Lawrence Lewitinn

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Why active investment management has a place in a portfolio

Passive investing—namely, putting money in an index fund—is considered the smarter choice for most people looking to put money to work in the market.

And the data are strongly in favor of passive investing. According to Standard & Poor’s, nearly 92% of stock funds weren’t able to beat the S&P 500 over the past 5 years. No less than Warren Buffet, perhaps one of the greatest stock pickers to ever live, is a strong advocate for passive investing and has said he wants the bulk of his estate invested in index funds when he passes away.

Passive investing also received a boost, thanks in part to upcoming changes in federal regulations. Starting April 2017, the Labor Department will require financial advisers handling retirement accounts to be fiduciaries. That means they will have to find funds that offer lower costs. To get in on the action, BlackRock (BLK) recently announced plans to cut fees on 15 of its largest index-tracking ETFs.

Yet investors shouldn’t completely turn away from active investing, according to Brian Barnier, director at ValueBridge Advisors and founder of FedDashboard.com. He argues that some money should be placed with active investment funds.

Barnier says that active investors have been getting a bad rap because of “style boxes,” the investment tool made popular by Morningstar. Style boxes force securities to be placed in a matrix of cap size (small, medium, large) and growth or value (or somewhere in between).

“The thing about style boxes is it makes an assumption that you’ve got to live in the box, which is not the way you and I invest,” he said. A company may go from being a growth stock to a mature value stock. But the investment manager, in order to stay within its mandated style box, may be forced to unload a good investment and keep bad ones, Barnier added.

Barnier says investors can outperform major indices by being selective. He notes that the number of S&P 500 companies with positive year-over-year growth has been trending downward since about 2000.

“We’ve all heard the phrase, ‘There’s no way you can cut your way to success,’” said Barnier. “That’s how we look at the business models and why business-model investing is so important as a way to get real alpha. And, oh, by the way, what is Warren Buffett doing at his Berkshire Hathaway (BRK-A, BRK-B)? He’s a super business-model investor.”

While Barnier doesn’t recommend abandoning all index-tracking funds, those investing some money with an active manager should do so with caution.

“If you’re using somebody else, are they unconstrained by that prison of the style box so they can follow the opportunity like Warren Buffett does inside Berkshire Hathaway?” asked. “If they’re closet indexing, then it’s not worth your money. So you’ve got to focus on the better stock picking.”

In other words, investors should ask if their active manager is thinking outside the (style) box.

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Why Alan Greenspan stopped being a jazz musician

What makes a great person great? That’s a question Bernie Swain, founder of the Washington Speakers Bureau, sought to answer.

Swain, who represented Ronald Reagan and Margaret Thatcher in the years after they left office, has interviewed nearly three dozen people at the top of their fields — including Madeleine Albright, Condoleezza Rice and Tony Blair. He compiled their stories into a book, “What made me who I am.”

He spoke to Yahoo Finance’s markets correspondent Nicole Sinclair about what he learned.

Yahoo Finance: What inspired you to write this book?

Bernie Swain: “Back in the mid-1980s, I represented Alex Haley, who wrote ‘Roots.’ And Alex used to come in my office and spend hours just sitting and obviously talked about family all the time. And he used to repeat a phrase to me, ‘When an old person dies, it’s like a library burning.’ And what he meant was that all our experiences in life, the turning points in our lives, are like the pages in a book. And he said, ‘Take a look around you to look at the people that you’re representing and understand what made them who they are.’ So I kind of sat on the idea. He persisted and after about 10 years, I wrote the book.”

Yahoo Finance: And a fascinating subject that happened to you as well, right?

Swain: “It did. I was two months away from my dream job. I had a 15-year career in athletics and I was going to be the athletic director of a major university. My wife read an article in Fortune magazine where the largest speakers’ bureau in the world walked into the Ford White House to pick up Ford, Kissinger and Haig. And in the article, Henry Kissinger says, ‘You know, I don’t like your 33% commission rate. Why don’t I sign with one of your competitors?’ Harry Walker says, “I don’t have any competitors.’

My wife knew I was frustrated with university life and the bureaucracy of it. And she says, ‘Well, they don’t have any competitors. Why don’t we do that?’ And so we put a second mortgage on our home. We now had $55,000 in mortgages on a $60,000 house and we rented a closet with Chuck Hagel who later became Secretary of Defense. And for a year we sat in that closet, writing letters to people, trying to call people.

Yahoo Finance: Let’s start off with Alan Greenspan. He was going to be a jazz musician. What made him change? What insight did he give you?

Swain: “Very interesting. One of the things I learned about this was that passion is often much more important than talent for successful people. And he used to play in a jazz band. In fact, he was in his 20s still playing in a jazz band where one of his jazz musician mates was Stan Getz; he felt that he could never be as good as Stan was. And ironically he used to keep the books for the band. So he figured that, ‘Well, if I can be as good as Stan, then maybe I can do something else’. And that was the only thing he was doing was keeping the books for the band and that’s what started him on his career.”

Yahoo Finance: What about former Labor Secretary Robert Reich? He had an interesting experience. He, of course, went to Yale Law School with his future boss, Bill Clinton and with Hillary Rodham Clinton. What was his story?

