Grow Your Portfolio the Intelligent Way

Reflections on the Best FreedomFest Ever

It already has been a week since the kickoff of FreedomFest 2018, but the memories are still very fresh in my mind.

This year, there were over 1,900 investors, business leaders, authors, professors, politicians, think tank organizers and concerned citizens all coming together to bask in the glory that is rational conversation on the issues of the day.

As one attendee observed, “I’ve always heard about FreedomFest but until you experience it, you can’t describe how exciting it is to be here.”

That’s definitely true from my perspective and, for me, this year was the best FreedomFest ever.

Jim Woods, Rob Arnott and Keith Fitz-Gerald enjoy a spirited debate on the future of Tesla and Elon Musk. Photo Courtesy of Unlock Your Wealth TV.

Without question, I had the best professional time of my life at FreedomFest. Between the presentations I gave, the panels I was on, and all of the interviews for my new lifestyle and personal empowerment podcast, Way of the Renaissance Man, it turned out to be one of the best experiences of my life (and I’ve had a lot of really great experiences!).

Yet by far the biggest, most flattering and most humbling aspect for me this year was my interaction with subscribers of this publication, as well as those who follow my Successful InvestingIntelligence Report and Fast Money Alert advisory services.

The appreciation, love and respect I received from subscribers were intensely gratifying, and it’s something I will always cherish and never forget. Particular thanks go out to readers Henry, Janice P., James H., “Tesla” Bob, and Rich C., for relating your success stories to me. Your satisfaction and appreciation for my products is why I do what I do.

I would also like to take this moment to thank a few others who made this year’s event so great. Mark Skousen, Jo Ann Skousen and the entire FreedomFest staff, Roger Michalski, John Phillips, Paul Dykewicz, Ned Piplovic and Heather Wagenhals.

Without your assistance, care and support, none of our shared success would be possible.

Now, one of the highlights for me this year was getting the chance to speak with Grover Norquist, president of the influential Americans for Tax Reform. At his special “Wednesday Meeting” at FreedomFest, he announced that President Trump is likely to sign an executive order indexing capital gains to inflation.

Jim Woods meets with Grover Norquist, founder and president of Americans for Tax Reform, at FreedomFest.

Norquist has been promoting this idea for years, and now it’s likely to happen. This could be very positive for the stock market, and I’ll be watching this development closely in the weeks and months to come.

Also know that it’s not too early to get on board for next year’s FreedomFest!

In fact, this week only, The Deep Woods readers can sign up for next year at the incredible rate of $395 per person/$695 per couple.

FreedomFest 2019: The Wild West will be held July 17-20, 2019, at the Paris Resort in Las Vegas. Do not miss this awesome opportunity to attend FreedomFest for the absolute lowest price. To register, simply click here.

Upcoming Appearance

I am scheduled to moderate a fiery debate between Mark Skousen and Mike Turner on “Buy and Hold vs. Market Timing,” Aug. 23-25, at the San Francisco MoneyShow. I also will be doing a presentation titled, “How to Invest Like a Renaissance Man.” I hope to see you there!

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Don’t Fear the Yield Curve? Really?

By Tom Essaye, Editor, Sevens Report

Is it 2006 or 2018?

That seems like a silly question, but the similarities between the two years are starting to worry me.

Consider:

  • The S&P 500 hit an all-time high in 2006 and 2018.
  • Oil surged to multi-year highs in 2006 and 2018.
  • Inflation accelerated in 2006 and 2018.
  • The Fed raised rates to multi-year highs in 2006 and 2018.
  • The yield curve inverted in 2006, and it is close to inverting in 2018.
  • Former Fed Chairman Bernanke dismissed the yield curve inversion in 2006 saying it didn’t warn of a recession, and he just did the same thing in an interview last night!

“There’s an argument that maybe inversions aren’t the signal they once were because long-term interest rates are unusually low.” — Ben Bernanke, July 17, 2018

“I would not interpret the currently very flat yield curve as indicating a significant economic slowdown to come.” — Ben Bernanke, March 20, 2006

Look, I’m not trying to scare anyone, and I don’t think we’re steam rolling into another financial crisis. However, you have to admit the similarities between the two years are somewhat concerning, and that is because the single most important question investors need to answer correctly is: “When is the economic expansion (and bull market) over?” 

Getting that question answered correctly will mean the difference between outperforming over the longer term vs. potentially getting caught in a 20% or 30% market decline.

