Blue Chip Gone Bad

In the not too distant past, General Electric was one of the most valuable companies in the world.  GE was the bluest of the blue chips, the maker of light bulbs and everyday appliances, a company so solid and trusted and reliable that it was a standard holding for retirees who bought it because it paid an old-fashioned quarterly dividend.

ge-led-bulbs-led11da19-870-h-64_1000Now, GE’s stock price has plummeted to less than $10 per share, its its renowned quarterly dividend has been reduced to a penny per share, and there’s actually talk on Wall Street that GE debt — which is now rated at BBB — could be reduced to junk bond status.

What happened? Many things have contributed to GE’s abrupt fall.  The company has a lot of debt, some of it generated back when GE had a AAA rating.  The debt has put GE into an increasingly leveraged position as the company’s stock price has fallen, which in turn has put pressure on the trading price of GE bonds.  The company’s lines of business have experienced some down years, and prior management was viewed as too slow to respond to the challenges facing the company.  To address the problem, GE has shifted to new management, which is trying to sell off assets to improve the company’s capital structure, boost the stock price, and keep the company off the junk heap.  And, as GE sheds assets, new management will have to figure out what the company is and where it is going, long term.  GE can no longer get by on its reputation.

GE’s current plight is another example of how the American economy moves quickly, and if companies don’t move with it they can be left behind.  As recently as 2005, GE’s stock market price made it the most valuable company in America.  Now, it’s fighting for survival.  And in boardrooms throughout the corporate world, CEOs should considering this cautionary tale and asking themselves:  “What should I do to keep my company from becoming the next GE?”

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Dow And Up And Dow Again

I don’t know what’s harder to read about right now:  political news, or the stock market.

dreamstime_xl_29871962-customSince I don’t want to lose any readers, we shan’t be talking about political news.  But checking out what’s been going on in the stock market recently is equally stomach-churning.  October has been one of the worst months in the stock market in a very long time, generating talk that we’re in the midst of a dreaded “correction.”  Even after springing back up by more than 400 points yesterday, the Dow Jones Industrial Average is still down almost 6 percent this month, making it the worst month since August 2015.  The news for the S&P 500 has been even worse:  in October its down almost 8 percent, its worst month since May 2010.

And for those of us who aren’t working on Wall Street, the movements of the markets seem random and inexplicable.  Stock are down, then up, then down again — sometimes, all on the same day.  On Monday, the Dow surged upward, then plummeted, and ended up covering more than 900 points in its abrupt mood swing.  You read the reports on the markets that try to make sense of the movements — on Monday, for example, the stated culprit for the downturn was concerns about new trade actions with China, and on other bad days it’s those nefarious “profit takers” — and you really wonder if anybody knows why the markets move as they do.  And this shouldn’t come as a surprise, either:  after all, the markets are the sum of the actions of millions of individual investors, mutual funds, trading bots, institutional investors, portfolio traders, brokerage firms, foreign investors, and countless other actors.  It would be an unusual day, indeed, when all of the disparate participants in the market are motivated by the same news to take the same actions on the same day.

So, what’s a small investor to do?  I think the key is to not overreact, and to realize that investing in the market is supposed to be a long-term thing.  The little guy is never going to have the information the big players do and can’t plausibly time the market or anticipate the abrupt movements.  If you’re in the market long-term, don’t get distracted by the sickening plunges or the big climbs, because you’re really focused on what’s happening over the course of years.  And if you can’t take a long-term view, maybe you shouldn’t be in the markets at all.

Ignoring that stock market app on your phone helps, too.

On The Roller-Coaster Ride

If you’ve got some of your retirement savings invested in the stock market, as many of us do, the last few days have been unnerving.  The market had an historic run up, and then it went down again.  Yesterday, where the Dow Jones Industrial Average at one point had dropped 1600 points, was an especially wild ride.

704254-001When the market behaves like this, what’s a normal investor, who’s not an insider or a financial kingpin, supposed to do?  You can get dizzy just reading all of the different views of what is “really” going on.  Some people say it’s just a predictable correction after years of historic gains.  Some say the Trump tax cuts have overheated the economy and the market is reacting to that.  Some say we’re long overdue for a bear market.  And some say the Federal Reserve Board hates President Trump and his focus on the stock market as a proxy for his presidency and just wants to bring him down low.

(The last theory, in which the Fed would be intentionally manipulating the market for overt political purposes, is especially troubling — and even in these conspiratorial times, seems pretty unbelievable.  To buy that theory, you’ve got to conclude that the Fed’s dislike for President Trump is so powerful that they are perfectly willing to take actions that torpedo the retirement portfolios of millions of individual investors just to give the President a black eye.  Could bureaucrats really be so disdainful of average Americans?  Call me naive, but I find that incredibly hard to believe.)

