Where Are We Going From Here? (Nov 2014)

[Dividend Watcher]

As I was reading SA and several other investments sites during the week, I was starting to become a little uneasy. In my opinion, there was more than a tinge of hubris which we have not seen since the Great Recession and I became a little more uneasy.

Sure Chuck Carnevale pointed out some fairly valued, big name stocks in his recent posts along with some other authors. However, if you read between the lines, he wasn't pounding the table to go out and invest. Instead, he urged further due diligence and caution to not over pay -- his usual, conservative strategy. Likewise, some of the other commentators, David Van Knapp, chowder & David Crosetti amongst a few others, that I have come to respect the opinions of, have not been gushing with suggestions as we saw in the 2009 - 2011 time frame. Our own Eric Landis had a good series on SA covering the different S&P sectors of the economy pointing out some interesting companies to research further.

On the flip side, the talking heads of CNBC, Yahoo! Finance and those that stand to gain from investors creating trading costs have been talking up the market. Likewise, some of the younger commentators have been more upbeat on the prospects for investors. To their credit, most have emphasized the long-term view and acknowledge that there will be pain from time to time. Yet I sometimes become skeptical thinking some of these people haven't lived or invested through the oil crisis of the 70s, the inflationary early 80s, the crash of '87, the dot.com bubble and subsequent bust at the turn of the century.

I don't mean to discount the impact of the Great Recession. It may be a once-in-a-lifetime event and what lies ahead for the next 20-40 years may be mild in comparison but it doesn't discount other events which may try all of our patience for a time.

At this time, we are witnessing a collapse of the oil market. This has happened before yet so many are discounting it as a short-term event. Maybe it is and maybe it isn't; only time will tell. To me, it is appears to be an inflection point. This can be good for the market and economy as a whole or it can be start of a downturn that will shake out the weaker players in and out of the sector and lead to sub-optimal growth in the near term. I don't have the answers nor a Magic 8 Ball.

On the plus side, cheaper oil means lower input costs for the majority of businesses and a boost for the pocketbook of consumers which may finally increase demand for goods and services. In this case, the hubris I detected may be justified.

However, in our interconnected world, the challeges to a major portion of our carbon-based economy may cause some severe dislocations to a great many. Imagine oil going to $30/bbl for an extended period of time. What effect will that be on the thousands of people employed in the shale fields? What about the businesses and localities that have had to support this infrastructure? If a lot of this willy, nilly investment dried up for any length of time what industry is going to step in to pick up the slack? Housing construction? I doubt it with wages stagnant for 2 decades and people still repairing their household balance sheets I don't forsee a return to the 00s housing boom with its McMansions.

I'm not writing to scare you nor am I all gloom and doom. I am, for the most part, optimistic about our economy for the long-term. I am going through a little angst here because of the tone of many people.

Now, perhaps, those of you that have popped in here lately asking for recommendations of stocks to put in your portfolio may see why responses have been lackluster. None of us want to say buy this or that and then rue the day when some unexpected event causes the stock to take a huge drop. You need to develop your own thesis on why you should or shouldn't own a specific company. Seadrill comes to mind immediately since that is the market's most recent debacle.

So, to bring up something similar, there is Deere (DE). We've talked about it here. It's been hashed out on SA and the talking heads have also chimed in at times. I hold it and it could suffer from something similar. Are you prepared for earnings (and possibly stock price) to drop somewhere around 50% should the farm implement market dry up for a time? It has in the not too distant past. This is a rhetorical question. I just wanted you to think of a similar industry which could suffer similarly to oil right now.

So what was the purpose of writing this diatribe? I wanted to document this gut feeling I've been getting for the last month or so -- since the August 2014 pullback, I guess -- and solicit some feedback. I am planning to hold what I have with maybe some rebalancing in the near term. That would only be because of the structure of my portfolio and not in reaction to the market. I'm wondering what you've been thinking about the near-term future of the market and the economy. I could be totally off-base here. Please join in with your thoughts.

[rapidacid]

I don't have a cohesive statement flow, nor do I have a macro roadmap to contribute, but I do have thoughts that float around, tho none of them are news to anyone:

Diversification allows for "mistakes" and bumpy roads. 3 of my top 5 holdings comprising a total of 10% of my portfolio are down an average of -4.49% today. My overall portfolio is up 0.15% today

Large / Mega Cap + Low Beta = 8h sleep every night. Build your core portfolio through a concentrated set of Large / Mega cap Blue Chips. Develop rest of portfolio with quality assistance companies

Numbers talk, everything else walks. I get SA instant alerts on all articles written about companies in my portfolio and I read maybe 5% of them. As DW stated, develop your own thesis about why you own a company. If the numbers work for you then stick to your guns and remember that most people are paid to write the articles you read online.

