Wall Street ignoring the economic pain on Main Street

Are you mystified that the S&P 500 is only down 13% from its February high and the NASDAQ is slightly positive year to date? You would think that all the bad economic numbers would dampen investor’s confidence in owning stocks. However, publicly trading companies on Wall Street have a number of advantages over Main Street.

  1. When it comes to government bailouts and subsidies, large public companies seem to be first in line. There are always claims that help is needed to save jobs or what they produce is an essential product or service. However, many of these companies used their cash to buy back stock and pay big executive bonuses instead of saving for a rainy day. (Airline industry)
  2. The Federal Reserve’s zero interest rate policy helps large public companies to sell bonds at low rates to stay afloat, a huge advantage over small and medium sized privately owned companies.
  3. The Federal Reserve has the bond and stock market’s back.  They are adding liquidity to the bond market by buying corporate debt and even buying high yield or junk bonds to keep interest rates low. This allows even the worst run companies to avoid bankruptcy.

Why I think that Wall Street shouldn’t be so optimistic regarding an economic recovery:

I agree with comments made by Fed Chair Jerome Powell who cautioned of a potential credit crunch as stimulus dollars start to dry up. The result would be the loss of thousands of small and medium sized businesses across the country. Owners of many bars, restaurants, gyms and clothing stores have stated that they are fearful of being able to cover their operating costs while limiting the number of customers allowed into their premises.

So far, 32 publicly traded companies have already filed for bankruptcy protection under chapter 11 which leaves many of their employees, suppliers and shareholders high and dry. The economic pain from Covid 19 could be long lasting as more companies file for bankruptcy protection. The recovery may take some time to gather momentum as some jobs will never come back.

It is hard to comprehend that Wall Street is dismissing the fact that all the jobs that were created over the past ten years have disappeared in just under three months. . The weekly jobless claims will continue to be momentous and don’t included workers who want a full time job but are working part time. It also doesn’t include many Americans who are out of work and don’t qualify for unemployment insurance.

I wonder, is it even possible to get people back to work without safely opening up schools and daycares? France reopened their schools last week and 70 new cases of Covid 19 were found in seven schools forcing them to close them again. A new concern for parents is an outbreak of a inflammatory syndrome in children that is linked to Covid 19. Cases of Inflammatory syndrome  have been diagnosed in 27 states in the United States.

Doctors have warned that many U.S. states have reopened without meeting CDC guidelines. The number of positive cases have spiked already in 14 states over the past few weeks. A rising death toll in the U.S. hasn’t stop many Americans from avoiding large social gatherings, ignoring social distancing guidelines and refusing to wearing a mask. There is a high probability that another spike in cases and deaths will dampen consumer spending.

Lastly baby boomers, (60 to 75 years old) have the most disposable income and also face the highest risk of dying from Covid 19. As a baby boomer, I will be avoiding the all travel and leisure activities.

  • Air travel
  • Cruising
  • Resorts and hotels
  • Movie theatres
  • Sit down restaurants
  • Casinos
  • Theme parks
  • Sporting events
  • Concerts

I will avoid anywhere there is large gathering or requires close personal contact.  I am not going to risk my life to get a haircut or go to my local pub to watch a sporting event. It is just a matter of time when Wall Street profits will be affected by lack of consumer spending.

 

Signs that this recession will be more severe than 2008-09

 

The last time we had zero interest rates was during the great recession of 2008-09. If you are a movie buff, that was one scary horror movie. Unfortunately, the sequel maybe even scarier. The plot, so far, is similar in many ways. The world faces a major crisis with high unemployment, massive government spending (bailouts), zero interest rates and central banks printing money.

How do you make a horror movie scarier than the original? The writer has to intensify the plot line and add some terrifying developments not seen in the original movie.

