MidSouth Week in Review:
December 14, 2018

Weekly Update from Fund Manager Buzz Heidtke, MidSouth Investment Fund

The S & P was down 1.9% for the day and down 1.2% for the week and is in line for the worst quarter in seven years.  More than $46 billion was redeemed from U.S. stock mutual funds and ETF’s for the week ending Dec. 12, the largest weekly outflow since Lipper began tracking flows in 1992.  $13 billon also came out of bonds.  Money market funds saw a huge inflow of $81 billion, a near record.  Morgan Stanley expects slowing loan growth and fewer interest rate hikes to hurt midcap bank fundamentals next year.  The highest percentage of financials made new lows since 2008.

Value Line Market Comments

Excluding the “FANG” group of stocks (Facebook, Amazon.com, Netflix, and Google-parent Alphabet, plus throw in Microsoft for good measure), the remaining 495 stocks in the S&P 500 are priced at less than 13 times expected 2019 earnings.  That’s not the only sign of cheapness.  The appropriate price/earnings multiple for the stock market is inversely related to the level of interest rates, since valuations are discounted flows of future earnings.  With rates still at historically low levels, stock multiples should be decidedly above historical averages.  Historically, with inflation around 2 percent, the average price earnings multiple has been around 19 times earnings.

According to Value Line, more than 100 companies trade at forward price/earnings multiples below 8.  There hasn’t been so many cheap since the peak of the credit crisis in late 2008, when forward earnings projections were probably not worth much anyway.  The last time the market saw more stocks with single-digit price/earnings multiples was in 1984, after inflation was coming off its peak of 10 percent, 30-year Treasury bond yields were coming down from 15 percent, and Fed policy rates had decreased from above 20 percent.

Well Known Stocks

That Look Cheap - Buzz

Name                          *Estimated PE Ratio             Yield               % Decline from Recent High

            IBM                                        8.6                               5.2%                            30%

            Ford                                        6.5                               8.5%                            36%

            Goodyear Tire                         7.0                               3.0%                            44%

            Exxon Mobile                         14.0                             4.3%                            15%

            International Paper                  7.8                               4.6%                            35%

            AT&T                                      8.4                               6.6%                            23%

            U.S. Steel                                3.7                               1.0%                            58%

            Southern Company                 15.7                             5.1%                            10%

            American Int’l (AIG)              7.8                               3.4%                            41%

            FedEx                                     9.4                               1.4%                            32%

            Altria (Tobacco)                      12.2                             6.1%                            30%

            General Mills                           11.6                             5.2%                            38%

            Kraft Heinz                             12.9                             5.2%                            41%

            Hewlett Packard                     9.1                               3.1%                            26%

                Average                               9.2                               4.5%                            32.2%

    *times estimated 2019 earnings

BuzzBits

Stock Buybacks –At the bottom of the bear market in 2009, S & P 500 companies bought back slightly more than $100 billion of their stock.  Now that the S & P is roughly 4x’s higher, what are they doing now?  Buying!  The estimated buybacks in 2018 will total around $770 billion or around 7x more than in 2009 – Fortune ….. Apple, whose stock is down 28% from its October high, has bought back more than twice as much stock over the past decade ($250 billion) than any other company over the past decade.  GE spent $46 billion over the past decade buying back their stock (bad move) – Mitchel Goldberg

Adultery – is a sin.  You can’t have your Kate and Edith too – Sign at the Chrystal Methodist Church in Effing, SC

Trillion Dollar Companies – In August, Apple became the first company to make the list, followed by Amazon briefly a month later.  Today, Microsoft is the highest valued company with a $817 billion valuation, followed by Amazon ($792 billion) and Apple ($792 billion) – Buzz

Boy Scouts of America – is considering filing for bankruptcy as it faces dwindling membership and legal costs related to their handling of sex abuse allegations.  More than 20 Catholic dioceses have filed for Chapter 11 protection as well as USA Gymnastics from sexual abuse lawsuits – Wall Street Journal

Tailored Brands – stock declined 30% on Thursday after the company lowered their guidance. An analyst later commented about the owner of the Men’s Warehouse and Jos. A Banks brands, “The stock folded like a cheap suit.”

15-Year vs. 30-Year Mortgage – Sensible borrowers will realize that if they get, say, a 15-year mortgage instead of a traditional 30-year loan, their slightly higher monthly mortgage payments could also mean a lower interest rate.  They would also pay it off in half the time the 30-year would take, saving tens of thousands of dollars in interest during the process – Wealth Planning

Average Interest Rates – 30-year fixed mortgage 4.9%, 15-year fixed rate mortgage 4.3%, auto loan 7.4%, credit card 17.1%, private student loan 7.8% - Kiplinger Personal Finance

Millennial Wealth – Nearly two-thirds of those aged 22 to 37 believed they would have seven figure wealth by age 45, according to a YCharts survey.  Millennials do not appear to have a preference for consummation that differs significantly from earlier generations, but they are less well-off than members of earlier generations, with lower earnings, fewer assets and less wealth – Eric Levitz ….. I visited a large retail mall last weekend and noticed the traffic count was high, but the buying was evidently lackluster because many of the retailers were offering all their items at 20% to 50% off.  A possible explanation is that when the stock market is depressed, investors feel poorer and therefore spend less.  This also applies to those who are not in the market – Buzz

Maximizing Social Security Payments – One spouse files for social security benefits before full retirement age, while the other, who must have already reached full retirement age, files a restricted application to collect spousal benefits only, which are equal to half of the first spouse’s full benefits.  The second spouse waits until 70 to collect their own benefits, thus taking advantage of delayed retirement credits – Jim Blankenship, CFP

What a Record – Kansas City running back Kareen Hunt was suspended by the NFL for kicking a 19-year-old woman.  Hunt’s family is loaded with bad actors:  his dad has been arrested 35 times, mom arrested for cocaine possession and DUI, step-dad 8 years in prison, brothers 23 years and 2 years in prison, uncle 10 years in prison, cousin 7 years in prison and four other cousins guilty of felony offenses – USA TODAY

Global Stock Valuations – have dropped to five-year lows with small cap stock price-to-earnings ratios (PE) declining to 13.3 from 16 in early 2018 – FactSet …. The small-cap Russell 2000 index is down 18% from its August 31 close over fears about slowing economic growth and higher interest rates along with tariff concerns – Wall Street Journal

buzz@msifund.com

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