Growth Trumps Everything

The stock market is making new highs week after week.  "How can that be?" some ask.  After all, the global economy is limping along, Japan (the third-largest economy) is in a recession and Europe is flat-lining.  U.S. GDP had a good last quarter but mostly limps along.  So what gives?

First, I'll remind readers that for years I've been saying that there is no alternative to stocks.  Bonds, commodities, real estate, cash equivalents, gold and Treasurys all pale in comparison.  Only stocks provide growth and in many cases a good and rising income stream as well.  That alone explains part of the bull market.  Nothing new to say about that.  It is what it is.

The prospect of future growth spurs investors, and it's doing so now.  It starts at the top.  Unless the economic pie is growing, personal income and corporate earnings will stagnate.  Yes, some companies can grow at the expense of others, but investing is a lot easier when GDP is ticking up.  The outlook for GDP growth into next year is improving.  Finally.

Earnings growth, it is said, is both the mother's milk of a bull market and the key to investment success.  The proof: since the market bottomed in March of 2009, stocks have soared and so have earnings.  No coincidence there.

Growth is the key on the portfolio management level, too.  Peter Lynch, once the manager of Fidelity Magellan, said: Invest in well-run companies whose earnings will grow.  It's no more complicated than that.  If you're right, the stocks will rise over the long term no matter what else is occurring.  That was true years ago; it's true now.

— David Vomund is an Incline Village-based 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. 

Preparing for a rising interest rate environment

The Fed won't raise interest until mid-2015 at the earliest.  That doesn't mean investors can't prepare portfolios for higher rates:

http://www.etfportfolios.net/bonanza/2014-11-13.pdf

David Vomund
www.ETFportfolios.net

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.

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

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.

 

           

The Bad News Bears

Have you ever noticed that when you watch national weather forecasts they always focus on the worst storms?  Most of the country might have great weather, but they'll show the area with the worst.  After watching this day after day one might think the weather is awful everywhere.  Obviously that's not true. 

The same is true for stock market coverage.  There is always something to worry about.  When one bad headline subsides another gathers attention.  Investors often wait until there is more clarity, but there is always something to worry about.  That news can be a distraction for stock investors.  The only time I can remember when there wasn't anything to worry about was early 2000.  Stocks were strong and Y2K was a non-event.  We all know what happened to stocks after that!

 

Going back to the weather theme, have you noticed we hear the term "wind chill" every day in winter?  "It's 30, but it feels like 10."  Why is it we never hear the term in the summer?  Weathermen don't say, "It's 93, but with the nice breeze it feels like 81."  Hmmm.  Maybe it's that bad news is more interesting, that's all.

 

News coverage of the stock market is a lot like weather forecasting.  For example, you often hear the term "correction" when an uptrending market pulls back.  The term implies something is wrong and needs to be corrected.  Yet when stocks are falling in a bear market, the frequent rallies are never called corrections.  Only when stocks fall in a bull market do we hear the word.

 

Today, many in the financial press are shocked that stocks are strong given the problems in Syria, Ukraine, Russia and Iraq.  Earnings and interest rates move stocks, however.  We remain bullish because rates are low and won't move significantly higher anytime soon.  Earnings are growing at 10 percent and the market's P-E ratio is near its historical average.  That's why stocks have moved higher.  And they will ... 

 — 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.

Here's What to Watch

The market quickly fell four percent from its high.  The financial media tell us many negatives -- geopolitical concerns, the threat of rising interest rates, etc. -- are adversely affecting the stock market.  Taken individually, the negatives are relatively insignificant.  As a group, however, they are enough to unsettle traders.  I said traders, not investors.

Geopolitical factors never have a lasting impact on the market so one should focus on earnings, which rose 11 percent in the second quarter, and interest rates.  Interest rates can be expected to rise if the economy shifts into high gear.  It is far from a certainty that growth will accelerate, however.  Since the recession ended in 2009 we've been told again and again that growth was about to accelerate only to be disappointed.  Remember the Obama/Biden "Summer of Recovery" bus tour?  That was in 2009!  Without the inventory buildup second-quarter GDP growth would have been less than 3 percent and final sales, a good measure of the economy, grew just 2.3 percent.  The economic environment can change quickly and so can expectations, as we recently saw.  To its credit the Fed continues to say that future policy moves will depend on future data.  Of course.