We are focused on getting that answer right, and that’s why we’ve been talking about the flattening yield curve for over a year!

I believe, due to my experience living through it (twice), that an inverted 10’s-2’s yield spread is a harbinger of a recession sometime in the next six to 24 months. So, I find it both unnerving and disconcerting that I’m now reading multiple explanations from very qualified individuals who assure me that, this time, the yield curve inverting isn’t a harbinger of a recession (and eventually lower stock prices).

This is exactly what happened in 2006 when the curve inverted.

This latest effort came from a Federal Reserve Research Paper titled: (Don’t Fear) the Yield Curve.

It has created some buzz in the world of economics and it’s making the rounds, so I addressed this paper in a recent paid edition of the Sevens Report, because I consistently want to remind my subscribers that, once again, it’s not different this time — and that a yield curve inversion is a warning sign for investors.

The thesis of the paper is that measuring the spread between 18-month and three-month Treasuries is a better leading indicator of a recession than 10’s-2’s. And, that spread is not sending the same worrisome signal that 10’s-2’s is currently sending.

The general argument here is that shorter-duration Treasuries aren’t subject to global growth estimates that can distort yields. As such, they eliminate the potential for a false signal from an inversion.

Put in plain English, the implication is that the 10-year Treasury yield is being distorted by European buying, and as such is not as accurate as in the past (i.e., it’s different this time).

Instead, the paper’s authors (both Fed staff economists) assert that the 18- three-month spread is a better indicator of looming economic slowdowns because it has more accurately reflected, over time, when the market expects the Fed to cut rates within a year.

Logically, if the Fed is cutting rates, then we’re facing an economic slowdown. So, this could be a predictor of that loss of economic momentum. And, that makes sense, as you’d see the 18-month yields fall as investors buy the higher yield ahead of lower Fed funds in 12 months.

But, here are the two problems with this analysis:

First, by the time the Fed is cutting rates, it’s too late. The Fed is always reactionary — both on the way up (waiting for proof of inflation) and on the way down (waiting for proof of a slowdown). Meanwhile, stocks are discounting mechanisms — they predict the future (sometimes inaccurately) before it happens.

Take 2007.

The Fed did a surprise 50-basis-point cut in September of that year — and within three months, stocks were 15% off their all-time highs.

Trying to determine allocation levels or manage money based on market expectations of a Fed rate cut is like playing bumper cars with a blindfold on — you need to turn the car to avoid a collision before you feel the impact, not after!

Second, trying to manage money based on predicting recessions is a fool’s errand. Again, stocks are discounting mechanisms, while recessions are usually dated long after the market has declined (and sometimes bottomed).

Take the last recession.

The National Bureau of Economic Research, which declares recessions, has the Great Recession starting in December 2007, when stocks were already 10% off their highs, and ending in June 2009, just three months after stocks had bottomed.

Bottom line, I’m not trying to throw garbage on the work of either of these gentlemen, because I’m sure they are both far more intelligent than I. But the fact that we now have Fed employees actively working on explanations on why “It’s Different This Time” regarding a 10’s-2’s inversion is sounding longer-term alarm bells in my head. Between that and a lot of other anecdotal observations, it is making me more and more convinced we are closer to the end of this expansion than the beginning.

Now, to be clear, that doesn’t mean I’m reducing stock exposure today. Because as I will keep saying, when the curve inverts, we traditionally have six-to-24 months of equity gains ahead. But the case that we are close to the end of this expansion continues to build, and I’m going to continue to relay those observations.

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Thanks to Tom Essaye for this great analysis. And, if you want to see more of Tom’s research, you can find a supplemental each month in my Intelligence Report advisory service. You also can find much of Tom’s thinking throughout my Successful Investing and Fast Money Alert advisory services, and directly at Tom’s Sevens Report.

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ETF Talk: Seeking out Small-Cap Dividend Payers

This week’s featured fund, the O’Shares FTSE Russell Small Cap Quality Dividend ETF (OUSM), tracks the FTSE USA Small Cap ex Real Estate 2Qual/Vol/Yield 3% Capped Factor Index.

OUSM reweights the index to reflect the performance of publicly listed small-capitalization, dividend-paying issuers in the United States based on three factors: high quality, low volatility and high dividend yield. The quality and low volatility factors are designed to reduce exposure to equities that pay high dividends but experience large price declines, as may occur with some dividend investing strategies.

