On this week’s show, Karl discusses whether or not the stock market is in a bubble. Karl doesn’t believe the overall market is in a bubble. However, there are parts of the market that are very extended and expensive. He’ll explain what areas he likes and which ones he’s avoiding.
Karl Eggerss: Hey, everybody. Welcome to the show. It’s The Eggerss Report. It’s your investing playbook. My name is Karl Eggerss. I’m the president and CEO of Eggerss Capital Management. We are a registered investment advisory firm, and on The Eggerss Report, each and every week on this podcast, we do a lot of things. The main thing we do is try to educate you, and tell you what’s going on, and we don’t have all the answers, but we do like to tell you what we’ve seen, what we’ve learned throughout all of our years of experience doing this, and the pros and the cons of doing one thing or another. We talk about financial planning. We talk about techniques and tactics, and just things to think about, to really help you become wealthier, and educate you on all parts of finance.
You can always contact us at eggersscapital.com, E-G-G-E-R-S-S capital.com, or you can call us at (210) 526-0057, and there’s other ways to get our information. We are on iTunes. This weekly podcast is on iTunes, so you can go onto the Apple Podcasts section, look for The Eggerss Report. You can put comments on there. You can subscribe to it, so we’d appreciate that. You can even rate it.
We also are just now approved on Spotify, so we are now on Spotify. The Eggerss Report’s on Spotify, so if you listen to Spotify, go to the podcast section, or just search “Eggerss Report,” and it’ll pop right up there. We are on Stitcher Radio. We have a Facebook page, Eggerss Capital. We also have an Instagram feed Eggerss Capital Management, where we post mainly pictures of charts, of various things, mostly technical charts for different ETFs, stocks, things of that nature, so you can go find that.
And lastly, go to our YouTube channel. Karl Eggerss, you can just search for that. We do a Technical Tuesday every week, just going over a few different areas, and so that’s another way to get our information, and by the way, speaking of that, this past week, we were talking about some economically sensitive areas of the market, that looked ripe to move higher to us. One of them, we were talking about the copper, JJC, which has moved higher this past week. It was one of the winners this past week, up about 3 1/2%, during the week.
Steel stocks and oil up almost 4% on the week, and we also talked about small caps, which were up almost 2% this week, so if you go onto the YouTube channel, you will see the chart on there, the charts that we were talking about, it’s a probably five to seven minute video on there.
And, really the big winners on the week. I just mentioned a couple of them. The other main one is bitcoin. The Bitcoin Investment Trust, GBTC. If you’re not wanting to buy physical bitcoin, but you’re wanting to go out there and track the price, or at least try to get some of the movement with it, GBTC is the way to do it. You typically pay a larger premium to do that, but it’s liquid, it’s easy to trade, and it’s at all-time highs, closing at 1,074, up 8% just on Friday alone, 18.6% for the week. Just a huge move out of that.
Now, what’s interesting. We’ll get back to some of the winners and losers, but we did see, earlier in the week, $30 million of cryptocurrency stolen, and Tether is the name of that one. It’s a startup that offers dollar-backed digital tokens. They claim that they’d been hacked, according to CoinDesk, and $30 million was missing. Almost $31 million had been stolen. And we saw bitcoin fall that day a little bit, and then just recover very quickly, so this is one of the issues.
Of course, for those of you that are really for cryptocurrencies, and bitcoin, and things of that nature, you’re saying, “Hey, this isn’t any different than anybody else stealing some money out of my wallet.” You’re exactly right. You know, you could lose your wallet, lose your cash. You know, having it in a bank’s probably a little easier than having it in some of these other areas, but of course, one of the main reasons that cryptocurrencies even exist is because folks don’t trust the banking system, especially after 2008, and so that’s why these cryptocurrencies now have been invented.
And there’s lots of different ones. In fact, earlier in the week, on Monday, I posted a picture on the Eggerss Capital Management Instagram page, and we showed a picture of a mining machine, and it was just making a visit, and that particular machine, some people said, “I thought it’d be bigger than that.” No, it’s just a little … almost looks like a little desktop computer, but it gets extremely hot, and the cost and the electricity to run that, there’s a crossover point, where you make your money back by mining this stuff yourself, as opposed to going to buy it, and of course, they’re very hard to get, so these are machines built specifically for this, with different algorithms, so this particular one was not for bitcoin, but a different type of cryptocurrency.