Goldman Sachs sees the first rate increase next fall with fed funds reaching 4 percent and the ten-year Treasury yield going to 4.5 percent in 2018 from 2.4 percent today.  Treasuries will return a mere 1 percent annually.

An unattractive bond market is good news for stocks.  In the fairly benign environment (GDP growth of 2 to 2.5 percent) Goldman foresees stocks will do well.  They forecast 2100 for the S&P 500 (an 8 percent increase from here) over the next 12-months on route to 2300 later.

Long-term investors, not traders, determine the market's direction over many years, and few are concerned about rates four years out and certainly not if they believe Goldman Sachs will be correct.  In the short term, traders can knock prices down by as much as five percent, and they do once or twice a year.  The reason, we are now told, is the incredible notion that investors are raising cash to take advantage of bond yields four years from now.  I think not.

Bottom line:  The main risk facing investors is not that interest rates will rise to a more normal level by 2018, as Goldman predicts.  No, the bigger risk is that the economy will disappoint once again and undermine profit growth.  I suspect not this time, but an awareness of that risk -- increasing to some -- plus normal profit-taking, really explains the modest selling in stocks.  

— David Vomund is a fee based investment advisor.  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.

Investing in Energy

Our Reduced Risk Income portfolio is overweighted in the energy sector.  Here's why: 

http://www.etfportfolios.net/bonanza/2014-02-06.pdf
http://www.etfportfolios.net/bonanza/2014-06-19.pdf
http://www.etfportfolios.net/bonanza/2014-06-14.pdf

David Vomund
www.ETFportfolios.net

This is for information purposes only.  Past performance does not guarantee future results.  Consult your financial advisor before purchasing any security.

The Bull Market is Alive and Well

http://www.etfportfolios.net/bonanza/2014-05-29.pdf

Market Timing

We have assembled this brief video with my thoughts on timing the market:

http://www.etfportfolios.net/personal/2014may6/

A key point in the video is to own a comfortable portfolio of securities that allow you to accomplish your investment goals without requiring large-scale moves into and out of the market.  For example, this year stocks are flat but those who have overweighted energy, utilities, and fixed income are doing very well.  That's what our Reduced Risk Income managed account program is all about.  For more information please visit www.ETFportfolios.net or give us a call at 775-832-8555.

Technology -- the new versus the old

Watching CNBC, there is a lot of talk of equity rotation from "new technology" to "old technology."  This rotation was on full display last week after earnings reports from Microsoft and Apple.  Microsoft announced that its cloud-based "Office 365" revenues doubled from last year.  Better yet, Apple announced it will boost its quarterly dividend by eight percent and increase its share-buyback program.

While new technology (social media, 3D printing, etc.) offers growth potential, today's investors prefer the more predictable earnings and attractive yields from the larger well-known technology stocks.

Dividend payments from the technology sector were unthinkable in the 1990s.  Back then, if a technology company announced a dividend, it was interpreted as a sign that the company was out of growth ideas.  Times have changed.  In a near zero interest rate environment, cash-rich technology companies are responding to the needs of investors.  Intel yields 3.4 percent, Cisco Systems yields 3.3 percent, Microsoft yields 2.8 percent, and IBM yields 2.0 percent.

There is an easy way to own dividend paying technology stocks.  The First Trust Nasdaq Technology Dividend Index ETF (TDIV) owns 89 dividend payers, each with a market capitalization of $500 million or more.  After Apple's dividend announcement, it became the ETF's largest stock holding and represents 8.5 percent of the portfolio.  In addition to the companies listed above, other holdings include Qualcomm, Oracle, Texas Instruments, Hewlett-Packard, and AT&T.  The ETF's 30-day SEC yield is 2.7 percent.

Thanks to "old technology" companies, the tech sector is now the biggest contributor to S&P 500 dividend growth.  That doesn't mean income investors should automatically buy the dividend payers.  After all, their track record of dividend increases is limited.  That said, the dividend payers are performing far better than the newer technology companies that must continually innovate and surprise in order to survive.  Increasingly, today's investors prefer stability and income from their investments.  As long as interest rates stay low (think years) dividends will be important.

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

Is the Market Topping? No.

Last Friday the Wall Street Journal listed the best and worst performing S&P 500 sectors right before bull market tops.  The sectors were examined during the three months prior to every bull market top since 1972.  What were the results and what do they mean today?  Read on.