Lastly ... ignore the noise. And almost all of it is noise. /CL -8% in one day is noise. Assuming you don't own ARCP nor SDRL, their plight is noise. Record cold winter is noise.

Accumulate dividend checks
Run screens for value
Allocate capital
Rinse & Repeat

[Jimbo]

Very nice read DW.

A couple of points from someone that is fairly new here.

I have learned to not sweat the markets nowadays, it is a long haul.

I have learned, (though I dont know what all is and isn't) tune out the noise. To me most of the SA articles are noise and it is getting worse (in my opinion), SA articles to me are like the little flyers sent to the house recommending this stock or that that will make me a MILLIONAIRE, not gonna happen anymore.

I am not old and wise to the DGI way but am trying to learn as much and as quickly as I can. Earthtodan was even nice enough to spend several hours with me showing me some good insights for investing.

That being said and relating to one of your lines about people asking about buys in the market, I for one appreciate the advice that others here give, not that i'm going to buy that stock but it gives me something to look at. If you were to name a stock or two and someone was to buy it and it was to fall, you should not feel bad or any pressure for giving said advice. To me the difference here and SA is it feels more like family and friends here and not someone with an agenda. At the time that you or others give some advice on a stock, that is what you or they believe and as you say there is no crystal ball for the Market future.

I do agree with some of your concerns for some of the Market but there is nothing I can do about that and I need to make as sound of decisions as I can to better my positions in the Market and let the chips fall where they may. I feel over a 20-30 year term all should be ok.

Thanks to you and all for your time and efforts to help one another and I love reading the articles.

Jim

[earthtodan]

(11-28-2014, 05:19 PM)Jimbo Wrote: To me most of the SA articles are noise and it is getting worse (in my opinion), SA articles to me are like the little flyers sent to the house recommending this stock or that that will make me a MILLIONAIRE, not gonna happen anymore.

Very well stated Jim.

[Roadmap2Retire]

Some great points raised here. I agree that there is a lot of noise and lots of investors have reached a point of hubris. We cant really know where things will go as the global events unfold. Best we can do is exercise caution, stay diversified, and keep looking for value and invest.

On a side note, I read a very interesting article about a deflationary boom yesterday. Its on a pension and macro-focused blog called Pension Pulse - a blog I follow and read regularly. There is a bit of "I told you so", which I personally find a bit annoying, but still an interesting read. I invite you to read it.

[EricL]

I think the market as it stands today is much different than the one leading up to the Great Recession. Pretty much all commodity prices including gold, oil, grains, and iron ore were at or near all-time highs in the summer of 2008 before the whole market collapsed.

In 2014 its nearly the opposite as gold, silver, oil, grains, etc. are all back down to near 2009 lows on the back of the extremely strong dollar and economic weakness in Europe and slowing growth in China. It seems that no matter how much printing is being done, inflation isn't happening and commodities continue to fall. As DW said, this should be beneficial to some sectors of the economy and should begin to benefit consumers with cheaper gas and more disposable income.

I personally don't see crude oil staying below $70 for an extended period of time. I think the market generally swings like a pendulum and we went from $150 in 2008 to $40 in 2009 and then back to $110 earlier this year and now back down to the $60's once again. I think we saw some forced selling and margin calls this week after OPEC surprised with no cut. If oil falls much further, consumption will increase quickly and if price stays low for any extended period of time, drilling in U.S. shale plays will slow and production will fall. I think we will generally see a $80-$110 range over the next 5 years with short periods of time above and below as the pendulum swings.

In the short term, I think retail could surprise to the upside this Christmas season, and with extremely weak comps from the bad winter last year, Q1 numbers will look good in comparison as well.

If you are a long term investor, volatility is your friend as it gives you opportunities to buy stock in great companies at a relative discount. When buying, focus on lower volatility sectors and always buy quality, financially strong companies and don't overpay for them.

If you are trying to trade, good luck!

[dividendventure]

Very interesting timing on this post. Ever since the latest general pullback everything rebounded really strongly with results.

I always feel uneasy when I see the market at these valuations. Right now, I am finding it very hard to find value somewhere apart from the energy sector.

Since I would definitely prefer to wait for the dust to settle on the energy sector before taking a swing (especially because I am already overweight on energy), I am having a hard time finding purchase targets.

I always have a concern that the market might just shoot up to unreasonable valuations based on unrealistic expectations and stay there for a year, preventing me from investing for that year. I'm still making my mind if I would try to buy the "least-overvalued" or just wait it out. Any ideas?

[Kerim]

Great post, and great thread -- thanks.

