Julie Jason advises us to make sound investment decisions in good markets and bad, and now is a good time to learn market stock. Read on to see her suggestions.
Now Is A Good Time To Learn Market Stock
BY JULIE JASON
As I’m writing this column on Feb. 8, I’m watching my stock screen — the Dow Jones industrial average just closed below 24,000 (down more than 1,000 points, representing a loss of 4 percent). A few weeks ago, on Jan. 17, the “red-hot Dow” (CNN’s term) closed above the 26,000 level. Back on Jan. 4, the Dow broke through the 25,000 mark.
If you are an individual investor who is worried, let’s talk about that. We know from money flows that some people wait too long to get into the stock market — that is, they wait until the market is “red-hot” before buying. I’m guessing one of two things:
- these individuals (hopefully) were not investing important sums of money, such as their retirement savings, or
- they were flying solo, without a co-pilot.
My first question to all investors is, What’s your horizon? The market is still in bull-market territory, the bull that began on March 9, 2009. If you have been invested in the market all along, the current pullback has to be put in context. No healthy market rises without correcting.
Some believe that there is more downward pressure to come, but not enough to move into a bear market (a 20 percent decline). Quoting from CFRA’s U.S. Investment Policy Committee Notes (Feb. 7, 2018):
“Despite yesterday’s (Feb. 6, 2018) reflex rally, this decline may resume and conclude with a double-digit correction, rather than the sub-10 percent pullback already recorded on a closing basis, due to how far the S&P 500 traded above its 200-day moving average and how elevated prices had become relative to EPS and inflation.”
Further, CFRA notes:
“A silver lining in all of this is that sharp and swift sell-offs have traditionally led to quick conclusions and rapid recoveries. In addition, following the end of corrections and bear markets, the three sectors and 10 sub-industries that were beaten up the most typically became the new leaders. Even though the worst might not be over, we are not projecting the start of a new bear market, since we don’t forecast recession.”
Earnings are far from weak: “This year we see Real GDP rising 3.1 percent and S&P 500 EPS up more than 19 percent, combined with a 2.90 percent 10-year yield and a 1.9 percent y/y change in Core CPI by the final quarter of 2018.”
So, if you are not one who jumped into the market because it was demanding your attention with all-time highs, I trust that you’re a savvy investor with a safely structured diversified portfolio and a long investment horizon. On the other hand, if you need some help to get there, I have some suggestions.
First, there is no better time to learn more about the markets.
As an example of a trusted resource, recall my recent column on FINRA’s investor forum. The Financial Industry Regulatory Authority is the nongovernmental regulator of the securities industry. I attended the forum in Stamford, Conn., on Feb. 1. The event was sold out, with nearly 500 investors in attendance. The presentation included “key principles of investing” and “tips for smarter investing,” which provide the foundation for good investment decisions. If you are curious, here is a video link.
FINRA has a wealth of unbiased educational materials on its website. Take advantage of them.
Second, I caution people about overconfidence.
Behavioral economists have brought to our attention that even the most experienced investors can act against their interest at times.
When tested, investors can prove to be insufficiently knowledgeable about basic investment principles. In a FINRA Foundation study, even experienced investors could only answer 4.4 questions correctly from a 10-question investor literacy quiz.
Third, if you are a do-it-yourself investor, consider the value a financial professional can bring to the equation.
There are many different types of professionals who have invested in developing their own expertise in order to serve a certain clientele. Finding a good fit takes some homework. If you would like some guidance, write to me at readers(at)juliejason.com; I’ll respond in this column.
One final thought: The financial markets are the one and only mechanism for building wealth over time and creating income for retirement. It pays to spend some time learning the basic principles that can lead to making sound investment decisions in good markets and bad.
* * *
Julie Jason, JD, LLM, a personal money manager (Jackson, Grant of Stamford, Conn.) and award-winning author, welcomes your questions/ comments (readers(at)juliejason.com). To hear Julie speak, visit www.juliejason.com/events.
(c) 2018 Julie Jason.
Distributed by King Features Syndicate Inc.