Kevin O’Leary, chairman of O’Shares ETF Investments, is predicting that the U.S. small cap space presents a tremendous opportunity.

Small caps are significant companies, with most topping $1 billion in market value. As a group, small caps have provided attractive performance, despite O’Leary publicly stating he prefers lower risk levels.

“Most people don’t realize that $1,000 invested in U.S small caps 15 years ago would potentially have been worth $3,385 today, compared to only $2,642 for U.S. large caps and now, with a strong U.S. dollar and the potential for reduced regulation to boost the U.S. economy, I have more reasons to own small caps,” O’Leary said in an interview.

There are several other advantages to investing in OUSM. Even though it has just $141.58 million in assets under management, OUSM is quite diversified at 223 holdings. Secondly, due to the nature of small-cap equities, investors may not be familiar or aware of many of OUSM’s holdings and would have to spend the time and energy on research if they wished to invest in them individually. OUSM cuts out all that hassle and conveniently offers exposure to high-quality small-caps in one place.

The fund charges an expense ratio of 0.48%, which is the standard for O’Shares funds. It has a distribution yield of 2.53%. Year to date, OUSM has moved slowly along with the broader market, returning just 1.48%. OUSM’s one-year return is 9.39%.

Top holdings in the fund are Steris Plc (STE), 3.40%; Bio-Techne Corp. (TECH), 2.31%; Encompass Health Corp. (EHC), 2.31%; Lazard Ltd. (LAZ), 2.26%; and Watsco Inc. (WSO), 1.99%.

OUSM’s sector exposure breakdown is as follows: Industrials, 23.83%; Financials, 17.51%; Consumer Discretionary, 16.66%; Information technology, 13.54%; Health Care, 9.41%; and Utilities, 7.61%.

For investors who are looking for small-cap, quality dividend companies with low volatility, consider doing more research on O’Shares FTSE Russell Small Cap Quality Dividend ETF (OUSM).

I am happy to answer any of your questions about ETFs, so do not hesitate to send me an email. You just may see your question answered in a future ETF Talk.

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The Weekly ETF Report Has a New Name

An uncommon take on money, ideas and society.

That’s the subhead of the new name of this publication, “The Deep Woods.” Interestingly, that subhead came about serendipitously via a close friend and long-time reader.

This gentleman recently told me that he liked my writing because it provided him “a deeper, uncommon take on everything from money and investing to philosophy and social issues.” He also jokingly added, “Plus, I even get some great song lyric references along the way!”

Now, for a writer, market commentator and someone who tries to see the world through a wide lens of ideas, my friend/reader’s comments were the highest form of flattery. So, I took this observation, condensed it and voila! A new publication name and subhead that I think better reflects the scope and perspective found each week in this publication.

You see, I’ve always prided myself on trying to look a little deeper into issues than merely the self-evident facts. That deeper look allows me to make connections between facts, values and philosophy, which I hope enriches the way my readers look at the world.

Indeed, since taking over the Weekly ETF Report about a year and a half ago, I’ve offered my views on not just subjects of investor interest, but also subjects as diverse as how to survive an active shooter, how to apply the lessons of your hobbies to the biggest of life’s decisions, the abuse of power and the rank hypocrisy of the Hollywood elite. I also have addressed the abundance of poor economic thought that permeates society, including Bastiat’s “broken window” fallacy as applied to Hurricane Harvey.

Most recently, I’ve written critically about what I consider to be the economically misguided tariff and trade war policies issued by the Trump administration. The policies not only threaten to hurt investors, but also threaten to hurt the entire global economy.

In The Deep Woods, I will continue to offer uncommon observations on a variety of eclectic topics, and I promise to apply the principles of reason to all of reality in an attempt to put the world into the most comprehendible and cogent philosophic context. Plus, I promise to keep the song lyrics, literary allusions and pop-culture references coming!

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Persuasion vs. Force

“The triumph of persuasion over force is the sign of a civilized society.”

— Dr. Mark Skousen

FreedomFest is perhaps the ultimate expression of what Mark Skousen says here about persuasion over force. Because when it comes right down to it, we can either persuade each other with rational conversations like the ones at FreedomFest, or we can engage each other with fists and guns. We know which option we prefer.

Wisdom about money, investing and life can be found anywhere. If you have a good quote you’d like me to share with your fellow readers, send it to me, along with any comments, questions and suggestions you have about my newsletters, seminars or anything else. Click here to ask Jim.

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