@theMarket: Nothing Memorable in the Markets this Week
Most indexes ended the week where they started. While day traders may have lost or gained from intraday moves, serious investors simply ignored the constant and contradictory stream of news coming out of Washington.
It isn't worth the space to comment on all the on-again, off-again series of tweets and statements that has become part of our daily diet. The main events that did carry some substantive weight were the House rollback of the Dodd-Frank rules. This easing of regulations on all but the largest banks, removes the required ‘stress tests' from most banks. While it relaxes some of the more stringent rules on banks, it does continue to regulate those areas that ushered in the financial crisis.
Bank stocks, which had already run up in anticipation of these changes, sold off on the news. Financial analysts believe that the new rules will trigger a wave of mergers and acquisitions among regional banks now that the government will be no longer watching every move they make.
The Federal Reserve Bank's minutes from their May meeting were also released. It gave market participants some hope, at least for a day or two, that the Fed would remain accommodative regarding interest rates. None of the members seemed worried that the economy could be overheating.
While June and probably September rate hikes are still on the table, the Fed members appeared to be relaxed when it comes to their inflation targets. Inflation hit 2 percent in March, but the central bank does not appear to be overly concerned that it has reached that number. Some believe it won't remain there and will fall back in the months ahead.
I guess the biggest disappointment for investors was President Trump's announcement that the June 12 summit meeting between him and Kim Jong Un is now off the table. Stocks worldwide sold off on the announcement. Whether or not this is just one more tactic in Trump's "Art of the Deal," remains to be seen. However, investors should realize that many of the issues between the U.S., North and South Korea, and China are not going to be resolved by a one-time meeting of these two leaders.
For example, Kim's sudden change of heart over his nuclear program, which occurred in late April, may not be all that it seems. Last month, the University of Science and Technology in China revealed that the mountain above North Korea's main nuclear test site at Punggye-ri had collapsed following a nuclear test in September of last year. Estimated at 100 kilotons, the blast was the sixth test and ten times stronger than any of the previous five.
As a result, a wave of earthquakes rocked the mountain and surroundings, creating so much tectonic stress that parts of the mountain collapsed, and fissures appeared throughout the mountain. Scientists believe that any further tests within this mountain range could generate a "critical failure" that could cause a wide-scale environmental disaster. Although no radioactivity has been identified along the China-North Korea border, Chinese scientists fear that radioactive dust could be leaching through tunnels, cracks and holes in the mountain.
Adding weight to this news, despite the name calling and North Korea's threats to drop all efforts of denuclearization this week, Kim went ahead and carried out the demolition of all the tunnels leading into its nuclear testing facility in the mountain. Why?
I'm guessing all these good-faith efforts by Kim are a sham. Contrary to his public statement that his nuclear weapons program is "complete," it is far from it, but his main testing facility has become a radioactive hell hole. China's concerns that the spread of North Korean radioactivity is a clear and present danger is probably the real reason for Kim's supposed change of heart.
In any case, we will continue to hear more on this. Meanwhile, the markets will continue to consolidate, until they don't. Once this period comes to an end, we should resume our climb higher, so stay invested.
Please take a moment this weekend and remember the fallen. I know I will. Semper Fi.
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The Independent Investor: It Is No Longer Enough to Simply Manage Money
Back in the day, money managers were revered. News stories spotlighting the year's "hottest hands," or that hedge fund's rising star were all the rage. Retail investors chased performance and paid for it. But times are changing, and simply beating the market for a year or two fails to impress most investors.
And with good reason.
Most of us are in the investment game for the long haul. We are saving for retirement: a process involving decades of saving and planning. Chasing the firm or adviser that "beat the market" this year has turned out to be a disastrous approach to that concept.
Most of us have now realized that you can't beat the market. Sure, for a certain period of time — days, months, even a few years — you can, if you are lucky. Over time, however, your performance will revert to the mean, which in this case is the average returns of the market overall. So, paying a money manager a high fee year after year to provide outsized performance is a fool's game.
On occasion, I meet some prospective clients, who still believe that's possible. They have run from adviser to adviser with great hopes followed by disappointment, and then bitterness and blame. As a fiduciary, I am required to tell them the truth. For those who don't believe it, I quickly show them the door.
Given the facts of financial life, why, therefore, should you pay a money manager yearly fees simply to give you what the market gives you? Why not save your money and buy an index fund and be done with it?
I think that is a rational approach for some of us, at least those who can weather the ups and downs of the markets without getting emotional (selling low and buying high). If you have the discipline to stick to a plan for many years without swerving, changing, or being influenced by outside events than you can manage your money as well as any manager. The problem is that few of us can do that. The rest of us need a coach and that's what you are paying for, but even that is no longer enough.
But how much is that worth? If, over the next decade or two, investment advisers continue to charge large fees for simply providing market returns and "coaching," I believe there will be far fewer of us around. The advent of artificial intelligence portfolios at substantially reduced fees is simply the first shot over the bow for an industry that hasn't changed in the 40 years I have been in it.
