Investment Ideas and Plans for 2020
Investment Ideas and Plans for 2020
1. Last year's market was hot despite bearish sentiment. Recessions were regularly predicted, often by news media who wished for a recession for political reasons. Defensive assets...bonds, REITs, etc. did well. The Nasdaq was up 35.2%, the S&P 500 was up 28.9%, and the Dow was up 22.3%. Last year, I predicted that 2019 would be a great year for income investors, so I will pat myself on the back. It looks like I did not make a specific prediction on the market averages, so I can't claim any credit.
2. The big jobs report for Nov. 2019 should change that bearish sentiment. Reasons for acceleration? Productivity up, labor participation rate up. A new boost for the economy.
3. I predict, again, that at least one of the major indices will be up over 20% in 2020. If Trump wins in a landslide and the Republicans re-take the house while holding the senate, I predict that one of the indices will be up 30%. If the Democrats nominate Elizabeth Warren or Bernie Sanders, the election will not be close and the market will ignore it. If they happen to nominate Oprah Winfree or Michelle Obama, the election will be closer and the market will pause in advance.
4. LinkedIn says highest jobs demand is in AI. Good place to look for growth investments....companies who develop the technology and companies who benefit from the technology.
5. Expect capital expenditures by businesses to pick up next year as trade issues get resolved. The resolution does not matter.
6. Many experts are saying to buy Europe because valuations are lower. I'm not in agreement with that. They may be lower because the economy has been stifled by the EU bureaucracy and central planning. If you really want to buy Europe anyway, just buy into the best economy there...Switzerland. I own the Swiss ETF, EWL and will probably add on. Switzerland is not in the EU.
7. China seems willing to de-couple from the west. They are removing all western computers. Will probably have their own standards based on Huawei. Chinese markets for US technology will dry up but western markets will benefit from the lack of Chinese competition.
8. The Fed has almost promised that interest rates will not change next year. This means that bond traders will not be able to profit from trading the swings, but buy and hold bond investors should have less interest rate risk. If you can live with a steady 6 to 7% return, preferreds and closed end funds of preferreds are super.
9. The impeachment caper will be good for the market because it makes it less likely that Democrats will retain or gain any power. Voting for impeachment when there is zero chance of conviction in the Senate just reminds voters that Democrats are motivated by personal dislike of Trump and are not focused on what is good for the country. It is an act of self-indulgence. The Democrats used their control of the House only to try to overturn the election and voters will understand this.
10. Stocks in the S&P 500 have returned 249% in the past 10 years
11. I reviewed all my sales in 2019 and found that most of them were mistakes; the stocks are higher now. That is the sign of a strong market. That tells me to be more patient about holding this year. Also, it may argue for more ETFs and closed end funds since I am less likely to trade these. For income, I prefer closed end funds because you can sometimes buy them at below net asset value and I also think they have better liquidity.
12. Don't be afraid to buy at a new high. Like a good party that no one wants to leave, a new high can dry up selling pressure and help the stock to go up more.
13. These issues bode well for 2020:
a. The Fed says they will not raise rates
b. There is cash on the sidelines from retail investors
c. Foreign governments are still stimulating their economies and that money flows here because we have the best economy in the world
d. Brexit is now certain and will result in a huge new trade deal with the UK
e. Our economic strength is attracting new businesses and investments
f. There is still no magic sector like real estate in 2008 or technology in 1999. This has been a broad-based advance
g. Less uncertainty about foreign trade with the China deal and the new NAFTA.
h. Low energy prices; we export now
i. Energy independence insulates us from mid east disruptions
j. low interest rates
k. We still have not seen euphoria from retail investors.
14. Risks to watch out for:
a. The Democrats want to shut down the economy with impeachment, the green new deal, the wealth tax and just plain old hatred for Trump. If they get any control, sell whatever they control.
b. North Korea could still do something crazy and suicidal; I think Trump is about to lose his patience and may just nuke them.
c. The mid east could still explode, but that is always a risk.
d. The US election will generate a lot of discord; if it moves to actual violence, that will be bad for the market.
e. I am sure that the $15 trillion value of bonds with negative interest (mostly Europe and Japan) is a problem but I don't know what the problem is, what the potential harm is, or how we can fix it. Or even if we should. It is worth noting that people in the US are thrilled when they get a tax refund from the IRS but that is just a zero interest loan being paid back after you did a lot of paperwork to get it back.
