On this week’s show, Karl discusses common mistakes investors make that can cost them thousands over their lifetime. Also, who were the winners and losers on the week? Karl gives the answer. In addition, everyone wants the answer to when will the stock market fall?
Karl Eggerss: Hey everybody, welcome to the Eggerss Report. It’s your investing playbook. My name’s Karl Eggerss. I am your host, and I will be talking about the markets today and a little bit of financial planning, all of that stuff that we do each and every week on the Eggerss Report. Just a reminder, eggersscapital.com is our website. E-G-G-E-R-S-Scapital.com. We’ve got all kinds of stuff on there. For some of you that are really technical and want some pictures of some ideas of things to avoid or things to buy, all those things that we give ideas about, we have an Instagram feed now that’s just charts at Eggerss Capital Management.
We also have two Twitter accounts. One’s my personal one that really has a little bit of everything on it throughout the week. That’s @karleggerss. We also have ETF Charts is another one we’ve created that has just what it says, only charts of ETFs. We have that as well. If you’d like to hear my interviews once a week, we post them on the website, but I do a live radio interview every Monday morning at 7:20 central time. It can be streamed right actually from our website. You can listen to that, and we do try to post it on our blog. If you go to the front page of our website, three main things that we do at Eggerss Capital Management.
Number one is financial planning, helping people with Roth conversions and when can they retire and when should they take social security. Even how to donate money, what does it look like, and what is the best, tax-efficient way to do that to charities. We also do investment management where we actually manage money for people listening. When we do that, we do not take custody of the funds. We’re an independent, fee-only, registered investment advisory firm. That’s important because we do not receive commissions from anybody. We do not push products. All we simply do is give advice.
Then the third thing we do is obviously educate, which is what this podcast is about. We post that on the financial education area and the blog area as well. If you’d like to subscribe to this podcast, you can always do it on Apple iTunes. If you just go to our website and you go to the podcast page, you’re going to see an icon. If you’re on your mobile, you click on it. It opens the iTunes store, and our podcast would pop up. You can subscribe to it. Pretty neat way to do that. If you need to call us, good old fashioned telephone, (210) 526-0057, (210) 526-0057. Well overall, a pretty quiet week.
We continued to see the stock market really just quietly, I don’t want to say quietly because people are noticing it, but it certainly is continuing to move up. We saw the markets move up about 1 1/2% this week. Dow Jones up 1 1/2%, the Q’s up 1 1/2%, the Nasdaq up 1 1/2%, S&P up a little over 1%. It’s just continuing to move higher, and we’re still seeing small caps move higher on the week. Again, we get this question all the time, which is “When? When, guys, is this thing going to rollover?” Meaning, when is this bull market going to end? It’s really interesting because really our value to most folks the last couple of years has been simply keeping them in the game.
There are so many people that literally if they’re worried about the stock market, they will sell everything. This is one of those times where you have to make a decision. The stock market in the short term is overbought. It’s very ripe for a correction. A correct is different than a bear market, and this is where most people get it wrong. They take their entire portfolio, and they assume that it’s like one stock. I’m going to sell it, so everything goes out into the money market, or they go buy real estate, or they do something. They make these huge moves. If you look at your friends that have done well in the markets over the years, most of them haven’t traded options. Most of them have not ordered a CD online from some person who says he’s got the secret.
They make their money by selling you CDs. They have not made their money by buying gold from X soap opera stars. A lot of them haven’t traded the majority of their portfolio. The majority of their portfolio has been left in the stock market for the long term. Now, having said that, I’m not an advocate of just sticking it in there and leaving it. There are times to do that, and certainly the younger you are, you can afford to do that, but as you age, there are other investments to put in there. The part that’s in the stock market needs to be managed and needs to have risk management with it to reduce risk as much as possible, but this really shifting around making these major changes more than likely is where a lot of folks are going wrong.
I see people every day. They sit in the money market for years and years and years, waiting, just waiting for that stock market to drop. Even if it does drop, it’s much, much higher than where they were when they made that decision to not invest. To me, that’s the biggest determining factor right there of how much money you’re going to have at the end, in retirement to really enjoy. There’s lots of ways to earn money, but the key is to earn it. For whatever reason, folks think the stock market is going to zero. They think it’s going to crash. We do have corrections every year, but it’s really interesting to me.
Again, I have a pretty interesting insight that maybe you don’t because I talk to a lot of people that are in the market or are out of the market, right. I talk to them about the reasoning and why, and we really dig into these conversations. It’s fascinating. The whole behavioral finance aspect of investing, to me, is fascinating and something we study. What I notice is, and I’ve actually challenged one of my folks to go back through client notes, phone call notes and mark when people made big, irrational decisions based on fear or overconfidence. Maybe we’ll publish it at some point without names of course.
