The Independent Investor: How to Handle a Pullback
The stock market is in turmoil. Several hundred point swings in the Dow and other averages has investors on edge. The indexes are suffering 1-2 percent point swings per day. How are you dealing with it?
Over the last several months, I have written several columns preparing you for this day. I thought it might be useful to give readers a refresher course on coping. Here are some useful tips on avoiding that worst of all reactions—selling on the lows.
Number one: do not check your portfolio. The more often you do, the greater the probability that you will panic and sell. Every time you check your investments in a freefall decline like this one, you will feel terrible. The only way you can stop the pain (you will say to yourself) is to sell. Don't do it.
You see, we humans are really not built for investing. Our primal instinct when we face danger is to run. That fear and flee response has been saving our butts ever since the first sabre-tooth tiger chased us out of our caves. But putting some distance between you and that predator doesn't work very well when it comes to investing.
We are more comfortable thinking in the short term. No never mind that stocks may come back next month or next quarter, most of us can't take our eyes or our minds off what happened today and what may happen tomorrow. How many of you remember the back-to-back declines we had in the first quarter of 2016? Not many, I would wager.
For some, this is an opportunity. Given that many of us receive bonuses in the first quarter of the year, we may have some cash sitting on the sidelines. This is the kind of opportunity that most investors hope for. Baron Rothschild once said "buy when the blood is running in the streets." Now is your chance to put that money to work. Buy a little on every down draft and be patient.
But doing that takes courage and willpower. You have to fight that instinct to simply husband that cash and "wait until the market recovers," but by then it will be too late. Do it now when panicky traders are giving away stocks at great prices. There is nothing fundamentally wrong with the markets or the economy. We are simply experiencing a long-overdue correction in stock prices.
But the markets have never experienced these kinds of declines, you might say. The headlines may scream "1,000 point drop on the Dow" but they fail to remind us that the Dow has gained much more than that over the last year. By the time the dust clears, we will have discovered that the total percentage loss of the main equity indexes will be no more or less than what we normally see in corrections.
As I have written many, many times before: this too shall pass. You trusted me then, so I am asking you to trust me now. You won't be sorry you did.
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@theMarket: Higher Wages Clobber Markets
@theMarket: Higher Wages Clobber Markets
Gains in a worker's paycheck are supposed to be a good thing, right? It means they can spend more, which contributes to growth in the economy, and maybe have a happier life. If all of that is true, why has the stock market swooned in response to Friday's labor report?
It's simple really. The non-farm payrolls report was another upside surprise. The nation gained 200,000 jobs in January, which is better than the 180,000 we expected. While the official unemployment remained at 4.1 percent for the fourth straight month, it was the growth in wages that surprised the market most.
Hourly wages rose 0.3 percent over the prior month. That brings the year-over–year wage gains to 2.9 percent versus last year. That's the best wage gain news since 2009. However, what may be good for workers, may not be good for the stock market and here's why.
The labor market is tight. There are thousands of jobs out there that are unfilled and that number is mounting. Now, what happens when you need a skilled worker and can't find one? You have to raise wages and woo someone else's worker to you. Right now, the construction and food services areas are feeling the pinch. In those areas, wages have spiked by as much as 4 percent.
Since both I and the country's central bank use wage growth as an important gauge of future inflation, a rapid increase in hourly compensation could force the Fed to raise interest rates higher and faster than investors expected (in order to head off a spike in inflation before it happens).
As we entered 2018, investors were not discounting higher inflation. Instead, they have betting on moderate GDP growth, a continuation of modest rate hikes throughout the year by the Fed, and robust earnings growth.
And then Congress and the president passed tax reform.
Ask yourself this question: if President Trump is correct and the tax cut is going to mean American corporations will be spending that $1.5 trillion in tax savings on investment, while hiring new skilled workers at higher wages, what do you think is going to happen to wage growth?
As I have said before, we did not need a tax cut. The jobs market was already tight (as we can see in the numbers today). The economy did not need to grow any faster than it already was. The time to have passed a tax cut of this size was in the Obama years when the Fed was begging Congress to help stimulate the economy. Instead, Congress refused, arguing that it would balloon the deficit, something the GOP was steadfastly against. Instead, Republicans insisted that spending should be cut, which it was. The result: years of slow growth, misery and high unemployment.
Fast forward to today. The tax cut is blowing up the U.S. deficit as a result of the Republicans change of heart towards deficits (go figure). This week's U.S. Treasury bond auction revealed that the Treasury is going to have to sell much more debt in order to fund this tax cut-driven deficit. In the bond market, the more debt the nation sells, the more interest bond buyers are going to demand. This will apply even more pressure to the upward path of interest rates.
