With a holiday shortened week, investors only had 4 days to digest the Italian news and position their portfolios. This news rattled markets but stocks recovered as the week went on.
Hey, hey, good morning everybody. Welcome to The Eggerss Report. It’s your investing playbook. Thank you for joining me. My name is Karl Eggerss. I am your host. I’m the President and CEO of Eggerss Capital Management. We’re a registered investment advisor or a fee-only registered investment advisor. That essentially means we don’t work on commissions of any sort, so we don’t get paid to recommend things. We essentially, when we advise clients, then we get a flat management fee and that way, there’s no ax to grand to push people in the one direction or another. That’s what we do.
But on this podcast, of course, it’s all about information and bringing you information each and every week to try to make you a better investor. Sometimes we’ll do interviews. Sometimes we’ll talk about financial planning. Sometimes, we’ll talk about estate planning. Sometimes we’ll talk about taxes. Sometimes we’ll talk about just the markets and what’s going on. You can look at our website at eggersscapital.com, E-G-G-E-R-S-S capital dot com. Our telephone number, 210-526-0057. Eggersscapital.com again is the website.
Hey, and by the way, I wanted to mention, I mentioned a couple of weeks ago, we were going to be doing something pretty interesting and we’re now doing that and it came right after Memorial Day, but we are participating in and a sponsor, proud sponsor of Operation Interdependence 2018. This is the 12th year that this has been going on. You can go to oidelivers.org or ktsa.com, which is who we’re doing it through and basically, we are one of the few locations where items can be dropped off and sent overseas to our military families. That’s pretty easy and you can go on our website to find out information about our location. We have the box there, and of course, you get a T-shirt if you drop off some items and there’s a list of items. If you go to ktsa.com, you will see Operation Interdependence. There’s an approved list of drop-off items and drop-off locations. Make sure you do that. Again, this is supporting our military families and we’re one of the proud sponsors of this. Go check that out and participate. We would appreciate that very much. We’re glad to be doing that.
All right, let’s talk about the markets. We had a interesting week, right? A yo-yo week, because we came in Monday but did we? No, we didn’t come in Monday because the markets were closed for Memorial Day and we knew there was some stuff going on in Italy. You probably weren’t paying attention to that while you were barbecuing and celebrating our troops and those that have passed away in battle and military service but what was going on was some stuff that website almost reminiscent of what we’ve seen a few years ago and what we saw on the financial crisis but the markets were closed for Memorial Day. We come in Tuesday and down we go. The Dow Jones down 400 points and it’s because of Italy. There’s some political things going on.
Bottom line is, Italy, their stock market suffered, their bond market suffered, their interest rates went way up. I mean, the biggest jump on record for their interest rates and you’re thinking, “Who cares Karl? We got mutual funds and ETFs.” We’ll you should care. Again, because this stuff tends to have a domino effect. It tends to bleed into other areas, other countries and so it is something we need to pay attention to and it’s something that we should be concerned about as long as it’s … If it’s going to be contained, that’s one thing. That got the markets off on a rough footing to go, “Man, what happens with the whole international markets?” Deutsche Bank, big large bank, having some major issues again. They’re saying, “We’re fine. We’re well-capitalized.” Does that sound familiar? Remember going back to 2008. The company’s saying, “We’re well-capitalized,” Lehman Brothers, gone. The market didn’t like that. The Dow Jones went down 400 points.
Now, I went on and did interview on Tuesday morning, usually I do it on Monday, on KTSA, which is a station in San Antonio in the South Texas area. I do that every Monday morning, give a little updates on the markets and the question was posed to me, “Should we be concerned about this Italy situation?” I said, “Look, this is a real situation but we need to continue to focus on the things that are mattering today, which is the economy still doing well, jobs, markets doing well, interest rates, while rising, are still low, the fed hiking but not aggressively. So let’s focus on those things and we are still in a bull market.” We believe that, that we are still in a bull market. We said, “We believe that this is a hiccup like we’ve seen Greece, we’ve seen Europe.” Since the bull market started in ’09, we’ve seen all kinds of issues pop up in the market. It’s like a speed bump. It goes through some turbulence and recovers.