  • This crisis affects the whole world with every economy feeling the pain.
  • The percentage of people unemployed could be worse than the great depression of the 1930’s (25% or more)
  • The government stimulus package was in the billions last time and now in the trillions with more to come.
  • Central banks are buying huge amounts of government debt and now are buying low grade corporate debt. (Even some junk bonds)

More terrifying developments

  • Although tragic that many consumers lost their homes in the last recession, small business failures will have a more negative effect on the economy. Small businesses are responsible for employing 48% of the U.S. workforce and have generated 65% of net new jobs over the past 17 years. The unemployment rate will be higher for longer.
  • Consumer spending accounts for 70% of economy growth. Unemployed consumers will have less money to spend. Plus, images of body bags and continuing daily death counts will inhibit consumers from risking their lives to go out and even spend money.  The last recession had little impact on travel, movie theaters, theme parks, sporting events, restaurants and bars. These businesses will continue to suffer until consumer confidence returns
  • The last recession didn’t produce long lines at grocery stores. Disruption of food production was unheard of and has become a real concern as some meat packaging plants have been forced to temporarily shut down. A shortage of fruit and vegetables could be next as migrate workers could face high rates of infection.
  • Normally a drop in oil prices has a positive effect on consumer spending but a total collapse does more harm than good. Oil companies have started to suspend capital expenditures, cut dividend payouts and reduced their workforce. Countries which depend on revenues from oil production will face large budget deficits making it harder for them to stimulate their economies.
  • Food banks are experiencing a surge from a high number of people who have never needed their help before. Images of long line ups are popping up all over the United States.

 

 

  • There was a coordinated world response to the financial crisis which is sorely lacking in dealing with this pandemic. Too many leaders are more concern with keeping their jobs than going their job.

 

 

The spread of misinformation by some world leaders and some media outlets could cause a second wave of this virus. The image below is an example of irresponsible leadership. Some of these people will get sick and some may even die. However, they will also spread the virus to their families, their friends and critical medical personal at hospitals. Being a Canadian, I hope that a change in leadership in the United States will help the North American economies recover sooner rather than later.

How will this horror movie end? My best guess is when a scientist shows up holding a treatment in one hand and a vaccine in the other!

 

Stay tune for some investment ideas during these turbulent times.

 

 

 

Op-Ed: I am less optimistic of a V shape recovery

It is difficult to write a financial blog when the death count from Corvid -19 keeps going up every day. However, the big question is when we will get back to normal? I think you have to look back in history at the Spanish flu of 1918 for some clues.

Policies used to reduce the spread of Corvid -19 are similar to what was done to reduce the spread of the Spanish flu. Unfortunately, isolation, quarantine of infected people, use of disinfectants and limitations of public gatherings were applied unevenly. (Sounds familiar?) Back then, the Spanish flu came in waves and infected 500 million people, about a third of the world’s population. It lasted from Jan 2018 until Dec 1920 and somewhere around 50 million people died.

I fear that world leaders are more worried about keeping their jobs then doing their jobs. Their slow reaction of issuing stay at home orders for non-essential workers will prolong the spread of the Corvid-19. In my humble opinion, a V-shape recovery is overly optimistic.

 

The roll out of government programs to get money into the hands of individuals, small business and bailouts of large corporation will take a long time to be effective.

  • Many government websites are crashing from the number of requests for aid.
  • Many small businesses will go bankrupt before the relief funds arrive.
  • The aid to  businesses are in the form of loans which add extra operating costs, this will hider rehiring employees.
  • The United States had 16.5 million unemployment applications over the past three weeks which is just a small sampling of what is to come.
  • This is a world recession so leisure and travel will be impacted for a long time. Plus business travel, conventions and hotel stays will be limited.

The best case scenario would be a slow and cautious U shape economic recovery. What is needed is accurate testing of people who would be allowed to go back to work.  Also, a quick development of a vaccine and an effective treatment for people who are infected with the virus.

The worse case scenario would be an L or W shape economic recovery. Rushing to reopen the whole economy could cause a second wave of the Covid-19 outbreak, killing thousands of more people and shutting down businesses all over again.

