The US will win through.
The Administration has moved quickly and decisively. In the matter of only a few weeks it has discussed, agreed and formalized a multi trillion dollar package of support. Of course there were failures to plan ahead; there was the obsessive need to play at politics, and throughout there was the sheet anchor of an untrustworthy President. But much has happened and much that is good.
Things may well get worse before they get any better. Cities are critically short of medical resources. They are confronting the near certainty of a pipeline of death. Lock down means unemployment, a cut in investment, zero based everything.
But the underlying strength of the US market, so apparent 6 weeks ago, is still there. We remain the go to place for world investors. However much it grieves me to say it beautiful Rome and Italy, Glorious Madrid and Spain, Athens and Greece are in far worse shape, and their economies were already threatened.We will come out of this pandemic with low interest rates and low stock prices, with a still robust consumer and a strong belief in capitalism and doing business. Expect to see an historic boom in M&A, aggressive Cap-X, and a rapid spring back of consumer demand. At the end of the year we will be flying, we will have a new President and we will be set fair.
That is when I will be writing about the real crash that is coming – but that is for another day. Till then build your portfolio and profit from the current prices.
Have a good day, James
Beware Elephants charging.
Debt is the elephant in the economics room. The last thre years has seen debt of any sort rising – college debt, household debt and especially debt raised in desperation by companies trying to stay alive, junk debt. The FED are now engaged in clear site in underwriting this debt with continued low interest rates and injections of funds of one stripe or another – QE4. Overall national debt already around $26 trillion is ballooning at a further $1 trillion each year. Th political results are encouraging with the stock market at record highs and P/E levels well above par.
But the best parties have to come to an end. What if inflation creeps back? What if those interest levels have to rise? a 1% point change adds up to a 25% increase in costs for a 4% current loan.
The weekend WSJ showed how the current tight labour market is indeed starting to lead to higher pay. Lower skilled wirkers gained 3.7% in november. Warehouse worker pay in Atlanta has risen 25% in the last two years. The next correction will be caused by wage led inflation. Beware elephants charging.
Have a good day, James
The price of debt.
Urged on by the White House, the US like most developed economies, is reducing its rates of interest. The aim is to encourage more consumption, more investment and more growth. But loose financial conditions come with a price. They encourage investors to take out more debt in their search for higher returns so building an overhang that threatens eventually to break the system.
The International Monetary Fund (IMF) recently published its economic update – its Global Financial Stability Report. It makes sober reading. Here are my three take aways:
– Low interest rates are well and truly here. Indeed the use of negative interest rates has risen markedly since April. Government and corporate bonds with negative yields stand at $15 trillion.
– An economic slow down half as severe as that of 2008 leads to the “sobering conclusion that debt owed by firms unable to cover the interest expenses with their earnings would rise to $19 trillion!”
– Pension funds and other institutions are already seeking to juice their financial returns by taking on risky and illiquid investments. Any market correction could lead to a herd like sell off, a sudden and excessive drop in asset values and prejudice the foundation of these core funds.
Here are my conclusions;
1. Do not ignore the IMF – its warnings are important.
2. The US remains the most resiliant economy (see numerous of my earlier articles) but it is hard to see other nations avoid the crunch. There will be a flight to invest in the US as the safest haven which will lead to what has been called elsewhere a short term “melt up” here in the stock market.
3. So keep alert, invest as I have been advising in US centric, low p/e, high growth and solid dividend stocks. There will be a window of opportunity on the upside – then it will be our turn!
Have a good day, James
Wealth Management – checking the strategy.
The economic situation is confused. Most of the traditional relationships have been overturned both at home here in the US, with developed nations and allie,s and internationally between nations and continents. There is a palpable sense of unease and threat. The US economy is the strongest but the rest are suffering. Our turn may be just around the corner.
Any commentator can point to the gathering flock of black swans. The US administration has lost the trust of the world and with it the easy and priceless right of play a helping role.
But despite all of this each of us relies more or less on the returns we can garner from our portfolios. So faced with the future – how do we make our money work for us?
Here’s my approach – a strategy dependant on a series of mental sieves that take me far from the stock market stardust of IPO’s, high tech, wizards forecasting untold wealth to an understood, objectively solid world of steady growth and a cautious preparedness to adapt and shift as the market evolves.
Step 1. See everything – do little.
There is an abundance of market chatter – I watch CNBC, read the NYT every day, watch the WSJ and IBD. They supply a background, a sense of direction, a context and taste for what may be down the road. But I do not make investments based on such a circus.
