This Too Shall Pass: The Election

 

The cloud of election-related uncertainty cannot pass fast enough. By the time you get this letter, we will be close to 30 days from the election.  Most of the white noise, name calling, intentional divisiveness, and scaremongering will have come to a merciful end. We will know the general direction the country will travel for the next four years. Regardless of who is elected, our objective will be to make the necessary adjustments to our portfolio and seek success.

Where are we now?

Right now there is a clear divergence between the positive returns investors are hearing about and what most investors are actually experiencing. Headlines indicate a positive stock market return for the year; but when we look more closely, we see that many great companies—especially pharmaceuticals, energy, and banksare not really participating in the heralded headline numbers of 2016.

Where do we go from here?

As Tom Petty and the Heartbreakers sang “…waiting is the hardest part, every day you see one more card...” Every day we count down to when this theater-of-the-absurd election will end. Then we can move into the sectors we want more of and out of the sectors we want less of.   There is no need to jump the gun trying to make portfolio adjustments and outsmarting ourselves. All we need is the courage to wait for the election results. We will listen to the newly elected president outline his or her real priorities which often are quite different from electioneering propaganda.

On fixed income and alternatives:

A few weeks ago the Federal Reserve Bank looked into the future and blinked again.  They chose to press the pause button again—as I suspected they would six months ago. I am not predicting, but I strongly suspect they will raise rates in December after the election.

We bought some gold last quarter after many years of zero exposure. So far it is a losing position. I think gold is intrinsically a useless commodity unlike copper, oil, and other industrial commodities. We bought gold in anticipation of inflation, but so far I have looked high and low but there is no inflation in sight.  Stay tuned!!

What should we look out for?

Are the politicians and the president now the masters of investment winners and losers?  Please NO!! But it is wise to avoid companies and minimize exposure to sectors in the crosshairs of Washington politicians. This is especially true now, when people are rightfully upset with companies that unconscionably jack up drug prices 600% without any R&D exposure or banks that open unsolicited accounts so executives can get more stock options.

In conclusion:

Yes, a new sheriff is going to be elected but the country is bigger than any president. More and more American businesses and investors will find a way to renew and reenergize the fabric of their businesses—as soon as they get some clarity on who will be the next president. Once they know the ‘who,’ they will supply the ‘how.’  My job is to identify these companies and provide an opportunity for my clients to prosper along with them.

Sincerely,

Femi T. Shote, MSF, ChFC, CFP®

Accredited Investment Fiduciary®

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Push. Fall. Rise. Repeat: Through the Brexit Storm and Rain

In my last letter, I discussed successful long-term investment as a cycle of Push. Fall. Rise. Repeat.  Deeper observations and additional reflection on my part—and recent Brexit volatility—confirm that being a long-term investor means experiencing turbulent events regularly. We can seldom relax in that pleasant valley where everything is just fine and dandy. The headlines of the Fall and the Push parts of the investment cycle are generally louder—and the painful reactions linger longer—than during the Rise part of the cycle for investors.

 

Where are we now?

Early June 24th, after the fateful Brexit vote, I expected dramatic market downturn and decided not to buy or sell any company we own because of this.  That was exactly what happened. I know it is not easy—and the hyperbolic news headlines are very difficult to ignore.  But ignoring them is simply the right course of action because as investors (not traders) we have to focus on the companies we own and why we own them. There is not one single company we owned because U.K. was a part of the single European market.  As a matter of fact, a few days after Brexit, a great timeshare company we had owned just since April 2016 was bought out for a 30% premium over our purchase price.  It is clear to me that although the British voted to leave the European Union, it did not mean they also voted never to go on family vacations around the world.

 

Where do we go from here?

I anticipate there will be more reverberations from the Brexit political shocker.  I anticipate the smarty pants strategists will regale us with even more hyperbolic forecasts for the upcoming election in the US. What does it all mean for us now? We will stay cool and disciplined.  The mission has not changed—we are looking for a few good companies without regard to whatever political party is in power.  Do cars still need repairs, do people still need to take their prescriptions, and do people still need to eat? In all my years of research—I have yet to find a substitute for food.