I am not investing based on stock market experts who tend to be overly optimistic. I am listening to the doctors who specialize on disease control. Their timeline of a vaccine is 12 to 18 months away. Therefore this recession will probably last around 18 to 24 months. The chart below illustrates that happen to the S&P 500 during the last recession of 2008-09:

This chart illustrates the past two years of the S&P:

I am not an expert on charts but I think that there is a good chance that what we are seeing is a bear market rally. There is more bad news coming that hasn’t been priced into stock prices. I would suggest that you play it safe and sell into stock market rallies and hold on to your cash.

Save lives and stay at home. The life you save may be your own!

 

 

 

 

 

Why interest rate cuts won’t save the economy or the stock market

This week, after an emergency call with central bank leaders around the world, the Federal Reserve cut interest rates. A somewhat surprising move coming about two weeks before its next scheduled meeting. It was the first emergency rate cut by the Fed since the financial crisis in 2008 and a strong signal that the central bank is taking the threat of the virus seriously.

The problem is that cutting interest rates, which were already very low, isn’t likely to do much to solve the kinds of economic problems posed by a pandemic.

Think of it like this: if more people get sick, more people can’t work. Businesses become less productive and ailing workers without paid sick leave don’t earn money. (They might also go to work sick.) Meanwhile, others who are either sick or afraid of catching the virus stop going out and spending money.

Restaurants, movie theaters, hotels and airlines have already experienced less revenue. More workers will lose their jobs temporary, so fewer people will have money to spend. Its classic cause of an economic downturn since the U.S. economy depends on consumers’ spending money.

Crucially, all the people out of work will still need money for food and housing costs. The new record-low mortgage rates aren’t going to solve that immediate problem, especially not for renters. Nearly 4 in 10 adults would have trouble handling a $400 emergency expense, according to a recent study from the Federal Reserve.

An economic downturn is coming, the problem is no one knows how severe it will be and how long will it last. China’s economy took a big hit and government took some draconian measures that can’t be done here in North America.

Some precautionary financial steps

  1. Top up your emergency fund
  2. Living pay check to paycheck: then get a line of credit or increase the limits on your credit cards
  3. Start looking for day care services in case of school closures
  4. Don’t put any new money into the stock market until the coronavirus is contained. (Too early to buy the dips, however make an investment shopping list)
  5. Get ready to refinance your debt, but keep in mind that there could be more rate cuts.

Why you shouldn’t panic over a decline in stock market prices

The chart below illustrate what happen to stock market values during the financial crisis. (Jan 2008 until Mar 2011) The left side of the graph shows the market hit bottom in Mar of 2009 and recovered most of it losses by Mar of 2011. I not suggesting that this current market downturn will get that bad.

Keep in mind that the stock market has gone straight up since the market hit bottom back in march of 2009 with a few little blips. The chart below illustrates that the current downturn could be just another blip. This virus will only have a temporary effect on the economy and consumer spending will recover. People will travel again, visit theme parks, eat out and business will be profitable again.

Back in September, I wrote a post to reduce some of your risk and move some money into dividend paying stocks. I hope that you followed my advice.  Dividend income should help to offset some of the fall in value of your portfolio.

 

 

 

Both young & old should make a budget

Contrary to popular belief, money has no value what so ever until you spend it. It is what you spend it on that has value. The value we place on money is dependent on what we think we can buy with it. The money you are paid as a salary is just a number written on a pay slip or is deposited directly into your bank account in exchange for the service you provided to your employer.

Why is budgeting so important

Since the value of money comes from its buying power, planning your spending ensures that you have enough money for things that you need and for things that are important to you. A spending plan will also keep you from spending money that you don’t have or help you get rid of unwanted debt. (Not all debt is bad)

The buying power of money is determined by the supply and demand for goods in the economy. Inflation in the economy causes the future value of money to reduce its purchasing power. A budget helps you figure out your short and long term goals plus measures your progress.

