“Games are won by those who focus on the playing field, not by those whose eyes are glued to the scoreboard.”
- Warren Buffett
Tonight Jeff Kim, portfolio manager for Good Harbor Tactical Equity Income, and I are speaking at the Chattanoogan regarding what has happened over the first six months of 2014 and where we see opportunities going forward. For more detailed information please let us know and we can get you a DVD recording of both speakers.
Below are some obstacles and opportunities we see going forward:
The crowd is almost always wrong at the extremes. When everyone wants to be buying at high valuations, we typically want to be selling and when everyone wants to sell in a panic at widely discounted prices, we typically want to be buying.
Recent data suggests that most investors have now gotten back into the equity market. At the low in March of 2009, the average equity position found in investor’s portfolios bottomed at 41% while cash holdings had climbed to 45%. Those who committed fully to equities at this time have done particularly well over the last five years. U.S. investors currently employ a 65% average equity position and a 19% cash position compared to the extreme of 74% and 11% achieved in March of 1998. As you may remember, March of 1998 was approximately two years before the technology market peaked and subsequently crashed. As it stands, we may consider ourselves about three quarters of the way to fully invested as defined by the height of the technology bubble.
While the average investor is getting more fully invested in U.S. companies, the CEOs, CFOs and other senior leaders in these companies are selling shares.
“The current message of the insider data is as pessimistic as I’ve seen over the last 25 years.”
- Nejat Seyhun
Nejat Seyhun, a finance professor specializing on corporate insider activity at the University of Michigan spoke on this recently. From his research dating back to 1998 and before he found that only some insiders have a consistently accurate view of their companies’ prospects.
“The insiders worth paying attention to are a company’s officers and directors. Those with relatively little insight, in contrast, are the largest shareholders.” For this reason he has made a point to only consider officers and directors in his data and chooses to discard what the institutions and large mutual funds are buying or selling.
In expounding upon what he is currently seeing with regard to insider bearishness, he states, “These insiders — corporate officers and directors— know more about their companies’ prospects than the rest of us. In fact, you may want to take their pessimism as a signal to ditch some of your stocks or shift into industries in which insiders aren’t heavily selling, such as energy, financials and basic industrials.”
ENERGY, FINANCIALS AND INDUSTRIALS
Those areas of the markets that were hurt the worst in 2013, performed best in the first quarter. The areas that look most opportunistic now include the financials from a valuation and recovery perspective. The energy and industrials sectors look attractive from a growth perspective via innovation and increased productivity.
Specifically looking at energy, U.S. energy costs have decreased and production has increased rapidly over the last few years. Natural gas is quickly becoming a valuable alternative fuel source as horizontal drilling and other ingenuous methods of extracting oil have improved our country’s output. The reduced energy costs and relatively low wage structures (due to productivity and technology) have allowed our manufacturing costs to come down versus the rest of the world. We are much more competitive worldwide especially as labor costs are increasing outside of the U.S. This allows us to be low cost manufacturers once again. Interestingly, the jobs derived from more competitive manufacturing are going to skilled labor and engineers rather than unskilled laborers. U.S. plants have become more automated and more productive requiring less man hours than most overseas plants.
In the financial sector we now have a much better feel for what worst case scenarios may be. Recovery timelines are more fully developed as the legislation passed a few years back has been studied for its impact but not completely implemented. Many had prepared for the worst and financial stocks were priced likewise. This sector is one of the most unloved currently, except by insiders who have been buying up shares this year.
Lastly, we feel that there is much more opportunity outside the U.S. than within its borders with regard to economic improvement and attractive valuations. Companies traded within the U.S. have much richer valuations than their European and Asian counterparts in general. Within Europe in particular, the Central Bank currently has the “pedal to the metal” in order to stimulate their economies.
In our country we came out of the 2008 crisis rather quickly by enacting stimulus packages and large scale bond purchasing programs from the Federal Reserve. It worked for the most part to get us back on our feet. Europe took another road by enacting austerity packages which caused several Eurozone countries to teeter on the verge of bankruptcy. They have more recently taken a page out of our playbook and have even gotten extremely aggressive in stimulating their economies. We expect their more recent actions to bear fruit allowing for much richer valuations for their companies and improving economies over the next few years.
European companies are also merger and acquisition targets in that they are relatively inexpensive and U.S. companies can enjoy lower tax structures by moving more operations overseas. Unless the U.S. government employs a more competitive corporate tax structure, U.S. companies will continue to find ways to invest outside our borders and take advantage of the lower tax rates.
“A bull market is like sex. It feels the best right before it ends.”
- Barton Biggs
Important Disclosure Information for the "Backstage Pass" Blog
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Franklin Wealth Management), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Franklin Wealth Management. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Franklin Wealth Management is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of Franklin Wealth Management’s current written disclosure statement discussing our advisory services and fees is available for review upon request.
Joe D. Franklin is President and Founder of Franklin Wealth Management.
He is the writer of the Franklin Wealth Management "Backstage Pass" Blog and former host of the Financial Focus radio show on Ruby, WDOD (1310 AM)