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Many things can happen in life that can cause personal financial strain. It can be brought on by poor decisions, loss of income or even, a death in the family. No matter More »

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How To Pick The Best Personal Bankruptcy Lawyer To Help Your Case

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Bankruptcy: What Are My Options And Limitations?

Even though filing for personal bankruptcy can seem like something to put off, you should not wait too long to do it. Know what you are about to go through and then More »

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Buffett says it’s ‘almost certain’ stocks will beat bonds over long term if rates, taxes stay low

Warren Buffett

Gerard Miller | CNBC

Warren Buffett thinks stocks are the place to be invested in for the long haul if interest rates and corporate taxes remain near current levlels.

“If something close to current rates should prevail over the coming decades and if corporate tax rates also remain near the low level businesses now enjoy, it is almost certain that equities will over time perform far better than long-term, fixed-rate debt instruments,” Buffett wrote in his annual letter to Berkshire Hathaway shareholders, which was released Saturday morning.

The letter also pointed to more exposure for two of his potential successors and addressed the company’s inability to find an attractive, monster-sized acquisition target that the ‘Oracle of Omaha’ has been known for.

Stocks got off to a hot start to 2020, with the S&P 500 and other major U.S. averages reaching all-time highs. Last year, the S&P 500 surged more than 28% to keep the longest bull market in U.S. history going.

The market got a boost from low interest rates from the Federal Reserve during this bull run, pushing bond yields lower and making equities a more attractive investment. The market got another jolt at the end of 2017, when the Trump administration slashed the U.S. corporate tax rate to 21% from 35%.

These elements, coupled with the “American Tailwind,” will make “equities the much better long-term choice for the individual who does not use borrowed money and who can control his or her emotions,” Buffett said.

The investing legend, however, offered a big caveat to his prediction: “Anything can happen to stock prices tomorrow.” He noted that occasionally, “there will be major drops in the market, perhaps of 50% magnitude or even greater.”

More exposure for possible successors

In the letter, the Berkshire chairman and CEO noted that Berkshire executives Ajit Jain and Greg Abel will answer questions at the company’s annual shareholders’ meeting in May.

This will be a departure from the meeting’s traditional format, which typically consists primarily of Buffett and Berkshire Vice Chairman Charlie Munger taking questions. Buffett said this change makes “great sense.”

However, the change comes amid growing frustration over a lack of a more formal announced succession plan. Buffett, 89, has hinted at Jain or Abel possibly taking over for him.

Both Jain and Abel were promoted in 2018. Jain currently runs all of Berkshire’s insurance-relate businesses while Abel handles all noninsurance operations for the conglomerate.

Buffett lamented once again in the letter that Berkshire has still not found an attractive acquisition target to spend the company’s massive cash hoard on.

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Read Warren Buffett’s annual letter to Berkshire Hathaway shareholders

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This fund is a play for the millennial home renter, and some of its holdings are up big this year

A contractor prepares a sliding door for a home under construction at the Toll Brothers Inc. Enclave at Rye Brook housing development in Rye Brook, New York

Michael Nagle | Bloomberg | Getty Images

Owning a home has long been the individual investor’s opportunity to hold real estate.

But the American millennial population is waiting longer than their parents to buy their first house, necessitating other avenues of investment into the world’s largest asset class.

Hoya Capital Real Estate started an exchange traded fund last March that its founder calls a macro play on the housing shortage in the United States. Some of its holdings, like Zillow and Redfin, are big winners in the real estate sector this year.

The Hoya Capital Housing ETF has rallied nearly 25% since its inception, bolstered by the low interest rate environment that accelerated last summer when the Federal Reserve started slashing interest rates.

The S&P 500 Homebuilders ETF is considered the benchmark for the housing market and has returned more than the Hoya Capital ETF since March, about 30%.

Hoya Capital’s founder and president Alex Pettee said the benchmark isn’t capturing the full macroeconomic picture that will persist through at least 2030. Trends in the mortgage market and what’s going on in real estate technology have become increasing important for investors who want their finger on the pulse of the housing market, Pettee said.

