The Safe Income Trade Wasn’t So Safe This Week

On this week’s Eggerss Report, Karl discusses the big drop in income stocks like utilities & REITs.  Are investors sensing a better economy and higher interest rates?  It appeared so this week.

Also, Karl talks about tax reform and what it really means to you.

Karl Eggerss:                      Hey, everybody. Welcome to The Eggerss Report, it’s your investing playbook. Thanks for joining me, appreciate it. My name is Karl Eggerss, I am your host. This is the pre-Christmas edition of The Eggerss Report. We’re going to cover all kinds of things today, so get your coffee, your hot chocolate, whatever it might be. Sit back, and we’re going to discuss the markets, everything financial. We cover everything on this show, practically. We cover stocks, bonds, mutual funds, ETFs, cryptocurrencies, real estate. We cover financial planning. All of that, we talk about every week on The Eggerss Report. Let’s get right to it here.

Eggersscapital.com is our website, E-G-G-E-R-S-S capital.com. Our telephone number, 210-526-0057. 210-526-0057. On our website, you’re going to find all kinds of things, so make sure you go check that out. Including, you can subscribe for free and anytime we write anything, we will send it to you. Anything posted on there into the shows, et cetera, so make sure you go snoop around on eggersscapital.com. Don’t forget, we have a Instagram page account, Eggerss Capital Management. A lot of those are charts, economic reports, stocks that look good, ETFs, anything goes on there. Of course, we’re on Facebook. You can like us there as well. As far as the podcasts are concerned, Spotify, we’re on there. We are on iTunes, we are on Stitcher radio, so lots of different ways to get the information.

This past week, you could go check out a couple interviews. One was about tax reform, which we’ll talk about briefly. The other was about bitcoin, because people are interested in these things. We always talk about what you’re interested in, and what we get a lot of question on, because if we’re getting a lot of questions about something, more than likely it’s a very similar question to what you might have. Let’s get right into it.

On the week, some of the big winners and losers, the … really commodities. When you look at copper and you look at the oil and gas stocks and the gold miners, really took off. I think one reason is because interest rates are starting to move. Now, remember, interest rates have been this low range for a long, long, time. They got very close to 2.5% on a 10-year treasury. When they did that, it seemed like … of course, the fed raised rates, but it kind of broke out of a little … been moving sideways for a few months, and now they were close to 2.5%.

Of course, the next hurdle would be up maybe a little bit higher than 2.6, and then technically we go up higher for there. Let’s see if that happens, but it seemed like once we had that big interest rate move, you saw interest rates move up, obviously, but you saw, really, commodities, things that should be doing well in a good economic environment, with interest rates rising. That kind of made sense.

Now, because of that, guess what some of the losers were this week? Utility stocks, big loser. Real estate. We’re still short in one of our strategies utility stocks. Probably a little oversold in the short term, but they had a really, really rough week. Almost 4 to 5% down this week. We think that’s the tip of the iceberg, to be honest, if interest rates continue to rise. Treasury bonds, obviously, got hit. Low-volatility stocks got hit. Kind of the safer things that benefit from a low interest rate environment really were the things that went down the most.

Now, obviously the elephant in the room is bitcoin, which was … when I said, “These other things were down the most,” that pales in comparison to what some of the cryptocurrencies went through this week. We saw massive selling in bitcoin, in all of the cryptocurrencies, really. The bitcoin investment trust, which is GBTC, that’s the particular one that … I mean, literally got cut in half. We saw just huge moves Thursday night into Friday, and some people went in and tried to buy the dip, they shut … Coinbase halted trading. Some of the futures in bitcoin were halted. Look, I talked about this. If you want to go to our website, there is an interview on there that I did this week regarding bitcoin, because people are curious. Really, what is it? What are the pros and cons?

I don’t own any bitcoin, so I just went out there and told people what I thought about it. I said, “This is something you should study.” You shouldn’t run out and buy something because it’s going up. For people who buy bitcoin because it’s going up, that is a dangerous game to play, especially if you’re using leverage to do so. There are people doing that. Then we see these 20, 30, 40, 50% moves. I mean, this literally can change peoples’ lives in a negative way. Go look at that interview, it’s on eggersscapital.com. We describe what it is and, really, the pros and cons of it.

Obviously, one of the other big things going on this week was a tax reform. Wednesday, it passed. Friday, president signs the tax bill. Again, we have a interview I did on the website, discussing the tax bill. The question was, “Hey, this was supposed to be a middle-class tax cut, what do you think?” My, really, Readers Digest version is that I think that this tax bill … there is a lot of shuffling around. There’s a lot of people who will get some breaks on one side of the ledger and have to pay more on the other side of the ledger. Is this [net net 00:06:37] going to be good? I think it will be good, but don’t expect your taxes to dramatically drop immediately. There are some people that will see immediate relief, and there are most … a lot of people that won’t. Where most of those people will get relief is via the economy getting better, that’s where most of us will get relief.

