Market Goes Up On Implementation Of Tariffs?

On this week’s show, Karl discusses a choppy week but ended with a bang as there was a broad based rally AFTER the implementation of tariffs by the U.S.  A classic sell the rumor buy the news event.

Transcription:

Hey, everybody, welcome to the Eggerss Report. It’s your investment playbook. Thanks for joining me. My name is Karl Eggerss. I’m the President and CEO of Eggerss Capital Management. We’re a registered investment advisory firm, located in south Texas, and we really help people all over Texas, all over the country.

Nowadays, with technology the way it is, it’s very easy to do, so if you ever need anything from us, of course, you can go to our website, eggersscapital.com. Our telephone number is 210-526-0057. We thank you for joining us.

We have a lot of new listeners each week on the podcast, a lot of new people. So, we always like to tell you a brief summary of what we do on this podcast. Number one, we try to educate you, so we tell you a little bit about what’s going on in the markets currently.

The stock market, the bond market, anything the financial market, things that are sticking out, things that are moving in the market. It’s kind of where we think things might be going.

False alarms. So, we try to filter out the noise and tell you, “Hey, don’t pay attention to that. Pay attention to this.” Those types of things. But, we also cover financial planning. Whether it’s talking about social security now, or is this real estate transactions, or retirement analysis, ROTH conversions.

All those things that maybe you haven’t thought of before. We try to bring those to you so you can get something out of it. A lot of you, obviously are very loyal listeners and have been for a while, so you kind of know the drill, but for those that are new, welcome aboard and we like to get your feedback.

If you ever want to email me, Karl@eggersscapital.com. I’ll answer your question either on the air or I will email you back or sometimes both. That’s the way this work. We like the two way conversation. The two way street here. That’s what we do. Again, eggersscapital.com and our telephone number, 210-526-0057.

The other thing I did fail to mention that we like to do is obviously we meet with a lot of clients. When we do so, we run into all kinds of different scenarios. I think it’s helpful to share some of those, what I would call case studies with you because it gives you a different perceptive or you could relate to something and say, “I’ve often wondered that. I’m glad he brought that up.”

I like to bring these real life situations to you and you can hopefully learn from them because you’re looking at things through your particular lens, which isn’t right or wrong. It’s just you have one perspective.

What we try to do is say, look at it from all these different angles because there’s a lot of people who view the markets differently from one another. They view retirement differently from one another. They view how they are going to gift their money or not gift their money differently from one another.

Again, just keep an open mind and kind of an agnostic approach if what we like to do. Kind of look at everything from the standpoint of hey, if we’re dropped on this Earth today, and we’re given these rules in front of us, what would we do? That’s how we approach it.

Let’s start off this week going through, what moved the markets? It was kind of a weird week. I don’t know about you, but anytime, any type of holiday lies in the middle of the week, it’s always a little difficult. Hey, I don’t like it personally because I’d rather a holiday be on a Thursday or Friday and kind of have a long weekend, but when it’s broken up the way it is, you know the stock market closed early on Tuesday, at noon, central time.

Then, the stock market was closed all day for 4th of July. Then, we were back at it on Thursday and Friday. It was kind of a split week, if you will. As we string it together, what did well this week. Well, we had BitCoin jumped this week, if you care about cryptocurrencies.

Another thing that jumped, one of the strongest areas, was Mexico. If you recall, a couple of weeks ago, two or three weeks ago, I said from a short term perspective, I could see Mexico having a nice little rally. It’s done that. Just since really the last, I would say, probably the last maybe month or so, we’ve seen it up about 15, 16%. It was up 7% just this past week alone.

Now, here’s the thing. I want to be clear about something. When I mention something on the podcast, something specific, whether it’s a stock, or an ETF, or whatever it is, the first thing I’ll do, is I’ll tell you if I own it or not for full disclosure because you don’t want to be listening to somebody who’s has an ax to grind and tell you to go buy something because they own it and they’re hoping the price will go up.

We always tell you if we own it or not, but we also don’t want you to run out and buy it, just because we’re talking about it. If we’re talking about it, it’s because we want you to study about it. We think there’s something interesting to look at, so we bring it to your attention.

So, we talked about Mexico. We owned Mexico after the Presidential election, back in November of ’16. Really good trade for us, and we continue to watch it, so we don’t own it currently and didn’t own it at the time we talked about that particular trade, that it looked good as a set-up.

The reason why is because we really want to own more diversified portfolio over emerging markets right now because we still like that. They’ve been beat up here in their last couple of weeks because of tariffs and the stronger dollar, but we really like emerging markets. So, do we hone in and get specific? Occasionally, we will and go buy a specific country, but we don’t own it right now.

Sometimes, I’ll still tell you about things that I like, even though I might not be buying it for myself or clients or anything like that and there’s a reason behind it. It’s not that we don’t like it. It’s just you can’t own everything.