15. The future is about optimization. The computer and communications technology is available and just needs to be applied. With GPS, we know where everything is all the time at almost no cost. The Uberization of everything; turn physical objects like cars into experiences, like going from A to B, that are available on demand. Fewer cars will be needed if they are used more efficiently. Your car is used perhaps 5% of the time; If that one car is Uberized, it may be used 80% if the time so you need fewer cars. This same concept can be applied to other objects. So, long term prices of objects will decline as they are used more efficiently; same with the materials that go into them. The trick is to figure out how to invest in this trend. It will be a long trend so we will have lots of time to figure it out.
16. The inverted yield curve turned out to not be a problem. Why? It was not caused by short term rates going up but by long term rates going down.
17. Housing will be a leading sector spurred by low rates, income growth and economic confidence. I like mortgage insurance companies.
18. Worries about robots replacing human workers and causing unemployment are not worth the bits they are written in. The economy is based on satisfying human needs and, fortunately, human needs expand quickly and endlessly. As it takes less effort to meet the basics of food and shelter, people quickly start wanting new things....3-D video games, yoga pants with no visible panty lines..... Human wants are endless and unpredictable. The growth in leisure time is a predictable long-term trend as people need to work less to meet basic needs. Leisure time is the seed bed for creativity and new desires. As we move up Maslow's Hierarchy of Needs to self-actualization, new needs develop. When people had to toil in the fields 12 hours per day, nobody had time to worry about visible panty lines in their yoga pants. Don't worry. Things are better than they have ever been, and they are getting better.
Business Development Companies
by Dave Dyer
This unique class of investment vehicles, which has only been in existence since 1980, is still largely unrecognized despite the fact that Business Development Companies (BDCs) seem to combine three elements that current investors crave: high yields, low volatility, and the potential for capital appreciation.
A BDC is a Regulated Investment Company (RIC), just like a Real Estate Investment Trust (REIT). Like a REIT, the BDC must pay out at least 90% of its pre-tax profits in dividends to shareholders. They are traded on the various public markets just like a REIT. The main difference between a BDC and a REIT is in the underlying assets. While a REIT holds real estate or real estate loans, the BDC owns equity positions in small companies or loans to small companies. But the BDC is not like a mutual fund or closed end fund that owns shares of other public companies. The companies in the BDC portfolio are all small private companies that are not traded.
The BDC operates somewhat like an old-fashioned bank. They issue shares to raise capital and then they fund small companies either with loans or equity positions. These small companies are currently having a hard time getting funding from the major banks, so there is a ready market for the capital. There are probably millions of small private companies in America right now, and this is a good way to get capital to them.
A BDC is more like a private equity firm or a venture capital fund, but, because they are publically traded, there is no requirement for investors to meet financial qualifications.
Here are some of the advantages of BDCs:
· The dividends are large, up to 11%, and they tend to grow.
· Large, consistent dividends will tend to lower volatility. A stock that pays a large dividend is less likely to have a big drop.
· Dividends from corporations are taxed twice; once as corporate profits and then as dividend income to the shareholder. Dividends from BDCs are paid from pre-tax profits and are only taxed once at the shareholder level. This can result in larger dividends.
· When new shares are issued by the BDC, the money is invested, and the dividends increase. For this reason, new shares do not typically dilute the stock price as they usually do when a company has a secondary offering.
· Because they are limited to 50% leverage, they are much less risky than banks which can use more leverage.
· You get the advantage of professional management and asset selection as you would in a mutual fund. The managers of the BDC try to select the best investments and often partner with their clients by providing business guidance.
· BDCs are better than mutual funds when you consider their tax efficiency. Mutual funds distribute capital gains annually, but you don't take your capital gains in a BDC until you sell your shares.
· Some BDCs will specialize in a market such as energy, medical, or technology, so you can focus or diversify as you please.
· Since the companies in the BDC's portfolio are not public and not traded, you can expect the BDC to be less volatile. The companies have no market value that will fluctuate as market conditions change or business events occur. This should make it easier to hold them on a long-term basis.
· BDCs are more convenient than Master Limited Partnerships (MLPs) because the tax reporting requirements do not include the complex K-1 forms. The income from a BDC is reported as a normal dividend.
