InnOvation Capital & Management, LLC
LAW – POLICY – FINANCE – MARKETS
INFORMATION FOR THE ENTERPRISE AND INVESTOR
September 7, 2016
Contact Richard Power with comments or questions. IntelDigest is intended for the use of our clients and colleagues. Material may not be reproduced, forwarded or shared without express permission.
This week in IntelDigest is a time to pause and reassess, specifically with respect to stock investments. To use a baseball analogy, we are in the 9th Inning of an investment ball game that began in 2009, as the economy began its “recovery” from the last major financial crisis.
I place “recovery” in quotes because the increases in value of stocks and other assets are attributable more to manipulation by the Federal Reserve and other central banks than actual increases in productivity, earnings from operations, or other legitimate business activities.
So, as we enter the 9th Inning, we pause to try to determine if the bull market of the last seven years will come to an end next year …. or next week!
Looking Up?
On the Plus Side (from the standpoint of the stock market), we remain in a historically low interest rate environment, which could remain for quite some time, even if the Federal Reserve raises rates slightly after the Election.
This has encouraged investors to search for Yield in equities, rather than more traditional vehicles. You cannot remain a Fixed Income investor when bank savings accounts and certificates of deposit pay practically Zero and the 10-year U.S. Treasury earns only 1.50%.
Another Plus is that American corporations have been running aggressive and unprecedented stock buyback programs because they can borrow cash at ultra-low rates to fund buybacks. This has buoyed stock prices, and could continue to do so.
You could call this a “Goldilocks economy” … growth is not great, but the economy is growing … interest rates are ultra-low and not expected to go significantly higher for another few years …. inflation is low.
Equities could remain high for several more months
Looking Down!
On the other hand … there are plenty of Red Flags waving, indicating problems in the marketplace:
• five consecutive quarters of declining overall corporate earnings
• Bloomberg reported that cash and cash equivalents for S&P 500 companies dropped to a median $860 million last quarter – a three-year low
• the top 50 companies in the S&P 500 accounted for more than half of that total
• the remaining 90% of S&P 500 companies have fast-falling cash balances
• much of that cash has gone to stock buybacks and dividends, but buybacks are slowing, as is growth of dividends
• as cash balances decrease, companies can still borrow at low rates to keep up buybacks and dividends, but that increases their debt burden
• Standard & Poors has reported that global corporate debt has already hit three times earnings before interest, taxes, depreciation, and amortization (EBITDA), the highest level since 2003, and nearly three times higher than last year
• wages are stagnant, and low interest rates make it difficult to save for retirement
• stock prices of many companies are at All-Time Highs, even as the company fundamentals continue to deteriorate
Add in other disruptions around the world:
• the U.K. leaving the European Union, and the possibility of other countries following
• aging populations in the developed world
• political tensions involving war and migration
• seemingly-clueless central bankers with enormous power
• a truly wild presidential election cycle
• an impending change in International Monetary Fund Special Drawing Rights (SDRs) which could have a severe impact on the U.S. Dollar within the next few years (we’ll discuss this, in more detail, in a late-
September issue)
Re-assess and re-evaluate
So, what do you do? Liquidate everything and go to Cash? Last week … in our discussion of Yield … we set out various investment possibilities, including real estate, gold & silver, and stock options. We will expand on these and other alternative investments … convertible bonds, preferred stocks, art, collectibles, et al … in the near future.
You should take the time now to reassess your investment goals and your portfolio. Are your goals and your holdings aligned? On track? Is your portfolio diversified for balance and safety?
Volatility will surely increase in the coming weeks. What is your comfort level? Can you endure losses in your accounts? Are you nearing retirement?
If you are more comfortable in traditional equities … stocks, ETFs, managed mutual funds, index funds … understand that now is not the time to be holding over-priced stocks with declining fundamentals. Expect to see your fellow investors in a general rotation into more defensive stocks in the coming weeks (this has already begun).
You would want to hold stock (either directly or through a fund) of the highest-quality companies with strong and improving fundamentals. You should look for consistent sales and earnings growth, strong support from institutional investors, and a history of paying and raising dividends.
Historically, regular dividend payments account for 40% of total stock market returns. Even when a general stock market downturn temporarily lops 15-20% off the stock values in your portfolio, regular dividends offset some paper losses and instill confidence that the company is strong enough to come back, and prosper again, in the near future.
Sell companies which do not reflect such strong fundamentals.
Act sooner, rather than later, to avoid a panic situation weeks or months down the road. It is time to plan for the inevitable downturn … if you haven’t already … and implement changes as soon as possible.
We will be writing every week about the problems that we see on the horizon, and possible solutions. We discuss finance, markets, government policies, and legal issues.
If you would care to call, we can discuss solutions which we are implementing for ourselves and for our clients. We would like to help you.