Budget Categories

  1. Shelter – rent, mortgage, property taxes
  2. Utilities – heat, hydro, water, cable, internet, cell phone
  3. Food
  4. Transportation – bus pass, car payments, gasoline, repairs
  5. Clothes & Accessories
  6. Gifts
  7. Insurance – car, home and life
  8. Entertainment – including vacations
  9. Emergency fund
  10. General savings – major purchases, debt repayments, retirement

It is really important for seniors to have a budget. You don’t want to outlive your money and be a financial burden to your children. There are three stages of retirement, “go go”, “slow go” and “no go”.

You tend to spend more money in the “go go” stage since today’s seniors are healthier than previous generations. Plus, life expectancy has increased so seniors will also have more leisure time.

As more people are living longer, the “no go” stage in retirement can become very costly due to the increasing risk of health problems. The risk of developing a cognitive disease like Dementia or Alzheimer increases with age. Costs for caregivers, assistance living and nursing homes are not cheap. (The cost for my elderly mother’s caregiver is about $20,000 per year)

Why people don’t budget

  1. They’ve got the wrong idea. Budgeting’s got a reputation for being too restrictive; you work hard for your money, why shouldn’t you be able to spend it as you see fit? But it isn’t as terrible as it seems. In fact, when you stick to a budget, you’re likely to have even more money left over to do with as you please. Budgets shouldn’t be about making big restrictive changes. Rather, when you examine your finances, you see small ways to make changes that will have big effects.
  1. It is intimidating. Got a vice that you don’t want to give up? Scared that if you make a budget you won’t be able to stick to it? There are tons of reasons you might fear drawing up a budget, but that shouldn’t keep you from trying! When you create a budget, you’re enabling yourself to find and fix the financial mistakes you make, rather than ignoring them and hoping they’ll go away by themselves.
  1. It is time-consuming & boring.Unless you have a passion for spreadsheets, chances are that budgets bore you to tears. You might not want to budget because the actual act of budgeting just seems like row upon row and column upon column of money that’s no longer yours.
  1. They think they don’t need to. In today’s economy, not many people can say that they don’t need to budget because they have enough money. Even if this is the case for you, a budget can always help you to save more.
  1. They think a budget can’t help. Most of us have heard the adage ‘the first step to recovery is admitting there’s a problem.’ Debt is a very personal issue and it can be difficult to admit, even to yourself. There are a variety of ways to help clear your debt and drawing up a comprehensive budget is the best way to start doing this.

I just put the finishing touches to my 2018 budget, how about you?

Panic at Orlando airport spoiled my golfing trip

Golf season in Canada can be very short because of bad weather. One of my guilty pleasures is heading south for an annual golf trip with the boys every November. We started this tradition sixteen years ago and I would have to be very ill to miss it.

As a volunteer driver, I experienced first-hand the panic at the Orlando airport while dropping off a friend after our last round of golf. We decided to go early so we could have   dinner together at the airport. Walking in, we faced a stampede of frighten travelers running and screaming to the exits.

Some travelers thought they heard gun fire while others thought that they heard an explosion. Standing outside watching the Orlando Police conduct their investigation with weapons drawn was very alarming.

It turns out that a camera battery exploded in a bag which cause people to panic and the airport to be evacuated. Thousands of travelers faced hours of waiting at security checkpoints.

Phil Brown, CEO of the Greater Orlando Aviation Authority, said a full ground-stop was issued at 5:30 p.m. and lasted until 9 p.m. At a press conference Friday night, Brown said 24 flights were canceled and 27 others were diverted. He acknowledged that some passengers will have to book new flights, and others might struggle to find hotel rooms for the night.

He added that some airport staff and TSA agents instructed the crowd to take cover, when the initial explosion created confusion among staff and passengers.

