Saturday, January 28, 2017

Searching for Value at Dow 20,000

With the Dow Jones Industrial Average at such a high of highs are there any investments left that are not overvalued?  Here are several ideas that I find interesting.

Emerging Markets $EEM

Emerging markets are still off of their historic highs by more than 30%.  There are various reasons for this lagging performance such as a strong dollar as well as a global glut of commodities.  As Trump takes office and Brexit begins to move forward we seem to be entering an era of anti-globalization.  On the surface these events do not bode well for emerging markets.  It takes a keen eye to see that finding a way to manufacture goods in these downtrodden countries without stepping on a political landmine could be extremely lucrative going forward.

Biotech $IBB

The Biotech sector is off of its highs by more than 30% as well largely due to political rhetoric from both Clinton and Trump.  It is natural for politicians to rail against the high costs of healthcare but the truth is that advanced healthcare has never been in higher demand.  In fact, this demand will only increase as more and more baby boomers reach retirement age.  An investment in Biotech, regardless of the political rhetoric, is as much of a no-brainer as it gets.

Energy $XLE

The Energy sector is still off of its all time highs by more than 25% mostly for the same reasons as those with Emerging Markets.  So we discovered this new technology called Fracking...why should that be a bad thing for energy companies?  The fact that the market forced this new technology into existence speaks more to the everlasting demand for more energy rather than to the end of it.  Plus the new focus of the Trump administration on manufacturing and infrastructure projects as well as his pick for secretary of state should only yield positive news for the Energy sector going forward.

Twitter $TWTR

Twitter is more than 75% off of its highs set after its IPO in 2013.  If you successfully invested in Facebook against all of the analysis that said that it would not be possible for Facebook to monetize mobile then you need to be invested in Twitter as well.  The arguments are essentially the does Twitter monetize this new medium of communication that it has created?  It is becoming increasingly apparent that if Facebook is used to connect with friends then Twitter can be used to connect with enemies.  It is no wonder that companies are shy to advertise on this platform due to its contentious nature.  It will take more time for most companies to figure Twitter out, though some like Wendy's are already beginning to discover the power of satirical promotion to create messages that sound less filtered and more real.  This very feature is also what Trump has leveraged to propel himself into the White House and is currently using as a political game changer.

Monday, January 2, 2017

Invest like a Predator in 2017

My personal expectation for the S&P 500 $SPY next year is a best case scenario of 3200, a worst case of 1700 and a most likely of 2450.  I suspect that the worst case would occur if we start to see the Eurozone unravel which is unlikely but also possible.  One catalyst on the horizon is the Euro being nearly at parity with the US dollar.  This is occuring because the world is panic selling Euros but on the flipside it also provides a natural stimulus to any Euro based economy.  Another unlikely catalyst is the presence of negative interest rates.  If the Eurozone was considered an economy on the verge of collapse negative rates would not be possible as there would be no bid for those bonds.  Going forward the Euro area can and should provide very many unique and rewarding opportunities to make outsized returns as risk moves back into the global market place. 

I suspect that the best case would occur if there is a significant rise in long term rates $TLT.  Most would interpret a rise in rates as a negative but to me that just shows risk and leverage coming back into the marketplace as the demand for debt begins to increase.  I think people give the Fed way too much credit regarding their control over the destiny of rates.  In my mind, the desire to borrow money has much more control over rates than Fed policy.  What would cause an increase in the demand for debt?  I think that it is simply optimism about making money in a growing economy.  As money making opportunities arise people borrow more and more money to invest as well as to spend.  This action causes rates to rise as borrowers bid higher for ever more expensive debt which eventually leads to a bubble.  Where could this source of demand possibly come from...Millienials, Boomers, GenXers?  This is the biggest question that will be on my mind going into 2017.

The year of 2017 is going to be favorable to those investors who behave like predators.  This means being able to be extremely patient while lying in wait for the best possible opportunities.  Waiting until a prime target is wounded is a sure way to increase your chances of success.  This means letting bad news work for you instead of against you.  Have you been noticing that over the past few years bad news only has a temporary effect on the market?  This is because the supply of buyers are beginning to overwhelm the supply of sellers.  With the dollar this high and interest rates this low...there are no more sellers...which is why you'll see the market continue to rise on bad news.

For example, Nvidia $NVDA was getting hit last week based on news from notorious short seller Andrew Left.  I agree with Left in that Nvidia has gotten way ahead of how would a predator invest in this situation?  Allow this news to wound Nvidia just enough for you to be able to catch up with it.  Practice extreme patience as well as persistence.  Ironically, the slowest ways to get rich end up being the fastest and the fastest ways end up being the slowest.

Finally, when investing in individual companies it is so important to be careful with the price that you pay.  Companies that have been around for a long time can be a lot more expensive than you think due to all of those share splits.  For example, take a look at Berkshire Hathaway A shares $BRK/A that haven't gone through any splits and are priced at over $250,000 per share!  Now how affordable are those shares?  To get a better perspective always look at total market capitalization and ask yourself if it makes sense that company XYZ should be worth so many billions because that is really the price that you are buying into.  Always remember to look for great companies as well as great prices and never accept one without the other.