 

On fixed income and alternatives:

Three months ago, I indicated that the Fed might pause a bit in raising rates in 2016. The Brexit vote and the subsequent global uncertainty suggest to us that pause is going to lead to hold for a longer time.  I believe lower interest rates will stay with us even longer.

 

What should we look out for?

I believe investors are not willing to make any bold systemic bets until the outcome of the elections in November. That leaves the markets in the hands of traders looking to react to unexpected shocks for short-term buys and sells.  As for us, we would like to identify one or two unique opportunities in the coming months that are not tied to the doldrums. It may be a new IPO or it may be a takeover target or a pharmaceutical company with a spectacular breakthrough.

In conclusion:

I don’t know who is going to vote to leave Europe next, or who will be the next president of the United States, or when the next unanticipated but regular market shocker will come, although I know there will be storms and there will be rain. BUT I am 100% certain that there is NO LIMIT to human ingenuity—or to the ever-vigilant entrepreneurs all over this great country ready to pounce and take over superb companies selling at significant discounts to intrinsic value.

 

Femi T. Shote, MSF, ChFC, CFP®

Accredited Investment Fiduciary®

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On U.K vote to exist Europe and expected market overreaction

Dear Friends,

I expect a sharp downturn in the US stock market this morning.

There is not one single company we own because U.K is a part of the European Union and thus not one single company we want to sell today because the British people have voted to leave.  I will rather see a vote than a resort to violence.

In the coming days and if we have additional cash power in your portfolio– I have a very short list of great companies, we will like to own but are currently fully priced that we will love to buy if I see a 10% temporary reduction in their prices.

Please go about your lives, enjoy your family and friends and if possible ignore the hyperbolic media and stock news. This too shall pass!

Femi T Shote, RetirewiseCFP

 

 

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Push. Fall. Rise. Repeat.

Push. Fall. Rise. Repeat ─ I first heard these words a few weeks ago from an NHL commercial as the League prepared its audience for the upcoming playoff season. Right away I saw the message as a perfect metaphor for what investments and the economy are all about. The “fall” part of the cycle, especially when sudden and dramatic, is what many people have a hard time with. They forget that the “rise” part will come after the fall part ends; and they often miss the “push” part because they are sitting on cash waiting for the perfect time. There is no and never will be a perfect time. We know beforehand that it is a repeating cycle: it is uneven—but it’s progressive in the long run.

 Where are we now?

2016 could not have started any worse. The fall was pronounced, and when it was over, my favorite long-term sectors—pharmaceuticals, biotech, and energy—were down the most. Just when the fall was at its lowest, the rise began, little by little. The market headlines now tell us that all the losses of 2016 were recovered by end of the quarter. This is actually not true in pharmaceuticals, biotech, and energy: these sectors are still deep in multi-year double-digit losses. I don’t think all of the losses will be recovered in pharma until after the election is over. Politicians love to beat up on the healthcare sector during an election year.

Where do we go from here?

As many of our long-term clients know, I don’t like making market predictions. Please permit me to waive that modesty right now. I can say this with 100% certainty: oil prices will rise again. It may be late 2016 or 2017 or 2018, but it will happen because it is a cycle. There will come a time when the demand and supply equilibrium tilts towards the suppliers again and—more important—when the market psychology of oil prices tilts toward higher bids. This is a fundamental reason that I don’t invest in stock market indices or seek to outperform any benchmark. My aim is simply to buy high-quality companies in a variety of sectors, and we’ve found over the long term that health care, banks, and energy are generally superior winners.

 On fixed income and alternatives:

I wrote three months ago “…after more than 8 years of cutting and maintaining interest rates, the Federal Reserve Bank did indeed raise interest rates in December 2015. What is next? I think they are going to continue raising rates in 2016 until energy prices begin to rise later in 2016 and 2017.” They may have hit the “pause” button, but we are clearly in the “rise” phase of the interest rate cycle—unless we end up with a technical economic recession, which is different from just a down market.

What should we look out for?