2011 was a time the market went down 21%, and there was a comment made to us, “I want to go all cash because I’ve seen this movie before,” meaning, this thing’s going way, way down. You know what the stock market’s done since 2011? How about coming into the election, right? All of these capitulation moments where people say, “I give in. I need to move all to cash,” we’ve marked them with an arrow. It is fascinating to see what the market did after that and where those were. They were literally at inflection points. Now what you look for on the other side, here we are at highs, right, not the high but at highs, it’s interesting.
Do we start to get phone calls of people saying, “I’d like to abandon my income strategy, my safer investments, and I need more stocks”? That would be a concern for me. That would be an arrow on the upside, right, to say, “Uh oh, overconfidence. We’re probably going to start heading down.” It’s human nature. It’s contrarian. I’m not picking on these particular people. It’s just human nature. It’s really interesting. They want more at the highs and want less at the lows and so if you can train your mind to do the opposite … When you go to wherever, hang out with your friends, and you hear the talk about how dominant an Amazon is for example or an Enron, right, you hear these conversations.
You need to have a red flag. Not to say you sell Amazon or not own it, but you really have to do your homework because if those people are talking about it, do you not think that Wall Street already has all their money in an Amazon for example? Full disclosure, we own no Amazon unfortunately, but would I buy it today? No. Would I buy it if it fell to $900? I’d have to evaluate it, but I’d sure like to buy it there a lot more than where it is currently, right. If you can simply train your mind to think a little more contrarian, it’s helpful. That’s not a exclusive, but generally, that’s going to keep you out of some trouble.
Now here’s the problem is that because we don’t have absolute numbers in terms of a ceiling and a floor, everybody thinks they know where the ceiling and the floor is, but they really don’t. Trust me, I’ve talked to hundreds of people over the last several years, and I’ve heard, “This thing’s definitely going down in 2016 or ’17 or ’15” or whatever it is. We’ve gone through corrections, so what we have to do is number one, start with history as a guide, right. We know that the stock market over the long term is going to be one of the best money making machines we have at our disposal. We know that. You can throw real estate in there. I’m fine with that.
You can throw bonds in there. I’m fine with that. When you start going down to gold or cash, it gets a little dicier, but we know these numbers. We can go back 200 years and know that, but we also know that the stock market will move sideways for 15, 20 years, and it will go down 10, 20, 30% at times. We know that, but what’s it going to do over the long term? Obviously, we have to look at somebody’s individual situation. If you’re listening to this and you’re 60 years old, the first thing you have to say to yourself is either “I’m retired, looking at retirement. I’m pretty close. I’m somewhere in that area.” Your time is shorter than a 20 year old’s.
You’re going to use that money sooner than they would use the money. Therefore, you don’t want to be selling when things are going down. Why would you sell? Because you needed the money to live off of, so a portion of that money needs to be in income producing securities so that when the market does inevitably go down, you don’t have to sell those securities to get the cash flow you need. It’s just basic finance 101, financial planning 101. You start there. Then yes, once we’ve got an allocation and a strategy and it could be a couple of strategies obviously, but they’re put together, then we look at the environment in which we are living.
Here’s what we know. Interest rates have been artificially or not even artificially, they have been held down by the Federal Reserve for years, over a decade. They’ve been suppressed. Where would they be on their own? Who knows? Maybe not a whole bunch higher. I don’t know, but they are held down. Because of that, that sent the clear signal to the rest of the world, “You can go borrow money to build buildings. You can go borrow money to buy stocks. You can borrow money for anything, to refinance your house, whatever it is, and that’s going to be okay because we’re not raising rates anytime soon.” The market took that signal and said, “Great.”
In the meantime, the economy actually did start to heal, slowly but surely, despite really nothing in Washington getting done the last several years. It recovered because naturally that’s what economies do. They ebb and flow, and they recover, and they go back through a recession. We will have a recession again, but they’ve been recovering. Things have been healing, healing, healing. By the way, as they were healing, the Federal Reserve still kept interest rates low, so you get this pent up demand for stocks because nobody wants bonds, nobody wants CDs or money markets, so they turn to stocks. That’s been great.
Because they’ve done that, guess what? Stocks aren’t as cheap as they were a few years ago. They’re now expensive. You have to go, “Okay, the stock market itself is expensive, so now what do I do?” Once again, that doesn’t mean you abandon the strategy and sell every stock. It means you go, “Okay, do I have too many stocks?” For example, if my plan long term was to have about 50% stocks, and it’s 65% because it’s done so well, yeah, this is a time you should be reducing that back down, absolutely. Not every stock is the same, and I think that is what we’ve been talking about the last few weeks is the next bear market will probably not look like the previous bear market.
