In Search of the Perfect Investment

There are two ways to invest in this market: You can load up on the winners — FAANG and SQ. Or you can buy a diversified portfolio — easiest way: buy a S&P500 index fund.

Loading up on winners means you’ve been doing good, better than a index fund — but at the cost of your sanity.

Hot winners fluctuate like a wh*re’s drawers (old Australian expression). One day, you’re on top of the world. The next you’re in the dumps — ready to sell everything.

If you’re heavy into hot stocks (like me), you have to throw out rules we’re painfully learned — like value investing, sane P/E ratios and stop loss orders — and substitute them for new ways of stock valuation thinking. Like growth, scaleability, media and Internet hype, ability to destroy an industry or two (e.g. Amazon, Netflix) marginal cost of goods sold, etc.

It’s amazing when you’re loaded up on a stock like Amazon that a tiny fluctuation in its value can make a huge change to your daily wealth or poverty. There are three “solutions.” At least three I’ve found.

+ Bear the pain/enjoy the joy.
+ Panic and sell when things look awry.
+ Do nothing. Play tennis. Visit Italy.

The critical thing is to read the quarterly earnings conference call transcripts and confirm or deny your own decision about the stock, and its long-term viability.

For me, this means few changes to my portfolio. I’ve long ago learned that if I sell because it’s dropped, I’ve panicked. That’s stupid. Seriously stupid. Not panicking is a learned discipline. Sell bad stocks. Not stocks that dropped.

Investment themes I do like include pet supply companies, like Zoetis and Central Garden and Pet Co. CENT increased its Q3 sales 15%, and EPS by 27%. Nice results. Both ZTS and CENT have been in my portfolio for a while.

The BIG question — what now?

Good news for employment in the U.S. — especially for the least-educated workers. The country added 157,000 jobs in July, continuing a strong hiring streak. The figure was slightly below what economists expected, and unemployment fell to 3.9% from 4.0. But the unemployment rate for workers without a high school diploma fell to 5.1% — its lowest since the government began collecting that data, in 1992.

Joel Ross Of Ross Rant fame is sanquine:

The Fed, for the first time in over a decade, has said the economy was “strong”. It takes a lot for the Fed to use such terms. Inflation remains around 2%. Wages are now rising for everyone, which is good for consumer spend, which means continued good GDP growth. In addition, the unemployment rate is likely to continue to drop to near historic low levels in the near term, also good for consumer spend, and GDP growth. Closure of Toys R Us accounted for the shortfall of new jobs in July. While the ten year is around 3%, it has been very stable for a long time, and 3% is still over 200 basis points below historic averages-“normal rates” . Even though the Fed will raise rates in September, that increase will not be enough to materially impact real estate and corporate borrowing. It will impact housing as mortgage rates will rise, but the price of new homes and the lack of inventory, especially at the lower end, has much more impact. Due to over regulation and rising land and construction costs, not much lower cost housing is being built, and surely not in urban areas where it is most needed. This is not going to change.

Read this also:

+ What America’s latest GDP figures reveal. From the Economist. Click here.

The next crisis? Everyone is looking. Next March will be nine years since the March 2009 low.

Once again, Joel Ross:

Government pension plans are only alive for a little longer due to the strong stock market. As I have mentioned for a long time, it is the next major financial crisis we will face. There are massive pension deficits all across the country, and no possible way to meet obligations.

Here is the issue. Government pensions began in the early 1900’s as a trade off of secure jobs at lower pay in exchange for a pension. In recent times, the unions, especially the teachers, bribed politicians with massive campaign contributions and other support, in exchange for breaking the basic concept. Pensions were raised, healthcare for the whole family was added, and then wages were raised to at, or even higher, than private industry in some cases. Then over staffing was added due to the low quality of education in high schools producing incompetent staff unable to do the work efficiently, and so that increased the numbers of people who get pensions. It was a great example of geometric expansion of liability.

Now many states and cities are going broke due to pensions they can’t pay. Some states actually let unions talk them into putting pension obligations into the state constitution as a right, so now the pensions cannot be changed. This is a crash coming at the next recession, and it will be horrible. We are talking trillions of liability for which there is no funding possible. Pensions go down, or taxes go up and services go down.

Tariffs Revisited

Could Trump’s Tariff War trigger a recession? Or is the “War” simply Trump’s negotiating style?

I’ve studied this. I think it’s too early to tell. The best articles I’ve read recently are these two:

+ Why tariffs are bad taxes. From the Economist. Click here.

