Bull is Ready to Rage

Mother's Little Helper portfolio was UP today +1,007.18 (+0.86%)

Overall GAIN/LOSS YTD: +$599.55 (+0.51%)

Our benchmark index, the S&P 500 is UP Year-To-Date (+7.52%)

http://money.cnn.com/data/markets/sandp/

"Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.” --Sir John Templeton

I made my buys for the year on December 28, 2017, see the new portfolio here (Click Here).

Thank you

I just wanted to say thank you and extend my appreciation to everyone who sent their condolences over the passing of my Mother, without whom this blog wouldn't be possible.

The portfolio got a bounce up today but still lags the S&P 500 our benchmark. Because this portfolio is focused on holding long term, 5, 10, 20 years or more, I'm not particularly concerned about this temporary under-performance. So far we're not making a killing but we're also not losing money. This portfolio is built entirely from index funds that provide global exposure to all markets in a balanced allocation. This is the bedrock of the stock investing we'll get back to next year as we build on top of this firm foundation.

Are Stocks Expensive?

No. Fairly valued, is probably a better assessment. On an individual basis some stocks a very expensive, some are fairly valued and some are down right cheap to the point of being mis-priced. Regardless of whether you're a stock investor or and index investor or a non-investor who just likes to watch from the side lines, everyone has an opinion about the market. I see this all the time but I always have to ask what their opinions are based on. I always need to know the 'Why'.

Recently I heard someone say Alphabet is really expensive, just look at the stock price it's $1,220 per share! Yes that's a lot of money, but expensive based on what? $1,220 is a lot of money for a candy bar, but really cheap for a new car. What are we really buying when we buy shares of stock. I think we really need to stop talking about buying stocks or index funds and start calling it what it really is; we're buying companies. Buying shares of a company comes with all the same responsibilities as buying a brick and mortar company, you have to know how it makes money now and what it's going to do to make money and grow in the future. In the case of Alphabet (GOOG) we see the company is actually very cheap and offers a great risk vs. reward. If we take away the cash, the stock trades at roughly market multiple and it just grew its revenue by more than 20%; plus the profits are ridiculous. Comparing Price to Cash Flow Per Share (P/CFPS) we find that Alphabet has historically and currently trades at much lower valuations than does Amazon or Facebook and arguably Alphabet has businesses with deeper moats and dare I say monopolies that keep fueling growth. The average investor probably can't buy a bunch of shares of stock at $1,220 a piece, but you can accumulate them over time on any significant pull back.

Price doesn't make a stock expensive, valuation does.

The Bull Market is Coiled and Ready to Rage

Grumblings from the bears continue as we enter into the longest bull market in history, 3,456 days to be specific. I actually think we've been through a succession of three bull markets that were tied together by some side-ways trading, but over the long term that's just semantics and not really important. The reasons I'm bullish:

First, I am always bullish on the stock market. At the lows in February and March of 2009 I wanted to invest heavily in the worst way because a number of indicators were flashing that we had hit the bottom, everything was on sale. With that in mind, a bullish call from me is not, extraordinary.

  1. Recently the S&P 500 rose above an important level of 2,872 and is continuing to push higher. The S&P 500 has a PE of about 25. I recently listened to an analyst who had calculated that only 8% of the S&P 500 PE is due to tax cuts, only 8%! That's some serious organic corporate growth and U.S economic growth. The reason the number is only 8% is because most corporations and small businesses haven't figured out what they will do with the tax cuts, or even how the tax cuts impact their business. What is having an impact is sentiment because of the tax cuts. Businesses are hiring more workers, paying them more money as the job market tightens, offering better benefits and looking to make longer term investments all because the tax cuts have encouraged them to do so. Hate the tax cuts, hate the administration that created them, whatever you're ideology, it doesn't change the fact that businesses are behaving exactly as predicted and that's good for everyone who has money invested in the stock market.

  2. Deducting 100% of capital expenditures instead of depreciating over several years hasn't had much impact yet as businesses work to figure out where they want to invest and try to get some greater certainty out of Washington. When CapEx shows up in earning announcements expect a big rise in the markets.

  3. Overseas cash was a big story last year and the year before. The new tax code provides a reduced rate to bring that cash back and invest it in the U.S. But just like CapEx, companies are still trying to figure out where and how they will invest all that cash. For the time being the overseas cash remains, well, overseas. Eventually that cash will get brought home and invested. The primary ways that money will get used are buying other companies (mergers and acquisitions), increasing dividends to shareholders, share buy backs and research and development. Most companies will likely do some form of all-of-the-above.