The three best performing sectors prior to major market tops are Consumer Discretionary, Consumer Staples, and Health Care.  All rose about 10 percent in the three months prior to major market tops.  The worst performers were Energy and utilities, which rose about 4 percent.

Is this showing an approaching major market top today?  Not so fast.  The sectors that typically perform best before market tops are performing badly now, and the sectors that typically lag as a market is toping are the best performers now.  Here are the details:

This year's best performing sector by a long shot is Utilities, which an 11 percent gain.  The second best performing sector is Energy, which is up 5 percent.  This year's worst performing sector is Consumer Discretionary, which is down 4.6 percent.

The 11 percent advance in Utilities is most interesting.  The year began with a near universal opinion that interest rates would rise and most every analyst recommended avoiding utilities.  When there is nearly universal opinion, best against it.  That's how Wall Street works and my Reduced Risk Income account clients have benefited from large utility holdings.  Readers of my newspaper columns know that Energy is a favorite sector.  Needless to say, we are off to a good start this year for many clients.

So don't be distracted by analysts that appear on financial shows or by Janet Yellen's every word.  It's still a bull market because the sectors that do well at market tops are lagging and the sectors that underperform at market tops are leading.  I expect better days ahead.

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.

Monthly Income

Are you looking to receive some monthly income from your investments?  Here are some ideas:

http://www.tahoedailytribune.com/northshore/10955420-113/percent-securities-income-yields

David Vomund

Is the Market Rigged? Yes.

Perhaps you saw the recent "60 Minutes" segment in which author Michael Lewis said the stock market is "rigged."  There has been a lot of talk and press about it since.  A few comments.

First, Michael Lewis has a book out, so kudos go to his publisher and PR firm for landing the "60 Minutes" gig.  He'll sell lots of books.  That said...

Investment professionals will surely take issue with the word "rigged."  They should.  Yes, some firms with the latest communication and computer technology can and do gain an edge over slower-moving institutions and larger investors.  I won't defend that.  That said, individual investors get far better executions, with lower commissions, now compared to any time in the past.

If a "60 Minutes" producer reads this blog, I suggest he or she do this:  Try a segment on how the stock market is overwhelmingly "rigged" in favor of long-term investors in high-quality stocks with rising earnings, not day-traders and especially not high-frequency traders.  The evidence:  every long-term chart of the market starts in the lower left corner and ends in the upper right.  The long-term return on stocks is close to 7 percent after inflation.  When I entered the business, the Dow stood at 2,200.  Now it's 16,550.  Yes, the market is rigged, rigged in favor of long-term investors.

Consider also the Forbes 400 richest Americans.  Most own stock in companies they founded or expanded.  Some are real estate developers.  Will you find any high-frequency traders on the list?  I doubt it.  Not now, not ever.  If the stock market were truly "rigged against investors" they'd be there.

The way to build wealth is not to day-trade but to own leading equity ETFs and quality companies that increase their earnings and in most cases dividends year after year.  That's the message "60 Minutes" should give investors.

David Vomund

Information on Vomund Investment Management is found at www.ETFportfolios.net.  Post performance does not guarantee future results.  Consult your financial advisor before purchasing any security.

Yellen Speaks

Fed Chair Janet Yellen held her inaugural post FOMC press conference.  Here are our thoughts:

http://www.etfportfolios.net/bonanza/2014-03-27.pdf

David Vomund

— David Vomund is an Incline Village-based 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.

 

A Shaky Start

The market is off to a shaky start to 2014.  Why the small setback?  Simple.  Economic data here and abroad are calling into question the global growth story.  China's growth is slowing, and some emerging markets are in turmoil.  Recent economic data here show weakness as well, especially in manufacturing and car sales.  Frigid weather on the east coast had something to do with that.  Who wants to go for a test drive when it's 5 below or look at houses to buy?  

Here's my take:  economic growth will be faster than last year, but not by much and not good in the first quarter (maybe 2 percent) due to the weather.  Interest rates will tick higher, maybe to 3.5 percent for the ten-year Treasury later in the year.  What won't be rising are short-term interest rates, which will remain near zero all year and beyond unless growth accelerates (most unlikely given the jobs picture).  For that reason alone stocks won't be falling far and in fact will be the best asset class for the year.  Traders and short-term trend followers fail to see that.  Some were caught up in the brief downdraft and imagined much worse to come.  That won't happen as long as short-term rates stay low because the alternatives are not and will not be attractive anytime soon.  Sound familiar?  So investors will continue to buy the dips.

