That Was The Week That Was-4th Week November

The Motley Fool, you may have thought being long gone, is still very much with us. It’s a company that offers a wide range of services from investment advice through newsletters and blogs to mutual funds. The company was started in the 90s by two Gardner brothers and a friend, Eric Rydholm. The friend was jettisoned early in the firm’s development of a money management company. The two brothers had no experience and were trying to grow their business out of their bedroom and advertised for clients by handing out flyers in residential doorways. Luck and timing were with the Gardners as AOL and the internet were at their infancy. The Gardner’s thought that the internet would be a good place to advertise for customers. Someone at AOL noticed their ads and asked if the Gardners would be interested in writing a financial column. The rest, as they say…

The 1990s were a perfect time to grow an investment advisory business especially with no real life experience, little knowledge of markets, a booming new internet and an innocent, inexperienced but willing customer base that would initiate the Day Trading craze. The Fool grew wildly in popularity. Hubris accounted for 99% of what the Fool’s sold America in those days. At one point they exclaimed that anyone could get rich in the stock market. The dot com craze made millionaires of anyone with an idea for a web site; and the Gardners continually wondered  why everyone didn’t plunk all their money into the internet and get filthy rich. The two brothers wrote best selling books, appeared on Public Radio and had millions of loyal fans. ‘It was easy to get rich in the market,’ The Fools preached. ‘You can’t lose.’ And the Gardner brothers couldn’t fathom how anyone could lose money in the stock market. But, as they soon found out, it all was not to be beer and Schnitzels forever. They certainly were no students of money management and not of stock market history. The dot com collapse illustrated how ill prepared and ignorant The Fool really was. The company shuttered operation’s overseas, fired workers and ended up with about 20% of what they had before ‘The Troubles’. Racing forward and Before the 2007 recession the Fool had its critics. In 2003 Mark Hulbert at MarketWatch criticized The Fool’s investment advice as being less than mediocre (my interpretation of his words). Not only did The Fool’s portfolios lose more money than did The Indices in 2002 but in the previous six years their picks produced only 1/3 of what the markets actually did. The Fools have bounced back ( sort of) and today have three mutual funds, a premium subscription service and their own web site, independent from AOL. The mutual funds have garnered little investor money and an average annual return on all three portfolios that is surprisingly modest since the funds came out ‘after’ the 2007 market collapse and should have done much better. All three funds are managed by the same crew, sans Gardners. The portfolios are unremarkable both in content and in returns. I occasionally read and report on their stock analysis but find little at The Fool that hasn’t been already reported. What I do find missing is ‘The Fool’ chutzpah- that back in the day made them refreshing whether right or wrong.

Dividend Trap? Consider…

Tobacco stocks have been bashed. Truly a sin stock these companies are the target of many government regulations- currently Russia and Australia. Still there are many regions that welcome them and the taxes they bring in to government coffers. Tobacco companies pay high dividends, increase their payout consistently and a few are involved in stock buybacks. These stocks have had a remarkable run the last five years and investors who owned them have done well. The last quarter has seen an exodus from tobacco, along with share price. Critics argue that tobacco companies artificially keep dividends high to keep investors satisfied. They also report that these dividends cannot be maintained for long period of time. Still Big Tobacco continues to motor along-finding new markets and customers. Investors searching for yield may want to put tobacco on their watch list. At some point they will provide value both immediately and future.

Also…

Busy, busy, busy… describes Boeing. The company has orders to keep it manufacturing for the next five years or so. The company expects to build and deliver 42 737’s a month beginning in 2014. That’s a lotta airplanes! The stock pays about a 2 % dividend and the stock priced right around where it was five years back. Run your own conclusions as to where the company shares will trade in the future; however, it would appear a consistent dividend is in the intermediate future. BA closed last Monday around $72 a share with a Morningstar fair value of $73.

Investors searching for stocks paying healthy, sustainable dividends may want to start now- or, wait as some analysts warn- share value may get even cheaper.