So, I mentioned Mexico a few weeks ago. It’s turned out to be a really good trade. Kind of went vertical the last few days. It was one of the strong winners this week, up about 7%. Biotechnology, up almost 6%, this past week. Again, only four trading days.

What else did we see here that was up? The pharmaceuticals, the healthcare industry, did really well. The Russell 2000, small cap stocks, are doing really well. Up about 3%, and remember the theory being that they’re not as impacted by tariffs and a strong dollar, so people are going to an area what isn’t going to be hurt by a strong dollar.

Remember, what does a strong dollar mean? That means if a country sells their goods overseas and has to bring that back into the US, those profits, they have to convert it back into dollars and they don’t get as much money in that exchange. That’s what that means.

Small companies don’t have to deal with that. That could be why the Russell 2000, the small caps, are up pretty good this year. Retail, another good week. Look, retail’s up over 10% this year. Remember when it was left for dead? Kind of been struggling the last couple of weeks, but again, a strong week and a strong year, so retail continuing to do well.

Utility stocks are on a roll. I still think that’s an area that we may be looking to reestablish a short, in our aggressive strategy, where we actually bet against those because they had been really beaten up in December and January, which we expected to happen.

Then, now they’ve bounced back. We may look to short that because I still think those are over-owned and people are buying those because they’re starting to worry about the economy and if it’s going to slow down. If it does, and interest rates don’t go up, utilities are a great place to be, but I don’t know if that’s necessarily going to happen.

Utilities did have a good week though. A lot of things had good weeks. Airlines had a good week. Semi-conductors kind of bounced back. Technology, in general, had a good week, so those look like those were vulnerable, but they came back strong.

Now, on the flip side, the stuff that’s getting hit, copper. Have you seen what’s happened to copper lately? I mean, just since early June, literally in the last, I would say, maybe 18 trading days, 20 trading days. You’re talking about down somewhere in the order of about 16, 17%. Big, big drop for copper.

Of course, people are watching that and saying to themselves, “Wait a second. Isn’t that the barometer for the economy? Is that telling us something?” I don’t think so. I wouldn’t say that just yet. Very, very over-sold, so let’s keep an eye on copper. That could be something that bounces back in the next couple of weeks.

Of course, aluminum. Remember Wilbur Ross holding up the Campbell soup cans on TV, talking about it’s not a big deal. Well, aluminum prices have spiked up after that. They have been coming down, so they were down pretty hard this week.

Oil. Oil stocks, or oil in general, are down just a hair. Silver down just a hair. Energy stocks down just a hair, obviously, with oil. Interest rates down a little bit, sitting at around 2.8%. Those are kind of your outliers and for the week, the NASDAQ, as I mentioned, up about 2.3%. We saw the S&P 500 up about 1-1/2%.

Let’s see. Yeah, pretty much those were the big outliers. The Dow Jones up about 3/4%. A lot of movement. Not a lot of necessarily action in the main indices, but we are seeing things seem to be settling down.

In fact, if you take a look at the stock market, let’s just call it the S&P 500, I posted on Instagram and Twitter a picture of the S&P 500 hourly. Now, I’m not suggesting to go trade the market hourly, but some of you, if you’re looking for entry points, the more you zoom in, the more you can determine if it’s a good entry point time or not.

I pointed out that the S&P 500 may be forming a bottom and it could find support and boy, did it hit it exactly on the mark that we had talked about and it bounced. Since that time, you’re looking at the market bouncing probably somewhere in the order of about maybe 3% or so.

It had a nice little bounce and it broke the downtrend. That was really the important part, so if you look at the S&P 500, which is just one index, it had been pulling back, pulling back, really since mid-June and it bounced. Not only did it do that, it kind of bounced near the 200-day moving average.

All these technical indicators look like we may be rolling up. We had some pretty good demand this week. Again, don’t overdo things here. Don’t get too bearish. Don’t get too bullish. Don’t overtrade. None of that stuff, because we are still in a bull market. I want to be clear about that. We believe that we are in a bull market.

Now, again, we’ve always talked about, okay, how do you navigate? Do you just ignore everything else? Do you ignore short term signals and all these things? No, I don’t think you do that at all, but keep your eye on the prize first because if you determine that you’re in a bull market, then you can build your portfolio based on that.

We believe we’re in a bull market. We don’t think anything’s changed. You could say, “Well, what about this? What about this? What about this?” You can say all of that and those are things we can discuss and chat about and may impact the market eventually, but I can tell you what investors are doing.

Investors right now continue to buy stocks, but more importantly, they’re not selling stocks. I mean, there is just no selling pressure. Of course, that can change. It did in January. I mean, the market had a nice little 10% pull-back in January.

