#ALSO THE DIA YOU GET FROM READING STORIES IS SUCH A SMALL PERCENTAGE OF HOW MUCH YOU NEED FOR A 10 PULL

[cringeism]

looking through old tweets of mine about old enstars and remembering that not only would i sometimes get multiple copies of the points 5* without spending any dia id also be able to rank for some characters as well. like you had to set timers to play every couple of hours constantly but it was possible. and i had a collection of a bunch of different characters cards bc id just participate in events if i thought the cards/outfits were cool. meanwhile in new enstars if you want any event 5* you have to hand over dia or else you wont get close no matter how much time you put in. forcing you to only focus on one character. i want to be able to get other cool cards with cool outfits : (

[valuentumbrian]

2018 Starts Out with a Bang!

Image Shown: An ETF that measures momentum (MTUM) has done considerably better than the S&P 500 since the beginning of 2017. Among its top 5 holdings are Microsoft (MSFT), Apple (AAPL), Boeing (BA)—newsletter holdings that have had excellent value characteristics along the way. Visa (V) is also included in its top 10 holdings.

Even some the most bullish and optimistic investors have been surprised by the resiliency of today’s market environment. Why does it seem appropriate to remind members that the stock market doesn’t always go straight up with almost no volatility?

Click to Subscribe to Valuentum today >>

By Brian Nelson, CFA

What a great start to the New Year!

The Dow Jones Industrial Average (DIA) and the S&P 500 (SPY) are up more than 4% so far this year, while the Nasdaq (QQQ) has been on a tear, up 5%, marking the best start since 2004, according to Seeking Alpha. It truly is incredible. I’m sure many of you reading this now were in the markets during the Global Financial Crisis and during the Great Recession, and many of you probably also remember the dot-com bubble and bust of the late 1990s/early 2000s, but you’d have to go back to the Crash of 1987 to capture the third most recent bear market, more than 30 years ago now. According to First Trust, the current bull market is nearly 9 years old, representing a total return of ~385% and an annualized return of ~18%, this following the collapse in 2008-2009, which sent stocks down more than half and some of the most prestigious banks (XLF) belly up.

Though we continue to believe that readers should exercise caution due to existing stock market valuations, which are frothy regardless of how you measure them, whether it’s the forward price-to-earnings ratio on the S&P 500, or the cyclically adjusted price-to-earnings ratio, or the market-cap-to-GDP ratio. But that may not matter. What many seem to be caught up on is that we are currently in a bull market, and that means that investors buy, and they hold, and without meaningful volatility in the markets these days, there’s not much to give the long-term investor to think about when it comes to reasons to sell. The self-perpetuating cycle of a steadily-increasing market with ultra-low volatility has taken many an investor by surprise, and even the most experienced of market observers can hardly believe it. We’d be remiss to say that the current magnitude and duration of the ongoing bull market is unusual, however. Perhaps this may be where optimists are gathering excitement.

For starters, if you look at the bull market that ended with the dot-com bust, stocks advanced more than 816%, representing an annualized return of ~19%, from the Crash of 1987. It took nearly 13 years to achieve this remarkable run. If we go back to the bull market than ended with the Crash of 1987, that was a near-13-year run, too, with a return of more than 845%, marking a 19% annualized return, too. There have been two other bull markets in market history with durations of nearly 14 years and over 15 years, with total returns of 800%+ and 900%+, respectively, meaning that today’s bull market could still be in the middle innings if history is any guide and if it is of the longer-duration variety. The average duration of a bull market is ~9 years, however, with average cumulative total return of 480%, meaning that if today’s bull market is only of the average variety, it is starting to get long in the tooth.

How did we get here? For starters, ultra-low interest rates and a flood of liquidity by the Fed, which has caused many an investor to jump into risky assets for yields. Second, the proliferation of indexing and/or buy-and-hold investors that aren’t paying attention to the price-to-fair value equation, but instead to other considerations (“put money to work” and the like), is generating a buy-at-any-price mentality, what many consider to be the primary cause of any stock market bubble. Third, a generally strong US economy that has not been exposed to exogenous shocks or systemic events for some time, though one could possibly point to Brexit (EWU), the London Whale incident, the property/stock markets in China (FXI, KWEB), or even the threat of nuclear war with North Korea--but nobody seems to care. Fourth, the March 2009 panic bottom may have been the greatest cause of this bull market, a generational low, perhaps shaking out some of the most reasonable and/or most emotional of investors for good, and they may have never come back.

