Investment News Letters

The Lawrence Investment Group

November 20 , 2014 On Blind Squirrels, Good News and Apple

My last letter was put together hastily because I wanted to get it out in real time as the market was extremely volatile and many of you called asking if it was time to sell. I wanted to answer quickly so my letter did not include a narrative on stocks or the market, but rather a discussion of why that was not the time to sell but the time to look for “flashing blue light specials” to scoop up. I said then, as I have said many times, that I am not a market timing trader but even a blind squirrel finds an acorn sometimes. Take a look at the date of the last letter, Oct 16^th, and compare it to this chart. Sometimes it is better to be lucky than good.

http://finance.yahoo.com/echarts?s=%5EDJI+Interactive#%7B%22range%22%3A%223mo%22%2C%22scale%22%3A%22linear%22%7D

I think for the remainder of the year, we are allowed to treat good news as good news. Recall for a long time we were in a period of “the news is not as bad as it could have been” and then a period of “the good news is not good enough and may be an anomaly.” Quantitative easing has ended and the FED will raise rates next year. In my life, I have lived through decades of interest rates of 5% to 7% and at sometimes they were double digits. Why should I fear a rate increase of 1% or 1½ % nine months out? It will only happen if the economy continues to get better. If the good news continues to be good. Earlier this year, I talked about achieving escape velocity in our economy; and, I am disappointed that we are not there yet. However, we appear to be on the way.

For the rest of this year many investment professionals will need to tune up their portfolios for year end. Many have not kept up with the market and would love to have some quick hitters. There is too much cash on the side lines and fixed investments are going nowhere In August I suggested an S&P 500 level of 2025 and we are well past that; look for a continued influx of cash into equities through December. And, as you will see later, much of that cash may well end up in Apple.

A lot has happened in the energy stocks with sharp downturns in some of my recommendations. I will address them in my next letter; but, for now I am not going to panic. And, for the most part, I will hang in there.

DOW: I am often asked about new opportunities; and, I want to hit a couple today. One I have not addressed before is Dow Chemical Company, DOW. It is a great stock paying a dividend of 3.3% and is dedicated to paying back to shareholders through dividend increases and stock buy backs. PE trailing is about on average at 16.88 and growth opportunities look to be outstanding. A great blue chip, dividend payer, to add to your portfolio.

DIS: Disney is one I have mentioned in the past but not recently. It continues to outperform and cannot help but make money. Theme parks have been so full they have had to limit entrance, studios doing well and Frozen rolls on. It is a good holding to diversify.

CMI: Cummins also has been mentioned a while back but it continues to excel. With 2.2% dividend yield and blue chip earnings and growth, this is another stock I like to own.

APPL: Through the years, the most frequent questions I get are “what’s up with Apple?” That is not surprising as I have been investing in Apple, and encouraging you to do the same, for many years to the point that I have finally received a 400% return on my initial investment. For those doing the math, that means each $100 invested is now worth $500. I have always viewed Apple as a value stock; but, I am aware that in the market, as elsewhere, perception is reality. For several years Apple was perceived as a momentum stock and every portfolio had to own it. The share price was driven to $700. Then, Apple missed analysts’ projections for a quarter; and, it lost momentum being driven down to about $400. Although it lost momentum, it never lost its quality as a value stock. That is what I keep preaching. So, in 2012, when I was asked where Apple would go, I predicted the share price would reach $700 and it did. Unfortunately, it fell back to $400 later that year; and, I suggested it would return to $600 in 2013. The price made it to $560. Then, the most common question I got was “when will it get back to $700?” I suggested 2014. Today it reached $818 and still has a long way to go. It is a value stock and every portfolio has to own it at year end.

At today’s price it is still about 15 times next year’s forecasted earnings and the S&P 500 is at about 17 times forward earnings. Add to that the high probability that next year’s earnings will beat current projections as the desire for iPhone 6 is currently insatiable. Note also that virtually all iPhones are selling with a $100 dollar upside price for increased memory which costs Apple about $10 and margins/profits should handily beat expectations. Therefore, I remain convinced that Apple is still a great value stock with strong growth potential. So, where do I think I may look at taking profits next? Try $142 post-split per share in mid-2015. To those of you who know me best, there are several obscure reasons for that target. One reason I feel as strongly as I do about Apple is their ability to achieve such intense brand loyalty. Those who are still waiting to buy an iPhone 6 will not consider an alternative solution; but, will just wait it out. The reasons for that loyalty can be found in Apple’s customer service mantra.

There were several very interesting examples of Apple’s mantra since the release of their last quarterly results. The first is a reiteration of the profound respect that Apple has for their customer which in turn results in immense customer loyalty. The following are two examples of that mantra. In Tim Cook’s earnings conference call he stated that Apple is the only internet company that treats its users as the customer. All other companies, Google, Yahoo, Facebook, etc, treat their users as their product. Their end customer is the advertiser to whom they sell your data. Look at Googles gmail as an example. Only Apple treats users as the end customer and protects your data as their own. His second comment was that Apple develops iPhones that best meet customer desires and then forces carriers to meet those standards if they want to carry iPhones on their networks. All other smartphone vendors are told by the carriers what they must do if they want their phones to function on the carriers network. That is a profound difference in the importance of the customer in their mantra.

