Dear Mr. Berko: In January 2014, my adviser had me buy 50 shares of Intercept Pharmaceuticals at $476, and it fell to $305 in February. In March, it began to zoom up, and my adviser had me buy 50 more shares at $422 because he thought it would go to $600. It’s now down to $158, and my adviser wants me to buy 100 shares. He insists that Intercept will get approval on a blockbuster drug this year, which could move the stock higher than $600. Is my adviser giving me the right advice? Please advise by email, because I need your answer right away.

C.R.

Akron, Ohio

Ěý

Dear C.R.: You have to be dumb, deaf and blind to pay over $400 a share for a company that doesn’t have sales or earnings and that probably won’t have sales or earnings for three years. Wow! C.R., you really take the cupcake!

Intercept Pharmaceuticals (ICPT-$158) came public at $15 in October 2012. Then, with a steady stream of engineered hype and hyperbole, the share price began to rise. The market-makers were able to unload their Intercept shares in the $40 range to the pros, who took their profits by selling them in the $70s to the hedge funds. Months later, the hedgies booked profits by dumping their shares in the $160s to the mutual funds. Months later, the funds took their piece of the pie, selling shares to the traders between $200 and $240. The traders then resold shares to the pros when the price was about 100 points higher (the mid-$300s), and the pros offloaded their shares to the stupids at $476, banking their gains. So, you’re the last man standing. As Bernie Madoff would say, you’ve been raptus regaliter!

Investors who paid more than the initial public offering price for this obscure, development-stage pharmaceutical company represent the waxing stupidity of a growing class of American investors that Wall Street calls “the stupids.” Psychologists suspect that this condition, a genetic defect in development, is peculiar to a species of investors whose mothers refused to breast-feed them. What else could account for assigning a $9 billion market value to a company with no earnings or sales? Only a stupid would pay $476 a share for a company with an iffy drug, called obeticholic acid, that won’t get Food and Drug Administration approval until 2018 – maybe! The feckless Financial Industry Regulatory Authority recommends a regimen of waterboarding, electroconvulsive therapy and group prayer sessions for investors who paid 25 percent over the IPO price.

There’s nothing evident to support Intercept’s $158 market price. The company is unlikely to report a cent of earnings until 2018 or 2019. In a small government-funded study in 2013 and 2014, Intercept’s obeticholic acid demonstrated very impressive results. During phase three clinical trials, the drug significantly reduced inflammation and other symptoms in patients with a type of fatty liver disease called nonalcoholic steatohepatitis. And because test results, which were probably leaked accidentally on purpose, demonstrated impressive results, investors entered a feeding frenzy and piled on. But when the National Institutes of Health discovered that obeticholic acid dangerously raises cholesterol levels and significantly increases the risk of heart attack, the funding stopped. Nevertheless, anxious stupids, fearful of missing the party, pushed Intercept to $497 a share last year.

C.R., I doubt that Intercept will ever return to either of your purchase prices of $476 and $422. I also believe that its current $3.3 billion value at $158 a share is a sucker’s bet. There is nothing on this fertile earth that supports this value. Intercept has $256 million in cash, no revenues except for research grants, 122 employees and high operating costs (rent, utilities, legal, salaries, insurance, accounting, equipment, supplies, etc.), which will burn through cash reserves like thermite. Those two purchases give you a basis of $449 and a loss of $29,000 if you sell at $158. And in my opinion, that price should continue to fall, so sell your shares. Then on sheets of notebook paper, write the following sentence 1,000 times: I shall never buy a stock that doesn’t have sales or earnings.

Address your financial questions to Malcolm Berko, c/o The Daily Journal of Commerce, P.O. Box 8303, Largo, FL 33775, or email him at mjberko@yahoo.com. © 2015 Creators.com

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Dear Mr. Berko: I have been watching Amazon.com Inc. for almost a year and have seen its stock price drop from over $408 last year all the way down to $290, but now it’s back over $300. Do you think the stock could move back to $400, and if so, would you recommend 50 shares of Amazon as a good short-term speculation? And could you please tell me about American First Multifamily Investors, which pays a 9.7 percent tax-free yield? I’d like to buy 3,000 shares.

