Profit From Fear – Part II


Part one of this report looked at how, since the Great Recession, interest rates have fallen below what was considered the norm.

Then the report asked, what is the norm?

Such low interest rates have never existed since WWII.   This has taken investors by surprise.

Even more important, other major currencies currently pay even lower interest rates than the US dollar.  This competition of currencies has caused the US dollar and US stock markets to become a poor value.

You can read Part One of “Profit From Fear” here.

Part one says: Fear is pushing the US stock market higher.

Normally fear pulls markets down and greed pushes them up.  Normally fear based appreciation only comes via hoarding… when panic is the ruling emotion.

The fear now is caused by low interest rates.  Investors fear that their money will not keep pace with inflation.

Yet as the global economy slows down, governments want to drop interest rates even more to stimulate commerce.

The 1st page headline in the September 6, 2019 Wall Street Journal is “Fed Lines Up Another Quarter-Point Rate Cut” (1).  This headline highlights a large, current, global economic problem.

The global economy is slowing but due to near-zero and below-zero interest rates there is very little economic stimulation that government’s can create through lowering interest rates.

Since most of the major governments are also heavily in debt, there is little they can do via increased spending, without raising enormous inflation risks.

The September 2019 Advisory Extra Report (2) produced by ENR Asset Management for its largest clients looked at the global low interest rate phenomenon.  This bulletin is only available to these large ENR clients and Purposeful Investing Course (PI) subscribers.

ENR is one of the very few investment management companies that can help US investors bank and hold assets with non US banks.

This month’s ENR Advisory delves into this problem of low interest rates in its feature review entitled: “The ‘Swissification’ of Bond Markets Coming Soon to U.S. Shores”.

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The Advisory says: Fears of economic recession are once again surfacing amid a deluge of softening economic data from overseas and more recently, even in the United States. These include manufacturing recessions across most major economies, including the United States, Japan, China and Germany, confirmed by plunging PMI Indices (Purchasing Manager Indexes).

The ongoing trade dispute between the United States and China, other regional trade tensions in Asia and elsewhere are also dampening business sentiment. Business capital spending worldwide has also slowed dramatically this year as corporations adopt a ‘wait and see’ attitude in an extended macro environment of increasing trade hostility and rising tariffs.

The American consumer, however, is the last man standing. Responsible for about 66% of GDP, the consumer remains buoyant as evidenced by recent earnings from retailing giants Costco, Wal-Mart Stores and Target.

Still, the collapse in global government bond yields since August is suggesting the world economy is sliding into recession over the next 12-24 months, if history is a guide. An inverted yield curve, a phenomenon occurring when short-term bonds yield more than long-term
bonds, has correctly predicted every recession since 1975.  Stocks can still rally amid an inversion, but eventually a bear market engulfs equities. The last such inversion occurred in 2005; by October 2007, the stock market peaked followed by a collapse in credit in mid-2008.

There will be a big push by the current administration to lower interest rates for the upcoming election.

A negative rate will lower the US dollar making American products more competitive short term and maybe keep the current economic boom going for a bit more.   In the long run, since America imports more than it export, this will cost consumers and hurt US business as labor costs rise to keep up with the higher cost of living.

A lower rate will also help the government continue to borrow excessive amounts.   That’s a key factor since this month, the U.S. budget gap widened to more than $1 trillion in the first 11 months of the fiscal year. This is the first time deficits have topped that mark since 2012.

Plus, when, the lowered rate no longer stimulates the economy and the normal economical cycle brings a correction… the Fed will have no tool to slow the hemorrhage down.

The New York Times article “Trump Wants Negative Rates” (3) shows that the current administration is pushing for negative rates even now.

The article says: The U.S. has never cut interest rates below zero, but such a move has been considered. There are some big hurdles.  The president said Fed officials should slash interest rates to zero or below in a tweet on Wednesday. In doing so, he urged the central bank to adopt a policy that its counterparts, including the European Central Bank and Bank of Japan, have used as an emergency measure to shore up weak economies.

Given that the Federal Reserve is presiding over a strong economy, it is unlikely to acquiesce. The Fed is expected to make a modest quarter-point cut at its meeting next week as it tries to guard against growing uncertainties, lowering its policy rate to 1.75 to 2 percent. But it is also unclear whether the Fed could practically and successfully use negative rates to stimulate the economy.

What are negative rates?

Commercial banks usually earn interest on the extra reserves they keep at central banks, like the Fed or the European Central Bank. Negative policy interest rates force them to pay to keep money in those accounts, a penalty aimed at pushing them to lend more and goose the economy.

Several of the Fed’s counterparts have introduced negative rates, including central banks in Denmark, Switzerland, Japan, Sweden and the eurozone, to stabilize either growth or their currencies.

How do they affect consumers?

While central bank interest rate moves are usually passed along to investors and consumers, banks in economies like the eurozone — which first turned to negative rates back in 2014 — generally do not charge everyday savers who keep money in retail bank accounts. But consumers do earn less interest on their savings accounts, and there are rare instances in which they have to pay to keep very large deposits at banks.