So, anyways, we are still seeing news in that, but these things continue to move up, and as I’ve said before, don’t go buy something just because it’s gone up. There was a great article, this past week, if you can Google it, Mashable, which is a technology site, really, reporting on different technology news, and one of the funny things they had on there was talking to your parents about bitcoin, over Thanksgiving, and it was just really hilarious, and really nailed exactly how some of my conversations go when I talk to people about bitcoin, that don’t know, really, what it is.
And it is confusing. I mean, this stuff is very new, but the blockchain technology is something that’s not going to go away, and you know, you need to learn about this. Whether you invest in bitcoin, or use it as a currency in the future, or any other type of cryptocurrency, that’s not the point. Learn about it, because our world is changing, and this is going to happen, right? There’s going to be digital currencies, eventually.
Now, maybe each country has their own, still, and we don’t go to one, centralized one, but this is going to happen over time, so interesting to see that, but getting back to our winners and losers.
So, some of the big winners, we talked about oil. Really, oil has continued to look good, pushing up. Really, it’s its highest level in 2017, going all the way back to most of 2016, trying to get over the $60 a barrel hump. I mean, really, these are all economically sensitive things, copper, steel stocks, semiconductors … Telecommunications companies bounced back this week. Metals and mining, railroads. We talked about railroads on our YouTube channel as well. All of those that we talked about have moved up.
On the downside this week, volatility down 15%, so now we are testing these all-time lows. In fact, I think on Friday, we actually went down through the all-time lows on the Volatility Index, and this is still one of the smoothest, if not the smoothest and least volatile markets we’ve ever had, and in fact, right now this is the largest streak ever without a 3% correction.
So, what will happen eventually is when we get a three, four, 5% correction, some people say, “Well, that just means people will buy the dip.” I don’t think so. I think what could happen is more the opposite, where when three, or four, or 5% happens, you’re going to see, instead of buying the dip, people finally saying, “Ah, here’s … It’s going to drop,” or you’re going to see people taking profits, and we could see it fall much farther, faster, and so we could have a more significant correction. Maybe it comes in January, but it’s really interesting to watch that, this very smooth, methodical market, so volatility down.
Silver, gold, gold miners, interest rates, you know, those types of things were down on the week. Not a lot, but down about a half a percent, the retailers down about a half a percent. We’ll see how some of the Black Friday numbers come in, see what those look like. I like and own the retailing sector, because not only do I think that retailing is changing, not going away, but the XRT is the one we own, and one of our strategies, XRT. Technically, it’s set up nicely. It got there. Now it’s at the top of a channel. If it breaks through, it could move higher, but the sentiment around retail is so sour right now, and you’ve really seen, in the past week … We saw a lot of companies coming out with some really good news, and some of those …
Now, they were worse than people would hope, but they were better than the expected numbers that were supposed to be there, so we saw a big pop in retailers, earlier in the week. So watch retail. I think that’s an interesting area. I mean, if you take a look at things like … You know, again, some of these retailers.
I mean, Walmart’s a classic example, and full disclosure, we do own Walmart, but a company that has really transformed themselves, using the internet to their advantage. We saw them pop, a couple of weeks ago, pretty strongly, so watch those, but those were some of the biggest losers on the week, but mainly, if you owned bitcoin, and you were short volatility, you had a really, really good week this week, not that a lot of people have that particular trade-on, but that is a trade that worked very well.
Of course, we had Janet Yelling … Yellen. I said “Yelling.” Yellen putting in her official resignation, since she’s going to get replaced, and this week, so that kind of was a quiet time. We saw the Fed Minutes come out, and really, a lot of people still focusing on this yield curve, which is the long-term rates minus the short-term rates, and when you take a look at that, you know, that does lead to a recession, typically, when long-term rates have gone not much higher than short-term rates, and in fact, they’ve actually what’s called inverted.
