Sunday, October 19, 2014

Panic Attacks

The market is volatile with daily swings of 200 points or more, mostly on the downside.  In the first 15 minutes on Wednesday the Dow shed 370 points and the S&P more than 40.  Stocks fell further in the afternoon (down 460 points, S&P off 55 at the worst) and later recovered much ground only to sell off early the next day.  At its worst, the S&P was off 9.8 percent from its recently set all-time high.  Equity investors were panicking, but they weren't alone.  There was panic in the Treasury market, too.  Panic buying that is.  The yield on the ten-year T-note fell to 1.86 percent before rising again (now 2.22). 

The apparent trigger for the panic selling of stocks was the worsening outlook for global growth, one that is being re-enforced almost daily with soft economic data.  The IMF calls it the "new mediocre."  Others call it the "new normal."  Whatever, it could last for years.  Central banks have all but exhausted their tools to spur growth and government stimulus programs costing trillions were mostly ineffective. 

There's more bad news.  There's sanctions on Russia, no growth in Europe and Japan, a recession in Brazil, default by Argentina, fighting in Ukraine, turmoil in the Mideast, Ebola, collapsing commodity prices, deflation risks, Hong Kong protests, etc.

Yes, I'm well aware of what is wrong.  There a lot going right, too.  The growth outlook is still improving, though not quite to the degree people expected a few months ago.  Of course, the stock market is all about future earnings and interest rates, and that alone explains the multi-year bull market; that also explains why it's not over. 

Operating earnings will grow 6-8 percent next year (estimates vary based on one's outlook for the dollar) versus 10 percent or more this year.  Real GDP growth will be 3 percent, give or take.  Perhaps the fall in gasoline prices -- equivalent to a huge tax cut -- will boost growth a bit more because consumers will have additional cash to spend.  The Fed is focused on the effects of the dollar's rise, near-recession conditions in Europe and falling commodity prices.  Conclusion: whenever interest rates rise they won't rise fast and they won't go far.  There may not be any increase at all next year.  That means the two key areas -- earnings and interest rates -- will be positives for stocks.  There's more.

Bear markets begin amid rising interest rates, increasing inflation, a deteriorating economic outlook ahead of a recession or slowdown, falling earnings and an inverted yield curve.  They also come when stocks are grossly overvalued (think 2000).  No sign of those now nor are they on the horizon.  In fact, earnings are improving, deflation, not inflation, could be a more likely problem, interest rates aren't rising and won't be, and stocks are at historically average valuations, many now even lower. 

Then there is a practical reason to be optimistic.  Investors need to put money to work.  Individuals, institutions, pension funds, professionals, and hedge funds have that in common.  Selling stocks that pay dividends and junk bonds and others that pay interest to hold cash that pays nothing is not a Phi Beta Kappa investment strategy.  It's not an investment strategy at all.  

I haven't changed my position.  Clear-thinking investors with an adequate time frame will choose dividend-paying (and raising) stocks for the same reason they've been buying utilities.  A better pay off for T-bills, bank accounts and money-market funds is so far over the horizon that they are off the table.  Forget long-term Treasurys with their token yields, and by all means forget gold and silver.  Only stocks offer income and upside potential.

Bottom line:  There may be more volatile days ahead with wild swings, but I wouldn't be surprised if Wednesday's panic low proves to be the bottom of yet another bout of profit-taking.  I've been through times like this before, many in fact.  Were they unnerving?  Sometimes.  Unpleasant?  Always.  A reason to sell bail out of all stocks?  No.  Not in a bull market.

— David Vomund is a fee-only money manager.  Information is found at www.ETFportfolios.net or by calling 775-832-8555.  Past performance does not guarantee future results.  Consult your financial advisor before purchasing any security.



Thursday, October 16, 2014

It's Still About Growth

Interest rates and stocks are down.  Here's why:

http://www.etfportfolios.net/bonanza/2014-10-16.pdf

David Vomund

Tuesday, September 30, 2014

Searching for a financial adviser? Here's what to ask.

A month ago the wealth management editor at The Wall Street Journal ran an article on why, after only nine months, he fired his financial adviser.  He thought he knew how to evaluate financial advisers; he didn't.

The problem he had with his new adviser was that they had different investment philosophies.  When evaluating an adviser you should understand his investment philosophy and strategy.  How does he control draw-downs -- through market timing or security selection?  How often does he trade?  Does he typically raise cash after some weakness?  Do taxes factor into his analysis?  If an adviser doesn't have a clear strategy then that is a red flag.

Fees are also very important.  When evaluating an adviser you should know how he is compensated.  If the answer is more than a sentence and is confusing then that is another red flag.  Does he receive compensation based on what he buys?  If so, there may be a conflict of interest.

The total fee you pay will be more than the fee the adviser charges, too.  If he buys a mutual fund that charges a 1.5 percent fee then you'll be paying that on top of the adviser's fee, which is likely about one percent annually.  The same is true if the adviser uses sub-advisers.  Also, what are the commission rates?  Discount brokerage firms charge less than $10 per trade.

Finally, there should be a discussion about performance.  This is tricky for the adviser because, unless all accounts have the same holdings and are traded at the same time, he can't advertise performance.  Nor can an adviser offer client testimonials.  Those are against the rules.  He should be able to offer some sample client accounts, however, and show how he'd invest your portfolio.

Choosing the right adviser is an important decision.  Make sure you are comfortable with him and his investment philosophy, and keep a close eye on fees.  Over the long run fees make a big difference.  For the record, I trade through one of the largest discount brokerage firms and never receive a commission.  Never.

— David Vomund is a fee-only money manager.  Information is found at www.ETFportfolios.net or by calling 775-832-8555.  Clients hold the positions mentioned in this article.  Past performance does not guarantee future results.  Consult your financial advisor before purchasing any security.