Ackman’s Hot Streak Continues, Dumps Berkshire, Says ‘We Can Be More Nimble’
Bill Ackman’s hot streak continues. This comes after he announced that his Pershing Square hedge fund has returned an average of 25% this year. It also trounces the average hedge fund return of -7%. Additionally, this reveals that it sold its $1 billion stake in Warren Buffett’s Berkshire Hathaway. The fund first invested in Berkshire less than a year ago and only weeks took a larger stake in the conglomerate.
Completely exiting the Berkshire position surprised many on Wall Street, as Ackman has long admired Buffett as a mentor. He recently said that Buffett had built Berkshire “to withstand a global economic shock like this one.”
It appears that Ackman, like many, may have felt frustrated by the lack of activity from Berkshire during the recent market downswing. Berkshire’s cash balance has ballooned to $137 billion. Many, including Ackman, had likely expected a portion of that cash to be used to scoop up bargains during the late-February selloff. The said selloff took markets down nearly 30%.
Instead, Berkshire stood pat, and that appears to have been enough for Ackman to pull the plug on his investment. While discussing the exit, Ackman said that due to Pershing’s smaller size compared to Berkshire, “we can be much more nimble… and so our view was generally we should take advantage of that nimbleness, preserve some extra liquidity in the event that prices get more attractive again.”
Pershing Square’s success over the last two years had thrust Ackman back into the spotlight. This, perhaps, turned the chapter on a period where he became more famous for his misses than his home runs.
He was invested in Valeant Pharmaceuticals as it collapsed. He also famously squabbled on live TV with fellow billionaire Carl Icahn over Herbalife. Then, he gave a nearly 3-hour-long presentation explaining why he thought the company runs as a pyramid scheme. He finally exited his $1 billion short position at a loss.
Ackman’s current hot streak started last year, when Pershing Square returned 58.1%. This is its best annual return since the hedge fund was founded in 2004. After years of letting others make the firm’s investment decisions, Ackman took back the reins in 2018 with a back-to-basics strategy he learned from Buffett.
He returned the fund to a strategy that invests in simple, predictable, cash flow positive companies. He said, “It’s very hard to lose money by buying great businesses if you pay a fair price. For a while there, we forgot that our main job was to make money, so we woke up, and now we’re back in the money making business.”
Making money is exactly what Ackman did earlier this year. He did so with “the single best trade of all-time,” as what many calls it. He correctly predicted that the coronavirus would wreak havoc on our economy. Because of this, Ackman made a $27 million bet that netted his firm a $2.6 billion profit in less than two months as the markets crashed.
Now, his war chest is full again. It appears that Ackman is ready to buy should asset prices come down again.
4 Ways To Lower Your Mortgage Payments
The number of Americans who have lost their job due to the coronavirus pandemic standing at more than 40 million. With this, many are struggling to pay their mortgage bills each month.
For nearly every one of us, housing is the single largest monthly expense. And unlike kicking a Starbucks habit to save a few dollars every month, your mortgage payment can’t be trimmed out of a budget.
Fortunately, you have some options available to help lower your monthly mortgage payment.
Refinance Your Loan
The Federal Reserve lowered rates back down to zero in late March in response to the coronavirus pandemic. With this, mortgage rates hit new record lows in early May. Bankrate.com is advertising 30-year fixed-rate mortgages as low as 3.5% and 15-year fixed-rate mortgages as low as 2.89%.
The benefit of refinancing at a lower rate is two-fold. The main benefit is with a lower rate on your mortgage, your monthly payment will go down, making it more affordable. The secondary benefit is that with a lower rate, you’ll pay less interest over the life of the loan. This potentially lets you save tens or hundreds of thousands of dollars.
You’ll incur some costs to refinance your loan. So, make sure that your monthly savings are large enough to justify the expense. Additionally, if you’ve had your existing mortgage for a number of years, you’ll be resetting your mortgage amortization back to 15 or 30 years. So if you’ve been paying on your 30-year mortgage for 8 years, instead of having 22 years left, you’ll reset back to 30 years (or down to 15 years if you take a shorter term).