The final example is the way that Apple tends to leapfrog, rather than migrate, technology. Remember, the iPod did not migrate the way we listen to music; it leapfrogged technology to the point that Walkman became obsolete. The newest example of that is the brilliance to the timing of Apple’s adoption of near field communication (NFC) technology for Apple Pay.

For years, it was assumed that the company would never incorporate the short-range radio protocol into its devices, as they had seemingly opted instead for Bluetooth LE – even as many Android manufacturers added it to their newest devices, with little impact on adoption. But, to many peoples’ surprise, the newly introduced iPhone 6 and iWatch product lines include NFC, in part to facilitate Apple’s intriguing new payments platform, Apple Pay.

So why did Apple decide that 2014 was the year to roll out the now decade-plus-old technology? The answer to that question has to do with the difficulties of driving market adoption around new hardware standards. Like most communications standards, NFC requires that two parties have access to the technology in order to work, in this case merchants and consumers, which is where things get particularly sticky for Apple Pay.

For Apple Pay, or any other alternative payments protocol to work, and to achieve mass adoption and challenge payment standards like physical credit and debit cards or cash, it needs to function nearly everywhere that consumers spend money. There are just 220,000 NFC-enabled merchants in the US today, out of the roughly nine million total merchants in the country. This could present a big problem for Apple Pay adoption.

But here’s the twist. The U.S. is set to migrate to a new EMV credit card system by October, 2015, that will use microchip-enabled credit cards, but still allows customers to sign for their payments. Banks can choose to issue cards that require a PIN number instead of a signature, but the switch to PINs will not be required in October 2015.

Beginning later next year, you will stop swiping the credit card. Instead, you will insert your card into a slot, just like people do in much of the rest of the world, where the machine will read a microchip, not a magnetic stripe. You’ll still be signing for the time being, but the new system also enables the use of PIN numbers, if card issuers decide to add them to their cards.

As of October 2015, any merchants that do not support EMV credit cards – smart cards with integrated circuits that enable point of sale authentication and help prevent fraud –will be liable for the fraudulent use of counterfeit, lost, and stolen cards. EVM cards are read at the point of sale by inserting the end of the card featuring the chip into a payment terminal, rather than swiping the familiar magnetic stripe on the back of the card. Consumers then may enter a PIN to authorize the transaction.

Part of the October 2015, deadline is what’s known as the ‘liability shift.’ Whenever card fraud happens, we need to determine who is liable for the costs. When the liability shift happens, what will change is that if there is an incidence of card fraud, whichever party has the lesser technology will bear the liability.

So if a merchant is still using the old system, they can still run a transaction with a swipe and a signature, but they will be liable for any fraudulent transactions if the customer has a chip card. And the same goes the other way – if the merchant has a new terminal, but the bank hasn’t issued a chip and PIN card to the customer, the bank would be liable.

The key point of a liability shift is not actually to shift liability around the market. It’s to create co-ordination in the market, so you have issuers and merchants investing in the migration at the same time. This way, we’re not shifting fraud around within the system; we’re driving fraud out of the system.

Why does this matter to Apple Pay? Because millions of merchants will be required to purchase and install new card-reader hardware in the next year in order to comply with this mandated standard. And when these merchants shell out for new card-readers, something they might do at most once or twice per decade, there’s a good chance they’ll opt for all the “bells and whistles.” Following Apple’s announcement, NFC is right at the top of the list of must-support technologies. It is the most secure as the merchant never sees the credit card number. Therefore, the merchant who uses Apple Pay always wins the liability argument. Hence, we could see a dramatic spike in NFC support in this country. Even with its incredible marketing might and its ability to drive hardware trends among consumers and enterprises, Apple surely would have had a tough time forcing NFC down the throats of slow moving and cash-strapped US merchants without the help of these regulatory changes. But, with the US market already obligated to catch up to the rest of the world around physical card security, it’s a much easier sell to support touchless mobile payments as well. I’m sure this timing is not just one big coincidence, but another example of leapfrogging, rather than migrating, technology. I am looking for $142.

I invite you to join me in building and preserving financial wealth to compliment “true” wealth: faith, family and friends.

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Larry Hollatz, RFC® Past Investment Letters @ Larry's Blog

The Lawrence Investment Group

October 16, 2014 The calm in the wake of the storm.

I started my last letter with the following statement: “We have been traversing a rather rough spot in the markets for a couple of weeks and it is easy to get downbeat. I know the feeling.” Little did I know what an understatement that turned out to be. I have received several calls this week asking what to do now and I answered them all the same. I am an investor, not a trader. I focus on investing for retirement and wealth creation, not on quick returns with high taxes. I think that a 5% to 10% “correction” means many of the dividend paying, blue chip stocks I advocate are going to be on sale. Many of the premier companies are selling at a discount for a limited time and that makes this the time to scoop them up. I cannot say we have hit the bottom, because nobody can, but I do see stocks selling at a discount and I do believe they will return to full value, and above, by year end and actually, much sooner.

The majority of the talking heads we see on the financial news channels are traders and are looking to make money fast. I recently heard one of them say he was making this particular stock a long term investment which means he might hold it for as long as five or seven days. Long term? Many of these traders are in large hedge funds and dealing in short term options trading and large margin positions. There is nothing wrong with that but it creates volatility. When we get big market changes, traders are faced with programmed, stop loss trades and often very large margin calls. The result is an avalanche of sell orders which cause the big price drops we have seen this week. These disruptions to traders are usually caused by fear and uncertainty which could hurt their short term positions.