At first glance, it may seem that the Orlando Aviation Authority may have over reacted to a faulty camera battery. However, it happened on the same day that Americans celebrate veteran’s day.  Plus no one wants to read about children getting hurt after visiting Disney World.

I felt bad for my friend who ended up sleeping at the airport as his flight was cancelled and rescheduled for 2:30 p.m. the next day. I was lucky that my early morning flight was cancelled and I got some extra sleep. It made delays in my rescheduled flight a little more bearable.

Will this unfortunate incidence stop me from going south golfing? Not a chance, however I may decide to spend a few extra days driving instead of flying.

The moral of this story is managing risk extends beyond the financial markets. Panic and over reaction can easily cause a major sell off in stock markets. You can’t predict what will cause a stampede to the exits.

 

 

 

 

 

Investing ideas: I liked the product so much, I bought the company

Victor K. Kiam made a fortune as the President and CEO of Remington Products which he famously purchased in 1979 after his wife bought him his first electric shaver. Kiam became famous as the spokesman for the Remington shaver. His catchphrase, “I liked the shaver so much, I bought the company”, it made him a household name.

Your iPhone is your BFF and you can’t function without a Starbucks latte. You post something on your Facebook page every day, go home from work and chill out by watching Netflix. They’re all products you love and know well.

But does that mean the companies behind them are good investments?

The short answer: At least it’s a good starting point.

At first glance, it isn’t a terrible idea to own stocks if you have a good understanding of a company’s products and have a good feeling it will be successful. Yet knowing whether a business makes a good product and has excellent customer service are by no means the only measurements for investing.

For example: Snapchat (SNAP) and Twitter (TWTR) are both very popular but can they become sustainable businesses with positive earnings growth? So far, it isn’t looking very good for either of these companies. Before you invest, you have to determine whether the product or service is just a new fad or a money-making long-term trend.

One of my best investment ideas in 2016 came from going on vacation on a cruise line. Talking to other passengers I got very positive feedback on their cruise line experiences. Plus many of my boomer friends confirmed that they also loved taking a vacation on a cruise line.  The baby boom generation is getting older and I had dinner with many passengers in their eighties and even with one women in her nineties. (This could be a long-term trend)

Although I was on vacation on a Carnival ship, I bought shares in Royal Caribbean after extensive research.

Price / Earnings Earnings growth (5yr) Operating margin
Royal Caribbean 17.7 times 16.45% 19.95%
Carnival 18.5 times 8.95% 16.63%

It turns out that I could have beaten the returns of the S&P 500 index by owning either RCL or CCL as illustrated by the chart below.

Finding good, long-term investments is exceedingly difficult, there are only a few good ideas out there. When you find an extraordinary business and you have an understanding of what its future looks like, you should invest some money into it. Unfortunately, going that takes time, effort and know-how, often more than casual investors will do on their own “but it can be done”.

Could President Trump cause another Great Recession?

Republican presidential nominee Donald Trump shakes hands with Democratic presidential nominee Hillary Clinton following the second presidential debate at Washington University in St. Louis, Sunday, Oct. 9, 2016. (AP Photo/Patrick Semansky)

Being Canadian, I am not trying to influence any of my American readers on who they should vote for next Tuesday. However, my investment portfolio is heavily invested in the U.S. stock markets, I shudder at the thought of what could happen under President Trump. Naturally enough, investors and analysts hate uncertainty. Hillary Clinton largely represents the status quo. Mr. Trump is more like Forrest Gump’s box of chocolates “You never know what you’re going to get.”

What exactly happens the day after? To markets? To the economy?

The conventional wisdom is that a Trump victory would lead to a swift, knee-jerk sell-off. Many investors will choose to sell stocks and ask questions later. The Mexican peso would most likely fall on fears of a trade fight along with ETFs that contain Mexican stocks. Some insurance companies could tumble on the uncertainty of what would happen if Obamacare was repealed.