Put Your Stimulus Check or Tax Refund Towards Your Loan
If you still have the $1200 of stimulus funds available, or are collecting a tax refund this year, consider using them towards your monthly mortgage payment. It may only cover a portion of your mortgage or maybe just a month or two. However, using this money instead of dipping into your savings or retirement account is preferable. There are discussions ongoing about a potential second stimulus check, but that may not be until later this summer.
Talk To Your Lender About Mortgage Forbearance
If you don’t have the financial ability to continue paying your mortgage, ask your lender about mortgage forbearance. If granted, this will allow you to skip a few months of payments without becoming delinquent or falling behind on your loan. Before you agree to a forbearance plan, make sure your lender explicitly lays out how you are expected to make up the skipped payments. Some may demand a lump-sum payment for the amount you skipped once your forbearance plan ends. Others may tack the amount onto the end of your loan term. Be sure you know exactly what the lender will do once you enter the forbearance agreement.
Find Out If A Mortgage Modification Is Available
If you find yourself falling behind on your mortgage payments and are facing default, your lender may be able to offer you a mortgage modification. A modification changes the terms of the original loan, such as lowering the interest rate, extending the term, or even reducing the principal balance. Typically, a modification is only allowed when the loan is in default. Therefore, if you are making timely payments and are current on your loan, this likely won’t be an option for you. But if you are having financial difficulties, your lender may be able to modify the loan and prevent you from going into foreclosure.
As Airlines Suffer, American Most Likely To File Bankruptcy
A few weeks ago, Boeing CEO Dave Calhoun startled the airline sector when he said a major airline would go bankrupt by Halloween.
“I don’t want to get too predictive on that subject. But yes, most likely,” Calhoun said. “Something will happen when September comes around.”
Airline stocks plunged as investors and analysts scrambled to determine which airline became most vulnerable.
RapidRatings, a risk assessment firm, recently completed a comprehensive stress test on the major U.S. airlines. They used dozens of variables including debt loads, cash flow analysis, and a loss of at least 15% of revenue.
American Airlines To Suffer The Most?
We may never know which airline that Calhoun was alluding to. Although, RapidRatings’ analysis says that American Airlines is the most likely to go bankrupt in the coming months.
The company also looked at Delta, United and Southwest, but none of them are in such dire circumstances as American.
In an interview with Yahoo Finance, RapidRatings CEO James Gellert said, “American is the most at risk and that’s it in every way you look at it. American stands out as the weakest of this cohort.”
The stress tests run by RapidRatings produce both a short term financial health rating (FHR) and long term core health score (CHS). According to RapidRatings, the FHR measures a company’s short-term resiliency and default risk. Meanwhile the CHS analyzes risk and company efficiency over a three year period. A score lower than 40 means a company is at risk of failing.
Gellert says the analysis has more than a decade of proven results. Also, “over 90% of companies that failed have been rated 40 and below on our scales.”
The stress tests found that American was the weakest U.S. airline going into the recent pandemic. It has a financial health rating of 59 and core health score of 66.
As the pandemic unfolded and air travel plunged 90%, American’s FHR score plunged to 29. Meanwhile, its CHS score fell to 27.
Gellert added that “I would be quite certain that is the airline in the crosshairs of the Boeing comment.”
The Future Of American
American, in response to the sub-40 stress test scores, said in a statement that it was “focused on rightsizing the airline for the current environment, and plan to reduce our 2020 operating and capital expenditures by more than $12 billion.”
Analysts, however, are starting to smell blood in the water. Cowen equity research analyst Helane Becker recently told Yahoo Finance, “American’s liquidity position is dependent on government aid, bucking the trends we’ve seen from other airlines. The company is receiving a total of $10.6 billion … [and] we expect another capital raise” in the 3rd quarter.”
Savanthi Syth, an equity analyst at Raymond James, also agrees American will need more capital to weather the storm. “I mean, if you look at the cash on hand that’s definitely the case,” Syth said. American has six months of cash on hand, United has 10 months, Delta has 12, and Southwest has almost 19 months, according to Raymond James.
Syth added, “I don’t think bankruptcy is a foregone conclusion… it’s just going to take longer for American to kind of dig themselves out of this kind of debt burden, and therefore equity could be challenged in the near term.”
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