Wednesday, October 16^th, 2024

Is an Escalating War in the MIDDLE EAST a “THREAT” to Markets???

October 7^th, 2024, marked the first anniversary of HAMAS’S terrorist attack on ISRAEL, with fighting intensifying in the twelve (12) months since.

The latest development saw IRAN launching ballistic missiles into ISRAEL—which caused minimal damage—and ISRAEL moving troops into southern LEBANON.

In short, GEOPOLITICAL “TENSIONS” seem to have only gotten WORSE in the past year, and many investors worry about the accompanying uncertainty on TRADE, OIL MARKETS and, GLOBAL ECONOMIC GROWTH.

In the week ending October 4^th, 2024, for instance, CRUDE OIL prices INCREASED 9.1% on concerns that IRAN’S OIL FIELDS would be targeted. It was the biggest INCREASE for OIL PRICES since March 2023.¹

Investor concerns are understandable…

BUT, given what I know from the long HIStory of REGIONAL “CONFLICTS”—and in particular “CONFLICTS” involving the MIDDLE EAST—I do NOT see a HIGH likelihood of MAJOR ripple effects on GLOBAL GROWTH or EQUITY MARKETS.

At this stage, I also see a very LOW likelihood of war spilling over into major ECONOMIC CENTERS, like the U.S., EUROPE, JAPAN and, CHINA, which I think means the impact on global GDP will be NEGLIGIBLE.

To be fair, IRAN’S recent barrage of missiles did result in MARKET VOLATILITY in both EQUITY MARKETS and OIL MARKETS as did HAMAS’S initial attack on October 7^th, 2023.

BUT, SHORT TERM VOLATILITY in response to the outbreak of GEOPOLITICAL “CRISES” and REGIONAL “CONFLICTS” is HIStorically COMMON…

Looking back at 54 “CRISIS” events since 1907, the DOW JONES INDUSTRIAL AVERAGE has FALLEN an AVERAGE of -7.1% during the “CRISIS” period, with the index posting an AVERAGE GAIN of +9.7% in the six (6) months that followed.

Looking back at conflicts since 1925—including the KOREAN WAR, VIETNAM WAR, the CUBAN MISSILE “CRISIS”, the IRAN-IRAQ WAR, two (2) U.S. WARS in IRAQ and, so on—it was only WORLD WAR II that resulted in a “BEAR” MARKET.

The IRAN-IRAQ WAR lasted from 1980 to 1988, which corresponded with a strong “BULL” MARKET that lasted from 1982 to 1987… AND with the current war, since the fighting broke out one year ago, the S&P 500 and GLOBAL STOCKS as measured by the MSCI WORLD are UP approximately +30%.

The point here is NOT that ARMED “CONFLICTS” are “BULLISH”...

The point is that UNCERTANITY leading up to a “CONFLICT” is what tends to weigh on markets. Once the “CONFLICT” is averted or fighting breaks out, the UNCERTAINTY fades and markets can start to PRICE-IN the effects on CORPORATE EARNINGS, FINANCIAL MARKETS and, GLOBAL ECONOMIC GROWTH.

In this instance, I think markets are telling us that the IMPACT on GLOBAL ECONOMIC GROWTH should be MINIMAL.

There is an argument that the real economic “RISK” is INCREASING OIL PRICES not necessarily a blow to GLOBAL ECONOMIC GROWTH or CORPORATE EARNINGS.

That’s fair, but it’s worth remembering that OIL PRICES remained firmly ABOVE $100 a BARREL from the beginning of 2011 through the SUMMER of 2014, during which time the U.S. economy GREW and the STOCK MARKET INCREASED by over +50%.

HIGHER OIL PRICES do not necessarily mean ECONOMIC RECESSION or WEAK MARKETS, especially in the current environment where OIL PRICES have been range-bound in the $70 - $80 a BARREL zone.

It is also important to note that IRAN produces a little over 3 million barrels per day of OIL, which is about 3% of GLOBAL DAILY OUTPUT.

That’s not insignificant, but it’s also true that because of WESTERN SANCTIONS, about 90% of that OIL gets exported to CHINA.

SAUDI ARABIA and other OPEC+ countries have plenty of spare capacity to make up for any hit to GLOBAL supply, which they would likely do if prices continue to INCREASE.