For some to have witnessed this much wealth evaporate during such a recent event as the Financial Crisis, for example, it’s hard to believe that the stock market could ever be considered a long-term wealth creator--but it has bounced back, and it may very well be because of the idea that the market has bounced back from the depths of ruin in late last decade, and in a big way, that investors may no longer be paying attention to it. They may say: “Buy and hold. Index. Reinvest Those Dividends. Keep Putting Money to Work. Get Started Saving as Early as Possible.” After all, if today’s investor believes the market always goes up, will it continue to be a self-fulfilling prophecy? Or will game theory take over and that one incremental investor that decides to get out eventually lead to the beginning of the end of this bull market? It has to end some time, right? Here’s the real deal: the bull market is going to work until it doesn’t, and valuations aren’t going to matter until they do. Unlike bull markets, which are long, slow marches higher, bear markets are fast and cut deep (and are very painful). According to First Trust, “the average bear market lasted 1.4 years with an average cumulative loss of ~41%.”

I think you need to start thinking, if or when, we do enter the next bear market, whether you might be able to handle a 40%+ loss in your wealth. This is why I want you to keep paying attention to the markets and your money--because if you believe in bull markets and you buy into what is driving the market today, then you have to also believe in bear markets, and we all know what happened during the very worst of the bear markets following the Crash of 1929. That bear market lasted less than 3 years, but it wiped out more than 80% of wealth in the US stock market. It’s a story nobody wants to remember, but it is one we should never forget. Sometimes it’s easy to get caught up in the latest and greatest financial instrument, or the buy-and-hold mentality, but you should also pay attention to price-versus intrinsic value. Nobody has ever been hurt taking profits, to my knowledge, but many an investor has gotten hurt being greedy.

The rise in cryptocurrencies ensues, as Bitcoin (XBT, GBTC) continues to hold most of its massive advance, though its conversion rate to the US dollar (UUP, UDN), has come down quite a bit from its height. The SEC is cracking down on initial coin offerings (ICO), but we won’t see the last of them. Still, speculators are growing more and more skeptical of the scarcity of cryptocurrencies, as more and more cryptocurrencies are created. Perhaps each has a limited supply, but if a new one can be created, then the scarcity argument may not hold for all, in aggregate. We’re also witnessing things that I never thought I would see again, things that are dot-com-bubble-like. For one, Long Island Iced Tea (LTEA) changed its name to Long Blockchain, blockchain being the technology behind Bitcoin and others, and saw its shares soar. Even Eastman Kodak (KODK)—yes that Eastman Kodak—is getting in on the action, announcing that it will launch a cryptocurrency called KODAKCoin “to help empower photographers and agencies to take greater control in image rights management.” Shares surged on that news, too!

We think the most important developments, however, are happening with respect to interest rates (TLT, TBT). Near term yields are reaching the highest they been in years, and the 2-year Treasury (DTUL, DTUS) has now passed the average dividend yield on the S&P 500, perhaps creating a conundrum for some portfolio managers that had been holding a passive index, in part for a yield portion, as now such portfolio managers can get an equivalent yield on a riskless Treasury instrument of rather small duration. We have been saying for some time that the tipping point will rest on when the market wakes up to a higher-yield environment, and while we may be a few percentage points away in the 10-year Treasury for that, yields are slowing inching higher, some of course more abruptly than others. This is partly why we are witnessing the sell-off in utilities (XLU) and REITs (VNQ), both equities’ prices highly sensitive to risk-free yields, regardless of underlying constituent fundamentals. Midstream energy equities (AMLP), though not directly tied to energy prices, only indirectly, have held up a little better thanks to rising crude oil prices (USO, OIL), which help the credit quality of their customers.

We think the rise in near-term risk-free yields, the weakening US dollar relative to the euro (FXE, EUO), and the recent advance in gold (GLD) prices are all in some part tied to US corporate tax reform. Our initial opinion of the tax bill is that the US will have a very difficult time paying for the capital expensing provision of the new bill, “which allows companies to deduct their investments in tangible assets in the year of the investment,” let alone the cut in the corporate tax rate to the low-20s (21% from 35%), too. The reality is that while the corporate tax cut will help stimulate new investment and pave the way for higher wages, it also has the ancillary dynamic of potentially driving sovereign yields higher, as we are witnessing, and driving inflation, as in what we have also seen with respect to higher wages and one-off bonuses. Waste Management (WM) issued tax-related bonuses, for example, and Walmart (WMT) did the same, but the latter’s announcement was followed shortly by the layoff of 1,000+ corporate workers.