Here are three tips that can help investing in good value shares.

Good Value Tip #1:  Invest during periods of low growth.  Periods of low growth are followed by periods of high growth and vice versa.  The periods of  low growth are the best times to accumulate shares.

Non dollar stocks markets have seen much lower growth than the US markets.

Good Value Tip #2:  Inexpensive equities in quality companies in good value stock markets are generally the better investments.  The last ten years have been a period of turmoil. Investors have turned toward what they have known to be safe in the past: US stock market and the US dollar.  However, the US stock market and the US dollar are overvalued when compared to other markets.  When a market recovers from undervaluation or contracts from overvaluations, the shares in the market, even good value shares, are lifted or fall due to the market’s momentum.  Look for good value markets and currencies as well as good value shares.  

Good Value Tip #3:  Weighted portfolios of good value shares offer the best return for the long term.  Stock picking is always difficult because there is always something we do not know.  Good value analysis combined with diversification removes emotional errors and evens out the losses and gains that are the fate of every investor.

We gain the best growth and safety of our savings and wealth when avoiding using short term data to understand long term trends.  Since we cannot always determine what is short term, sticking to good value tactics helps overcome the fog we face when looking into the future.

Gary

The Only 3 Reasons to Invest

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The stock market has always been the best place of places to protect and increase wealth over the long haul.   Yet it’s also been the worst place to lose money, a lot of it, quickly.

There are only three reasons why we should invest.  We invest for income.  We invest to resell our investments for more than we had invested.  We invest to make our world a better place.

The goal of investing should be to stabilize our security, bring feelings of comfort and elimination of stress!

We should not invest for fun, excitement or to get rich quickly. We should not divest in a panic due to market corrections.

This is why my core stock portfolio consists of 19 shares and this position has hardly changed in three years.  During this time we have been steadily accumulating the same 19 shares and have traded only three times.

A model portfolio that dates back to 1969 has dramatically outperformed almost every stock market in the world.

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A hundred US dollars invested in that portfolio in 1969 is now worth $44833 compared to $100 invested in an equity weighted world index being worth $11,548.

This portfolio is built around a strategy that’s taught in my Purposeful Investing Course (Pi).  I call these shares my Pifolio.

This portfolio more or less matched the S&P 500 until May 2018.  Then a stronger US dollar made the portfolio look like it was falling behind.   This currency illusion creates a special opportunity we’ll view in a moment.

This portfolio above is based on stock price to value analysis built around 91 years of stock market data.

The value analysis is used to create a portfolio of MSCI Country Benchmark Index ETFs that cover  stock markets that are undervalued.  I have combined my 50 years of investing experience with the study of the mathematical market value analysis of Michael Keppler, CEO of Keppler Asset Management.

In my opinion, Keppler is one of the best market statisticians in the world.  Numerous very large fund managers use his analysis to manage over $2.5 billion of funds.  However because Keppler’s roots are in Germany (though he lives and operates from New York) and most of his funds registered for the European Union, Americans cannot normally access his data.

I was lucky to have crossed paths with Michael about 25 years ago, so I am one of the few Americans who receive this data and you will not find his information readily available in the US.

In a moment you’ll see how to remedy this fact.

The Pifolio analysis begins with Keppler’s research that continually monitors 46 stock markets and compares their value based on current book to price, cash flow to price, earnings to price, average dividend yield, return on equity and cash flow return.  Then Keppler takes market’s history into account.

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Michael Kepler CEO Keppler Asset Management.

Michael’s analysis is rational, mathematical and does not cause worry about short term ups and downs.  Keppler’s strategy is to diversify into an equally weighted portfolio of the MSCI Indices of each good value (BUY) market.

This is an easy, simple and effective approach to zeroing in on value because little time, management and guesswork is required.  You are investing in a diversified portfolio of good value indices.

A BUY rating for an index does NOT imply that any one stock in that country is an attractive investment.  This eliminates the need for hours of research aimed at picking specific shares.  It is not appropriate or enough to instruct a stockbroker to simply select stocks in the BUY rated countries.  Investing in the index is like investing in all the shares in the index.  You save time because all you have to do is invest in the ETF to gain the profit potential of the entire market.

To achieve this goal of diversification the Pifolio consists of Country Index ETFs.

Country Index ETFs are similar to an index mutual fund but are shares normally traded on a major stock exchange that tracks an index of shares in a specific country.  ETFs do not try to beat the index they represent.  The management is passive and tries to emulate the performance of the index.

A country ETF provides diversification into a basket of equities in the country covered.  The expense ratios for most ETFs are lower than those of the average mutual fund as well so such ETFs provide diversification and cost efficiency.

Here is the Pifolio I personally held at the beginning of 2020.   There have been no changes since.

70% is diversified into Keppler’s good value (BUY rated) developed markets: China, Germany, Hong Kong, Italy, Japan, Norway, Singapore, Spain and the United Kingdom.