If we lower taxes, the economy gets better, great. Now, we did see a bunch of these companies, immediately after this bill passed, come out and say, “We’re going to give bonuses of $1,000 to a couple hundred thousand employees.” AT&T did that, Wells Fargo did that, Comcast did that, Fifth Third Bank Corp did that, Bank of America did that, just to name a few. Then in addition, I think AT&T said they’re going to spend an extra billion dollars on infrastructure spending. Are we seeing the immediate effects of this tax bill? Yes, we are seeing that. Those are other benefits coming from this, is that, is it going to grease the wheels?

For people who say, “Well, what if these companies get money back from overseas, repatriation, and they simply go and buy back their own stock?” Well, many of you own those stocks in your 401ks, in your IRAs, in your brokerage accounts, and you will benefit from that as well, if they do that. Overall though, is this sweeping reform? I think it’s a little bit of an exaggeration. This is an old-fashioned, trickle down, corporate tax cut. That’s mainly what this is. I’m not saying I necessarily have a problem with it, but let’s say it for what it is. This is not, “Hey, everybody’s getting a tax cut,” because not everybody is going to get a tax cut. A lot of people will, but I think most people, they’ll see marginal difference in their taxes, including you.

That was a big mover. Now, what I’m seeing, and this is something a little … maybe a little warning sign, is that I’ve had a few people reach out to me this week and say, “Hey, I see that we got tax reform done. I’m bullish on the stock market now, because of that. I’m more bullish than I was before.” We need to discuss buy the rumor, sell the news. You’ve heard that many times, but the reason that the stock market … part of the reason, I believe, that the stock market has really taken another leg up, really since … let’s call it mid-November, the past month, is because of tax reform. A lot of that news is baked in, I believe. It wouldn’t surprise me … and we saw a little weakness, not much, on Friday, but a buy the rumor, sell the news. That now that that’s in there, do we get a selloff now going forward?

The market is stretched, any way you slice it. It’s been stretched. It may continue to be stretched, and it may continue to go up. In the last couple of weeks, we’ve taken some off the table in some of our strategies because it’s just so overstretched, and it needs a pause. It needs a pullback. There will be opportunity still, and we still have a lot of money invested in the stock market, but taking some off the table might be the prudent way to go.

I do believe that some of this may be priced in. The reason I bring up people mentioning this to me is because when you see people that are panicking in the market, wanting to sell everything, “Get me out at whatever cost.” Those are usually inflection points that are a good buy time, but there’s the other side of it that we don’t talk about very often. That is the side that basically where people are congratulating you, or they’re wanting to get more aggressive. They’re wanting to dump the safe stuff and get the more aggressive things. That’s also a warning sign that something could be coming that could lead to a sell off.

We’ve been hearing some of that this week, so I’m a little cautious going into the end of the year here. Obviously, we’re going to see lower volume over the next few days as we go through Christmas, and we go through New YEar’s, that week. Then we enter the new year, and let’s see if its rotation, that we’ve been talking about, happens. Overall, I mean, it’s been great. If you’re sitting out of the market, you’re probably frustrated because it continues to go up. If you’re in the market, and you’re wanting more stocks, be careful. Those are mainly the types of conversations that we’re having right now. It’s not a lot, but it’s a few that I wanted to just discuss. That buy the rumor sell the news is something that happens quite a bit, quite a bit.

Now, we came out this week … a lot of the strategists came out and said, “Hey …” They always talk about, “The end of 2018, this is what we think the S&P 500’s going to do.” Bespoke did a great little summary of this and said … basically, they showed all the analysts and what their levels are going to be. Canaccord lead the list. Some of these people want to be at the top of the list, so they make outlandish predictions so that they can … everybody will talk about them. Canaccord said they think the S&P is going to be 3,100, about a 15% gain for the S&P. On the low side, HSBC was the only one of … there’s probably a dozen, 15 of these that came out. Jefferies, Deutsche Bank, Oppenheimer, Morgan Stanley, Wells Fargo, usual suspects. HSBC was the one that had the S&P dropping about 1% for next year. Everybody else has it going up. In fact, the average is about 6.5%. That’s about the average that they see this happening.

Now, what’s interesting is Bespoke went back and said, “Let’s take a look at all these strategists and price targets and see where these things ended up.” Of course, we’ve had an average of about a 9% increase. Now, most of the time, for example, in 2016, the actual change in the S&P was 9.5%, and the estimate was around 8.4. we saw a little bit of difference there, but of course it’s all over the map with most of these. Bottom line is most analysts are going to try to … the market’s going to be in the 10% range, and that’s the long-term average. Of course, nothing’s ever average. We could be down 20% next year. Those are some of the strategists and some of their levels that we are … they’re predicting for 2018.

