Hey, good morning everybody. Welcome to Creating Richer Lives with Karl Eggerss. Welcome to the podcast. Thanks for joining me. Just a reminder, (210) 526-0057 is our telephone number and our website, creatingricherlives.com. Click on the insights, you can get more information there. The blogs are posted there and the podcasts and so forth. In the next couple of weeks probably you’re going to start seeing all of that information right there on the front page for you and lots of ways to get information from us via email. Or you’re welcome to call us or email, and we will certainly help you out any way we can.
Happy labor day coming up. We have a three-day weekend, and of course the markets are closed Monday. Just a quick housekeeping note, tomorrow morning I will be on CBS, San Antonio doing an interview discussing tariffs, the trade war, and really how it impacts all of us and your portfolio. So make sure you tune into that. It’ll be on at the seven o’clock hour AM, central time. Again, for those of you in the surrounding San Antonio area, it’s on the CBS affiliate.
All right, well let’s jump right in here. Let’s first go through what the major averages did this week because it was a little better than last week. You remember last a week ago, Friday, ended the week, Dow was down well over 600 points. The tariff and trade war was escalated after the bell, Friday, Trump retaliated with more tariffs, and then so we didn’t know coming into this week how the markets would react and we got off to a pretty good start. It was very interesting watching how that all culminated.
But for the week, we did see markets were up about 3%, 2 1/2 to 3% depending on which index you looked at. And it was pretty strong across the board and we had two really good days, Wednesday and Thursday, back to back days where the internals were very strong. And that’s really what we need. Remember we’ve seen some really capitulatory days, a week ago, Friday being one of those where we see everybody just giving up. And then again, as I’ve been saying, we need days followed pretty quickly on those nasty days to get some real intense buying. And we’ve seen that pretty broad based buying. And right now it seems as though the market has an upward bias unless, big caveat, we get negative news, whether it’s the federal reserve or whether it’s President Xi or President Trump or their escalation, or China and the U.S., the markets still do have an upward bias.
So for the week, again, markets were pretty strong across the board. And you’re still seeing, despite the gains in stocks this week, you’re still seeing gains in bonds. I mean, bonds are still having a very, very good year, and most of you would not have guessed that. I’ve talked to many of you over the years that would have said two, three, four years ago, “Eh, don’t really want a lot of bonds because, how much lower can interest rates go?” Well, we’ve seen they can go a lot lower, and we’ll get into that in just a little bit. So bonds have had a very good year. Of course, that kind of reduces your expectations for bonds going forward because of where they have come from.
But let’s get into this week. We came in again Monday not really knowing with those new tariffs if the markets would be down or up, and futures were all over the place in the mornings. But the Dow finished up about 250 points. And Trump essentially mentioned that China called and wants to continue talking. And it was interesting because as the week went on, there was rumors that no, that that call never took place. Very strange, very strange. Some Chinese officials were saying, “We don’t know of this call.” But regardless, it boosted stocks that day.
Now, they were probably a little oversold, but it did boost the stock market, and it got me thinking, are we at a point right now, and Trump kind of alluded to it this week, President Trump, is this Trump put? Remember they used to call it their Bernanki put? In other words, any time the stock market would go down, they would say Ben Bernanke was there to lower interest rates and kind of bail the stock market out because he could essentially put a floor in a put, put a floor into the market. Is that president Trump now? And you think about it, he seems to know that he has the power to tweet something positive, to say something positive, verbally or on Twitter, and it gets the markets going up. And he kind of alluded to that fact this week when he said, “I can do a deal any time it.” It’s as if, again, it’s as if he’s waiting to do a deal until we get closer into the election cycle. Just speculating here. But it’s as if he’s the puppeteer right now and we’re all the puppets. It’s very interesting to watch. And so again, he comes out and says that, Monday, Dow Jones goes up 250 points.
Now Tuesday we got off to a very interesting start. Bill Dudley, who was president of the Federal Reserve Bank of New York from 2009 to 2018, so just came off the Fed, wrote an op ed piece for Bloomberg where he said, amongst other things, “Trump’s reelection arguably presents a threat to the U.S. and the global economy to the Fed’s independence and its ability to achieve its employment and inflation objectives.” And he went on to … Basically, he was essentially advocating further on in the article for the Fed not to bail out Trump. So this is very, very interesting and dangerous.
Here’s why, the Fed is supposed to be independent. Look at the data, they have a dual mandate, full employment, low inflation. That’s what they’re supposed to do. Not get into politics, not get into anything else, not worry about the stock market. But what happened was in this article he went on to discuss that the the global economy slowing down, and especially the U.S. economy is slowing down, because of president Trump’s tariffs and trade war. And remember, Chairman Powell has been saying that we’re lowering rates, not because the economy is so bad, but we’re doing it as an insurance policy against things deteriorating. Will, Bill Dudley is saying, “Look, we need to separate. President trump needs to be on an island.” In other words, the Federal Reserve, you guys don’t need to be lowering rates, bailing him out for his mistakes.
