BY MALCOLM BERKO
RELEASE: WEDNESDAY, JANUARY 10, 2018
Stinky GE Still a Buy
Dear Mr. Berko: My stockbroker wants me to buy 400 shares of General Electric. Is he nuts? — JS, Moline, Ill.
Dear JS: Last June, Jeff “Big Melt” Immelt, who took control of General Electric (GE-$18.47) from the iconic Jack Welch just before 9/11, announced he’d be stepping down as CEO. Good! He’s been replaced by John Flannery, a 30-year GE veteran who ran the company’s healthcare division. Huge yawn! Most doubt that Flannery and his personal broom can hurry GE’s price recovery. So far, his appointment has made as much difference to GE as would the advent of another fly to a slaughterhouse. That should change if Flannery’s broom can muck out the executive suite and remove the stench from the Augean stables in GE’s useless boardroom.
Recommending GE at $25 several years ago was among my biggest disappointments since buying 250 shares of Studebaker-Packard in 1962. That company shut its doors in 1966. GE, with $126 billion in 2016 revenues and $13.4 billion in profits ($1.07 a share), wasn’t earning enough to pay its 96-cent dividend, so Flannery reduced it to 46 cents, saving the company over $4 billion a year. GE’s not in trouble; it just lost its mojo.
GE’s established dominant product categories — turbines, locomotives/transportation, lighting, medical imaging, renewable energy, aircraft engines and service contracts — do very well. Its service contracts business generates margins in excess of 30 percent.
GE’s problem is fivefold:
1) Integrating the power and grid business of Alstom, a French company GE purchased for $14 billion in 2015, has proved more difficult than anticipated. Slow penetration in the European power infrastructure is disappointing. Still, 30 percent of the world’s electricity is generated by GE equipment. Recent events suggest modest success and profits this year.
2) Volatile fossil fuel prices are hurting GE’s oil and gas segment, an important growth platform for its slowly growing industrial portfolio. However, oil prices are expected to remain at current levels ($55 to $62 a barrel) through the first half of 2018.
3) It may take several years for GE’s industrial division to replace the significant, albeit slightly worrisome, earnings from GE Capital, which Immelt stupidly unwound in 2015.
4) Observers believe that integrating oil field service provider Baker Hughes’ business, which GE purchased for $7.5 billion, will be more difficult than anticipated, as the sale was predicated on oil’s trading at $60 a barrel.
5) Finally, bigger isn’t better. GE is so ginormous (301,098 employees in 180 countries) that it’ll take GE’s brain a week to discover that competitors are eating its tail.
However, GE should slowly stagger forward, and I’m comfortable staggering forward with a 48-cent dividend yielding 2.7 percent. If 2018 revenues come in at $132 billion and produce profits of 90 cents a share — as is projected — GE may even raise its dividend to 50 cents this year. If Flannery can hold the reins steady during the coming four years, analysts believe that net profit margins could improve from 8.9 percent to 15.3 percent. Analysts believe that 2022 revenues could come in at $165 billion, that earnings could reach $2.20 a share and that the dividend could be increased to a buck again. That’s a potential 5.5 percent yield at today’s $18.47 price. There are quite a few ifs, but if those ifs can reach reality, aficionados believe that GE could trade in the $50s by 2022.
There’s impatient buzzing by some activists suggesting the best way to maximize shareholder value would be to divide GE into four independently traded companies — dealing with medical imaging, aircraft engines, oil and gas service and equipment, and power generation, respectively — each with profitable service contracts. These four independent companies could have a combined share value of $50 to $60 within 18 months.
Your broker gave you good advice. GE’s long-term debt is declining, while book value, return on capital, return on equity and cash flow are improving. Still, GE’s board members have egregiously failed shareholders and management. These toadies, who gleefully fleeced millions of dollars in perks and directors’ fees, are responsible for GE’s humiliating performance. They should be pilloried, placed in stocks, publicly whipped and then prosecuted for malicious misfeasance. Buy 400 shares, but hold your nose!
Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775, or email him at [email protected] To find out more about Malcolm Berko and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at www.creators.com.
COPYRIGHT 2018 CREATORS.COM
Republicans Ready To Finalize Stimulus Bill As Dems Continue To Squabble
Treasury Secretary Steve Mnuchin and White House Chief of Staff Mark Meadows met with House Speaker Nancy Pelosi and Senate Minority Leader Chuck Schumer on Saturday. This is a rare weekend session to try and break the stalemate between Republicans and Democrats over the next stimulus bill.
No deal was finalized. However, Mnuchin said he and Meadows were willing to meet with Democrats every day. This can go on until an agreement is reached.
The sticking point for Republicans is an unwillingness to extend the $600 per week unemployment benefit. They feel the amount needs to be pared down to a more reasonable $200 per week so that unemployed workers have a financial incentive to find work instead of making more money by remaining unemployed.
Unsurprisingly, Democrats want the $600 to be reinstated and have tied it to a host of other demands that have nothing to do with the pandemic, like their insistence on approving $1 trillion to be sent to state and local governments to fund budget shortfalls, food stamp increases, and assistance to renters and homeowners. Mnuchin said that’s “something we’re not going to do.”
Democrats Refuse to Agree
Mnuchin appeared on ABC’s “This Week” yesterday. There, he said the White House understands the need for extra unemployment benefits. However, he also says the Democrats are holding up the deal.
“The president is very concerned about the expiration of the unemployment insurance,” Mnuchin said, adding “We proposed a one-week extension at $600 so that, while we negotiate a longer term solution, at least all those people don’t lose their money. I’m surprised the Democrats won’t agree to that. They’re insistent on having a larger deal.”
He also said that Republicans aren’t willing to burden our country with more debt.
“There’s obviously a need to support workers, support the economy,” Mnuchin said. “On the other hand, we have to be careful about not piling on enormous amounts of debt.”
Until a Deal Is Made
He added that the White House supports a one-week extension of the $600 per week until a deal is struck. However, he believes $200 is a more appropriate amount for the extra weekly benefit.
“There are cases where people are overpaid,” Mnuchin said.
He did add that both sides agreed on the need for another $1200 stimulus payment for Americans, and that once approved, the checks could be in the mail within a week.
Both sides have agreed to meet daily until a deal is struck, and at least one Democrat sounds optimistic that a deal will be reached sooner rather than later.
“This was the longest meeting we’ve had and it was more productive than the other meetings,” said Schumer. “We’re not close yet, but it was a productive discussion — now each side knows where they’re at.”
Chief of Staff Meadows, however, doesn’t expect a deal is forthcoming. Appearing yesterday on CBS’s “Face The Nation,” Meadows said, “I’m not optimistic that there will be a solution in the very near term.”
Here’s Why The ‘Cockroach Portfolio’ Is Gaining Popularity
Ray Dalio, the founder of Bridgewater Capital, calls it the “all-weather portfolio” and it’s helped his investment management firm amass roughly $140 billion in assets.
Former Libertarian presidential candidate Harry Browne called it his “fail-safe investing” portfolio. Additionally, It just had its best three-month return ever. It returned 18%, far exceeding its average annual return of 7%.
Browne’s investing philosophy was that when times are good, stocks do well. Meanwhile, bad times are good for Treasury bonds, and gold does well during stagflation. Also, cash is king during a recession or crisis.
Since we don’t know what the future holds, Browne advocated for putting 25% of your portfolio into each asset class. He also suggests being prepared for whatever comes. With bonds, gold, and Treasury’s in your portfolio, you’ll underperform during a bull market. However, you can more than make up for it by softening the blow during a down market.
The “Cockroach” Portfolio
Back in 2012, Dylan Grice, a former strategist with SG Securities, called that type “the cockroach” portfolio. He dubbed it as such due to its ability to survive anything thrown at it.