Faster rate hikes by the Federal Reserve that are more than the real economy can bear. As shareholders in banks we at this time welcome higher interest rates, but are the American and global economies ready for higher rates? Other countries’ central banks are indicating NO, as they are reducing rates to zero and indicating a willingness to go to negative interest rates like Japan.

In conclusion:

The need to and the ability to help clients focus on the totality of the cycle, not just the headline-grabbing fall phase of the investment cycle, is the raison d’être of my relationship with you. I know it is very easy to say but very hard for folks to be steadfast when markets were falling as we experienced the last three months. The one thing that I want YOU to be sure of is that with grace I shall remain steadfast and disciplined, because I know beforehand that it is a cycle of Push, Fall, Rise, and Repeat.

 Sincerely,

Femi T. Shote, MSF, ChFC, CFP®

Accredited Investment Fiduciary®

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Trade myths and realities

This is perhaps the only economic and political article you need to read all year to understand the phenomenon of Trump, Sanders,  why people are voting for them.

https://www.washingtonpost.com/opinions/trade-myths-and-realities/2016/03/20/9f6d9d30-ed1e-11e5-b0fd-073d5930a7b7_story.html?hpid=hp_no-name_opinion-card-c%3Ahomepage%2Fstory

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Can your 401(k) account be too big?

http://www.cnbc.com/2016/02/25/can-your-401k-account-be-too-big.html

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Energy House of Pain

 

2016 is an election year with no incumbent running. That means all the candidates will go negative on the economy and its prospects. Their game plan will be to say, “Everything is rotten—but pick me as your next president!  I will fix it, and all will be perfect—if you elect me as your next president.”

Since the political and media echo-chamber will be banging negative drums through November 2016, let me be first to declare that: Yes, it is true the stock market was a bit wobbly in 2015 and there will invariably be more headwinds in 2016.  However, I am confident that the American economy and its people are naturally resilient and will find a way to outperform other economies in 2016.  I am America and I approve this message.

 

Where are we now?

The negative volatility in December and the not-surprisingly negative beginning to 2016 are associated with what I call the energy house of pain.  The fundamental issue is this: Is the price of crude oil so low that American energy companies (upstream and downstream) are going to go belly up? This is no longer a trifling topic because, unlike a decade or two ago, America is now a net producer, not simply a net consumer, of oil.  There are now more jobs (both clean energy and carbon energy jobs) on the line if crude oil prices stay too low and for too long.  There are concerns about the cascading effect on banks, the corporate high-yield debt market, and revenues in states other than just Texas and Oklahoma, as many more states are now participants in the shale oil revolution.

 

Where do we go from here?

2016 is going to be about disciplined action on our part.  We must know what we own and why we own these companies.  There should be no knee-jerk reactions to short-term noise and attention-grabbing headlines. If the companies we own are not performing, we have the courage to sell and move on.  But if the companies we own are superior performers yet the market as a whole is in a bad mood about everything, we must have the discipline not to react. Yes, it may mean stock prices will be lower for the next 6 or 9 months, but the fundamentals of the American economy are still solid.

 

On fixed income and alternatives:

In my quarterly letter of October 2015, I wrote that the time had come for the Federal Reserve Bank to begin to raise rates.  I wrote that it was time for confidence in the leadership of Chairwoman Janet Yellen.  In December, after more than 8 years of cutting and maintaining interest rates, the Federal Reserve Bank did indeed raise interest rates.  What is next? I think they are going to continue raising rates in 2016 until energy prices begin to rise later in 2016 and 2017.

 

What should we look out for?

More energy-induced turbulence and the Federal Reserve Bank continuing to raise rates until it invariably trips the economy into a recession.  It is akin to being in a hospital and the attending physician continues to administer pain reduction medicine; but a continuous injection regime eventually trips the patient into a coma.

In conclusion:

We need to keep cool as the toxic brew of negative headlines and politically motivated seeds of doubt and division confront investors.  We need to keep in mind this salient truth: the American economy and its people are indeed strong and resilient. Our job amidst all to come in 2016 is disciplined thought and—more important—disciplined action.  

 

 

 

Femi T. Shote, MSF, ChFC, CFP®

Accredited Investment Fiduciary®

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