My crystal ball is STILL not back from the shop, if you can believe that, so I've got no idea where things are headed. They say they are still waiting on parts from Korea, but I'm becoming skeptical they will ever arrive.

The ability to "tune out the noise" is important, I agree. And though I can easily dismiss it, I actually enjoy the noise. I especially love reading separate articles about a company on SA, released on the same day, arriving at completely different conclusions about the company's future. It helps me to keep in mind that nobody -- absolutely NOBODY -- knows what is going to happen in either the near-term or long-term. Nobody. Period.* And anyone that suggests otherwise is just blowing steam or trying to sell you something.

Not to get metaphysical here, but investing is an act of faith. Those dollars that you are saving? You could consume them right now in a million different ways that would increase your standard of living right now. A new TV, new shoes, theater tickets, a trip to Paris, gifts for your loved ones, charitable donations. Instead, though, you decide to "save" them, so that you can consume them later, when you will be too tired or uninterested in working.

But those "saved" dollars are just IOUs, really. And it is possible that society will not be willing or able to pay back those debts to you when you want to cash them in. If society collapses, you'll have been a sucker to curtail your current consumption in hopes of a comfortable retirement.

For the last couple hundred years, though, things have been (from a historical, relative perspective) stable. And the stock market has generally gone up. This has coincided with an era of economic prosperity. So we are left with the general notion that investing is a somewhat "safe" way to store your IOUs until you want to cash them in, and maybe to even beat inflation while doing it, so that you can consume even more later (in adjusted terms) than you could now.

But it is an extremely imprecise science. Every now and again, things get so out of line with both recent history and common sense that there are relatively safe bets to be made. The 2008-2009 crisis was one such example. Investing in great companies at fire sale prices then was a no-brainer. If the world was about to end, then your dollars were worthless anyway, so why not trade 'em in for shares of MO at $15 per share and yielding 8 percent (just in case the world didn't end and people kept smoking)?

But those are very rare circumstances. Most of the time, you are squinting at charts and buying stocks that are more or less somewhere in the "fairly valued" range and hoping that society keeps chugging along and that the market will continue -- generally -- to keep going up. That feels like a relatively safe long-term bet, but it could be completely wrong. And in the short and medium term, you might as well throw darts about where the economy or indexes or commodity prices will go.

All you can do is formulate a plan, stick to it as best you can, and hope for the best. My version of rapidacid's formula:

1. Accumulate capital however you can (income from work and accumulated dividends).
   
2. Invest regularly, in the companies that present the best mix of quality and value at the time.
   
3. Keep some powder dry for those rare times where there are real bargains aplenty.
   
4. Hope society does not collapse and that one day you get to cash in those IOUs you've been accumulating.
   

Again, NOBODY knows what is going to happen next.

*Except maybe in the case of an insider with important and actionable information that has yet to become public about a specific company, and you don't want to get involved in that!

[Dividend Watcher]

I didn't come back to this article for a while since I wanted others to chime in. I really expected more to comment with the collective knowledge here but appreciate those of you that did.

First off, I'm sorry to hear about your crystal ball, Kerim. I hate to say it but you really should be buying American-made crystal balls and not that cheap Korean junk you pick up at Target. Below is a picture of me using mine as I was doing some stock screening the other day.

   

Well, after what seemed like a volatile couple months or so I actually feel better about things now. Market volatility is up and not all in the same direction. To me that's a plus. When everything keeps going up with nary a discouraging word, I really begin to get worried. In the last couple weeks we've had some dips where I'd consider adding bits & pieces here and there and not feel nervous about the position so I did. Prices are a little high but not downright outrageous. The holiday shopping period wasn't marked with spikes either up or down but overall it seemed to be fine for most retailers. Thankfully, at least from what I was able to see in my busy schedule, no one was killed at a Walmart fighting over any of the season's specials. Unemployment is down even though it seems many are part-time and/or low wage jobs -- at least they've got some money coming in.

The oil market is in disarray right now. Everything seems to have dropped quite a bit, some more so than others, yet we haven't really seen anything in hard numbers. Everyone is offering an opinion or forecast which I'm guessing you can classify as noise right now. I'm comfortable where I'm at even though I'm wondering if the wife & I may see some dividend cuts with ESV or HP. In either case, as of right now, I'm willing to hold on through the cuts and look to the other side as I think both have been pretty conservatively managed for the business they're in. They don't call them "roughnecks" without a reason.

