@theMarket: The Market's Last Quarter
Today marks the end of the third quarter for stocks in 2018. But it is the fourth quarter that will determine what kind of year it will be. Let's place our bets.
First, we should look at what could go wrong over the next three months. Tariffs probably lead the list. More of them, (although the dollar amount is minimal in the scheme of global trade), would be bad for sentiment within the global stock markets. Mid-term elections are a toss-up, but simply not knowing the outcome I count as a negative. Quarterly earnings results might also hold some risk for investors. And finally, the latest investor sentiment readings (a contrary indicator) are as high as they were back in January before the stock market sell-off.
Since there is no way of knowing what our esteemed president will do on the trade front, let's simply acknowledge that risk and move on. Mid-term elections are also an unknown quantity, but my bet is that the Democrats will take the House, while the GOP will maybe hold the Senate if they're lucky. In all likelihood, after a bit of volatility, the markets will move on regardless of results.
As for earnings, they may be a bit different than the pleasant, upside surprises we have become used to over the last two years. Negative pre-announcements by various companies are ticking up. As of this week, 74 out of 98 S&P 500 companies, according to FactSet, have guided lower for the third quarter. So, what gives on the earnings front?
It is simply confirmation of what Federal Reserve Chairman Jerome Powell told us this week about Trump's trade war: "We've been hearing a rising chorus of concerns from businesses all over the country about disruption of supply chains and materials cost increases."
Bottom line: you don't actually need tariffs to be implemented to impact economic growth. Trump's constant threats and tweets about what he might or might not do on the trade front is creating an atmosphere of uncertainty. Corporations are becoming more cautious, guiding down expectations, and generally delaying expenditures until they see what happens.
Right now, investors expect third-quarter revenue growth to average 7 percent, while year-over-year earnings growth should come in at around 20 percent. Sounds good, doesn't it? But those numbers are down from second quarter results of 10 percent revenue gains and 25 percent earnings growth. The fourth quarter expectations are even lower with 6 percent revenue growth expected and 17 percent gains on the earnings front.
In the past, I have discussed the phenomena of "peak earnings" and how the wonderful results of the past few quarters have been artificially inflated by one-off events. The Republican tax cut giveaways to the nation's corporations were squandered on buy-backs of shares, increases in dividends, and mergers and acquisitions, but those effects are winding down.
Despite the effort in Congress this week to make those tax cuts permanent (in hopes of propping up the markets until after the mid-term elections), it is doubtful the Senate will go along with it. Adding another $750 billion or so to the $1.2 trillion it has already cost to cut taxes this year seems to be a "bridge too far" even for a party that has abandoned all semblance of fiscal integrity.
The U.S. Advisory Sentiment data now places the bulls at 60.6 percent, the most bulls counted since Jan. 18, 2018, and the seventh straight count above 55 percent. Usually, readings above 55 percent indicate caution. Over 60 percent signals elevated risk and the need to take defensive measures.
On the surface, all these arguments should set us up for a bear market in the last quarter. However, every one of these arguments has been around for at least the last three months and look what the markets have done. The Dow is up 9 percent, the S&P 500 Index up 7.5 percent, and NASDAQ gained 7.7 percent. Bottom line: the markets have shrugged off the negatives and moved higher. Why should the fourth quarter be any different?
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The Independent Investor: Credit Freeze for Free
It just got cheaper to freeze your credit files, thanks to the Economic Growth, Regulatory Relief and Consumer Protection Act. But should you do it?
The law, signed by President Trump back in May, only took effect this month. It requires the three major credit reporting bureaus — Equifax, Trans Union and Experian — to drop the fees to freeze your credit. Those fees ranged from $3 to $10 per person, times three credit bureaus, plus more charges to "thaw" your credit. Consumers can now also un-freeze their files, either temporarily or permanently, free of charge.
Thanks to a recent spate of credit breaches, Congress felt it needed to do something about the problem. Readers may recall last year's credit breach at Equifax and its aftermath. Hackers stole personal data, including Social Security numbers, birth dates, addresses and even some driver's licenses from an estimated 143 million people in the U.S. Another 210,000 credit card accounts were also at risk. To make matters worse, the company knew about it, but kept quiet for some time before revealing it to the public. There had been a flurry of hearings, investigations and demands from both sides of the aisle to do something about it. Then there was the Yahoo breach in 2016, where over one billion users were impacted. Several banks, including Citibank as well as countless department stores, have reported hacking of information for millions more users. Thus, the new legislation.
So, what exactly is a credit freeze? It is a way to protect personal information from credit fraud and identity theft. Once you freeze your account, no one can get access to your credit files to open a new fraudulent account in your name. The downside is that you can't apply for new credit, either, unless you lift the freeze using a special PIN number.
