Black Friday – Economic Scarcity Reason for Violence

 

 

 

 

 

Black Friday may mean a black eye for some shoppers. Black Friday deals are a recipe for violence in many parts of the US, and while I can’t deny this is unacceptable, I will comment that it is more common around the world than you might think.

Why do large defence contractors, for example Lockheed Martin (NYSE: LMT), make billions of dollars per year? What makes these types of companies fabulous investments? Conflict. Conflict around the world is essentially either fought for dominance of a certain group of people for a certain set of resources. Resources can be land size, energy, food, manpower, etc.

Black Friday is creating mini wars in parts of the United States where resources are scarce, generally speaking those who get involved in brawls really need these black Friday deals as their chance to get a unit of a limited supply of something – PS4, XBox, Flatscreen TV, etc. If you make people have to compete to get the resources, fights will happen.

You Are Forced To Invest in Risky Assets

Mortgage rates history

Bank CD Rates

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Take a good hard look at the charts above. While mortgage and CD rates were over 10% in the mid 1980’s, mortgage rates have dropped to between 3 and 4 % starting in the 2010’s and the bank interest rates have fallen to around 0.1%. The problem with the current investment environment today is that there really is no where to get a great return except for higher risk assets. Stocks and bonds both carry risks, and have been heavily pumped up due to the lack of alternatives such as existed in the past. Central banks have been pushing people with assets to invest in the stock market for quite some time now, as such investments ostensibly drive economic growth and also people’s retirement accounts.

Retirement accounts in the US are not the same as they were  in the past – in 1980 the 401k accounts were started by private companies take take advantage of section 135(a) of the Revenue Act of 1978. This became a trend among companies across the US and is now the standard. Companies would much rather have individuals put money into their 401k than be obligated to support them after retirement. The 401k is a type of defined contribution plan rather than a defined benefit plan. Federal law does not require employers to offer or to continue to offer a plan, but most white collar jobs do come with this benefit.

The IRS dictates that 401k beneficiaries being distributions at a certain age. The rules are a bit different for designated beneficiaries, but they should be closely followed otherwise penalties will be imposed. If an employee decides not to invest in a 401k, he or she does not receive any taxable benefits offered by the 401k which could either be:

  1. Untaxed deferrals to the 401k plan
  2. Untaxed gains for the Roth 401k plan

In short, money that goes into the normal 401k plan is not taxed up front but instead when removed from the account. Money that goes into the Roth 401k is already taxed but doesn’t get taxed when removed. Entire industries are supported on fees and administration costs related to people’s 401k accounts – if you haven’t yet, you should check out how much money you are charged for keeping money invested in each mutual fund, bond, ETF, etc. you are holding. Deciding to put your 401k money in fixed income will yield you close to nothing, but having money invested in international funds generally is more risky.

Unfortunately for the saver of today, the best investments tend to be stocks or real estate. Gone are the days of investing in bank CDs, at least in the US. If you’re looking overseas many countries still have double digit interest rates you can get on savings, but those countries tend to have higher inflation too.  Keep in mind holding a foreign bank account you will need to report your assets with the IRS using the FBAR form.

cd rate

 

 

Strategic De-Vesting

My last post noted how investing during a stock market trough is a wise decision. Many financial advisers will never advise their clients to reduce exposure to the stock market, but given the current price valuations I suggest selling off some stocks to hold gold, silver, or practical real estate. The reason for this is clear – the stock market has had a great ride, but that ride is based on a handicap of low interest rates and valuations which exceed standard price/earning ratios of the past. Amazon has a P/E ratio of 300, Tesla has a P/E ratio of nothing because they don’t even turn a profit! Apple holds a pretty low P/E ratio of around 11 because of doubts on future profitability.

The point is, there is a frothiness to the US stock market which is alarming. In my opinion it would be best to sell of around 30% of your portfolio now and ensure your investments are in stable asset classes. I’ve mentioned investing in water almost almost one year ago, and here are the results (using 1 year return from today):

GE : up 22% (Current price $32.21)

ECL : up 6% ($119.10)

AWK: up 62.95% ($82.76)

WTS: up 21.47% ($61.05)

I would keep these water stocks except for ECL and sell high risk assets such as Tesla, Amazon, etc. to ride out the upcoming correction.

If you check out my post on how investing in the stock market is like a chess game you should note that my recommendation on gold/silver stocks has also paid off.

The particular company I linked in that post has gone up 151% and is now trading at 6.05. I suggest selling this stock at this time to retain the profits.