This week’s disruption may have been caused, or aggravated, by the Ebola scare. For the first time ever, people in this country became infected and fear set in. People might be afraid to go out to eat or shop; the holiday retail season may be at risk. They may well be afraid to fly or travel or to take vacations. Thus the economy which, is fragile at best, may slow down even more and earnings may fall driving down stock prices. In a trader’s mind, he better sell fast before somebody else does and the stock prices go down.

This week’s disruption was also aggravated by the dismal European economy which appears to be entering its third recession in six years. It is the strongest indication of the slowdown of growth in the world markets and corporate earnings growth may slow driving their stock price down. In a trader’s mind, he better sell fast before somebody else does and the stock prices go down.

And finally there is the FED with their never ending attempt to manage our recovery. This month is supposed to be the last of the bond purchases and the fear is that interest rates will rise. Well it turns out the market controls interest rates, not the FED, and the 10 year Treasury bond interest rate dropped below 2% this week. The FED is not going to raise rates in the near future and when they do, it will because the economy has finally reached escape velocity. That would be good news but traders make into bad news because higher interest rates may cause corporate profits growth to slow and drive the stock price down. In a trader’s mind, he better sell fast before somebody else does and the stock prices go down.

So this week we had the perfect storm of these three headlines, coupled with many other fears including the uncertainty of the upcoming election, that generated maximum fear in the market. That broke the courage of the traders and the rapid “correction” has occurred. I used quotation marks on the term correction because by definition a correction is a fall of at least 10% and on average the major indices have fallen 7.5% as I write this letter. It is not uncommon to have a correction in a bull market and for the market to continue. There is always a correction out there and several of you have asked me when it will come. It is not if, it is when, and if only I could answer that.

But remember, we are not traders; we are investors. We are investing to ensure we have a very enjoyable retirement without any worries about income, and to create wealth in concert with that goal. Therefore we focus on the fundamentals of the stocks we purchase and the fundamentals of the market and economy because that is what pays dividends and provides long term growth. Those have not changed this week and the recovery will be swift. In recent letters I have been contrasting popular momentum stocks with solid fundamental stocks and encouraging you to invest in the latter. This week Apple, my favorite fundamental stock, went down about 5%. At the same time Netflix, one of the momentum darlings of Wall Street, went down 22%. It remains prudent for us investors to ignore the talking head traders and focus on quality fundamentals.

In spite of the panic trading during this week’s near correction, I have not seen one analyst revise their forecast for 2014 or 2015 market targets. Each analyst has their own unique method for formulating these predictions but two components are in all formulas. They are the corporate earnings looking forward and the ratio the market assigns as fair market value. The market P/E if you would. Each analyst includes a few other parameters and a little of their secret sauce in formulating these forecasts but not one of them has revised them this week. Not the bulls or the bears. The world economy is limping along and ours is doing a bit better but unless we have major catastrophic headlines like an Ebola outbreak or a serious geopolitical event, the bull market remains alive.

Another headline in the past week or two has been the dramatic decrease in the price of oil. Although this has had a short term negative effect on my favorite energy companies, XOM is down about 10%, it will have a major effect on our economy. The decrease of the price of gasoline at the pump acts as a huge tax cut for all Americans. It is estimated that the current price saves the average low income and middle class family over $50 a month and that will increase as prices continue to fall at the pump. That is $50 or more a month that will be spent in other places in our economy and bodes well for the upcoming holiday shopping season.

Investors; take a deep breath and relax as the traders are tearing their hair out. Take a hard look at the types of fundamental, blue chip stocks I have been advocating and look around for a flashing blue light special. I have very few individual stocks in the retirement accounts that I manage as I much prefer to focus on the more diversified mutual funds and/or ETFs. However, all that I said about shopping for, and investing in, solid fundamental stocks that meet our investment goals, applies to funds or ETFs comprised of these solid stocks. The funds I use have only dropped a percent or two this week and that is the beauty of diversification. In fact, the REITs have actually increased in price. Never-the less, they are selling at a discount that will not last for long. With interest rates hitting 52 week lows this week and world economic growth plodding along; it will be a long time before you can expect reasonable returns on the fixed income space. Treasury bonds have a return less than inflation and CDs and money market funds have returns of less than one tenth of a percent on average. This is an ideal time to beef up your equity fund holdings in your retirement accounts. I invite you to join me in building and preserving financial wealth to compliment “true” wealth: faith, family and friends.

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Larry Hollatz, RFC® Past Investment Letters @ Larry's Blog

The Lawrence Investment Group

August 24, 2014 Boring Investments Keep on Moving on.

We have been traversing a rather rough spot in the markets for a couple of weeks and it is easy to get downbeat. I know the feeling. Then, I wake up on Saturday morning and rush to check out the latest issue of Barron’s as I do each week. Feeling a bit gloomy, I notice the Aug. 16, cover of Barron’s is entitled “Drilling For Profits” and is a cover story about Schlumberger, SLB, which is positioned for a “50% upside-or more”. Now, those of you who have been with me for a while are very aware that I have been talking about, and recommending purchase of, SLB for years. There is no better way to dust the gloom off of my investment attitude than to read this hawkish article that my largest individual stock holding is poised for a 50% upside. I cannot talk about SLB in every letter because it becomes boring, although very profitable.