It is already happening. Since the tax cut passage, the U.S. benchmark interest rate, the 10-year bond, has spiked past 2.70 percent (today it is trading at 2.85 percent). Many bond players believe if the ten-year cracks 3 percent, the stock market is going to have a big correction. By the way, the thirty-year U.S. Treasury bond has just topped 3 percent, so you see where this is going.
Readers may recall my distinct unhappiness at this tax reform. Over several weeks, I tried to warn readers that this tax cut was going to be a disaster. Those in the Trump camp discounted my columns, sending me hate mail instead. Partisans on the other side simply cried all the way to the bank as the stock market roared higher in January.
Okay, so now what? It is not the end of the world. Instead, these fears of higher rates, spiking inflation, etc. are overblown for now, since we do not have enough data to determine what will unfold as the year progresses. Right now, these events are simply an excuse the markets needed to pull back. Something I have said is long overdue. That is healthy. How far down? I am expecting a 5-6 percent pullback overall before the market resumes its upward trend.
Remember, I have said that if the tax cut is simply a "thank you" from the Republican Party and the president to business and the wealthiest one percent of taxpayers for their 2017 campaign contributions, than it is simply politics as usual and no harm done.
If companies use the tax windfall to buy back shares, pay bigger dividends, and reward their CEOs, that helps the stock market, but not the economy or its workers. Inflation will increase, but at a modest pace, and the Fed will continue its program of gradually tightening, instead of jacking rates up quickly and driving the country into recession. We won't know which way this will play out until the spring. In the meantime, hang in there and hope that the tax cut was simply a payoff and tool to buy votes in November's elections.
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The Independent Investor: Health Care and the 3 Musketeers
Earlier this week, three of the country's most influential corporate titans sounded a call to battle. Given the inaction of our government, these modern-day musketeers are preparing to storm the battlements of sky-rocketing health care costs.
Jeff Bezos of Amazon may not have the swash-buckling prowess of Athos, nor does JPMorgan Chase's Jamie Dimon compare in physical strength to Porthos. And granted, Warren Buffet of Berkshire Hathaway would be a stretch in playing Aramis, but make no mistake, they do bring a combination of strengths that could revolutionize what I believe is the single greatest threat to our nation's economy.
Back in May of last year, I wrote a column bemoaning the fact that while our politicians continue to bicker over the symptoms — health care insurance — they lack the courage and expertise to address the cause —rising health care costs.
Back when I wrote that "Mr. Buffet, a Democrat, in his recent shareholder meeting, took time to address what he called the real problem for American business, and it wasn't taxes. The cost of health care, he maintained, now represents about 17 percent of this country's Gross Domestic Product (GDP). That's up from just 5 percent of GDP fifty years ago."
I also pointed out that other corporate giants, such as Bill Gates, founder of Microsoft, had echoed Buffet's warnings in a TED Talk presentation as well. At the time, I believed my column had fallen on deaf ears, but lo and behold, here are these three champions announcing (in a deliberately vague press release) a partnership to address that very issue.
The companies said they will develop ways to improve the health of their employees, with the goal of improving customer satisfaction and reducing costs. The statement said that "they were going to bring their expertise to bear in a long-term effort through an independent company that is free from profit-making incentives and constraints."
While Warren Buffet is revered for his investment prowess, he also knows quite a bit about insurance, since his Berkshire Hathaway owns Geico Insurance among other financial subsidiaries. Clearly managing health insurance is a large part of the cost of health care. Then there is Jamie Dimon, the chairman of one of the largest banking goliaths in the world. He has a legendary knowledge of the financial and payment systems. He understands the role of middle-men (of which the health care system abounds). He is also an advocate of more, not less, competition. Jeff Bezos of Amazon provides a proven ability to bring health care into the age of the internet and beyond.
Other business owners have tried in the past to tackle this problem, or have beseeched government to solve the problem. But this is the first time that three modern-day, Queen's Guards have drawn swords. They will be personally ramrodding this effort.
Some discount the effort as mere publicity or simply unimportant since the three will be focusing on building a better system for their own employees and not the nation. Altogether, the three companies have one million workers, a good sample to work with. However, in my opinion, if they are successful, the business community would jump at the chance to mimic a system that lowered costs and improved benefits.
How serious is this effort? If the stock market is any indication, readers should pay attention. The entire health care sector in the stock market swooned on this announcement. The sector lost $74.5 billion in value in one day simply at the thought that there could be a better way to tackle this problem.
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@theMarket: Bulls Barrel Through Another Week
Better quarterly earnings trumped concerns of a declining greenback this week sending all the U.S. stock averages to yet more record highs. There appears to be no end in sight for this continued "melt-up" in the markets.
Over in Davos, Switzerland, President Donald Trump addressed the annual World Economic Forum. For the most part, it was a classic display of "Trumpisms"— MAGA, unfair trading partners, historic stock market. His "ain't American grand again, thanks to me" message failed to impress most of his foreign audience although his supporters were ecstatic over his speech. But whether you love him, or hate him, "The Donald" never fails to make headlines.