Swain: “Well he’s 4’ 11” so he was teased and bullied from the time he was in preschool. And so one of the mechanisms he used was that he would find an older boy who could walk with him and protect him. And he found that when the older boys walked with him that the bullies didn’t pick on him. One of the people that protected him was Mickey Schwerner.

And he lost track of Mickey over the years. Mickey wanted to be a veterinarian, ended up [going into] social justice and during the civil rights [movement] in the South, what he did was go down South to protest and was killed by the sheriff’s department along with two other people. Upon learning of the death of Mickey Schwerner, [Reich] totally changed his life. He wasn’t interested in politics and he suddenly became interested. He figured that if Mickey tried to protect him, he wanted to spend his life trying to protect other people.”

Yahoo Finance: One person who isn’t in business or economics is the great football coach Lou Holtz. How did he get made?

Swain: “I always thought, imagine how amazing it would be if you had a CEO who took six companies that were all not profitable and by the second year you made them profitable. And not only made profitable, but you gave them a big name. And that’s what Lou Holtz has done. He took six failing teams over his career made them all successful. They’re all winning records by the second year. And he took them to a bowl game by the second year. And all of that was based on a theory of how to treat people correctly. And we’re going to do the right thing in life. And that’s been his philosophy. And all the kids that have played for him live in the same philosophy: ‘Is this the right thing to do?’”

Yahoo Finance: From the experiences and the stories, is there anything that stands out or a theme that runs through?

Swain: “The interesting thing that Alex Haley made me pay attention to was that the people in the book were not successful because the way I thought they were successful and I think the way a lot of people think they’re successful.

“They weren’t given opportunities that are not available to the rest of us. Most of these people that are in the book came from humble and modest beginnings. And what they learn from is they learn from the influences of the defining moments, the turning points in their lives, the forks in the road. And that’s what gave them the wisdom and the strength and made them successful in accomplishing things in life. “

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China's renminbi has a long way to go despite official reserve status

In China, October first is a holiday marking the anniversary of the Communist takeover of the country. But this year the first day of the month will be another historic day for China. Its currency, the renminbi (RMB), will join the US dollar, the Japanese yen, the British pound, and the euro as a reserve currency for the IMF.

However, one expert doesn’t think too much should be expected from the currency any time soon, despite its new status.

“It’s happening before the RMB actually becomes a major reserve currency,” said Eswad Presad, professor at Cornell and former head of the IMF’s China division. “It seems like the IMF is getting a little ahead of the game. But part of the reason the IMF is doing this is to bring China into the fold, so to speak, and took acknowledge that China has become a great economic power. The currency still has a long way to go, though.”

Presad, author of a new book chronicling the history money in China called “Gaining Currency: The Rise of the Renminbi,” notes that the RMB remains under tight government control, unlike the other reserve currencies. Although China is the world’s second-largest economy, it is estimated that the renminbi is just around 1% of global foreign exchange reserves.

“Traditional attributes of a reserve currency—open capital account, flexible exchange rate—are not there for China yet,” he said. “It’s become a reserve currency just because China is so important in terms of world GDP and world trade … It accounts for about 13% of the world trade and it’s been the biggest contributor to global growth. So it’s largely size that’s driving this as if now.”

The US dollar won’t be dethroned by the Chinese renminbi any time soon, Presad said, though it may have some sway in a few regions.

“If China doesn’t stumble in terms of growth, if they continue with their economic and financial market reforms, make the currency more market determined, open up the capital account, it could very well rival the Japanese yen, the pound sterling, and perhaps even erode the euro share to a significant extent,” he said. “It will start playing a significant role in the Asian region and perhaps another region such as Africa and Latin America, which are very tied in to trade with China.”

Another factor holding back renminbi from top status is that the country’s financial markets and institutions aren’t as transparent as those of other major currencies, argues Prasad.

“China’s not there yet in terms of its financial market development and in terms of its data and government transparency,” he said. “So I think that is a long way to go even for the renminbi.”

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Commercial real estate prices are back to pre-crash highs but transactions are falling

Commercial real estate transactions took a huge hit in August.

That month’s data, compiled by Real Capital Analytics, show transactions on income-producing properties dropped to $30.5 billion, a fall of 23%. Transactions consisting of multiple property portfolios fell 46%, while single asset deals declined 19% year-over-year.

This is happening while the sources of financing have been shifting. For the first half of 2016, regional and local banks were the biggest lenders for income-producing properties in the United States.

From January to June, $183 billion were borrowed to finance commercial properties valued above $2.5 million. One out of every five dollars in those mortgages came from smaller banks, with New York Community Bank and Signature Bank lending a combined $5 billion, putting those two at the top of the list of smaller lenders.

Those smaller banks are taking a bigger slice of a shrinking pie at the expense of commercial mortgage backed securities (CMBS). Just 9% of mortgages were made through CMBS in the first half of this year. Two years ago, CMBS loans dominated the market at 28% of commercial mortgages.

Source: Real Capital Analytics

Some borrowers used the CMBS market to finance larger deals involving multiple properties. But there are now fewer of those types of deals. According to Jim Costello, vice president at Real Capital Analytics, that may have led to a downturn in commercial property transactions.

