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Since Markets Go Up And Down, Here's What To Buy Now And Later

Published 04/22/2014, 01:29 AM
Updated 07/09/2023, 06:31 AM

We all know the market has to correct "sometime." In the springtime blush of an outlier market in 2013, some people may have forgotten this simple truth, but markets do go down as well as up. That’s why I always provide a 144-year historical chart of the S&P in every issue of our investment publication. It allows us to see the forest as well as the trees. It keeps us from either panicking when everyone thinks the sky is falling or over-extending when the market shoots ahead on thin volume and speculative enthusiasm.

Regular readers are unsurprised by this current correction. We’ve been expecting a correction for some time and tried to position for it, not by day-trading or jumping in and out trying to time the market, but simply by buying a fair amount of long/short mutual funds, quality high dividend-paying stocks and those with a lower Beta than the market itself.

So the question on everyone’s lips now becomes: is this the end of the bull market we’ve enjoyed since the spring of 2009? No one knows, but our best guess is “Probably, if only for a few months of much-needed correction, anyway.” Think of a balloon that is difficult to blow up at first, then becomes easier to inflate the more hot air we blow into it. If we just keep blowing, it will burst. But if we occasionally let a little air escape, and then re-inflate it, the walls have stretched and can better handle the increased volume of air. Well, the market of 2013 definitely had lots of hot air blown into it so a normal correction should be welcomed, not feared.

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If we are correct, expect a market pullback severe enough to turn johnny-come-lately bulls into scared rabbits -- 12%? 15%? -- after which time the mid-term elections may give a boost to investors' hopes that the long day's journey into night that has been the US economy will turn better with new adult leadership, sending the market higher. This is often the case after the mid-term elections presage positive changes and the politicians do whatever they can to make certain the economy is firing on all cylinders.

The bottom line is that we are reallocating with a view to buying the best companies at the best price. So we have placed ever-tighter trailing stops on most of our long positions; if they begin to execute you can be certain we'll advise our readers and provide actionable avenues to protect ourselves in the event a broad decline is beginning.

We are buying more long/short mutual funds and ETPs PowerShares S&P 500 Downside Hedge (PHDG) and Barclays S&P 500 Dynamic VEQTOR ETN (VQT). We are also buying convertible bonds and “income funds” that are allowed to trade bonds like RiverPark Strategic Income (RSIVX), not merely hold them. We still want capital gains, we just don’t want pure long equity positions to get there.

What will we buy if this proves to become a real decline? America.

Never Give Up on America

You read it here first: America is going to be the rebounding center of global manufacturing. The confluence of two of our Big Themes, an energy-independent North America and the onshoring of jobs once lost to Asia and other emerging market regions, virtually guarantees that American industrial might will prevail.

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When the higher productivity of higher-wage US, Canadian and Mexican workers is factored into the equation and we add the incredible energy advantage North American, and especially US, manufacturers are gaining, the results are baked in. To this last issue, let’s take a look at an erstwhile fine competitor to US manufacturing: a reunited and re-energized Germany. Yet just recently, German economy and energy minister Sigmar Gabriel said Germany risks "dramatic deindustrialization" if it doesn't reduce energy costs. After Angela Merkel declared Germany would decommission its low-cost-per-BTU nuclear infrastructure, and continued that nation’s long-term bowing and scraping to pressure from the Green party, energy costs soared in Germany.

All those windmills that now cover the landscape cost way more than their proponents said they would and produce considerably less power. The story for solar energy is even worse. Tropical nations, with long days of abundant sunshine, can certainly benefit from solar power. Many temperate areas are the same: think Arizona to Florida in America’s Southwest and Southeast. But, really now, in places where the mid-winter sun only shines, on the rare day it does, for 6 to 8 hours a day, who was the leader dumb enough to extract extra taxes from the citizens in order to install massive solar farms?

Take a look at a map. You’ll note that Berlin, Germany is actually farther north than Saskatoon, Saskatchewan. The difference is that Saskatchewan has gas and oil nearby. Really nearby.

In Germany, the various subsidies and renewable-energy taxes are now costing German consumers and industry some $32 billion a year. And it isn’t just Germany. In December, the Center for European Policy Studies noted that European steelmakers are paying twice as much for electricity and four times as much for natural gas as we do in the U.S. Energy for power and transportation of finished goods are two of the largest costs for any manufacturer. If U.S. manufacturers pay half as much for electricity (and one-fourth as much for natural gas) how long do you think it will take for that to translate into a compelling pricing advantage for U.S. manufacturers?

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In addition, our source of gas is stable; we derive it primarily from the USA and Canada. One of these days, we may even replace some Venezuelan, Nigerian and Saudi oil (versus nat gas) with oil from Canada, as well, if our president makes the common-sense decision to approve Keystone XL, which was proposed in June of 2008 and has been held hostage ever since by well-meaning folks -- even though the safety, economic, and environmental issues are not on their side.

For us, the decision is simple: the oil is either coming to the U.S. or TransCanada (the owner of the larger Keystone Pipeline System) will build a different pipeline and send it by sea to China. Either way the environmental footprint is the same, but China gets a secure source of energy while we spend billions to keep the sea lanes open to Nigeria. Sounds like cutting off our nose to spite our face, doesn’t it?

Even if some Canadian oil finds its way to the U.S., the other binary decision is: it will either come by pipeline or it will come by rail. There are currently over 200,000 miles of oil pipelines all across the USA, and the safety record of pipeline transmission is vastly superior to that of rail!

As for environmental complaints that Canadian oil sands are a dirty fuel — they are cleaner than coal, which they will replace, and as clean, environmentally, as California crude or, for that matter, the environmental lobby's favorite, ethanol processing.