Warren Buffett, billionaire, wealth creator, and genuinely well respected guy has said he plans on giving away the vast majority of his billions. He goes on to say that he believes his family should work for what they get. What he doesn’t say is how extremely well off his immediate family is now, and for the future. He also has said that rich people should pay more in taxes. He has even stepped up to voice his concern that folk like him get to pay relatively low rates on dividends and capital gains, and he doesn’t think that’s fair.  Other rich people agree- another one or two percent in taxes, some of them say, is not sending any of them to the poor house. Another story Warren likes to share is that when he buys a stock he buys it forever. He insinuates that average investors follow his lead. He points to Coca Cola and  Wells Fargo as companies he has owned and added to over the years.  The illusion he gives is that once Berkshire-Hathaway buys a company it really buys the company-period. And, in many cases, especially insurance, Buffett and his team do exactly that-they end up owning entire companies like GEICO and Sees Candies. The buy and hold forever mantra was never a part –even close- to what Buffett and  his long-time business partner Munger did. It’s even less so today now that Buffett is approaching the age where he may not get out of bed one morning; he has two rambunctious lieutenants, that he recently appointed, that manage about 10% of the entire portfolio. He and Charlie Munger still manage the other 90%. Changes are being made as those ‘ never to be traded ‘ stocks in the top ten list are being sold off. Names such as Kraft, Proctor and Gamble and Johnson and Johnson. Berkshire has sold about 30% of PG along with large stakes in ConocoPhillips and US Bancorp. Picking up shares or adding to them this year has been shares in CVS Caremark, Dollar General, General Motors and General Dynamics. Then in the third quarter the firm sold both CVS and Dollar and bought Deere, Precision Castparts and Wabco. The point is that investors shouldn’t believe every investment fable rich people toss about. Firms need to buy new, sell old and re-allocate or they’d still be owning buggy whips, railroads and oil companies.  Keep that in mind as the new year approaches…

Surprise! Least expecting even a modest rally The Street gave a Holiday bump to stocks Monday with a 200 point move to the upside. S&P closed at 1387. Moody’s  downgraded France, because they don’t have a central bank. This put pressure on the entire EU- again. Apple bounced over 7%… but no one really respected that as a permanent move- most think a short lived relief rally and there is another bounce due- according to analyst at MarketWatch, Avi Gilbert. Facebook rolled out an ‘Amazon’ like click and buy e-commerce ‘New Gifts’. It works like Amazon, the company collects credit card info and Facebook, or one of its providers, send gift to anyone on the giver’s list. Another way Facebook makes money- not competing with Amazon but part of an entire ‘social’ web experience. Intel fading in the chip wars as PC sales down and the company is not positioned in the mobile devices. The company closed around $20.00 with fair value by Morningstar at $27. The company needs to re-arm to get into the mobile game.According to WSJ on Tuesday the company pays a healthy dividend around 4% but even that is not enough to entice investors at this point.

Financial Advisor- a Business Mag- reported on a Congers, New York chap who fleeced investors out of $3 million. He advertised on the internet, bragging about his, ‘Best Trading Days’. He claimed to invest the money in hedge funds…only he didn’t. He also wasn’t licensed in any shape or form in securities or advising in securities…He had a history as a burglar, confidence man, thief and drug addict. one phone call would have saved millions…just one…

Morningstar in a Greg Wolper article asked if Emerging Markets were truly emerging? The phrase ‘emerging markets’, Wolper writes is meant to denote not an overall development but in an investment sense. Some countries are wealthy but have few publicly traded companies and have limited trading volume. Investors should also know that large cap foreign funds may have up to 25% of their assets invested in emerging markets. The emerging market group also has a pattern. The MSCI Emerging Markets Group has gained 2%, on an annualized basis over the past three years, while the European developed sector has lost 0.1% in the same time period.

Sprint has a deep pocket partner and AT&T and Verizon are in for a fight. Masayoshi Son, Japanese billionaire of Korean parents, acquired 70% of Sprint earlier this year. In Japan he had a scorched earth policy to his telecomm rivals- cutting prices that, according to the WSJ, made them chose between customers or stock holders. The Journal warns that both AT&T and Verizon are already in a stringent pricing strategy and this could be the exactly wrong time to pick a fight. Son’s bet is if he can make the Sprint network better than both his domestic big rivals he can draw away customers. Shares closed Friday @ $5.61 and Morningstar estimates fair value at $7.00.