Bottom Line for YOU, ME, WE the ATWWI FAMILY

GEOPOLITICAL “CRISES” and wars are highly undesirable for their impact on the DAILY LIVES OF AFFECTED CIVILIANS, GLOBAL STABILITY, TRADE.

BUT, a GLOBAL “RECESSION” requires TRILLIONS of DOLLARS worth of damage to the GLOBAL ECONOMY, which current “CRISES” do not seem capable of delivering.

NOTE:S&P 500 companies earn LESS than 1% of REVENUE from the affected regions.

MARKET VOLATILITY may continue if the “CONFLICTS” ESCALATE and news coverage will almost certainly be constant.

BUT, YOU, ME, WE the ATWWI FAMILY would be WISE to monitor this environment for the next few months—or perhaps longer—and REMEMBER that the “DESIRE” to REACT to a “CRISIS” is almost ALWAYS “COUNTERPRODUCTIVE” and COSTLY!!!

Now is a time to remain PATIENT and FOCUSED on U.S. ECONOMIC FUNDAMENTALS, which remain quite STRONG...

PEACE & BLESSINGS

Kenneth Reaves, Ph.D.

Tuesday, October 15^th, 2024

Four (4) “KEY” Metrics That Will Help You Evaluate/Analyze Stocks

Metric #1: DIVIDENDS HISTORY 

Every stock, has its own internal dynamics. So there is no such thing as a percentage of retained profits that is right for all industries, let alone all businesses.

BUT, I can say this: When I’m looking at companies to invest in – private or public – I like those that are committed to retaining the CASH they need to solve unexpected problems and invest in GROWTH while at the same time distributing PROFITS to shareholders as often and as generously as they can.

It says something important about the company’s management: that it is cautious, not greedy, and yet OVERSTAND/UNDERSTAND the importance of rewarding stakeholders along the way.

So that is the first (1^st) of the four (4) metrics I look at when investing in stocks: a history of paying dividends to shareholders. I want to know how OFTEN the company pays out DIVIDENDS… and HOW MUCH.

Metric #2: EARNINGS HISTORY 

With a few exceptions, I want to see a STEADY GROWTH IN REVENUES.

A VOLATILE SALES HISTORY makes me “NERVOUS” – especially when I can’t figure out why it’s so “ERRATIC”.

A steady INCREASE IN REVENUES is at least an indication that the people running the business OVERSTAND/UNDERSTAND how to make it GROW. You would be surprised at how often this is NOT the case.

The rate of GROWTH is IMPORTANT too…

For small companies, I like to see faster growth. After the first several years, I want to see significant growth – 30% to 50% a year. Then, when the business gets to the $100 million level, I’m happy with 20% to 30%. And when it breaks through the $500 million barrier, I’m comfortable with 10% to 20%.

Occasionally, I make exceptions to these expectations. But only when I can clearly OVERSTAND/UNDERSTATND why GROWTH was less and how it might recover. If I’m too far away from the business to OVERSTAND/UNDERSTAND the why and how, I stay away from it…

Metric #3: RECENT SALES 

The HIStory of EARNINGS is very IMPORTANT, but I also like to see how sales have been doing in the past six to 12 months. This is significant for the most obvious reason: I want to make sure that something really “BAD” hasn’t happened since the company’s last annual report.

Metric #4: CURRENT INDUSTRY

Often, I like to compare investing in businesses to playing POKER, the only casino game where the odds are NOT stacked against the player…

The most important rule of POKER, is to know what table you are playing at.

If you choose a table that has too many players, it is difficult to “WIN” even if most of them are amateurs.

If you choose a table with only a few players, all of whom are “EXPERTS”, it is also difficult.

The correct table is one where your odds of winning are the best, and that is a table where the “EXPERT” competition is LIMITED.

The same is true when INVESTING…

As a “GENERAL” rule, you will do better investing in a solid but unexciting company in a fast-growing industry than you would putting your money into a business with an exciting story in an industry that is going nowhere or is on the decline.

In short, I look for “QUALITY” when choosing making my stock investments. I look for the quality of the FINANCIALS, of the MANAGEMENT, of the PRODUCTS and of CUSTOMER RELATIONS.

Choose to invest in companies that have a proven growth strategy, a sufficient flow of cash, a commitment to employees, customers and shareholders.

