Trump Stocks VS Hillary Stocks

At this point it’s safe to say that unless something extraordinary happens either we will get a Donald Trump or Hillary Clinton presidency. While I could spend volumes discussing the economic implications of either win, at this point its more important to figure out what companies will benefit or lose from each presidency so you can take a gamble or get out before its too late.

Coal/Oil

Its safe to say that fossil fuel companies would continue to get hammered under a Clinton presidency. If Clinton is anything like Obama, we should see a few more coal stocks go bankrupt like Peabody Energy (Formerly PBU) and Arch Coal (Formerly ACI). Surviving coal companies include Cloud Peak Energy (NYSE:CLD), Westmoreland Coal Company (NASDAQ:WLB), and Alliance Resource Partners, L.P. (NASDAQ:ARLP). Oil companies face regulatory difficulties under a Clinton presidency, but most should be able to survive as oil maintains current price levels. The coal industry in my opinion is a bad investment at this time due to the very cheap price of steel and the lower demand from China and the United States.

Defense

One area that will most likely benefit from a Trump presidency is the defense manufacturing companies. Companies which would produce items for the military and navy include General Dynamics (NYSE:GD), BAE Systems PLC (LON: BA), and and array of other companies. You can also invest in Mutual Funds iShares Dow Jones US Aerospace & Def (ITA) or Fidelity® Select Defense & Aerospace Portfolio (FSDAX). Over the past year ITA has returned 18% and FSDAX has yielded 14%.

Healthcare

While I’m tempted to say the healthcare industry would continue well under a Democratic president, I can’t say for sure given the very cutthroat price increases which have made them a popular industry to attack from both Democrats and Republicans. If the Democrats end up further building up Obamacare it’s quite likely the pharmaceutical industry will be volatile. The TPP agreement pushed by Obama and Clinton will make people in 3rd world countries have to pay more for medicine, which may end up furthering profits in this sector. Time will tell. I’m not going to put any recommendations here.

Gold / Silver

If you’re a gold or silver investor, then the past year has been very kind to you. Especially if you’re into gold and silver mining stocks. Helca Mining company (NYSE:HL) surged 215% YTD and almost 200% in the past year, from under $2 to $6. Barrick Gold Corporation (NYSE:ABX), Goldcorp Inc. (NYSE:GG), and Silver Wheaton Corp. (NYSE:SLW) are all big players in this market. This is one of my favorite industries to make huge profits from moderate changes in base precious metal prices. It’s hard for me to say which candidate will cause these to go up further, it’s more dependant on the Federal Reserve interest rate policy and inflation. However based on the campaign talk It seems like a Clinton presidency would be better for precious metals. It’s always a good idea to have these as part of your portfolio to some degree.

Real Estate

Donald Trump made most of his money off of real estate – it’s always good to include this in your mix of assets. As the world population expands real estate will most likely continue to climb regardless of who makes president. A recession could certainly hit prices, but only temporarily.

Conclusion

I’d get out of coal, first of all. I’d put money into defense stocks as they should outperform the market under either presidency. I’d allocate some money into precious metal if only for an insurance policy on the dollar. I’d get some cash out of this frothy market and wait for the market to tumble before the election before strategically investing in under-priced high return on equity stocks.

Beware of Overpriced Stocks

Today Netflix crashed 13% after lower than expected subscribers were reported for the second quarter. It now trades at $85.63 after falling $13.13. If you had invested in this stock just yesterday you would have lost over 13%. The first thing I do when I see stock headlines like this is pull up the stock and look at it’s P/E ratio. This is currently at an outstanding 266! That’s more than 20 times that of Apple, meaning people have much higher expectations of growth with this stock.

That being said, 266 is better than a P/E of 0 (sometimes denoted ‘-‘), which means that the company does not turn a profit at all. One big example of such a company is Tesla. People are so adamant that Tesla will be the wave of the future that they’ve heavily invested in this stock, which means that Tesla will probably have a high beta. When fluctuations happen you will see these high beta stocks swing much more violently than stable low risk stocks such as Proctor and Gamble, Johnson and Johnson, and utilities. That being said, certain events can still cause ‘stable’ companies to flop or gain/lose an incredible amount of value – buyouts, disasters, shortages are some of these types of events.