“You can’t go to your local bank down on the corner and get a $10 billion loan,” said Costello. The CMBS market, he said, “was very efficient in terms of getting a number of investors to kind of spread the risk around.”

FindTheCompany | Graphiq

The state of the commercial real estate market has some people concerned, particularly Boston Federal Reserve president Eric Rosengren. Although he is thought of as a more dovish member of the Federal Open Market Committee, he was one of three to dissent at the Fed’s most recent meeting at which the central bank voted to keep rates steady. Rosengren has made clear his worries about commercial real estate’s rising prices.

“You should be concerned about what the banks are doing and look at that cautiously and just make sure that they’re not getting too far ahead of their skis,” Costello said.

US commercial real estate’s average cap rate—which is equal to a property’s net income divided by its value—is back down to 6.5%, where it was in early 2007. During the financial crisis, cap rates soared above 8%. Cap rates fall as property values rise.

Source: Real Capital Analytics

Nonetheless, Costello won’t call the current market a bubble, especially given the near-record low interest rates found in today’s mortgage market.

“‘Bubble’ is fighting words,” he said. “A bubble is about poorly formed expectations… [In the previous boom] people were buying on expectations of tremendous income growth moving forward. [Now] they’re buying and paying very high prices just for the current yield. And really what is a high price today, it’s not about this crazy expectation of mania, of trying to get a property and ride that appreciation wave. It’s really just a capital preservation move. With the yield curve so low and with rates so low, capital is moving in just as a way for preservation because there’s some sort of ongoing yield.”

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Jim Rogers warns: Trump and Clinton will lead to 'bankruptcy and war'

Few people on earth can be called a “legendary investor,” but Jim Rogers certainly fits the bill.

The chairman of Rogers Holdings was the co-founder of Quantum Fund along with George Soros in the 1970s. He now lives in Singapore and is a heavy investor in emerging markets. Rogers also holds two world records for going around the globe twice—once by motorcycle and once by car.

The world Rogers sees now is not so bright and sunny, at least economically. He holds steadfastly to his prediction three months ago on Yahoo Finance that Brexit would lead to something “worse than any bear market you’ve seen in your lifetime.”

“I’m not a very good market timer,” admit Rogers. “I don’t mean it is going to happen next week, but you will see in the next couple of years the worst bear market in your lifetime. It’s going to be very, very bad so I hope that you’re worried.”

He doesn’t expect Europe’s economy to get out of its tepid growth any time soon.

“Europe has problems,” Rogers said. “They have, just like we in America, very high debts, and the debts are getting higher and higher. And they’re not doing anything to solve their trade problems. It’s a mess. And now of course the U.K. is leaving. That’s going to cause more disruptions all over the world, especially in Europe. As I say, you should be worried. I’m worried, anyway.”

Rogers anticipates even China will see some trouble. The Bank of International Settlements recently warned about China’s credit-to-GDP gap. Loans in the country are at about $28 trillion dollars, larger than the U.S. and Japan combined.

China’s increasing use of leverage came about in the wake of the global financial crisis of the past decade, notes Rogers. That could have dire consequences in the event of another economic crisis.

“In 2008, the Chinese had a lot of money saved for a rainy day, and they spent it and helped bail out the world,” he said. “Since 2008, even China has debt. It’s amazing. For decades, they didn’t have debt for many historic reasons. Now they have debt. So the next time around, you’re going to see bankruptcies in China which is going to shock a lot of people—including the Chinese—and they’re not going to be able to help us like they did before.”

Rogers is long Chinese equities despite having dire expectations. “There are going to be bankruptcies,” he added. “Many companies that do business with the West and have leverage are going to suffer.”

Yet there are segments of the Chinese market that are inoculated from turmoil in the rest of the world, he maintains. One industry is environmental cleanup.

“China is filthy, but now China is spending a lot of money trying to clean it up,” Rogers said. “If you’re in the pollution business in China, you don’t care if Europe disappears. You don’t care if America goes bankrupt, because you’re too busy trying to clean up China.”

He is also investing in the country’s health care sector. “If you’re in the health care business in China, you’re in good shape,” he said.

Russia, Kazakhstan, Nigeria and Rwanda are other countries where Rogers is either invested in or plans to put money to work in the near future.

On the commodities front, investors may have taken a shine to gold’s (GC=F) glittering 26% year-to-date rise, but Rogers is sweet on sugar (SB=F). The agricultural product is up 49% since the start of 2016 and has just about doubled in the past 12 months after spending years on the downtrend.

There are securities Rogers is not bullish on. He is short US equities, particularly large names like Apple (AAPL), Amazon (AMZN) and Netflix (NFLX)—a position he said has turned out poorly for him thus far. “They are the basic stocks which never go down and go higher and higher at my expense all the time,” he said.

But the US political situation may cause Rogers’ bearish bets to pan out.

“If Mr. Trump wins—which I would suspect he will—and does what he says—these are his words, not mine—it will lead to bankruptcy and war,” predicted Rogers, who said he will likely vote for Libertarian candidates Gary Johnson and Bill Weld. “As history shows, serious trade wars with everybody has always led to bankruptcy and that has often led to war. If Mrs. Clinton wins, same thing—it’s just going to take longer. She’s just as bad. She has no clue about world economics, and she has no is no clue about American economics.”

