Breakout Or Breakdown?

On this episode, Karl discusses the positives and negatives of the current stock market environment.  Also on this episode, have you tried to get a mortgage lately?  Karl will share some tips if and when you begin shopping for a mortgage.  Lastly, do you have biases against certain types of investments.  You shouldn’t.  He’ll explain.


Karl Eggerss:                      Hey welcome to the podcast everybody. My name is Karl Eggerss. This is the Eggers report. It’s your investing playbook. Thanks for joining me. We appreciate it. Our telephone number 210-526-0057. Our website, E-G-G-E-R-S-S Of course, you can go and if you want to listen to the podcast or any previous versions of it, previous episodes, we have them all on there, every one of them. So, right at the top of our home page, there’s a listen here banner. You click on that. It takes you right to the podcast page. You can subscribe to it.

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All right. Well, what do you think about the market right now? It’s kind of a rhetorical since you can’t really answer me, but is it is it setting up to break down? Is it setting up to break out? Is the worst behind us? Look, technically speaking, we had a double bottom where the market went down, bounced, came down and sometimes for those of you that don’t know we’re talking about, this as a clean family show, but a double bottom is essentially when the market goes down it bounces and then it goes down and it tests the old lows successfully.

In other words, it bounces off of it. So, technicians that will look at charts for a living look at then go, “Good. It tested it. It went down there and it held.” So, that was a good thing, check the box. It also bounced off of its 200 day moving average. What is that? Well, real simple. You can manually calculate look at the last 200 days prices, you average it out, you plot it, and then the next day, you calculate the new average, dropping off the one from 201 days ago, plot that, you end up getting a line. That line sometimes tells you the direction of the market and sometimes has been used to help people determine if we’re in a bull or bear market.

So, it did both of those things, but it’s also making lower highs. So, that is a negative, and it almost feels and I’ve been saying this on Twitter probably on the podcast that this technical set up almost feels a little too easy from the standpoint of it just bounced and here we go and everything’s fine. So, we’ve used in one of our strategies on Thursday we lightened up in one of our strategy that is meant to reduce volatility which we have some that don’t really care about volatility. We have some strategies for some clients that want volatility reduction. We actually sold some stocks on Thursday and reduced it after this recent bounce we’ve had, because we’ve had declining volume a little bit.

Not to go off on a tangent but you might say, “Who wouldn’t want volatility reduction?” Well, think about it. If you reduce volatility, you’re taking less risk. You may be putting some cash on the sidelines. What if the market just keeps going up? You’re going to end up not making as much. So, sometimes a reduction of volatility can mean less return as well so that’s why we have different strategies that have different goals. One of our strategies which is our growth strategy has a component that’s kind of an on-off switch. It’s either in the market or out. It was out coming into the New Year. We went through that fall in February and we bought and then fell it again. We bought some more and then it’s bounced and now we’re taking a little bit of that off the table and kind of sitting back. So, this is not a bearish call. It’s kind of a “Okay, let’s see if the bouncy ball can keep bouncing along. We’re just going to move sideways or we’re going to breakout or break down.”

Now look here’s the deal, I mean again in the big picture, we have and there’s been a lot of talk about this on Wall Street the last several days is we’ve had the breadth of the market B-R-E-A-D-T-H not bad breath, we’ve had the breadth in the market which has been very good. In other words when you look at the stocks going up versus down, those lines have been making new highs. Very interesting, right? Across the board. So, you don’t get bear markets when breadth is improving. You get bear markets when breadth has been declining for a while. There’s been some exceptions to the rule, but for the most part, you rarely see that. So, that’s a good thing.

So, even though the prices have not making make new highs on the S&P and on the Dow Jones, a lot of the breadth indicators have. As I’ve said, supply demand is still very good for the stock market. Lately in the past few days, it hasn’t been. Overall in the last couple of weeks as we’ve been meandering higher but you still have things conflicting, but overall demand looks okay and supply looks good.