The last bear market, 2008, was an all or none bear market. Everything went down. There was no hiding unless you owned treasury bonds. The next bear market might look very, very different, and so knowing what you own is extremely important. If I buy a stock today that’s already sold off 50%, I’m not as worried about that in the next correction as I am the stock that is still up at new highs because I’ve seen the way the market works. People take profits on things they have profits to take, and they leave things alone that are already beaten up. Once you put those things together, meaning your personal financial situation and the environment, then you come up with an allocation and hopefully something that you can stick with, which is the key.
To me, having an element of income is really important because it is the shock absorber. When the stock market’s going straight up like it is right now, everybody wants the returns of the S&P 500 and the Dow Jones, but they don’t want all the risk with it. It’s real easy to say, “Boy, the Dow Jones looks great this year. I wish I made that kind of money,” and then have all these concerns about North Korea and President tweets and all of these different things and hurricanes. You can’t have all that fear and then say, “But I want all that,” because again, if you had that fear, you probably adjusted your portfolio more conservatively, and so you can’t compare apples to oranges.
If you’re all stocks, then you can. Getting the allocation is proper. Where are we right now? Well, I do think again, we are ripe for a correction because things are stretched. All of our exhaustion indicators, the complacency out there, all of that suggests that we should have at least, at the very least, a pause in the up at the very least. That doesn’t mean it’s necessarily going down, but the odds of making money over the next month, maybe they’re less, right. That’s where the income comes in. That’s where taking some profits comes in, but that does not mean a 20% drop. It could, but it doesn’t mean that. It’s not a definite.
We’ve seen this market primarily in things like small caps, right. We’ve seen small caps go up literally 12% since about a month-and-a-half ago, maybe even five weeks, have been a huge move. Is it because of the tax reform? Probably so, so that is something I would look for a pullback in. If you have small caps, you’re saying, “I want to sell some stocks today, what should I sell?” Small caps would be one of the things I’d probably sell as a trade. It could pull back 3 to 5%, no problem and still be on its way. Small caps have been doing very well, and we’ve also seen a persistent move up in interest rates. Have we not?
We’ve seen interest rates move up, really the 10-year treasury went from about we’ll call it 2.1%, and it’s sitting at about, let’s call it almost 2.4%. You go, “Karl, geez, I remember back in the 80s when we were talking them in the teens.” Yes, but that was the 80s. We’re not there. A move of 2.1 to 2.4 is relatively speaking a bigger move, and technically, it broke out as well. Could we see it break out of this range we’ve been in for a while and go back up to three or whatever it might be? That would be something that could possibly derail the stock market because right now, with rates in check and in an economy that’s okay, the stock market’s going to keep on going up.
We can see by the way, we see there is still demand for stocks. We see it coming in, and it feels like you’re starting to get to this period of the beginnings of capitulation. “All right, maybe I was wrong. I thought the hurricanes would take it down. I thought the election would take it down. I thought North Korea would take it down. It’s not. I guess I’ll dump my money in there.” If we see that with heavy volume, that would be a big red flag for us. Even taking that out, we are seeing the market now, some of these short-term indicators are telling us that we’re stretched.
If you’re sitting on some money and just dying to get it in the market, maybe a pause would be good. If you doing that, you’re probably hoping for some type of smaller pullback that you could take advantage of. Some of the big winners this week, by the way, were things like the airlines really had a good week, and they were a really nice technical setup. Unfortunately, most of our strategies are fully invested. We had no cash to take advantage of it, but airlines really from mid-July, they took a really hard hit. From mid-July, airlines went down somewhere around 15% until early September, and then they bottomed.
Then once they bounced, I had pointed it out to one of my guys in the office and said, “This thing is nice. It’s bounced. If it pulled back a little bit, it’d be a nice entry point.” Again, we had other investments making money, so it’s fine. We didn’t have the cash sitting around, but those are up about 12% from their low in early September. In about a month, airlines have moved up about 12%. They were up almost 5% just this week. Telecom stocks, which have been pretty miserable most of the year, still down 9% for the year as a matter of fact, they were up about 3% this week.
