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RICHARD BAND:
Welcome everyone this is Richard Band, Editor of Profitable
Investing Newsletter and I see that we have 340 people with us already for this webinar.
I hope we’ll be able to accommodate everyone else who would like to join us. We’ve
been doing these—a series of these over the past couple of years and it seems that we
seem to schedule them at very opportune times, and certainly right now the stock market
is doing some exciting things.
We’re pressing up against five year highs for the Dow
Jones Industrial Average and the S&P 500. You got some great earnings reports in the
last few days from companies we own. IBM yesterday, I hope you got a chance to buy
that one a couple of week ago when we gave our last buy signal on IBM. And this
morning Unilever from England reported a great fourth quarter and the stock reached an
all time high today. So we’re delighted with that.
And overall our results have been pretty good too. We’ve now multiplied our
wealth five times since 1990 when we began Profitable Investing with a very
conservative approach and I’ve been investing right along with you so I’ve been
watching my own net worth rise along with yours at approximately the same pace. And I
think we’ve done well enough together to say that it has been a success. I keep doing
this because I enjoy what I’m doing, not because I have to.
I’ve been following the
advice I give you and I invested along side you and the results I think have been
encouraging for us. Doesn’t mean that we’ve been infallible or never made mistakes.
We certainly have made them along the way, but the overall results have been very
satisfactory even in this difficult time for the economy and the financial markets over the
last 12 or 13 years.
A reminder to those of you who may have to leave us in the middle of this
webinar. We’re going to be running until 5:00 P.M. eastern time (so approximately one
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hour) and if you do need to leave us we will post a replay and a transcript within several
days on the web site. So don’t feel that you have to stay if you’ve got something else
pressing that is on your schedule. Feel free to move on and come back to visit the web
site later if necessary.
Boy have I received questions from readers. We’ve got several hundred of them
already in hand. I’m going to try to answer as many as possible during this session; so
during the first 30 minutes of the webinar I’ll give you my presentation, my outlook on the
markets and then in the second half, last 30 minutes we’ll try to reach as many questions
as possible, but remember even if your question is not answered during the webinar I
will keep it and I will try to answer it in the newsletter. Read the newsletter carefully.
Read my blogs and I think you will find that many of your questions are addressed
subsequently in those forums. So we don’t forget your questions. We do try to answer
them all, but obviously they can’t all be answered in a 30 minute Q&A session. I will do
my best. I promise we will.
All right today’s topic is: Back From the Cliff: Can the Bull Charge Again in 2013?
We’re back from the fiscal cliff and sure enough the bull is charging at least here in these
opening days of 2013. The market has done extremely well in these first few days and
we found that in situations like this the market will often continue to rise even well after
the first few weeks of the year and I’m going to share with you a little bit what I’ve
learned on what the market does after its had such a strong beginning. But first let’s
take a look at where we’ve come from in just the last few weeks.
Something important has happened in the fundamental background and that is
the tax deal that Congress reached on New Year’s Eve and I would have to rate it as a
mildly positive outcome for the markets.
Obviously we don’t like tax increases under
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any circumstances.
Most investors would prefer to have lower taxes, not higher, but
this tax deal was less bad than it could have been. For one thing it lessens uncertainty.
It puts some definite rates on paper that we can live with in the next few years. We’re not
going to have to change the tax rates and I think that is a definite positive; less
uncertainty about the rate that people will pay. And then specifically I am encouraged
that the 15% top rate on dividends and capital gains has been preserved for 99% of
investors. Now if you’re one of the one percent whose taxes are going up, perhaps
you’re not so happy about that – and I sympathize with you – but we could have gotten a
much worse deal, let’s put it that way, if some of the things that were talked about earlier
had actually come to pass. So we’ve got a 15% top rate on capital gains and dividends
for the great majority of investors. That is a positive. Why? Because the income tax
rate on dividends and capital gains has a great deal to do with the country’s formation of
capital, people’s willingness to save and to invest. It is saving and investing that causes
the economy to grow in the long term. So you don’t want to have too many hindrances
to saving and the investment end and taxes are obviously a major hindrance or can be a
major hindrance if they’re too high.
And let’s not cry in our beer here; even the high income investors are going to be
paying less on their dividends, less tax on their dividends than they did under Ronald
Reagan. So you know it’s not as bad as it could be. Now some people will come back
and say, “Well, what about the Social Security tax hike that people are already seeing in
their pay packets here in January 2013?” It’s true that we’ve gone back to the old social
security withholding rate that prevailed before the financial crisis and so people are
paying more in social security taxes, but this is a tax that comes out of people’s
consumption spending. It does not come out of their investment and I think that’s an
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important distinction. I don’t like taxes generally, but if we’re going to have taxes I’d
rather see them come out of people’s consumption than out of their investment income
and so on balance I think this is a mildly positive outcome, certainly not as bad as it
could have been.