In my opinion, I would not consider buying any company with a P/E ratio higher than 100, and would discourage investing in an unprofitable company. If I had to use a stock screener to automatically buy stocks I suppose I would filter by P/E ratio between 10 and 22 with a dividend of between 1 and 3.5% and a return on equity of at least 10%. Return on equity means how much percentage profit each stock generates. For example Apple has in the first quarter had a return on average equity of over 30%, meaning if each dollar of stock generated 30 cents in profits. Not bad! A low return on equity means the profitability of the company based on its equity is low, so more money put into the company might not yield much profit so the incentive for price growth or dividend payouts is probably lower.

 

The Stock Market Vs a Chess Game

The stock market is in some ways much like a chess game – prices of stocks usually are priced based on future expectations. In other words the folks at multi-billion dollar hedge funds have done the math, and have tried to play a long ways into the future. This can be said about the price of stocks, and the price of stock derivatives. The biggest reason why the stock market has been falling in recent weeks is due to the expectation that the Federal Reserve is going to raise interest rates – a low jobless claim rate cause stocks to sink faster because it increases the chances that the Federal Reserve will in fact raise rates to stave off inflation. By doing so, stocks are no longer as good of an investment relatively speaking compared to cash – stocks have risk and cash has little risk, so to increase interest rates means you can get more return for a no risk investment.

However, since the stock market looks to the future there is a very real possibility that stocks will have taken into account a Federal Reserve interest rate increase before the increase happens – and if the increase is lower than expected you should see the stock market start to jump back up due to its factoring error.

That being said, investors should still reassess the forward price earnings ratios of their stocks to make sure they aren’t holding on to something that is too expensive. Speculators will still hold onto company stocks which they see as having lots of potential even though they are priced very high. You can see that in companies like Tesla, where a company that doesn’t have a P/E ratio because it isn’t profitable yet still boasts a good stock price. On the other hand, a company like AFLAC has a very low P/E ratio of 10 because I suppose investors don’t see AFLAC coming up with the new invention of the century. Apple is priced at a moderately cheap price of around 15, as investors are weary that Apple may have had its day in the sun and won’t come out with any new revolutionary products since legend Steve Jobs has left.

My suggestion then is to sell off your expensive stocks and as the market drops incrementally buy back in as prices because attractive. As an insurance policy against the Federal Reserve deciding not to raise interest rates I suggest buying some precious metal company stock, and companies that will do well under higher interest rates include banks such as Bank of America. I want you to be the one who yells Checkmate before your portfolio yells it to you!

Please make sure to read my disclaimer below before taking any action.

How Does Greece Affect the US Economy?

Greece in and of itself does not directly do much business with the United States. Greece does not have manufacturers that compete with the US, such as S. Korea, China, and Germany have. Greece does, however, greatly impact the European Union not only because of the size of its economy but more importantly due to the thought of a collapsing EU. The EU (European Union) was created in 1993 and has 28 member states. If Greece exits, it will raise the spectre of other economically weak countries like Italy and Spain leaving – this will shatter the Euro and send investors running for the hills. It will make the US dollar much stronger which will hurt US exports, which in turn will affect US international companies negatively. It will also hurt US tourism as it will be much more expensive for Europeans to visit the United States.

The thought of a collapsing economy and certainly the fact that Greece has stopped people from withdrawing their money from their own bank accounts may have a ripple effect across other countries in Europe and possibly the world. The 2% drop in the Dow Jones on Monday and the 2.5% drop in the Nasdaq does not bode well for an actual Grexit (The new term used to describe Greece’s exit from the Eurozone). Stock markets that are already priced too high in terms of price earnings ratio will feel more pressure to correct themselves. A falling stock market means less market capitalization in companies which is used to fund their operations, which may in turn lead to job losses. The stock crash of 1929 led the way for the Great Depression in the United States, which is an extreme example of what happens when a stock market crashes.

If a stock market crashes then confidence is lost, and the likelihood of new jobs is dampened.

 

Reading the above you might think it’s time to head for the hills, but I think that a more important and less pronounced threat is the United States debt and trade deficit which will not be helped by a European crisis. Ways to protect yourself include but are not limited to:

  • Shifting out of stocks and into cash, whose value will most likely increase relative to the rest of the world unless the Federal Reserve doesn’t increase interest rates and comes out with another stimulus package
  • Making sure that your portfolio does not include European investments

Of course, these protective measures may limit your upside potential, but will most definitely defend you against a downside. If you’re courageous enough, you can always short individual stocks. Please read my disclaimer below and have a nice day.

