Monday Mailbag: Yellen’s Gift, Detroit’s Hype, Target’s Bullseye… and More

Federal Reserve Chair Janet Yellen’s dovish remarks last week sent already overvalued stocks to record highs. But think back to when the stock market crested in 1987, 2000 or 2008. Were you caught up in the euphoria… and did you eventually get crushed?

For this aging bull market, Janet Yellen is proving to be the generous fairy godmother who keeps on giving. However, one of the greatest trading imperatives is to check your emotions and get ahead of the investment crowd.

As you might expect, many reader letters lately have inquired about our prediction for a stock market correction this year and how to prepare. It’s a constant topic of concern, especially in regard to the proper defensive allocation.

Battening down the hatches…

Pictured to your left is the latest portfolio allocation of our flagship publication Personal Finance. The cash portion prompted this letter:

“As protection against a correction, Personal Finance has recommended a cash allocation of 25% for some time. Is this a target percentage regardless of the size of the portfolio? If so, do you consider Vanguard STerm as cash?” — alias “Dollar Bill”

I’ll hand the question over to Jim Peace, chief investment strategist of Personal Finance and director of portfolio strategy for Investing Daily:

“Yes, the asset allocation model is irrespective of portfolio size. I don’t consider the Vanguard Short-Term Bond ETF (NYSE: BSV) the same as cash since it has an average duration of 2.8 years and nearly a quarter of the portfolio is rated ‘A’ or lower. Granted, it would take a highly unlikely sequence of events for this fund to lose significant principal value, but it is theoretically possible.”

Doubts about Detroit’s “renaissance”…

Concerning my July 11 issue (Has Motown Regained Its Mojo? Investors Should Be Skeptical):

“Your article on conventional behemoth automakers is spot-on. I agree 100%. Remember how complacent Detroit was when Japan-based Honda and Datsun entered the auto market in the 1960s? I do and I’ve never bought an American car since, because of their low reliability and high price-points.” — Ralph J.

As I explained in my article, analysts are overselling the supposed rebirth of American car makers. Major OEMs such as General Motors (NYSE: GM) and Ford (NYSE: F) are making forays into new technologies such as autonomous cars, but the verdict is still out as to whether these ballyhooed investments will actually pay off.

Detroit has a history of making splashy tech investments that go bust, as we saw during its futile spending on robotics during the 1980s to keep at bay the threat of Japanese automakers.

Meanwhile, the U.S car industry posted a weak performance during the first six months of 2017. Sales to the end of June dropped by 2.1% compared to the same period a year ago. For now, avoid the stocks of U.S.-based auto OEMs.

Hands on or… hands off?

My July 5 issue (Why You Should Be a “Passive-Aggressive” Investor) elicited the following letter. The reader’s arguments are so persuasive, I decided to publish his email in its entirety:

“The biggest problem with investing in actively managed funds is that today’s returns are NOT predictive of next year’s returns. By the time you find out that your previous winner is now a loser, you probably have taken a big hit. I watched during the 2008 debacle as Fidelity ran my supposedly conservative Fidelity Fund investment down 60% or more to… chase what? Had they just sat on it, I would’ve been better off than turning paper losses into real ones by trading constantly.

It was a mess that I was only able to fix by taking the remaining value from their fund and investing it on a gamble into my former employer’s stock. I was cautioned against doing so by the Fidelity guy on the phone, but I reminded him of the current state of my ‘safer’ conservative fund supposedly being guided by their well-compensated gurus. Luckily for me, the bet paid off and that stock bounced back rather well, whereas the Fidelity Fund did not. By my effort, I saved a huge part of my retirement plan.

I have not invested in actively managed funds since and I have been further troubled by the need for and the response to the Department of Labor rule about fiduciary responsibility. I’m not for any softening or delay in implementing that rule. With uncertainties about outcome beyond this quarter or year and questions concerning whose interest is primary, the active funds are not on my list of desirable investments.” — Timothy D.

As I thoroughly explained in my article, our investment strategists advise a mixed approach that combines both active and passive methods. But Tim’s comments are well taken and instructive. 

Target hits the mark…

A regularly recurring theme among reader letters has been the steady decline of conventional retailers amid the onslaught from e-commerce giant Amazon (NSDQ: AMZN).

In particular, some readers have expressed optimism that PF Growth Portfolio holding Target (NYSE: TGT) would prevail, while others have been gloomy about the prospects for Target and the other Big Box retail chains.

Through it all, we’ve steadfastly touted Target’s staying power and in recent days we’ve received a strong dose of vindication.

Target shares jumped last week after the company increased its earnings guidance for the second quarter of fiscal 2017. Target said it now expects its second-quarter earnings per share (EPS) to fall above the high end of its previous forecast range, which was EPS of 95 cents to $1.15. This improved guidance follows better-than-expected first quarter results.

The news came after previous issues of Personal Finance, as well as my daily newsletter, made it clear that Target possesses inherent strengths that set it apart from its traditional retailing peers and that recent pressure on TGT shares has been unwarranted.

In announcing the enhanced guidance, Brian Cornell, chairman and CEO of Target, stated:

“Target’s recent progress reinforces our confidence and commitment to our strategy as we build an even better Target for tomorrow. Following better-than-expected results in the first quarter, we’ve seen additional, broad-based improvement in traffic and category sales trends in the second quarter, despite continued challenges in the competitive environment.”

Cornell has launched a $7 billion project to renovate existing stores, speed the expansion of smaller-format locations, and strengthen Target’s online presence to take the fight to Amazon. As I made clear in my May 17 issue (What Darwin Can Teach Us About Retail Stocks), I think Target’s efforts at reinvention will pay off.

Jim Pearce agrees:

“As I described when we added TGT to the PF Growth Portfolio in the April 12 issue, Target is already implementing an aggressive strategy to reduce its vulnerability to Amazon.”

Crude fortune tellers

The volatile energy sector is on many of your minds. With the price per barrel of U.S. benchmark West Texas Intermediate (WTI) crude now hovering in the mid-$40s, investors are wondering if the threshold of $50/bbl is the new normal. This reader email is indicative:

“Within the next five years, is it possible for WTI to hit $55 per barrel?” — Jim B.

Robert Rapier, chief investment strategist of The Energy Strategist, thinks oil prices will inevitably march higher, but the question (of course) is when. As Robert puts it:

“I can rationalize why I think the interplay between growing demand and OPEC’s cuts will trump the increase from U.S. shale production, but the theory ultimately has to manifest itself in lower inventories. When that happens, oversold energy producers should bounce back.”

It doesn’t help prices that U.S. producers have put the pedal to the metal. Last Wednesday, the American Petroleum Institute reported a 62% annual increase in oil and gas drilling in the second quarter of 2017 in the U.S.

Predictions for the price of oil are all over the map and they’re constantly changing. A research note released Tuesday, July 11, from the strategists at Barclays (NYSE: BCS) call for WTI to reach $75/bbl by 2025. Goldman Sachs (NYSE: GS) recently lowered its expectations for WTI in 2017 to $52.92/bbl from $54.80/bbl.

Meanwhile, widely followed energy expert Todd Gordon recently asserted that crude may retest the previous lows of 2016, which paves the way for oil in the lower $40s and maybe even the $30s.

Among all the energy prophets out there, I put my greatest faith in Robert Rapier. His latest take:

“Most, if not all of the bearish projections are priced into oil, and there may not be much more downside if prices hold above $40/bbl.”

Whether you’re an energy bull or bear, the upshot is that energy volatility is here to stay. Stick to low-cost producers with strong balance sheets, prolific proven reserves, and prudent management.

Got any questions or comments? Send me an email: — John Persinos

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