Steve Mnuchin, the administration's treasury secretary, was also at Davos. He managed to sink the dollar by over 2 percent on Wednesday, simply by failing to toe the line of former U.S. officials. The mantra of past secretaries had always been a strong dollar is good for America. Instead, Munchin, when asked about the weakening dollar, commented that short-term gyrations in the dollar did not concern him.
That's all the media and currency traders needed to hear. The dollar tanked, commodities roared, and news stories were circulating that U.S. currency policy had changed. By Thursday, Trump and his damage-control team went into action, denying all of the above and that the dollar would "become stronger and stronger." Mnuchin later insisted he had been misinterpreted and that a strong dollar was in the best interests of our country.
The greenback played yo-yo for the rest of the week. Down, up, down and by Friday back to the same levels it had been before the controversy. To be fair, Mnuchin was just telling it like it is. The truth is that no country's treasury secretary cares the least bit about the short-term meanderings of their country's currency, as long as those movements are within an acceptable range. To me, it was refreshing to hear someone acknowledge the facts of currency life, but what do I know?
The dollar's recent decline was triggered when Former Fed Chairwoman, Janet Yellen, mentioned that inflation was weak and might continue to be so. That set off some speculation that the Feds' intent to hike rates further might change, which would keep U.S. rates low. In addition, other central banks have recently signaled their intent to re-examine their monetary stimulus programs that could mean higher rates abroad.
Between the possibility of higher interest rates overseas, plus stronger global growth prospects elsewhere, investors are realizing that there are places besides the U.S. to put your money. Selling some green-backs and buying Euros or Yen-denominated stocks might make sense. Stocks worldwide had another great week as a result.
As for the market, overall, we are beginning to see a bit more volatility. By itself, that is not a bad thing, because the stock market is supposed to be volatile, and I suspect that may continue. At the same time, there is an overwhelming feeling out there that the market is living on borrowed time. With investor sentiment registering about 12 percent bears, many strategists are promising it is not "if" but "when" that pullback will occur. They are probably right. But before you begin thinking that you can time this market take note. The odds that you or me can get it right this time, meaning picking the top (and picking the bottom to get back in) is no better than winning the lottery.
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The Independent Investor: There's Nothing Sheepish About the Price of Wool
We humans have been using wool for thousands of years. It was the primary clothing material of the middle ages. But even today, new uses for wool are cropping up, driving prices to record highs.
The primary use for wool continues to be in clothing production. The newest demand for this natural material is coming from sport's companies such Nike, Puma and Adidas that are weaving it into sneakers. It appears that a new generation of consumers prefer natural over synthetic fibers. They want to know where their products come from and where they are going.
Even old codgers like me are not immune to this trend. Six months ago, I purchased my first pair of wool shoes. Not only are they the most comfortable shoes I have ever worn, but the wool is both warm in the winter and cool in the summer. A client reminded me that weavers are also using increasing amounts of wool in their products as well.
Actually, there are plenty of other uses for wool. Wool is the top choice for high-quality carpets, for example. You'll also likely find it in the padding underneath that rug as well. Furniture, such as seat upholstery, as well as stuffing and covers are also made from wool. Blinds, curtains, cushions, even wallpapers, are often made of wool, as are blankets and wool-filled duvets.
Wool is also coming into vogue in places like China. The growing affluence of its people and its manufacturing prowess make China an increasingly important market for wool. Australia is the world's largest supplier of apparel wool (90 percent market share). China consumes about 78 percent of their exports, but there are about 100 countries worldwide with at least some wool production.
New Zealand, Uruguay, the U.S. and China all contributed to the 1,161 million kilograms of wool produced in 2017, according to the International Wool Textile organization. That is a 70-year low.
The bad news is that wool is expensive to use and that situation won't be changing anytime soon. In Australia, wool production has been stable since 2010 and is forecasted to grow by a mere 4 percent this year to about 446,000 metric tons. Why?
Well, lamb chops explain part of the reason. Sheep production has been increasingly focused on meat production, rather than wool. Refocusing production to produce more wool and less meat is a multiyear process and cannot be accomplished over the short-term. The decision to switch may have more to do with demand here in the U.S. than anywhere else. Increased demand for wool in the United States represents the largest growth opportunity for Australia's wool products. An estimated 70 million sheep were shorn in the Down Under last year.
For that to increase, the Aussies want to see our consumption of wool on a per capita basis increase. Today we consume a mere 300 grams (11 ounces) per year. That compares with about one kilogram of consumption in China, Europe and Canada. I'm betting consumption will increase, but as it does, so will the price of wool, at least for the next year or two. So my advice is to buy those sneakers or that sweater now, because it is just going to get more expensive in the future.
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