“I have said, you should be worried.”

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After Bayer and Monsanto, the next big M&A deals may be here

M&As just got more interesting with the announcement that Bayer (BAYRY) is paying $66 billion for Monsanto (MON). And it could give some signals about the latest trends in mergers and acquisitions.

Wednesday’s deal was important for two reasons, according to Greg Portell, a partner with management consulting firm A.T. Kearney with a focus on consumer products and media.

“It shows you how much easier it is to grow valuations through selling a business as opposed to growing revenue,” said Portell. “The second key point is that it underscores how companies are starting to look to build out ecosystems around their core businesses.”

That’s a development found not just in mergers and acquisitions with old-school businesses like agriculture but also in media, technology, and communications sectors.

Earlier in the summer, Microsoft (MSFT) agreed to purchase LinkedIn (LNKD) for $26.2 billion. That acquisition was significant because it also “set a very clear valuation for what a social network is worth in the open market,” said Portell. “Up until this point, we hadn’t been able to get that kind of visibility.”

Portell adds Verizon’s (VZ) planned acquisition of Yahoo (YHOO), parent company of Yahoo Finance, as another one of this year’s most consequential M&A deals. “It illustrates that importance of the ecosystem,” he said.

Two main trends tie these deals together, Portell said. First is the ability to drive growth.

“The second big part of it is the shift to younger businesses,” he said. “Whether it’s innovation for a CPG [consumer packaged goods] going after a small startup that might be organic or homegrown or if it’s a media company making an acquisition or an investment in one of the new media darlings, the shift to younger consumers is driving a lot of this activity.”

That could give some indication as to where the next hot M&A deal could be found.

“Media will still see that activity, in part, because there are a lot of mismatched companies right now,” said Portell. “If you look at that concept of building the ecosystem, there are a lot of companies that don’t have that ecosystem or are missing key components. So we would expect to see some of the non-players thus far come into the discussion either as buyers or sellers.”

Another big space will be in the consumer sector, he added. “Those companies aren’t able to grow revenue organically, and the markets are tapped out,” Portell said. “They are getting a lot of pressure both from activists and from management teams to find that synergy and structurally change their business very quickly. Acquisitions are the best way to do that.”

Particularly, large companies that have a single line of business but little opportunities to grow naturally will be the most likely to make a move, he said.

“You’re looking for companies like a Time Warner (TWX),” said Portell. “Perhaps they’re going to be an active buyer or seller in the space. Viacom (VIAB), once they put some of their business issues behind them, will be looking to make moves one way or another. As well, a company like AT&T (T)—they were in the game a little bit for some of these recent acquisitions and now they are undoubtedly sorting through and filtering opportunities to build out that ecosystem and start shifting it into a revenue model that is much less consumer-centric.”

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How Ford is tackling tech in the 21st Century

Ford Motor Company (F) spent much of the 20th Century being one of America’s most innovative companies. In an exclusive interview with Yahoo Finance, executive chairman Bill Ford explains how the company is facing the opportunities and challenges of the 21st Century.

Bill Ford has a lot on his shoulders as the great-grandson of founder Henry Ford (and also of industrial innovator Harvey Firestone). “I’m continuity here,” he said.

Ford also has to help take Henry Ford’s vision and update it for the current era, in which Silicon Valley has taken the lead on innovation that was once the realm of industrial giants such as Ford.

Yet Ford sees an advantage that his company has over traditional tech giants. One difference between Ford and many of the companies in Silicon Valley, the executive chairman said, is that, “the minute you don’t have a shiny object” people leave startups, something his century-old company doesn’t worry much about.

Nonetheless, Ford has tech companies trying to break into the automotive industry. On top of the list is Tesla (TSLA), the electric car manufacturer that is currently valued at $29 billion compared to Ford’s $51 billion as of Monday’s close. According to data compiled by MotorIntelligence.com, Ford has sold 1,962,602 vehicles compared to just 23,300 Tesla cars sold so far in 2016.

For Ford, how a company presents technology to customers is critical. Yet the company retains its connection to its history. When asked about whether he thought of changing the official name of the firm from Ford Motor Company to just “Ford”, the executive chairman and scion of its founder responded, “Hell no!”

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Why rates could stay low no matter what the Fed does

While Fed Chair Janet Yellen and Vice Chair Stanley Fischer recently hinted that another rate hike is likely sometime by the end of the year, low interest rates may be here for the long run irrespective of Fed action.

Lower rates are not just the result of central banks buying billions of dollars worth of bonds over the years in the United States, Europe, and Japan, according to Brian Barnier, head of research at ValueBridge Partners and founder of FedDashboard.com.

“There’s more cash in the world and less need for cash in production,” he said. Relative to disposable personal income, household and nonprofit cash holdings are up since the 1990s. But in the past decade, debt’s share of personal income has steadily decreased.

However, that cash isn’t being used directly to fund the private sector, Barnier claims.

