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Joseph L. Shaefer
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Joseph L. Shaefer is the CEO and Chief Investment Officer of Stanford Wealth Management, LLC, a Registered Investment Advisor. Joe retired as a senior executive at Charles Schwab and Co. to found Stanford Wealth Management, LLC, in 1990. He also spent 36 years in a very different leadership... More
My company:
Stanford Wealth Management LLC
My blog:
The Investor's Edge
My book:
Bringing Home the Gold
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  • The Year of Living Dangerously: 2011?


      

    There are three times when a bear market is particularly dangerous:

    At the beginning,

    During, and

    At the end. 

     

    At or near the beginning, there is typically a waterfall on more than one occasion as investors rush to sell everything and anything.  They’ve seen many, most or all of their gains evaporate as the talking heads intone “this is just a normal correction.” Since most investors don’t join in the bull market until it’s already up 40% or 50%, by the time it’s “officially” a bear and declines 20%, they barely break even.  (Starting at $100 to reach $140, then losing 20% of $140 takes them back to $112.   And they still have a sizable decline ahead to donate the $12 profit to cooler heads…)

     

    During the decline, there are many head fakes during which time the market soars ahead, making investors think the worst is behind them.  They are called “sucker rallies” for a reason.  Compared to the highs before the decline, things look cheap — but only compared to the highs.  So people get suckered in, have their hopes dashed, after which we reach the final phase of the bear.

     

    At the end, most investors give up on the head fakes and sucker rallies and tell their brokers to sell everything that remains before the market declines even further.  And that blowout selling is my — and your — cue to start buying.  Notice I said “to start buying.”  Nothing goes straight down or straight up.  There’s no rush.  Panicked investors will be happy to sell to us on any new little blip down.  It’s our job to accommodate them and begin accumulating when the worst is behind us.

     

    During a bear, some sectors will emerge as investor favorites.  If the bear is long enough, those trends can be played on the long side.  This time around, it might be the energy stocks or the agriculture stocks.  It could be timber or other basics as the emerging giants retrench, tighten their belts, then go for another round of growth.  It might be precious metals, given our government’s insane headlong rush to devalue our once-proud dollar – though metals are a very crowded trade today.   We won’t know where the pockets of strength are until we are there.  The secret is to buy value cheap and to keep some cash available for buying more as we have corrections and confirmation of the strongest sectors. 

     

    I purchased “insurance” in 2010 in the form of inverse ETFs.  I used them as a hedge against yet another major decline.  As it happened – aren’t we all geniuses with the certainty of hindsight? – I would have made more money going long without any protective insurance.  But the idea of insurance is that you are protecting yourself, while hoping you never have to call the insurance company.  I recently unwound all these positions and will now use a cash buffer, buy intrinsic value companies, and stress the sectors I believe will do best going forward as our “insurance” rather than maintain any inverse ETF hedges.  (Except one: I still believe the inverse Treasury play, whether via TBT or TBF will work out well for the patient!)

     

    So what sectors are we nibbling at these days?  Energy, especially natural gas.  Agriculture and food companies bought right.  Timber firms with fabulous real estate holdings and even a couple deeply-depressed land companies in desirable demographic/geographic locations.  Uranium firms and platinum metals group companies.  Pollution control firms (desperately needed in nations like China and India).  Companies that clean up filthy water (ditto).  Regional financial firms.  Health care companies.  And the big engineering firms (and some utilities with deep experience and knowledge) that design and build coal, gas and nuclear plants for electricity generation and refineries for oil and natural gas.  But let’s not put the cart before the horse.  I’m not rushing into the market.  Just trying to do what we always do – buy quality firms in unpopular sectors when their valuation indicates a low downside risk.  If we can get good income that is at a payout ratio that indicates a good likelihood of continuing or even being raised, so much the better.

     

    I do not believe the bear is toothless just yet.  I believe 2011 will be a dangerous year to commit completely to one side of the market or the other.  Smart, steady accumulation when others are uninterested will likely yield the best results.  I expect the further sideways action that typifies bear markets (rather than the steady downward decline that most people envision) to continue into 2011.  (See more on this reality in the charts posted here.)  But I also believe that we are closer to the end of this bear than the beginning or the middle.  If you agree, here are a few firms we are looking at that you may want to consider for your own due diligence, as well:

     

    Encana Corp. (NYSE:ECA)  2 ½ points above its 52-week low.  PE 10. Yield 2.8%.