But if you have ever had the misfortune of dealing with these credit bureaus, you know how time-consuming and complicated it is to change anything at all in your files. First, you need to be able to contact them. Sometimes the robo-answering service can keep you on the line for hours. You are required to repeat this excruciating task at all three agencies and you better have all your account numbers, credit card numbers and everything else handy and documented.
Remember, too, that if you need to apply for a loan, a credit card, set up electricity or phone service, rent an apartment, buy a house, obtain insurance, even apply for a new job, you can't — until you thaw your credit file. That will mean calling back all three companies, waiting in line, unlocking your credit, conducting your business, and then re-establishing the credit freeze. Putting up with these monumental delays may well be insurmountable for many.
You could, instead, take advantage of a credit lock, which works like a freeze and is offered by the credit bureaus. The companies market it as being more convenient since consumers can lock and unlock their credit files simply by using a smartphone application. Of course, they charge you a fee for it, as much as $20 a month, and that fee can be increased (and probably will be) in the future.
Fraud alerts could be the way to go. If you believe that your information may be in jeopardy, you can notify all three credit bureaus and they will then have to verify your identity before releasing information. Fraud alerts had expired after 90 days, but the new law requires them to remain in place for a full year.
Bottom line: if you are an actual victim of ID theft, a security freeze is critical. If you think you might become a victim of ID theft (your wallet was stolen or lost, as an example) a freeze might be worth considering. If so, do not lose your PIN number. If you do, it will cost money and mountains of your time to get a new one. And finally, if you are paranoid about identity theft, consider a fraud alert. Your credit information will still be available, but creditors must take reasonable steps to verify your identity before granting you credit.
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@theMarket: Record Highs and More to Come?
The Dow and the S&P 500 Indexes made record highs this week. That's right, we broke the levels of January and we closed out the week holding these new higher levels. So much for the bear's prediction of a 5-7 percent pullback.
Over two weeks ago, when I published my last column, I wrote that most of the Wall Street community was expecting a pullback. I warned readers "that when the pack is leaning one way, you should be looking the other way. I say stay invested, look beyond a month or two, and prosper by the end of the year."
OK, in hindsight, that was sage advice, but now what? You aren't paying me the big bucks to tell you about the past. Do we continue to move higher, or do we fail right here? I think stocks have some traction now that we have broken key resistance. We could move up to 3,020 or so on the S&P 500 Index before all is said and done.
There's plenty of reasons to hope for the best, despite that wall of worry I mentioned in my previous column. The tariff tiff between Trump and the rest of the world is slowly becoming old news. More and more economists and trade experts are coming to the same conclusion that I did over a month ago. When you add up all the tariffs and counter-tariffs, the economic impact is equivalent to a hill of beans.
An atmosphere that is long on rhetoric, but short on impact, equals higher stock prices, at least in the short run. And rather than reduce forecasts for economic growth, many economists are pushing up their growth estimates for both the U.S. and the world economy. The unemployment rate continues to decline here at home, and more and more workers feel confident enough in their job prospects to search for better-paying jobs.
The Fed is still on course to raise rates again. And the bond market is going along with the moderate rate increases since the inflation data continues to remain under control. At some point, that scenario will change, but until it does, there appears to be a floor under equities.
There are negatives, however, and any one of them could throw a monkey wrench into the positive scenario that I have presented. At this point, the mid-term elections are less than two months away and it doesn't look good for Republicans. Recent polls indicate that the GOP could lose the House and there is even some talk of losing the Senate. If so, we could see a paralysis in government over the next two years.
President Trump's political problems seem to be escalating on a weekly, if not daily, basis. It appears that many of the President's closest allies have not only found themselves in hot water, but are now willing to provide evidence against him to save their own skin. These investigations have plagued Trump since the election. They appear to be occupying more and more of his time and energy. A situation that I suspect will only escalate if the Democrats gain additional power in Congress.
Historically, October has been the worst market month of the calendar. That doesn't mean a down market is a sure thing. There have been plenty of times in the recent past where old market adages have not worked. But even if we do get a pullback, I wouldn't sweat it. Stay invested and wait it out.
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The Independent Investor: Dogs and Their Cars
Pet ownership in America is well over 50 percent. Nine out of 10 of these owners view their pet as part of the family. As such, dollars spent on traditional pet ownership areas such as food, veterinary needs and boarding have expanded to include things like exercise and travel. For more and more Americans, that trend has grown to include what cars we purchase.
This hit home for me recently when my wife and I began discussing our next automobile purchase or lease. In times past, our decision may have been based on what vehicles provided the best fuel mileage or winter safety in snow and ice conditions. But this year, it was all about what car would be most appropriate for our 10-year-old Labrador retriever, Titus.
Over the years, from time to time, I have written about Titus while examining topics such as the growing cost of owning a pet to the reasons everyone should purchase pet insurance.
