Beware of Earnings Drops

by | Apr 17, 2019 | Archives

When stock markets are at all time high levels that have extended for record breaking lengths, corrections are simply waiting for a trigger to be pulled.

What will be the trigger that brings US stock prices down this time?

Earlier this month we looked at  how the US Treasury bond yield curve recently inverted.  That review explained how stocks historically peak six months after the yield curve inverts.

The warning this week is that lower corporate earnings could cause share prices to severely drop.

We could see a share price collapse at any time.   The Wall Street Journal article “U.S. Stocks Slip on Mixed Earnings” (1) helps us understand why a correction could be due.  The article says”

U.S. stocks fell Monday as a fresh batch of earnings reports sent bank shares sliding.

Stock trading has been muted the past few weeks as investors have waited to get a sense of how U.S. corporations fared in the first quarter.

With earnings for S&P 500 companies widely expected to decline in the first quarter from the year-earlier period, analysts and investors said they would be trying to get a sense of whether growth is set to falter further or rebound in the following quarters.

Let’s be clear, shares may continue to rise for some time.  The chart below shows that the MSCI  World Stock Index is selling at 2.39 price-to-book, but in  1999 the record high price-to-book for that index was 4.29.   Based on price-to-book-history,  it would appear that there’s still room for share prices to rise.

This week we sent Purposeful Investing Course subscribers the 79 page Keppler Asset Management’s Good Value Developed Markets Analysis for this quarter.

One feature of this report is the table below that shows how the Developed Markets Top Value Model Portfolio compares to selected indices as of the end of March 2019, based on important variables (current numbers for book value, 12-month trailing numbers for the other variables — no forecasts).

In addition, the chart shows the MSCI World Index at its all-time high valuation at the end of the last millennium and at its all-time low valuation in September 1974.

The Spring 2019 chart below shows that the MSCI Index World Growth Index is selling at 4.21 price-to-book.  That’s close enough to the all time record high to be scary.

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Keppler’s report said (bolds are mine):

The annual earnings of the companies in the (cap-weighted) MSCI World Index rose 24.3 % in 2018. Now, at the end of March 2019 annual earnings growth slowed down to 17.5 %, which, however, is still more than twice as high compared to its 10-year average of 8.4 %.

Due to the base effect of the previous year, earnings growth rates are commonly expected to come down to single digits later this year. Current annual earnings growth of the MSCI World Value Index of 19.0 % beats the earnings growth of the MSCI World Growth Index of 13.1 % by 5.9 percentage points.

This does not make sense considering that the MSCI World Growth Index now sells at a premium of 115 % to the MSCI World Value Index based on key fundamentals, e.g. book value, cash flow, earnings and dividends.

The change in favor of value strategies is now long overdue: There is no reason left to buy growth stocks! While the average developed market—as measured by the KAM Equally Weighted World Index—is now under-valued by 23 % vs. the cap-weighted MSCI World Index based on traditional valuation measures, the Top Value Markets are undervalued by 34 % compared to the cap-weighted MSCI World Index and by a whopping 56 % compared to the MSCI World Growth Index.

Based on these fundamental relationships, our total return expectations for the Top Value Markets over the next three to five years stand at 7.7 % p.a.—2.9 percentage points above the 4.8 % we expect for the (cap-weighted) MSCI World Index.

Get Keppler’s full 79 page Keppler Asset Management’s Good Value Developed Markets Analysis and 52 page Keppler Asset Management’s Good Value Emerging Markets Analysis, every quarter, as a subscribe to the Purposeful Investing Course.

Learn how to invest easily, safely and globally in good value stock markets.

Gary

Stress Less Investing

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The stock market has always been the best place of places to protect and increase wealth over the long haul.   Yet it’s also been the worst place to lose money, a lot of it, quickly.

There are only three reasons why we should invest.  We invest for income.  We invest to resell our investments for more than we had invested.  We invest to make our world a better place.

The goal of investing should be to stabilize our security, bring feelings of comfort and the elimination of stress!

We should not invest in social networked protests that guarantee loss.  This is like burning our houses down in protest.

If we want to change the world, we should invest in good equities that bring profit and use the extra wealth to create something beneficial for mankind.