So, what about the economy? Leading economic indicators just came out on Thursday. They’re still good. Last month was revised up. So, remember those are the things looking out on the future saying things are still pretty good. Earnings have been even better than the high estimates. So, that’s been good. So, why isn’t the market blasting higher? Here’s the reason why. I don’t think it’s Syria. We know it’s not Syria because we started dropping bombs, blast missiles, whatever you want to call it a week ago Friday evening and Monday and Tuesday market just went up. So, that’s not the issue. The issue is and I’ve been saying this the biggest bugaboo for the market has been “What if the economy is slowing and the Federal Reserve continues to raise rates?”

You’ve been noticing the yield curve flattening. So, for those of you that don’t know what a yield curve is, maybe you’re new to the show or we haven’t talked about it much I guess, I don’t know, the yield curve is essentially looking at all the different maturities of rates. So, three months, six months, one year, two year, five year, 10 year, 20 year or 30 year, the long-term rates, the 30 year and the 10 year should be higher than the one year, five year rates and the two year rates. They should be higher, taking on more risk, locking your money up longer, you should be compensated higher.

So, what a lot of investors look at is the difference between let’s say a two year treasury bond and a 10 year treasury bond. In a good economy, it should be widening. You should have a steepening yield curve. What we have been seeing the last several months is a flattening yield curve. Why is this? Number one, the Federal Reserve is raising interest rates. They control the short end, one, two year rates are going up because of them, but in the meantime, the 10 year rate has not gone up. It’s got up a little bit but not near as fast as the two year. So, the difference between the two is getting narrower and narrower.

So, what does that mean? Well, we know that all these recessions typically have an inverted yield curve. That means where the long-term rates are lower than the short-term rates. It’s inverted. It’s negative. That signal something is wrong. We are headed, we’re not there yet, it’s important, but we’re headed that direction. So, in anticipation of that, people are going, “Wait a second, something’s wrong otherwise we wouldn’t be seeing this.” It’s almost as if you’re taking somebody’s temperature and its 99 degrees and you go, “It’s supposed to be 98.6. It’s 99.” You make the assumption it’s going to 103. Maybe it does. Maybe it’s just a 24-hour little something and you got a little fever. It doesn’t mean you have the flu. It doesn’t mean any of that, but is it more likely? Yes, it’s likely that when you get a temperature it’s going to go up a little bit more and is likely when the yield curve flattens, it could go inverted. So, that is the problem.

Investors are saying, “That is telling us something. That is telling us the economy isn’t as good as we think or it’s peaked. Maybe the economy is too good.” Meanwhile, this is interesting, all the inflation indicators are going up. Commodities have been having a really good time lately, which we’ve been bullish on commodities if you’ve been listening. We’ve been saying it’s been one of the worst places to be the last five years and we thought that it will start to turn around. We are seeing that. Look at oil. Look at nickel. Look at all these things going. Aluminum prices going straight up. Something’s going on here. Is it inflation? Wages have been going up.

So, you know what that means, don’t you? Economy that’s potentially peeking or slowing and then at the same time inflation picking up. I know some of you said it aloud stagflation. Could that be stagflation? I don’t think so, but could we see a mini version of it? I think the answer is yes. We could see a mini version of it. So, what does that look like? Well, it could mean that over the next few quarters, the growth rate of our economy in the US slows a bit. In other words, the best is behind us. Doesn’t mean we’re going to recession. It just means the growth rate slows a little bit 2.6%, 2.4%, 2.2%. You get my drift? At the same time, that inflationary type indicators and investments are going up. That’s kind of a bad combination. So, let’s watch that. So, what does that mean for you?

Watch what you own, number one, because we’ve already seen a little bit of a rotation starting to out of some of these Gogo stocks and some of them have bounced by the way, but we started to see a little bit of struggling from the  [inaudible 00:12:18] stocks, right? Now Netflix still up at a tie, but Facebook well off its high. Apple kind of churning around there. Full disclosure, we own Apple in our dividend plus portfolio. Google off its highs. So, those have struggled a little bit. How about utility stocks? Well off their highs. How about REITs? Well off their highs.