+ Tariff threats intensity in U.S. effort to hurt China. From the New York Times. I tried to get you a link . But lost it. Hence I’ve reproduced the entire article below. It was in the August 3 edition of the international edition of the New York Times. It’s a really good piece.

Travel tips

+ No self-respecting credit or debit card levies fees on overseas charges. But they clearly make money on converting Euro charges into dollars. Google says the Euro costs $1.16 to the dollar. But my bills are coming in at 1.18 and 1.19. Maybe the idea is to ATM Euros and pay in cash? I’m not sure. Anyone got any ideas?

+ Windows is horrible for WiFi traveling. Apple — iPhone and MacBook — work like a charm. Apple stuff logs onto hotel WiFi lickedity split. Windows doesn’t. It’s always been that way. Probably best to stick with your iPhone.

+ Microsoft Outlook email works terribly in places of weak WiFi signals. Best to use Gmail.

+ You can bargain with any and every hotel — especially the more pricey ones. You can even bargain with the reservations clerk while standing at the checkin counter.

+ Verizon will sell you overseas calling. My first call (I kid you not) was

“Hi, this is Dave from your local carpet cleaning company.”

+ Fast express inter-city European trains are good. The local ones are often awful. I caught one from Munich, Germany through Austria to Bolzano, Ialy. It was a disaster. Endless unannounced stops — for construction, for train crew change, etc. Ditto for one Michael caught from Venice to Bolzano. Late, like mine.

+ Resist eating. Free breakfasts at ritzy European hotels are huge, magnificent and tempting. Easy to eat three croissants. Skip lunch.

I’m in Italy

Michael and I are on a Backroads biking tour in and around the Dolomites. At 3,000 feet where our hotel is, it’s much cooler than down in the valley boiling at 95.

Europe is “enjoying” a serious heat wave where temperatures have peaked to 105. Stay sway for now. Not much is air conditioned.

How advanced is Canada?

After having dug to a depth of 10 feet last year, British scientists found traces of copper wire dating back 200 years and came to the conclusion that their ancestors already had a telephone network more than 150 years ago.

Not to be outdone by the Brits, in the weeks that followed, an American archaeologist dug to a depth of 20 feet, and shortly after, a story published in the New York Times: “American archaeologists, finding traces of 250-year-old copper wire, have concluded that their ancestors already had an advanced high-tech communications network 50 years earlier than the British”.

One week later, the Canadian Dept. Of Mines and Resources in Newfoundland reported the following:

“After digging as deep as 30 feet in Newfoundland, Jack Lucknow, a self-taught archaeologist, reported that he found absolutely zip. Jack has therefore concluded that 250 years ago, Canada had already gone wireless.”

Another bad Canadian joke.

Harry Newton, who worries about Trump’s Tariff War. Here’s the full piece from the New York Times International edition of August 3, 2018. It’s a really insightful piece:

Tariff Threats Intensify in U.S. Effort to Hurt China

Determined to make Beijing negotiate, Trump considers higher penalties President Trump has escalated his trade war with China, ordering his administration to consider more than doubling proposed tariffs on $200 billion worth of Chinese goods, to 25 percent from 10 percent, as talks between Washington and Beijing remain at a standstill.

Mr. Trump instructed the United States trade representative to look into increasing tariffs on Chinese imports like fish, petroleum, chemicals, handbags and other goods to 25 percent, a significant step in a dispute that is beginning to take a toll on industries and consumers in both countries. A final decision on the size and scope of the tariffs is not expected before September.

The effort to further punish China is being led by hard-line advisers to Mr. Trump, who believe inflicting painful measures on Beijing is the best way to force it back to the negotiating table on trade. But that approach is once again creating fissures within Mr. Trump’s own team, with his Treasury secretary, Steven Mnuchin, adamantly opposed to ratcheting up the tariffs and Peter Navarro, a key trade adviser, advocating the higher duties, people with knowledge of the discussions said. Stephen K. Bannon, who left the White House last August, has also been counseling the president to pursue tougher tariffs, according to people familiar with his thinking.

The potential for a 25 percent tax is being fueled by deep frustration within the Trump administration over its unsuccessful attempts to press China to change its trade practices, as well as by a sharp decline in the value of China’s currency. Administration officials have also been concerned that China may be manipulating prices of commodities like soybeans to harm American farmers, and hurting American companies through regulatory practices – for example, detaining shipments of agricultural products in customs until they rot. “We have been very clear about the specific changes China should undertake,” Robert Lighthizer, the United States trade representative, said in a statement Wednesday. “Regrettably, instead of changing its harmful behavior, China has illegally retaliated against U.S. workers, farmers, ranchers and businesses.”