 

So in summary my suggestion:

Hold on to the water stocks

Cash out and perhaps put money into modest real estate

 

Capitalizing on People’s Fears

The stock market has lost about 10% of it’s value in 2016 so far. Consider this a 10% discount from what it was before 2016, however timing the discount is nearly impossible. One thing’s for certain, buying a stock now would be better than buying that same stock 19 days ago. One way to ensure you’re getting a discount regardless of how low the market goes is to dollar-cost-average. If you’ve already lost a it in the stock market this year, then most likely your instinct is telling you to sell before it reaches 2008 crash levels. If it does recede further this might be a correct strategy, however very few major news organizations will tell you this. The 2008 crash erased about 50% of stock market value between late 2007 and early 2009, so we still have 40% to go if the crash gets that bad.

One commodity that almost always seems to prosper when stock markets crash is gold. Gold and treasuries. One investment that often gets hit after the stock market is real estate. However, real estate value decline isn’t usually permanent unless you’re talking about a city which becomes deserted like Detroit. You can also make money off of real estate by renting it out – assuming there are renters interested in your location. Other alternatives for the timid include putting the money in a CD, which unless you are holding it for 10 years will give you a measly return less than inflation in many cases. Other uses for money include education, donations, or simply burning to keep the house warm.

My suggestion is to dollar cost average a return to the market, and keep an eye out for severely undervalued investments in the next few weeks or months as the market crashes. If you have investments in relatively unharmed stocks, it might not hurt to sell those and use the money and buy the stocks which will recover the most.

Investing in Water

One aspect of investing that some people consider when they decide where they put there money is helping mankind. That could be in the form of a simple donation or investing with companies that help mankind develop. One area that needs investment that will forever be necessary is water transportation and desalination. Water scarcity is one of the largest risks to economies around the world, as populations continue to grow and glaciers and fresh water sources continue to diminish. I visited Lake mead less than two months ago and it currently sits at the lowest level since Hoover dam filled up this artificial lake in the 1930’s, its clear to me that civilizations across the world cannot continue to rely on traditional reservoirs and a certain amount of precipitation to divert emergency. As we have done with oil infrastructure, the same will eventually have to be done with water – desalination and purification of ocean water and pumping that water across lands to irrigate and placate populations.

The biggest players in that type of game can definitely change if the need escalates, but currently we have a list of the following companies who are related to supplying water infrastructure or desalination services:

  • General Electric (GE)
  • Ecolab (ECL)
  • American Water Works (AWK)
  • Watts Water Technologies (WTS)

This is a short list, but in summary General Electric has worked on desalination plants and will definitely be a player to come in this field. Ecolab is involved in water purification technologies. America Water Works is more of a utility company that provides water service and waste water treatment (another vital component of sustainable water infrastructure). Watts Water technology helps provide water quality solutions – in layman’s terms it creates plumbing pieces that help buildings smoothly move water around. Feel free to view each company’s website for more details.

These types of investments can be a form of macro trend investing – investing in technology which is up and coming and required for a sustainable future. As folks have witnessed in recent history investments into coal and dirty energy have proved very unprofitable, and that is based on standards governments have been setting which have resulted in fewer coal powerplants and slower growth in the demand for crude oil as car efficiency goes up and electric car sales increase. Water is a resource that everyone needs – which can be conserved but will need more supply soon!

 

How To Prospectus Hunt For Stocks

Some investors are clueless when it comes to investing in stocks per industry. There is a way to take out a lot of the hassle of opening financial reports and studying the growth patters of companies – have someone else do it for you! You can hire a portfolio manager or you can buy ETFs which manage a portfolio in your desired sector for you. Another, cheaper, alternative is to simply Prospectus Hunt.

I will be using PHO as my example today – PHO is a water industries based ETF which according to their description:

PowerShares Water Resources Portfolio (the Fund) seeks investment results that generally correspond to the price yield of the NASDAQ OMX US Water Index (the Underlying Index). The Fund generally will invest at least 90% of its total assets in common stocks that comprise the Underlying Index. The Underlying Index seeks to track the performance of the United States exchange-listed companies that create products designed to conserve and purify water for homes, businesses and industries. The Fund invests in the sector such, such as industrials, utilities, healthcare, information technology and materials. Its investment advisor is Invesco PowerShares Capital Management LLC. [1]

Creating products that are designed to conserve and purify water sounds like a pretty noble and lucrative business. I want to take part. The easiest thing to do is obviously to invest in PHO, however if you read their prospectus closely you will notice an “expense ratio” of 0.61%. This is actually a bit higher than the industry average expense ratio of 0.44% for ETFs, and a bit lower than the standard 0.74% expense ratio for index funds. For those who don’t know what expense ratio is:

Expense ratio is the percent amount of your holding that will go towards the fund manager every year. For example if you have $1,000 in an ETF with an expense ratio of 0.61% then you’re going to be paying $6.10 every year to the managers of the fund. Most funds have their holdings listed publicly on their website – Currently PHO has the following as their top stock holdings:

  • WAT      Waters Corp
  • ROP       Roper Industries Inc
  • PLL        Pall Corp
  • PNR       Pentair PLC
  • FLS         Flowserve Corp
  • MWA      Mueller Water Products Inc
  • ITRI        Itron Inc
  • WTS        Watts Water Technologies Inc
  • TTC         Toro Co/The
  • WTR        Aqua America Inc

 

Now that you have a nice list at your disposal the only thing left is to pick a few of these stocks to invest in. Look for standard things, like P/E ratio, growth, current events that make the company appetizing and go for it! Doing this will usually leave your investments more volatile as you will have less diversity but eliminate the expense ratio for each year and enable you more control over your investment make-up.

If you’re interested in different types of ETFs a have a few that you can pick from below:

  • USO (Oil)
  • PPA (Aerospace and Defense)
  • IDU (Utilities)
  • GLD (Gold – keep in mind that ETFs may not hold stocks but may instead hold physical commodities such as gold)
  • SLV (Silver)

 

Good hunting.

 

References:

[1] Invesco Distributors, Inc. “Product Details.” PHO – PowerShares Water Resources Portfolio. Invesco Distributors, Inc., n.d. Web. 16 Apr. 2015.

Frivolous Purchases and You

If you’ve read the tech news lately, you’ll know that Apple is going to release it’s Apple Watch on April 24th in Australia, Canada, China, France, Germany, Hong Kong, Japan, the UK and the US. The most surprising and talked about subject about the release was the price on it’s Edition series of watches, which will range in price from $10,000 to $17,000. These watches are made of 18-karat gold which Apple claims to be developed to be “twice as hard as standard gold” and sport the sapphire screen. While these watches look “nice” they are certainly still pieces of technology. The funny thing about technology is that it depreciates much faster than other durable goods – faster than a mahogany piece of furniture, for example. I’d expect digital technology products to depreciate faster than mechanical products of a similar type (for example a Rolex watch).

If one spends $17,000 on a Apple Watch – a watch that starts out at around $350, then one should expect the rest of the watch to be worth at least $16,000 – which it is not. You’d be able to buy more than 12 ounces of gold for this price. The gold portion of the watch is not described to be compatible with newer versions of the hardware, so when the Apple Watch 2 comes out the value of your watch probably goes down by around $10,000!

As someone concerned with you making the most of your money, while still enjoying life, I would not suggest buying a Apple Watch Edition. Go ahead and splurge a few hundred dollars on a piece of technology if if will, but $17,000 is a fools purchase.

$10 Oil Will Never Happen

Recently I read an opinion article posted on Bloomberg View where a guy named Gary Shilling predicted that the oil price could fall as low as $10. The title of the article read “Get Ready for $10 Oil”.

Of course this is a sensationalist title, and the author probably doesn’t really believe that oil will fall that low, but it ranked #1 on Google News results. The link is here.

Before people go buy new Hummers, let it be known that the lowest production cost in the world is $10-$20 per barrel in Saudi Arabia – and Saudi Arabia only produces around 13% of the world’s crude. The US imports most of it’s oil from Canada, and produces shale oil at a cost between $25 and $95 per barrel. It would be more economical to simply stop pumping oil rather than producing it for free – and that’s what’s happening. Around 100 shale oil rigs were closed in the US in late January, and more are probably being closed as we speak. Countries with small bankrolls will not be able to afford running their oil industry with oil at $10, and will most likely end up in economic chaos. Russian oil production costs are between $10 to $16 but the transportation costs are high to get the oil to suitable refineries and around the world. World demand for oil is not decreasing, but increasing at a slower pace (until the effects of people all bathing in oil and taking joyrides in 18 wheelers starts to kick in).

As of today Crude WTI oil trades at $52.78 and Brent trades at $57.39. Brent is the price used for global oil producers and WTI stands for Western Texas Intermediate. This is up from the low of around $45 in late January.

With all the volatility in oil prices you can bet people are making money off of the price changes. You can too – just read my article “How To Capitalize on Low Oil Prices“.

Cheers

 

Hello world!

Welcome to a whole new world of financial wisdom. I encourage you to explore the site fully and thoughtfully and if you have any questions or concerns email me at adam@thehighestreturn.com

Cheers!