Question:
Lately on radio and TV, I have heard numerous comments like: “When the government prints money, most of it ends up in the stock market, causing it to be overpriced. A bubble is developing like the one that brought down the real estate market. When QE ends, the bubble will burst, big time. Move to cash before it’s too late. [Fed Chairman] Ben Bernanke is the most powerful and dangerous man on the planet.” What do you think? Is the stock market a bubble about to burst?
Answer:
After draining more than $600 billion from equity mutual funds over the past six years, investors finally became net buyers only in the past three months. The idea was to chase people to risk, and with interest rates historically low, it appears as though that has happened. Following the “Great Recession,” fearful investors kept buying bonds and money market funds, driving down interest rates to near zero.
If you are looking for a bubble, we believe it is in the fixed-income market. If you hold any fixed-income securities, we recommend keeping the maturity as short as possible to keep your principal from being eroded when interest rates finally rise. When quantitative easing finally ends, interest rates will increase and as a result, could wreak havoc on the value of your fixed-income investments, especially those with long-term maturities, as they have the greatest interest rate sensitivity. Staying in securities with short-term maturities will help to alleviate some of this risk. When interest rates rise, the stock market will likely fall as competing assets will be paying a higher yield than was previously available in the market.
Another common concern regarding the Fed and its money printing is the potential for significant inflation. While inflation is possible and even likely, history suggests that as long as inflation doesn’t surpass 5%, stocks do in fact act as a hedge against inflation, further supporting our recommendation to be in stocks. Interest rates certainly rise when investors foresee inflation. However, this inflation can also help to boost future revenues and earnings, specifically for companies in the Consumer Staples sector where price increases are more easily passed along to consumers. We believe that that the stock market is the place to be for any money outside of your 10-year liquidity needs.
Question:
Last week I heard you recommend Coach, Inc. I hold Fifth & Pacific. Do you think I should make a switch?
Answer:
Fifth & Pacific Companies Inc. (NYSE: FNP) is the old Liz Claiborne. The company designs and sells under retail premium brands, including Juicy Couture, Kate Spade and Lucky Brand. The company is looking to sell some of its brands. In our opinion, it is not currently in a good position. The company has a poor structure, and is rated C+ for financial strength by Value Line. The company has seen sales plummet from $5 billion in 2006 to just $1.5 billion in 2012 when the company posted a loss of $74.5 million. We recommend selling Fifth & Pacific if you own it.
We recommend Coach, Inc. (NYSE: COH). We believe that Coach is a good brand. While it has been beaten by Michael Kors Holdings (NYSE: KORS) as of late, we think it is a strong company at a good price.
Question:
Years ago you used to rail on Coke, saying we should all own Pepsi. Do you still have the same opinion these days?
Answer:
We like both The Coca-Cola Company, (NYSE: KO) and PepsiCo (NYSE: PEP); however, we prefer PepsiCo. We believe the company is poised to do well, as the CEO has been under pressure to make the stock move. We also believe PepsiCo’s snack business to be best in business. For years, Coke had bad management. We strongly suggested that it was a holding to be avoided. Nowadays, management has the company on a solid track and is running it well. Both companies are OK to hold.
At Henssler Financial we believe you should Live Ready. If you have questions regarding the stock market or your investments, the experts at Henssler Financial will be glad to help. You may call us at 770-429-9166 or email at experts@henssler.com.
Disclosures
This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
