After a few months off, the bull market is back. Stocks have overcome higher interest rates, tariffs, and nuclear talk and while some of the indices haven’t made new highs, there are plenty of others that have. Also, on this episode, Karl discusses one of the most overlooked strategies available to retirees.
Hey, everybody. Welcome to The Eggerss Report. My name is Karl Eggerss. Thank you very much for joining us. We appreciate it as always. We come to each and every week at this time, or really whenever you want because it’s a podcast, and that’s the beauty of it.
It’s on demand, so we do put these out Saturday mornings. You can listen to it on iTunes, on Stitcher Radio, on Spotify. You can go directly to our website, but for those of you that get it directly emailed to you, that’s the easiest thing to do, and so if you go to EggerssCapital.com, you will see at the very top of the page, you’re going to see a thing that says, “Listen to The Eggerss Report.” It can’t be much simpler than that. You click on it.
It’s going to show you all of our old shows. There’s a Subscribe button. If you just click on that, you will be able to get this sent directly to you, and of course, if you’re on something like iTunes, you can go to the iTunes store and get it there. We thank you for joining us. Our telephone number, 210-526-0057. 210-526-0057.
Our website EggerssCapital.com as we just mentioned. E-G-G-E-R-S-SCapital.com. We’re going to talk about a couple of things today. Number one, we’re going to go over what’s moving the markets, and they are moving, and we’re going to tell you some of the things we did this week. Then, we’re going to talk about what you should do when you retire. There’s a brief moment in time where you can save a lot of money, and really, we think this is one of the most overlooked areas of financial planning for people that are entering retirement.
We’ve probably briefly discussed it in the past, but I want to go over it again because I see it time and time again, so we’ll do that in just a little bit. Let’s first get you what happened during the week. We saw really this … To me, this bull market is getting its second legs, and we saw the technical picture of the stock market really improve over the last few days. Of course, we had this situation in earlier in the year where we were in this correction, but we were holding the lows okay, but the highs were getting lower, and lower, and lower, which is generally a pretty favorable technical pattern, and sure enough, it did break out, and now we’re seeing this come to fruition.
If you look at things like small caps, they’re taking off, and so I’m going to tell you what worked this week, what didn’t work, and then I’ll tell you what we’re doing about it. One of the big movers this week by the way was copper. Copper was up big-time over 7%, copper’s up. Remember death of retail, Amazon was killing everybody, retail was going away? Retail stocks up 6% this week, and we had been saying for a while …
We made some money on retail back in late ’17 , and we no longer own any direct ETFs or anything like that. We do own some retailers individually, but we said at the time, “Look, retail is changing, right?” It’s not going away. It’s changing. Old malls are becoming distribution centers. Amazon is forcing a lot of people to change, and so you’re seeing companies like Walmart, which full disclosure, we own Walmart in our Dividend Plus Strategy, but you’re seeing a lot of those types of companies changing.
Walmart’s really competing with Amazon, and there’s other ones that are changing and they’re later to do so, and there’s of course some that are going away, but retail’s changing, but the retails had a really big week this week. The Dow Jones was up almost 3% this week, so just the 30 biggest companies. The S&P 500 up 1.6% this week, but some of your other big winners, Home Construction. The Homebuilders did really well. The banks, materials, all of those up over 3%.
Pharmaceuticals up two and a half percent. Staples up two and a half percent, so you can see here, this is pretty broad-based, which is really what we’re wanting to see. We don’t want to see a narrow stock market. We want to see a broad-based participation, and that’s what we’re getting right now. On the down side, you would expect the biggest loser, volatility. Volatility.
Whenever the market’s going up, volatility drops. Some of these international markets like specifically Brazil got really hit this week, down another 5%. Brazil now, just since early ’18 is down somewhere in the order of about 29%, 30% just since the peak in ’18, so a big drop off, so look for some of those areas as potential bounce back trades. Fundamentally, it’s hard to really make a case right now, but watch some of those. They’re what you would call, if it was a bullish picture, they would be going parabolic, right? They’d be going straight up.