G.K.

Port Charlotte, Fla.

Ěý

Dear G.K.: I think Amazon.com could trade back at the $400 level in the next six months because there are enough fools and dreamers out there to move it up again. If it runs back to $400, the reason won’t be potential earnings of $2; frankly, there’s no investment in the galaxy worth a price-earnings ratio of 200-to-1. If it returns to $400, it will only be because Dr. Pangloss and his legion of loonies who worship the Wizard of Oz, the Great Pumpkin and the Jolly Green Giant will have made it so.

Amazon.com (AMZN-$297.50) is an $89 billion-revenue company that will report a loss again in 2014. And this year, revenues may rise to $96 billion. Wall Street believes that Amazon’s earnings will be between a profit of $2.30 a share and a loss of $1 a share. This wide range is an indication of Amazon’s uncertain earnings prospects and casts doubts on CEO Jeff Bezos’ management expertise.

At the beginning of last year, when Amazon was trading at $400, I advised a reader not to buy the stock, suggesting that it was priced for stupids and not investors. And today, some 90 points lower, Amazon is still priced for stupids. I can’t imagine paying $300 for a stock that had no earnings last year and may lose big money this year. Bezos must have similar thoughts, because records show him selling 1 million shares in February 2014 at $357 and pocketing over $360 million. In all fairness, Bezos still owns 84 million shares; perhaps he just needed some walking-around money. But all of us are thankful for the federal taxes he paid (we hope) on the gain. Some observers suggest that Bezos may purchase another newspaper (he recently bought The Washington Post), and I’ve heard talk from two sources that he is in the market to buy a professional football or baseball team and an airline too. Meanwhile, what do you think could happen to Amazon’s stock price if management reported unexpectedly higher operating expenses on its various business sectors as it did earlier in 2014? I don’t think the reward justifies the risk, but if you have idle money that’s growing restless, try buying 50 shares. There are still stupids who might buy Amazon from you at a higher price.

America First Multifamily Investors (ATAX-$5.31), which came public at $20 in 1998, is followed by only one brokerage. Oppenheimer came out with a buy recommendation in February 2014, when the stock traded at $6. And the Oppenheimer lads still recommend its purchase. No one else on the Street follows ATAX, though Deutsche Bank early last year acquired a block for its own account. The current 12.5-cent quarterly dividend has been steady since 2010; it yields 9.7 percent and is tax-free. Yep, tax-free. Oppenheimer and Deutsche Bank in 1998 took ATAX public at $20 to acquire, hold and trade a portfolio of federally tax-exempt revenue mortgage bonds. These bonds were issued to provide construction and permanent financing for 32 Section 8 multifamily residential properties. ATAX owns a portfolio of 42 revenue mortgage bonds, issued by states and local housing authorities for the construction of over 5,100 living units. The 32 facilities are located in California, Florida, Illinois, Indiana, Iowa, Kansas, Kentucky, both Carolinas, Ohio, Tennessee and Texas. ATAX has 60 million shares, revenues of $34 million, net profits of $13 million and a book value of $5.10, and it has paid a 50-cent dividend since 2009. I prefer a 3,000-share purchase of ATAX to a 50-share purchase of Amazon.

Address your financial questions to Malcolm Berko, c/o The Daily Journal of Commerce, P.O. Box 8303, Largo, FL 33775, or email him at mjberko@yahoo.com. © 2015 Creators.com

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U. S. equity markets rose over the course of 2014 as the U.S. economy continued to strengthen. In December the Dow was flat, the S&P was down 0.4 percent, and the NASDAQ was down 1.2 percent. For the year the Dow was up 8 percent and the S&P was up 11 percent – 13.7 percent when dividends were reinvested; the NASDAQ was up 13 percent.

The best sectors among S&P stocks were utilities (up 25 percent), health care (up 24 percent) and information technology (up 19 percent). Energy was the worst performing S&P sector. In late 2014, the S&P finally rose to a new inflation-adjusted high.