“Textbook economics says households and nonprofits are supposed to be funding business but that’s not what’s in the data,” he said. “For a long time, it’s come down but now we’re picking up cash in the non-financial business sector relative to their gross value added or GDP or their production. So they’re throwing off cash at the same time households have more cash. That’s a lot more cash that’s driving down the natural interest rate.”

And although cash is on the rise, prices haven’t followed suit. “Cash is going up but costs of production are falling,” Barnier said.

Property, plant, and equipment costs have declined relative to GDP over the past few decades as technology decreases the need for a large real estate footprint and shrinks the size of machines needed in manufacturing. Labor’s share of GDP has also fallen since the start of the millennium.

“That’s also why you’re seeing some of those lower prices out there,” he added.

Investors need to accept the idea that lower notional rates will be in place for a while, said Barnier. “Prepare your portfolio in a very different way than you have been in the past,” he recommended.

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Why things could be different this time around when the Fed raises rates

Fed Chair Janet Yellen and Vice Chairman Stanley Fischer used the Federal Reserve’s conference in Jackson Hole, Wyo., to prepare the world for at least one interest rate hike by year’s end.

“They feel the data is strong enough that they are on their way for the next rate hike,” said Ben Emons, chief economist and head of credit portfolio management at Intellectus Partners.

The world is a bit different now than in December 2015 when the Fed last raised rates, Emons postulated.

“Last year when they hiked rates, it had a very negative effect on markets because the dollar strengthens, the commodity markets fell, and that led to widening of credit spreads, particularly in the energy sector,” he said. “This time around, those dynamics [have changed]. So the question is how strong will the dollar become again as they hike rates and how would that have an impact on the global economy because the Federal Reserve these days cannot really hike anymore just based upon U.S. data. It has to focus on the global economy as well. The dollar plays an important role.”

Inflation will also weigh on the decision. Recently, San Francisco Fed President John Williams argued that 4% would be a good inflation target for the central bank rather than the current 2%. On Friday, Yellen said it was something the Fed would look into after more research.

“It suggests that they’re open to that idea to see what it really could mean for the U.S. economy in the future,” said Emons, who added that such a major change in a key target level could have consequences.

The savings rate would increase as people try to offset devaluing due to higher inflation and negative real interest rates. Emons noted, “That would lead to a lot of capital flows going around the world seeking more positive real returns and that will be quite impactful.”

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'It's about to hit the fan': One of Sam Zell's favorite indicators signals real estate market top

There’s a simple statistic so powerful that one of the most successful property owners of all time uses it as a real estate buy and sell signal. And right now, it may be indicating that now is the time to sell.

Membership in the National Association of Realtors (NAR), the largest organization of real estate agents and brokers in the US, rises and falls with the overall real estate market, notes Constantine Valhouli, founder of data firm NeighborhoodX.

He says the relationship between NAR membership and market health was first brought to his attention several years ago by Sam Zell, chairman of Equity Residential (EQR). According to Valhouli, Zell has a knack for timing major sales at around the peak of the market and just as NAR membership is at a top.

For example, Zell sold his Equity Office Properties Trust to the Blackstone Group (BX) for $23 billion in February 2007. At the time, NAR membership was at 1,316,060, just off its October 2006 peak of 1,370,758, based on the organization’s data.

Source: NeighborhoodX

“Those numbers that you see are spiking as a result of people saying, ‘There’s easy money to be made here,’ so people are getting their real estate agent licenses,” Valhouli explains. “And you’re seeing people chase that easier money which might suggest that the market’s overheated.”

By September 2008, Lehman Brothers folded in the wake of the housing market collapse, triggering the financial crisis. But at that point, the NAR was already down to 1,251,826 members.

As Valhouli points out, the peak and subsequent drop-off were also pronounced in states like New York, Florida, Texas and Massachusetts.

NAR membership hovered around 1 million from 2011 to the first half of 2013, with a low of 963,455 in March 2012. Since then, the realtors’ organization has seen its roster increase again.

In October 2015, when NAR membership reached 1,165,746, Zell sold once more, this time disposing 23,000 apartments for $5.4 billion. For Valhouli, that could indicate trouble may be around the corner.

“If we look at the timing of Sam Zell sales against the peak previously, it tends to be three to four quarters out,” he said. “He sold … a major portfolio in the fall of last year, so it looks like it’s about to hit the fan.”

Disclosure: The author is a member of the National Association of Realtors.

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How to play smarter defense in a defensive market

Stocks appear to be slogging their way to new highs over the past year. Yet underneath the surface, it seems there’s been a good, old-fashioned rotation into more defensive stocks.

The best-performing sector so far in 2016 is utilities, known for its steady stream of dividends. The ETF tracking the utilities sector (XLU) is up over 22% year-to-date. As with fixed-income securities, low bond yields generally translate to higher prices for utilities stocks.

On a relative basis, other defensive sectors are also riding high, notes Brian Barnier, director at ValueBridge Advisors and co-founder of FedDashboard.com.

  He charted the Price/Earnings/Growth (“PEG”) ratio of several sectors using data from Zacks Research Systems. The PEG ratio takes the asset’s price and divides it by expected 12-month forward earnings to calculate a price-to-earnings (“P/E”) ratio. It then takes the P/E and divides it by the anticipated 3- to 5-year annualized growth rate.