Also, a company that plays a prominent role in an industry that is GROWING.

But, QUALITY is a “SUBJECTIVE” value. You can’t measure it

BUT, you can measure the HIStory of a company’s DIVIDENDS, EARNINGS, SALES and, STATUS in its industry.

These four (4) “KEY” metrics will help you evaluate/analyze stocks for possible placement within your investment portfolio.

PEACE & BLESSINGS

Kenneth Reaves, Ph.D.

Monday, October 14^th, 2024

Steps To Take On The “WEALTH” Creation Road

The first step to engage in the process of following the “WEALTH” creation road is to OVERSTAND/UNDERSTAND that generating “WEALTH” is a CREATIVE PROCESS…

If you have ever written a story, composed a song, painted a picture, planted a garden, figured out how to repair an appliance, planned an event or decorated a home, then you have a sense of what a CREATIVE PROCESS is like.

Search your memory for anything along these lines – it will give you a place to begin.

Then allow yourself the time and relatively stress-free space to both daydream and focus on what you might create that could generate some “WEALTH”.

This is where the WORRY, FEAR and, DESPERATION that stem from money problems can plague us, thwarting our ability to bring our “CREATIVITY” to bear.

Most people miss the most IMPORTANT issue: PUTTING OUT FIRES RATHER THAN ADDRESSING THE SOURCE OF THOSE FIRES.

Earlier, I talked about the “JOURNEY” of “WEALTH” CREATION and that word “JOURNEY” is important…

Even if you come up with a “BRILLIANT” idea that could solve a unique set of problems for millions of people, it still will take TIME and PERSEVERANCE to bring it to FRUITION.

Make the time to ”LEARN” about your ideas, the market for those ideas, your potential customers and their changing needs and priorities, manufacturing, delivery, protection, relationships, dynamics… and so on.

There will be a lot to “LEARN” between coming up with an idea and attaining the “WEALTH” that it can create.

That’s true whether you are starting your own business or working for an organization. Generating “WEALTH” IS A PROCESS THAT WILL TAKE TIME.

Also, know that HABITS are a “KEY” part of the “WEALTH” CREATION JOURNEY…

PEACE & BLESSINGS

Kenneth Reaves, Ph.D.

Wednesday, October 9^th, 2024

WARREN BUFFETT’s: Current Top Five (5) Stock Picks

Your wealth should be invested in stocks that ideally generate ABOVE AVERAGE RETURNS with BELOW AVERAGE MARKET “RISK”.

One of the best ways to do that is to follow the WARREN BUFFETT “MODEL”.

In fact, if you want to invest in companies attractive to the BILLIONAIRE, make sure they are:

• Simple companies that are easy to OVERSTAND/UNDERSTAND
• Companies with PREDICTABLE, PROVEN and, GROWING EARNINGS
• Companies that can be bought at a “REASONABLE” price
• Companies with an “ECONOMIC MOAT” or a “UNIQUE ADVANTAGE” over its competition.

“I look for companies that have a business we understand; favorable long-term economics; able and trustworthy management; and a sensible price tag. We like to buy the whole business or, if management is our partner, at least 80%,” says Warren Buffett.

So, which stocks have recently been “FAVORED” by the BILLIONAIRE??? Here are five (5):

Opportunity No. 1 – Occidental Petroleum (OXY)

Starting in 2022, Buffett’s Berkshire Hathaway aggressively bought shares of Occidental Petroleum (OXY). Further buys throughout 2023 and 2024 have totaled 243.7 million shares, or about 27.7 percent of the company.

Oil giants like OXY have been whipsawed in recent years amid energy price volatility. But energy companies have been focusing on generating cash, rather than investing in questionable oil projects given the price volatility. As a result, oil giants have been returning excess cash to shareholders through BUYBACKS and DIVIDENDS, which Buffett loves.

Remember the ole trading/investing saying…“cash in trash when inflation runs hot, and oil is an inflation hedge.”

Best of all, OXY is a leading producer in the U.S. Permian Basin, which holds about 105.7 billion barrels of oil. That avoids the political “RISK” of investing in energy projects overseas.

Opportunity No. 2 – Verisign (VRSN)

While Buffett is famously “AVERSE” to investing in TECHNOLOGY stocks, if a business has an easy-to-understand model, Buffett will consider that stock.