Stocks in 2014 as represented by the Russell 3000 were worth 143 percent of gross domestic product, the highest since year end 1999. Increase in household wealth is over $7 trillion over the past three years, according to the Federal Reserve.

Third quarter GDP was revised upward to 5 percent – stronger than expected. Consumer spending rose .06 percent from October to November with the effects of lower prices for gas at the pump taking hold. Oil and natural gas prices both dropped as moderate weather and slowing world economies created a supply glut in those commodities. Crude oil fell to $53.30, the lowest price since May 2009.

Personal income increased .04 percent over October. The strengthening dollar has made investments in the U.S. more attractive. The dollar might well be headed to parity with the euro, where it has not been since 2002.

The only dark spot in the U.S. numbers was that the consumer sentiment declined slightly to 93.6 percent from 93.8 percent in November, according to the University of Michigan consumer sentiment numbers.

The market has weathered another eurozone crisis, the steep drop in oil prices, the end of quantitative easing and the threat of rising interest rates, among other things. The market rise has not been smooth, with a drop of 7.4 percent in early fall and another sell-off of 3.5 percent in December.

The run-up has now lasted nearly 70 months, making it the fourth-longest bull market since World War II.

Bond markets do not share equity market enthusiasm, with declining yields suggesting wariness among investors, even as the Federal Reserve makes plans to raise rates. A rise in yields brings its own worries. A spike in yields in 2013 rattled global markets.

With profits expected to rise about 8 percent in the next 12 months, the markets should see a similar increase in 2015, assuming no change in the price-earnings ratio of stocks. Based on the markets’ current price-earnings ratio of 15.8 times future earnings for the next year, U.S. stocks seem fairly priced.

But profits may not be as strong as they look. Per-share earnings have been increased by share buybacks. Investment in capital expenditures is only a little more than buybacks and dividends. The percentage of buybacks to increased capital expenditures is higher than any year since 2007, which suggests that companies do not have a better use for their money.

As readers of this column know, I often say the market climbs a wall of worry. There is nothing wrong with that as worry keeps a damper on exuberance, which we all know can get out of hand. Just as success breeds success, the strength of the U.S markets compared to the rest of the world and the strength of the dollar has attracted foreign funds.

The U.S. Federal Reserve is poised to raise interest rates in 2015, but they have promised to “be patient.” The decline in oil prices will partially offset the rise in interest rates.

Central bankers all over the world are doing their best to strengthen their economies with little success. European markets have been subdued as fear of deflation takes hold in Europe. The growth rate of European economies has been low, with Eastern Europe especially under duress because of Russian bellicosity. Emerging markets have been under stress too, primarily because of the strengthening dollar and in some cases the fall in oil prices. Because emerging economies often borrow in dollars, they are especially susceptible to a strengthening dollar.

Asian markets have had problems as China’s growth rate has declined. The Chinese central bank has pumped money into the economy, but has not been able to stop the decline in the growth rate. The Chinese property market, which has been robust, is now under pressure and Chinese investors haven’t been looking more to the U.S. as a safe haven for investments.

The recent purchase of the Waldorf Astoria is reminiscent of the Japanese purchase of Rockefeller Center at the height of the Japanese property bubble. A few years later, the Japanese were scrambling to get out of their U.S. investments at a steep discount. The Japanese were propelled into a two-decade recession. Now Japan has entered another recession.

With the growth in U.S. GDP, the resulting increase in profits and the influx of foreign capital, we can expect the U.S. markets to continue their strong run. We can expect rising capital spending, higher dividends and share buybacks. With so much investing feeding the markets and such a positive outlook among investors, one can easily be suspect of the strength of the markets.Ěý Thus we are back to the wall of worry – a good thing.

William Rutherford is the founder and portfolio manager of Portland-based Rutherford Investment Management. Contact him at 888-755-6546 or wrutherford@rutherfordinvestment.com. Information herein is from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. Investment involves risk and may result in losses.