Ignore Most Market News

The average stock investor should avoid most news stories related to stocks. The reason I say this is that many times people have emotional ties to gains and losses and tend to make far too many transactions for what is necessary based on reading a barrage of market news, which is a entire industry unto itself. I recently commented on how inconceivable it was for the price of oil to hit $10 per barrel, but that kind of news made headlines. While people were heading for the hills, I decided to and taught readers how to invest in oil using ultra ETFs. Now Brent crude is trading at $63.31 and those who had shorted oil when it was less than $50 per barrel would be feeling the pain.

Now the key word here is ‘most’. Many folks try to make a name for themselves and their product by claiming outrageous things trying to build publicity for their name and if the off-chance they’re right it was all worth it! Well, if they’re wrong then they’ll just stay quiet for a few months. There are, on the other hand, reasonable financial advisers who will make thoughtful suggestions about the state of affairs.

My suggestion is this:

The stock market is overpriced, a historically good bet but given current P/E ratios it’s just a matter of time before the market falls. The timing on that fall is between now and 1 year from now. The correction should be between 10 to 20%. Many people should be looking forward to this correction in order to bolster their portfolios at a discount.

Oil has taken a hit but is on a comeback. We will probably see the price of oil rise in a few months – possibly due to global conflict.

To act on this would be to simply sell stocks and buy oil.

Make sure to read my disclaimer below.

6% Chinese Stock Market Drop

On October 28th, 1929 the Dow Jones Industrial Average fell 12.8%.

On May 28th, 2015 the Shanghai Composite Index dropped 6.5% – the largest fall since 2008.

The Wall Street crash took place after a period of speculative buying where many Americans were borrowing money to invest in stocks. The same can be said about Chinese investors, and to a lesser extent American investors as of late. As P/E ratios drift higher and higher, or non-profitable company stocks start to rise, it’s only a matter of time before the market gets overheated. Considering many of these investors are using borrowed money, the risk of sudden downturn is higher – Margin loans must be called if account balances get too low, and burned investors will not be able to get back in the market.

Whether the 6% drop is a prelude to something bigger is yet to be seen – but keep in mind the market in China does not allow single shares to go down more than 10% in a single day, which means we may see a further drop tomorrow. This will in turn put stress on Chinese investment banks and will have a trickle down effect on the Chinese economy. If mom and pop investors are all putting their life savings in the stock market do you think they will spend as much on the street as they used to?

Anyways, this is all speculation, but I think it’s safe to say we are going to be seeing some pretty interesting financial news come out in the next few months.

The Most Powerful Force in the Universe

E = mc²

E = mc²

Albert Einstein

Mass energy equivalence paved the way for our most powerful weapon and energy source. Nuclear force was not, however, the most powerful force in the universe according to this man. Instead, it was compound interest.

Einstein was a man of relativity, and while it is true that nuclear is the strongest type of force taught in the classroom, in the real world his statement makes a lot of sense. The top 1% of income earners will make much of their income off of investments, and these investments typically yield a certain percent of profit per year which is then applied back upon itself the next year. This is one way in which income inequality grows – because the lower wage earners do not put their money in compounding investments.

It is important for anyone looking to get the highest return on their investment to understand the basics of compound interest.

Rule of 72

For those that don’t want to pull out a calculator to find out how long their investments will double in size there is a helpful and speedy way of figuring out roughly how long it will take to double their money. Divide 72 by the interest rate and that will be the number of years a annually compounding investment will take to double. See examples below:

9% interest – 72/9 = 8 years

5% interest – 72/9 = 14.4 years

3% interest – 72/3 = 24 years

If you use outrageously small or large interest rates the rule of 72 starts to break. Obviously a 100% interest rate will double your money in just 1 year, not eight and a half months!

Compound Interest Formula

The mathematical formula for annually compounded interest is

FV = PV * (1 + i)ᵗ

Where FV is future value, PV is present value, i is the interest rate, and t is the number of years. As most readers know, this is an exponential function of time (See Figure Below).

Solid line is exponential function with lower constant value.

Solid line is exponential function with lower constant value.

As you can see, exponential values can quickly get out of hand. Other real world examples of exponential growth include population growth in developing countries, inflations affect on currency (exponential decrease in value as seen below).

How inflation eats away

How inflation eats away

The phenomenon known as the rising income gap comes largely from these two graphs. The top graph represents invested wealth and the bottom represents buying power of a single unit of a depreciating currency.

What do I do?