Probably the most ridiculous thing going on right now, to be honest, there’s a story this week. We’ve seen this, really, a couple of times over the past few weeks. Companies changing their name or mentioning that they’re going to do something related to the blockchain, or to cryptocurrency. A company, Long Island Iced Tea Corp, okay? You could probably guess what that company does. They changed their name, and … to Long Blockchain. Their stock went up 238% after the company rebranded itself to the Long Blockchain Corp. They had been selling non-alcoholic beverages. Now, they said, “We’re going to partner and invest in companies that develop decentralized ledgers known as the blockchain.” Their stock jumps up.

Now, what’s interesting about this is this insider trading, if they bought shares of their company? Because you could make a case that it’s not. They said, “We’re going to do this. We’re going to change our name,” knowing full well what the reaction is going to be, but they don’t control that reaction. Very interesting, but we’ve seen a few of these companies do this, that say they’re going to change their business, or they acquire another company and their stocks skyrocket. Longfin is another one. Doesn’t this stuff … I mean, really. Doesn’t this stuff smell and look like the dot com bubble? I mean, remember back then, it was if you put dot com after your name, your stock went up. It seems like it’s the same thing now.

It’s very analogous, because I do think that there will be cryptocurrencies going forward, which ones prevail and which ones fail … remember, there’s about … I think there’s 1,200, 1,300 different cryptocurrencies right now. It’s not just bitcoin. There’s a ton of them. Most of them will fail, just like most dot coms failed back in the 2000, 2001 timeframe. It feels and smells very much like that. Now, one thing we know is that the internet did survive and many of the companies survived, but which ones? I warn you about this cryptocurrency mania going on.

There’s several things you should do, and we’ll talk about those over the next few weeks, if you’re even entertaining investing in this stuff. Just be very, very careful. We’ll go through some steps to do that. One of the other things we saw regarding bitcoin, which was kind of interesting. There was a gentleman that, several years ago, was mining bitcoin, back in 2009. James Howells, he was an IT worker in the United Kingdom. He mined his own bitcoin. Basically, he ended up with 7,500 bitcoins. He decided, at one point … they were stored on a hard drive. He decided, at one point, to throw the computer away because it was broken. He kept the hard drive, as a lot of people do. They keep the hard drive because that’s the important data on there.

Well, in 2013, apparently he was moving and he discarded the … accidentally discarded the hard drive and it went into the city dump. So he had 7,500 bitcoins, you do the math. Depending on when you listen to this, bitcoin could either be 10,000, 8,000, or 20,000. That 7,500 bitcoins, when this was written, was worth about $127 million. This guy threw away $127 million. Now what he’s doing is he’s like, “Hey, I need to get into that landfill and I’m going to search for it.” And it’s against the law, and they won’t let him. And he seems to have a pretty good attitude about it. Says, “Well, I probably would have sold some years ago, and no big deal.” But he wants to go through this stuff, and of course, that hard drive is probably ruined from the weather, anyways.

Can you imagine? $127 million of bitcoin. When they say there’s going to be 21 million bitcoins ever produced, this … some of these people lose their passwords, they throw away hard drives. This is the problem. There may not ever be that many in quote unquote circulation. I mean, this stuff going on is, again, stuff that you saw back in the dot com bubble in 2000 through 2002. Amazing.

Before we wrap up this abbreviated pre-Christmas show, we did see new home sales come out, and existing home sales, but new home sales came out on Friday and really blew it out of the water. We’re still getting this good economic data coming out. The question is is that going to continue to translate into bottom line profits of companies? If it does, this thing can continue to run. Because again, what we know is even if you believe the market’s overpriced, it can get more overpriced. In the short run, as I said earlier, we believe that this thing’s a little stretched. Wouldn’t mind or doubt that we could see some type of pullback in the short run. Again, look at what you own. How much of it … of your portfolio is it? If you have something that was 8% and it’s now 15%, you may need to adjust. This is the time to perhaps do that, because there are still bargains out there.

I mean, again, we are by no means bearish at all, but there are certain pockets we are bearish on, and we’ve talked about those in the recent weeks. Those are the areas that we want to avoid. That allows you to continue to participate in the market, but in a more tactical way, shall we say. It is getting harder, because even things that are value are becoming more and more expensive. Just be smart with what you’re doing, and don’t abandon the safe part of your portfolio, it’s there for a reason. It’s very easy to look at the safe part of the portfolio and say, “It only made this much,” and be tempted to abandon that to go invest in things that have already gone up. Remember, you can’t buy yesterday’s returns. Hey, guys, merry Christmas. We will be back here next week. We’re not taking a break through the whole time here, so we’ll continue to have our normal podcast. They may be a little shorter, but maybe we’ll do kind of a year-end review next week and talk about things we’ve learned in 2017, kind of what we’re looking for in 2018.

We always appreciate you following … we have a lot of new followers. Always feel free to give feedback, guys. Karl, K-A-R-L, @eggersscapital.com, is my direct email address. I’ll answer your questions. We like suggestions for the show. We like positive and negative feedback. We really appreciate you listening all this year. Again, have a very merry Christmas. Take care, everybody. We’ll see you back here next week on The Eggerss Report.

Speaker 2:                          This show is for entertainment only and the 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.

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