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Dear Mr. Berko: Our first grandchild was born several weeks ago, and we’re thrilled. We want to invest $30,000 for his future in some stocks that he can keep forever and not have to watch. I remember that about 25 years ago (we’ve been reading your column for 30 years), you recommended a portfolio of 10 medical stocks, which you said did not have to be watched, and said they would do better than the Dow Jones industrial average if all the dividends were reinvested. I think two of the stocks were Amgen and Biomet. Could you please put together a list for us?

L.D.

Jonesboro, Ark.

Ěý

Dear L.D.: You have an excellent memory. Yes, Amgen and Biomet were two of those recommendations. Biomet was just acquired by Zimmer Holdings (ZMH-$113.42). I remember those stocks well because my sister, who put $2,000 in each, enjoys reminding me that I didn’t take my own advice. And darn, I wish I had. She still owns each of those issues, and with all dividends reinvested, the cumulative value of her 10 stocks is almost $250,000. Meanwhile, including Amgen and Zimmer, the following medical issues are still tops on my list of compelling, nearly foolproof, long-term investments: Becton, Dickinson and Co. (BDX-$139.16), Baxter International (BAX-$73.29), C.R. Bard (BCR-$166.62), Bio-Rad Laboratories (BIO-$120.56), Varian Medical Systems (VAR-$86.51), Medtronic (MDT-$72.20), The Cooper Companies (COO-$162.09) and Cardinal Health (CAH-$80.73).

The Affordable Care Act has opened Washington’s money spigots to the max. And because health care spending is perceived to be free, it has become the fastest-growing sector of our economy. In 2011, we spent $2.8 trillion on health care, and in 2015, we’ll spend $3.8 trillion, or about 22 percent of our $17.4 trillion gross domestic product. In the coming 10 years, health care spending may exceed $9 trillion, or 27 percent of our expected GDP. Sloppy accounting, purposeful waste, clever fraud, intentional abuses, overcharges for X-rays and tests, billings for procedures never performed and supplies never received, and accounting systems that maximize billing charges will cause care costs to explode. The graft and fraud in America’s health care system will put military spending, $90 hammers and $700 toilet seats to shame. Meanwhile, crazy, wild companies with names you’d never recognize will be making huge bucks, and their shares will be testing new highs. Risky investments in ArQule, Sangamo BioSciences, Ardelyx, MacroGenics, Ignyta, Agenus, Insmed, Dynex Technologies, CorVel, Landauer and other companies with strange-sounding names will become vacuums for the swirling gold dust in the health care air. They’re too insanely risky for your grandson.

The 10 issues I previously recommended will continue to do well, and there are compelling reasons to own each of them. However, I’m as certain as sunshine and blue skies that speculative opportunities exist for your grandson with the following volatile stocks: Cerner, Genmab, Kite Pharma, Relypsa, Egalet, Alkermes, Intrexon, Versatis and Endocyte. And there are five no-load Fidelity funds that own these issues, as well as others, and each of these five funds has prospered uncommonly well. So I’d recommend that you invest $6,000 in each of the following:

• Fidelity Select Biotechnology Portfolio (FBIOX-$223), a $9.2 billion fund, has one-, three-, five- and 10-year total returns of 38 percent, 45 percent, 34 percent and 11 percent, respectively.

• Fidelity Select Health Care Portfolio (FSPHX-$219), with $7 billion, has one-, three-, five- and 10-year total returns of 40 percent, 36 percent, 28 percent and 15 percent, respectively.

• Fidelity Select Medical Delivery Portfolio (FSHCX-$83) is a small portfolio ($900 million) with total returns of 28 percent, 22 percent, 21 percent and 15 percent.

• Fidelity Select Medical Equipment and Systems Portfolio (FSMEX-$39) is a $1.6 billion portfolio with total returns of 26 percent, 24 percent, 19 percent and 11 percent.

• Fidelity Select Pharmaceuticals Portfolio (FPHAX-$21), with $1.5 billion, has total returns of 32 percent, 27 percent, 24 percent and 15 percent for the one-, three-, five- and 10-year periods.

