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2018.11.18 Penn Wealth Report Vol 6 Issue 05

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Penn Wealth Publishing Subscription Information http://www.pennwealthreport.com/the-report.html Penn Wealth Publishing 9393 West 110th Street 51 Corporate Woods Suite 500 Overland Park, KS 66210 4 PeNN Wealth Report volume 6 issue 05 18 Nov 2018 Penn Wealth Report Copyright 2018. All Rights Reserved. From the Editor/ As I write this, the stops are hitting. Individual holdings are dipping below their minimum acceptable price point, and they are liquidating. In some cases, they are protecting gains; in oth- ers, they are limiting losses. Using the experience of the past twenty-one years as a guide, this means that the markets have hit a trough and will probably start heading back up. But what if that is not the case? Two times during the past two decades, this actually wasn't the way it turned out. Instead of hitting bottom, we were in for two years—in each case—of sheer ugliness. e first time we called it the tech bubble burst. e second time it was the finan- cial crisis. In each case, investors were caught off guard. e truth is, we really do not know what is going to happen going forward. When oil climbs to $75 per barrel, the Goldman Sachs guru (strictly an example; several people come to mind) comes along and tells us why crude is going to $100 per barrel. When it makes a dramatic fall to $55, the same expert tells us why it is headed to $45. Give me a break. When AOL had a PE ratio of 600 back in the late '90s, we probably should have seen the storm brewing. But the experts started throwing out terms like "paradigm shift" and "new econ- omy" to explain away the crazy numbers. Right now, I look at Netflix's ridiculous 100 PE and I call B.S. (And not just because CEO Reed Hastings seems like a first class punk). Valuations matter, and high-flying Teflon companies do even- tually come crashing back to earth. Speaking of value, it has been out of favor for the better part of a decade. It's obvious we like value companies—just take a look at the list of PE ratios in the Penn Global Leaders Club section of the Report: Eastman Chemical with its 6, Kroger with its 7, Union Pacific with its 9. Even tech darling Apple is now trading at a 15 multiple! More than PE ratios, we love looking at the relative strength index (RSI) of a company. As a general rule, a stock with an RSI of over 70 indicates an overbought condition exists, while an RSI under 30 indicates a company is probably oversold. Right now, Apple has an RSI of 33 and Facebook has an RSI of 28. Six months ago investors would have killed for levels like that, so why not now? I recall the exact same set of circumstances in 1999. Not only were value stock being pilloried, they were being uncere- moniously jettisoned as part of the dying "old economy." How quickly circumstances change. Value mattered in 1949 when Benjamin Graham wrote e Intelligent Investor, it mattered in 2000, and it matters today. Value investors always seem to get the last laugh. So, if we are in for an extended downturn, what should we do? e same thing we should do if we have bottomed out: assure protection is on our portfolio, and look for great values. MSH Michael S. Hazell editor in chief It feels like a bottom, but what if it is something much different? In hindsight, it is easy to say that we should have seen the 2000-2002 market nightmare coming, but it certainly wasn't obvious in 1999. Shocks often come when you least expect them.

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