Now we move into the next stage of the debate of the spending issue and we
have the whole month of February that will probably be given over to that dispute over
how—what are we going to do about federal spending? Can we get it under control?
The debt ceiling issue has been put aside for now. Today you may have heard that the
House of Representatives voted to postpone for three months any action on the debt
limit. The debt limit will be basically allowed to rise without any—at a specific figure to
hem it in for the next three months. Meanwhile the Congressmen and Senators will be
able to debate the issue of federal spending and what kind of cuts can be put in place so
as to bring the budget a little closer to some kind of sustainable balance.
And in the long term I think the big risk here for the markets is that they do
nothing. The settlement that Congress reaches some time in the next four to five weeks
turns out to be just kicking the can again. I think over the long run that would be a very
serious negative for the markets if nothing comes out of this debate in the next four or
five weeks.
That’s a very crucial—it will be a very crucial confidence builder or
confidence killer whether Congress can act decisively on this issue because let’s face it
our federal debt is becoming a serious impediment to growth and this little chart here will
give you some indication of where we stand. In the last 30 years since 1980—basically
since the early 1980s—the ratio of federal debt to our gross domestic product (which is
the output of goods and services in the whole economy) has tripled and now accounts
for all of the federal debt. It’s now over 100% of GDP. It’s tripled in 30 years. You can’t
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keep going that way, and in fact as I mentioned in our February issue Professors Rogoff
and Reinhart have pointed out in their book that once this ratio passes 90%—we are
past it now—there tends to be in all nations around the world and throughout history,
there tends to be a great slowdown in economic growth. And I think that’s what we’re
into that slowdown already. Long term growth has been very poor in the last five or six
years, really the last decade has been disappointing for growth.
And unless the
government can rein in its spending, I don’t think we’re going to get back to the kind of
growth that you and I would have seen back in the 1990s, 1980s and we would like to
see it again for our children and grandchildren. But I don’t see that happening unless we
can finally come together and trim some of the programs that are leading to the runaway
spending in Washington.
So that’s the chart that keeps me awake at night and I hope that in the next four
to five weeks we can start to make some kind of a down payment on controlling the
government spending. Meanwhile there he is, Mr. Bernanke, doing what he can to keep
money flowing easily.
money.
He’s holding interest rates at essentially zero on short term
And he’s promised to pump a trillion dollars of new cash into the banking
system over the next year. It just boggles the mind, but that is what the market loves to
hear. The stock market loves to hear that more money is coming into the banking
system because some of that money inevitably finds its way into stocks and if I had to
point to one thing that is driving the stock market higher right now and probably will for
some months to come. It’s the big easy, the big easy.
Look at the historical record and this is a very encouraging thing at least for the
longer term. I’m talking now about the remainder of 2013. This is the so called January
barometer and we are at this point up in January almost 5% on the Dow Jones. I didn’t
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see it closing so I think maybe we were right around 5% so far for the month to date.
And if you look at the next to the last line on this little table you’ll see that since 1950
there have been 17 years when the Dow in January was up 3-1/2% or more. That’s
where we are right now. And in the subsequent months from February to December the
average gain on the market of the Dow Jones was over 11%.
The median was even
higher, so over 11% for the remaining months from February to December on average
and the percent of positive outcomes in those years was 82%. So your chances of
losing money over the remainder of the year are pretty low when the month of January is
running as well as it is.
So should we just throw all caution to the wind? Well the contrarian in me says
no. We’ve gotta be a little more careful than that because these positive factors are all
very well known to the investing public. The public is in, as this little slide tells us. And
this is a chart from the American Association of Individual Investors. They keep track of
a number of things, but one of their interesting little studies is to ask their members, the
AAII members who are individual investors how much of their personal portfolios they
have put into cash and as you can see most investors including AAII members behave
the way they shouldn’t. They have too much cash on hand when the market is low.
That’s when those blue lines have spiked high in 2002 and 2008. When the market is
low people are sitting on a lot of cash; just the opposite of what they should be doing.
And then when the market is high they’re not holding much cash. As you can see cash
levels have fallen off quite a bit in the last two years, two and a half years people have
become rather complacent about the level of the market.
Whatever they may say
people talk about being nervous and afraid and all of that, but people have been
spending down their cash and putting it into either stocks or in some cases bonds. But
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they have pulled money out of cash. The cash reserves are not quite as low as they
were during the boom years of the late 1990s, but they are lower than they were in the
run up to the financial crisis in 2007. And that I think gives me pause; that the public is
in this game. It may not be—my brother Charlie who has sworn off the stock market and
stayed out of it, has been out of it for five years and you probably know some people too
that are out of the market forever. They’ve left the building, but among the folks that are
still playing the game a lot of them own common stocks that have drawn down their cash
reserves. That’s a reason to be cautious.