Now, Titus has reached an age (like his owners) where he is slowing down. Arthritis in both shoulders, a back operation last year, and just wear and tear from retrieving way too many balls has made it increasingly difficult for our guy to leap into the back of an SUV. It appears we are not alone.
Seventy-seven percent of dog owners say the option of having pet-friendly features available would impact their decision on which vehicle to purchase the next time they are in the market to buy a car. That number increases to 89 percent for millennials.
In a recent 2018 auto trends report published and conducted and published by Google, the internet company found that the average American was 36 times as likely to search for pet-related items like a dog car seat or dog hammocks than the average person in Germany, and 10 times more likely than the average person in Japan.
Back in the day, when you went on a road trip, Fido stayed at the kennel or with friends or relatives. Today, no road trip would be complete without man's best friend tucked safely in the back. Problem is that what constitutes safety for a Chihuahua may not be safe for a 90-pound Rottweiler. Popular wisdom says, "the larger the dog you have, the bigger the car you need."
So, we have an SUV outfitted with a metal grill that sections off the baggage area. The space has been fitted out with a nice dog bed, towels, leashes and Titus' favorite toys. Most dog-friendly cars offer roomy interiors, seats that fold down, and has low ride height so that dogs can get in and out easily.
Who among us can forget Subaru's successful marketing campaign and website for their Forester wagon? It was built around (you guessed it) an aging chocolate Lab, declaring that their car was "dog-tested." Subaru's Dog Tested Facebook page even provided driver's licenses for your pets.
Toyota and Nissan, among others, have also jumped on the band-wagon. Nissan rolled out a new concept car, the "Rogue Dogue," based on its popular Nissan Rogue model. Among canine-oriented amenities offered are: a removable pet partition, secured leash-attachments, padded walls and floors, a 360-degree dog shower and dryer (I kid you not), spill-proof water and food dispensers, slide away loading ramp, a canine first aid packet, storage drawers and waste bags.
Before you get your hopes up, the Rogue Dogue is only a project vehicle and as such is not on the market yet. At some point, if there is enough demand, Nissan might enable dealers to add these features on an aftermarket basis.
As for me, I am hoping that Nissan does roll out the Rogue Dogue by next year. It sounds like the perfect car for our family, that is, if Titus approves.
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@theMarket: September's stock market
Next week, Wall Street's big boys return to their offices. Campaigning for mid-term elections moves to the front burner, and tariff threats between the U.S. and China will likely escalate. Welcome to one of the worst months of the year for stocks.
It is true that both September and October tend to be negative months for the averages. Since 1945, the S&P 500 Index has, on average, lost 1 percent. In addition, it is a mid-term election year where Septembers are almost always rocky months for the market.
One could say that investors face an entire fall season of potential risks. Besides those I have already listed above, there will be the implementation of the new Iranian sanctions to contend with. And don't forget the recent free fall in so many emerging market currencies because of a stronger dollar and rising interest rates. We also have another budget deadline for Congress coming up. Last, but not least, are some events in Europe that bear watching.
The Italian budget, which is due at the end of September, could be contentious, since the budget promised to the voters may not be acceptable to the European Union. That could trigger another crisis of confidence like, but more serious, than, the recent troubles in Turkey. Brexit is another on-going concern, as is the outcome of our potential tariff talks with the European Union on autos.
All the above should maintain, or even elevate, that "wall of worry" that we have been living with since January. The good news: despite these concerns, the S&P 500 Index, along with most other averages, have reached record highs in the last week. The S&P is now up 9 percent for the year and NASDAQ is even higher.
Given these obstacles, readers should not be surprised that a growing chorus of market pundits are warning of a 5-7 percent decline in stocks "soon." OK, that's probably a fair guess, given the gains we've had, but so what. Do you really want to time the market here for a normal, and shallow pullback?
Statistically, while September and most of October are rocky months, the historical data says that whatever losses one incurs in the next two months, will be more than made up for by the end of the year. Are you good enough to guess the top, sell, and then get back in for a measly 5 percent? If you are, please manage my money.
Another thing with this "danger ahead" scenario is the number of people that are predicting this will happen at any moment. In the space of one week, my electrician, a dentist, two cab drivers and a librarian have all told me (and are convinced) that not only is the economy on its last legs, but the stock market was teetering on the edge of a precipice.
When I asked what led them to believe that this decline was imminent, they answered with conviction.
"They are all saying it."
I never did get them to explain exactly who "they" were. The answers ranged from "those guys on the TV," to "my book club members," or "a neighbor who is in the business." As a contrarian, I've heard these kinds of concerns in the past. It usually means that when the pack is leaning one way, you should be looking the other way. I say stay invested, look beyond a month or two, and prosper by the end of the year.
A reminder, there will be no columns over the next two weeks while my wife and I are in Norway on vacation.
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