Observations.
You’ve heard me say on previous occasions, that stock market declines provide a great buying opportunity. We get a chance to buy value, just as if your favorite food item is experiencing a Manager’s Special on sale at your favorite store.
You’ve heard me say on previous occasions, the stock market is “rigged to go up”, because entrepreneurship, efficiency, and inflation protection are embedded within its economic pricing model. This is still true, but a 32 P/E ratio has me a little worried. (1.)
You’ve heard me say on previous occasions that gold and silver are the worst long term investment ever invented providing barely a 1% per year return since 1980. “Rat poison squared” to coin a popular phrase. But even a stopped clock is correct twice a day. 
WHAT CAN GO WRONG?
I’m temporarily issuing a “yellow light” since we’re 9 years into this economic recovery with interest rates still at historically low level rather than somewhat higher rates. Agricultural commodities grains like corn, wheat and soybeans are at the same levels in some cases as they were between 2005 to 2013.
We bring to your attention the following;
- Passive index investing has gained tremendous popularity is distorting valuations
- Amazon, the world largest retailer $ 763 billion in size has a P/E ratio above 250 (2)
- The top 6 holdings in the S&P 500 (symbol: SPY) at the time of this writing, are Apple (3.71%), Microsoft (3.19%),
Amazon(2.79%), Facebook(1,82%), J.P. Morgan(1.65%) and Berkshire Hathaway(1.65%). The problem is the top holding for Berkshire Hathaway at 22% is Apple Computer! (3) - Uber, the world’s largest ride sharing provider owns no taxis or cars, has a market cap of $51 billion
- Airbnb, the world’s largest room accommodation firm owns no hotels, has a market cap of $30 billion
- Bitcoin, the world’s largest digital currency, owns no banks has a market cap of $143 billion (4)
- “Sovereign Debt”, the world’s largest loan pays no interest, has a market cap of ~$3.4 trillion
- Alibaba, the world’s largest e-commerce company owns no inventory has a market cap of $497 billion
Six “Begin Again” Steps to Protect Your Standard of Living in the Next 5 Years
I would like to close this letter with a few actionable items we can all take, to help put us in a better position to deal with the uncertainty which lies ahead. Feel free to pick and choose whatever is in your best interest and in your own personal situation.
- Buy Items On Sale: Inflation Protection
Buy extra cans of food, soup, light bulbs, soap, clothing, toothpaste, deodorant, paper products and other consumable items you use every day. If an item you use is discounted, on sale and has a long shelf life, don’t buy one extra item; buy ten of them, space permitting. If the velocity of money trend is changing, this will lead to higher prices. Think a little like a “prepper”. Don’t pay up for goods. Keep a sharp eye open for a good deal. Do not store gasoline, oil or any highly flammable items. Don’t go broke doing this either. - Review Your Portfolios
Consider adding or re-balancing a portion of your investments to an equal weighted S&P 500, similar to the PowerShares Equal Weighted S&P 500(symbol: RSP). A majority of the stocks in this index have a weighting of between 0.23% and 0.19% and theoretically better distribute single name risk.Certificate of Deposits (CD’s) coming due should be reviewed. After considering the 1 year & 5 years “risk free” rates at about 2.58% to 2.8%, look at riskier floating rate note funds which increase in value, rather than decline as interest rates go up. Don’t go overboard in allocating to these funds if you feel they’re a good fit for your investment needs. CLICK HERE to download the PDF file of 50 Floating Rate Note ideas. - Managing Debt
Change your loans from adjustable rate to fixed as soon as possible. You’ve heard this a million times. - Re-balance Your Company Plan
Check your company 401(k) and add 5% to 15% of commodity, real estate or alternative based mutual funds. Remember that Target Dated and Retirement dated mutual funds generally consist only of US stocks and bonds. We want to prepare for the unexpected, which is potentially higher rates and inflation. - Consider Micro Investing
“Micro-invest” with smartphone app like Acorns® or Robinhood® and roundup your purchases to begin investing especially if you don’t have a plan in place. Initially the annual cost is high w/ respect to your portfolio size, but that changes over time, the bigger your portfolio grows. Look to add commodity based ETFs if possible. - Bitcoin (for very aggressive investors)
Consider buying bitcoins as a form of insurance. Bitcoin, the currency is stored in a, as yet unhackable global distributed computer network, and is completely outside the bond and S&P 500 stock universe where the majority of most people’s financial savings are. Bitcoin lacks that systemic (across the board) risk – it’s outside the system. Find someone who can help you securely purchase and safely store this digital currency. If you don’t know anyone, please call us. You do NOT have to buy one entire bitcoin. Bitcoin is divisible into pieces 1/100 millionth of a bitcoin. You can buy $25, $50, $100 or $5,000 dollars of bitcoin. Only buy an amount appropriately sized to your financial condition.
Contact us if you would like a portfolio review. The only cost is your time.
1. http://www.multpl.com/shiller-pe/
2. https://finance.yahoo.com/quote/amzn?p=amzn
3. Dorsey Wright & Associates
4. https://coinmarketcap.com/
Disclosures:
This material specifically references cryptocurrencies, including bitcoin. Cenacle Capital Management owns positions in multiple products that seek to provide exposure to bitcoin and other cryptocurrencies. As a relatively new asset class that carries substantial risks, only investors that can appreciate the risks associated with an investment should invest in cryptocurrencies or products that offer cryptocurrency exposure. With all such high-risk investments, you may lose all 100% of your investment.
Cenacle Capital Management is a State of Illinois registered investment advisor. IARD 130804
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