In Search of the Perfect Investment

Thank you Harry:

SQ and NVDA are presenting at the BofA tech conference today. Square presents at 5:20 PM EST. To watch, click here.

Latest Ross Rant

Here’s part of his latest excellent newsletter. You can subscribe here.

    Moodys has issued a statement that CMBS loans are now almost as risky as in 2007 because 75% of them are interest only, and the interest only period is now 6 years, up from 2.2 years just a few years ago. In addition, they are becoming much more covenant light, and are at higher leverage. All of this is a red flag since these things create much more risk of serious problems when the recession hits. There is also a bigger concentration of single tenant properties, which, as we have seen in retail, can be deadly in a recession. Asset and sponsor quality is also deteriorating.  There is now so much competition to put out loans by so many non-bank sources, that borrowers can get lenders to compete, which always means lower quality underwriting. Far too much capital chasing too few good deals. Underwriting is not nearly as bad as in 2006-7 yet, but it appears the trend is what it always has been, when the economy is strong and there is too much capital, underwriting standards fall down, and then the stage is set for a bad outcome when the economy goes bad.

It is typically 10-12 years between collapse of the last crash and then credit quality deterioration and the next credit collapse. We are at 10 years. Dodd Frank had rules to try to avoid a replay of 2008 in CMBS, but a lot of loans now are made by private equity funds that are not subject to these regulations. One thing that is immutable is that as each generation comes into Wall St, they think they know better how to do it, and they eventually do the same dumb loans in pursuit of profits and bonuses. It has never been different. We are not about to have a major crash again, but CMBS loan quality is deteriorating now, and one day in the next 2-3 years it will be a bad problem. When they start doing a lot of CDO’s and virtual CMBS pools with derivatives, then that is a sure sign the end is near.  That has not happened yet. The rating agencies have increased credit enhancement levels, but that will not stop the risk trend. This issue is a long term increasing risk, not one we need to worry about creating another crash in the near term. The next one will be more confined because the banks are not going too far out the risk curve, and residential loans are much more in control for now.

The US economy is entering the sweet spot. Unemployment is near record low. U6 is 7.2%, not far from the record low of 6.9%. Everything is now charging ahead after a slower than expected Q1. It just took time for most average working people to actually see wage increases combined with tax reductions, and job security, and so real take home pay increases for the first time in a decade. Now they believe what they see in their paycheck, and not what Pelosi and the mainstream media tout as just for the wealthy. Wages are up 2.7%, vs a year ago, and up .3% just in May, which is well above inflation. Workers who make low pay now realize they can change jobs to better paying factory, construction, or other jobs.

 Oil is likely to stay in the $60-$70 range as the US ramps up production to be the first or second largest producer in a year or two. Fracking works at under $40 per barrel now that the producers in the US went to new technology to counter the Saudi attempt to force US producers into bankruptcy. Instead the US drillers went to high tech and lowered costs dramatically, which stopped the Saudi attempt to put them out of business. The IMF says at below $40 most other oil producing nations are not able to cover their financial needs, so US drillers are well insulated from major price declines below their costs going forward. That means the US has much cheaper energy than the rest of the world, and now, under Trump, is becoming a major exporter of LNG and even oil.   That means more exports, more jobs, means more revenue for the US government, and a dent in the trade deficit.

 Q2 is likely to be at least 3.5% GDP and maybe even 4% as consumers are now ramping up spending, and as companies are now in a position to begin to undertake new capital spend plans with the tax bill and strong economy, combined with massive deregulation. We are now in the growth cycle that will feed on itself. Q3 is likely to be as good as Q2, if Q2 is over 3.5%, and that will strengthen Republicans chances to  hold the House. Try as she may, Pelosi has a hard time convincing voters that  job growth is no good, and workers are in trouble. Inflation is still under 2% with gas prices declining again as oil prices are no win decline. Voters will see their bigger paychecks, and the economic growth, and know what is reality. There is a good chance even blacks will start to shift Republican as they see black unemployment at record lows, and getting even better.

Even ex-felons are getting training now, and jobs. Low wage workers, mostly minorities, are moving now from part time to full time (457,000 over the past year), and low wages are now under pressure to be raised to find any workers. Long term unemployed has dropped by 476,000 over the past year. People who were unemployed or working only a few hours a day under Obama, will get full time, much better paying jobs with benefits, and will see the real difference, and how the strong economy has improved their lives. Meantime Pelosi says they are going to raise taxes and impeach Trump. Not a good selling proposition. As the year goes on toward the election, more and more people will feel a lot better about their lives, and not want to change things in DC.

 All of this is very good for stocks going forward. As consumers now ramp up spending, corporate profits will soar, and stock prices will rise on the earnings, and likely  expansion of  PE multiples as optimism increases for better earnings ahead. The slow down in the EU will not impact stocks for a while, nor will tariffs. The market continues t be driven by the FANG-tech stocks. If you invest in QQQ, or similar ETFs, you get to ride the wave without worrying which stocks to own.

Useful stuff

+ LED bulbs are still new. Before you buy a zillion of them, buy a couple and test them. I’ve had several MR-16 LEDs blow within days. I now have one flickering. I’m sick of changing MR-16 bulbs.

+ Stay away from bitcoin and other cryptocurrencies. That little tulip bulb will blow up and lose a lot of people a lot of money.

+ Don’t give anyone your credit card or bank information if they call you. The IRS just issued Tax Tip 2018-86 which says it will never ask for this information over the phone. For more, click here. 

+ If you want to live forever, move to Hawaii, give up smoking, don’t abuse alcohol or drugs, and eat vegetables, fruit, nuts and whole grains. For more, click here.

The new town get-around

+ My friend and reader, Steve Guyer, bought his wife a new Trek electric bike:

He writes:

It has nine gears and operates like a regular bike until you want the electric assist. The electric assist has 4 levels , depending on how steep the incline is. My wife has no complaints and loves it. She’s been out on it about a dozen times over the past few weeks. The only thing she mentioned is that it is heavy ( around 45 lbs), so it’s not easy for her to get onto a bike rack by herself.

It has nice controls:

Says Steve,

The green screen is the display / control for the electric. The +/- controls the 4 electric stages and the display shows the stage you are in, as well as remaining  battery power and the speed you are going. The green screen shows speed when the electric assist is on. When the electric assist is on , it turns on front and rear blinking safety lights so makes the bike easier for cars to see.

I love electric bikes. This summer, Michael, my son, and I are going on  Backroads bike tour of the Dolomites (big, steep mountains) in Austria and Italy. Michael specified an electric bike for me, so he wouldn’t have to wait by the side of the road for his doddering Daddy.

Love this map

So, who moved Colorado to Wyoming?

Harry Newton, in slightly younger days. Curiously, the only lasting impact of my serious car accident of a month ago is an uncertainty in movements my daily life. I have a friend who broke her ankle a few months and is now recovering. She finds uncertainty in daily movements also. She calls it her PTSD. In short, be careful. Don’t do stupid. Neither of us know how long our PTSD will last. Weird.