The gold miners, I put a picture out earlier today, Twitter, on our ETF Charts, and I put it out on Instagram and showed a picture that the gold miners broke out back in mid-August. We talked about that we owned them at that time. They broke out. As they went up, they started to go vertical. We took profits on that, and we owned the gold miners. Then they pulled back and gave up about half, maybe two-thirds of their gains. Then we reentered that trade in our aggressive strategy, and except this time, we went to the junior miners, which are more volatile. Now the chart looks like it could be starting a second run, so gold miners, we’re up about 3% this week.
Pharmaceutical stocks, we’re up this week about 2 1/2%. Copper was 2 1/2%. Home builders up about 2 1/2%. On the downside, what was the weak area? Well, oil. Oil was down about 4 1/2%, still zig zagging. If you take a look at the picture from June, you’re getting this higher highs and higher lows. Some people predicting that now we go back under 50 and stay there. We’ll see, but because of that, obviously the energy stocks themselves were all down on the week. XLE was only down about .61%, so it wasn’t big. If you look at some of the things like exploration of production companies and the equipment and service companies, they were down about 3%, so they got hit pretty hard.
We’re looking at the XLE for example, 200, they move in average, and it’s hitting right up against it and pausing. Those were some of the bigger losers, and we’re also seeing railroads were down. Pretty much everything else was mediocre, and then of course, most things were up in the positive because of the markets were going up this week. I started this show talking about when, right, this question that we get all the time, “When is this market going to go down?” I think by trying to answer that, number one, that’s already the wrong question to ask because nobody knows when. What we do know is when we zoom out and we give ourselves enough time, it goes up over the long term, but the long term is not two years.
The long term is 10 years, 15 years, 20 years. What’s interesting about this is everybody was waiting for September because September, over the past 100 years, has been the worst month for stocks. Well guess what? We’re in October. September came and went with nothing, and it was a classic example of why we mention seasonality and we talk about it, but that it doesn’t always work that way. You have to use other factors. Despite horrific shootings, despite horrible storms and devastation, despite constant rhetoric between North Korea and the United States, all of that and yet the market continues to move and it does so with little volatility.
If this year finishes the way it is, we’re going to have the lowest draw down, meaning the lowest drop intra-year going back to pre-Great Depression. Think about that, and if you go, “Okay, well does it have to go back up?” Probably so, but does it have to go up a lot? I don’t know. We’re in a low volatility era, and that could continue for a while. The things that we like to look at and we pointed out in our client newsletter this week was let’s just stand back and look at the earnings. Earnings are the stock market. Are they not? Sometimes they don’t jibe together, but for the most part, over the long term they do. Earnings are going up right now.
In fact, not only are earnings going up, the revenues that you can’t tinker with are going up. For the last two quarters, companies have beat the revenue estimates at the highest rate in two years. You say, “Well that’s the earnings. What about the overall economy?” Same deal with that. Again, the indicators we look at, and we look at several of them, one of them we published, it’s a basket. It’s like throwing a bunch of indicators in one big index. We’ve never had a recession when these indicators were pointing up, and they’re pointing up right now. That’s why we’re not worried about a bear market, but we always worry about a correction.
That is something we always worry about, and so we do have to have some finesse of when you buy things and how you buy things and how you position your portfolio. I wouldn’t avoid the stock market, but I would avoid owning too much of the stock market right now. If you’re listening and you’re 30 years old and you say, “Is this a good time for the stock market,” I would say, “Maybe not with that dollar, but if you’re going to be sticking this money in every week, every month, at every paycheck, you continue to do so.” Then as your portfolio grows, yes, you begin to diversify into other things such as credit, lending, real estate, alternatives, things of that nature.
You put all those things together, and that’s how you end up having a portfolio. Absolutely, the stock market is, again, not the cheapest in the world, and it’s due for a pause, but we don’t see a severe bear market on the horizon. Trust me, for those of who that have been listening well over 10 years, which there’s a lot of you, you know that we’re not permabulls, meaning we don’t believe the stock market always goes up no matter what and you just ignore it and stick it in. Absolutely not. There’s been times I’ve been very, very bearish, and there’s been times I’ve been bullish and wrong and bearish and wrong.
I try to look at the markets for what it is, and it’s not always popular. I can recall in 2007, many of you were listening before the financial crisis. I didn’t know we were going to have a financial crisis, and I didn’t know we were going to drop 55% from high to low, and I didn’t know that there was going to be bankruptcies and companies such as Lehman Brothers that literally disappeared. I didn’t know that. What I could see though was that the stock market was becoming more and more and more narrow, less companies going up, a handful of companies doing the heavy lifting, and also the economy was getting weaker. That was happening in 2007.