In my opinion, investment advisers are at a critical juncture. While they beat their chest for providing an extra percentage point or two for their clients, they ignore an entire array of financial challenges that could prove fatal to their clients. I have been writing columns on many of these issues for years.
The rising cost of health-care poses a greater challenge going forward than any down draft in the stock market. Protecting your assets and passing them along to your children is equally (if not more important) than identifying the next internet darling in the stock market.
When and who should take their social security benefits, or having enough money to put your kids through college are concerns that are just as important as what the market did this year. Elder care planning, financial planning and advice on veteran's benefits are some additional areas where more and more of us are going to need high-caliber expertise.
As market performance becomes the norm, and more and more investors focus on what really matters — a holistic approach to managing their wealth and welfare — who among the nation's advisers can offer all of these services? Outside of our firm, I can't think of any. And this is not an advertisement; it is a call to action for an industry that is stuck in their ways that they need to change or perish.
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The Independent Investor: Are Americans Saving Enough for Retirement?
If you simply read the headlines, you would assume that over half of Americans aged 55 and over, have no savings as they approach retirement. That's a dramatic statement, but is it true?
Most statisticians derive that data by adding up those who have an IRA or similar tax-deferred savings account such as a 401(k). The latest data compiled by the Federal Reserve Bank's Survey of Consumer Finance indicated that 53 percent of households, age 55 to 64, had some savings in those tax-deferred accounts. So, yes, by that standard, almost half of all Americans fail the savings test.
But what about all the people who work for the government? There are 22 million workers toiling away within the ranks of federal, state and local government, and all of them have traditional defined benefit pensions.
That's 14 percent of the labor force! Those pensions have amassed
anywhere from hundred thousand (maybe less) to $1 million or more.
While corporate pension funds have been seen a multi-decade decline among workers, there are around 13 percent of private sector workers who are participating in defined benefit pension plans. In fact, roughly 40 percent of all workers between 55 and 64 years of age are expected to receive a traditional pension benefit in retirement.
When you add all those segments together, the outcome is entirely different. Almost 75 percent of workers in the U.S. either have a tax deferred savings account or a pension account. That still leaves a goodly portion of Americans coming up short. However, all is not as bleak as it looks for those people.
Let's talk about the low-wage earners making around $10,000 per year over their lifetime. When they retire, they will receive Social Security benefits. Those benefits could equal as much as 84 percent of their yearly salary. Almost 19 percent of Americans fit within that category, according to the Social Security Administration,
Can some one in retirement live on $10,000 a year? Not likely. Remember that Social Security was never intended to be a retirement account. It was simply unemployment insurance that could help a worker feed his family until he found a new job during the Great Depression. Today, given that we now have unemployment insurance in addition to Social Security, the population has come to think of it as a retirement benefit.
As you can see, most Americans have and are saving for their retirement. That's not the question. How much you are saving is the critical variable in this equation. How much should I save, you might ask, to see me through my golden years? My answer is, whatever you might think, most of us are not saving enough.
The way to begin answering this question accurately is to find out how much you and your family are spending per year. For every household who can answer that, I see at least 20 families who have no idea what their yearly expenses are. It should be obvious that without knowing your expenses, there is no way you can know how much you might need once you retire.
My advice is to find out now, while you are young or at least middle-aged, and set up an appointment with a Certified Financial Planner. Few people have the ability and financial education to create a lifetime play of savings all alone. Make sure that the CFP is a fiduciary and spend the money.
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@the Market: Stocks Look Ready to Reach New Highs
The S&P 500 Index had its best week in two months. All the averages made good gains and investor sentiment numbers are improving. We could see a return to the January highs before summer unless something comes out of left field.
Left field has become a familiar place for the markets under the present political regime, but not all the news has been negative on that front. Take the release of three American prisoners by North Korea as an example. Kudos to the president for that one. Then there is the Iran nuclear deal — another campaign promise kept. Why are these important?
An American politician willing to keep his campaign promises is a historical event, in my opinion. The June 12 meeting between Kim Jong Un and President Trump is another fabulous breakthrough. Those remarkable actions can and have impacted investor sentiment in ways that have lifted hopes and with them the markets.
The jury on bowing out of the Iranian nuclear deal is still out. Readers may recall that back in 2015, Iran agreed to curb its nuclear development efforts in exchange for the lifting of severe economic sanctions. The U.S., U.K., Russia, China, Germany and France all signed the agreement.
At the time, many Americans felt it was the best deal that could be had. Suspicions remained, however, that Iran, despite the treaty and its denial that it ever had a nuclear weapons program, would and could continue to develop that effort secretly. Just days before the president's decision to back out of the deal, Israel released a mountain of documents detailing what they believe was Iran's clandestine, decade-long nuclear weapon program.
Whether it was the Israeli documents that decided the president, or something else, the deed was done. Why is this important to investors? Oil.