That has led to a lot of recessions in the past. However, the stock market has done very well, and we covered that last week, has done well during those times, so keep an eye on that, but overall, we’re still seeing things okay, and in fact, from a stock market perspective, when you look at the stock market, we still have small caps and mid caps doing very well, and what generally happens, in a stock market that is beginning to weaken, and we saw this in ’07, ’08, is that you start to see the leadership fall off, and one thing that we saw in ’07, ’08 was small caps started to weaken, mid caps, and the large cap stocks were the last of the Mohicans. Those were the ones that were still hanging in there, and new highs.
So we want to watch for that. We’re not seeing the small caps and mid caps struggle. They were for a while, a couple of years ago, and then after the election, of course, we got this big bounce, and now you’re seeing small caps really, really doing very well, so watch that. So we want to watch the advance decline, how many stocks are going up versus down. We want to see the types of companies going up versus down, but we’ve been a proponent of really looking at companies that, in this particular situation, would have already weakened, so we believe that everybody’s waiting for this big market crash, right?
That’s what everybody’s waiting for, because we’ve had two of them in the last 17 years. We’ve had two 50% drops in the last 17 years, and now, what we’ve been seeing, really in the past couple of years, is more of a rolling correction, crashing markets. So what does that mean?
Well, look at energy back in 2014, right? That whole sector crashed. It didn’t just fall. It didn’t correct. It crashed. Companies went bankrupt. People lost millions of dollars. It was a crash, and that is a big area of the market. In fact, it was so big, it made the earnings of the whole Standard & Poor’s 500 go down for two or three quarters in a row. Now they’ve recovered.
So we’ve already seen energy crash. Now energy looks bullish, but what if technology’s the next thing to go down? You know, we’ve already seen several types of companies go through this. Retail companies. Do you not think retail has already crashed? So is it possible that, sector by sector, industry by industry, you get big drops, but the overall market does not?
Now, we are seeing a big move of this movement to, “Well, I’ll move out of my complicated hedge fund, and my complicated stock picking fund, into just a index fund of some sort, because it’s done well the last few years,” and we think that is … When people talk about bubbles, which is an overused term, really they should be looking at that particular area.
We’ve got an example of several companies that have been trading for a certain valuation, whether it’s price to earnings, price to book, price to cash flow, price to free cash flow. Whatever it is, these companies generally trade with a certain characteristic, and in the last few years, they are trading way out of characteristic. I mean, they are expensive, and so we do, in our Dividend Plus portfolio, have a value tilt to that portfolio, and that portfolio’s done extremely well this year.
Now, had we bought some growth names, more growth names I should say, because we do own some, but if we bought more, it’d probably be up a little more, but it’s had a phenomenal year, but we feel like it’s much safer right now, because the types of companies we’re buying are reasonably priced, and what’s happening is there’s a big part of the market, where you see these companies that aren’t fast-growing companies at all. They’re not growing fast, and yet, people are paying a tremendous amount for them, because either they have a dividend, or just because the overall market’s pushed them up.
So there are pockets of bubbles, and pockets of overvaluation, no question about it, so you have to decide, “How am I going to invest in this environment?” And again, if you use plain Jane index-type funds, which have done great the last few years, that is the most expensive part of the market. It just is, and so again, and I’ve said this in the last several weeks, know what you own and why you own it, because at some point, when this shifts, you’re going to see, I think, these overvalued companies come down hard.
So, really the trick right now, investing-wise, that we’re kind of using, is we’re participating. We’re not one of these people that says the market’s expensive, so we’re just going to sit on the sidelines. Those are the perma-bears. Those are the people that write articles every week, that have headlines trying to scare you, to get you out of the market. Meanwhile, the market keeps going up, without those people.
And some of these people get on CNBC all the time. They get on Bloomberg. They write all over the place, and they’re just wrong, consistently. So what we’ve chosen to do is say, “Hey, we’re not going to capitulate and go own the most expensive parts of the market, just because everybody else does.”
Now, are we giving up some return to do that? Sure. No question about it, but you know, having things go up in price … Our stock portfolios have done well this year, even given that we’ve had some things that haven’t done well, or maybe they’re out of favor, or maybe they’re value, and we’re okay with that, because there is risk-reward, and what’s happening right now is, really, everybody’s preparing for something that they can see.
