flight to safety

It’s Second Look—and Second Opinion!—Season

graphic shows the words "'Tis the Season" inside a magnifying glass

Clients, the markets are at a low point. It’s a prime time to revisit our holdings! Let’s take a second look. 

To be clear, portfolio reviews are part and parcel of our regular business. But these times of churn and change are a great opportunity to look more closely—and try to make sense of everything given the context. 

Conversations with some of you lately have inspired some changes. Could it be time to garner tax losses and take a different approach with some of your resources going forward? 

Our goal at 228 Main is to grow your buckets. We believe the better off you are, probably the better off we will be down the road. That’s enough for us to review and comment on your plans and planning, as well as your investment holdings and accounts. 

While it’s Second Look Season for us in the shop, could it be Second Opinion Season for anyone in your life? It could be you know folks who are paying fees for investment management when their investments don’t seem to be managed at all. Does anyone in your life have long-term investments stuck in stagnant short-term holdings? 

I often say I’m in business to talk all day. If you have questions about your holdings, I might as well be talking to you and your loved ones! And clients, please know that we have nothing to lose by your seeking a second opinion of your own. All the power to you: you are the boss of what you do with your wealth. (We seem to get all the business we deserve, and none that we don’t.) 

No matter where our resources land, remember that the markets go up and down. We won’t tell fairy tales about “minimizing risk” or getting market returns without enduring the inevitable fluctuations. We will not ignore that the price of so-called “safety” is often the loss of potential future gains. 

But we do believe in striving for long-term total returns. So we live with volatility. No waves, no voyage. No rain, no flowers. 

Clients, when you have questions about your situation, please write or call. If you know someone who would like to chat with us, let them know Second Opinion Season is in full swing, now through year-end! 

Thank you all, for everything. 

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Play the audio version of this post below:

It’s Second Look—and Second Opinion!—Season 228Main.com Presents: The Best of Leibman Financial Services

This text is available at https://www.228Main.com/.

Safe is the New Dangerous

© Can Stock Photo / onepony

We strive to see the world as it is, and act accordingly. Going by the textbook and implementing conventional wisdom without testing it against actual conditions is not in our playbook. What we see today is nothing short of astonishing—for two reasons.

“Safe” has become the new dangerous. We are astonished at how the investment world appears to be upside down in some respects. And we are astonished that so few of us seem to have noticed.

During the year 2000, the technology-heavy Nasdaq Composite index fell over 39%1. This crushing of technology and growth stocks at the start of the millennium and the financial crisis that arose just seven years later drove fear of the stock market deep into the psyche of some investors. Consequently, we believe there has been a flight to safety that has created some real anomalies.

Yields on long term government bonds and high yield corporate bonds have fallen to near historical lows not seen in over 50 years2. It isn’t just in bonds, either. Supposedly safe stocks appear to be the most expensive part of the market.

Standard & Poors reports that the market average price to earnings (P/E) ratio is about 18. Food companies, shampoo makers, toothpaste sellers, medical supply companies and utilities are priced at a premium because those lines of business are assumed to be recession-proof…you know, safe. In an 18 P/E market, these companies are priced at 22, 25, 30, or 34 times earnings3.

We have owned many of these companies in the past at P/E’s of 10 or 12 or 14. Why anyone would own an electric utility when solar plus battery technology is bound to turn them upside down is beyond us. (We wrote about the coming change here.)

Consequently, we believe that allegedly “safe” stocks have become so expensive they are dangerous. The textbook says utility stocks are safe. We look at the world and say, “Not really.” Safe is the new dangerous.

Meanwhile, there are market sectors and companies priced below the market average P/E, including some with dynamic prospects in the years ahead. We believe the stocks we own are bargains. That’s an opinion, not a guarantee. You know we don’t offer guarantees, except that values will fluctuate.

Clients, if you would like a longer conversation about this upside down situation or any other topic, please email us or call.

1Nasdaq, Inc.

2Federal Reserve Economic Data, Federal Reserve Bank of St. Louis

3Standard & Poor’s, Inc.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

Stock investing involves risk including loss of principal.

Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.

Floating rate bank loans are loans issues by below investment grade companies for short term funding purposes with higher yield than short term debt and involve risk.

High yield/junk bonds (grade BB or below) are not investment grade securities, and are subject to higher interest rate, credit, and liquidity risks than those graded BBB and above. They generally should be part of a diversified portfolio for sophisticated investors.

Government bonds are guaranteed by the US government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value.

The Biggest Stampede Ever?

© Can Stock Photo / afhunta

We think it every day. We’ve written it scores of times. We’ve said it thousands of times. We believe it is the most valuable principle we follow: “Avoid stampedes in the market.”

In our view of the world, a stampede has two criteria: large money flows in, and irrational pricing. For example, in the technology boom of the late 1990’s, very large money flows went into technology stocks. Some were new issues that had no business, no earnings, only a plan. Others were real businesses, but priced five or ten times what they would have been in more normal times.

(We usually speak of stampedes rather than bubbles, because ‘stampede’ connotes herd behavior that is an integral part of the process.)

The flight to safety, or money pouring into the supposed safety of fixed income investments, has reached historic levels. The large money flow satisfies one criteria of a stampede. What about the other one, irrational pricing?

The government of Italy recently issued fifty year bonds. A very few years ago, Italy could barely sell bonds due to the well-publicized economic problems of Europe and the systemic flaws of the Euro common currency. Italian bonds, of course, are denominated in euros. So investors in the bonds issued by a country thought to be going broke a few years ago, denominated in a troubled currency that was born only fourteen years ago, will not get their money back for fifty years.

In a sane world, what ridiculously high rate of interest would be required to persuade you to buy these bonds, if you could even be convinced at any price?

How about 2.85% per year? That is where the bonds were issued. It seems every bit as ridiculous as the most over-priced dot-bomb stock of the tech wreck. Both criteria of a stampede have been met, in spades.

We are working hard to understand the threats and opportunities presented by this stampede. We believe it is the key issue in the markets for the years ahead. If you are interested in how your situation might be affected, please write or call.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.

International debt securities involves special additional risks. These risks include, but are not limited to, currency risk, geopolitical and regulatory risk, and risk associated with varying settlement standards. These risks are often heightened for investments in emerging markets.