Since formal talks between Beijing and Washington broke down in May, Mr. Trump has intensified his threats, saying he is prepared to impose tariffs on all Chinese imports. Beijing has promised to retaliate with its own measures, and both countries have already imposed tariffs on $34 billion worth of each other’s products.

“China’s position is firm and clear: Pressure and blackmail from the U.S. won’t work,” Geng Shuang, a spokesman for the Chinese Foreign Ministry, said at a briefing on Wednesday in Beijing in response to reports about the 25 percent tariffs. “If the U.S. takes a further and upgraded move, China would definitely retaliate to safeguard our legal rights.”

Mr. Trump privately told advisers this week that he was intent on staying the course to punish China with additional tariffs. Mr. Mnuchin has been advising against such a move, preferring to try to engage with his Chinese counterparts to resolve their differences.

But his hand has been weakened by a recent and rapid depreciation in China’s currency, which helps to make Chinese goods cheaper in foreign markets and buoys exports. That has given hard-liners inside and outside the administration an opening to advocate even higher penalties.

The Chinese currency fell to a 13month low against the dollar this week. The move came partly because of market forces, but also because China has been allowing the heavily managed value of its currency, the renminbi, to slide in currency markets in recent weeks.

Mr. Trump strongly warned China against further depreciation of its currency as part of a flurry of early-morning tweets nearly two weeks ago.

Scott Kennedy, a China expert at the Center for Strategic and International Studies, said that ratcheting up tariffs to 25 percent would put substantial pressure on Chinese leaders to devalue their currency even more, to help offset any further losses to exporters. “We can expect further depreciation and vigorous internal debates about a one-off devaluation,” Mr. Kennedy said.

The message from the White House is “we can raise tariffs faster than you can devalue,” said Derek Scissors, a resident scholar at the American Enterprise Institute.

The 25 percent tariffs on $200 billion worth of imports would come on top of the existing penalties on $34 billion worth of products and an additional $16 billion that are scheduled to go into effect soon. China has vowed to respond to any trade measures in kind, and it has already imposed its own tariffs on $34 billion worth of American soybeans, pork, electric vehicles and other goods.

The administration’s trade moves are aimed at forcing China to end what it calls unfair trade practices, including improperly obtaining American intellectual property. Mr. Trump’s advisers argue that past administrations have failed to sway China with diplomacy and that the United States must be prepared to take a tough stance to change its course, even if it hurts American businesses and customers in the short term.

On Wednesday, Congress passed legislation that will strengthen national security-related checks on Chinese investment in the United States, a move that is also aimed at curbing China’s ability to capture valuable American technology.

The Americans and the Chinese have been carrying out back-channel talks over how to resolve their differences, but both sides remain hesitant to embrace more formal negotiations. At present, the discussion is mostly centered on whether more formal talks should resume.

Mr. Mnuchin spoke casually with the Chinese delegation at the Group of 20 summit meeting last week and said he had been in touch with Liu He, a highranking Chinese official charged with negotiating with the United States, to see if he would be at the meeting. However, China decided not to send its most senior officials to the meeting, so no bilateral discussion was held, Mr. Mnuchin said.

China has been looking for solutions that would end the trade fight without requiring the country to make policy concessions that might limit the country’s economic growth, according to people familiar with Chinese economic policymaking, who were not authorized to speak publicly.

Mr. Geng said on Wednesday that China remains eager to find a resolution to the dispute. “China has always been suggesting to use dialogue to resolve trade issues – our efforts and our sincerity are clear to be seen by the international world,” he said. “At the same time, we have to emphasize, our dialogue must be based on mutual respect and equality, on rules and on credibility. Unilateral threats and pressure will only lead in the opposite direction from what we wished.”

While the tariffs are aimed at hurting China, they are also having an impact on American consumers and businesses that rely on products from China’s factories. Farmers and manufacturers, in particular, have complained that they are bearing the brunt of the trade war as China raises the price on imported soybeans and other agriculture products that it typically buys from farms and on materials and products imported by manufacturers to make machinery, clothes and other products.

“Increasing the size of the tariffs is merely increasing the harm that will be done,” said Matthew Shay, the president of the National Retail Federation. “Tariffs are an unacceptable gamble with the U.S. economy, and the stakes continue to rise with no end in sight.”

Last week, the Trump administration announced it would offer farmers up to $12 billion in subsidies to help compensate them for losses incurred as a result of the trade measures. But to offer the same level of aid to other industries that have been affected by retaliation from abroad, it would cost the administration an additional $27 billion, the U.S. Chamber of Commerce estimated in an analysis.