“What I like best about cockroaches,” wrote Grice, “isn’t just their physical hardiness, it’s the simple algorithm they use to survive. According to Richard Bookstaber, that algorithm is ‘singularly simple and seemingly suboptimal: it moves in the opposite direction of gusts of wind that might signal an approaching predator.’ And that’s it. Simple, suboptimal, but spectacularly robust.”
Grice has calculated that for long-term investors, this type of portfolio has done at least as well as the traditional 60/40 stock and bond mix since the early 1970s. But most importantly, it managed to avoid any massive drawdowns.
And just like cockroaches, your first job is surviving as an investor, says Groce, while prospering is job number two.
A Similar Approach
Fortunately for investors who are looking for this type of portfolio, an ETF has recently launched that follows the same approach as the “cockroach” portfolio.
It’s called The Advanced Research Investment Solutions Risk Parity ETF (RPAR) and was launched last November. Alex Shahidi, the managing partner and co-chief investment officer, says they’re up to $620 million in assets so far.
He says the ETF has returned 12% so far this year compared to 1% for the S&P 500.
Most importantly, during the crash in March it fell just 15%, less than half of the drop in the S&P 500.
According to Shahidi, the fund is 25% stocks, 15% industrial commodities, 17.5% gold, 20% long-dated Treasury inflation-protected securities and 42% long-term Treasury bonds. Total exposure to the market is 120%, because the fund is 20% leveraged.
The stock mix is half U.S. and half overseas stocks, with the overseas portion tilted toward high volatility emerging markets.
Nobody knows what the market will do next, so Shahidi says you want to be prepared for any outcome. “You want to be diversified to (different) economic environments,” he added.
He did say that “If I had to pick an asset class for the next 10 years, it would be gold.”
How To Buy Gold For Your Investment Portfolio – Part 2
Yesterday was part one of buying gold and silver coins for your investment portfolio. With gold and silver both on a hot streak, investors are looking for the fastest way to gain exposure to and buy precious metals. You must be prudent and exercise caution so you don’t make a mistake and find yourself with a bad investment.
Do: Buy Gold With Your Savings
Don’t borrow money to buy gold. Use your savings so when you take possession of your gold, it’s yours without any claims against it. With volatile gold prices, you don’t want to be paying back a loan on your gold if the price suddenly dips.
Don’t: Buy Gold With Credit
The current financial system is built on fiat currency and debt with dollars being printed out of thin air. The reason to own gold is the opposite of that. So to purchase gold by using the system it is protecting against defeats the purpose of owning gold. Just use your savings and own your gold outright from day one.
Do: Store Coin Nearby
If a crisis hits and you need access to your gold, you don’t want to be out in public trying to retrieve your gold. So whether it’s in a small safe hidden in your house or buried in your yard, keep your gold nearby for easy access.
Don’t: Store Coins In a Safety Deposit Box
Storing your gold at a bank sounds like a safe decision. But it’s a bad idea for a few reasons. The first is that if there were ever a crisis, you have to go to the bank to retrieve your gold. That assumes the banks will be open during a crisis. Then you have to get access to your safety deposit box, retrieve your coins and safely get them home. That’s a lot of things that need to go right during a crisis. Additionally, gold has been confiscated before. Here in the US, gold was confiscated in 1933 under Franklin Roosevelt. If it were to happen again, gold stored at home, where there is no record if it, is much safer.
Do: Only Invest With Money You Don’t Need For Awhile
Nobody knows when inflation will hit, or the dollar will collapse, or when gold prices will finally take off. But we aren’t trying to time any of those occurrences. The reason to own gold is a long term store of value. So you don’t want to speculate in gold. We could see prices move higher or significantly lower. But long term, history has shown that gold prices steadily march higher as the dollar steadily declines in value. So when buying gold, make sure it’s with money that you don’t need in an emergency. We suggest using savings or other funds that you don’t need to worry about getting access to for at least five years.
If you have any more questions about investing in gold, find a reputable gold coin dealer near you. They will be glad to answer questions.
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