Feeling much better than when I awoke, I tear myself away from the SLB cover story to peruse the rest of this week’s Barron’s. The next front page story is “Shiny Apple iPhone maker still has room to run” or “Why Apple could continue to shine.” This is deja vu all over again. Now, those of you who have been with me for a while are very aware that I have been talking about, and recommending purchase of, APPL for years. There is no better way to dust the gloom off of my investment attitude than to read this hawkish article that my second largest individual stock holding is poised for a 15% plus upside. For those of you who are keeping score, that is a $805 pre-split price target. I cannot talk about AAPL in every letter because it becomes boring, although very profitable.

So let us talk about something different. The Q2 earnings season has come to end and, by most accounts, the profit performance has been above expectations. Reported corporate earnings have been solid in the second quarter of 2014. Roughly 66% of the companies within the S&P 500 have reported earnings that have beaten analysts' estimates. This ratio is higher than it has been historically which indicates that earnings are overall growing faster than market expectations.

This market just keeps plodding along on its bull run, or perhaps walk, with no end in sight. Yes, we have had about a 3% pullback; but, this was more of a reconsolidation of money moving from the frothy momentum stocks to the more reasonably priced companies we have been talking about. Companies that actually have earnings. Earnings growth remains limited by the lack of top line growth and the fear that profits cannot continue to expand without some movement on the top line. That has not happened because our economy remains stagnant as employment growth struggles and there is virtually no wage inflation. That means workers have no extra money to spend on goods and services. So, we remain in a rut. As contrary as it may seem, we do need some inflation, wage inflation, to grow this economy and to enable businesses to raise prices.

Why have wages remained flat as we move out of the great recession? The FED has decided to call it slack in the employment pool. In past recoveries, when unemployment falls to a certain level, say 5%, employers must increase salary offers to entice workers from an ever smaller labor pool to come on board. That, in turn, generates wage increase for current works and wage inflation occurs. In this recovery, the unemployment rate as reported by G3 has fallen to near 6% but the true unemployment rate as reported by G6 is 12%. The difference is millions of workers who might come back into the labor pool could eventually go back to work if the right opportunities exist.

What is National Labor Board U6 unemployment rate?

The U6 unemployment rate counts not only people without work seeking full-time employment (the more familiar U-3 rate), but also counts "marginally attached workers and those working part-time for economic reasons." Note that some of these part-time workers counted as employed by U-3 could be working as little as an hour a week. And, the "marginally attached workers" include those who have gotten discouraged and stopped looking, but still want to work. The age considered for this calculation is 16 years and over.

The Congressional Budget Office estimates the current size of the “potential labor force”—how many workers would be in the labor force if job opportunities were strong—at around 159 million. The size of our current labor force is just 155 million. In other words, about 4 million workers are “missing” from our workforce. If those workers were in the labor force looking for work, the unemployment rate would be 12 percent instead of 6.2 percent. Currently, the unemployment rate is hugely underestimating the amount of labor market slack.

Large numbers of discouraged workers are key to why the U.S. labor participation rate lingers at 62.9 percent, down from 66.4 percent in January 2007, just before the recession and the financial crisis was about to roll over the economy.

And this is, in addition to the 7.5 million Americans who are currently working part-time but want to work full-time, often referred to as involuntary part-time workers. Most want a full-time job but can't find it or their employers have cut back on their hours for business reasons. The number is still about 3 million more than before the financial crisis.

All of the recent headlines about the FED policy are about how they are going to measure and manage this employment pool slack. They are not going to take action to slow the economy’s growth until this work force slack is absorbed and the early signs of wage inflation appear. For investors like you and I, this means the market will continue to thrive on low interest rates and Quantitative Easing for at least several more quarters and the signs of an impending change should be obvious. In other words, stay invested as the S&P heads to 2025.

The most frequent question I get is “when will this bull run, walk, end?” I do know it will end; but, I do not know when. There are no signs on the horizon of it ending soon. Home prices are growing slowly. Job growth numbers continue to improve although not up to historical standards. The budget deficit is down by about 50% year over year although spending is still out of control. Household debt has been reduced, home equity has increased and home construction shows signs of improving. Geo-political issues remain but do not seem to impact consumer or business spending. Perhaps the scariest thing out there is that we do not see anything scary on the horizon. That being said, it is time to stay invested in equities as there are no other viable options, bonds or fixed income, which can provide a return that even keeps up with our tame inflation.

In recent letters I have focused primarily on wealth growth and not enough on retirement planning which is my core interest. The primary difference is the amount of risk we can take in our investments. We can afford significant risk in our wealth growth investment to seek a higher return but we cannot afford as much risk in retirement planning. My goal has been to have clients retire at the same income they had in their pre-retirement years to ensure a very comfortable retirement. In researching the paragraphs above concerning work force slack, I came across an interesting scenario. The comments were about a GM employee who lost his job and after months of looking for employment, decided to retire. He could survive on his social security and small GM pension but did not have the lifestyle he planned for in retirement. He wants to return to work but not for $10 an hour and wants to use the skill set he already has. He wants to make his retirement more comfortable and plans to do so when the labor slack, which I discussed above, is absorbed and wage inflation occurs.

