Best of the Newsletter October 2017

The political world crapped a proverbial brick last week when noted economic ignoramus Elizabeth Warren suggested in congressional hearings that Wells Fargo CEO John Stumpf should lose his job over an aggressive and sometimes fraudulent consumer banking practice. The company fired 5,000 employees, it was fined $185mm and the stock responded to the controversy by dropping 12% in the past month.

Meanwhile, the employees fired represent less than 2% of those employed by the corporation and $185mm is just over 1% of last years operating cash flow of $14B.

Morningstar puts the company’s value at almost 50% higher than the current price, the stock trades for just 1.3x book and the dividend yield is almost 3.5%.  I will be looking to add Wells Fargo in each of the retirement accounts I manage this week.

One more thing, I hope you looked into starting some sort of position on Wells Fargo last week.  I purchased call options with a $42.50 strike price that are now up 56% on just a 3% increase in the stock price.  High five.

When oversold the sellers of the stock (supply) have temporarily outnumbered buyers (demand). Obviously overbought is the opposite situation. The theory around these two terms is that at times the market will overreact in the short-term to some piece of news or even a rumor, driving the price past where it should go – in either direction. Here are the measures we use to find whether a stock has been overbought or oversold:

Relative Strength Index – RSI oscillates between 0 and 100 based on the speed of price movements. Over 70 is considered overbought and under 30 is considered oversold.

Bollinger Bands – Plots the mean price and two standard deviations below and above it over the period chosen. When the actual price is further than the two standard deviations away from the mean the security is considered overbought or oversold.

Full Stochastics – Shows the latest close relative to the high/low range over the periods chosen. 20 is considered oversold and 80 is considered overbought.

Anyway, one of my actual independent actions is my complete disregard for 401k plans.  There are too many better options for my money and I’m way too claustrophobic to hold my money in an account that I won’t be able to use for 35 years.

Unfortunately, as I’ve written ad infinitum, ‘How should I invest my 401k?’ is the most common question I am asked as soon as I identify myself as a former financial wunderkind and a current boring bank employee with an investing website.  So I’ve spent a lot of time thinking about the pros and cons of 401k plans, which we will look at in this article.