We should not invest for fun, excitement or to get rich quickly. We should not divest in a panic due to market corrections.

This is why my core stock portfolio consists of 16 shares and this position has hardly changed in five years.  During this time we have been steadily accumulating the same Top Value ETFs  and have traded only a few times.

The study below shows how a value based model portfolio that dates back to 1969 has outperformed almost every stock market in the world.

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The US market has not been even close to the top performer over the long term.

The DQYDJ Dow Jones Industrial Calculator (1) shows that an investment in the Dow Jones (with dividends reinvested) has risen at an average of 10.74% over the last 50 (51 actually) years.

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That’s 10.74% is pretty good, but an analysis of 51 years performance of all the developed stock markets shows that (using country indices as hypothetical investments) investing in the top value (not top performing) markets would have returned 12.5%.

The chart below shows the analysis.

 

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An annual return of 12.5% compared to the 10.74% US return is a 1.76% per annum difference.  This may not seem like much,

In the long term the difference is huge.  Calculations from the investor.gov site (2) shows that $10,000 invested at the 10.74% compound rate turns $10,000 into $1,817,734.62 in 51 years.

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Wow, that sounds pretty good until you look at the results of the 12.5% rates.  $10,000 grows to $4,062,362.22!

Investing in the top value (not the top return) markets earned $2,244,627.60 EXTRA!

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$4,062, 362.22 means you would have $2,244,627.60 MORE by investing in good value markets versus $1,817,734.62  earned investing in the US market.  That almost 125% more money!

Here are the best value developed markets at this time (as of end of March 2021).

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No matter how we look at it, over time, value investing always wins!

Our portfolio is built around a strategy that’s taught in my Purposeful Investing Course (Pi).  I call these shares my Pifolio.  The course shows how to use the value analysis of Keppler Asset Management to create a portfolio of ETFs that cover undervalued stock markets.  I have combined my 50 years of investing experience with the study of the mathematical market value analysis of Michael Keppler, CEO of Keppler Asset Management.

In my opinion, Keppler is one of the best market statisticians in the world.  Numerous very large fund managers use his analysis to manage billions of dollars in funds.  However because Keppler’s roots are in Germany (though he lives and operates from New York) all of his funds are registered for the European Union citizens, Americans cannot normally access his data.

I was lucky to have crossed paths with Michael over 25 years ago, so I am one of the few Americans who receive this data so I can share it with Pi subscribers.

The Pifolio analysis begins with Keppler’s research that continually monitors 46 stock markets and compares their value based on current book to price, cash flow to price, earnings to price, average dividend yield, return on equity and cash flow return.  Keppler looks at these numbers and takes market’s history into account.

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Michael Kepler CEO Keppler Asset Management.

Michael’s analysis is rational, mathematical and does not worry about short term ups and downs.  Keppler’s strategy is to diversify into an equally weighted portfolio of the MSCI Indices of each good value (BUY) markets.

This is an easy, simple and effective approach to zeroing in on value. Little time, management or guesswork is required.  You are investing in a diversified portfolio of good value indices.

A BUY rating for an index does NOT imply that any one stock in that country is an attractive investment.  This eliminates the need for hours of research aimed at picking specific shares.  It is not appropriate or enough to instruct a stockbroker to simply select stocks in the BUY rated countries.  Investing in the index is like investing in all the shares in the index.  You save time and gain incredible diversification because all you have to do is invest in the ETF to gain the profit potential of the entire market.

To achieve this goal of diversification the Pifolio consists of Country Index ETFs.

Country Index ETFs are similar to an index mutual fund but are shares normally traded on a major stock exchange that track an index of shares in a specific country.  ETFs do not try to beat the index they represent.  The management is passive and tries to emulate the performance of the index.

A country ETF provides diversification into a basket of equities in the country covered.  The expense ratios for most ETFs are lower than those of the average mutual fund so they provide diversification and cost efficiency.

Here is the Pifolio I personally held at the beginning of 2021.   There have been no changes since.

70% is diversified into Keppler’s good value (BUY rated) developed markets:  Germany, Hong Kong, Italy, Japan, Norway, Singapore, Spain and the United Kingdom.