If you’ve read to this point then you’ve already taken a good first step – you’re searching for knowledge and exponentially growing your financial acuity rather then let your mind exponentially waste away. I suggest creating a financial plan which takes into account your age (time till retirement), risk tolerance, and net worth and allocate uninvested funds into investment accounts. Investments can range from stocks, bonds, real estate, and even high interest savings accounts. Keep in mind that these days interest rates are amongst the lowest in mankind’s history, in the United States in particular. Most of all, don’t panic!

What Explains the Chinese Stock Market Price Boom?

The Chinese stock market boom has been scrutinized by the US mainstream media for it’s rapid ascendance. You will hear people mentioning that high school dropouts are now investing in large numbers without understanding the basic fundamentals of companies including but not limited to earnings. The Hang Seng (Hong Kong’s Market) has risen 60% this year having been opened up to sell shares to Chinese investors.

In all reality, small scale investors make up a small portion of actual market volume – and while it’s true that a large number of them are trying to get in on the action, the real reason for this steep rise is a law change which hampered real estate investment tactics. This included increasing the minimum down payment on a second property to 20% and increasing the capital gains tax on property sales to 20%. If you’ve lived in Asia you will find out that Chinese investors are big into real estate – and this spreads beyond China and Hong Kong into other ASEAN countries including Australia and New Zealand. Even less educated folks know the value of owning property, and many of them have been fortunate to make a reasonable amount of money in the past few decades as China has progressed to claim the world’s #2 spot economically speaking.

Stack the new property restrictions with two interest rate cuts by the central bank and a specter of a stimulus package down the road and you have the perfect environment for a stock market to flourish. This is similar to how the US stock market has reacted in the past few years to the Federal Reserve stimulus packages and extended periods of historically low interest rates.

Just this week, the Hang Seng market value rose above Japan’s Nikkei – an amazing feat but not unexpected given their market getting opened to Chinese mainland investors. Japan continues to stagnate as its fundamentals and workforce are burdened by a low growth rate and near zero immigration (due to strict immigration laws). The one bright side to the economy these days is higher tourism due to a stronger dollar against the Yen.

Some imagine the Chinese and Hong Kong bull markets will continue for awhile until free cash flow diminishes. Others are more skeptical, including most US pundits – they envision a large correction. I can foresee a huge catastrophe if the tax laws are changed regarding Chinese capital gains tax on stocks, but given the new restrictions on real estate trading this isn’t completely out of the question.

In hindsight, an American investor could have made a fair amount if he/she invested in Matthews China Fund Investor Class (MUTF:MCHFX), which has gone up 20.17% Year To Date. This fund specifically zoned in on Chinese stocks has outperformed one of the best American stocks Apple (Apple has gained 12.96% year to date) and NASDAQ (A piddly 4.57%). Investors can also consider investing in a broad array of Asian dividend stocks using the Matthews Asia Dividend Fund Investor Class (MUTF:MAPIX) which has gone up 12.95% YTD.

It goes without saying that the one who thinks there’s a serious bubble can always short these types of securities, but this is EXTREMELY risky. There is still more free cash flow as a percentage of the stock market capitalization in China than the US, meaning that they can pump a lot more money into the stock market before running short on liquidity. My expectation is that if the Chinese stock market is reaching bubble capacity and collapses, it’s quite likely to impact the US stock market. Even from a psychological perspective, seeing a bubbled stock market pop may cause people to rethink their investments.

How To Capitalize on Low Oil Prices

With crude oil trading the lowest it’s been since 2009 there are a few things you can do today to capitalize:

As Jerry Reed says in his song “Lord, Mr. Ford“:

Well, if you’re one of the millions who own one of them
Gas drinking, piston clinking, air polluting, smoke belching
Four wheeled buggies from Detroit City, then pay attention:

Now is a perfect time to load up the family and take a road trip. A penny saved on gas is worth more than a penny earned (considering taxes).

If the price of oil remains low, many sectors stand to benefit from the cost savings to their business. Obvious candidates include shipping, airlines, and retail. Oil revenue dependent companies should be avoided if low prices persist, such as drilling support and manufacturing companies.

If you think the oil price is bound to jump up sometime in the near future then you can buy oil futures, or if you have a regular stock brokerage account you can trade in exchange traded funds (known as ETFs) which base their performance on the performance of the oil price.