These are going straight down. They can’t go down at this pace forever, so watch those as a potential trade if you’re wanting something short-term. Utility sector getting hit. Biotech down marginally, so those were some of your things that were down a little bit. Look, as I mentioned, this broad-based rally is what I want to focus on because if you look at things like small caps, and mid-caps and areas like that, they’re at new highs, so even though you’re focusing on the Dow Jones, the S&P 500, which those are still off of their highs, those don’t tell you the whole story.
Remember, the Dow Jones has 30 companies. The S&P 500 has 500 companies, but we need to be looking at thousands of companies, the small ones, the really small ones, the medium size ones. Those are really the heartbeat of America. Those are the ones that are doing well, and you can see it in the breadth numbers. When you look at the, which stocks are going up, it’s broadening. This is a broad-based rally, so if I sound a little bullish, it’s because I am.
I think that this bull market that we have been in and continued to be in, even through January, February, March and April has resumed up. Technically, it looks like we will be, especially on the S&P and the Dow Jones, we will be testing these old highs very soon, and so what are you doing? If you’re still sitting on the sidelines, paralyzed by this market, you have to have a plan to get back in. Earlier this week, in our growth strategy, we had about 20% cash, and we reduced that down to about 5% cash. We didn’t just do it because we feel better.
We didn’t do it because we woke up on the right side of the bed. We didn’t do it because somebody told us to. We didn’t do it because some bald man on TV that has stuffed animals and sound effects told us to. We did it because we’re on a specific system. We have developed a system. It’s not the best mouse trap, but it’s our mouse trap, and we said, “Look, this has an on/off switch”, and when volatility picks up as it did earlier in the year, our on/off switch says, “Get out of the way.”
Now, one way to get back in is if the volatility drops, which it has, so that was one of the main drivers for us getting back in. The other way we could get back in is if, pardon the French, but crap hits the fan, and the market drops severely, we will also use that cash to go and buy, so we have a piece of our growth strategy that is either long, short, or in cash, and it’s been primarily in cash for most of ’18. We did do some quicker trades back in, I think it was back in February when the markets had those really nasty days. We went and bought those. The markets bounced a little bit. We took advantage of that, but for the most part, that chunk of money’s been out.
It is now back in, so our longer term indicators, which have been bullish, but I would say our medium term indicators have also gone bullish, so those are all good things, but you can see it in the breadth. I mean, you can see this market spreading out into all these different areas. Not only did we do that, but a couple other areas that we moved in this week was we really took some profits in the Exploration & Production companies. Those, if you take a look at them, of course they went through some really tough times, what 2014, 2015, and it was probably a once in a lifetime buying opportunity. Plenty of those went bankrupt, but as a basket, it was a great opportunity.
Hard to go through if you owned it, but if you stayed with it and if you added to it, it did really well. We saw a lot of those companies bottom out early 2016, have a really nice run until the end of 2016, and then, they gave back like two thirds of it. Remember, I mean, a lot of these companies went way back down again as oil started to pull back, and so around August of ’17, they’d given up like half or two thirds of their gains that they had made all through 2016, and then we had another run. Now, we’re at the same place roughly that we were back at the peak of ’16, so energy maybe as a specific sector, we’re not as bullish on. I would say we of course still own some energy in some of our strategies, but as a sector trade, we took that off, and where did we move the money?
We moved the money into Homebuilders. Take a look at Homebuilders. Really nice charts setting up. There’s two ETFs, XHB, which is the one we own in our aggressive strategy, ITB, which we do not own. Very similar. ITB has a little more direct into the Homebuilders.
XHB tends to have things in the home-building process. Could be paint companies, could be carpet companies, but that whole area looks really good. Take a look at XHB. Again, we own that full disclosure in our aggressive strategy. Take a look at this chart. A lot of these stocks are still off of their highs, so we really like the fact that we’re able to go buy something that hasn’t run up as much.