Furthermore as this slide indicates values are not particularly attractive when you
compare stock prices to a long term average of the earnings represented by those
companies in the S&P 500 Index. Yes, if you look at just this year’s earnings or past 12
month’s earnings the market doesn’t seem that expensive, maybe a little above average.
But if you average out the earnings over a ten year period as Professor Schiller at Yale
University does, you use that ten year average figure as the denominator in your price
earnings ratio, you see that the price earnings ratio is actually way, way above the
historical average. Historical average is about 15 to 16 and then to get down to a really
under valued market it would have to be around ten which is where the great bear
markets of the past have generally ended. We’re nowhere near that. We’re around 22
today and just to get down to 15 or 16 you’d have to have a 25% or 30% decline in the
market indexes.
So either earnings have to grow a lot in the next few years or prices
have to come down some or some combination of the two. But I think we are a long way
from a major low and we didn’t really even get there in 2008. I’m hoping we’ll never get
back to those 2008 prices again, 2009, early 2009 prices. We may not have to get there
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if earnings continue to tick up, but as of right now the market is pretty expensive. So the
public is in, the market is expensive and that’s a reason to be cautious.
Now here is something I’m watching, and I did promise you in my e-mail blast
about this webinar that I would give you this chart that I’m watching. This is kind of just
something to keep an eye on in the next few weeks. Let’s see if the market can break
out of this range here. This is the value line geometric index. Unlike other stock market
indexes, the value line weights each company (and there are about 1,700 of them in the
index) weights each company equally, not like the S&P 500 where Apple has 5% of the
market value.
These are all equally weighted. And as you can see the value line
geometric index still has not come back to its high which was reached the last day of
April 2011. So watch that 400 level on the value line geometric index. And if it can
finally break out above 400 I think the market would be in much better shape. But as of
now there is still this divergence between the value line’s peak almost two years ago and
where we are today. So let’s watch that 400 level. I’d be a lot happier if the value line
could break through it on the up side.
All right, so we’ve got a Federal Reserve that’s trying to push the market up. Yet
there are not a lot of bargains. What do you do? What does the prudent investor do in
this type of environment? And my suggestion to you is that you nibble at stocks, but just
be very careful about the kind of companies you are buying. I get a lot of questions from
people, you know, what about getting into small caps? What about getting into mid caps
now? What about getting into emerging markets? And I believe in all of those things at
the right time and at the right price. As you know if you’ve been following me for the last
five years or ten years—some of you have been with me for 20 years or longer—if
you’ve been with me for any length of time, you know that there are times when I
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recommend these more aggressive investments, at least for a portion of your portfolio,
small caps, mid caps, emerging markets. I like them all and I think they can enhance
your wealth. But with the market as high as it is,having more than doubled off its lows I
think it is important to be careful and to buy things that are going to treat you reasonably
well in any weather. And these four I’ve talked about in the February newsletter. I hope
you will read the newsletter carefully and the descriptions I’ve given to each of these
companies; Coca Cola, McDonald’s, Microsoft, Southern Company, these are all stocks
that I think you can buy now, hold on to regardless of what the market does in the next
six to twelve months.
So if you are underweighted in stock—and I know some of you are from the
questions you’ve sent in to me. You’ve told me hey look I’m sitting on—I’ve just received
$100,000 inheritance or a lump sum from distribution from my former employer. What
am I doing to do with this money?
And I would say to you take your time, there’s no
hurry to invest it all in stocks, bonds or anything. Take your time, spend it gradually, but
if you’re going to start right now, the things you should be focusing on are blue chips that
pay a good dividend, have deeply entrenched franchises and will continue to treat you
well even if the market runs into some rough weather later on in this year. And I think it
will at some point there is going to be a correction. There has to be. The market doesn’t
run straight up the way it has in the last four weeks or so. So there is going to be
another correction. You’ll have a chance to build your position in some of the more
volatile stocks, mutual funds later on, but for now buy things like Coca Cola, McDonald’s,
Microsoft and Southern Company. If I had to choose just one, I suppose I would make it
at this point—I guess, oh boy, it’s a pretty tough call—but between Coke and Southern
Company. Coca Cola has raised its dividend 50 years in a row. This is a company with
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probably more upside than most any low risk stock that you can find in the market today
and they’re yielding almost 3%. Buy it at $38.00 or less. Southern Company yields
even a little more, 4.5% and that I would buy at $44.00 or less. Our Southern Company
of course is a large electric utility based in Atlanta and this is the kind of company that I
think will treat you well if interest rates start to rise or if the economy starts to falter.