One such investment is VRSN. Berkshire took a $2.6 billion stake in the company at the end of 2023. Verisign provides domain name registry services for internet navigation. That essentially makes the company a “SWITCHBOARD” for those navigating the internet.

That’s the kind of business that doesn’t require any manufacturing costs. Data-driven companies are capable of tremendous profits, as indicated by Verisign’s impressive 55% profit margin. The company’s financials are also attractive right now.

With a market cap of less than $20 billion, this is one of Berkshire’s smaller holdings, but it’s one that could lead to higher returns for patient investors.

Opportunity No. 3 – Snowflake (SNOW)

Another eyebrow-raising Buffett investment is in Snowflake (SNOW). They provide a cloud-based data platform, allowing users to consolidate data into a single point. As a business service company, it fits in with a number of other Buffett investments over the decades.

The tech-heavy orientation of the business will make this a volatile position for Buffett. Berkshire paid LESS than $1 billion for a stake now worth about $1.2 billion. That’s even after shares have been volatile. Snowflake is an “UNUSUAL” Buffett buy as the company is NOT yet profitable.

HOWEVER, shares trade at an attractive valuation, thanks in part to a CASH RICH balance sheet of $3.85 billion. Rising demand for data analytics as a business service fits in well with Buffett’s strategy of buying companies capable of tremendous GROWTH over time.

Opportunity No. 4 – Citigroup (C)

Warren Buffett is a “VALUE” investor, uncovering stocks that trade at LESS THAN INTRINSIC VALUE that should trade at a HIGHER MULTIPLE. One of the stocks fitting that mold was Citigroup (C).

Buffett often buys shares of large banks, usually following a “CRISIS” that leads to a BIG DROP in their SHARE PRICE, and Citigroup is just one of many big bank stocks Buffett “LOVES”.

In addition, with a low valuation and a strong dividend yield of 3.4 percent, Buffett was simply getting “GREEDY” with Citigroup stock, as others became fearful. Shares still trade at about 0.6 times their BOOK VALUE.

For a BANK, BOOK VALUE is a good indication of the VALUE of the BANK’s LOANS. A “DISCOUNT” to BOOK VALUE is attractive, and suggests some “UPSIDE” over time.

Plus, as Buffett waits for the Citigroup stock to recoup its losses, his firm can still sit back and collect an impressive DIVIDEND YIELD and benefit from the bank’s SHARE BUYBACK.

Opportunity No. 5 – Coca-Cola (KO)

What’s not to “LIKE” about Coca-Cola (KO)???

With STRONG DEMAND, DEPENDABLE DIVIDENDS and, INCREDIBLE EARNINGS GROWTH, Coca-Cola may be one of the best stocks to own for the LONG TERM.

Buffett, who drinks about five (5) cans of Diet Coke a day, agrees, once calling KO a “FOREVER” stock. Coca-Cola is also a DIVIDEND KING, raising its dividend for the last 60+ years. A current yield of 3.1% today isn’t the most impressive out there, but it’s still far higher than the S&P 500’s 2% DIVIDEND YIELD.

Even better, the total addressable market for NON-ALCOHOLIC drinks is estimated to be worth $833.1 billion. From here, it could grow at a CAGR of 5.6% through 2030.

Coca-Cola is likely to continue taking a big part in that growth, especially as it has DIVERSIFIED out of soda products in recent years and into other beverages such as COFFEE and ENERGY DRINKS. That will continue to fuel profits – rewarding shareholders in the process.

So while Coca-Cola is a well-known Buffett holding, it’s still one with a surprising amount of GROWTH ahead.

PEACE & BLESSINGS

Kenneth Reaves, Ph.D.

Tuesday, October 8^th, 2024Top of Form

The Recent FED’s Rate Cut Could “SUPERCHARGE” These Three (3) ETFs

Key Points

• A 50-bps cut to interest rates could boost stocks, with categories like SMALL-CAPS and EMERGING MARKETS companies in a position to benefit in particular.
• ETFs focused on these themes can offer broad exposure while minimizing the “RISK” associated with companies in these spaces.
• A PREFERRED SHARE FUND also gives investors access to the potential for high-dividend-yield companies that can benefit from lowered rates as well.