We come back Wednesday and of course, the banks got hit on Tuesday, but Wednesday, everything rebounded, pretty good day on Wednesday. Thursday, market down again. Friday, we had a jobs report. 223,000 jobs in the month of May that estimates for 190,000 new jobs, so upbeat. What did the market do? It went up and we finished up about 220 points on Friday. That’s back and forth. At the end of the day, what happened? Well, the markets overall had a, I guess, flat to down week. The Dow Jones was down about half a percent, whole thing on the four trading days. But there was some standouts. Energy bounced back. It had a little rough time in the last few couple weeks but it bounced back. The metals and mining did well. The biotech up about 4%. Technology up about 2%. Interest rates, sensitive things like real estate, investment trust, they were up almost 2%. Not bad. Small caps, up over 1%.
Then on the flip side, what were the losers? Well, what’s interesting is we had a bifurcated market. Energy itself, oil went down but as I mentioned, the oil stocks rebounded. But what got hit the hardest, Brazil, Italy, those areas really struggled. Now, that we are finished with the month of May, the biggest losers in the month of May were some of these international ETFs. Brazil, down 16% in the month of May. Down over 20% just in the second quarter so fat. Mexico down 13.5% in the month of May. Italy down 10%. These are big moves but in the US, it was green. We still have this market where we started to see international start to outpace the US the last several months and in the last few weeks, they’ve started to struggle again.
Again, when you look at the year-to-date, international markets in the US are in the ballpark. There are international markets down a hair, US markets up a hair depending on the index you look at but we’re still, we are seeing some weakness internationally and those are again, the cheapest stocks in the market. But those areas, I mean again, in May, we saw a big difference between international and what we saw on the US. The area that led small caps did really well, technology did really well in May, especially small cap growth. 7% in the month of May. That specific area. That’s an area of standout. We’ve got kind of a mixed bag this year and we saw everything do pretty well.
Now, on the downside, consumer staples, telecom, utilities, financials, all down this in May and so far this year, consumer staples are down over 12%. We’ve got almost 20% difference. If you owned consumer staples versus had you owned small cap growth. Talking about some specific areas but that is a big, big divergence. Some people call it the stock pickers market. But look, I want to transition here because I get to experience watching what people do with their portfolios and everybody comes from different backgrounds and their portfolios, they come from different situations and so they view their portfolios and how they manage them very different.
I’ve met a few people recently that I look at their situation and say, “You don’t need to be doing what you’re doing,” and some people say, “I agree,” and some people say, “I don’t agree.” What I mean is some people believe that, and I may have mentioned this in a previous podcast, that their whole portfolio should be traded. What I mean is they take their net worth and if they’re bearish on the markets, the whole thing goes to cash or very, very conservative and if they’re bullish, they get it invested and they’re swinging back and forth. As I’ve mentioned before, I’ve met a lot of people, Chicago Mercantile Exchange, in New York money managers, mutual fund managers, hedge fund managers, they don’t do it this way. They don’t do it this way with their personal money. When you see people on TV, their own stuffed animals and people on TV telling you they like the stock for tomorrow’s trade and those types of things. I can tell you because I’ve talked to many of those exact people that that is a very small segment of their portfolio.
When they say they own a stock, and you go, “Wow, they must really love it,” it’s a small piece. They own ETFs, mutual funds for the long-term and then they have a trading portfolio. I meet people that I look at their situation and say, “Hey, you need a big chunk of your money in income production. You don’t need to be taking that type of volatility and you don’t need to be trading all of that. They say, “Yeah, I see that,” and some say, “No, I don’t see that. I’m bearish on the market.” Then the market goes up and they scramble to get back in and they’re confused because they believed they know what the markets going to do and the way we manage money is we believe there is a chunk of money, a core piece that should stay in the market.
You go look at a picture of the stock market over the last 100 years and you argue with that. You can’t argue with it. What you could argue with is that what about over the next several months, couple of years. Again, that’s why you segment your money. Now, I also talked to some folks who come in and say, “I know I shouldn’t be doing all this trading. I know that sometimes I’m too bearish or I’ve got this slant. I’ve been reading this or reading that.” They say, “I want a money manager,” to diversify away from themselves and they’re open-minded enough to say, “I want you to do it differently than I would do it.” That makes for a great relationship because they see the long-term picture and the benefit of having something that has a yin when there’s something that has a yang, if that makes any sense.