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Indeed, thanks to the shale revolution, the U.S. is actually reducing emissions faster, at less expense, than the EU. Between 2005 and 2012, U.S. carbon-dioxide emissions fell by 10.9%, according to the "Statistical Review of World Energy 2013." During the same period the EU's emissions fell by 9.9%, according to the Netherlands Environmental Assessment Agency.

Meanwhile, elsewhere in the world, global coal consumption has risen by about 55% over the past decade as populations grew, manufacturing was shifted to them, and demand for electricity soared. While important projects like Keystone XL are being held up and U.S. consumers and manufacturers are paying electricity rates that could (and very well might) come down even faster, the U.S. is the world leader in cutting carbon-dioxide emissions — and our willingness to find cheap sources of energy close to home has created hundreds of thousands of new jobs, no thanks to the politicians.

Recently, energy economist Wallace Tyner estimated that by 2035 the shale revolution will have added $473 billion per year to the U.S. economy. American consumers will benefit and I predict that American manufacturing, as a result of all three of our Big Themes (adding the Internet of Everything to North American Energy Independence and Onshoring of Jobs) will enjoy a resurgence that will dwarf our current economic malaise.

So -- will there be a market decline? Sooner or later, absolutely. If not this month, then next. If not this quarter, then next. But for our part, that just means the chance to scoop up great American manufacturers and energy producers at prices 10% or more below their current prices. By adding income funds, convertible bonds and long/short mutual funds and ETFs to the mix, we aim to have funds available to buy low.

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Here's our take on the specifics:

THE TYPICAL BULL MARKET LASTS 4.4 YEARS -This one has already gone on 5 years +

THE HISTORIC MEAN CYCLICALLY ADJUSTED S&P 500 PE RATIO IS 16.5 - It's currently above 25

I'd add to these, valuation concerns that corporate revenues are dreadful and earnings are only slightly better; and that QE, the basis for much of the cash sloshing around to buy equities, is declining month by month. I then subtract an "x" factor for the market's ability to go to extremes for longer than anyone expects, and finally note that our Growth & Value portfolio is still on an even keel but the trailing stops in our Aggressive Portfolio have mostly been triggered. (Oracle (NYSE:ORCL), Teradata (NYSE:TDC), Titan International (NYSE:TWI), Rydex S&P Equal Weight Fund (RSP) and FirstTrust Technology AlphaDEX (FXL) all were triggered; only Cisco Systems (NASDAQ:CSCO), Penn West Petroleum (PWE), and the PowerShares S&P 500 Downside Hedge ETF (PHDG) are still outstanding, and close to their stop points.) All these are signs to me that the market is churning like it does at market tops.

It's time to play defense. We're going to increase our exposure to income offerings and decrease our exposure to purely long equities, particularly those with great stories, lousy earnings, and no dividends. Specifically, as of the close on Monday, April 21:

IN THE GROWTH & VALUE PORTFOLIO, we will:

  • Keep our trailing stop on iShares S&P Global Energy (ARCA:IXC) at $1 (Current T/S would occur at 44.65 based on Apr 17 price.)
  • Keep our trailing stop on Statoil ASA (STO) at $1 (Current T/S would occur at 28.24 based on Apr 17 price.)
  • Sell 1000 Pacific Drilling SA (PACD.K), 500 the Mexico Equity and Income Fund (MXE), and 350 iShares S&P SmallCap 600 Index (IJR) at market on close.
  • Sell all shares of the following mutual funds: ARTHX, BUFBX, FMLSX and GASFX
  • Sell $30,000 of MFLDX and $50,000 of RGHVX, both mutual funds
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Buy an additional $60,000 of the following mutual funds: RSIVX, buy $90,000 PFODX, and buy $110,000 STABX.

NOTE: If you are not a client of a Registered Investment Advisor like Stanford Wealth, you may need to consider a different boring bond fund rather than STABX -- SUBYX or one of the scores of PIMCO funds, like PIAUX, for instance. STABX is a load fund for retail investors; clients of firms like ours pay no load. The mutual fund family waives the load because we typically buy in million dollar increments and we tend to be more stable holders of their products. Of course, if you buy $1,000,000 of their fund at one time, they'll waive the load for you, too.

IN THE AGGRESSIVE GROWTH PORTFOLIO, we will:

  • Keep our trailing stop sell orders on 700 Cisco (NASDAQ:CSCO), 1500 Penn West Petroleum (PWE) and 500 PHDG
  • Sell our remaining 500 American Eagle Outfitters (NYSE:AEO) at market close
  • Sell all shares of the mutual fund SWHFX, $35,000 of OBIOX, and $25,000 of MFLDX
  • Buy the following mutual funds: $35,000 more RSIVX, $60,000 PFODX; as well as 300 more Peritus High Yield (HYLD.K) at a limit of 52.90 GTC

The overall philosophy we plan to stick with? Diversify. Preserve Capital over Time. Buy When Others are Selling -- Sell When Others are Buying.

The Fine Print: As Registered Investment Advisors, we believe it is our responsibility to advise that we do not know your personal financial situation, so the information contained in this communiqué represents the opinions of the staff of Stanford Wealth Management, and should not be construed as personalized investment advice.

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Past performance is no guarantee of future results, rather an obvious statement but clearly too often unheeded judging by the number of investors who buy the current #1 mutual fund one year only to watch it plummet the following year.

We encourage you to do your own research on issues we discuss to see if they might be of value in your own investing. We take our responsibility to offer intelligent commentary seriously, but it should not be assumed that investing in any securities we are investing in will always be profitable. We do our best to get it right, and we "eat our own cooking," but we could be wrong, hence our full disclosure as to whether we own or are buying the investments we write about.

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