With the Federal Open Market Committee (FOMC) CUTTING INTEREST RATES by a larger-than-expected 50 basis points in its September (2024) meeting, businesses throughout the country will be able to take out loans more CHEAPLY.

One intended goal of a RATE CUT like this is to foster increased profitability through business expansion. While many categories of STOCKS could theoretically benefit from a RATE CUT, some are better positioned than others due to DEBT LOADS, LINKS TO CONSUMER SPENDING and, DIVIDEND STRUCTURES.

Selecting individual names most likely to benefit from a rate cut can be difficult, so many investors mitigate risk and diversify their holdings by targeting Exchange-Traded Funds (ETFs) instead. Some ETFs may provide a buffer against the possibility of a market slump due to concerns about COOLING LABOR FIGURES and the STRENGTH OF THE DOLLAR.

IJR

iShares Core S&P Small-Cap ETF

SMALL CAP stocks tend to be beneficiaries of RATE CUTS because of their reliance on FLOATING RATE DEBT. Many of these companies do not have the balance sheets to be able to sustain operations and growth without taking on significant debt.

However, reduced borrowing costs and easier financial conditions could help these companies, in particular, to expand their footprints. The small-cap-focused Russell 2000 has climbed by more than 22% in the last year in anticipation of a RATE CUT.

The iShares Core S&P Small-Cap ETF NYSEARCA: IJR holds a BROAD BASKET of more than 600 Small-Cap stocks, effectively managing some of the “RISK” that is commonly associated with individual companies of this size.

IJR also offers YOU, ME, WE the ATWWI FAMILY access to a variety of sectors for further DIVERSIFICATION—likely a useful approach given POST RATE CUT SECTOR ROTATION.

VWO

Vanguard FTSE Emerging Markets ETF

The Vanguard FTSE Emerging Markets ETF: VWO offers a cheaper alternative to many other Emerging Markets Funds as well as BROAD EXPOSURE TO COMPANIES AND SECTORS AROUND THE WORLD.

The fund's ASSET BASE and TRADING VOLUME AVERAGES support both ACTIVE TRADING and BUY-and- HOLD investing styles. VWO is up more than 13% in the last year, which is shy of benchmarks like the S&P 500, although this may indicate that there is still GROWTH potential in the EMERGING MARKETS space that has not already been priced in.

PFFD

Global X U.S. Preferred ETF

PREFERRED SHARES of companies tend to BENEFIT alongside other STOCKS when INTEREST RATES FALL.

Add to this the potential for HIGHER THAN USUAL DIVIDENDS from these STOCKS, and they will become an even more attractive prospect following the FED's RATE CUTS.

HIGH DIVIDEND YIELD STOCKS in INTEREST RATE SENSITIVE industries also tend to carry large VOLUMES OF DEBT, so they too stand to BENEFIT from INTEREST RATE CUTS.

The Global X U.S. Preferred ETF: PFFD holds more than 200 PREFERRED STOCKS with a focus on UTILITIES COMPANIES and BANKS, both of which stand to BENEFIT from a more favorable LOW INTEREST RATE environment.

PFFD also balances strong DIVIDEND PAYOUT with an EXPENSE RATIO LOWER than some of its peers, helping to ensure that YOU, ME, WE the ATWWI FAMILY do not lose out on “PASSIVE” DIVIDEND INCOME due to fund fees.

What Follows the RATE CUT???

The larger-than-expected RATE CUT could be a major boon to STOCKS ACROSS SECTORS, which could help to drive GROWTH in each of the above ETFs. At the same time, YOU, ME, WE the ATWWI FAMILY should be mindful of the potential that the UPFRONT RATE CUT combined with “CONCERNS” about the LABOR MARKET may spark a RECESSION. This is why, despite the fact that many ETFs are designed to make investing easy for “BUT-and-HOLD” INVESTORS, it may be worthwhile to take a more PROACTIVE approach to monitoring ETF performance in the weeks and months following the FED’s recent RATE CUT. On the other hand, if the RATE CUT has its intended effect and prompts a continued SURGE in the markets, these funds will position YOU, ME, WE the ATWWI FAMILY, well to take advantage of those gains and get “P.A.I.D.”.

PEACE & BLESSINGS

Kenneth Reaves, Ph.D.