So what’s really happening here?  Beats me!  My guess is that the run-up has been so significant that there are lots of people out there who thought it was time to take their profits, and the downward movement caused by those sales then triggered some market-decline benchmarks that automatically produced further sales and caused the sharp fall — but that’s just a guess.  Maybe somewhere on Wall Street somebody knows the real answer for sure, but I doubt it.  The stock market is so complex, so huge, and so prone to human reaction that it’s difficult to explain these downward spikes.

So, to put the question again, what’s a little-guy investor to do?  If you think saving money for retirement is prudent — if you don’t, you probably wouldn’t read this post in the first place — and you need to find a place to put your money until the retirement day comes, there really aren’t many alternatives to the stock market that can produce a meaningful return.  Most of us aren’t offered opportunities to invest in real estate deals or development projects, and we probably wouldn’t be comfortable having a big chunk of our money invested in such illiquid things, anyway.  Bond yields are low, and banks pay next to nothing on CDs.  So where else are you going to put your money?  This reality suggests that basic, brute economic forces are going to continue to make the stock market a preferred investment option for people and businesses, not just in the U.S. but also abroad.

But you’ve got to recognize that the stock market is a long-term investment, and it’s going to be a roller coaster ride.  When you’re on the coaster, it’s pretty hard to get off on the highest hill, and you don’t want to exit the car and move onto the tracks at the bottom, either.  You just hold on, scream when the cars start that big downward move, and feel your pulse racing until the end.  Or, you can simply close your eyes, recognize you’re on the ride and there’s not much you can do about it, and focus on other things until your circumstances make you a short-term investor and there are true decisions to be made.

Who knows what this current jittery period will bring?  It’s time to hang on tight.

Investing In Space

Let’s say your modest portfolio in the stock market has had a good run over the past year or so, and you’re looking for a new investment opportunity.  Let’s posit, further, that you think Bitcoin is a curious bubble that’s going to burst someday, and that you’d rather put your money into a company that produces something more tangible and more futuristic.

Well, what about space?

fh-onpadSpaceX is racking up a number of impressive accomplishments.  Last month SpaceX successfully tested its Falcon Heavy Rocket, and it is moving forward on launching what it calls the most powerful operational rocket in the world.  The Falcon Heavy launch is set for next week, on February 6, from the Kennedy Space Center in Florida.  The successful launch of the Falcon Heavy would join other stellar (pun intended) SpaceX accomplishments, like being the first company to launch a rocket with payload into space and then land the rocket back on Earth, and being the first company to relaunch an already used rocket.  SpaceX also built the first private spacecraft to dock with the international space station, and it’s shown it can reuse the spacecraft, too.  If you’re trying to make space a commercially viable enterprise, developing reusable rocket technology and reusable spacecraft technology, to hold down the cost, is a crucial first step — and SpaceX looks like the leader in taking that step.

But here’s the thing:  you can’t invest directly in SpaceX.  It’s a private company, and its founder Elon Musk has said he won’t take it public until the company has started to make flights to Mars.  Why?  Because Musk is afraid that if the company goes public before then, there’s a chance that the stockholders will pressure the board to focus on things other than colonizing Mars — which is Musk’s goal and is bound to be more expensive and difficult than, say, establishing Moon exploration bases or mining asteroids for precious metals.  It’s not an unreasonable fear on Musk’s part.  So if you want to own a piece of SpaceX, you can only do so indirectly, by investing in Alphabet, which owns a piece of SpaceX as well as parts of Google, YouTube, and other things.

Okay, so SpaceX isn’t currently available for the intrepid investor who wants to get into the space exploration game.  Are there other options?  It’s not easy to determine, because a lot of the companies that are touching upon space issues — like Boeing, for example — are better known for producing other objects.  But you can start to get a sense of what’s out there by looking for lists like this one, on potential investment opportunities involving space, or looking for articles about company announcements related to space activities and then figuring out whether they are publicly traded.

It’s not easy for the casual investor.  What we really need is for one of the stock exchanges to create a “space index,” just like there’s a Dow Jones “transportation index.”  The index would identify the space-related public companies, mutual funds would be established to invest in each of the space index companies, and those of us who’d like to put our money in the heavens could buy into the mutual funds.

Hey stockbrokers!  How about giving investors interested in space some help here?

The Dow Hits 20,000

Yesterday the Dow Jones Industrial Average reached a new high, passing the 20,000 level.  The NASDAQ index and the Standard & Poor’s 500 index also are at all-time highs.

gomez3It’s an interesting milestone, and one that is very pleasing to the millions of Americans who have money invested in stocks or mutual funds.  Investment in the stock market — especially through managed mutual funds — is one way the average American can put money away for retirement and (we hope) earn a decent return on our savings.  Over its history the Dow has been pretty dependable in that regard, overcoming periodic drops and crashes and showing significant long-term increases both in absolute terms and on an inflation-adjusted basis.  That’s why, if you’re taking a long-term view, financial planners will tell you that the stock market is the best place to put your money.