· BDCs are much more liquid than a traditional private equity investment that may tie up investment capital for years. The BDC can be sold in the market at any time like any other stock.
· Small companies are where much of the innovation happens in our economy so there is a chance for a BDC to own some big winners.
As with any investment, there are also some risks and warning signs. Here are some that you should understand:
· If a BDC announces a decline in their dividend, they are probably having some problems. Perhaps some of their companies have defaulted on loans or gone out of business. Poor management decisions will show up quickly as declining dividends.
· In some market cycles, the small companies in a BDC are out of favor and viewed as too risky. A shift in market sentiment to risk avoidance can harm the share price of the BDC even if the dividend is stable.
· A change in the favorable tax treatment of dividends could make BDCs less desirable, although most of their dividends are non-qualified.
· Rising interest rates could make other income investments relatively more attractive.
Copyright © 2012 by Dave Dyer
Fixing Obamacare is Easy
I have a plan to fix Obamacare. The goals of my plan are to make insurance available to all and less expensive while having less government involvement in the medical choices that people make.
There are three steps in my plan. The first one addresses the cost of health insurance. The second one takes care of people with pre-existing conditions or who exceed the lifetime limits on their policies. The third one provides a permanent solution.
Step 1: Can you imagine how expensive auto insurance would be if the insurance company had to make their product available at the same price to any driver who came along? The fellow with lots of wrecks and tickets would get the same price as the good driver, and it would be very high. It sounds crazy, but that is exactly what they are proposing to do with health insurance by forcing insurance companies to take people with pre-existing conditions. The people with pre-existing conditions are certainly going to cost more for the insurance company and these costs will be passed on to the other customers. The same reasoning applies to the abolition of lifetime maximums for each patient. If the insurance company is going to insure potentially unlimited expenses for each customer you can bet they will raise premiums to cover those costs. In auto insurance, the liability insurance they sell you is always capped at a specific amount and the collision damage is capped by the value of your car.
So, just eliminating those government requirements (covering all per-existing conditions and having no lifetime maximum) would allow the insurance companies to provide less expensive policies. It costs the government nothing to make this change.
Step 2: Something must be done to make sure that people who are uninsurable will still have an opportunity to buy insurance. What luck!! The government already runs a huge insurance company that takes people with pre-existing conditions: Medicare. This massive asset has been running for decades so we do not have to start from scratch. Medicare has the staff, the programs, the offices, the procedures and relationships already in place, but they are restricted to those over 65 or with disabilities. Just open Medicare to people with pre-existing conditions that make them a bad risk for the private insurance companies. These would need to be well-defined and Medicare might also need to price coverage higher than they do for the over-65 folks, but this is a topic for the actuaries to work out. The important thing is that an option would be available that would take people who can’t find coverage from a private insurance company. In the same fashion, Medicare could be used as a backstop for people who exceeded the lifetime maximum coverage of their private insurance.
Of course, this will cost the taxpayers some money, but money is going to need to be invested in Medicare anyway, and this could be a part of the larger project of making Medicare financially sound. Medicare is a major government resource and it should not be ignored.
Step 3: President Trump could bring in all the insurance executives and give them this speech: “Listen up you jerks because I am only going to say this once. The government has screwed up this health insurance thing big time. Now, I want you to fix it. I will give you just two years to find a way to sell inexpensive health insurance to healthy younger Americans. The government is going to take care of the elderly, the disabled and the ones with pre-existing conditions so your risks will be lower. The government is also taking care of the really poor people with Medicaid, so you are left only with the of business and just open Medicare to all. The only thing you can’t do is raise premiums on someone just because they have gotten sick. You have to take that risk when you sell the policy. Do you understand?”
This may be the oldest management trick in the world; I know you didn’t break it but if you don’t fix it you are fired. If this doesn’t work, we probably don’t deserve to have a private health insurance industry.
Note that over time, the need for Medicare to cover people with pre-existing conditions should diminish. If the insurance companies are successful in selling to younger people, and can’t increase premiums just because someone gets sick, more people will be covered when they do eventually develop something that requires expensive treatment. The need for the Medicare backstop will decline after a generation of people has been covered by private insurance. And if they have had good preventive care over time, they are less likely to need that expensive treatment.