Whatever it is, Southern Company should be able to do well.
By the way someone asked, so why don’t I just try to answer this question in
connection with Southern Company. Someone asked about a story that was in the Wall
Street Journey recently indicating that electric companies and electric utilities may not be
selling so much of the juice in future years, as perhaps they had been anticipated to do,
that the growth rate in electricity generation is going to be somewhat subdued. And I
tend to agree with that actually. As long as its economy is kind of slogging along,
utilities, just like a lot of businesses, are going to be growing at a slower pace than, say,
would have been characteristic in the 1990s or ‘80s.
But a company like Southern
primarily earns its bread by distributing electricity to retail customers, to homes and to
retail organizations, shopping centers and things like that. They do not do a lot of
wholesale selling of electricity to other utilities. So you want to own utilities that are
primarily focused on retail distribution rather than wholesale generation of electricity for
other utilities. So that’s where you want to be, Southern Company would be the place.
In the bond area, obviously I’m concerned about the low yields and the possibility
that at some point interest rates will rise. I don’t think we are going to see a significant
rise this year precisely because the Federal Reserve has promised to keep the money
market rates at zero for the next couple of years. So I don’t think we’re going to see a
significant move yet up in interest rates, but still I am concerned about that risk at some
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point nipping us and I am also concerned that if we went into a recession a number of
corporate bonds could run into—companies could run into problems servicing their debt.
So I don’t want to be lending a lot of money to corporations for long maturities. I want to
keep my maturity short and that’s what this slide is all about. Shorten up on your bonds,
shorten up on your maturities and these three bond funds that I have mentioned to you
here all focus on the shorter end of the maturity spectrum. They want to get their money
back within the next five years, let’s say five to six years. And by focusing on short
maturities you reduce your risk of being caught in a bond that will default on you.
So
Double Line Total Return Bond Fund is probably my top recommendation right at the
moment. They are yielding 5.4%. This fund invests primarily in mortgages. Some of
them are below investment grade mortgages, but the money managers have done a
great job of selecting mortgages that are not going to default.
So they’ve got an
excellent record in that regard and remember the Federal Reserve is buying what is it
$40 billion a month. I think it’s $40 billion a month of Treasuries and $45 billion a month
of mortgages. So the Fed is supporting this market and as long as the Fed is doing that
we might as well profit from it. I disagree with it from a policy standpoint. I think it’s a
dreadful thing to do. And I think it’s distorting the mortgage market and I have my grave
doubts about this little real estate book that we’re in right now because it’s being
supported in part by artificially low mortgage rates. But that being said they’re doing it
now and as long as the Fed is buying these mortgages I don’t see a lot of down side on
it. So I’m going to be Double Line. I’ve got a fair amount of my own retirement funds in
Double Line and believe me though I’m watching that market very carefully and if I ever
see a sign that the Fed is going to step aside and not support the mortgage market we
will be selling Double Line. But for now we’re in it and we’re making 5.4% yield.
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If you can take just a little more risk I like the Wells Fargo Advantage High
Income Fund, 5.8%. As the name implies they invest in so called junk bonds, but they
keep the maturity short which I believe will help to reduce your risk of default.
And if
you look at the historical record you will find that this fund did quite a bit better than its
peers during the financial crisis. Yes it dropped, but it did not drop nearly so much as
other bond fund junk bond funds during that crisis.
So I don’t intend to hold this fund
forever. If I see the economy starting to roll over into recession I would probably sell it,
but for now I’m willing to collect the 5.8%. And then finally the Pimco Fund is the one
that I’ve recommended in our ETF portfolio and that’s one—actually is a little bit out of
our price range, but if it comes down to $103.00 or less you can buy the Pimco fund at
ticker symbol HYS.
I promised I’d tell you something very briefly about precious metals and in just
one sentence I guess I would say that my favorite precious metal of the three would be
silver. Silver seems to be gaining ground on gold and in this chart you can see that
silver is gaining ground on crude oil as well. So it’s in a very gentle uptrend. There is a
certain amount of oscillation within the uptrend obviously, but right now it appears that
silver is gaining ground very gradually against both oil and gold. And if I were to buy a
inflation hedge in here probably silver bullion through the I-Shares Trust SLV ticker
symbol would be the best way to get into silver for a little bit of an inflation hedge
because I think we will see inflation coming back in the years to come with all of this
money pumping. Eventually it’s going to catch. Maybe not this year, but eventually it’s
going to catch and when it does, when inflation comes back you will be glad you owned
at least some physical bullion; silver being the most attractive of the options here.