    ConAgra Foods (NYSE:CAG) ½ point above its 52-week low.  PE 13. Yield 4.4%.

    Plum Creek (NYSE:PCL) 3 points above its 52-week low.  PE 34. Yield 4.6%.

    Exelon Corp (NYSE:EXC) < 3 points above its 52-week low.  PE 10. Yield 5.3%.

    WestAmerica Bank (NASDAQ:WABC) 1 ½ points above its 52-week low.  PE 15. Yield 2.9%.  

    CML Healthcare Income Fund (OTC:CMHIF) 2 ½ points above its 52-week low.  PE 23. Yield 9.0%.

    Chesapeake Energy (NYSE:CHK)
    3 points above its 52-week low.  PE 16. Yield 1.3%.

    Citizens Holding (bank - CIZN) 2 points above its 52-week low.  PE 13. Yield 4.5%.

    And, for more aggressive portfolios / positions,

    Eli Lilly (NYSE:LLY) 2 points above its 52-week low.  PE 8. Yield 5.7%.

    Petrobras (NYSE:PBR) < 3 points above its 52-week low.  PE 9. Yield 0.5%.

    China Agritech (OTCPK:CAGC) < 3 points above its 52-week low.  PE 56. Yield 0.0%.

     

     

    Author's Disclosure:  We and/or those clients for whom it is appropriate are now long ECA, CAG,PCL, EXC, CMHIF, CIZN and CAGC.  We are reviewing the others, and more, for possible inclusion in our portfolios.

    The Fine Print: As Registered Investment Advisors, we see it as our responsibility to advise the following: we do not know your personal financial situation, so the information contained in this communiqué represents the opinions of the staff of Stanford Wealth Management, and should not be construed as personalized investment advice.

    Past performance is no guarantee of future results, rather an obvious statement but clearly too often unheeded judging by the number of investors who buy the current #1 mutual fund only to watch it plummet next month.

    We encourage you to do your own research on individual issues we recommend for your analysis to see if they might be of value in your own investing. We take our responsibility to proffer intelligent commentary seriously, but it should not be assumed that investing in any securities we are investing in will always be profitable. We do our best to get it right, and we “eat our own cooking,” but we could be wrong, hence our full disclosure as to whether we own or are buying the investments we write about.

     

     

    Nov 21 4:59 PM | Link | Comment!
  • Munis Are Poised on a Knife Edge


    As long as the feds and the states were able to prop up the various municipalities with taxpayer funds from another state, munis looked pretty good.  But now too many of the states themselves are in deep kimchi  Just one anecdote from my personal geographic vantage point: typically, the time between fall color and open ski resorts up here on the Nevada side of Lake Tahoe is a time we don’t see many out-of-state license plates.  In those other times visitors come up, spend money, and leave.  Not this year.

    This year, however, we see scores of California license plates – most of them parked in front of real estate brokerage offices.  California and Nevada are both losing residents: Nevada is losing the hard-core addict gamblers in Vegas who are returning to California’s more generous welfare payouts, and California is losing many of its most productive, entrepreneurial and prosperous citizens to Nevada’s more libertarian tax code.  I think we Nevadans are getting the better part of this bargain.

    Municipalities in every state derive a healthy portion of their revenue from state subsidies. That’s only fair, since the state sales taxes are collected without regard to which city or county it comes from, but it is the “City of Wherever” or “County of Whatever” that must provide fire, rescue, police and other essential services.  However, with many of its most well-off citizens fleeing the onerous taxes and experimental politics of states like California, the income tax base, state sales tax base, and licensing and fees base are all shrinking.  At least 45 states are showing declines in total tax revenues.