Now again, the numbers are suggesting lower interest rates. The economy has been slowing as we’ve been saying for months. It’s been slowing. The global economy has been slowing. They’re going to continue to drop rates. He’s saying, “Don’t cut rates, let Trump fail on his own.” So essentially, he’s saying that let’s throw six million people out of work, embrace the recession because we can’t be doing this with President Trump. Those are very dangerous words because it undermines the Federal Reserve’s independence. And there are others apparently inside the fed that feel the same way. Some believe that that Federal Reserve interest rate hike in December, which many believe was one too many, was done with some intention. You hate to believe that, but what Bill Dudley said is very scary. It’s because manipulating and getting political with interest rates, costs people jobs. Real jobs. It costs your portfolio, potentially. I mean, that sent shockwaves around the financial markets. It really did. It was very kind of surreal to read something like that, to be honest.
And this isn’t just my opinion. I talked to a chief economist at a very large firm this week who felt the same way. He said, “These were dangerous words and this has nothing to do with politics. You just don’t want the Fed making these types of comments.”
Now, Tuesday, all the talk was about small caps and the relative strength. They’re weaker and weaker and weaker. So large company stocks are outperforming small company stocks, and that ratio goes all the way back to 2003. So we’re seeing real weakness in small company stocks. They’re still down about 5% this month versus the market’s down about 2%.
Wednesday. This is another little interesting tidbit that came up. Google announced they are shifting their Pixel smartphone production from China to Vietnam. That production won’t come back and China knows that. China cannot afford for folks to start abandoning production there and moving it to Mexico, to Vietnam, South Korea, wherever. That is where America from the tariff standpoint has a leg up in this negotiation. Very interesting to see that because again, could that cause kind of a snowball? Will multiple companies start doing that? It’s not easy to move production out of a country to another country and they’re doing it.
Now, the Dow Jones was up 250 points as I mentioned Wednesday. Very strong day internally. We were down 130 at the open. But as I said at the intro, no news is good news. No news, a very quiet day and the internal is very strong. What was interesting is you started to see a broad participation, meaning value stocks, which have been really unloved for a while now. Participate, not only Wednesday, but Thursday.
Did you guys ever see The Big Short, or read The Big Short, the Michael Lewis book? Turned it into a movie. Good book. Great book. Good movie. I’d say the book was better than the movie, but very, very good. It was talking about the housing market bubble and the folks that benefited from the collapse of housing and how everybody thought it was crazy. Housing just doesn’t go down. Of course there was a bubble, too much lending, the story led to the financial crisis.
Well Michael Burry, who was a doctor and started trading for family and friends and essentially opened a hedge fund later on and lost a lot of people because he started betting and creating securities that would benefit from the housing crash, and literally went to these big investment companies and said, “I want to bet against that.” And they were saying, “We’ll take the other side of that deal.” And they would create securities. He was losing money month after month because he was early. Not wrong, but early. People were laughing at him, and all his investors were fleeing. He ended up making a fortune. I believe he closed his fund down and just does it as either a family office or something to that effect.
But he came up this week and said he sees a bubble in passive investing and he got mocked and ridiculed. I think he’s spot on. I think that the fact that you have some of the best mutual fund managers, asset managers of our lifetime, of our generation, in last five or six years have really struggled versus an index fund is concerning because if you look at some of the indices, and primarily just a handful of companies, they have been lifting the indices on their own while the cheap companies, the undervalued companies, the ones off the radar have struggled and there’s this bifurcated market which we’ve talked about for months. It’s continuing. I think when folks think they can just dump their money in and just constantly make money with not much risk, that’s a problem.
Over the long-term, diversification matters. Real diversification, not just an index fund and a bond fund. You have to have more than that. You have not needed it. Let me be clear. You have not needed real true diversification the last five or six years, and we are starting to see multiple signs of 401ks of investment shops giving up on certain types of investments because they have not worked, which is the wrong reason. 401ks are getting rid of commodity funds, for example. Just one example. Because they haven’t performed well. That is not a good reason. That is a buy sign in my opinion.
Now Goldman Sachs has a great picture. I’ll see if I can share it. Essentially what it shows is over time, there’s some things that outperform and there’s some things that underperform the Standard & Poor’s 500. It’s just normal, right? You’re going to get bonds underperforming or outperforming and international stocks underperforming or outperforming and real estate and so on and so forth. That goes on for a long time. There’s a clear line in the sand around 2013 where almost everything has underperformed the S & P 500. In other words, true diversification just has not worked. Part of it is this passive investing that Michael Burry is talking about. This guy is super smart and again, some are making fun of him.