Two of the most popular of such funds are ‘UCO‘ and ‘SCO‘. UCO aims to emulate 2x the positive price change of oil, while SCO aims to emulate 2x the negative price change of oil. Take a look at the performance of these two funds over the past six months.

UCO ultra oil fund performance for past six months

UCO ultra oil fund performance for past six months

SCO ultra oil fund performance for past six months

SCO ultra oil fund performance for past six months

As you can see, UCO has been hammered by the fall in oil price over the past six months while SCO has climbed over 250%. If oil stages a large rally then UCO has a lot of upside potential – while SCO has a lot to lose. Four potential strategies that would benefit from a oil price increase include the following:

  1. Buy call options for UCO
  2. Buy put options for SCO
  3. Buy long UCO
  4. Sell short SCO

Outside of purely playing the oil price movements with these ETFs, you can also consider buying companies that have been hammered by the lower prices. This strategy involves more risk because companies have the possibility of going bankrupt and bringing their share price to zero, while the oil price will never reach zero until a revolutionary technology make it obsolete (and that transition time would be formidable).

Oil behemoths are more likely to survive a sustained weak oil price than smaller more leveraged companies. Some of these giants include:

  • Exxon Mobil Corporation (XOM)
  • Chevron Corporation (CVX)
  • Royal Dutch Shell (RDS.A / RDS.B)
  • BP (BP)

Smaller players that may return a better yield if a oil rally occurs include:

  • ENSCO (ESV)
  • Transocean LTD (RIG)
  • Seadrill Ltd (SDRL)
  • Northern Oil & Gas, Inc (NOG)

 

Whether or not the oil price remains cheap, recovers, or falls even further there are always ways to profit from it if you take a certain degree of risk. Given the deflated state of oil, it’s large but limited supply, and the motives behind the price bullying of American oil operators by OPEC I think oil will stage a moderate comeback in the next few months (make sure to read my disclaimer below).

Low Dollar Stocks Not Necessarily Cheap

The statement “cheap does not mean cheap” has never been more meaningful. The first “cheap” means price relative to fixed amount say $100, and the second cheap means how much the stock costs relative to the value of the underlying company. A $1 stock might seem cheap to the inexperienced investor but a $100 stock might have a lot more value and be cheaper in relation to how much of a return you will be getting based on a company’s earnings.

Case in point – Advantage Oil & Gas Ltd is trading at just $4.59 , but it’s last reported earnings per share was just three cents! For those who know what P/E ratio is that would be a whopping 134.72. On the other hand, you might have a company like Chevron with a price of $108.21 but earning $10.86 per share while paying dividends of over a dollar per quarter! I would much rather choose Chevron over Advantage simply because the first is more of a gamble!

I think the biggest problem people have is that they think that a single or a few shares of an “expensive” stock is more risky, when in fact the opposite is true! See how investors in China are piling money into penny stocks, which might sustain itself if enough people keep joining in but most likely will result in a huge bust.

I’m not saying that high or no P/E ratio stocks should be ignored completely, however these types of securities are more risky than others. If you think there’s an upper bound on a share price you are wrong, as the $224,000 price for Berkshire Hathaway proves.

Using a stock filter, I have randomly chosen a few stocks that are ‘cheap’ under the layperson definition and ‘cheap’ under the investor definition. I will post their five and ten year performance below.

Cheap (dollar wise)

Of course, one of the reasons you might stumble across a cheap stock is because it's price has already stumbled so much!

Of course, one of the reasons you might stumble across a cheap stock is because it’s price has already stumbled so much!

Helios and Matheson Analytics Inc – Perhaps the only good random pick, pays a 5% dividend but the price change has been disappointing in the past 5 years considering the rest of the market

Vaporin Inc – looks like this stock got vaporized

 

Cheap (P/E ratio)

ACE Limited - Looks like a steady price increase, yielding almost 140% in the past 5 years on top of regular dividend payments.

ACE Limited – Looks like a steady price increase, yielding almost 140% in the past 5 years on top of regular dividend payments.

Allstate Corp - 125% return on past 5 years along with regular dividends. Another winner in my book.

Allstate Corp – 125% return on past 5 years along with regular dividends. Another winner in my book.

Andersons Inc - 186% return in past 5 years with a small dividend. Not too shabby.

Andersons Inc – 186% return in past 5 years with a small dividend. Not too shabby.

While there are thousands of more examples to go through, just a random selection of a few showed that the first version of cheap should have just been thrown in the trash and the second, intelligent, version is what you should be looking out for.

Good hunting!