  4. Finally we have the mid-term elections. Politics don't fit into my investment thinking and to some that makes me a villain, to others a pragmatist. My own explanation is that I can't build a portfolio around geo-political events or the personalities of politicians. Therefore I just have to endure whatever comes my way, with respect to investing. Historically the stock market has shrugged off political turmoil. If we look at the Kennedy assassination, Nixon resignation, Clinton impeachment and more we see that the market may pull back temporarily but quickly finds its footing and prices in the events.

  5. Recent political events suggest that there is an increased likelihood that the Democrats will retake the house. Should this occur there is a general assumption that not much will get done in Congress. Historically investors have shown a love for grid lock; the markets perform very well during periods of grid-lock; why, because grid-lock is a form of certainty and the stock market loves certainty.

Mid-Term elections have a peculiar impact on markets. Since 1904 one constant has endured, markets go up during a mid-term election year. Specifically I've found that the average from the election year low to the following year high is a whopping 50%. The 2018 S&P low was 2,581 and we're not likely to revisit that number again anytime soon so this theory is predicting the S&P 500 will reach approximately 3,800 or more in 2019.

Right now is the best buying opportunity in the entire 4-year cycle.

If you've been sitting on the side-lines wondering when to invest maybe just wait for a day when the market has a good sell off to take advantage of an S&P 500 index with low fees, I like Vanguard ETF Index funds for their performance and very low fees. If you're comfortable with your level of investment in index funds and want to venture into stocks the sectors that should perform best are healthcare, technology and industrial's. Over the past few weeks we've seen a resurgence in retail and other consumer staple companies which is showing that the consumer (75% of the economy) is strong. With target hitting a 52-week high and many other retailers doing well we can see that shopping is not all about Amazon. Today we saw a big boost to healthcare stocks, particularly a few of the small cap biotech companies.

If you're comfortable selecting individual stocks in those sectors I'll recommend that you start by making a list of companies on the new high list; wait for a pull back and look to start a position by averaging into the shares. If you need to sell some shares to raise cash do it from you're consumer staples and utilities.

In addition to healthcare, technology and industrial's, a well rounded portfolio should include some financials as interest rates increase and business loans increase financials should do well. My favorite financials are JP Morgan, SunTrust, KeyBank and Visa.

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Keep Me Honest

I am attempting to keep track of my calls and predictions by logging them at the bottom of every post.

  1. Bond prices will decline as a result of rising rates and a Dollar Shortage.

  2. Invest in China stocks. NetEase, YY, JD, Baidu, Alibaba, mobile phone services and makers, and China BioTech

  3. Invest in Whirlpool (see Whirlpool caveats above), Kohl’s, Costco Wholesale, Home Depot, Dollar General and Casey’s, Ingersoll-Rand, Illinois Tool works, Paccar, Honeywell, and DowDupont, PayPal, Square, Goldman Sachs, Citibank, Bank of America, JP Morgan, DBC, Apple, Microsoft and Caterpillar.

  4. Goldman Sachs slides to around $210/share

  5. Proctor & Gamble, Coca-Cola, Merck and Pfizer will go lower as rates rise.

  6. The Chinese yuan will replace the dollar in international trade. Not this year, but it will happen in coming years.

  7. The DOW will close the year with 9-10% gain.

  8. The S&P 500 will close the year at 2900-3000.

  9. The portfolio will generate about $2,065 in dividends.

  10. M&A of drug companies will increase over the next 24 months.

  11. Healthcare, technology, industrial's and financials should outperform through the remainder of the year and into the high of next year.

  12. JP Morgan, SunTrust, KeyBank and Visa perform well through remainder of 2018.

Stay Invested,

Clay Baker

Disclosure: I am personally invested long in some or all of these funds that appear in the Mother's Little Helper portfolio or manage these investments for my Mother's portfolio and may purchase or sell shares within the next 72 hours. I am also invested in other stocks and funds that do not appear in the MLH portfolio but may be mentioned or related to this article. It is not my intention to advise or encourage the purchase or sale of any security. Since I may on occasion discuss Bitcoin and other cryto currencies I disclose here that I personally own investments in the cryto-currencies listed here: AMZN, DBC, VTI, VWO, VEA, VIG, XLE, MUB, TBT, GLD, Bitcoin, LiteCoin

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. This article is not intended to offer investing advice, guarantee 100% accurate predictions, or to be interpreted as providing a personal recommendation.

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This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice.
This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities.

© 2016 by Clay Baker all rights reserved