    So what are most of these states doing to replace tax revenue? Creating jobs? Slashing taxes to encourage new businesses? Cutting spending? Of course not. By and large they are raising taxes, getting more and more from fewer and fewer. And the fewer and fewer are voting with their feet.  When last I inquired at U-Haul, just to get a feeling for how many people are going which way, I discovered that the cost of a one-way rental from Austin, Texas to San Francisco, California is $900. From San Francisco to Austin, the cost is $3,000.   Think that gives a pretty good idea of where all the trailers and trucks are ending up?

    Capital goes where it is welcomed and well-treated. Once upon a time that may have been  California, Michigan, Illinois, New York, New Jersey or Pennsylvania where, once upon a time, so many Fortune 500 companies were based.  Today?  It’s Texas that is home to 58 Fortune 500 companies, more than any other state.   If you own bonds issued by municipalities in high-tax states, remember: capital goes where it is welcomed and well-treated.  People and companies are free to vote with their feet in this country.

    The Rockefeller Institute for Government and the Brookings Institution recently estimated that the funding shortfall in state and local governments will exceed $50 billion in 2011. The states with the highest taxes also have some of the worst budget problems – no shock to anyone who understands the difference between individual entrepreneurialism and state-sponsored nanny-ism as practiced in high-tax, high-nanny-factor California, Michigan, , Illinois, New York, New Jersey and Pennsylvania. All of these states are slashing revenue-sharing with their local governments.

    The markets will recover.  The economy will recover.  But vast sectors of the economy will not – or they will lag significantly, during which time your money invested there will either be dead money or dying money. 

    What to do now?  That is an individual decision.  For me -- I have sold off all of my and our clients’ once-substantial holdings of the munis we purchased for them a couple years back when bonds really were a safe haven against the vagaries of the equity markets. 

    If you insist upon holding munis, I suggest you ONLY own investment grade bonds (AAA, AA, A or, only for the gamblers out there, BBB.)  Also, research on your own or ask your broker what kind of cash reserves the issuer of your bonds maintains. Anything less than 18 months to two years...sell the bond while you can. In addition, accept a little less interest but buy “pre-refunded” or “escrowed to maturity” bonds. You’ll earn less with this money-in-the-bank-to-pay-at maturity kind of bond, but you should be every bit as concerned this year about the return of your principal, not just the return on your principal.

    I think a shakeout is coming for all bond classes (except for “floating rate bonds” that re-set and rise with increases in inflation.)  I wouldn’t touch most with a 10-foot pole.  Not when I can buy the stocks of quality firms that pay current dividends higher than bonds pay today, which also have a history and likely a future of increasing those dividends!

    For munis, these days, I’d paraphrase Chief Martin Brody (the Roy Scheider character) in Jaws: “We’re gonna need a longer pole…”

    Author's Disclosure: As of today, we are completely out of all muni bonds.  Sometimes advising what and when to sell is more valuable than discussing what and when to buy…

    The Fine Print: As Registered Investment Advisors, we see it as our responsibility to advise the following: we do not know your personal financial situation, so the information contained in this communiqué represents the opinions of the staff of Stanford Wealth Management, and should not be construed as personalized investment advice.

    Past performance is no guarantee of future results, rather an obvious statement but clearly too often unheeded judging by the number of investors who buy the current #1 mutual fund only to watch it plummet next month.

    We encourage you to do your own research on individual issues we recommend for your analysis to see if they might be of value in your own investing. We take our responsibility to proffer intelligent commentary seriously, but it should not be assumed that investing in any securities we are investing in will always be profitable. We do our best to get it right, and we “eat our own cooking,” but we could be wrong, hence our full disclosure as to whether we own or are buying the investments we write about.

     

     

    Tags: Macro View, Bonds
    Nov 18 6:36 PM | Link | 2 Comments
  • Hope, Change, Death & Taxes

       

     

    The elections of last week have made me more sanguine, as an investor, than I have been all year.  Why?  Because a lame duck Congress that might like to stick it to those who voted against them is thinking more about where their future bread will be buttered.  Many of them they are unemployable in the real world, so they will become K Street lobbyists.  That means they’ll need to suck up to the crowd that replaced them.  And the crowd that replaced them got in, largely, on a platform of returning fiscal responsibility to big government.  The newbies don’t want the lame ducks truncating their popularity by failing to extend the Bush tax cuts and the lame ducks don’t want to jeopardize their future 3-martini lunches at the Capital Grille.

