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®

Posted in Prudent Investor | Leave a comment

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

 

 

Posted in Prudent Investor | Leave a comment

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®

Posted in Prudent Investor | Leave a comment

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

Posted in Prudent Investor | Leave a comment

Can your 401(k) account be too big?

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

Posted in Prudent Investor, Retirement Income | Leave a comment

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®

Posted in Prudent Investor | Leave a comment

I Get Knocked Down, but I Get Up Again

They say it ain’t over until the fat lady sings. I think I hear the U.S. stock market singing the following, “I get knocked down, but I get up again. You’re never going to keep me down. I sing the songs that remind me of the good times and I sing the songs that remind me of the better times.”

Where are we now?
The convulsion that began in the middle of August over China and the debate over when the Federal Reserve Bank should start raising interest rates basically wiped out all the gains of 2015. The more relevant reversal for us is the abrupt and sudden losses for biotech and pharmaceutical companies. For years, I have generally overweighed in healthcare (biotech and pharmaceutical) companies because the fortunes of many of these companies are not tied to general economic conditions. Investing in the healthcare sector is conducive to the fundamental analysis, independent judgment, and disciplined management that I am superior at: it is not about the herd mentality. In line with my values of full disclosure and transparency with you, we had been winning for years with pharmaceuticals, but we got our butt kicked in pharmaceuticals in August and September. All of a sudden ─ a fever to sell pharmaceuticals broke out on Wall Street: the good, the great, and the sacred cows were all slaughtered in the madness.

Where do we go from here?
It is really simple (notice I did not say easy) right now ─ will the economy continue to slog forward (it need not be brilliantly), and will the Federal Reserve Bank raise rates before the end of 2015?

On fixed income and alternatives:
As Yogi Berra said, “When you come to a fork in the road, take it.” I think we have now come to a time when the Federal Reserve Bank under the leadership of Janet Yellen needs to make a decision. The markets and, more important, many business leaders are looking for clarity and direction on interest rates so they can make 2- to 5-year strategic business cycle decisions.

What should we look out for?
Look to see continuous and senseless selling of the kind we experienced this past quarter, often without regard to fundamentals. Some are based on computer algorithms. My friends’ computers are coded to sell when things are going down and buy when things are going up without regard to any fundamentals. Folks, that is diametrically the opposite of common sense and the profitable adage “buy low, sell high.” These run-amok computer-based trading systems simply add violence and volatility to daily fluctuations ─ which in turn create more fear for the average investor.

In conclusion:
Yes, pharmaceuticals were knocked down heavily this past quarter, but I am reasonably confident they will get up again. Over the next 3, 5, and 10 years investors in healthcare companies will sing songs of good times and better times. We will keep singing, when we are resilient, we will keep winning because nobody is going to keep us down.

10/5/2015 Femi Shote,CFP

Posted in Prudent Investor, Retirement Income, Warren Buffett | Leave a comment