30% of the Pifolio is invested in Keppler’s good value (BUY rated) emerging markets: Brazil, Chile, Colombia, South Korea, Malaysia and Taiwan.

iShares Country ETFs make it easy to invest in each of the MSCI indicies of the good value BUY markets.

For example, the iShares MSCI Germany (symbol EWG) is a Country Index ETF  that tracks the investment results of the MSCI Germany Index. The fund is at all times invested at least 80% of its assets in the securities of its underlying index that primarily consists of all the large-and mid-capitalization companies traded on the Frankfurt Stock Exchange.

iShares is owned by Black Rock, Inc. the world’s largest asset manager with over $4 trillion in assets under management.

There is an iShares country ETF for every market in our Pifolio.

This year I celebrated my 52nd anniversary of writing about global investing. Our reports and seminars have helped readers have better lives, with less stress yet make fortunes during up and down markets for decades. This information is invaluable to investors large and small because even small amounts can easily be invested in the good value shares we cover in our seminar.

How you can create your own good value strategy.

I would like to send you, on a no risk basis, a 130 page basic training course that teaches the good value strategy I use.   I call this strategy Purposeful Investing (PI).  You learn all the Pi strategies, what they are, how to use them and what each can do for you, your lifestyle and investing.

You get this course when you enroll in our Purposeful Investing program (Pi) with a triple guarantee.

Triple Guarantee

Enroll in Pi.  Get the 130 page basic training, a 46 stock market value report, access to all the updates I have sent in the past three years, two more reports on investing (described below) and an online Value Investing Seminar right away. 

#1:  I guarantee you’ll learn ideas about investing that are unique and can reduce stress as they help you enhance your profits through slow, worry free, easy diversified investing.

If you are not totally happy, simply let me know.

#2:  I guarantee you can cancel your subscription within 60 days and I’ll refund your subscription fee in full, no questions asked.

#3:  You can keep the two reports and Value Investing Seminar as my thanks for trying.

You have nothing to lose except the fear.   You gain the ultimate form of financial security as you reduce risk and increase profit potential.

When you subscribe to Pi, you immediately receive a 120 page basic training course that teaches the Pi Strategy.   You learn all the Pi strategies, what they are, how to use them and what each can do for you, your lifestyle and investing.

You also begin receiving regular emailed Pifiolio updates and online access to all the Pifolio updates of the last two years.  Each update examines the current activity in a Pifolio, how it is changing, why and how the changes might help your investing or not.

Included in the basic training is an additional 120 page PDF value analysis of 46 stock markets (23 developed markets and 23 emerging stock markets).  This analysis looks at the price to book, price to earnings, average yield and much more.This year I celebrated my 51st anniversary of writing about global investing.  Our reports and seminars have helped readers have better lives, with less stress yet make fortunes during up and down markets for decades.  This information is invaluable to investors large and small because even small amounts can easily be invested in the good value shares we cover in our seminar.

Stock and currency markets are cyclical.  These cycles create extra profit for value investors who invest when everyone else has the markets wrong.  One special seminar session looks at how to spot value from cycles.  Stocks rise from the cycle of war, productivity and demographics.  Cycles create recurring profits.  Economies and stock markets cycle up and down around every 15 to 20 years as shown in this graph.

The effect of war cycles on the US Stock Market since 1906.

Bull and bear cycles are based on cycles of human interaction, war, technology and productivity.  Economic downturns can create war.

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The chart above shows the war – stock market cycle.  Military struggles (like the Civil War, WWI, WWII and the Cold War: WW III) super charge inventiveness that creates new forms of productivity…the steam engine, the internal combustion engine,  production line processes, jet engines, TV, farming techniques, plastics, telephone, computer and lastly during the Cold War, the internet.  The military technology shifts to domestic use.  A boom is created that leads to excess.  Excess leads to correction. Correction creates an economic downturn and again to war.

Save $102 If You Act Now

Subscribe to the first year of The Personal investing Course (Pi).  The annual fee is $299, but to introduce you to this online, course that is based on real time investing, I am knocking $102 off the subscription.

Triple Guarantee

Enroll in Pi.  Get the basic training, the 46 market value report, access to all the updates of the past two years,  right away. 

#1:  I guarantee you’ll learn ideas about investing that are unique and can reduce stress as they help you enhance your profits through slow, worry free, easy diversified investing.

If you are not totally happy, simply let me know.

#2:  I guarantee you can cancel your subscription within 60 days and I’ll refund your subscription fee in full, no questions asked.

#3:  You can keep the reports as my thanks for trying.

You have nothing to lose except the fear.   You gain the ultimate form of financial security as you reduce risk and increase profit potential.

Subscribe to Pi now, get the 130 page basic training, the 120 page 46 market value analysis, access to over 100 previous Pifolio updates, plus begin receiving regular Pifolio updates throughout the year.

Subscribe to a Pi annual subscription for $197 and receive all the above.

Your subscription will be charged $99 a year from now, but you can cancel at any time.

Gary