As for emerging markets, while there have been many times that selling in emerging market stocks and bonds briefly impacted U.S. equities, including last May, the effect was very short-lived and did not undermine a bull market, not in the late 1990s, not last May, and not during times in between.  Nor will trouble in Turkey or Argentina and elsewhere torpedo the bull market now.   Rattle it yes, which is understandable after a long bull run, but not derail it.  

Real estate brokers advise buying the best house you can afford in the best neighborhood.  That's also good advice when it comes investing.  The U.S. economy is the best neighborhood, so to speak.  Stocks are the best asset, the present turbulence notwithstanding.  So far, the stock market has retreated 5.7 percent.  In a perfect world, stocks would steadily advance in line with earnings, but our world is not perfect and sell-offs happen.   We've seen many and we'll see more.  Over the last four years those who bought the dips were rewarded.  I expect that now too.

 — David Vomund is an Incline Village-based 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.

2014 Outlook

One can never really put a fine point on the economic and market outlook, though that doesn't stop scores of strategists and many in the financial media from giving it a go, their dismal record (forecasting a gain of only 8.2 percent last year) notwithstanding.   For that matter, that never stopped me.  So...

Some things are clear enough.  Longer-term interest rates, which bottomed a few years ago, will be rising and the 10-year Treasury will approach a 3.5 percent yield, maybe even more, during the year.  Many bond prices already reflect expectations.  Short-term rates, near zero now, will remain there all year.  That means yields on money-market funds, CDs, T-bills and such will be virtually zero.  

Stocks will continue to transition from being undervalued five years ago to being fairly valued now en route to being significantly overvalued at some point.  The market doesn't spend much time at a fairly valued level.  Either it's in transition from being undervalued to overvalued, or the other way around.  We are in the former now.  One reason is that the global economic picture is gradually improving, especially here and in much of Europe.  Very accommodative central bank policies worldwide are paying off.  

Earnings have grown for a few years thanks primarily to share buybacks and financial engineering with interest-rates near zero.   But earnings growth ultimately depends on an increase in capital spending in a growing economy.  If investment comes along then GDP and earnings growth will accelerate and the estimated $120 for S&P operating earnings in 2014 will materialize and perhaps even be exceeded.  That would mean stocks are far from overvalued now and could become considerably undervalued as the year unfolds and investors look forward to more growth in 2015.  Fair value for the S&P is around 15 times earnings, which is where stocks are now.  Bull markets never end when stocks reach fair value, however.  Investors always overshoot and at the end stocks become truly overvalued.   They always overshoot on the down side as well, as we saw in 2009.

Stock market history shows that after surges similar to the one in 2013 the subsequent year is usually a good one. I expect that to be the case in 2014.  In spite of the shaky start to the year, most expect an 8 to 10 percent return.  I can't disagree.

 — David Vomund is an Incline Village-based 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.

 

Christmas 'Presents'

Christmas is over but investors, including most of my clients, received a few presents recently.  I'm referring to dividend boosts.  General Electric raised its quarterly dividend to 22 cents and Pfizer raised its to 26 cents.  AT&T, the highest yielding stock in the Dow, just raised its dividend for the 29th consecutive year.  MDU Resources, one of my favorite stocks, increased its dividend for the 23rd year.  There are many more examples.  

 

Historically, dividends account for 43 percent of the stock market's long-term annual return of around 10 percent.  With stocks up close to 30 percent this year, it's easy to make a case that dividends will become a more important component in total return as we move forward.

 

Dividend paying stocks are easy to own.  Most are from companies that are financially stable and mature, and they are typically less volatile that other stocks.  Shareholders can either enjoy the periodic dividends or have them reinvested. 

 

Investors can own their favorite dividend-paying companies or buy a dividend ETF.  Here are two of the latter to consider:  The SPDR S&P Dividend ETF (SDY) holds 60 companies from the S&P 1500 that have raised their dividends annually for at least 20 years.  Its expense ratio is 0.35%.  An alternative is ProShares S&P 500 Aristocrat (NOBL), which holds S&P 500 stocks that have increased dividends annually for at least 25 years.

 

With few exceptions all of my stock holdings have above-average dividend yields and nearly all raise their  payouts year after year.  Dividends provide more than just walking around money.  Over time dividends account for close to half of the market's total return.  When you own several of these companies, you'll be receiving dividend "presents" again and again.

— David Vomund is an Incline Village-based 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.