The Debt Cycle and how to use it wisely.

Having lived through five economic cycles during our adult life we find each one to some extent resembles the other.  There is the build up where business is going well and the animal spirits reach a apex. Greed trumps fear and people borrow heavily to take advantage of increased opportunity, interest rates rise due to demand and debt is high.  Then the recession occurs and almost all of a sudden fear trumps greed and interest rates tumble due to the lack of borrowing and lack of business activity.  One thing to remember in a business boom is "risk happens fast." 

One of the most important parts of the business cycle is the borrowing cycle.  High interest rates mean increased borrowing, and low interest rates mean decreased borrowing.   However smart investors and the most successful investors understand one takes advantage of the moments where there is the proverbial "blood in the streets."  When others are running from borrowing, smart investors take advantage of low rates and borrow money.  

Right now debt, or the fear of debt, is making the idea of borrowing supposedly not smart. But in truth right now is a great time to borrow money. Borrow to invest in income producing assets not consumer purchases.  Interest rates are still low and likely to stay that way for at least another year.  So experienced companies, long term thinking corporations, and smart individuals are taking advantage of this generational low interest rate moment and borrowing money. Much of this borrowing up to now has been corporations refinancing debt from higher rates to long term low rates.  Helping them with profits long term.  Some individuals have been buying homes and locking in sub 5% rates too. Simply put the experienced and the smart see this as an opportunity and not a time to be fearful. Note much of this borrowing is for good capital investment that can appreciate in value , not consumer spending which loses value. 

The best way to view this is to do exactly what the crowd is not doing, borrow when rates are low and lend when rates are high.   The best ways for the individual to take advantage of the high point in the cycle is to buy high grade corporate bonds, good quality municipal bonds, and even some long term US treasury bonds and leave stocks.  When the business cycle goes down and business activity pulls down interest rates the bonds you earlier bought will have appreciated in capital value and that is the time to sell.  Sell the bonds and use and borrow money for stocks and capital investments of course. 

One final note during this business cycle the Federal Reserve has been quite active in holding down rates for a longer period. So caution is wise as to how quick rates move upward and how much this round. 

So the point here is to think and be wise and take the present time to do some borrowing. Borrowing and lending money against the cycle is one way the rich get rich and stay rich. 

                

Richlands First Baptist Church Family Life Center... A Shared Experience. A Shared Sacrifice.

Long time friends like to tell you that they can be apart for sometimes years and get together and immediately pick up conversation like they saw each other just yesterday.  This comes from a shared past of experiences and life events that bind them together.   Some institutions too, such as schools, churches, and places of employment,  have those same shared experiences that allow those who are now or were in the past associated with the institution to come together and be one. 

Which institutions one might be associated with can effect their entire future life. The most important thing a parent can do is attach their children's self value to an institution of real value.  Having that value attached to an institution like a church makes the child and later on the adult want to live up to the higher spiritual values that being associated with the religious institution implies to others.  There is an old adage that it is at the end of a man's life does he then understand and appreciate how important his decisions were at the beginning of his life. We find ourselves blessed that one of those decisions early on was to associate with and most importantly continue a close association with the First Baptist Church of Richlands NC.  Indeed over the decades despite living elsewhere we kept up with the events of this church and continued our shared experience of participating in the many activities either personally or through my father who was a lifelong member. 

This Sunday's opening and dedication of the long waited for Family Life Center at the church brings much of these experiences full circle for us. Our long association with this church began as a child in June 1960 almost 54 years ago   We were there as a young teenager when the church first considered the cost of building the present church buildings. We were there when the church built and moved to it's current location. We were there when the discussion commenced on building the new Family Life Center back in August 2003.  

When the fund raising for the new building commenced the church began using the phrase "equal sacrifice, not equal gifts".  At first we had issues with the word sacrifice, because we thought it negative sounding and besides gifts to God should not be considered "sacrifice' but more "gifts".  But we have changed our minds about that idea as we now see the importance of using the word "sacrifice" in this situation.  This goes back to building and maintaining an institution, in this case being a church.  Every once in awhile the best way to keep people together and holding onto the shared values is to have a generational moment of shared sacrifice.  The members and those associated with First Baptist Church are indeed having a moment of shared sacrifice and shared participation in the funding and building of this new building.  It is not any different that the past generational moments when new buildings were needed and money raised and buildings built.  We continued the tradition and bound ourselves together as Christians to make it happen. 

It has been almost seven years ago we sat in our father's living room talking about his desire to see his church more forward and build a new needed building.  With declining health and advancing years he wanted so much to be a part of the sacrifice and shared experience that brought about the March 23, 2014  dedication of the new Family Life Center.  He asked us to take some of what he passed on in life and be sure to do what he would have done financially to make sure this building became a reality. As we have stated earlier we told him to rest in peace that as long we were alive he would be too and we would do as he would have done.  So he is part of this moment as well as us since we have shared in the "sacrifice" of erecting this building.  Indeed several church members told me Sunday that he would have been pleased I came to be a part of the service.  He certainly would be happy to see the Family Life Center become a reality. 