You know, you hear about the black swan. These are events that we don’t know about, that we haven’t prepared for. There will be some event that takes the market down, that we haven’t prepared for, so you have to be diversified. You can’t treat the market today as if it’s always going to be this way, and, “Well, I’m a confident investor, and I’m a long-term investor, and …” You know, market’s have some big drops. You know, big drops, 20, 30, 40%.
How are you going to handle that at that point, especially when you get into retirement? And listen, we talk to a lot of people each week, that are approaching retirement or in retirement, and when they’re in retirement, trust me, when they’re working … And I explain this to people all the time, when you’re working, you put up with a lot more out of the stock market in terms of volatility than when you’re not working. When you are retired, you don’t seem to put up with 20, 30, 40% drops in the market, because you’re not adding to your portfolio. In fact, you might be pulling off of your portfolio, so it’s really important to see where we are right now in the big picture.
And this is what we know, technology stocks have transformed the world. They are in a bull market. Some people would argue they’re still not expensive, but they are built on growth, so if the growth slows down at all, those companies get hammered. We’ve seen that. So, technology stocks are a big part of the market now, so as they go, the market goes, okay? So if you own that, just know that those are an expensive part of the market.
Dividend-paying stocks of slow-growing companies are an expensive part of the market. This would include consumer staples. This would include utility companies. This would include and maybe even some private REITs, excuse me public REITs, like … I don’t want to even name any, but some public REITs that really are glorified stocks, but because they pay income, they have very high valuations. So be careful about those areas, but if you look at areas like, we mentioned retail, energy … If you look at commodities in general, those are areas … International still has a long way to go, we think.
Those are areas to … You don’t have to own exclusively, but have some exposure to those, and maybe even overweight them, and what that allows you to do is participate in the market gains. If the Standard & Poor’s 500 keeps going up, great, but if it rolls over at some point, and we saw a few days this past week, where the stock market … Some of our portfolios literally had almost every position in them up, and yet the DOW was down 50, 75, 100 points.
And it’s because you could see that happen, where there’s really a transformation, where some of the leadership’s falling apart. So it hasn’t happened just yet, in a consistent way, but it is something that we need to continue to watch, so monitor that, but really, I mean, you know, some of the portfolios we’re seeing, when people bringing them in, is we’re seeing, really, portfolios either don’t have a strategy, at all, or they’re just overexposed to the overall market. You know, they’re overly diversified, and we really do believe that index funds are probably the biggest bubble right now. You know, this, “Hey, let’s just stick it in there and see how it goes,” thing, so be very careful about that.
And we even saw, on Thanksgiving, we saw, of course, the international markets were open. The Chinese stock market fell two to 3% that night. So, you know, when you get something like that, you go, “Why did that happen? What’s going on with that?” There’s more regulatory crackdown, apparently, but could that spill into a correction?
So, we didn’t see that happen on Friday at all. I mean, obviously markets were open a half day on Friday, and had a pretty good day, especially in the technology area, but watch some of these other areas, for some types of cracks in the market, and see if that happens.
Hey, I wanted to switch gears real quick. You know, we’re sitting here, a lot of online shopping on Black Friday, et cetera, and somebody put a chart together. It’s pretty interesting, about the things that happen in 2017, on the internet, in one minute. Every minute, what happens. 900,000 logins onto Facebook, 16 million text messages every minute, 70,000 hours of Netflix watched every minute. I know that’s kind of a weird one to think about, “How can you watch more than one minute in a minute?” But of course, this is cumulative, right?
750 grand spent online every minute. Instagram has 46,000 posts, 452,000 tweets, and I think I see most of those, 15,000 gifs sent via Messenger, 40,000 hours of Spotify hours listened to, 156 million emails sent every 60 seconds, three-and-a-half million searches on Google, and on YouTube, 4.1 million videos viewed, and lastly, Google Play and the App Store have 342,000 apps downloaded every, single minute. That’s one minute.
So, one thing that’s interesting about that is how does that happen? How does that work? And how do we benefit? Well obviously, some of those companies, the Netflix, the Googles, the Amazons, you know those are companies right there, that you can see, and again, some of them are very expensive, but what about the technology behind the scenes? One way we take advantage of that is investing in real estate, in some of those … that lease to some of those companies.
