 8 years; the economic cycle.  How? A “Ponzi Scheme” for lack of a better term (you might kindly say “uber Keynesian Economics”).  The cycle is such that we print trillions of dollars, those dollars go to banks and large businesses, then workers such as middle class people receive paychecks (not very large) and loans.  That money is spent and taxed as income taxes or sales taxes on goods and services.  Goods and services are referred to as Gross Domestic Product (GDP), and the cycle starts once again with printing more money, etc.  Our current government debt to GDP is the worst in the world, around 110%.

Countries around the world, especially third world countries were lent money by the World Bank and International Money Fund.  The definition of “well intended lending” may be misconstrued by people like me.  If countries like Greece can’t pay their loans on a timely basis, country assets will be sold off to pay the loans and normally to the rich around the world.  Argentina may be the next country to watch.  Argentina’s currency and stock market have tanked.

I’m afraid we are heading toward a world recession because of many reasons. One might be over too high of expectations, but the biggest in my mind is debt.  Politicians promise the world at election time, and then can’t deliver.  In 2010 our US balance sheet debt was approximately $10.5 trillion, today it sits at $22.3 trillion.  We are going to cover debt more closely in this blog, however if you are interested in tracing our US debt from about 1772 to present mainly from our involvement in wars please read my blogs 133 through 145.

Let’s talk first of our country.  We hear little about the USA needing another $1.3 trillion or thereabouts to keep the doors open October 1^st (our fiscal year end), and to tide us into next year.  Mr. Trump is alienating politicians around the world when he needs cohesion and good trading partners.  It is proving that tariffs are not helping us, and hurting the middle class.  Tariff taxes are a pass through of costs to the consumer if they want and need products.  Now, we are looking at adding more tariff taxes to Chinese goods.  China is not being hurt the way Mr. Trump thinks.  First, China has about 1.3 billion people.  They have downgraded their expected GDP to 6% from 8%, however that is 4 times more than our current GDP.  China has already filled in trading gaps with other countries like wheat from Russia and soybeans from Brazil.  The two biggest future economies in the world are India and China. With sanctions and tariffs aimed at China they recently sold off about $200 billion of our US bonds; now owning $1.1 trillion.  Somehow Japan was able to purchase $200 billion of our bonds, now making them the largest holders of our debt.  Russia was the 4^th largest holder of our bonds, but when we sanctioned their country on goods and services they sold most of their holdings.  We are not harming these economies, we are hurting ourselves.

I am a good American, but let’s make some comparisons here.  Let’s compare China and the US on a few points.  China runs an autocratic government that moves quicker than our two party system that accomplishes little and argues about everything.  China has greatly improved their infrastructure and cities making them examples to the world. (I have been in Asia six times and to China to witness this.)  Staying out of wars China is more nationalistic and spends their money within their country.  China has moved 300 million of their people into the middle class category over the last 9 years where we have significantly decreased our middle class.  Being quite well-off financially they are large buyers of gold to support their currency.  They are able to keep their currency low to make goods inexpensively and available at low prices worldwide.  China’s debt to GDP is roughly 50%, or half of our burden.

In light of our problems, our US dollar remains strong to other currencies.  What are the pros and cons of a strong currency?

Pros: 

-       A strong dollar backs the strength of our debt and bonds. 

-       The strong dollar makes imported goods less expensive to the consumer.  It offsets some of the cost of tariffs.

-       More Americans can travel abroad cheaper.

Cons:

-       More travel abroad takes our dollars out of this country.

-       Our US manufactured goods are more expensive to buy elsewhere, thus our exports decline.

-       With exports declining, fewer manufactures will want to set up plants in the US, and production decreases, thus tax revenue declines.

More countries are slipping downward.  Permit me to explain.  Germany the week of August 19^th issued new bonds with a negative interest rate similar to Switzerland.  Denmark has a zero interest mortgage rate.  Our inversion curve of long-term bonds to short term has only become worse; related to recession.  Why?  Smart people are hedging.  They are giving up risk, including higher risk stocks and seeking shelter in low risk bonds.  The more demand for bonds, the lower the interest rate needs to be to sell the bonds.  Well then, who is propping up our stock market?  I watch the trading patterns of stock markets and my speculation is our largest banks with government approval are stepping in.  (Please refer to The Plunge Protection Team Act of March, 1988.)  So why might this be bad for all of us with retirement programs that hold stocks?  At some point the banks may have to “mark to market” like they needed to do with real estate loans in 2008.  They could not meet capital requirements and many banks went out of business.  There too we saw our government select banks to save, and which ones to let go.  Life is not fair!  Here’s a point for you to ponder.  What will happen if the government makes the big banks “mark to market” on their loans if the stock markets return to a normal/historical P/E of 15:1 when the DOW is now at 27.5:1?  I would render the answer to be another collapse of our banking system.  We caused it, we will have to suffer the effect.

Other countries are a mess.  The exit of Britain has been miserable, and a new Prime Minister has replaced Mrs. May, that being Boris Johnson.  We’ll watch to see if he can handle the situation.  The big thing here is trading, and it is affecting all European countries.  The Prime Minister of Italy resigned this past week, and Italy is in a mess along with France, Spain, Portugal and many others.  Mexico this week needed to re-do their earnings (GDP) and appears to be heading into recession.

I hope you have gained new information from this blog.