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And then finally I wanted to mention to you one foreign currency that looks
attractive to me. The Indian rupee which appears to have bottomed against the dollar or
if you put it the other way around the dollar seems to have peaked against the rupee and
this chart which I have printed in our February issue shows you how since last June the
rupee has gradually strengthened against the dollar and through the Wisdom Tree
Rupee Fund which we recommended in the February issue, ICN is the ticker symbol,
you can earn a 6% yield on your money and we hope that you’re going to earn some
appreciation from a rising rupee against the dollar. So there’s the income yield and the
potential appreciation, which I think could amount to maybe 12, 13% total return in the
next year or so. And that would be a good option in addition to your bonds, in addition to
your precious metals, in addition to your stocks. ICN is the ticker symbol and we want to
buy that at $21.25 or less.
And then finally, I want to get to your questions in just a moment, but finally I did
want to give you a couple of sells and these, the stocks that I’ve listed here as sells are
meant of—well they’re individual. If you own any of them you probably should be selling
them into this rally, but I’ve chosen them because they represent a wider phenomenon
that’s going on here in the market right now. And that is that if you look at the daily most
actives list on the New York Stock Exchange or on NASDAQ, you will find that the top 20
or top 100 stocks in terms of share volume every day include a large number of stocks
that are selling for less than $5.00 a share, penny stocks in other words. These are
companies that maybe once upon a time were competitive in their industries. Today
they are not. They are has-beens. They have broken business models, in many cases
their products lines are becoming obsolete and these penny stocks are being traded by
speculators as lottery tickets. People are buying them for a buck, two bucks a share,
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maybe three or four in some cases, hoping that maybe they’ll be able to double their
money quickly. Well that in itself is not a good sign. When you have so much volume in
these low priced, low quality stocks, that’s telling you that a lot of people are out there
speculating, that there is a speculative fervor in the market that is troublesome and
eventually it is going to come back to bite folks that are playing this game. These
pennies are gonna vanish. That means they’re gonna go to zero; some of them, in fact,
probably a majority of them. I will go out on a limb and say this—a majority of the stocks
that you see on the most actives list, trading for less than five bucks a share, a majority
of them will not be around within the next five to seven years. They will be gone. They
will be zero. They will be worthless. And I would say to you don’t play this game. If you
own them, maybe you own for instance Alcatel Lucent, you bought it years ago when it
was a more successful company. You have ridden it all the way down. I don’t think it’s
gonna come back. I really don’t think it’s going to come back. Rite Aid, the same thing I
think is true of Rite Aid. And I think if you have held it this long that the best thing to do
is to sell it, take a tax loss and be rid of it. And I have tried to do that in my personal
portfolio with some stocks that have not done well in the last couple of weeks. I have
just kind of have pulled out a few of them and said I’m gonna let them go; I will take
advantage of the tax write off. And you know there’s something very liberating about
taking a tax write off on an investment that has not done well. You know what it liberates
you to do when you have booked the tax laws you are then free to do a little more
frequent trading and you can take advantage of a short term run up in a stock and sell it
without worrying about paying tax on your gain. So I think that’s not a bad thing to be
doing here in this late stage of the bull market that has been running now for four years;
in the late stages of the bull market to do a little bit of trading, try to get some short term
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gains, but if you don’t want to have to pay a tax on those short term gains you want to be
sure that you’ve got some losses that you can offset against your gains. So get rid of
these vanishing pennies, do take some losses and you will find that you are free to do a
little more trading and hopefully to gain some short term advantage in the market as
well.
Okay I have spoken long enough. We have 24 minutes left and it is your turn. It
is your turn to ask your questions, and wow, have we got them. Let me just see what my
total is here. I think I have 243 questions. So there’s no way I’m going to be able to
answer all of them, but let’s try to take as many as we possibly can. A lot of people
asking about foreign markets, and specifically George here asks me whether we should
be allocating more equity money this year to Asia and/or Europe.
I assume he means
versus 2012. And my answer to that would be basically do the same thing you were
doing last year. I don’t sense that Europe or Asia offers a much better opportunity than
it did last year. Now I say that because the markets in Europe and Asia have already
moved up a lot from their lows last year. Remember Japan was flat on its back as
recently as the middle of November. The Japanese stock market has risen well over
20% since then so, you know, is this a good time to be throwing a lot of money into
Japan? No, I think Japan could do as well as the U.S. market in the next eleven months,
the eleven months remaining in this year. But I don’t see Japan doing a lot better than
the U.S. from this point forward. And the same would be true of the European stocks.
So I think the answer to George’s question basically is put the same amount into foreign
stocks this year as you did last year.
Now what is that, percentage recommended holdings? Bill asks me what would
be the recommended amount that you should put into foreign stocks and bonds. And I
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could tell you this our model portfolio consists approximately of 20% in foreign stocks
and bonds. So we’re 78% domestic and about 22% of the model portfolio is in foreign
stocks and bonds. In the stock area alone we have about 10% of our stock portfolio in
emerging market stocks and about 12% of our bond portfolio in emerging markets
bonds. But that does raise a more general question and that is why do we have only
22% of our model portfolio in foreign investments?