We also would like to mention the current pastor Rev. Gary McAbee as something of a God send as well.  It takes a special person and someone who has a strong faith in God to LEAD a church to take on such a task as building a new church building.  Taking on the debt itself is enough to scare off the most confident person, therefore believing God will find a way and continuing to say so to your congregation takes faith.  Through all this Rev. McAbee has been God's good and faithful servant.  To that I will add my thoughts of "well done."

 We personally have found something more in this shared experience. That being the small sacrifices and participation here has enriched our life more than expected.  We find our spiritual values stronger and one of another of my father's long quoted phrases better understood.  His use of the phrase "pass it on" is legend and frankly for many years I thought what he was saying to us and others was to pass on some of life's gains and God's grace to others.  He did have that in mind, but more too.  The shared experience and shared sacrifice of the new Family Life Center is truly a moment where we pass on the spiritual blessings of cementing the younger generation to this revered old church.  One day we expect that there will come a time where they too will need to make sacrifices to get something done and they will then hopefully remember this moment, have a healthy dose of Rev. McAbee's faith,  get it done and "pass it on' to another generation to continue the shared experience and shared sacrifice of being associated with this church. 

In closing let us pass on a conversation we had with Billy Smith after Sunday's service when he walked up to us and mentioned that he had been at the groundbreaking of the older church buildings on this site.  The groundbreaking had occurred at a point on the grounds where the new Family Life Center now stands and when the ground was broke Jack Whaley and member of the then new facilities committee had said he knew that one day there would be yet another building placed right where he was breaking ground.  We hope those of us who remember Sunday's event will find the younger members now recalling this moment the way Billy Smith remembers one that happened almost a half century ago.  

This time it is different?

If you invest and worry about the move up in the stock market this year you have heard the phrase several times, "this time it is different."   To that we say yes it is different but valuations are valuations and there are reasons for stocks having certain values. Every time the market pros tell you this time is different it is not different.  We have been through at least 5 market downturns and heard there was no limit to the top each time and each time the market pros and market press were wrong.  Valuations are based on nothing more than the cost of money, think US Treasury yields and bank borrowing interest rates.  

Most stocks over almost any time period earn about 8% including dividends, so use that figure for your investing decisions. When stock markets get frothy bond and borrowing interest rates go up and earnings measured as PE multiples go up. Deduct the cost of inflation, say 3%, and you get your real return.  Right now stocks in index funds are the best choice as they are for most investing environments.

The market is trading generally around 17 to 20 times earnings. So what is a fair valuation? We tend to like around 13x to 14x, and consider certain stocks below 12x to have some upside value.  To be fair there are some stocks fairly valued at 30x or above if they are growing quickly, but if you buy those individual stocks at such high valuations you are subject to the one time disappointment in a quarterly earnings which can literally devastate your stock price. So buying individual stocks we suggest sticking with those under 12x.  

The way we come at this valuation model is using the 8% return we noted earlier here.  That means $100 would earn $8 annually or about 12.5 times a stock valued at $100.  Hence a 12.5 Price Earnings multiple. Now stocks have some value over the exact return as owning a company can protect you from inflation since companies can raise prices.  They also have the opportunity to increase their earnings and raise the stock price due to good corporate governance. So good companies can be valued higher at 13X to 15X PE, but beyond that you begin to take on risk.  Thus assuming it is a solid large cap company they should at least be able to return 8% to the owner over time and therefore anything under 12X should be a good value. Stock selection is very important, so if you prefer not to do the homework, buy a index fund and let the averages work for you. 

If you are investing for the long term we once again believe buying a good S&P 500 index fund and supplement with another well managed higher risk stock fund.  Vanguard has many from which to choose, so go there and make some choices. There will be enough stocks in those funds that if one has a bad quarter you will not feel much pain. If you are investing in individual stocks below we will suggest some options. 

We currently trade telecom and insurance stocks, with some selected big bank stocks throw in.  Add in some real estate and selected special situation stocks and beyond that we find it harder and harder to find values.  No you will not get rich quick here, just make good capital gains and nice dividends to pay your bills. Currently Met Life and Aflac offer some good values in insurance.  We like JP Morgan and Citigroup for bank stocks.  BP and Holly Frontier are good values in the oil patch.  AT&T and Verizon offer some good value in telecom. Add in China Mobile too.  National Retail Properties and Realty Income offer a couple of exposures to real estate that are very safe. We find Apple and IBM interesting lower PE tech stocks.  Cisco has some appeal as well.  Lastly if you want something a bit more out on the risk profile try Stifel Nicolaus as a growing financial enterprise.  Sears Holdings remains an interesting risk play to us as well. 

We either own long or own options on any stock mentioned in this posting.