Selling can occur and we’ve really gone nowhere for most of this year and that’s frustrating some people. The theme of last week’s podcast, in the last couple of weeks, has been patience. We have to be patient. This is not … Yes, we would love to win the battle all the time, but we really want to win the war.

We’re in a bull market. There’s no doubt about that in my mind. It’s just a matter of, are we going to have a deep correction? Are we going to continue to move sideways for a while? I mean, look, as I’ve said before, the market is adjusting to the fact that the economy is doing well. The fed has acknowledged that. They’re raising interest rates and everybody’s throwing a pity party.

Investors are saying to themselves, “I don’t like this. I liked when the fed wasn’t raising interest rates.” Well, they are and it’s because the economy is improving. We got a good jobs report on Friday. Low unemployment. Everything is fine. Wages picking up speed a little bit, not too hot, not too cold, kind of Goldilocks.

Now, are there issues with debt and we’ve transferred the debt, a lot of the debt, from the individuals in this country, and now the corporations have taken on all this debt, and countries have a lot of debt, so we’re not putting our blinders on, but what we’re saying is, when those things do start to matter to investors at some point, which they probably will, we will see it show up in the data as we analyze it and the selling pressure will pick up, and we might get defensive at that point.

The short moves, day-to-day, week-to-week, even though it’s frustrating because this market hasn’t gone anywhere in a few months, it’s digesting the fact that we are adjusting to a new period. We’re adjusting to the fact that the fed doesn’t have our back anymore as much.

They’re not raising aggressively, but they’re still raising rates and markets don’t tend to do well when the federal reserve raises interest rates. That has been a multi-month adjustment and we’ve seen it.

Then, you pile on top of that, all these tariffs, which billion here, billion there, billion here, and what was interesting this week, was everybody said, “Oh, no! What’s going to happen at the stroke of midnight and we actually implement some of these tariffs?”

Well, lo-and-behold, emerging markets went up on Friday after that. And, the stock market went up, quite a bit on Friday. So, emerging markets, by the way, again, we love that area. We think that not only is it good in the short term, it’s good in the long term as well.

But, it’s interesting how everybody comes in today scratching their heads, or I should say, on Friday, scratching their heads, and saying, “Why would the market go up on Friday?” Well, it’s because again the market was pricing in tariffs.

So, I don’t want to see this, but at the end of the day, this is tough stuff. It’s a high stakes game of chicken that all these countries are playing with each other, but it’s going to happen, some form or fashion. Let’s see who gives, right? Who says, “I’m out.” We’re going to see that play out, but that’s been an overhang for the markets because will it affect our economy? Will it affect economies of other countries?

The answer is, of course it will, the bigger these numbers get. $200, 300, 400, 500 billion dollars of tariffs will eventually impact. As I said last week, it’s really more a function of what do companies do? Do companies start to anticipate this and hold off hiring people? Hold off building factories?

That’s the thing that I think could cause some angst and also hurt investors from really wanting to buy more stocks. But right now, I think things still look okay.

Again, what are your options right now? Do you want to own bonds right now? I don’t want to own bonds. Real estate is looking toppy. I can tell you, as we transition to another topic here, as I’ve said before, I have never met a client that didn’t like real estate and that’s always worried me.

I want to talk to you about real estate in the short term from an investment standpoint, especially it could be the commercial, or it could be the residential. I oftentimes meet people that have condos. They have townhouses.

Things that they have bought for an investment and they tell me, “I don’t know if this area is going to do extremely well. I don’t know if … We didn’t buy it for a steal. We bought it okay. It’s in this pretty good area, but I’ve got a mortgage on it. I’m paying taxes and I’m paying this. I’m paying that. What do you think?”

What do you think? We run the numbers and we go, “Yeah, the only way you’re going to make money from this, if you rent it out, is to get a much higher rent than you think you’re going to get. Number two, that the value, the price appreciates on that particular investment.”

They’ll oftentimes tell me, “We don’t think that’s going to happen.” To me, if you own real estate, you either have to have … You bought it cheap or you anticipate it going up in value dramatically or thirdly, you have to have a lot of cash flow from it. Sometimes, and most of the time, what I see is, people don’t have any of those.

They have okay cash flow. They go, “As long as it’s covering the mortgage, I can hold it.” Yeah, but the mortgage is a lot of interest that you’re paying. You’re not really building principal a lot in the first few years.

Yeah, it’s okay if you think the price is going to go up, but if you don’t think it’s going to appreciate, then again, it makes it not that great of an investment. I guess if I was to assess what’s going on right now, people are probably …

I don’t know if they’re quite as bullish on real estate as they were tech stocks in the ’90s. That was kind of extreme, but I can tell you, people are a lot more bullish on real estate than they are right now about stocks.

