Hi Everyone,
Happy New Year!!
During 2016 (1/1/16-12/31/16), “Dow Index” rose by 13.5%, while our portfolio rose by 31.38% during the same period. In 2014, only 16% of fund managers beat the “market”. If we did not have Twitter, we would have done better but most prudent analysts are optimistic that eventually Twitter will rise above previous highs.
Now we are so close to that big number 20,000 on the Dow! As one analyst stated, the market has to keep knocking to get through ‘big numbers’ that have a big psychological impact on the investor psyche so now the market keeps knocking on Dow 20,000. In January 1987, for the first time the “Dow’ hit 2,000; in less than 20 years, it has gone up by 10 times. When Trump won, a co-worker asked me whether I could recommend a stock based on the Trump victory and I stated that US Steel would be a good bet. US Steel is running a very tight efficient operation but due to Chinese cheating on international agreements and dumping (selling below cost), US Steel has been having a difficult time for the past few years-the very thing Trump ran against. During the last couple of months, US Steel share price tripled!
As a contrarian, this market scares me. Everyone is overly bullish. That is a big red flag for investors to be cautious. According to the National Association of Active Investment Managers (NAAIM), the bullishness among investors has reached it’s 2nd highest point EVER! Also this has been above the historical average bullishness for 4 consecutive weeks-longest such streak in 2 years (Barron’s December 2016). I advise investors to put a small portion of their portfolio in to put options on the Dow Index (DIA) and if the market go sailing higher, buy more puts. This kind of a bull market is not healthy. Since Trump’s victory, not only interest rates went up but the Feds promised more will follow soon and the dollar has been rising sharply; which is very bad for most companies but investors ignored all that. This is too is a bad sign. Why is it bad for everyone to be bullish? Less money on the sidelines to come in to the market and also one unexpected blow, could send all investors rushing to the exit. As Barron’s put it, “When everyone zigs, the market tend to zag”.
In 1930. Smoot Hawley brought up legislation to impose high tariffs on imports which led to a trade war among nations which decreased US foreign trade by 40%. We are living in a different world now where we are more dependent on foreign trade. Technology companies get 70% of their revenue from other countries. In 1930, total US foreign trade as a percentage of US GDP was 0.6%. Now we are much more dependent on foreign trade and a trade war will take us to a place where we have never been.
One thing we are sure of over the next 4 years, with a Republican President and a Republican Congress is that we will have lower tax rates. This will make tax free muni rates go up as local governments try to compete for funds. Since we are close to full employment and with fiscal policies adding fuel to the fire, the Federal Reserve will have no choice but increase interest rates at a faster rate than previously anticipated. This too will make the tax free muni rates go higher. As muni or other bond rates go up, the principal will keep going down; and unlike equities, the probability of making a full recovery is close to zero.
Now is not a time to buy equities or bonds. It is a good time to start hedging against a bear market in the future. Whenever the next correction or crash comes, we can add to our holdings.
Have a great January!
Fernando