Proponents of using PEG ratios argue that they take into account a security’s growth. For example, if two companies have similar P/E ratios, the one with the higher growth rate will appear cheaper. However, critics of the PEG ratio maintain, among other things, that two factors—forward earnings and expected growth rates—are highly subjective.

According to Barnier, the PEG ratios for several sectors are rallying as the market gets more defensive.

“The big growth in price-to-earnings-to-growth, where a higher ratio means a scary or high valuation less justify the fundamentals, are in… the nonresidential, non-retail REITs,” he said. The PEG ratio for utilities is also on the rise this year.

Those looking to be prudent without suffering higher PEG ratios would do well to steer clear of typical defensive stocks and instead buy companies that show consistent earnings, recommends Barnier. He is particularly positive on the Zacks Earnings Certain Proxy, a measure consisting of several dozen companies that regularly produce steady earnings. It excludes interest rate sensitive and high growth stocks and includes old, reliable companies like Colgate-Palmolive (CL), Clorox (CLX), and Smuckers (SJM).

Barnier advocates that more active traders looking to ride the sector rotation should look at PEG ratios relative to share repurchases because the latter may skew the earnings per share number. That’s because buybacks increase the current earnings per share at the expense of the value in cash used to buy the shares.

“If those PEGs are high and they’re buying back a lot of shares, that’s not a really good place to be,” he warned. “And on the other hand, if they’re low and they’re behind back a ton of shares…. that’s really not a place to be because all that buying back is hiding that that PEG ratio should be a lot higher, that the valuation should be much more stretched.”

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Stocks with growing dividends have been the way to go since 1972

Equities are just about at all-time highs. Yet taking a more conservative approach in selecting stocks may turn out to be an investor’s best bet, according to one portfolio manager.

Chad Morganlander of Stifel’s Washington Crossing Advisors advocates buying companies where dividends are increasing. One reason is that with interest rates near record lows, he expects the demand for securities with yields to increase. The other is because he anticipates a continuation of the current low-growth economic environment.

“When the global economy—and particularly [that of the] United States—is growing slowly, people are looking for consistency and quality in individual companies,” said Morganlander, who manages a rising dividend-based portfolio.

Companies with growing dividends generally have solid fundamentals, he claims. “If a company is actually growing their dividend, more times than not, their revenue growth has been quite stable as well as [have their] profit margins—particularly operating margins,” Morganlander said.

He adds that investing in growing dividend stocks would have provided the highest average annual return and simultaneously the lowest average annual risk from 1972 to 2014, based on data compiled by Ned Davis Research, Inc.

S&P 500 Dividend Category Annual Return Annual Risk (Based on Monthly Return Variations) Growers and Initiators 11.6% 15.9% All Dividend-Paying Stocks 10.9% 16.8% No Increase or Decrease 9.5% 18.1% Dividend Cutters 3.4% 25.1%

Source: Ned Davis Research, Inc.

Morganlander is currently long several rising-dividend stocks:

Church & Dwight (CHD)

Morganlander has a $110 price target on the parent company of such household products as Arm & Hammer baking soda and Orajel. Shares closed at $100.52 on Friday with a dividend yield of 1.4%.

“We think the dividend growth will be between 5% and 15% over the next five years,” he said. “They have very little debt on their balance sheet… Many people complain, ‘Hey where can I find the next Procter & Gamble (PNG)?’ This is a type of company that if you own it for the next five, 10, 15 years, you’ll do quite well.”

Pfeizer (PFE)

The pharmaceutical giant, with a dividend yield of 3.4% as of Friday, was recently added to Morganlander’s portfolio. “We think that there will be an improvement within operating margins as well as within revenue growth,” he said.

Amgen (AMGN).

The biotech company is trading at around 13 times its next 12 months of expected earnings, notes Morganlander. He has a price target of $200 per share, a 15% premium to Friday’s closing price. It currently has a dividend yield of 2.3%.

“Revenue growth is going to be fairly consistent,” he predicts. “And operating growth is going to be fairly consistent as well.”

Abbott Labs (ABT)

“Abbott Labs has an operating margin that we believe is going to increase over the next three to five years at a very, very steady pace,” Morganlander said. “As well, revenue growth will be fairly consistent. It’s baby formula; we think that that’s going to be their critical product that they’re going to sell into the emerging markets, which is going to do quite well. We feel we can get a total return between 15% and 25% over the next 18 to 24 months.”

PepsiCo (PEP)

Morganlander has a $120 price target on the soft drink and snacks maker. Shares closed at $108.66 on Friday and dividends right now yield 2.8%.

“We think that the company can have an increased dividend of 5% to 10% over the course of the next five years,” he said.

[lawrencelewitinn-blog]

These are the most affordable cities for renters to become homeowners

Housing prices are close to record highs as borrowing costs are just about the cheapest they have ever been. Yet despite low mortgage rates, the percentage of people owning a home is the lowest it has been in over half a century. Data from the U.S. Census Bureau show the homeownership rate below 63%, its lowest level since 1965.

“Incomes have had difficulty keeping up with the pace of house price increases,” explained Danielle Hale, director of statistics at the National Association of Realtors (NAR). “Even though jobs are growing and mortgage rates remain low, affordability is a challenge for renters across the country.”