Step 2. Form a world vision.
If you read the NYT or follow my Thought for Monday Blog, you will already have a world view. Economically we may well be closing on a perfect storm exacerbated by the foreign and trade policy missteps of the US. This has increased the vulnerability of our neighbours in America. It has added to the uncertainties in a Europe already threatened by Brexit, Nationalism, polarisation and the ongoing threat of Russia and immigrants from North Africa. It has threatened China’s hitherto vital role in shoring up trade throughout the world. It has set back technological and global action just when climate change, poverty, health care and education most needed modern and scientifically sensitive treatment.
But, however depressing, this scenario has clear cut implications for any individual wealth management strategy. Chinese stocks will underprform so long as the US seeks to hamstring them as will American companies with strong Chinese trade ties. There may be one or two excepptions – Poland for example – but no European nation is a reliable centre for economic growth in the immediate future. Most face debt challenges and are internally split by increasingly adversarial and extreme internal political disagreements. South America is confrontinfg a full hand of environmental and economic disasters – as is Africa.
The only safe focus of investment is the United States. Less reliant on overseas trade and led by a still buoyant home consumer market, US centric companies are performing well – especially those that play directly into the home market – restaurant chains, pet companies, local media groups, local communications, building supply and property companies.
Step 3. Hedging the downside.
But the volatility remains, the black swans are flocking, and we are in the record 10th year of GDP growth. The likelihood is that there will be a recession within the next 18 months – certainly the market and the chattering classes can talk of little else.
So build a hedge of gold and keep a significant amount of cash to help you through the recession and allow you to buy into the market at a future time of much lower prices.
Step 4. The Selction Criteria.
Here are my criteria for choosing my portfolio:
– US centric businesses – no contamination from my world view.
– Strong record over the last 3 years, and strong forecast growth.
– Strong ROE, positive cash flow, and little debt.
– Clear special market strengths – a robust “moat”.
– A reasonable P/E below 40, and a robust dividend.
– No significant black mark from my regular research sources – Seeking Alpha, Zacks, Fidelity and Investors Business Daily.
Step 5. The Portfolio as at 10/11/2019.
So here are the current “winners”:
ABR, AT&T, CDW, CPRT, CQP, CTRE, GDXJ, GLP, GWPH, KL, LAD, LMRK, MPW, MTZ, MSFT, NRZ, NXST, RCII, SAND, SEDG, SSRM, SMG.
22 companies – I find it hard to keep tabs on more – and there are always the dozen or so others on my watch list – all great companies, each with at least one flaw – a high P/E, some china exposure.
The portfolio is spread equally across all shares and 50% is currently in cash.
I am severe with losses , pruning at -5% and closing out at -8%. I am no less severe with profits, taking them at +10%. So far I am up over 30% this year – I would settle now for a further 10% by the end of the year.
I hope this note is helpful in what has been a topsy turvey world. All the best, James
Trump runs out of Time.
The White House has made two major foreign policy mistakes.
In the first place it has opened a Pandora’s Box of potential calamity by glibly thinking that China, Europe, Iran, North Korea, and our own continental neighbours would react with warmth, understanding and generosity to US bully boy tariffs on trade.
The stock market and GDP are stuck in a band influenced by the usual performance indicators but more than ever influenced by the on off progress of the squabbles, debates and negotiations now being held with a broad range of sovereign nations. None of these negotiations is more precarious or of greater significance than those with China.
A whole hearted agreement would lift the stock market and GDP to new levels. Apple would do well. The President could boast his economic genius and he might win re- election.
But, I tell you now, there will be no new level of agreement and no re-election.
The President has lost international trust with nations that are in many respects larger and more developed than we. Europe’s population is 520 million, China’s is 1.4 billion – our is only 320 million. These nations furthermore grow upon the soil of proud histories. China like the UK has been a superpower before; more it is the only one to have done so not once but twice already.
Trump’s second mistake has been bad timing – and that has completed the strategic opening for the Chinese.
The President has barely a year before the 2020 elections. He needs to juice “his economy” now. It looks likely to undershoot 1% over the next 18 months – hence his frantic efforts to cajole the FED into reducing interest rates to zero. His dreadful presidency has won him no new support and failing to get an “agreement” with the Chinese will doom him to defeat and the prospect of facing the New York courts.
Eventually you get what you earn.
China’s strategy is gift wrapped on a silver platter – keep zigzagging around a hardball core, wait out the untrustworthy President in anticipation of a better and more worthy adversary in 2020.
Trump has run out of time.
