There is a Time to Make Money and a Time to Not Lose Money

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Leo Marsh
5 years ago
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1 Delta Investment Management is a registered investment advisory firm headquartered in San Francisco. Delta welcomes discussions with individuals seeking investment advice and advisors seeking a new partner. Delta manages stock and bond portfolios and alternative investments at TD Ameritrade and Schwab. Please contact Delta at info@deltaim.com or to learn more. June 2, 2017 There is a Time to Make Money and a Time to Not Lose Money There is a time to reap and a time to sow. Investing is a thoughtful activity. If you don t have an investment thesis that is the output of a sound investing process, then don t invest. It s that simple. During times when your disciplined investment process shows positive expected returns, invest (sow). What is our current investment thesis? Now is a time to make money: 1. Earnings are expected to be up roughly 22% year-over-year in The first quarter earnings season positively reinforced this expectation. 2. There are no significant signs of recession in the next six months. 3. International economies are expanding clearly good for international stocks and global growth benefits U.S. stocks, especially large capitalization stocks with international exposure. 4. Low bond returns continue to make stocks relatively attractive The Fed Model. The Fed Model The Fed Model is an informal model that came into being in a Federal Reserve report issued in The model compares the stock market s earnings yield (Earnings/Price, E/P) to the yield on 10-year treasury bonds. The Fed Model states that bond and stock market are in equilibrium, fairly valued, when the one-year forward-looking earnings yield equals the 10-year treasury yield. The Fed Model is a simple tool to measure attractiveness of stocks. The 10-year treasury yield is roughly 2.2%. The earnings yield of the S&P 500 is 5.4% (2017 estimated operating earnings estimate is $ divided by S&P 500 index 2,430 equals 5.4%). According to the Fed Model, stocks are attractive.

2 If we modify the Fed Model by replacing 10-year treasury yield with the corporate Baa bond yield, stocks continue to be attractive on a relative yield basis. Since the beginning of the year interest rates have notched lower and earnings have been revised higher making stocks even more attractive. Why would we modify the Fed Model to use corporate bonds rather than government bonds? The main reason is to match the risk level of the bonds with stocks. U.S. government bonds are considered to have very low default risk as the U.S. Treasury

3 can print money to repay the bonds. Corporations can t print money. Corporations can t absolutely guarantee bond repayment and/or future earnings projections. By using Baa rated corporate bonds, we believe we have matched the bond default risk to the earnings risk of the S&P 500. During a May 8 interview with CNBC, Warren Buffett talked about the importance of interest rates when considering stock valuation. Buffett stated that the valuation of stocks is driven in part by interest rates because the value of companies is based on the discounted value of their cash flows. Stocks are dirt cheap, Buffett said, if rates stay around current levels or increase only modestly over the next 10-plus years. Now is a time to be invested. However, the investment landscape is always changing. Every working day, we monitor the landscape looking for evidence that the make money today investment thesis is at risk. In time and with certainty, the market will eventually transition to a time to not lose money. As an investment firm and with this newsletter, we seek to partner with you in the task of participating in bullish markets and avoiding major bearish markets. Parting Shot We hope the commentary and the charts in this newsletter are helpful in analyzing current market conditions and the investment landscape. We are compiling our favorite charts into a new Delta Chart Book. We will be updating the Delta Chart Book quarterly and offering readers a live conference call to review the charts (more details will follow in future newsletters). If you would like to subscribe to our quarterly chart book, please call or so we can add you to the list. There is an annual processing fee of $20 to receive the chart book and participate in the live conference calls. This service is complimentary for clients. Our wealth management services are devoted to the task of building and protecting client wealth using rules-based, non-emotional tools and our experience. As this bull market extends, the importance of being prepared and adaptive to negative trends also rises. We invite you to give us a call at (415) , visit or us at info@deltaim.com if you have questions about how we can assist you in managing your investment accounts.

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5 (Delta MSI is published every week in Barron s) Pursuant to the provisions of Rule 206(4)-1 of the Investment Advisors Act of 1940, we advise all readers to recognize that they should not assume that recommendations made in the future will be profitable or will equal the performance of past recommendations. This publication is not a solicitation to buy or offer to sell any of the securities listed or reviewed herein. The contents of this letter have been compiled from original and published sources believed to be reliable, but are not guaranteed as to accuracy or completeness. Nicholas Atkeson and Andrew Houghton are also principals of Delta Investment Management, a registered investment advisor. Clients of Delta Investment Management and individuals associated with Delta Wealth Adviser may have positions in and may from time to time make purchases or sales of securities mentioned herein. THIS NEWSLETTER IS PROTECTED BY COPYRIGHT LAW. UNAUTHORIZED DISTRIBUTION AND/OR REPRODUCTION BY PHOTOCOPY OR ANY OTHER MEANS IS STRICTLY PROHIBITED AND PUNISHABLE BY A FINE OF UP TO $25,000.

One of the most important things we have learned over our years in the financial markets is beware of the crowd.

One of the most important things we have learned over our years in the financial markets is beware of the crowd. Delta Investment Management is a registered investment advisory firm headquartered in San Francisco. Delta welcomes discussions with individuals seeking investment advice and advisors seeking a new partner.