Sound retirement planning and investing can keep you from being in that position. For maximum capital safety, we can put our money under the mattress. The problem then, of course, is purchasing power deflation as our money buys less every year. If a dollar under your mattress buys a loaf of bread today, it is very likely it will only buy half a loaf when you retire. Today, bank deposits and CDs paying less than a quarter of a percent are no better than money under your mattress. Bonds have historically low risk but today the rates are very low and lower than inflation. When interest rates do increase, as they must, the value of your bonds will decrease and many retirees will incur significant capital loses. There remains only the equity market; but, we must approach with caution. I suggest a small basket of very well diversified mutual funds or ETFs as I do not want to watch, or worry about, individual companies. I want to sleep at night. I prefer mutual funds as I have some faith in how they are managed. Using this strategy on the several retirement portfolios that I manage, I have received annual returns of 14%, 13% and 16% over the past one year, three year and five year periods. Recall using the rule of 72, and investment that returns 14% doubles in just over five years. If you invest in these portfolios and continue to add the maximum allowed each year to those investments, you will not only find yourself with a very comfortable retirement but will be well on your way to creating significant wealth. Go for it.

To achieve the proper diversification and thus the lowest risk, I like to use the Morning Star Investment Matrix and spread my investments across about six of the nine boxes. As I have discussed before, it is important to review your matrix periodically to ensure you remain in the balance that keeps you where you want to be on the risk/return curve. I would be happy to recommend specific funds and portfolios that I recommend and have found to be successful.

I invite you to join me in building and preserving financial wealth to compliment “true” wealth: faith, family and friends.

Provide Feedback

Larry Hollatz, RFC® Past Investment Letters @ Larry's Blog

The Lawrence Investment Group

June 30, 2014 A Period of Consolidation and Energy Opportunities

May was another good month in the market; not the outstanding bull of last year, but a continuation of the slow melt-up that provides handsome returns. We appear to be in a consolidation period which implies that the market wants to stay with a bullish bias for the long haul. It's just time to take some profits off recent winners and rotate it to other stocks, as I discussed in my last letter with value replacing momentum. This creates sideways action for the overall market even though there are some extreme winners and losers each day. Once this process is complete the broader market should return to the upswing.

Growth has slowed down because economic expansion is slower this time around. We are used to 3%+ GDP growth coming out of most recessions. This one took a while longer to get heated up, stuck between 1-2% GDP growth most of the time. This means we have not created excesses like most expansions from the past which is the harbinger for future recessions. I am concerned that Q1 growth was restated to negative 3%; and, we all just seem to dismiss it as a one off. I am cautious but signs point to growth on the rise later this year which equates to more legs for this bull market.

There is still too much money on the sidelines or in underperforming bond funds. The reason being that the current generation of investors were horribly burned twice in recent memory (the bear markets of 2000 - 2002 and then again 2008 - 2009). This means they will be late to the party once again. As they climb on board, stocks will make another leap higher. Those who stay in bonds can be assured they will get their coupons but could easily lose 30% or more of their capital with a 2% uptick in inflation. We could also put that money in near zero percent fixed income investments; but, it will not help us in retirement if a loaf of bread costs $10.

Again all that remains is equity investments. But, the frightening thing for me is that more and more talking heads are moving to the strategy I have been advocating for the past year or so. With so many headed in this direction, what can we do different? We need to continue to invest in the blue chip, multinational, dividend payers that I have been recommending. However, it is time to become even more selective. Dividends are good but just dividends are not enough. Look for a history of increased dividends first. Then look for continuing profit growth; companies cannot sustain dividend growth without profit growth. Finally, look for topline growth. In this time of weak consumer demand, a disproportionate amount of profit and dividend growth may be the result of financial engineering. Again, for sustained growth in profits and dividends, sooner or later we must achieve top line growth. I believe, if you pick stocks in that order, you will handily outperform the general market. So what about some of my favorites?

For those of you who have stayed with me through the years, you know that I have been advocating investing in fossil fuels since the beginning. In recent letters, I have recommended SLB and XOM; while in the past, I have also supported COP, ECA and CVE. I have only reduced my holdings in the latter three because with all of the gains in these investments, my portfolio became very over weighted in energy. So, I scaled back in the interest of diversity. They remain solid investment choices and may outperform XOM. In 2010, I wrote a thesis on investing in fossil fuel based energy (still on my blog); and, virtually everything I said then is true today. Many have asked if we should remain long in these investments with the upsurge in alternative energy. The answer is a resounding yes.

It is easy, with all that we hear about the rise of alternative energy in the U.S., to lose sight of one basic fact: in terms of real, everyday energy consumption in the U.S., fossil fuels still rule. In fact, so far in 2014, more than 90 percent of energy consumption in America has been supplied by oil, natural gas, or coal.

According to the latest U.S. Energy Information Administration (EIA) numbers, non-fossil fuel energy accounted for about 9.25 percent of total American energy use in 2013. That in and of itself is probably surprising to many people. But, if you dig a little deeper into the numbers, other surprising facts emerge. The following is a chart of the year-to-date U.S. energy consumption by source, as of June 23, 2014.