I mean isn’t half of the world
economy represented by foreign countries? You often hear that and my answer to that
is that, first of all, I don’t think most American investors feel comfortable putting half of
their wealth into foreign investments. And indeed it doesn’t matter what the theoreticians
and what the academics say that they should be doing, I think most people are just not
comfortable with that. And you know something? This is an example, I believe, of a
case where the public may know more than the professors do. You know the professors
don’t always take the real world into account and what happens in the real world. Well in
the real world there are some disabilities to foreign investing. One is that the rule of law
overseas tends not to be observed quite so scrupulously as it is here in the United
States. And you know you saw that in Russia where the Russians just basically stole
the assets that were owned by British Petroleum, BP; and they’ve done that on a
number of occasions with foreign investors. They have essentially robbed the foreign
investor and this is Russia which is supposedly, you know, a kind of quasi European
country and it’s much worse in some other countries in Latin America and elsewhere. So
the rule of law is not always observed overseas the way it is here. You also find that
foreign—in the case of foreign stocks most countries charge a withholding tax on your
dividends and that tends to reduce your return especially if you are holding those foreign
stocks in a retirement account where you cannot obtain a tax refund or tax credit for the
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withholding tax. So the withholding tax is a drag.
If you invest in international mutual
funds you will find that the management charges tend to be higher than they are for
domestic funds. So you’re losing something there on management fees.
And then finally this is another point that I don’t hear discussed very often and
that is that foreign countries tend to have their stock markets concentrated in far fewer
industries than we do here in the USA. Europe for instance is much more heavily—the
European stock index is a much more heavily weighted in the financial sector than they
are here in the USA. Europe has a very small technology sector, but a very large
financial sector. Do you really want to own a lot of European banks? That’s what your
mutual funds are going—your European mutual funds are going to invest heavily in
banks because that’s where the indexes are in Europe. And you will find that to be true
also in emerging markets.
Most emerging markets indexes have a very heavy
concentration in financial stocks. You don’t hear too much about that. So there are risks
in overseas investing.
I’m not saying that you shouldn’t invest overseas. You should,
but we have only 22% in foreign investments because I am aware of these other risks
and I don’t want my subscribers to be hurt and I don’t want myself to be hurt either.
Remember I invest along side you and I’m almost 62 years of age. I built a good fortune
and I don’t want to lose it. So I am keenly attuned to risk.
Okay, good. Let’s say…here is a question from, let’s see. From Ken. He says
he is astounded at the resiliency of the dollar and he still remains slanted toward foreign
stocks and bonds. He says am I crazy? Well why is it that the dollar has been relatively
strong against foreign currencies? That’s kind of surprised people hasn’t it that the
dollar has not—after falling there in 2009 it kind of stabilized and it has basically
stabilized since then. Why is that? Well essentially I think it’s because we are in a race
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to the bottom. Other countries are trying to inflate their currencies just as fast as we are,
and the Japanese, for example, just announced that they are going to try to push their
currency down. In the last few days they’ve announced a big effort to diminish the value
of their currency. So they’re all racing to get to the bottom. Europe wants to get its
currency down. England wants, the British want to get their currency down. So when
they’re all pushing these paper currencies down the dollar tends to remain at a relatively
stable level against foreign currencies. So I would not invest overseas with the idea that
the dollar is going to go to pot and I’m going to make a huge amount on the foreign
currencies. You can make money on certain specific currencies at certain times, but I
would not make an overall bet that foreign currencies are going to do a lot better than
the U.S. dollar over the next two or three years.
Okay, question from Daniel about where will interest rates go in 2013. Well I
already told you I don’t think the short term money market rates are going to change
much at all.
The Fed has said it wants to keep those rates where they are, so the
greater question is: what happens to Treasury bond yields, to longer term bond yields
here in 2013? And my answer to that is that I think we are pretty close to an important
high in bond yields right about now. It may go—the ten year Treasury yield might go up
to 2% for a day or two, might even go a little higher than that for a very short time, but I
think we’re pretty close to the top. I’ve been doing some studies on that just today.
Some of my long term charts, looking at them back to 1992, and what I’m seeing here is
that even though Treasury yields have picked up a little bit here in the new year there
hasn’t been a lot of momentum behind this move and it’s looking to me as if the age-old
pattern—now seems to be an age-old pattern because it’s been going on for 30 years,
the age-old pattern seems to be taking hold again in which rates can bounce a little bit,
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but then they seem to bump up against the ceiling and they come back down. So I am
not really too concerned about Treasury yields going wild on the upside. I would be
more concerned that the economy could weaken at some point and yields could come
down on Treasuries, but they might not come down on lower quality merchandise. So I
am watching that situation very carefully. I think the worst outcome would be if we go
into a recession. I don’t think we’re going to have a runaway boom that drives interest
rates remarkably higher.