That worries me a little bit because watching a TV show, overpaying for real estate, not anticipating all the numbers and doing all the number crunching, you can end up not doing very well. It’s not very liquid either. I like real estate, don’t get me wrong, and I think it plays a part in a portfolio.

So, have you noticed all these people watching these shows? I mean, the flipping shows. I can buy a house and put some real neat crafty things in it and all of a sudden, it’s going to jump up in value, $50,000. It’s nice, we all look at that, but I really don’t believe a lot of people put the pen to the paper and analyze this. They feel like, it’s tangible.

I even hear commercials now talking about, “Do you want to invest in real estate that are actual real properties as opposed to stocks? Those aren’t actual real stocks.” I mean, when you invest in stocks, you own part of the company. It’s a small sliver, but it’s no different. You own a bond. You are lending actual dollars to an actual company or an actual person.

All these investments are real. The question is, what’s the liquidity? How much is it going to grow? Does it spit out any cash flow? What’s the tax situation? How much effort is into it? That’s another thing. The beautiful thing about public markets, whether it’s real estate or stocks, is that I can click a button and get out pretty easily.

When I’m dealing with real estate, tangible, real, real estate, it can be kind of a pain to deal with. So, it does serve a purpose in a portfolio, but how do you do it? There are many ways to do real estate. Public [reeds 00:20:42], private [reeds 00:20:44], individual homes, individual condos. You could do a strip center, industrial park. There’s all kinds of ways to invest in real estate and they’re all diversified.

Again, I like all of them, but when we put a portfolio together, the first thing we look at, if somebody says, “I like this,” or, “I like that.” Really, it’s not about your feelings, it’s about what makes sense for your goals and your situation.

The best way to do it is again, look at these things from various lenses. How liquid is this investment? How much do we anticipate it to grow? Does it produce any sort of cash flow? How are we taxed? Is it ordinary income? Is it a long term capital gain, preferably? Is it qualified? Does it have a qualified dividend? How safe is it?

I hate to tell you, but there’s really no investment out there that has all of those characteristics that check all the boxes. It’s really about building a portfolio. So, diversification is not buying four different mutual funds. That’s not diversification.

You are subject to severe volatility. You’re subject to a potential crash, right? How safe is it? It’s probably going to grow for the long term, but what if you need it and you have to sell that stuff at the time that it’s down? That’s when you start to pair it with maybe municipal bonds. You start to pair it with savings, CDs, right?

Then, again, well, if I’m going to give up liquidity for this investment, I’d better be compensated for it. That’s how you put the puzzle piece together and that’s when you really start to diversify.

This is nothing new for those of you that have listened for all, you know I’ve had this message for a long time. I think the portfolio construction is, unfortunately, underappreciated, because we all have our biases. I like certain investments more than others, but I force myself to do other things, because I know it’s good for me.

I don’t like certain vegetables, right? I would like to eat cake and pie all day long. I’ve got a sweet tooth, I admit it, but I’m forced to eat other things that are good for me because it’s balanced. I have to.

Having said all of that, again, be careful. The reason I bring this up is because, again, I had a case study. I had somebody I was talking to who just “loves” real estate. My thoughts and my comments to them were “That’s fine. It fits in a portfolio fine, but let’s analyze, why did you buy it? Does it make sense to own it? What are your options here?”

What we found out, was when we crunched the numbers, it really was like putting the dollar bills under a mattress, but for a whole lot more stress. Now, did they learn a lot through the process of buying the real estate and doing all these things? Yes. Did they learn a lot and going through that whole process? Yeah, absolutely. Learned all that stuff, but it was work.

So, there was some tuition they paid. Did they lose money? No, but was it really worth it? Maybe, maybe not, but at this point, what do we do? Again, this is somebody that is diversified, so this is not somebody that is just all real estate, but people do tend to do more of the things that make them money. That’s fine.

If you have your own business and you know how to make money with it, that’s all fine and dandy, but to diversity into the public markets makes a whole lot of sense. That’s my message for you today is, make sure that you are diversified in a real way, a meaningful way.

Again, it’s all about when do you need the money? Because if you have a high cash flow, high income, you can afford to take more risks than somebody else because you’re not going to need to take that money out of your account at a bad time. That’s just a little tidbit.

Hey, don’t forget, we got a full week next week. We’re going to have a lot of, of course, more economic data coming out. We always like your feedback on the show. 210-526-0057. That is our telephone number. Our website is eggersscapital.com.

If you want to get the podcast, we are on Spotify, the Apple podcast, or iTunes, we’re on there. We are on Stitcher Radio, iHeart Radio. You can subscribe to our blog, right on our web page. Eggersscapital.com. Of course, you can always follow us on Twitter @karleggerss is my handle.

Have a wonderful weekend. We will see you back here next week on the Eggerss Report. It’s your investing playbook. Thanks guys.

This show is for entertainment only and information provided by the host, 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.

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