Have a good day, James
The US is sliding towards zero interest rates.
Two sides have been playing very different games. The White House needs to showcase economic growth as its ticket to reelection. The FED are concerned with longer term and broader issues, the possible path to recession, and the complex unexpected consequences of a trade war on several fronts.
We are in silly territory – this is no way to run the economy of the world’s superpower. It pits the fake news and twitters of an economically naive President against the FED’s inability to communicate or perhaps even to comprehend the political life and death struggle on the edge of which they stand.
So what is likely to happen?
First we are in the 9th year of positive gdp growth – an 80 year old record. As you would expect, if only for that very reason, people are talking up the trend coming to an end. Clearly the chance is that we are nearer to the end than the beginning. The chattering classes are talking a recession.
It hasn’t helped that, caught in the cross hairs of the President’s ferocious and public shaming of Powell the FED has back tracked from gradually unwinding the QE program and, in its embarrassment, is muttering softly and through clenched teeth vague mantra about one, two or maybe a steady succession of small cuts to below 2% – in line with the Europeans who are looking at some very different statisitics.
But what does the FED really think, and does it matter?
First of all it matters very much. This is an extraordinarily qualified and experienced institution, with long established relationships around the economic world and an unequivocal remit to work for the good of the US. Ignore them, ridicule them at your peril.
What do they think? The FED models are showing a major slow down. Instead of the Trump vaunted 3% growth the New York forecast is now down to 1.5% falling to 1% by year end.
The overall FED model is signalling a 49% chance of a recession within 12 months – the highest risk probability since 2008.
With interest rates slipping every few months, the FED has less and less room to stave off the first signs of a recession and most investors know that or sense it. But they aso know that reducing the interest rate juices their short term returns, may hold up profitability and certainly avoids the ultimate moment when the trillions of outstanding bad debt faces higher interest rates and so inevitable collapse. No one said this was an easy circle to square.
Here are one or two other thoughts before we decide what to do.
– The internet searches for the word “Recession” have just spiked four fold.
– The rest of the world is suffering from an economic slow down – annualised growth is now at a statistically questionable 1% – most of Europe is facing collapse, a hard Brexit is on the cards.
– The US foreign policy at best is creating enough worry, concern and lack of trust to be contributing to the down turn and it is hard to see any help coming from that quarter until after the election in 2020.
In a nutshell it is possible to see the strength of the US consumer and the self sufficiency of the US ensuring that this remains the best house on the street. But it is hard to see a street that is growing and prospering enough to allow our industries and businesses to flourish and grow at the margin.
So max out on the still buoyant American consumer – employment remains high. Choose companies with low p/e, strong growth, and solid dividends. Build your gold holdings buying on weakness.
Have a good day, James.
Perverse US Economic management.
It is perverse that the US has so little confidence in the shared values, judgement, and motivation of its leadership that it should insist on splitting economic management between the White House and the FED. In the hypocritical name of independence their “working together” is interpreted as a form of deviant chicanery where it would seem eminently sensible for both parties to work hand in glove.
As it is, the President has turned the process into part of his drum beat for reelection and is in a win/win position with his unthinking 39% rump of supporters. He can win credit for demanding lower interest rates without the risk the policy may be misguided. He has turned the FED into his own political punch bag.
But stand back and look again – this is an abrogation of authority, it is fiddling, fudging and flailing – because it is covering up the economic management of the nation, it is adding to the uncertainties of policy, and so the hesitancy of business to invest.
The US needs to know what its economic policy is, to publish it clearly, and then to manage it openly. Waiting for the next FED conference, tracking the President’s midnight tweets is no way to manage the world’s leading society. Covering up policy shifts will only further weaken confidence in what is already a rotton system.
As it is, I am indebted to J.T.Crowe of Money and Markets for pointing out that the FED has silently reversed its tightened monetary policy over the last 2 weeks and reinitiated Quantative Easing with $14bn as the first salvo of QE4.
Berated by the President, the FED has already suggested a reduction in interest rates. Together with QE4 they will have silently reversed the national economic strategy – and not one politician has noticed!
Invest sparingly. US centric stocks, gold and strong high dividends are the name of the game. Sell China, sell Europe, and sell the UK.
Hav a good day. James
James is advisor to the Merrill Lynch Wealth Management King Group.
Portfolio Review – end Summer 2019.
The problem is the President.