Again, be very careful about portfolio construction. I talk about this all the time. It so important. I don’t care if you have 200,000 to your name. I don’t care if you have 20 million to your name and I’ve worked with people in both ends of the spectrum. It still comes down to diversification. Most of you listening do not have 20 million dollars but when I talk to clients that do have that type of net worth, they are asking the same questions that you’re asking. “What do we do with this extra money that we just got? Are we too bearish? Are we too bullish? Are we too conservative? Are we too aggressive? How do I pay for my kids’ education and what should I do?” Maybe not worried paying for their kids’ education. They’re not worried about it, but they’re asking, “How do we do it?” What’s the best way to do it?
It’s important to think about because again, it’s about allocation and if you are trading and you like trading, I don’t want to take that away from you and if you’re good at trading, that’s fine. But, if you really know what you’re earning and you say, I’ve been making 15% a year my whole life. Good for you, but I can tell you, you’re probably in the minority in that regard. It’s important to understand what you are making and what you’re trying to accomplish and then finding tools to do that, to accomplish what you’re trying to accomplish. But I can tell you, most of these folks on TV, don’t be fooled. They have long-term portfolios. You can have a trading portfolio, where you’re trying to either nickel and dime the market or make outsize returns and that’s fine. But you should acknowledge that the market generally goes up and you want to have a piece of the market all the time and how you diversify that’s another conversation.
But I see people give up because they look and go, “That doesn’t jive with what I’m thinking.” Again, you have to go back and look at your history. Are you making the same mistakes you’ve made in the past or not? Again, if we, Eggerss Capital Management, had all the answers, we’d be doing one specific thing. If I was the best biotech stock picker, then I would be doing that. But we realize that sometimes, we may be bearish and the market goes up or we may be bullish and the market goes down. Therefore, we diversify.
Most of you have saved enough. You’re trying to protect it. You’re trying to grow it. But you can get by on reasonable returns with minimal volatility. Unfortunately, we don’t see a lot of that. We see portfolios that don’t have a lot of rhyme of reason to them. They don’t have a strategy. That’s really the thing that is missing. Keep that in mind as you are, again, building your portfolio.
What happened to the sell in May and go away? As I mentioned a few minutes ago, it didn’t really work this past month and that’s the problem with … I like to talk about seasonality things. We know that May has been, over the last 100 years, the second worst month. September’s been the only negative month but it’s been the second worst month but it didn’t do that this month. In June, July, those are good months generally. But what if they aren’t this time? Look at the seasonality but don’t base it on, “Hey, sell in May and go away.” I mean, that’s not the way the real world works. Do you think we’ve seen this? Do you think Warren Buffett sells his portfolio in May and goes away? No, he doesn’t. He doesn’t do that. Why should we do that? Be careful about seasonality.
Hey, by the way, I saw something interesting this week and I wanted to talk to you about it. It is, a lot of you are concerned about the national debt. I’m concerned about the national debt but when we talk about the national debt, we never really talk about it in terms of relativity. In other words, is the national debt, can we afford it? In other words, let me ask you this, when you were 17 years old and you had a part-time job, if I would’ve told you, you had $5,000 of debt, right now, you would say, “$5,000 of debt is not a big deal. I could pay that back.” But as a 17-year-old, with a part-time job, it was enormous. Fast forward, you’re now 55 years old. You have 250,000 of debt but you have a net worth of $1 million, $2 million. Is that debt as big a deal now as it was then? No, but the number has gone up quite a bit.
What’s the difference? It’s relative to something. It’s relative to your income. Can you afford the debt? All of these things right? Well, our national debt is no different and Brian Wesbury, this week, made a very interesting and compelling argument that our debt, our interest that we pay on the debt, relative to our GDP is the lowest, I think, it’s ever been if I recall what he said. We can afford it. That’s one reason why interest rates have been held so low for so long. He went on to say that the average interest rate on our debt is about 2%. When you look at all the bonds, it’s about 2% a year. That’s what it’s costing the United States. He went on to say, “What if that was doubled at 4%?” It would still be within the normal range going back several years. In other words, the interest that we were paying on our debt back in the 80s, 90s was relative to GDP, was much higher than it is today. What that means is the interest we pay is lower. Our economy is bigger, so it’s relative.
Does that mean I think we should throw caution in the wind and not look at our expenses and our waste? Of course, we need to reduce spending. People need to be held accountable for that type of spending. But again, it is comforting to know that you have to compare it to other things. We need to continue to grow this country and we need to control our spending. Nobody should disagree with that, but a lot of people fail to look at the numbers behind it. I thought that was really an interesting argument. What do you think? I mean again, many of you talked to, you say, “How much higher can this market go with all this debt?” The answer is it could go a lot higher with all this debt. It could.