The long-term implications of the tax cuts have yet to be completely ironed out yet, in our view, but if government tax receipts fall to the point where yields on US Treasury instruments soar, an occurrence that may be accompanied by outsize inflation, an increased discount rate could have a more-than-offsetting impact on company valuations, across the board. Though it may be hard to believe that the corporate tax reform could potentially be a negative in the long run, given that it will drive accounting earnings per share higher in the near term, the largest component of value for an organization originates in its long-duration enterprise free cash flows, which are very sensitive to discount rates that tie future value to today. Said differently, it matters more what the 10-year yield ends up being in the event of a higher cost of borrowing for the US, for example, than the delta in earnings per share for next year or 2020, even if that delta may be meaningful and exciting. No change happens in a vacuum, and that’s the case for political events in the form of tax cuts, too.

All things considered, however, the US economy is performing wonderfully. GDP continues to advance at a nice clip, unemployment is super low, and consumer sentiment is at or near highs. Innovation at Silicon Valley continues unabated, the energy (XLE) ecosystem is recovering, and companies like Netflix (NFLX) and Tesla (TSLA) remain of great interest. Newly-minted millionaires in Silicon Valley and in the Bitcoin community may be in part driving the broader stock market higher, too, and some are saying that the demographic make-up of millennials (MILN) could make the next 20 years in the stock market the best 20 years yet. That is going to largely depend on continuous innovation, and while we had Microsoft (MSFT) in the 1990s (Windows 95), Apple (AAPL) in the 2000s (iPod), Facebook (FB) and Twitter (TWTR) in 2010s (social media), only time will unveil that next-generation breakthrough in the 2020s. How about a cure for cancer? Wouldn’t that be nice? We’re monitoring the oncology divisions of big pharma very closely these days.

As we wrap up, there is one change that I have been mentioning for months now, but as of this edition, it is finally incorporated into the Best Ideas Newsletter. I think it moves us in the right direction of giving our customers what they want. What we've found from member feedback is that many are having varying experiences with the newsletters. For example, many of our members were not aware that Visa (V) and Apple, two of the best performers in the Dow Jones Industrial Average during 2017, were among our favorite ideas last year, as they were the "highest-weighted" ideas in the simulated Best Ideas Newsletter portfolio--so calculations regarding the ideas in simulated portfolio fashion were less relevant for a great majority of our members, and in some ways, our excitement surrounding the success of ideas wasn't as well-received as we would have liked.

As a result, and as we have been saying for a couple months now, we think a list-versus-weighting format may work the best, as it gets our favorite ideas at the top, and helps to explain how we think about the ideas themselves, that we may like one idea more than the next one, etc. This is now reflected in this January edition of the Best Ideas Newsletter. It also offers more flexibility with respect to providing a range of weightings, giving us more time for analytical work as opposed to doing the monthly calculations. We continue to measure our ideas and methodologies, of course, as we view this as par for the course, and we think the Valuentum Buying Index rating, the fair value estimates and ranges, the Dividend Cushion ratios are worth the membership price alone, let alone the newsletters that we provide. In any case, thanks for the feedback and making Valuentum the best it can be. We appreciate it greatly. Here’s to a great 2018!

<The Best Ideas Newsletter was released January 15, 2018.>

Related ETFs: SLV, IYR, MTUM, BA

--------------------------------------------------

The High Yield Dividend Newsletter, Best Ideas Newsletter, Dividend Growth Newsletter, Nelson Exclusive publication, and any reports and content found on this website are for information purposes only and should not be considered a solicitation to buy or sell any security. Valuentum is not responsible for any errors or omissions or for results obtained from the use of its newsletters, reports, commentary, or publications and accepts no liability for how readers may choose to utilize the content. Valuentum is not a money manager, is not a registered investment advisor, and does not offer brokerage or investment banking services. The sources of the data used on this website and reports are believed by Valuentum to be reliable, but the data’s accuracy, completeness or interpretation cannot be guaranteed. Valuentum, its employees, independent contractors and affiliates may have long, short or derivative positions in the securities mentioned on this website. The High Yield Dividend Newsletter portfolio, Best Ideas Newsletter portfolio and Dividend Growth Newsletter portfolio are not real money portfolios. Performance, including that in the Nelson Exclusive publication, is hypothetical and does not represent actual trading. Actual results may differ from simulated information, results, or performance being presented. For more information about Valuentum and the products and services it offers, please contact us at info@valuentum.com

.