Markets mixed Tuesday…mostly up, though..Fed Chairman Bernanke, in the WSJ, indicated that the Fed would continue through 2013 its policy to push down long term interest rates. Bernanke also warned that failing to stave off the falling off the fiscal cliff the Fed could do nothing that would save the country from being thrown back into a massive recession. A lot of them in Washington still don’t really get it…

Talk to Your Accountant or Tax Attorney. Time is now to cull your portfolio. Sell both winners and losers ahead of 2013. Lock in gains and losses.

 

Home Building is vital for the economy- Construction of new homes creates jobs not only in the building trades but you get jobs in distribution, cement, lumber, heating & cooling, lighting and other specialties. In addition the industry creates jobs in sales, architects, lawyers, lenders and other professionals and businesses. Home building has been the stalwart leader in all recessions. The nations inventory of existing homes, according to Reuters, would be exhausted in 5.4 months. The average home nationally increased in October 11.1% from a year earlier. The share of distressed properties was flat from September.

Better than expected manufacturing news out of China boosted the markets on Wednesday. Dirt has been shoveled on the China grave as analysts and soothsayers have been predicting the slowing of China’s growth.  Ford Motor is expected to expand its dealership in China, saying  Western China is growing faster than Eastern China. ( We get that in Michigan, too. There’s the east-siders and west-siders and some folk never venture across Woodward-ever.) By 2015 Ford plans to add 130 dealers in Western China. Ford is also looking for dealers for its Lincoln brand.

Morningstar’s Patrick Oey reported on his picks for an investor to get exposure to China. Chinese stocks are trading at near all-time lows. With the meeting of China’s 18th Party Congress, where new leaders are elected to 10-year terms, improving economic figures were supported by government mandated infrastructure spending from earlier this year. For those interested in the Chinese market Oey suggests the following ETFs: SPDR S&P China (GXC), which holds both Hong Kong listed and New York listed Chinese securities. iShares MSCI Hong Kong Index (EWH) is an ETF dominated with property companies, utilities and banks. Call me for analysis and if either one or the other fits your portfolio.

Life Insurance companies are bailing out of the business. The latest this past summer was Jackson National Life that decided not to sell life insurance policies. The company has not provided details on what will happen to existing policyholders. The Hartford left the annuity and life business last year. A combination of low rates and poor investment returns in the fixed arena are causing companies to rethink their positions. Expect consolidation in the industry. If you have an existing Hartford or Jackson National policy call or e to determine exactly what you should do.

Bloomberg reports that store mannequins will be keeping an ‘i’ on customers. Equipped with cameras the  EyeSee dolls, developed by Italian mannequin manufacturer, will be watching for thieves in national retail stores this holiday season.

 Friday’s news before the markets opened was that the Europeans were having a difficult time coming to some sort of a budget resolution. The Brit’s, French and Germans were in opposite corners. Down day, I thought. Wrong!  Trumping politics was encouraging economic data from Germany and China. Ignoring EU political petulance U.S. investors tacked on another n..i..c..e day. RIM, considered a doorknob not that many days ago, rallied 14%. Now some advocates, according to WSJ, think its cheap even with the bounce. Tech was up 4%.S&P 500 gained 3.6%-largest weekly gain since June. But…wait, short trading day and volume was light.

Zacks cautions that big investors are sitting on the sidelines as Congress has 2 weeks. That’s  weeks where they have to come to some sort of an agreement. And some folk are unsure that they can do it- or even want to. If we can’t get our house in order why should foreign governments loan us money by buying our debt? There’s the rub, you see.

 Finally- Who killed Ho-Ho’s, Twinkies and Ding-Dongs? Was it the union with demands or management that piled on too much debt? In the end the unions gained nothing, management lost a business, investors lost money, ancillary businesses and suppliers lost future business and anything owed to them by Hostess. It doesn’t matter. The recipe and brand will be sold for pennies to repay debtors and the general public won’t care as long as they get their sugar fix. In a way this was a microcosm of what’s now going on in Washington, DC.

Questions call Paul @ 586 783 7080 or write him at pstanley@westminsterfinancial.com. Share this blog with someone who cares about their money.