Again, we think investors should be wary of most US stocks and bonds going into 2018. Here are the biggest danger areas Camarda sees:
1. US large cap stocks, particularly growth and tech stocks, the current market darlings. US large caps have flown high indeed since the market bottom in 2009, eclipsing most of the rest of the world. Many of these market corners have not been frothier since 1929, or 1999, a couple of fearsome dates to remember. To make this worse, many non-Camarda investors have portfolios chock full of such positions, making the pain in the inevitable correction or bear market potentially far worse than any seen since the Great Crash of 2008. If you think you may be exposed – and for non-Camarda investors, the odds are pretty good you are – contact us for a free portfolio stress test and risk opinion.
2. FANG stocks. Tech darlings like Facebook, Amazon, Netflix, and Google (now Alphabet) are wonderful companies with life-changing innovations. Such companies own the future. But that doesn’t’ mean they’re worth paying any price for. As I write this, the P/E on Amazon is over 300, meaning that if the company paid out every nickel in earnings, with nothing held back to grow or fix the roof, an investor would have their money back on a share of stock in 300 years. Camarda thinks you should stand clear, but be ready to get back in when valuations become reasonable again, such as followed the dot-com crash 17 years ago.
3. US bonds maturing in 3 years or longer, including US Government (Treasuries), agencies, municipals and corporates.
As interest rates go up – and rates are most assuredly going up – bond prices fall. The risks are insidious since a) inflation and interest rates are highly correlated, meaning a fixed interest rate payment on bonds you hold represents a decreasing real return as rates/inflation rise; b) many investors have purchased bonds at premiums – paid more than the price the bonds will mature to – as a result of abusive sales practices and a sales pitch based on the coupon yield –the interest divided by the face amount – instead of the probably-lower yield to maturity – the coupon payment divided by the price the investor actually paid for the bond. The short of this is big hidden losses down the road for the legions of investors that have unknowingly overpaid for their bonds.
4. Real estate. I am talking investments in physical real estate here, like in rental houses you actually own and have to get sprayed for roaches. As a long-term investor in rentals – with my first buy stretching back to 1982 or so – I’ve developed a good nose for valuation metrics and a profitable relationship between rental rates and housing prices. While, even with Zillow, real estate can still be such an inefficient and opaque market – incredible bargains can be found in even the most bloated markets (kinda like value stocks), the relentless rise in prices since the Great Recession, the everyone’s-a-house-flipper popularity of the investment, and the inevitability of interest rate increases (nothing chills real estate values like expensive leverage) tell me to stay away from buying now. If you’re getting a good return on what you have, hold on, but consider selling if the tax consequences are manageable.
5. Bitcoin and other speculations. Digital tulip bulbs, anyone? Price run ups have been dizzying, most folks really don’t understand them, and finding fair valuations is almost impossible. These are craps-table speculations, and should be avoided.
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