I mentioned the ag sector in my original post (DE specifically) and promised R2R I'd take a broader look into the sector when I had a chance. He was more interested in ADM at the time. Of course, I've collected a pile of notes and historical studies but just haven't had time to even read it all let alone form a more logical opinion than my "gut feelings". What does make me wonder is that in a cyclical industry, the usual rule of thumb was that P/Es were compressed (low) when companies were at the peak of their earnings cycle and often much higher when a bottom in the market was reached. Right now, DE has a P/E of less than 10. Their annual report just came out and I skimmed management's letter and took a quick look at the income statement. Earnings dropped a little and management wasn't sanguine about the outlook. I guess we'll have to wait and see over the next couple years and see how things turn out. In the meantime, I'm holding my DE and reinvesting the dividends. If/when a drop comes, at least I'll be adding at better yields.

Lewys120 asked over on the 'What Did You Buy Today' thread:

Quote:Currently on watch list;

KO (at around $40)
AAPL
JNJ <--- Looks decent but not overwhelming
WAL

What's everyones opinion on these at current valuation?
Nothing cheap really :/

Since I didn't want to clutter up that thread, I thought I'd add it here since I was muttering anyway.

He was really wondering about JNJ and I bought some today. I felt that it wasn't going to come back to 'cheap' much before my wife retired -- it's in her portfolio -- and we'd miss out on several years of compounding which is important at our age.

That got me thinking (I know, a bad thing because then I ramble) about something that's bugged me for a few years. I kept wondering why I never noticed the power of reinvested dividends in my younger days. Many stocks I owned then, JNJ, HNZ, STT for example, all had their dividends reinvested. With commissions pretty high back then, I didn't trade much and reinvesting was still free so took advantage of it.

I mentioned somewhere here that I was doing some work putting a new network in for a client last summer and found the business section of the newspaper dated March 3rd, 1991 in the ceiling. Curiosity got the best of me and I pulled it back out to look at what yields and prices were then. Lo and behold, JNJ closed at $82 on the previous Friday (3/1/1991). The dividend was listed at $1.36 annually giving us a yield of 1.6% and P/E was hovering around 24.

Then I looked at some others:

SYMBOL - YIELD - P/E
EMR - 2.97% - 14
GE - 2.96% - 14
CL - 2.43% - 16
CLX - 3.6% - 15
KO - 1.82% - 26
PEP - 1.21% - 24
MCD - 3.02% - 6
XOM - 4.81% - 14 (I don't know the symbol back then but no Mobil)
CVX - 4.08% - 12 (same as XOM)

There's tons more but you get the idea. Just like now, it seems the favorite growth & income stocks such as JNJ, KO & PEP, all sported high P/Es and low yields. The other comparisons were all over the place and there were names you won't see any more.

So then I was wondering what the market was like when these numbers were recorded. Here's the long-term S&P 500 from Yahoo Finance:

   

I hope you can see the numbers. I've put the marker on the closest date to the old newspaper I used. We were on the verge of the great 90s bull. I'll bet dividends didn't keep up with prices through it and that could be the reason why dividends never stood out nor piqued my interest. Before the 90s, I spend my money on mutual funds because I didn't know any better so they wouldn't have meant anything to me at the time.

Since Lewys was asking about JNJ and I just bought it, I thought I'd focus a little more on that:

   

Wow! You can see the marker shows JNJ's price to be $10 and change yet the price in the paper was $82.00. That's about 7.2% CAGR with NO dividends taken into account and starting at a P/E of 24. How many splits is that?

Lewys, my thinking when I bought some JNJ yesterday was that the current P/E is around the high teens and yield is 2.7%. Compare that to above. There's another dividend boost in the next 6 months and JNJ is going to keep on doing what they're doing. They have an A+ credit rating, have some more drugs in the pipeline, have a much larger consumer division than before and you're hopefully planning to hold for another 30 years or more. Do you think it's a fair price here? I don't think you'll notice much difference if you buy at $95 or $100. Maybe if it goes back down to the $60 range it will but don't call me to let me know, I'll be at the bank taking out a mortgage.

As for KO, David Crosetti at Seeking Alpha worked for KO for many years and has a boatload of KO stock. His opinion from following the stock for a million years is that when it crosses into the 3% yield range it's fairly valued. Again, compare KO's stats today with what I listed above. Then go look at a 30 year chart and tell me if you think KO is in a fair range now. (FYI, the paper lists the price back then at $52-3/4.)

AAPL I have no opinion here and WAL I don't know a thing about. So there's my answer.

Just remember the past ain't the present and all that jazz. This is my own opinion and I don't work for any brokerage. The moon rises in the night. I own KO and JNJ and all the other usual disclosures.

So there's the followup to my whining post I started this thread with along with some extra stuff thrown in. The comments everyone else added made me think some more so thanks. Appreciate any and all further thoughts.

[Malonziziz]

What happens if the Fed raises rates this time, of course, remains to be seen. But as we enter the sixth year of the post-crisis bull market, strategists are reminding investors to keep their guards up against big changes in the landscape.