These days, of course, there aren’t many alternatives for the average folks.  The interest rates on CDs are a pittance, and the returns offered by municipal bonds and corporate bonds that used to be the bedrock of retirement planning aren’t very attractive, either.  Investing in stocks in “emerging markets” seems pretty risky, too.  Those are all forces that help to explain why the stock market has been on a prolonged bull market run that has seen the Dow triple in value since it hit its low point in the dark days of March 2009.

Unfortunately, some Americans who might have shared in the Dow’s run-up got out of the market right as it hit its low point.  Gallup has determined that, in 2016, only 52 percent of Americans adults have investments in the stock market, down from the all-time high of 65 percent in 2007.  Obviously, many of those people bolted when the market crashed in 2008 and 2009 and they’ve never come back — perhaps because they are too afraid of another crash, or perhaps because they were so hurt economically by the Great Recession that they simply aren’t in a position to invest.  Those who rode out the sub-prime storm, kept their heads, and kept their investments benefited.  It’s a classic example of why anyone who invests in the stock market can’t try to time the market and has to take a long-term view that follows a long-term plan.

20,000 is an artificial milestone, of course, and we’ll no doubt see downturns in the future — but the stock market remains an important way for the average people to build their retirements and plan for the future.  For those who are in the market, 20,000 is a welcome number indeed.

Another Bank On The Brink

The Masters of the Universe on Wall Street, and in financial capitals around the world, will be holding their breath today.  They’re waiting to see what happens to Germany’s mighty Deutsche Bank, the latest big bank to fall into crisis and roil the international markets.

deutsche-bank-1If you are unfortunate enough to own Deutsche Bank shares, you know what I mean.  The value of its common stock has fallen more than 65 percent in the past year, and a credit rating agency has moved its outlook to negative.  The Department of Justice has demanded that Deutsche Bank pay $14 billion to settle an investigation into residential mortgage-backed securities, although the Bank hopes to negotiate down to a lower payment figure.  Deutsche Bank has been removed from  European blue chip stock index because its share price has fallen so far, so fast, and now there are reports that some hedge funds are moving holdings out of Deutsche Bank to other banks.

Why should we care?  Because earlier this year the International Monetary Fund issued a report that found that Deutsche Bank “appears to be the most important net contributor to systemic risks in the global banking system.”  “Systemic risks in the global banking system” — there’s a phrase that should send shivers down your spine.  The bank has substantial exposure in derivatives . . . and equally important, it has significant connections to the big banks in America, Great Britain, China, Japan, and other countries around the globe.  In our modern, globalist world, that’s just how the huge financial concerns work.  That means that any serious problem at Deutsche Bank will have a ripple effect in America — an effect that is already being felt in the markets here.

So once again we are faced with the prospect of a big bank that has engaged in risky behavior teetering on the brink, with calls for a national government — in this case, Germany — to come forward and say that it is ready to step in and rescue the bank from the consequences of its own actions.

Sound familiar?  Hey, I thought this was supposed to have been fixed in 2009.

 

Losing $9 Billion In A Day

Monday was a crappy day in the stock market all around the world — but it was crappier for some than for others.

rsz_istock_000017344562_fullBloomberg Business reports that yesterday, the world’s five richest men lost a total of $8.7 billion — and when you’re talking that kind of coin, you might as well ignore that paltry $300 million and round that figure up to $9 billion.  Jeff Bezos’ holdings alone fell $3.7 billion in value, Amancio Ortega lost $2.5 billion, and Warren Buffett, Carlos Slim, and Bill Gates saw their net worth drop between $730 million and $870 million.  Yikes!  You could buy a professional sports franchise with that kind of cash.

Imagine, losing billions of dollars in a single day.  And we think we’ve got problems when the market tumbles, as it did on Monday, and our 401(k) portfolios drop, and we wonder whether the bottom is going to fall out of the market again, as it did in 2008 and early 2009.  At least we’re not measuring the money that has disappeared in billions, with a “b.”

We shouldn’t feel too sorry for Jeff Bezos, though.  Even after losing $3.7 billion, his net worth is still a hefty $56 billion, and he had a pretty good year last year — his net worth increased by $31 billion in 2015.  Ortega is even more in clover, because his net worth after his $2.5 billion loss is still a staggering $70.4 billion.

It’s hard to imagine one person having so much money.  It makes you wonder:  for these guys, when the market plummets, does it hurt to lose a billion dollars in a day?  Or is it really more like Monopoly money is to us?