If the total return on those funds averages 12 percent over the next 25 years, that $30,000 would grow to $510,000 when your grandson is 25.

Address your financial questions to Malcolm Berko, c/o The Daily Journal of Commerce, P.O. Box 8303, Largo, FL 33775, or email him at mjberko@yahoo.com. © 2014 Creators.com

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Dear Mr. Berko: You once recommended General Electric at $25. I didn’t buy the stock, because the company was so big that it reminded me of the Pentagon. Would you still recommend a 200-share purchase? Also, what is your opinion of Synchrony Financial, which GE spun off in July?

G.S.

Kankakee, Ill.

Ěý

Dear G.S.: General Electric (GE-$25.40) is slimming down and becoming better-focused. In the past decade, GE has been one of the worst-performing stocks included in the Dow Jones industrial average. An October survey of several dozen fund managers revealed that they believed that GE was “uninvestable, unmanageable, too complicated, too diverse (and) too slow.” And several “buy and hold” fund managers admitted that they’re frustrated with the stock’s performance. It seems that they and other investors are shunning GE in favor of smaller, less convoluted conglomerates, such as Textron, Honeywell, Danaher and 3M. And Scott Davis, an analyst at Barclays, told investors in November that GE’s earnings reports are so confusing that it takes him “days to fully digest them.” I recall a frustrating hour trudging through those reports in March, when I recommended GE at $25.

Though in fairness, GE did spin off Genworth Financial (GNW-$8.50), its $10 billion-revenue life insurance and financial services company, at $19.50 a share in 2004. Three years later, GE got out of the plastics business, selling it lock, stock and barrel to a Saudi firm for $11.9 billion. Then, in 2013, GE sold its media business, NBCUniversal, to Comcast (CMCSA-$58.92) in a deal valued at $40 billion. And recently, GE sold its iconic appliance business to Electrolux in Sweden and simultaneously purchased the power generation business of the French conglomerate Alstom. If the board decides to go the full monty, Barclays says GE should spin off everything not related to its global infrastructure-related businesses – energy, aviation and transportation. So another spin-off may be GE’s medical devices business. This unit should be worth enormously more as a stand-alone entity, and Wall Street believes that it will trade at higher multiples than competitors Johnson & Johnson, Stryker and Medtronic.

GE may have most of its spinning out of the way. Still, its share price did diddly-squat last year, as it had in the dozen previous years. Meanwhile, 21 percent of GE’s industrial revenue is exposed to plunging energy prices – primarily those divisions making equipment that drills, pumps, measures and transports oil. So GE’s power generation business will be hit hard if oil prices remain weak. And continued lower oil prices will slam the fortunes of oil-producing countries where GE hopes to grow its revenues. However, the 88-cent dividend may be raised to $1 in 2015, and with alacrity, I’d buy GE as a conservative long-term investment yielding 3.5 percent.

Synchrony Financial (SYF-$29.75) was previously a part of GE Capital. GE hired Goldman Sachs, Morgan Stanley, J.P. Morgan and Citigroup to take 20 percent of Synchrony public at $23. The underwriters did a yeoman’s job, off-loading 125 million shares, which steadily rose to $30 a few months later. GE still owns 80 percent of Synchrony’s shares, which may be distributed to shareholders at some point in 2015. Synchrony is the largest provider of private-label credit cards in the U.S., based upon purchase volume and receivables. Synchrony also has an inventory of credit products (personal loan plans) through programs established with a diverse group of national and regional retailers, local merchants, manufacturers, buying groups, industry associations, veterinarians and health care providers. In 2014, Synchrony posted $6.2 billion in revenues, with net profit margins of 32 percent, and earned just under $2 billion, or $2.20 a share. Low oil prices, which may continue for 12 to 18 months, are bullish for Synchrony because most Americans don’t bank their savings; they usually spend and borrow more. And Synchrony will be Johnny on the spot, assisting buyers and sellers in financing their transactions. Synchrony doesn’t pay a dividend, but that may change soon because the balance sheet has $14.8 billion in cash, which is equivalent to $17.50 a share.