XHB down about 12 and a half percent, off of its highs as we speak, and whereas, if you look at something like the Exploration & Production companies, they’re pretty much sitting at their highs. A little bit off their highs, but pretty much near their highs. Take a look at that area. Again, don’t run out and buy these things because I mentioned them, but go research, “Why do we like these?” Really, it’s more of a technical picture.
Yes, I like that these areas are tied to the economy and the economy is doing well, but take a look at the picture. This thing was in a pretty severe down slope, and then for most of May, the Homebuilders were moving sideways. They’ve clearly broken out really heavy volume, especially on Friday, so take a look at that area. Those were a couple of the areas that we moved this week. Look, as I said, the bear’s argument, which may be valid by the way, is that we are, this is as good as it gets, things have peaked, and we’re only going to see slow down going forward, and we have a federal reserve that is threatening to continue to raise rates, and so their fear is, “Look, they’re going to keep raising rates that’s going to cause what could be a credit bubble”, people borrowing a lot of money the last few years, so they’re going to be raising rates that’s going to hurt those people.
At the same time, the economy is going to naturally be slowing because it ebbs and flows. That’s a disaster for everybody. That could be the case, but this stuff doesn’t happen overnight, and I think that’s the key, is that you have to stand back and look at these long-term indicators, and look at the supply and demand for stocks. What we see right now is there’s still plenty of demand for stocks, there’s not a lot of supply coming on, and so we are still bullish, and we would stick with that. Does that mean that we do not have corrections?
Of course, it doesn’t. We will have corrections, but I like the fact that we’ve gone through three or four or five months of kind of not going anywhere, which is good because it allows for the valuations to catch up. Remember, during this time, what did we see? Earnings going up dramatically, so if the price of the stock doesn’t go up, but the earnings do, doesn’t that make the stock cheaper? Yes, because the PE ratio just got smaller.
Price didn’t go anywhere. E went up, so the P stays where it is. The E goes up. You do the math, things are cheaper. That’s been a good thing. Now, the market’s recovering here, and you go, “Why would it be going up now?”
I don’t know. We could look at all kinds of things. Maybe it’s because Kim Kardashian is getting people pardoned. Maybe it’s because Dennis Rodman is going to go to the North Korea Summit. I mean, is this the new cabinet that we’re looking at in the future?
I don’t know why the markets are going up as far as now versus three weeks ago. I can just tell you that in the big picture, we hear tariff talk, all negotiation going on. We hear denuclearization. Do we believe it or not? I don’t know, but I do know earnings are going up. We’re in a particularly good Goldilocks period.
Are we blind to the fact that we have all this debt, or we’ve got all this borrowed money from all over the place? Are we blind to the fact that we’ve got real geopolitical risks? No. We’re not burying our head in the sand. All I can do and all I’ve done in my whole career is look at, “What is the market telling us? What are investors doing?”, because in order for this bull market to turn into a bear market, there has to be people stop buying stocks, and they have to start selling stocks, and on whole, and we’re not seeing that.
We’re not seeing it in masses. Okay, yes. Do we see occasional selling and a lack of buying? Yes, but are we seeing it in the masses? The answer is no, so that’s an encouraging thing.
That tells us that, “Look, we’re still in a bull market”, so you need to position yourself, and if you’re sitting there on the sidelines going, “When do I get in? I’ve been waiting, waiting, waiting”, when you’re comfortable, it’s going to be, I don’t want to say too late, but when you’re comfortable, you’ve missed a lot of gains, and so therefore, you have to either have a system like I just mentioned we did, or you have to average into the market. Here’s the thing, if you’re sitting on the sidelines now, and you say, “I’ll just average in the market”, what’s going to stop you from trying to get back out of the market again next time you get fearful? Again, have a system, and if you can’t do it, you hire an advisor to do it for you. That is part of the premium you pay, is to say, “I want to take this off my hands and let somebody else do it.”