It’s real interesting and we’re going to touch on kind of this passive versus active and really looking at growth stocks and value stocks in just a minute. Let me wrap up Thursday and Friday because that came up Wednesday. Thursday, Treasury Secretary Steve Mnuchin came out and said that issuing ultra long US bonds is, “Under very serious consideration in the Trump administration.” Possibly setting up a move that could mark a historic revamp of the $16 trillion treasury market 100 years was mentioned.
Now here’s the deal. You heard me literally two weeks ago talk about this and say, if there’s so much demand for our 10 year bonds and our 30 year bonds, why doesn’t the government issue 40, 50, and 100 year bonds? Why not refinance their debt longer, make our debt payments as a country lower while we can? Now you’re hearing about it now. Now, Steven Mnuchin had mentioned this months and months and months ago, but now that there’s demand, overwhelming demand and you’re seeing negative interest rates around the world, he brings it up again and 100 year bonds being mentioned. Now if you go, “Oh my gosh, who on earth would invest in a 100 year bond?” Look around the world. It’s happening now. It’s just not happening in the United States … Yet. Right?
Now Thursday, China said, we won’t immediately retaliate to the US tariffs. To me, what comes to my mind is, “On the next As The World Turns.” Or in any other soap opera you can think of. Because if you go back and look at all the articles for the last 18 months, they all say the same thing, which is, “Stocks rise as trade war tensions ease. Stocks drop as tariffs threaten the bull market.” I mean it’s back and forth and back and forth and both countries need to save face. Chinese New Year’s coming up. Big celebration. This is coming up October 1st so we have about a month where they’re not going to do anything prior to this. That has been talked about. They probably won’t. So they’re just going to puff their chest until afterwards and then maybe they will give in. They keep apparently wanting to maybe wait out President Trump. We’ve heard that, right? Let’s see if we can deal with somebody else in the new administration.
I don’t know if their economy can stand that. Again, companies like Google leaving, I don’t know if they can wait for that. President Trump on the other hand, he may not want to do this too quickly, but we know he watches the stock market and we’re still not much off of all-time highs. I mean we’re sitting at about, let’s call it a four and a half percent off of our 52 week high, all-time highs, for the Standard & Poor’s 500. Look, small caps are down 16% off their high. So they’re international. There’s other places that are down more. But my point is is that if we were down 10, 15, 20% he’d be getting a deal done. Right now he may feel like I don’t have to get a deal done. Let’s just keep seeing what happens. If it goes down a little further, boom, I can come out with a positive tweet and up we go. He is the puppeteer right now. Every time trade war worse, guess what happens? Money goes back into bonds because the economy would struggle under a extended trade war.
It’s just like a soap opera. It’s back and forth and back and forth. It’s like we’re in the middle of this washing machine getting sloshed around. Right? That’s how you feel. But in the big picture, we still haven’t had a tremendous amount of volatility. Nothing compared to December of 2018, nothing compared to that. But we have had some more volatility. Now we finished the week on Friday. Again, very quiet. As the week went on, it got very, very quiet. Again, there’s an upward bias to the market when we don’t have bad news. To me, no news is good news right now.
Now quickly, had a discussion internally to one of my guys about, it’s interesting if you look what’s happening right now. There is a big wedge where you have companies that are selling at ridiculous valuations. They don’t make a profit. Their revenue is going up,
But they’re kind of new. It’s like a new industry or new thing, and the revenue is going up but they make nothing and people were paying astronomical valuations for them. Then you have, on the other side of the ledger, companies that have been around for 50-75 years that aren’t growing their revenue very fast at all, but they’re cheap. You’re getting them at $0.70 on the dollar maybe and they aren’t going up like the other ones are. And it’s interesting because you start to hear excuses, “Well, those new companies, how do you value that really? You know, they’re doing some neat things and maybe they deserve a different type of valuation.” Doesn’t that sound familiar to you? Does that not sound like the 1990s tech bubble when people were making up irrational reasons and trying to be rational, but they were irrational about, “Well, you can’t value that company that way because it’s a new type of company and you can’t use traditional valuation metrics.”
That’s what leads to bubbles popping. And I think we have pockets of bubbles in this market. And I think Michael Burr is right, but here’s the good news is that there are still plenty of things out there, areas, pockets, sectors, industries, you name it, that are cheap and safe. So, it’s a matter of, again, knowing what you’re investing in. Now, here’s what’s interesting, though. At the end of the day, and I this could be an hour long conversation, but at the end of the day, to me, value stocks… And it’s all in the eye of the beholder, but value stocks are easier for you and I to invest in and research than growth stocks. Because growth stocks, in order for them to keep going up and up and up, it takes a lot more research because if that growth isn’t what it’s been doing in the past and it doesn’t exceed that, they get hit really hard, generally speaking.