Nonetheless, there are some markets where a sizeable percentage of renters can afford to buy the median-priced home.

City Share of renters who can afford to buy a home 1. Toledo, OH 46% 2. Little Rock, AR 46% 3. Dayton, OH 44% 4. Lakeland, FL 41% 5. St. Louis, MO 41% 6. Columbia, SC 41% 7. Atlanta, GA 40% 8. Columbus, OH 38% 9. Tampa, FL 38% 10. Ogden, UT 38%

Source: National Association of Realtors

Besides affordability, one factor for inclusion on the NAR’s list is future employment prospects.

“Each of the cities that are on this list had to have job growth that was above the national average,” Hale said.

A large share of affordable cities is found primarily in the South and Midwest. “They all have strong job markets,” said Hale. Those are also where she expects new entrants to the list in coming years. “Louisville, Memphis, Chattanooga… might be on the list in the future.”

[lawrencelewitinn-blog]

How Brexit could be a boon for America's commercial real estate market

Some investors are worried that Brexit will prompt a global selloff in real estate, but it may not be all bad news for some US markets.

British property funds faced enormous pressure from those seeking redemptions after a majority of UK voters decided to walk from the European Union. Earlier in the month, two large British institutions — Standard Life (SLI.L) and Aviva (AV) — halted redemptions on their commercial property funds to stem large outflows.

The fallout from Brexit will be somewhat complicated for US real estate markets, according to Jim Costello, senior vice president at data firm Real Capital Analytics. However, he expects the net result to be positive.

“London was a huge place for safe harbor real estate investment. They’re just not going to be doing that as much as all the uncertainty is sorted out,” he said. “So we may see a lot of capital moving to the United States looking for that safe harbor.”

While the previous financial crisis was ignited with a selloff in the real estate market, Costello doesn’t expect history to repeat in this instance.

“It’s a little bit different this time—and you know you’ve got to be careful when someone says ‘this time, it’s different,’” he said. “It’s not a broad confidence issue. We don’t see that same kind of problem in the United States.”

And although commercial real estate volumes are down, prices haven’t much moved, added Costello. He is not worried that the reduced number of transactions compared to last year is a sign of potential trouble in the market.

Last year’s transactions were dominated by big portfolio deals spurred by lower interest rates, contends Costello. This year is seeing more one-off deals, where buyers focus on a single property rather than a group of them. “That activity is down somewhat as well, but to me it says it’s on more stable ground,” he said.

The next 12 months should appear similar to today, forecasts Costello. “You’re going to continue to see the echo effects of the previous year continue to impact the deal activity,” he predicted. “Flat or even just a slight increase — it’s safe and steady and boring — but I think that’s where we’re headed.”

[lawrencelewitinn-blog]

Never mind the Brexit — here are energy stocks still worth buying: Portfolio manager

Oil prices have been volatile since the Brexit vote, but there may be opportunities in the energy space, according to one portfolio manager.

Robert Thummel, portfolio manager at Tortoise Capital Advisors, sees crude prices trading mostly in a range between $45 and $55 per barrel for the long term.

Thummel expects uncertainty over Brexit to lead to a greenback rally that, in turn, will put pressure on crude as oil is priced in dollars. Nonetheless, he anticipates that long-term drivers — namely demand from China and India — will support energy prices.

In order to play the sector, Thummel is long several different categories of energy stocks. One is in the infrastructure space, where he is long Sunoco Logistics (SXL) and Enterprise Products Partners (EPD).

“In an environment when the 10-year Treasury [yield] is at 1.5%,” Thummel said, “high-yielding income-producing energy stocks are a great place to invest. Both Sunoco Logistics and Enterprise offer investors really healthy dividend yields — 5% to 7% — plus they grow their dividends every single year and have a track record of doing so. They do that by owning a diverse network of strategic pipeline assets that are absolutely critical to this nation’s energy infrastructure.”

On the production side, Thummel is positive on companies operating out of the Permian Basin in the American Southwest. “Pioneer Natural Resources (PXD) is one of our larger holdings,” he said. “It’s a company that owns a large number of acres in the Permian Basin. It’s growing its production volumes and it’s one of the few oil companies that is growing production volumes in this price environment.”

Outside of petroleum, Thummel is also bullish on natural gas. He is long EQT Corporation (EQT) and Spectra Energy (SE) because of their operations in the Marcellus Shale, a region covering parts of New York, Pennsylvania, West Virginia and Ohio.

“The growth potential for natural gas being produced from the Marcellus Shale will be quite dramatic,” he predicted. “Over the next several years it’s going to fill demand over the long-term basis for not only for the US but for Mexico [and] potentially for Canada.”

[lawrencelewitinn-blog]

How one company convinced you to give a diamond engagement ring

“A diamond is forever” is a phrase James Bond and brides all over the world know all too well.

But a shiny diamond ring only became a virtual necessity during marriage proposals in the past few decades thanks to aggressive marketing by the company that at one point controlled nearly 90% of the entire diamond market — De Beers.