What’s been working? Take a look at oil, straight up. Take a look at commodities in general, doing very well. So, there could be a rotation going on. So, you need to react to that. As I mentioned earlier, I mean look in the short term here, I think it’s interesting we need to watch the market because these big selloffs typically reverse in the middle of the day kind of like what happened a few weeks ago, remember that? When we open down I think it was 500 points and finished up 250 for the day. It was in … I don’t remember. It was in early April. We also had that kind of reversal in February as well. If you look at a candlestick chart, there’s a big long tail on the end of it marking way down but it just reversed on no news.

Those are how corrections end and maybe we’ve had that. Maybe we’ve had enough. I don’t know but I don’t like to see volume declining as we’ve been seeing for most of April. So, let’s watch. I think we’re still in this kind of correction mode, but I wouldn’t make major moves at all because you could still get whipsawed pretty easily. Volatility is starting to come down a bit, but you could certainly see this correction thing we’re going through continue for a while, but know what you own.

There have been really some interesting charts for those of you that trade a little more. I don’t mean in a day trading, I just mean kind of trend watching here, because there’s been some interesting setups and some interesting things going on, some charts that look really good and some ones that maybe don’t. So, I think in this environment where maybe the market continues to go sideways essentially for a long time, there’s some trading that may be able to take place depending on who you are in your strategy because again some of you don’t do any of that, you just have a strategy for long-term and kind of long-term investments ride, that’s fine.

I like using a combination approach where I think there are some things to do we’ll call it, but having kind of a core piece that’s invested. Watch this market right now because I think in general I feel neutral about it and maybe in a very, very short run maybe slightly negative just that we could see a little more pull back before we move higher, but again behind the scenes, there’s a lot of things that are still working. I think the biggest bugaboo is going to be this economy and what we see out of it over the next few weeks and months.

Now I want to shift gears a little bit. We try to do financial planning things on this show as well because a lot of you have questions all the time about it could be literally things about Social Security, should you be taking it, should you be doing Roth conversions, all of those things, but also what about just mortgages, going through the process of getting a mortgage. There’s a whole conversation about should you get a mortgage versus cash if you can afford it. Are you optimizing your dollars by paying cash or should you always get a loan? Even when it comes down to getting a loan, really interesting what some of these companies do.

When you go to get a loan, let these companies compete for your business. You’ve got individual brokers essentially local, your real estate agent probably works with them, you may know somebody, when they go shop the mortgages around, sometimes they’re cheaper. They will sell you on the fact that their service is better, maybe, maybe not. Then you have the big boys. We all see the commercials. What I’ve noticed those, when you look at these because I’ve analyzed a lot of these over the years is that sometimes you get two comparisons and let them send you something in writing. When you compare apples to oranges, it makes it difficult.

So, what sometimes they do is they’ll say, “Hey you’re a repeat customer at the national place.” Because of that, we have zero origination cost and you say, “Boy, what a good deal.” You say, “Can you send me that?” When you say send it to me, guess what? Now they know that you want to look at it and you may be comparing it to something. So, they send it to you and oftentimes if you look at maybe they don’t have an origination cost but they have an administration fee or an other fee, in other words they just move the fee from one bucket to the other, so compare apples to apples. In addition, some places will say, “Hey, we have this rate and it’s a really good rate.” You say, “Boy, that’s a much better rate than this other company.” Did you realize that maybe your pain points? What does that mean?

It’s a percentage of the loan and you buy down your rate. So, you say, “Hey to get your rate lower, you have to pay some upfront money to get it lower.” Now it may be worth doing that depending on how long you plan on being in the house and having that particular mortgage, but sometimes there’s a crossover point. It may take a few years to make it worth it. So, you have to know how long you’re going to be in there to determine this, but get them both to fight over each other. If you have one, you may say, “You know what? If you could drop that by another $500 on your processing fee or your administration fee or whatever type of fee, maybe I’ll go with you.” They will do it. These companies are hungry.