“I want to go fishing, go hang out with grandkids, go play golf”, whatever you’re into. That’s why you have somebody do it so you don’t have to decide when to do these things. You need to get on a system. You need to get a portfolio plan together so that you can go on and live your life. Now, speaking of living your life …
This is really interesting. When we … Again, pardon me if we’ve talked about this before, but it’s been interesting to watch every time a retiree comes in, let’s say they’re 62, 63 years old, 64 years old, maybe 65, and all these things are running through their heads, and we do this all the time. We do this financial planning for folks, and we look at everything from the 30,000-foot view. We look at this and we say, “Okay. Let’s analyze this.”
“Nothing in a vacuum. We look at everything individually. Do they have a pension? Do they have big retirement assets? Do they have taxable money? Do they have any Roths?”
“What are their legacy goals?” In other words, “Do they want to leave money to the next generation, or do they want to leave money to a charity?” Those things are all important, so what we do, oftentimes … This isn’t everybody, and that’s why you have to analyze it, but oftentimes, what we see is people retire or they’re about to retire, and they’re first freaking out because they’re not going to have income on a daily basis, and so their natural tendency is to take social security as quickly as possible, and we usually will encourage them not to if they can. It’s a great, it’s longevity insurance with social security.
Now, what’s going to happen is picture this retiree that retires at 65. We have told them because of their situation, they can defer social security until 70, so they’re going to have four, five years of zero income, okay? Let’s just hypothetically, they have zero income. Here’s a really interesting trick. What you do is you look and you say, “I don’t want to at 70 years old have social security income, and at the same time, have required minimum distributions out of my IRAs, which I’m forced to take, and pay all these taxes on that because I’ve got big IRAs because I had a big 401(k), so what do I do?”
What you do is you do some Roth conversations during those years. We call it ‘Filling the bucket’, because what happens is if you graphed your income, you would see it dip down at retirement, and then when social security kicks in, all of a sudden, it goes back up again and you have some income, so you have this gap of really no income. Instead of us going, “That’s a negative”, we turn it into a positive, and go use that low income to do some Roth conversions. What you do is you convert some of your IRA to Roths. Now, why would you do that?
Why would you force yourself to pay taxes? Number one, you don’t have to, right? There’s no guarantee that it’s a good move. I mean, look, giving away money now versus not doesn’t seem like a good deal, but if you have legacy goals, leaving it to the kids, and you want your required minimum distributions to be less down the road, you can convert, and by the way, you may be able to do some Roth conversions and not pay any taxes on them because remember, you can have income. You get deductions, so you have these deductions, and what’s going to happen is because of that, there’s a portion you can convert without paying any taxes, or what we do is we like to set some type of tax rate that we’re not willing to go above, and we calculate all that for folks, and get their income up just to that bracket so they’re paying the lowest bracket maybe for a part of it, and we do these conversions over the next several years.
Then, at 70, they have income, they have some nice Roth IRAs that are growing tax-free, and they don’t have to have the required minimum distributions as much on their traditional IRAs. You following me? That is a really neat trick. Now again, it’s not for everybody. It depends on your goal.
It depends on your income, “How much do you have on the outside?”, “Do you have your other income when you retire?”, all those things. That’s why you have to have an advisor calculate these numbers for you, and because it’s very difficult to calculate them on your own, and you don’t want to make a mistake and pay taxes you don’t have to. You don’t want to do this just because somebody said, “Hey, Roth conversion seem like an interesting idea.” They don’t work in every situation, but I can tell you, we use them enough to where it really makes a lot of sense in a lot of situations. Now, again, what are you guessing on so to speak?
How long you might live, what you’re going to do with that money down the road, what are tax rates going to be in the future versus now. Those are all real considerations, but what we’re trying to do is narrow things down and go with the odds, okay? If we look and say, “You know what the odds are? This couple is not going to use all of their money, and they’ve told us specifically they would like to leave as much money to the next generation as possible”, boy, a Roth IRA is a great way to do that. Now, remember, you don’t have to have a Roth IRA to do this.