Address your financial questions to Malcolm Berko, c/o The Daily Journal of Commerce, P.O. Box 8303, Largo, FL 33775, or email him at mjberko@yahoo.com. © 2014 Creators.com

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Dear Mr. Berko: I’m a 79-year-old healthy widower. I’m a retired high-school teacher with wonderful memories, and I still keep in touch with some of my ex-students. I recently sold my house to the family who had been renting from me since 2004, and after all the pages of make-work and paperwork, I came away with a check for $109,000. This family was paying me $1,200 a month. I’ve been living comfortably in a modest coach house that used to be the garage. For years, my son and his wife have been urging me to join them in their Tallahassee, Florida, home. Their home has a nice “father’s area” – with a kitchen, bath, TV room and private entrance – and it sure beats the winters in Detroit.

My problem is that I need about $9,000 a year from the $109,000 I got from the sale of the house. Every year, I take a special journey for six weeks with a couple of male colleagues. All my other living costs are comfortably supported by savings and my pension. At today’s low rates, the best I can get on $109,000 without risk is less than 3 percent, which leaves me $6,000 short of the $9,000 I need. I won’t ask my son for money, though this is pocket change for him. Apparently, there are many stocks paying 9 percent or better, but I don’t have the knowledge to pick the best issues. So I would appreciate any help you can give me to pick the steadiest and highest-yielding stocks.

M.S.

Detroit

Ěý

Dear M.S.: Moving from Detroit to Tallahassee is like moving from Kathmandu to paradise. However, if you come across a huge stink that’s difficult to place, don’t worry about it. That odor comes from the Florida Capitol on Monroe Street, and most residents become used to the rank smell after a few years.

There are plenty of issues that pay dividends of 9 percent or better that I can vouch for today but can’t vouch for tomorrow, which is where you hope to spend the rest of your life. I can give you the names of 207 issues with dividend yields better than 9 percent. You may have a remote chance with issues such as Annaly Capital Management (NLY-$11.26), yielding 10.6 percent, Chimera Investment (CIM-$3.33), paying 10.7 percent, and dozens of others with double-digit yields. But I wouldn’t take the chance. Short-term Russian and Ukrainian paper will bring you 17 percent and 13 percent, respectively. Long-term Venezuelan bonds bring 35 percent, and there are some mighty attractive yields from Turkey, Argentina and Brazil that could knock your socks off. However, the risk factor with these issues is so obscene that you could be arrested for indecent investing, and I could be named as your accomplice.

At a healthy 79 years old, you could easily live to 91 before continuing your special journey elsewhere. So consider putting that cash in a 1 percent certificate of deposit and taking an annual check for $9,000, including $8,000 from principal. In this instance, that $109,000 would last you for 13 years – or perhaps a tad longer if interest rates rise a bit. It’s a no-brainer; it’s no muss, no fuss and no bother.

A second alternative I sometimes recommend is a single premium immediate annuity. This is a contract in which you give an insurance company a specific sum of money, and it guarantees to pay you an income every quarter for the remainder of your life. An insurer would guarantee you, as a 79-year-old man, a 10 percent income on your lump sum, so all you would need to invest would be $90,000. And the insurer would post you a $9,000 check (partially nontaxable) every year, even if you live to be older than Moses or Methuselah. Then you’d get to keep $19,000 in cash for gewgaws, gimcracks and doodads. But there’s a caveat: If you were to die next year or four years hence or eight years from now, the insurance company would keep all of the remaining kit and caboodle.

In the end, though, my best recommendation is: Ask your son what to do.

Address your financial questions to Malcolm Berko, c/o The Daily Journal of Commerce, P.O. Box 8303, Largo, FL 33775, or email him at mjberko@yahoo.com. © 2014 Creators.com

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Dear Mr. Berko: Please explain what happens to the market during the third year of a president’s term in office. The market is supposed to be up the third year, and I would like to invest about $20,000 very conservatively if you think the Dow Jones industrial average will go higher during the coming year. My broker told me to ask you what to buy.

J.W.

Kankakee, Ill.