Make them fight over you. Play a little tennis match with them. Get two or three companies. A little bit of a pain because you have to upload all your tax documents or whatever they’re requiring but it can be worth it. The small companies can compete with the big companies. They can. I’ve seen it happen over and over as I’ve analyzed these, but just keep in mind that again they will call their fee something different. So, really put them next to each other and kind of figure out what are my closing costs, what are my origination cost, is this one have points in it and this one does not, get it all on the same page and then it will be pretty clear which one is a better deal.

Now just because it’s a better deal, doesn’t necessarily mean you should go with it. There is some service involved and some places will keep the loan, they will not sell it. Some of the big national places will keep their loans and not sell it. Other places most brokers are going to immediately sell your loan. So, soon as you sign the closing documents, within the next couple weeks you will get a letter saying, “We have sold your mortgage to one of the big boys.” The big boys being Wells Fargo, Chase, etc. Quicken Loans or Rocket Mortgage keeps their loans. It’s their paper. There’s not necessarily a pro or con to that, just letting you know that’s how it works. Of course, most of those places Fannie Mae ends up with these loans. These companies are really just servicing the loans.

So, that’s just a little bit about mortgages, because as we may be in the last few innings of refinancing here, you’re still to be moving a lot of you, but as interest rates start to creep up, people feel a little more antsy to get that loan. Rates are still very low. I think a 30 year mortgage last time I looked was probably around 4 1/2 to 4.6% on a 30 year. Some of you want to do a 15, again a separate conversation about which one is better, but in the big picture, rates are still low but as they creep up, it causes people to maybe bring forward “Hey, we were thinking about moving. Let’s do it now because rates might be higher in the future.” Just know there’s a lot of things in this world that you can get a better deal on and mortgages is one. A lot of people don’t believe that’s the case but you can negotiate with these folks and I would recommend doing so.

The last thing I want to leave you with before we wrap this episode of the Eggerss report up is I alluded to it earlier but I think too many of us, at least the people that I meet and I meet a lot of people on a financial level in terms of looking at their things, seeing what they’re doing, seeing what’s been recommended, I think too many people are pigeonholed or boxed into one particular type of investment. I’ve seen that my whole career. It could be they like real estate. So, everything they do is real estate. They don’t see … they have blinders on to know that there are other things out there besides real estate. Even within real estate, you could do lending. You can do renting. You can do flipping. You could diversify within there.

I also see when it comes to the stock market. I see people that say, “I don’t like mutual funds or I don’t like individual stocks. They’re too risky.” Those are blanket statements that need to be dug into. Mutual funds, I’ll tell you how we use them. This is just our own way of using them, but mutual funds, the reason we use mutual funds, when we do and some strategies we do and some strategies we don’t, if it’s something that you as the client or me as the advisor can’t do on our own, there’s some uniqueness to it, it’s worth using a mutual fund and maybe even paying a premium to do so. In other words, having a higher expense ratio we’ll call it. That could be using a fund manager who has a unique process or has a really long term track record. Even if they’ve done poorly in the last couple of years or whatever the case may be, what are they doing? Why would we be using a mutual fund to pick stocks when we could just go buy an ETF or buy the stocks our self? So, really look at the process.

How about I don’t like stocks, they’re too risky? Well, how many stocks do you own? Which stocks do you own? What’s your method for buying them and selling them and analyzing them? I think all of the things serve a purpose. When you put them in combination with each other, they work pretty well. Really the thing is you need to look at your own portfolio as really a puzzle. Each of these puzzle pieces they serve a different purpose. So, if you have something in your portfolio that is meant to be low volatility and for income generation whether it’s an income fund of some sort, whether it’s a loan you are doing to somebody, whatever it might be, you should not compare that to the stock market. If the stock market goes up 20% one year and you made five on your low volatility income piece, you still accomplish your goal in you. So, you can’t compare that to the stock market. I see people doing this.