Okay, will you notify us? That’s what Jerry says; will you notify us when it’s time
to sell tax free municipal bonds? Well I certainly will try to, Jerry.
You know why—
because I own a truck load of these things myself and so it’s in my interest to let you
know when I think municipal bonds are a sell. I don’t believe we’re there yet. As I said
just a moment ago, I don’t see interest rates going dramatically higher. The most states
and localities seem to have stabilized their finances in the last year or two, stabilized you
know is not—you could say that after a person has been in a terrible accident. So it’s
not necessarily stabilized in great condition, but even the state of California seems to be
able to raise funds in the debt markets pretty easily right now. So I don’t see a problem
in the municipal market at the moment, but the thing again I will be watching for is not so
much a run up in interest rates. That’s what everybody seems to be asking about. Don’t
worry about that. That I don’t think is the worry yet. That will come. That will come,
believe me, that will come probably in 2015, ’16 when this inflation problem rears its
head, when all of the money printing by the Fed comes home to roost, then rising
interest rates will be a problem. We have to try to catch that issue while it’s still fresh on
the burner. And believe me I will be watching it very carefully. But the main worry I have
about 2013 for the bonds that I own and that would be the high yield bonds and the
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municipals is that we somehow slip on a banana peel economically and go back into a
recession. We were in the slowest recovery since the Great Depression. Can you
believe that? The jobs growth that we’ve seen since this recession ended in 2009, now
three and a half years; the job growth has been the slowest since the Great Depression.
It’s terrible. It’s terrible and I hope we can keep our heads above water as a country and
that the economy holds together here in 2013 and get higher stock prices. That would
be lovely and maybe unemployment comes down a little bit. Well that would be lovely,
but believe me the main risk is that things unravel and I will be watching that very
carefully because yes Jerry I own a lot of municipal bonds too. For now hold on to them
because it does not look as if Congress is going to meddle with the tax exempt status of
municipal bonds. So hang on to those municipal bonds and especially the closed end
funds that I recommended to you back in 2010, early 2011. Wow, have we got huge
gains in those things. I was looking at one of them today, one of the funds I bought right
near the bottom and it’s up almost 40% since then. So I’m sure you’ve got good gains
too because you’ve been investing alongside me. And you can hang on to those things.
Now a question from Bill; why have utilities such as AT&T, Verizon, Con Ed,
Dominion, Duke, those are the ones he’s naming and I would also throw in Southern
Company, why have they been rather weak this year? In other words not keeping up
nearly so much as the Dow Jones, even though the fiscal cliff was resolved without
much damage to the dividend taxes? Why are the utilities, you know, why are they just
kind of creeping along here rather than moving up robustly? Well Bill I think the answer
to that is in the market psychology. We are in a flight from safety, not a flight to safety, a
flight from safety.
I’ve been telling you about the signs of speculation out there, the
penny stocks that are going crazy, at least their trading volume is going crazy. People
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are making risky bets right now and when they are in a risk seeking mood they don’t go
for the utilities. But you know something? I guarantee you this, as soon as the market
starts to get a little wobbly, as it will at some point, they will come rushing back into the
utilities.
So the time to buy the utilities like Southern Company would be while they’re
still reasonably attractive, the prices are reasonably attractive because the crowd will
come back to these things and will want them. But right now we’re in a flight from safety
mode and that’s what’s happening. Some people are even selling their utilities to buy
risky stocks. I think they will live to regret that, but that’s what they’re doing at the
moment. You go the other way. Be prudent, buy your utilities, don’t buy the penny
stocks now. Don’t buy the high beta stocks right now. That is a good way to make the
same mistakes you made in 2008, 2007, the mistakes you made in the late 1990s.
Don’t make the same mistake a third time.
Okay, good. What are some of the telltale signs be of a market reversal? When
the stock market is ready to give us a decent pull back and it will come? Well I could
give you a long list, but I’m only going to give you one indicator that I will be talking about
frequently in the blogs over the next couple of week and that is the insider sell/buy ratio.
Insiders of course are the officers and directors of America’s publicly traded corporations
and they tend to be very savvy judges of their own company’s prospects. No surprise
there, huh? They work at these companies day after day. They hear the inside scoop
and even though they may not all be privileged to know what the Chairman of the Board
knows, they know enough to make an intelligent judgment, a more intelligent judgment
about the company than any Wall Street analyst can. And then when you aggregate the
behavior of all of these insiders into one ratio you can find what they are thinking about
the market as a whole. What are they thinking right now? Well the news is not good. I
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have been talking about that in recent blogs. We just got a new number today. The
insider sell/buy ratio for the past eight weeks, we’re looking at an eight week average is
mow 4.75 to 1—4.75; that means there are 4.75 sell transactions being executed by
insiders for every purchase. That’s very high.