Again, we look at a lot of different things and not just one thing in the vacuum and I think that $21 trillion mark is a scary figure. I think we need to look at social security probably sooner than we look at the debt. Now, those two things, of course, are tied together in a certain aspect but social security is something that we can see it’s broken and we can project out. We’ve got an issue. Again, I think what’s going to happen is they’re going to continue to raise the retirement age. They’re going to continue to … The benefits aren’t going to keep up with inflation on those types of things and they’re going to keep adjusting and trying to make this work until there’s a real solution but right now, there’s not a real solution.
It’s up to you to make your portfolio grow and you’re going to fill that gap because look, when you retire, you probably don’t have a pension. Maybe you do but you probably don’t and if you don’t, you’re going to have social security and maybe some rental income of some other income but pretty much, your expenses are higher than your income and that difference is pulled from your portfolio and you’re going to have to make this thing last and it gets stretched over your lifetime.
Don’t rely on social security, which I know, many of you do not. I’ve actually had some folks tell me, don’t include it in our planning process, which I don’t think that’s the answer either, but do we give it a lesser weight? Do we look at other things, sure. But I thought, the $21 trillion debt relative to other things was a really interesting and compelling argument.
Where are we as we wrap up here. Well, here’s the thing. You guys, most of you listen every week, you kind of know where we’ve been. We’ve been saying we’re still in the bull market. We still think we’ve got a ways to go here. We’re not permanent bulls but look, stock market was going probably faster than it should have earlier in the year. Reversed, probably harder than it should have. Got a little spooked with the fact that the feds said, “Yes, we’re going to raise rates,” and they actually did it and they’ve continued to do it at a moderate pace. But they have done it.
Market didn’t like that and investors are adjusting to that. We had technically, a bounce and a double bottom. February, April, we bounced off that. Technically, things look good and the backdrop looks good. Now, some will argue that the economy has peaked. It’s about to slow. It’s interesting. Let’s put some of these people on record that are adamant. See, I’m not adamant about it. I’m just monitoring, going, the scale looks tipped to me that we continue higher based not what the jobs report says but about what are investors doing and they continue to buy stocks on dips. More importantly, they’re not selling. They’re not panicking, selling, get me out at whatever cost. That’s not happening.
Having said that, we still think higher prices are coming or positioned as such but I really feel like the last few months has been an adjustment. The market has adjusted to the fact that we have a Fed that is saying, we’re normalizing, we’re raising rates and they’re doing it. What’s happened is you’ve seen short-term rates spike, you’ve seen long-term rates go up a little bit and so, people that borrow money, people that use leverage. It’s costing them more. The market’s thrown a little bit of a temper tantrum the last few months and adjusting for that. But at the end of the day, market’s just flat. It’s better to have a flat market than us be having a temper tantrum down 15 or 20%.
Things still look good to us and again, we’re looking at a lot of different things. Something that we try not to look at but it’s hard not to are these headlines that come out. These headlines where, again, summit, no summit, trade war, no trade war. This back and forth. Earlier this week and last week, it almost felt like, remember least week’s podcast was named, “Play it again Sam.” It almost fel like we were going back to where we were a few months ago. It was rocket man. It was holding up aluminum cans and we had tariffs and everybody was mad at the US and it felt like that. But remember, we have a template. The market sold off and then eventually said, that’s not a big deal. Earnings are pretty good for this companies and it went up. Then, the last few days, we started to see some of that talk again and started to see a 400 point drop on the Dow.
Investors are starting to wise up to the fact that let’s remove the noise and let’s focus on profits because that ultimately is what’s going to drive this market higher. Some people believe that profit cycle has peaked and that’s an estimate on their part and we don’t make any forecast in that but I could tell you that, right now, we do not see signs of a recession or any type of major selling going on on wall street.
All right, don’t forget eggersscapital.com, 210-526-0057. Have a wonderful weekend. Don’t forget Operation Interdependence. You can go to ktsa.com to see some of the locations and the items to drop-off and we at Eggerss Capital Management, being an official sponsor, we do have one of the boxes, a drop off location at our office. If you need to get ahold of us, get more details on that, please do so.
All right guys, have a wonderful week and we’ll see you back here next week. Take care.
This show is for entertainment only. Any information provided by the host, guest and the 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 on radio or TV. Use your own judgment or get yourself a trusted advisor.