“In 1938, when the Depression had really cut into the American economy, the company De Beers hired an advertising firm [N. W. Ayer & Son] to help reinvigorate the social custom of giving an engagement ring,” said Rachelle Bergstein, author of “Brilliance and Fire: A Biography of Diamonds.” “They hired an advertiser who created a set of print ads that made the diamond ring feel really timeless. They wanted the product to feel classic and almost as if something that the knights were giving their ladies back in the medieval times. And they accomplished it.”

Bergstein’s book traces the history of diamonds in popular culture. It also looks at how many of today’s esteemed jewelry houses were founded by salesmen whose tactics today would shock many of their tony customers.

Pierre Cartier’s aggressive sale of the storied Hope Diamond was, to be polite, flabbergasting.

“The Hope Diamond is probably the most famous gemstone in America,” Bergstein said. “It has a fascinating history because many people believe it is cursed. Whether or not that is true, Pierre Cartier, who got his hands on it at the turn of the century, used that story to his advantage to sell it to a young capricious socialite with a lot of money on her hands called Evalyn Walsh McLean.”

Cartier, according to Bergstein, embellished the tale of the Hope Diamond, spinning a yarn of how in the 17th century merchant Jean Baptiste Tavernier supposedly plucked the jewel from the statue of a Hindu god. It then found its way in the hands of French, British, and Ottoman royalty, causing a string of bad luck wherever it went, according to the tale. Cartier likely played up the rock’s dark past to help convince the American heiress to acquire the gem.

“He leaked stories about the Hope to the press,” Bergstein noted. “The American public loves hearing about a stone that was so evil that it cursed the wealthy people who bought it. There’s something fantastic about the idea of a product that is attracting wealthy people and then ruining their lives.”

Of course, Cartier wasn’t alone in aggressively selling diamonds to the world. “Charles Lewis Tiffany, Harry Winston — these men really understood the power of the press,” Bergstein said. “Tiffany, when he was starting Tiffany & Co. (TIF), was one of the first American jewelers to compete on a global stage. The heritage jewelers were all in England, they were in France; they had access to royalty and so they had access to really wonderful, grand stones. Charles Tiffany was a bit of an upstart so he was able to make sure that the press knew when he was buying big diamonds. And at the time of Tiffany & Co.’s popularity, he was considered the King of Diamonds.”

Famed jeweler Harry Winston also made his relationship with the press a key part of his sales technique. “He would get his hands on a very big diamond and he would make sure the press knew about it,” Bergstein said. “When a big diamond was being cut, for instance, he would invite the press to come to his offices and watch.”

“They both really understood the media and I think were maybe ahead of their time in that way.”

Today, roughly $80 billion in finished diamonds are sold annually. And the industry is pinning a lot of its hopes on the rise of middle class diamond buyers in China and India.

But the days of a few big players controlling the supply — and demand — for diamonds have come to an end. At one point, De Beers had immense power in southern Africa (Zambia and Zimbabwe were known as Northern and Southern Rhodesia, respectively, named for De Beers founder, Cecil Rhodes).

The tarnish of “conflict” or “blood” diamonds tainted the industry and eroded the public’s perception of diamonds, Bergstein notes in her book. And then there’s the rise of “lab grown” diamonds that, unlike cubic zirconia, are chemically indistinguishable from natural diamonds. These factors took a toll on the once-dominant De Beers.

“There’s Rio Tinto (RIO) in Australia, there’s Alrosa (ALRS.ME) in Russia, and so De Beers now probably controls about 30% of the world’s diamonds,” Bergstein notes. “After the conflict diamond crisis, they changed the direction of the their business so that they were no longer marketing stones that they hadn’t mined themselves.”

[lawrencelewitinn-blog]

Real estate pros see recession by 2017, survey shows

The real estate sector is getting a little more pessimistic about the economy and a majority of professionals in the industry now see a recession ahead in the next 18 months.

A survey of 400 people in the real estate business by PricewaterhouseCoopers (PwC) and the Urban Land Institute (ULI) showed a drop in positive sentiment to 69% from 84% six months ago. Current levels are at the lowest in two years.

“There’s a lot of weird stuff going on in the world—China, interest rates, volatility in the equity market—all of which is creating anxiety,” said Mitch Roschelle, a partner at PwC.

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And while a majority of those surveyed remain positive for now, more than half expect a recession by the end of 2017, notes Roschelle, who adds that two out of the last four recessions have been in part due to a slowdown in the real estate market.

However, he sees a silver lining to real estate pros losing their optimism.

“They’re saying, ‘Listen, maybe we need to back out. Maybe we need to not reinflate a bubble and cause another recession,’” said Roschelle. “If we don’t reinflate a bubble with housing prices and we don’t reinflate a bubble with commercial real estate prices, we may not have that bubble bursting causing another recession. So if there is a recession, real estate folks are saying, ‘It’s not going to be because of us this time.’”

Global uncertainty may also lead to some overseas investors turning to U.S. real estate. “The more volatility that goes on in foreign markets and the more uncertainty there is about geopolitical risks in foreign markets, they tend to rotate toward U.S. dollar-denominated investments and income producing asset classes like real estate,” Roschelle said.

“What’s interesting is foreign sentiment for U.S. real estate has improved while domestic sentiment has weakened.”

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