Hoya’s ETF, with an expense ratio of 45 basis points, is made up of 100 different stocks that touch the real estate sector. About 30% of the equities are home ownership and rental operations, such as AvalonBay and Essex Property Trust. The next 30% are homebuilders like Lennar, PulteGroup and Toll Brothers. Another 20% of the portfolio goes to home improvement and furnishing stocks, including Home Depot, Lowe’s and Restoration Hardware.

The more unique 20% of the Hoya ETF, which the S&P Homebuilders ETF doesn’t include, weighs home financing and real estate technology companies like Zillow, Redfin, CoreLogic, Realogy and RE/MAX. Zillow shares surged this week, bringing its year-to-date gain to more than 40%, after its quarterly results showed more people used its real estate website to buy and sell homes.

“A lot of consumers’ first touch point of the housing market is on Zillow or Redfin,” said Pettee.

Redfin has rallied 52% this year alone and shares of Realogy are up more than 35% in 2020.

A renter’s market

Homeownership in the United States has declined since the financial crisis, when the red-hot U.S. housing market collapsed under the weight of an over-leveraged banking system blanketed with subprime mortgages that were dressed as mortgage-backed securities.

In April of 2008, the homeownership rate was 68.1% in the U.S., and at the end of 2019 that rate was 65.1%, according to the Census Bureau.

Since the last recession, there has been a period of under-building of new homes and under-investment in existing homes, Pettee said. Currently, the average age of a U.S. home is between 39 and 40 years old, compared to 28 to 30 years old in 2008. The shortage is more prevalent on the starter-home category, where the supply of homes under the $100,000 figure is down 15%. That pushes more millennials, first-time and other younger buyers into the rental market.

Millennials, anyone born between 1981 and 1996, are buying homes later than their parents, creating a population bulge of 25 to 35 year-olds that are looking to settle down amid the housing shortage.

Renters represent a massive untapped audience for Hoya’s ETF, said Pettee. Instead of putting money into a savings account and earning 1% on the investment, they can own the index that reflects the 5% increase in home prices, he added.

“If you can put those savings into something that is more closely tracking the asset that you ultimately want to purchase, at least it’s serving as a kind of hedge to rising housing costs. You’re at least benefiting from higher home prices,” Pettee said.

Those homeowners who have 30% to 50% of their net worth tied up in their home might be a tougher sell to buy into the ETF; however, Pettee said owning the index could actually bring risk down for an investor’s biggest asset.

“Our message to the homeowners is that your biggest asset is concentrated in one particular zip code in one particular street, which is the ultimate undiversified asset,” said Pettee.

A major headwind for the ETF would be a spike in interest rates. When rates are low, people refinance their mortgages and usually put the extra cash each month back into their home. In a high-rate environment people generally buy fewer homes and under-invest in home improvements.

— with reporting from CNBC’s Nate Rattner.

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Here’s how to tell a bear market is coming

A trader works at his post on the floor of the New York Stock Exchange, December 19, 2018.

Brendan McDermid | Reuters

Trying to time the market can be dangerous, but there are certain signals that the professionals look for when trying to gauge future risk in stocks which could be helpful for regular investors to monitor.

Bank of America Securities curated a “bear market signposts” list for clients to help predict when stocks might be close to embarking on a bear market. The list of 19 signals ranges from fundamental to sentiment-related indicators and uses data tracking back more than 50 years.

Currently 63% of the bear market signposts have been triggered, up from 47% in January. Since 1968, when 80% of the indicators are triggered, a bear market occurred, meaning stocks fell 20% from their most recent highs.

“Stocks appear to be pricing in more good news than bad,” Bank of America equity and quant strategist Savita Subramanian said in a recent note to clients.

The signposts list was almost triggered in October of 2018 when it hit 79%. The S&P 500 went on to briefly dip into bear market territory on an intraday basis following that signal, and suffered its worst December since the Great Depression. The Fed raising rates, as they did in 2018, is a trigger on the bear market signal list, as bear markets have always been preceded by the Fed hiking rates by at least 75 basis points from the cycle trough.