You know, when you hear about the cloud, and I hopefully don’t need to tell you this, but your messages aren’t really stored in a cloud somewhere. They call it the cloud. It’s actually on a server somewhere, and when you walk in one of these buildings, they may be 12 story buildings, and every floor has racks and racks of air conditioning … Excuse me, racks of computers, and the air conditioning in there is phenomenal, and this is where all the stuff is stored.
This is where all the stuff is moving around, and most of those companies don’t own those physical buildings. And they look like office buildings from the outside, but on the inside, they usually … For every dollar of rent they’re paying, they usually put in, on average, about $12 of infrastructure into these buildings.
So, what we’ve chosen to do is own companies that rent those buildings to those companies, and they’re big companies you’ve heard of, and we do that sometimes through the public markets, we do it sometimes through the private markets. Public markets are going to give you ease of getting in and out, but they’re going to get you a lot of volatility, and usually more expensive. Private markets get you, obviously, just owning the real estate and getting the rent. Pretty cut and dry, pretty simple, and so that’s an area we really like, from a real estate perspective, and we’re always talking about balancing your stock portfolio with your income portfolio, and really looking at this from a volatility standpoint, you know?
We work with a lot of retirees, and people that have left companies, and have pensions, that were getting lump sum, or they’ve sold companies, and they’re looking for income, tax efficient, safer income, and unfortunately, when you look at things like the stock market, it doesn’t give you a lot of that. You use the stock market for more of your growth, more of your inflation hedge, et cetera, but you really have to put a portfolio together.
And, sometimes people put their money into really silly things, that are very hard to understand, very hard to get out of, in hopes of making bigger profits, but you really have to make it simpler, and say, “Can I live off this, and make my own virtual paycheck for the rest of my life?” And many of our clients can, but that’s one way we do it, is by investing in different types of asset classes, and one of them is taking advantage of all these things on the internet that are happening in 60 seconds, so just a little tidbit there, and thought you’d enjoy hearing what happens online in 60 seconds.
Hey, don’t forget, our YouTube channel, Karl Eggerss, and of course we’re on Twitter, @KarlEggerss as well. You can always contact us. If you want to look at your own sit, (210) 526-0057. Eggersscapital.com is our website, and just a reminder, you know, we talk to a lot of people every week, because we visit with people in their different situations of life. Some of you listening are single, and need to know about planning for yourself. Some of you are maybe married for the second time, because of either a death of a spouse, or a divorce, and so there’s Social Security benefits to think about, when to take those, how to take them, coordinate that with a pension. How long can you work? What things you want to do in retirement.
It’s just pure planning, and we meet a lot of folks that come in, and they think they have everything figured out, and then we show them some things, and they go, “I didn’t really think about it from that perspective,” and so it’s just that brainstorming, that back-and-forth conversation we have, that really helps to really solidify their retirement, and make it as smooth as possible, and allow them to do things as efficiently as possible, and really, it sounds cliché, but accomplish the goals that they want to do, because all of our clients do have very different goals. Yes, most people want to make as much money with as little risk as possible, but what they do with that money, do they want it to leave it to the next generation? Do they want to leave it to charity? Do they want to spend it all? Do they want to give away some of that money while they’re alive? Those are really important conversations, and ways to tackle that.
Well, I hope you all had a very happy Thanksgiving. I know I did. I appreciate all your support, and continue to share the podcast. We’re growing our audience. A lot of you send questions in. We appreciate that. We have new followers each and every week, and don’t be afraid to email me directly, Karl@eggersscapital.com, I will answer your question personally, and try to put it on the air, if it’s something that is, I think, worthy of having everybody share in really what that question might be. So appreciate it. Don’t forget, (210) 526-0057, eggersscapital.com. Have a wonderful week, everybody, and we will see you right back here next week, on The Eggerss Report. It’s your investing playbook.
Speaker 2: This show is for entertainment only, and information provided by the hosts, guests, and this station should not be deemed as advice. Your investment decision should be based on your own specific needs. You should do your own research before you make those decisions. As president and CEO of Eggerss Capital Management, Karl Eggerss may hold securities mentioned in the show, for himself and his clients. Just don’t buy or sell anything based on what you get from radio or TV. Use your own judgment, or get yourself a trusted advisor.