A worst case scenario is Mr. Trump’s anti-trade policies would send shock waves around the world. Add a stock market crash and it would plunge the world into recession. Europe’s economy is very fragile and it wouldn’t take much to tip Europe back into a full blown recession. This would lead to a serous banking crisis that could spiral into emerging markets.

The biggest test for the stock markets might be pegged to the future leadership of the Federal Reserve. There is much more uncertainty regarding who Trump might nominate, though he has made it clear he would not re-nominate Chair Yellen.

Now, a handful of economists have suggested that despite all of the promises made by both candidates, odds are high that whoever the next president is, they will preside over a recession. They argue that we are in the second-longest bull market of all time and the eighth year of this economic expansion. It is hard to believe that we will go through the next four years without a hiccup. If merger activity is a gauge of the market’s cycle, the recent spate of deals suggests we’re closer to the ninth inning than the first.

In reality, it’s impossible to predict how the markets would settle after an initial sell off. It will take time for investors to truly make sense and “math out” how his policies would affect the economy. Now, Trump’s bark will be a lot worse than its bite in terms of actual implementation of his anti-globalization position. Hopefully, a split in the congress and the senate will stop Trump from carrying out any outrageous election promises.

Am I worry about the U.S. election? Not really because I am an option trader. I have sold covered calls to protect most of my U.S. stocks. I have sold only a few cash secured puts on stocks that I am comfortable holding long – term. Plus, I have some extra cash just in case of a market sell-off. I am very comfortable switching from selling cash secured puts to buying puts if there is a bear market.

Where am I going to be next week? On vacation from the markets in Orlando, playing golf with my golf cronies. Hoping that they don’t ask for any financial advice and looking for another hole in one.

hole-in-one

 

Will that be Debit or Credit?

debt-card-swipe

Most financial writers would recommend purchasing items using a bank debit card or cash instead of a credit card to control impulse buying. A debit card transaction will allow the vendor to take money right out of your bank account. It is so quick, you can see the transactions appear on your online bank statement minutes after your card has been swiped. This is good advice because spending money that you don’t have can lead to accumulating a lot of unnecessary debt.

However, my only problem with using a debit card or cash is security. Lose your wallet or purse and kiss the cash good-bye. If thieves get a hold of your debit card, the bank will not cover your loss. I am fortunate that the credit card companies in Canada have all adopted chip technology with a 4-diget Pin number for added security. Plus most retail stores even have a tap option for purchases under $100.00, so tap and go is quick and easy.

My decision to always use credit over debt, just saved me $1,470.67 because my wife’s credit card was recently compromised. The thief was very smart, only one big transaction which the credit card company didn’t red flag as an unusual purchase. I always check my monthly statements and recognized the bogus charge immediately. This is the third time in less than ten years that I have had to get a new credit card due to fraud.

The previous two times, the credit card company called me after they noticed some unusual activity. Although, it was a little embarrassing to have my credit card purchase declined but it is better than losing money. My experience with credit card fraud has made me into a frantic when it comes to making sure that I don’t lose any credit card receipts. I always cross-reference the receipt with my monthly statement. We even record each on-line purchase on a separate piece of paper and file it with the rest of our receipts.

Thieves have become very bold! I received a phone call at 6:00 a.m. from someone pretending to be from my credit card company. He stated that my credit card may have been compromised and requested that I should turn on my computer to check my debit card transactions. He wanted to get access to my banking information. Warning bells went off in my sleepy head. What the thief didn’t know was that credit card and debit card were with two different banks.

Protect yourself from fraud

  • Use a credit card for all your on-line purchases for added protection
  • Keep your receipts and check your monthly credit card statements
  • Hang up on questionable phone calls and call your financial institution
  • Use a pin number that doesn’t have any personal dates, like your birthday
  • Change your pin number from time to time
  • Share with family and friends information on current scams in your area

What is your answer to the question? Will that be debit or credit?