The problem is that we are all inclined to judge the relevance of something by the amount of media coverage it receives. On that basis, renewable energy is simply huge! Whole oceans of ink have been used up talking about the rise of wind and solar power. Naturally, we assume that they are currently leading the way and transforming energy consumption in America. The facts say otherwise; and, we should invest based on facts.

Even within the 8.75 percent of consumption that renewable sources account for, neither wind nor solar power, the most prevalent energy sources in the press, are particularly significant. Nuclear power comes in fourth behind the big three and accounts for as much production as every other renewable energy source combined; wind and solar, on the other hand, together account for 1.39 percent of supply.

As I said in my 2010 thesis, it’s not that solar and other alternative energy sources aren’t going to be extremely important in the future. It’s just that the future is not here yet. The big three — oil, natural gas, and coal — still dominate. Within those three, things are shifting quite rapidly. Coal is losing ground and natural gas usage is increasing. Energy usage, particularly for electricity generation, is clearly cleaner than in the past. And, that trend is likely to continue, but anybody who tries to tell you that we are close to the end for companies with a focus on traditional energy sources is way off the mark. Of course, coal, oil, and gas are finite, and it is only logical that a shift to renewable energy is coming. The numbers show that this is happening, but it is still a long way off and well beyond my investment horizon.

All of this leaves the U.S. with two obvious implications for energy investors. Firstly, don’t give up yet on oil and gas producers. They are still expanding to meet growing demand and will continue to do so in the near future. Secondly, if you look at certain solar or wind energy stocks and believe you have missed the boat, you are probably wrong. There is still a long way to go if either is to fulfill its potential. Those of us who have remained long SLB have been rewarded to the tune of 30% year to date; and, I strongly recommend a solid position in SLB, XOM, COP, ECA and/or CVX.

For all of you who have asked me about APPL, my response every time was that it would reach $600 in early 2014. As I write this today, APPL is at a price of $656 on a pre-split basis and, in my opinion, has plenty of room to run. At today’s price, APPL is still undervalued considering their P/E ratio and commitment to increasing dividends. We do not know what Apple’s product release plans are; but, we are confident that they will release two new iPhones this year. We also know that they will be in the 4.7 inch and 5.5 inch range and at least one of them, probably both, will have quartz screens. I expect to see these devices in late summer with plenty of time for the Christmas season. I also expect the sales and profit numbers to blow past estimates resulting in a stock price of $700 to $750 ($100 to $107 in post-split price) by Q1, 2015, What is coming beyond the iPhone 6 is unclear; but, I believe it will include the long awaited iWatch as a heath/fitness/wellness device and a TV device of some sort.

The introduction of the smart phone by Apple several years ago has effectively killed the market for the following products:

Voice recorder – answering machine
Alarm clock, stopwatch, timer
Music players, Mp3 players, Walkman
Landline phones
Small format cameras
Flashlight
GPS units
Pagers
Video recorders
Pocket calculators
Watches

The obvious question is what comes next? I think future Apple product launches may well spell the demise of some or all of the following products:

Video gaming consoles
Fitness recorders and gadgets. Nike has already killed theirs.
Health monitoring devices
Video on demand services
Home monitoring and control devices
Bicycle computers
??????

If this does indeed happen, especially game consoles which typically sell for $600 and for which Apple already has all of the required technology, watch for revenue, profits and stock price to far exceed current expectations. Of course, I must continue to stay long APPL.

WFC is another stock that has recently rewarded investors and remains a strong hold to buy. I would also continue to hold or accumulate NSC, BA, DIS, CAT, IBM, and CMI. I am reducing my position in GLD as I believe the other investments I recommend are a better place for that money. I would avoid GM as I am quite surprised that consumers continue to buy their products in spite of the massive recalls and near criminal like attitude of the company.

I invite you to join me in building and preserving financial wealth to compliment “true” wealth: faith, family and friends.

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Larry Hollatz, RFC® Past Investment Letters @ Larry's Blog

The Lawrence Investment Group

May 9, 2014 Momentum Stall – Reverses Direction – Traders Book Losses

The vicious cycle of 2014 continues to claim more victims. Just as traders were becoming more confident after logging many days and weeks in the plus column, we saw the same "Risk Off" behavior as a couple weeks back. I am referring to where small cap, growth and tech stocks all did much worse than the S&P average. And heaven forbid you owned a stock in all 3 of these buckets because likely you took a nasty 10% plus haircut in the past few weeks. For growth investors, a not-so-funny thing happened on the way to the S&P's new highs over 1900 this year: a take-no-prisoners correction in growth stocks, from Social Media and Cloud industries to Biotech and Clean Energy industries. Many of the highest-flying stocks that led on the way up last year have been cut in half. And the Russell 2000 Small Cap index just closed below its 200-day moving average for the first time since November 2012. I hate to say it...but this may be the sideways year the market needs to digest the outsized gains of the past. Over time it should be a more logical range bound path instead of the violent swings we see now.