So, really compartmentalize your whole portfolio. Many of you you’re dealing with tens of hundreds of thousands of dollars or millions of dollars and you’ve gotten to the point where you’re not 25 years old just starting to put in your 401(k). You’ve accumulated significant amount of wealth especially relative to maybe where you ever would’ve thought or as a kid you probably didn’t think you would have as much money as you do and you have this money. Now you have to parse it out and say, “Okay, how much am I willing to put at risk? How much if I not? What do I need for income? Do I need to use mutual funds to accomplish that? Do I need to use ETFs to accomplish that or do I need use individual stocks to accomplish that or private investments?”

All of these things play a part in a portfolio and that is just a natural maturation of your portfolio. It starts off with one thing where you start adding to it and you’re young, but as it gets bigger and bigger, you have to fill these other buckets up with different things that have different goals. When you blend it all together and you look at the stock market, it may be very different than the stock market. You’re diversified. You have a portfolio you’re also trying to protect not just grow and have a lot of volatility to it.

Don’t say things like I don’t like stocks or I don’t like ETFs or I don’t like mutual funds or I don’t like CDs. Now, you could say I don’t like annuities. I agree with you on that one. Most of these things there may serve a purpose. In fact, I would even argue annuities may make sense and mainly one situation I can think of. If I had a pro athlete come knocking on my door and said, “Hey man, I just signed a $50 million contract and I’m 22 years old.” An annuity is a great way to get that person an income for the rest of their life. It may not be the best investment but it’s a guaranteed income that if their knee blows out or if they have friends that want them to open a nightclub or do something stupid with their money, they could blow all their money but this money is sitting over here at an insurance company that’s going to pay them an income at a certain point in time for the rest of their life and they can’t really undo it. That may make sense.

For most of our listeners most of you, I’ve seen most of you, you’re not that athletic relative to a pro athlete, okay? So, we’re probably not in that situation, but honestly, I mean stand back and say, “Here’s my goal with this chunk of money. What’s the best way to do it?” Yes, the best way that you want to do it as efficiently as possible, simple as possible, but sometimes you have to add some complexity to get the job done.

I don’t go to the med clinic when if I needed back surgery. I go to the med clinic when I got a sore throat. You need precision. I think as you accumulate wealth over your lifetime, you need some of that. So, it may not make sense to you necessarily all these different things but explore them, see what’s out, because there’s a lot of investments to choose from and they all serve a different purpose. We use a lot of different ones here at Eggerss Capital Management. We do because we see the pros and cons of ETFs and mutual funds. I’ll be honest, rarely do we use a mutual fund if it’s something like the blue-chip growth fund or the small-cap value, because I can get an ETF that can do the job in a more efficient cheaper manner.

If I have a fund that hedges out interest rate risk and benefits from rates rising in a deflationary time with maybe some preferred stocks that aren’t traded on the public markets, those are things I can’t do on my own. So, it’s worth having a mutual fund to do that. So, those are some specific examples of reasons we would use certain investments in certain circumstances. So, hope that helps a little bit. Just open your mind up a little bit because I’ve had that conversation with people. It may not even be something that you say “I don’t like this or I like this.” but I can see it in your portfolio what the … I’ve met people they always want the hot stock.

They’re always chasing the hot stock. They end up just having this horribly volatile portfolio that has big drawdowns. They just can’t sit still and let something work and be patient with it over time. It’s “I got to have the hottest thing lately.” It doesn’t work over the long term.

All right, Eggerss Capital Management,, 210-526-0057. Have a wonderful weekend everybody. We will see you back here next week on the Eggerss Report, it’s your investing playbook.

Speaker 2:                          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 from radio or TV. Use your own judgment or get yourself a trusted advisor.


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