     

    The extension of the tax cuts would be enormously good news for Main Street.  Whatever your think of the estate tax, until now you haven’t had a vote.   It’s been decreed a “soak-the-rich” tax by an administration that believes that the way you earn money in America is to write a grant better than someone else writes a grant and then “the government” gives you money.  They simply do not or will not understand that “the government” has no source of income other than taking it from some citizens and, after skimming its take off the top, redistributing the remainder to a different group of citizens.

     

    I have no dog in this fight.  My and my wife’s parents, grandparents and other forebears were solid blue-collar folk.  Neither of us will ever be burdened with the travails of having to deal with inherited wealth.  But Americans define ourselves by many characteristics and a key characteristic that we share is a sense of fair play.  Since people often build huge estates within a single lifetime because of the wonders of the capitalist system and the power of their lawyers, some argue that they should say thank you to the rest of their fellow citizens when they no longer have any personal ability to spend the money. 

     

    But I must point out that they already paid on these earnings -- whatever they were legally obligated to pay every day of their working life on every cent they earned.  It would be more elegant to close the tax loopholes but then  let the person who earned it decide what to do with whatever is left over, rather than let an insatiable federal and in some cases state government decide they are “entitled” to some portion of one’s life work.  I  think a 5% levy to render unto The New Caesars might be fair.  But 55%?  How stupid do they think we are?  (Don’t answer that; there is no end to the contempt these elitists hold us in!)         

     

    This has left us with the unique situation where an octogenarian or nonagenarian with a large estate can either die in 2010 and escape all estate taxes or die in January 2011 and pay anywhere from 37% at the lowest end to 55% at the highest.  So do they hope to die this year in order to change the future for their children?  I don’t think that was the hope and change those who voted for hope and change were expecting.

     

    With just 1 in every 2 Americans (53% versus 47%) paying any income tax at all, we have already reached a point where half of America is becoming attached to a national welfare system, so what’s wrong with asking “the rich” -- you know, those dumb suckers who still pay taxes -- to fork over most of what they made after they die as well as more and more of what they make while living?  Because it’s wrong.  It offends our sense of fair play.

    If we wittingly or unwittingly use the tax code to socially engineer the kind of populace they want to see, with 47% of them able to vote without paying a dime to earn that right, it means that the few areas the Constitution actually assigns to the feds, like national defense, interstate commerce, national infrastructure, et al, which benefit everyone, are paid for by fewer and fewer people.  Personally, I’d rather see everyone pay something.  Repeal the credits and deductions that aren’t available to everyone, and make everyone feel the pain of supporting the  nation’s work.  Make $10,000 this year?  Paying $500 in taxes, just 5%, will be pretty painful.  But at least it makes you a stakeholder. 

     

    It is deceitful for the government to claim they are not raising taxes, except on the rich.  While it’s true that  there need be no new tax levy, simply allowing the Bush tax cuts to expire in the middle of the worst recession since the Great Depression will have the effect of taking money from every taxpayer at a time when every household budget is already stretched to the breaking point.  The administration’s answer seems to be (a) they know better how to spend your money than you do, and (b) to be a good American and keep retail sales robust, you should simply continue spending, but do it on credit.

     

    As for (a) above, may I recommend a visit to this page on Senator Tom Coburn of Oklahoma’s website.  Outside the Beltway, Americans still have enough common sense to be outraged that the government spent the money in the “stimulus bill” on  things like $62 million for a tunnel to nowhere in Pittsburgh, PA that even PA Gov. Ed Rendell called “a tragic mistake”; $308 million for a joint clean energy venture with BP (!); $200,000 to help Siberian communities lobby Russian policy makers; $554,763 for the Forest Service to replace windows in a closed visitor center at Mount St. Helens ; $298,543 to predict the weather on other planets; and $180,935 to discover a better method for freezing rat sperm.   (No word yet on which politicians have volunteered to be donors…)

     

    If you think you can (a) spend your money more wisely than the feds and (b) choose not to follow their example and go further into debt, they don’t care.  Here’s what happens if / when the Bush tax cuts expire:

     