You may never had a Roth in your life, and maybe it’s because your income was high enough, you couldn’t ever do one. You were disqualified. You can’t contribute to a Roth because of your income is too high. There is no limit on conversions. You can convert because IRS says, “Convert all you want.”
“We want that tax money now”, and you’ve been trying to say, “You know what? I’m in my 60’s. That doesn’t make any sense. Why would I do a Roth conversion?” It can make a lot of sense. It’s not about how much longer that’s going to grow.
It has to do with taking advantage of a low tax bracket. Now, if you’re somebody that does have a pension, you have a second job, this may not apply to you, so we have to look at the numbers, but I can tell you, it’s one, little financial planning trick that I think is overlooked quite a bit because you’re trained and you’ve heard Roth IRAs, and you immediately think 18-year olds, right? That is, yes, if you’re accumulating money, you’re in a low-tax bracket, a Roth is a great place to do it. Even if you have a 401(k), you should be telling your kids and grandkids, “Look at the Roth 401(k) if it’s available to you, or fund a Roth on the outside because take advantage of your low bracket right now because hopefully, you won’t be in that low bracket eventually”, and so they can accumulate some big wealth inside of a Roth IRA. That’s what we always think about when we talk about Roth IRAs, but there’s also this conversion, and it really makes sense.
Now, I don’t know what the future holds for the Roth IRA. I think it’s intact, but we did hear rumblings really under the prior administration of potentially taking Roths away, all of that. I think regardless of what happens in the future, everybody’s going to be grandfathered, right? They may say, “We’re going to do away with the Roth”, but everybody has theirs. It’s stuck in there.
You’re good to go for the next several years, but that’s a trick. Again, I would encourage you, there’s a lot of things to think about before you run out and do this. You cannot make these decisions in isolation, whether it’s social security and when to take that. We tell just as many people to take it sooner rather than later than we do deferring it. Again, it has to do with their situation or your situation, not just read it in Money Magazine, and therefore, I should go do it, okay?
Keep that in mind. We’ll try to do more. One thing I want to do over the next several weeks and months is I want to continue to try to bring you information from all different angles, financial planning, investment, but also want to bring in as we’ve done in the past some experts in areas of taxes, real estate, you name it. We don’t have any kind of regular segment. I don’t have guests on all the time as you know, but I’d like to continue to bring some people on occasionally to discuss these things, areas that are maybe their expertise, not mine, and so we will do that because we want this show, we want you to get something out of it from a financial standpoint, and plenty of you do.
A lot of you share this show. We appreciate it. A lot of new listeners all the time. I ran into a lot of people who say, “Love it. I love listening to podcast. I always get something out of it”, so thank you very much.
We know that our audience … It’s amazing. Our audience is much more interactive in terms of not only just getting information and watching and listening to it, but also the feedback than what the traditional stats would say. Most people do not open emails when they get them. You guys have elected, all of you have elected to listen to this show, and so when you get it, you’re probably looking forward to it and get some kind of nugget out of it.
Again, we’re open to suggestions on what you’d like to hear in the future. We’re open to criticism, whatever you want, or just questions, so if you need to email me, it’s Karl@EggerssCapital.com. That’s my direct email address. I answer my own emails, and you can always call us at 210-526-0057, and our website, EggerssCapital.com, E-G-G-E-R-S-SCapital.com. We continue to get a lot of accolades for the website being redone probably, maybe it was about a year ago we redid it, and we really, really like it because it’s straightforward.
Somebody said, “You should do endorsements on there. Have some quotes from some people that like it or have done stuff with you.” I said, “You know what? We have rules and regulations, and we don’t want any endorsements, so thank you very much”, but we just put the information on there as it is, and we appreciate you guys listening and giving us the feedback. All right. Hey, have a wonderful weekend.
If you’re in the South Texas area or maybe anywhere, I don’t know, stay out of the heat, and if you’re going to stay out of the heat, go jump in the pool or something. Have a good weekend. We will see you back here next week on The Eggerss Report, your investing playbook.
This show is for entertainment only, and information provided by the host, guests, and this 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.