Meanwhile, the Dow Jones, because it’s 30 of the biggest companies, was making new highs. I specifically remember people telling me, “What are you looking at? Why are you saying that the market doesn’t look good and you’re getting more defensive? Why is that?” It was because these indicators were telling me so. I’m telling you right now those same indicators are not doing that. Those same indicators are confirming where we are. As you know, for those of you listening saying, “I know the stock market’s expensive though.” It is, but it can always get more expensive, right. That’s not a justification for just going out there and buying it, but it does tell you that we could go on for a couple more years like this.
I was talking to somebody just the other day that said, “Well, you know, I mean everybody knows that, you know, in 2018 to ’19, the market’s going to drop.” Everybody knows that? I don’t think anybody knows that. Just take the facts for what they are. Strip your emotions out of it, right. Some of you, you’re always bearish. No matter what’s going on, the market’s going down. It’s going down. It’s going down. Some of you just think it never goes down and that you can just run outside without a raincoat whenever, and it’s never going to rain. Just have a balanced approach.
I’ve met a lot of you over the years that came in to us one way, and now you see the balanced approach and the benefits of having stocks when you didn’t want them and having bonds when you didn’t want them. Yes, in the short term, we are exhausted so to speak. I think we’re getting stretched, and I think we’re probably one news headline away from having some pullback. Remember, the news headlines may drive short-term volatility, but they will not drive long-term movements in price. Even for some of you technicians, looking at things like RSI, relative strength, those things are very, very high right now.
If you look at some of the indicators we look at, this is stretched. It’s just simply stretched, and we’re due for a pause, but it could be the pause that refreshed they call it where it just moves sideways, gives it some time, and then goes back up to a whole nother level. Yes, if you’re sitting there with most of your money in the money market, it is not an easy time to get in, but that’s why either A, you do it over some systematic time, B, you know what things to buy, or C, you let a professional do it because you have to look at yourself in the mirror and go, “Why would I change” if you just keep doing it yourself.
The people that I’ve seen change are the ones that we’ve worked with and we’ve gone through this and shown them, and they’ve gone, “I see the error of my ways.” They’ve admitted it, and then they moved on. That’s me too by the way. We’re not perfect at this stuff either. We’ve learned, but it’s because we’re doing with millions of dollars and doing it at 50 times the rate that you’re doing it. We’ve seen all the mistakes, and we’ve dealt with every type of client you can think of whether it’s young, naïve person, a widow, divorced people, people that have preconceived notions, “I hate mutual funds” or “I love stocks” or “I only want to do options,” all that stuff.
We’ve seen the pros and the cons of all that, so I think we’ve got a pretty good system down now. It’s not perfect, but I like our mousetrap. What we try to do is try to share some of that mousetrap on the weekends with you. Right now, it was a pretty quiet week, and so what you have to do is just say, “Because it’s a quiet week, and there’s no real easy money sitting there, I’m not going to rush to do anything. I’m going to methodically pick away.” There are still really good deals on stocks out there. There are still some excellent deals. Even though we’re at new highs, there are tons of companies that are not.
Cherry picking those companies and buying a good deal feels really good, especially when the market is at a high. Hey just a reminder, Eggerss Capital, our website eggersscapital.com, our telephone number, (210) 526-0057, our Twitter handle @karleggerss and @etfcharts. We are also on Facebook. You can like us on there, and we are on Instagram as Eggerss Capital Management. If you ever need our help, you can go to the website, you can call our phone number, either way. Many of you are signing up for really our organizing your finances tool. What it is it’s a free tool on our website that you go on, and if you go onto the financial planning section of the site, there’s a big, old button that says “Financial Planning.”
If you click on that, you’re going to see a green bar, and it says “Free Track Your Finances Tool.” You click on that, and the cool thing about it is it’s a three-step process and takes just a few minutes. It links up, and you can start monitoring your accounts via credit cards, checking, investment accounts, 401(k)s, all of that. As they change, it changes in there. It’s a great aggregator. Then down the road, if we ever help people, this is the same system we use for the input. This is where we start our analysis, so it’s a pretty neat system. It’s totally free. We make it available for folks right there on the website, or you can just go to eggersscapital.com/tool, and it’ll take you right to that.
That’s something on the website you can take a look at, so if you need our help, we’re here for you. We appreciate you listening as always. Don’t forget if you want charts, certain charts you want to look at, give us your requests. If you have questions, firstname.lastname@example.org, K-A-R-L@eggerscapital.com is my email address. We’ll try to accommodate that. Obviously, we can’t get to everything each week. There’s a lot of stuff going on, and we try to put out as much information as possible, but we can’t always do that. Thank you for listening and have a wonderful weekend. Take care everybody.
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 decisions 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.