    Tax rates will go up for everyone, not just the “rich” making over $250,000.  Today’s 6 brackets of 10%, 15%, 25%, 28%, 33% and 35% would be replaced by five brackets with the higher rates of 15%, 28%, 31%, 36% and 39.6%.     Today’s rate on long-term capital gains and qualified dividends is 15%. Starting next year, the maximum rate on long-term gains will increase to 20%, and the maximum rate on dividends will be taxed as ordinary income, so that means it will go as high as 39.6%.  Taxpayers in the lowest two brackets of 10% and 15% currently pay nothing on capital gains held a year or more and on all qualified dividends. Starting next year, they will pay 10% on long-term gains and 15% to 28% on dividends.  

    Finally, all those complex-for-the-sake-of-complexity phase-out rules would come back.  Basically, if you make more than x amount, your itemized deductions for mortgage interest, state and local taxes, charitable donations and other lawful deductions will be lessened in stages until you get no benefit whatsoever for them.  Ditto for your personal exemptions.

     

    You can see why, even with the hassle of K-1s, I may be willing to once again recommend MLPs for your consideration.  If you are in the highest bracket and have $20,000 in corporate dividends you will pay $7,920 of it to fund your part in teaching Siberians how to lobby their government and figuring out how to freeze rat sperm better.  But in an MLP, a substantial part of your distributions may be structured to simply reduce your basis price, after which you’ll pay the lower capital gains taxes, and then only when you finally sell.  In a municipal bond fund, you might only make 3.5% a year but that will translate into a pre-tax 5.8%.  If we can find munis that are safer and yield as well or better after-tax, we will. 

     

    It is a basic law of the political jungle that if the government can get away with taxing it, they will.  And if they tax it, they will spend it -- all of it.  And more.  Us hicks in the private sector know the best way to keep the country growing is private investment after appropriate due diligence in the very best companies, ventures and people.  We do  our homework because it is our money at stake.  We don’t send our money to a gulag and we don’t pour it down a rat-hole. 

     

    But when bureaucrats are given the responsibility to dispense money that is not their own, why not study the climate on other planets?  By the way, I’m not saying prima facie that all these endeavors are worthless.  I’m saying that (1) if they’re worthwhile why don’t universities getting $30,000 a student do some of this research on their own, and (2) if it turns out that some majority of taxpayers thinks it is a worthwhile idea to support national defense or infrastructure or commerce or some other proper national-level government responsibility, could we at least wait until the good times return and we have a little mad money?  Do we have to spend it just as rapidly in the lean times, as well?  And how many American jobs did we stimulate in Siberia?

     

    My belief that Americans have had enough of such lunacy, and that the lame ducks will be prevailed upon to extend the current tax policies, leads me to believe that MLPs, royalty trusts, Canadian income trusts, and good dividend-paying companies will provide more after-tax income than most currently believe.  

     

    As a starting point, we are currently buying Rayonier (NYSE:RYN), Plum Creek Timber (NYSE:PCL), Total Petroleum (NYSE:TOT), Exelon (NYSE:EXC), and CML Healthcare (OTC:CMHIF), all this week and last.  If you are an income buyer looking to get more dividends from companies offering good growth as well, you might consider them for your own due diligence.

     

     

    Disclosure: We, and those clients for whom it is appropriate, are buying RYN, PCL, TOT, EXC and CMHIF.    

    Disclaimer: As Registered Investment Advisors, we see it as our responsibility to advise the following: we do not know your personal financial situation, so the information contained in this communiqué represents the opinions of the staff of Stanford Wealth Management, and should not be construed as personalized investment advice.

    Past performance is no guarantee of future results, rather an obvious statement but clearly too often unheeded judging by the number of investors who buy the current #1 mutual fund only to watch it plummet next month.

    We encourage you to do your own research on individual issues we recommend for your analysis to see if they might be of value in your own investing. We take our responsibility to proffer intelligent commentary seriously, but it should not be assumed that investing in any securities we are investing in will always be profitable. We do our best to get it right, and we “eat our own cooking,” but we could be wrong, hence our full disclosure as to whether we own or are buying the investments we write about.

     

     

    Nov 10 12:20 AM | Link | 2 Comments
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