Iran is the world's fifth-largest oil producer, pumping 1.5 million barrels/day in an already tight energy market. Taking that supply off the market via new sanctions provides additional fuel stoking the already-accelerating price of oil. For my view of oil prices and where they are going, please read my column "What's up with oil?"
However, it is not always what it seems in geopolitics. The other signatory nations are steadfastly opposed to America's unilateral departure from the treaty. As such, it is a distinct possibility that the remaining treaty nations will simply ignore our departure, disregard the sanctions, or, in some cases, give lip service to sanctions but direct their companies to simply carry on as usual. If so, that sanctioned oil will be re-routed to China, India, or parts of Europe, leaving the U.S. decision ineffectual and the Iranians free to continue along their nuclear path.
As for the gains in the stock market this week, credit goes to the president's actions and a stellar earnings season. The average earnings gain was 25 percent (18 percent minus the tax savings). Thursday's consumer inflation data also helped. The Consumer Price Index (CPI) came in lower than expected, leaving traders to believe that inflation is still reasonably under control. In which case, the Federal Reserve Bank need not raise rates any higher than the market expects this year.
As for all this worry about "peak earnings," the historical data somewhat contradicts those concerns. Seventy percent of the time since WW II after peak earnings were reported on the S&P 500 Index, the markets were higher nine months later. I hope that helps. I'm thinking we go higher, after some profit-taking in the coming week. The S&P 500 Index should hit 2,800 soon. From there, it is only a hop, skip and jump to record highs of 2,872 made back on Jan. 26.
I'm not quite sure we will get there this month and there will be pullbacks galore, but we are heading in the right direction.
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The Independent Investor: What's Up With Oil?
Two years ago, the experts were telling us that the price of oil would continue to fall. Twelve-dollar oil was a real possibility. The end of OPEC was nigh as well as their ability to influence geopolitics. It appears those predictions were premature.
The price of oil has more than doubled over that time, from roughly $30 a barrel in the spring of 2016 to over $71 a barrel today for West Texas Intermediate crude. Those same experts now expect the price could gain further, but there is no agreement on how much higher it can go.
The "swing" factor in that equation is firmly in the hands of American shale producers. They are the culprit of the past three-year decline in oil prices and will likely be the key determinant of future prices in the short-term.
In November, U.S. crude production exceeded 10 million barrels a day. We haven't seen that since I came home from Vietnam back in 1970. There is a real possibility that America could become the world's largest oil producer by the end of this year. That would put us ahead of both Saudi Arabia and Russia. What a change that has been since the days of the OPEC-instigated oil embargos, long lines at U.S. gas stations, and rationing!
The impetus for this astounding change in our fortunes has been the developing technology, which was largely government-funded, that has allowed U.S. entrepreneurs to explore and develop enormous oil and natural gas-rich shale deposits throughout the country. But that's only the beginning of this saga.
These producers, unlike traditional oil companies, can turn their energy spigot off and on at the drop of a hat. Typically, the oil majors such as Exxon or Saudi Arabia's Aramco, require five to 10 years to develop conventional oil reserves. Once in place the oil flows and it is difficult to change course quickly, whereas these unconventional players have developed their drilling and fracturing techniques to the point that they can respond to price changes within a few months.
At the same time, these modern-day wildcatters have cut their cost of production dramatically. They now represent half of all U.S. production and are increasingly profitable. For the first time, many of them will be able to fund future drilling and exploration through their own cash flow. The Permian Basin in Texas and New Mexico is the favorite target of future expansion.
However, that is not the whole story. It appears that even with a dramatic increase in shale oil production, the demand for oil in the short-term will outstrip supply. The world's economies have been growing and organizations such as the IMF are forecasting further growth in the years to come.
Oil and its derivatives, you see, are still needed to fuel this growth, despite advances in alternative energy. Every year, roughly four million barrels are consumed by the world's furnaces and engines. Oil analysts expect an additional one million barrels per annum will be necessary to satisfy future world demand.
That means energy producers will need to replace about 40 percent of this year's oil production over the next decade or so. The most logical and cost-effective approach to this challenge would be to exploit global reserves of shale oil. These deposits are abundant in just about every corner of the world. The problem will be in extracting it. Other countries are far behind our own energy producers. They will need to develop their shale ecosystem and supply chains from scratch.
Since most of these nations are either traditional oil producers/exporters or importers of oil, they will need to spend billions of dollars in new investments to gather, treat, transport and store these new shale oil deposits. As for their existing oil fields, oil majors will require a great deal of time and effort, as well as investment in new technologies, to compete with low-cost shale producers.
While longer-term demand for oil will likely remain robust, in the short-term, we can expect to see continued price volatility in the markets. That's because shale producers will be quick to jump-start new production as prices spike higher, and turn off the spigot when prices fall. It is no longer an OPEC-controlled market where Middle Eastern dictators and kings set prices and the world adjusts. Today's wild and wooly free market will require a strong stomach and an even stronger capacity to absorb sudden and sharp changes in price.
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