Fortunately for those of you who have been reading my Investment Letters and following my investment advice, none of this matters. There is a reason my letter is entitled “Investment Letter” and not “Trader Letter”. I have advocated investing for retirement savings and wealth creation by purchasing value stocks with strong profits, growing revenue and reasonable dividends. Those who have done so are reaping the benefits of the S&P's new highs over 1900 this year. With the chaos of momentum stocks crashing around us; we just keep chalking up very handsome gains. Let’s take a look at just what momentum investing is:

Definition: Momentum investing is a strategy of capitalizing on current price trends with the expectation that momentum will continue to build in the same direction. But when is the best time to use this investing strategy and which are the best mutual funds? Most commonly, and especially with mutual funds designed to capture the momentum investing strategy, the idea is to "buy high and sell higher." For example a mutual fund manager may seek growth stocks that have shown trends for consistent appreciation in price with the expectation that the rising price trends will continue.

The Greater Fool Theory

What this means is momentum traders just look at what the stock is doing in a technical analysis and ignore the fundamentals. I prefer to call this this “The Greater Fool Theory”. That is no matter what you foolishly pay for a fast rising momentum stock today, you believe someone will come along tomorrow and pay even more. In value investing we look for P/E and PEG ratios in line with the S&P average and look for increasing profits and revenue. In momentum trader we overlook such rigor and look only at price appreciation. When there are no earnings, and therefore no P/E ratio, we look at a price to sales ratio. Generally a reasonable expectation for a P/E ratio today is 15 to 19 and P/S ratio of 2 to 4. When you look at the chart I have included below, the largest losers are those which have violated those guidelines.

In spite of all of the doomsday headlines and dire predictions of the financial broadcast media, who are traders not investors, there is plenty of hope for those of us who just want to prepare for a reasonable retirement and moderate growth of wealth. Fortunately, the long term bull market will not end until either the next recession appears on the horizon OR valuations get bubblicious. This sideways process in 2014 is doing a good job of making sure a bubble doesn't take place as the hardest hit are those with the most premium to give back. Do the best you can to keep focused on that long term horizon that reminds you that the bull is still in charge. In time, it will start showing the proper benefit in your portfolio.

As Q1 earnings season firms up, it looks like we could see another quarterly record close to $27 EPS for the S&P 500. And from there, the estimates track higher to an expected $31+ for Q4. Add them up and you get $117 for the full year. Now divide that number into S&P 1900 and you get 16.25. That's the P/E multiple for the broad market index. Not terribly cheap, nor expensive.

Here's the key way to view these numbers: in an expanding economy where corporate balance sheets are strong and interest rates are seen to remain low for a considerable time, the stock market has not yet seen its peak because that multiple will probably expand to 17-18X. If the market continues to discount the positive economic and earnings trends, a conservative 2015 EPS estimate of $122 multiplied by 17 puts the S&P index at 2,074.

Yes, the bull market is getting up there in terms of age. And the market always runs ahead of the economy by at least 6 months. But the expansion has been slow and steady, almost as if it has found a path to stay clear of the old boom-bust volatility. And this means that the direction for earnings is still upward, keeping that P/E multiple respectable and affordable. The S&P 500 has closed successively higher in the months of February, March and April while the news has focused on the momentum crash. This strength has been partly defensive in nature as institutional investors reallocated capital from growth areas to blue-chip safety and yield. But as long as the S&P keeps finding buyers in the 1800-1850 area, it argues for broad market accumulation that usually leads to higher prices.

With money market returns near zero and bond prices falling to even lower levels in the past weeks, there is no place to realize a return greater than inflation other than the equity markets. When the bond interest rates finally do increase as they must, investors will face substantial loss in the value of those bonds. Reread a couple of my recent letters and stay invested in quality blue chips. Rather than a discussion of specific stocks this time around, I am including a table of the stocks I have been advocating compared to the infamous momentum stocks. Recall the returns seen on my recommended list are in addition to dividends that are generally higher than bond returns.

Value Investment vs Momentum Investment

		PRICE
COMPANY				Change	P/sales	P/E Tr
	1/23/2014	3/18/2014	5/8/2014
XOM	$96	$95	$103	7%	1	14
SLB	$90	$91	$101	12%	3	19
BA	$136	$124	$131	-4%	1	22
DIS	$75	$82	$81	8%	3	22
GM	$37	$35		-4%	1	19
GLD	$122	$130	$126	3%
AAPL	$553	$521	$594	7%	3	14
WFC	$46	$48	$49	7%	3	12
NSC		$96	$94	-2%	3	16
IBM	$182	$187	$190	4%	2	13
CAT	$88	$96	$104	18%	1	18
CMI	$132	$143	$148	12%	2	18


TWTR	$63	$51	$32	-49%	23	N/A
FB	$57	$69	$58	2%	8	29
YHOO	$39	$39	$36	-8%	8	29
NFLX	$389	$420	$319	-18%	4	120
WFM	$51	$54	$38	-25%	1	26
AMZN	$400	$379	$290	-28%	2	453
VRTX	$84	$79	$65	-23%	16	N/A
TSLA	$181	$240	$178	-2%	11.0	N/A

		note TSLA -25% since March

Please have a very happy and fruitful 2014. I invite you to join me in building and preserving financial wealth to compliment “true” wealth: faith, family and friends.

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Larry Hollatz, RFC® Past Investment Letters @ Larry's Blog

The Lawrence Investment Group

March 18, 2014 The Same Old Bull is Alive and Well

Just a few weeks ago, in early February, the market was in the midst of a nasty pullback with fears of more pain to come. And in no time, we were back within striking distance of the S&P highs of 1850, where we struggled for several days. After a few intraday attempts to break through, only to pull back at the close, we have now clearly put 1850 behind us.