On the flip side, I don’t care if a company has zero revenue growth. If you go in there and look at the books, look at their assets, look at what they owe people, what they’re supposed to get from people, you can put a valuation on there pretty easy. In other words, you’re not having to assume some type of growth metric, whereas with growth stocks, you do. Therefore, it’s very difficult in my opinion to really… If you’re doing individual stocks, it’s harder to do your homework on a growth stock than a value stock.
Now, which one’s which? There’s some blurred lines there sometimes because many people believe some of the growth stocks out there are value still. It’s all in the eye of the beholder, but traditionally speaking, value stocks are beaten up right now and they’re not hard to value. Growth stocks are difficult to value, and that’s just something to think. If you start doing individual stocks, if you’re doing your research… And most growth stocks, by the way, are kind of story stocks. In other words, they got some neat story behind them. You use their product, you go there to eat or what have you and so it makes sense, and you go, “Well, yeah. I use it, so it must be good. I’ll go buy it” without doing the homework necessarily to look at why is it going up? Is it just hype?
We have this chicken sandwich bull market going on right now. I kind of joked on Twitter this week that we have a blow off top potentially in chicken sandwiches. There’s a fight between Chick-fil-A and Popeye’s. Now, the company that owns Popeye’s, Canadian company, their stock’s gone way up based on all this hype. They’re sold out. They’re literally sold out. There’s cars wrapped around the building and there’s 20 people inside and they’re running out of chicken sandwiches, signs on the door saying, “We don’t have anymore.” Are they creating this buzz? Maybe. Is it going to hurt Chick-Fil-A? Maybe. But that is hype, right? It’s hard to buy stock when it’s gone up 50%, for example, because of this short-term phenomenon whereas hypothetically… Chick-fil-A is not public, but hypothetically, let’s say Chick-fil-A’s sales were flat, but we looked in there and said, “You know what? They have all these assets. They own all this real estate.” They have all these things and they’re selling it like 75-80 cents on the dollar. That’s an easier story to buy than to go in and buy a company that is going straight up based on short-term fast growth that may or may not last. There’s a lot of pressure.
And we saw this with Starbucks back in the day if you remember. Grow, grow, grow, grow, grow. And then when the growth just started to slow, they got hammered. Same thing with Whole Foods. Eventually, Amazon bought Whole Foods. This has happened to company after company that people are buying a trajectory and assuming this growth lasts forever and it just doesn’t due to the law of large numbers. So, if you’re buying individual stocks, really think about that. When you’re putting a portfolio together, very challenging to go research stocks in general. Most people probably shouldn’t be doing it at all, just it’s very difficult. But number two, what type of stock are you buying? Are you buying a story? Are you buying profits by the pound? And there are plenty of good companies out there that are profits by the pound currently and there’s plenty of companies that are hype currently.
Anyways, I hope that helps a little bit. We’ll kind of get into that a little more over the next few weeks because I think this market’s very interesting right now. I still believe at the end of the day we’re in a bull market based on all the technical work I do, based on all the looking at the internals, which were very good this week. And if you look at what happened coming into the beginning of 2018, a year and a half ago, foreign markets were doing well, US markets were doing well, and then the word tariff got introduced and ever since then, the market has basically moved sideways with more volatility. So, if we can get that removed and the uncertainty removed, I think we can also get the economy starting to pick back up because of the fact that we do have low interest rates. That is going to help a lot.
And in fact, something didn’t get noticed this week. It’s a kind of… Probably most people have never looked at it, don’t even know what it is, but the truck tonnage report. Go look that up. It’s at all time highs right now. 70% of the goods moved around this country are via truck. I mean, you want to see how the economy’s doing, you look at that and you look at gasoline prices for those trucks and the gasoline supply and demand for those trucks. That will tell you how the economy is doing and it does not look like a recession. So, for whatever reason, this recessionary fear’s popping up and it’s probably because we are getting a slow down, but a slow down is different than a contraction and a contraction’s different than a financial crisis. So, a very good report that came out this week, again, a new all time high and it’s very interesting. You could put that truck tonnage report on top of the Standard & Poor’s 500 and you get a pretty tight correlation. Very interesting to watch that. So, again, just one indicator, but a very good one.
Hey, just a reminder if you need our help, 210-526-0057. This show’s been brought to you by Covenant Lifestyle Legacy Philanthropy. And just a reminder, Sunday morning, 7:00 AM… Sometime around 7:00 AM, probably 7:15 or so, central standard time. On the CBS San Antonio affiliate, I’ll be talking about tariffs, trade war, kind of where we are, given all of the new information that’s been coming out. Hope you have a great Labor Day and take care, everybody. We’ll see you back here next week.
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