The office of President rightly commands respect of itself, no matter who may be the incumbent. But eventually performance counts. There has been a marked change in tone towards the White House this summer. Even Fox News has become critical. Leading financial commentators are turning fretful and irritated by Trump’s systemic narcissism and wreckless incompetence. Leading the world’s sole hyper power is nothing like running a family property company. The President is becoming recognised on all sides as the problem.
So how does all this affect our portfolio management?
1. The vast and robust conumer base to our economy remains. However at the margin we also need export markets to underpin the growth of our best businesses. Some sectors (e.g. farmers)rely upon overseas sales. Sophisticated supply chains have been put together over the last decade to underpin the economically optimal delivery of goods and services especially in the most technically demanding sectors . Trump’s bully boy braggadocio has unravelled this achievement.
2. His beggar my neighbour, win/lose foreign policy has alienated friend and foe alike. We are now resolutely set against mutual collaboration on any of the global issues challenging the world – climate change, new technology, education, poverty and health care.
3. So despite its underlying strength the stock market (the S&P) has barely moved over the last 12 months. Winning a return has been a question of stock picking, hence this series. This may be about to change.
4. The sole focus of the President of the Unitd States , far from being on the future of the nation, is now on his own reelection. He will do everything he can to keep the stock market rising at least till the end of 2020. But he is running out of options.
His mismangement has created so many potential black swans that he is hemmed in by geo economic threats that are largely out of his control.
My portfolio has adapted to this reality of a zig zag market within a flat, possibly rising narrow band over an otherwise ribust home economy.
1. So I have stuck with US centric, high dividend stocks with strong growth prospects, reasonable PE’s and little debt.
2. I have continued to play the gold market buying and selling KL, GDXJ, and SSRM.
3. I bought into MA, V and MSFT on weakness.
4. T and RDSA have been added as strong dividend payers with potential scope for growth through 5G and Sustainable Energy.
The portfolio is up 44% for the year to date, which is a strong performance – but it has lost 6% points since the start of the summer.
All the best, James.
James is advisor to the King Group Wealth Managers of Merril Lynch.
Stick to the Plan and Take Profits.
My record start to the year (up 50%) has been cut by 4 percentage points over the last two weeks. Sometimes you have to take the rough with the smooth, but the feeling is never a good one.
We are living within the shattering gold fish bowl of doubt and ambiguity created by the White House. “Never bet on the news” they say – but what choice do you have when it is only the news and twittering news at that?
So here’s what I have done. I have:
– once more cut out stocks with any international reach.
– focussed on america centric companies with low debt, high ROE, strong expected growth and significant dividends. This is the only market to be in.
– consolidated my holdings in gold, now at 25% of the portfolio.
– transposed the portfolio 40% into cash.
and I want to add one other important directive. Take profits at 15% or earlier – it is likely the market will remain volatile. The WSJ and NYT have both carried articles recently showing how the market has been essentially flat August 2018 to August 2019. Holding on for the long haul will prejudice your winnings – keep taking profits off the table. All the best, James.
James Cooke is advisor to the King Group at Merrill Lynch Wealth Management.
Nothing changes…everything changes. Here is my summary for “action”.
1. The US market remains robust. Left to its own devices it is the go to place for investors, the american consumer is strong.
2. The challenge is created in the main by the potential black swans of Europe, Brexit and Italy in particular, and the emergence of populist and nationalistic despots around the world.
3. The US is adding to the market’s concerns through the incoherent handling of its foreign policy especially in respect of China, North Korea, Russia and its traditional Allies.
4. The potentially harmful effects of a protracted and ill conceived trade war are becoming apparent – think farmers, luxury goods and declining R&D quite apart from the cost of shifting established supply chains. At the same time the White House is trying to muzzle the farmers with cash and force a low interest rate policy against the judgement of the FED.
5. US policy is focussed not upon the development of the US, or succour to our friends and neighbours, let alone support for the developing world or the truly global challenges we all face but upon maintaining the rump of the President’s supporting voters who he deems critical to his reelection.
So expect further market see sawing within a relatively small range at least in the run up to November 2020. It is unlikely the China dispute will end well, and some at least of the black swans will take wing.
In this context I have sold all shares that did not meet the most stringent criteria – America-centric; solid EPS, growth forecasts and sector futures; low debt; minimal overseas exposure and solid dividend. The gold holdings have been topped up. The portfolio is approximately 33% cash, 33% gold and 33% stocks.
It has already been a good year, we are currently 47% up. I am in no hurry to spend the cash and will hold on either for an unexpected market improvement of for the correction.
All the best, James.
James is advisor to the King Group of wealth managers at Merrill Lynch.