Yes, it is as if nothing ever happened. And often rounds of profit taking can be nothing more than that. Just a time to wring out excesses even though the fundamental outlook is unchanged.

Yes, there is always the risk of a geopolitical event which may disrupt the market as we saw with the recent saber rattling as Russia moved to assert itself as the regional power while ”not invading” Ukraine but merely sending troops to wander the streets and annex Crimea. The sharp recovery as tensions eased is emblematic of what a small player Russia really is in the overall world economy.

And, oh yes, there are the reports that the China economy is slowing to a level of just three times the growth rate of the U.S. economy, 7.5% vs 2.5%. Is that supposed to be a problem? Is that why the iPhone is the number one smartphone seller in China? China has been attempting for a year to slow down their economy to avoid runaway inflation and chaos; perhaps they are actually achieving that.

The current investment premise now is quite the same as when we ended last year. It may be even better when you consider that bond prices are actually lower than they were late last year. On March 9^th, the bull market celebrated its five year anniversary. Indeed, there is much to celebrate with a +176 % gain on the S&P 500 since that date. It looks like the current investment bond rates are even lower now; and, we have another solid earnings season in the bag. It is best to assume the bull market is in place until a recession looms on the horizon or stock valuations get out of hand on the high side. Neither is the case now so the bull market continues on.

As I stated in my last letter, 2014 is not a year where a rising tide raises all boats. However, it is a year where judicial investing can result in above average returns. With each new high, we see investors wanting to lock in their gains and reap some profits. But, on the other side of the trade, we see investors fearful of being out of the market for the next leg up. And through all of this, more cash has come out of fixed income and off of the sidelines, refueling every small upside. There is no alternative, not bonds, not CDs, to equities to achieve returns higher than inflation. It is imperative that we remain invested. With retail food inflation at 3.5% in 2014, we cannot afford to be invested in those fixed income vehicles and risk the associated loss of purchasing power.

This year, even more than last year, that means we must invest in fortune 500, U.S. based stocks that pay good, consistent dividends and have a large percentage of their sales and income in overseas currencies. That pretty much sounds like a solid filter we should use in picking our investments. This strategy also reminds me of what Warren Buffet said when asked how he picks stocks. His response was that he manages a portfolio of very well run businesses rather than a portfolio of stock prices; it takes more patience but results in much fewer bad investments. So, let’s look at some well managed businesses we would like to own.

XOM – SLB: These two companies have been high on my list for a long time. SLB is expected to significantly outgrow the market in 2014 and is expected to increase its dividend. They are heavy into fracking and international drilling; two areas of rapid growth. Fracking sites have about half of the production life of traditional drilling which means SLB’s installed base is constantly increasing demand for new sites. XOM took a slight hit as Putin is acting up because of their huge joint investment in artic exploration and development. Russia may threaten to cut shipments of gas and oil to Europe and to walk away from joint projects like the XOM deal, but they will not. Exports of oil and gas are the largest drivers of the Russian economy and Putin will not back down from that. In fact, for years Russia has been encouraging eastern European countries to stay away from fracking and exploration for “environmental concerns”. The only environmental concern Putin is promoting is Europe’s dependence on Russian petroleum. To the extent that those supplies are threatened, SLB and others may see opportunities to grow in Eastern Europe.

NSC: With the explosive development of oil production in the northern U.S., we really need pipelines to move all of that oil. But, they do not exist. Instead, we now have rolling oil pipelines which are 50 to 100 oil tank cars riding the Norfolk Southern Corporation rails across the U. S. NSC has added 100 locomotives in the past year and is now laying track on frozen tundra to meet rail demand. A Berkshire Hathaway company, they are part of a 350 locomotive expansion project and are expected to outperform and raise their dividend above the current 2.3%.

BA: Boeing remains on track for a stellar year and more as they expand both 787 and 777 production with new plants. They had a dip as the Malaysia 777 episode was feared a crash; but, it was not an accident. There is also some fear of a 787 production problem with cracks in the wings. Assuming those wings can be reworked, Boeing should continue to fly high.

DIS: Still the best bet in entertainment and I would continue to hold. I would like to see them increase their dividend but have not heard any chatter.

GM: Last time I said it is “hard for me to recommend this because of bail out history but GM and F have their acts together”. Now, I think it is time to leave GM. I think they will spend the next year answering to congress and the government on why they did not institute a recall years ago and before nine people died because of the ignition switch problem. They will get over it; but, I see it as dead money for over a year.

GLD: I still want at least 5% and no more than 10% gold in some form in my portfolio.

WFC: The kind of class company I want to own with their solid growth and 2.5% dividend.

IBM: Another holding I am not ready to trim. Look for new highs by year end.

As we have overcome the geopolitical turmoil of the past several weeks with only a slight dip or two, it appears that investors are focusing on the good things that are happening in our economy. Yes, employment growth is disappointing, but, we are seeing a slow but steady improvement in the economy. The Fed continues to taper and the same old bull is continuing to run. Short of a financial disaster that no one sees coming, it is time to continue to invest in your future.

Please have a very happy and fruitful 2014. I invite you to join me in building and preserving financial wealth to compliment “true” wealth: faith, family and friends.

Provide Feedback

Larry Hollatz, RFC® Past Investment Letters @ Larry's Blog