Here’s a full list of the bear market indicators from Bank of America:

  1. Federal Reserve raising interest rates
  2. Tightening credit conditions
  3. Minimum returns in the last 12 months of a bull market have been 11%
  4. Minimum returns in the last 24 months of a bull market have been 30%
  5. Low quality stocks outperform high quality stocks (over six months)
  6. Momentum stocks outperforming (over six to 12 months)
  7. Growth stocks outperforming (over six to 12 months)
  8. 5% pullback in stocks over the last year
  9. Stocks with low price-to-earnings ratio underperform
  10. Conference Board’s consumer confidence level has not hit 100 within 24 months
  11. Conference Board’s percentage expecting stocks go higher
  12. Lack of reward for earnings beats
  13. Sell side indicator, a contrarian measure of sell side equity optimism
  14. Bank of America Fund Manger Survey shows high levels of cash
  15. Inverted yield curve
  16. Change in long-term growth expectations
  17. Rule of 20, trailing price-to-earnings ratio added to CPI is above 20
  18. Volatility index spikes over 20 at some point within the last 3 months
  19. Earnings estimate revisions rule

Bearish signs to watch

Currently, if investors buy a 3-month treasury bill, they will be getting a higher yield than if they buy a 10-year treasury note. This is not normal. Typically, the more long term the holding period of the government security is, the higher the returns. This is a bond market phenomena called the inverted yield curve, which is known to precede recessions and sits as one of Bank of America’s bear market sign posts.

Another indicator that is currently triggered is muted price reactions for earnings beats this season. Stocks are getting their thinnest rewards for beating Wall Street’s estimates on earnings since the first quarter of 2018 and the third lowest level since 2000, according to Bank of America.

“Historically, small rewards preceded negative S&P 500 returns 60% of the time over subsequent quarters,” Subramanian added.

Stocks with low price-to-earnings ratios are also currently underperforming, flashing a bear market warning sign. Stocks with low PE ratios are generally considered undervalued and can be a good buying opportunity. When investors don’t buy into these cheap stocks it normally means they are crowding in high growth names. This means that the most expensive stocks are narrowly driving market returns.

Another flashing signal is tightening credit conditions, which occurs when it becomes harder to borrow money from the bank. In times of uncertainty or an economic slowdown, banks will tighten their lending taps to hedge for risk. Each of the last three bear markets started when a positive percentage of banks tightened lending standards. A recent Fed survey showed banks expected credit standards to tighten this year.

Bullish signs to watch

One indicator that remains at bay is Bank of America’s Fund Manager Survey recommended cash levels staying above 3.5%. Typically, when fund managers are not recommending positions in cash to clients, it’s bullish; however, Bank of America said it can be a contrarian measure of buy-side optimism. Therefore, since the current recommended cash position is above 4%, the signpost is not triggered.

A change in long-term growth expectations is another indicator that is currently not triggered. While stocks are off their recent highs due to worries about the Chinese coronavirus and companies like Apple and Coca-Cola downgraded their earnings expectations due to supply chain disruption, the consensus seems to be that the financial fallout of the virus will be short lived. Near-term pain is being acknowledged; however, Wall Street firms are optimistic growth will recover in the second half of 2020.

Another recent bullish signal is that consumer confidence in the U.S. grew more than expected in January as the outlook around the labor market improved. The Conference Board’s consumer confidence index rose to 131.6 this month from 126.5 in December. Economists polled by Dow Jones expected consumer confidence to rise to 128. Any reading below 100 signals a bear market could be coming.

When the Cboe Volatility Index, a commonly watched fear gauge, spikes above 20, it triggers another bear market warning sign. Despite coronavirus and U.S. presidential election uncertainty, the VIX sits below 17, which remains bullish for equities.

To be sure, while this method developed by the bank has a good track record, it’s always possible that different factors accompany the next bear market. And most professionals advise against trying to time the market based on technical factors such as these.

Still, it could be a helpful exercise for regular investors to go through this list in order to gauge how much risk they should be taking with their investments.

— with reporting from CNBC’s Michael Bloom.

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