30% of the Pifolio is invested in Keppler’s good value (BUY rated) emerging markets: China, Brazil, Chile, Colombia, South Korea, Malaysia and Taiwan.

There is one trick Pi subscribers learn about China which is different from the rest of the funds.

iShares Country ETFs make it easy to invest in each of the MSCI indices of the good value BUY markets.

For example, the iShares MSCI Germany (symbol EWG) is a Country Index ETF  that tracks the investment results of the MSCI Germany Index. The fund invests at least 80% of its assets in the securities of its underlying index that primarily consists of all the large-and mid-capitalization companies traded on the Frankfurt Stock Exchange.

iShares is owned by Black Rock, Inc. the world’s largest asset manager with over $4 trillion in assets under management.

There is an iShares country ETF for every market in our Pifolio.

This year I celebrate my 53rd anniversary of writing about global investing. Our reports and seminars have helped readers have better lives, with less stress yet make fortunes during up and down markets for decades. This information is invaluable to investors large and small because even small amounts can easily be invested in the good value shares we cover in our seminar.

How you can create your own good value strategy.

Stock and currency markets are cyclical.  These cycles create extra profit for value investors who invest when everyone else has the markets wrong.  One special part of your course looks at how to spot value from cycles. Stocks rise from the cycle of war, productivity and demographics.  Cycles create recurring profits.  Economies and stock markets cycle up and down around every 15 to 20 years as shown in this graph.

The effect of war cycles on the US Stock Market since 1906.

Bull and bear cycles are based on cycles of human interaction, war, technology and productivity.  Economic downturns can create war.

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The chart above shows the war – stock market cycle.  Military struggles (like the Civil War, WWI, WWII and the Cold War: WW III) super charge inventiveness that creates new forms of productivity…the steam engine, the internal combustion engine,  production line processes, jet engines, TV, farming techniques, plastics, telephone, computer and lastly during the Cold War, the internet.  The military technology shifts to domestic use.  A boom is created that leads to excess.  Excess leads to correction. Correction creates an economic downturn and again to war.

Save $124.50 If You Act Now

Subscribe to the first year of The Personal investing Course (Pi).  The annual fee is $299, but to introduce you to this online, course that is based on real time investing, I am knocking that down to $174.50 in this special offer.  Plus I am reducing annual renewals from $299 to only $99.

I would like to send you, on a no risk basis, a 130 page basic training course that teaches the good value strategy I use.   I call this strategy Purposeful Investing (PI).  You learn all the Pi strategies, what they are, how to use them and what each can do for you, your lifestyle and investing.

You get this course when you enroll in our Purposeful Investing program (Pi) with a triple guarantee.

Triple Guarantee

Enroll in Pi.  Get the 130 page basic training, a 46 stock market value report, access to all the updates I have sent in the past five years right away, plus numerous updates over the next year. 

#1:  I guarantee you’ll learn ideas about investing that are unique and can reduce stress as they help you enhance your profits through slow, worry free, easy diversified investing.

#2: I guarantee to send you monthly updates that are based on a study of every share in 46 stock markets around the world.  These updates will show the values, the earnings of all these markets and categorize each market as Top Value (buy), Neutral Value (hold) or Poor Value (sell)

#3:  If you are not totally happy, simply let me know. I guarantee you can cancel your subscription within 60 days and I’ll refund your subscription fee in full, no questions asked.:

You have nothing to lose except the fear.   You gain the ultimate form of financial security as you reduce risk and increase profit potential.

When you subscribe to Pi, you immediately receive a 120 page basic training course that teaches the Pi Strategy.   You learn all the Pi strategies, what they are, how to use them and what each can do for you, your lifestyle and investing.

You also begin receiving regular emailed Pifiolio updates and online access to all the Pifolio updates of the last five years so you can back track if you desire.  Each update examines the current activity in a Pifolio, how it is changing, why and how the changes might help your investing or not.

Subscribe to a Pi annual subscription for $174.50 and receive all the above.

Your subscription auto renewal will only be $99 a year from now, if you renew, but you can cancel at any time.

Gary

(1) www.wsj.com/articles/global-stocks-pause-to-start-the-week-11555315308?mod=article_inline

 

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