At the market high last fall the peak
reading was 4.79 so we’re very close to the peak reading from last September. If this
ratio gets up past 5 to 5-1/2 let’s say that would be definite sign that the pot is boiling
over. You want to be more aggressive in taking some money off the table and prepare
for a market pull back. So please if you do watch the blog I hope you will continue to do
so because I will be keeping you up-to-date on this number. It’s hard to find in the public
prints.
The people who issue this number, the Vickers’ people try to keep it to
themselves, but I have a way of getting the number and I share it with you. So we will
share it with you if the news continues to suggest that the insiders are dumping heavily,
but that’s something I will be watching very, very carefully.
Question here from Dennis about master limited partnerships and the outlook for
energy prices for 2013. Well the good news there is that it really doesn’t matter too
much what happens to energy prices in 2013 because our master limited partnerships
are toll takers. These are companies that build pipeline storage facilities, gas processing
plants, things like that and while they have some exposure to fluctuations in commodity
prices it’s not nearly what you would be facing with producer’s oil and gas for example.
So it really doesn’t matter that much what happens to energy prices this year. Your MLP
should do just fine. Now at the moment they’ve had a big run up in the last few weeks
especially since the tax bill was passed and MLPs were left alone. Everybody breathed
a sign of relief. Basically MLP prices have gone up sharply. I don’t think I’d do any
buying right at the moment, but I’m sitting on those things. Some of my MLPs have
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doubled and tripled. I assume yours have too because I bought them at the same time I
recommended them to you so hold on to your MLPs and we will buy them again if there
is a pull back. Now you did ask, Dennis, specifically about energy prices. I think we’re
going to see a pull back here.
I think oil is pretty close to a high at $95.00 per barrel
and I would not be surprised if some time during the spring months there was a pull back
into the mid $80s and that would probably bring a lot of oil stocks down again and that’s
where I think we’d be buying again. But hold on to your Chevron and hold on to your
Royal Dutch Shell and things like that. We will get a chance to buy more of them I think
at somewhat lower prices in the next couple months.
Okay well we’re almost out of time. Let me take maybe just one more question
here and then we’re going to have to wrap it up, but as I said at the beginning I will
answer a lot more of your questions in the newsletter and in blogs to come. Here’s a
question from let’s see, okay, from Debra about what to do if you have to increase your
exposure to equities.
I’m assuming this is, Debra, you’ve got a lot of money in cash,
you’re watching the world go by here and you’d like to put some money to work. I would
say start on a regular dollar cost averaging program, spread it out over perhaps a six
month period and put in a little less this month starting with the four blue chips that I
have you earlier in this session. And then move on each month. Look at what we have
in the newsletter, start building up your position a little bit each month, but don’t do it all
at once because I think the market generally speaking is high and you want to try to buy
on pull backs. Those pull backs will improve your results and furthermore if you buy on
pull backs, you’re less likely to get scared out when the market goes against you a little
bit. You see that what happens to people who buy at the top. They buy at the top and
then they find the next day it’s dropped and they start to panic and sure enough before
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you know it they’re selling at a loss. I want to save you from doing that. So dollar cost
average over the next six months or so. Put in a little each month and that’s how I think
you will get to where you want to be.
Well we have come to the end of our hour. The bottom line I guess I would say
is that for the time being it looks as if the stock market has a tail wind behind it. Mr.
Bernanke is putting a lot of cash into the banking system. That is helping the market
and we’ve had some resolution to the tax issues.
Maybe we will get a resolution of
some sort that could even be somewhat favorable for stocks when Congress addresses
the spending issues in the next couple of weeks.
But in any event, you should
remember that the market has come a long way. It is important to control risk, to be a
buyer on weakness only; do not chase prices higher, and above all maintain an
adequate balance between your stocks and your fixed income because when the stock
market starts to fall your bonds and your cash will cushion the blow and that is so
important to keep you in the game. You don’t want to be like my brother Charlie and so
many millions of other investors who have given up the game because they got blown
out in 2008. It does not have to happen to you. Be prudent and you will be successful.
Thank you for joining us, for listening. We will be back soon with another of
these webinars. I love your questions and I apologize if I didn’t get to yours today, but I
promise you that I will be taking your question into account as I write the blogs and the
newsletter in the weeks and months to come. Thanks so much for your loyalty. You’re
the best people on earth and you are the folks that keep me getting up every morning
and facing the music so to speak. Thank you for being a friend and a subscriber and
good night.
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