Ěý

Dear J.W.: You’re referring to the presidential stock cycle, the numbers from which show that the Dow Jones industrial average has a better performance during the third year of a president’s term in office (regardless of whether it’s a first term or second term) than it does in any of his other years. The consistency is remarkable. Since 1896, according to Barron’s, the 30 companies included in the Dow Jones industrial average have gained an average of 15 percent, including dividends, during a president’s third year, with an 82 percent degree of reliability. That’s nearly four times the average gain (4.4 percent) in all other years. And again according to Barron’s, the third year of a president’s second term in office, the Dow Jones industrials have gained 18.4 percent. And during all second-term third years that followed two years in which the market gained, the Dow has been plus an impressive 18.7 percent. The real reason behind the presidential stock cycle is that politicians go to extreme lengths and do everything within their power (some go to greater lengths) to get re-elected. And many of the greater lengths that politicians go to are downright, outright embarrassing and illegal.

This 82 percent degree of reliability that the stock market will rise is an impressive figure. But an even more impressive figure is a 100 percent degree of reliability. That’s how often the Dow has risen in the third year of a presidential term since 1940. And most professionals believe that 1940 is a more relevant point on which to focus. They note that the government’s role in the economy and the White House’s ability to affect electoral outcomes grew enormously with the advent of the New Deal and the stimulus of World War II. So, since 1940, the Dow Jones industrials have risen in every third year of a presidential term, gaining an average of 22.3 percent. So, sweetheart, that ain’t chopped liver, as Bernie Madoff was often heard to say. And it’s an especially lovely figure because it contrasts markedly with the 3.1 percent average gain for all non-third years since 1940. So tell your broker to buy 100 shares of the Dow Jones Industrial Average ETF (DIA-$180.06), a fund mimicking the performance of the Dow.

Then there are naysayers who believe that this impeccable Dow Jones record will end this year as abruptly as a rabbit’s tail. They believe there are no more arrows remaining in the government’s quiver, and here are their reasons: 1, interest rates are at zero; 2, the Federal Reserve can’t make the cost of borrowing any lower; 3, interest rates are certain to rise; 4, our fiscal deficit is in the hundreds of billions of dollars; 5, our dollar has risen in value against most currencies; and 6, record consumer installment and credit card debt ($3.3 trillion) will depress the growth of our gross domestic product.

Meanwhile, Russia is floundering, Its ruble is crashing, and it costs Russia $92 to produce a barrel of oil, which trades at $60. Europe has enormous unemployment problems and is struggling to keep its collective head above water. Even Australia has its share of economic woes. But Russia’s problems take the cake. Many believe that the Russian economy can’t improve under the current regime. Unfortunately, the crisis there may be worse than the West realizes, so the Russian bear and her 146 million cubs are mewling in despair. The biggest fear – and it’s unspoken – is that Russian President Vladimir Putin will try to solve his country’s economic problem by engaging the West in some form of hostility. It would work because war creates full employment, which helps people forget their miseries. And be mindful that Putin plays a better game of chess than President Barack Obama.

Address your financial questions to Malcolm Berko, c/o The Daily Journal of Commerce, P.O. Box 8303, Largo, FL 33775, or email him at mjberko@yahoo.com. © 2014 Creators.com

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Dear Mr. Berko: My 16-year-old son has saved up over $6,000 in the past two years from part-time jobs and wants to invest this money. He has done some research on the computer, and his investment of choice is McDonald’s. I also looked it up and read that the company’s revenues and earnings are falling and have been for several years. My son did a lot of work on this stock and compiled 37 pages of research and articles about the company. I don’t want him to make a mistake. How can I tell him he’s wrong without stifling his initiative?

P.M.

Jonesboro, Ark.

Ěý

Dear P.M.: Don’t! Even the most successful businesses are subject to cyclical headwinds from time to time, and McDonald’s (MCD-$91.34) has never been an exception.

Yes, McDonald’s does have problems. After impressive revenue and earnings gains between 2005 and 2011, a 40 percent improvement in operating margins and global sales growth averaging 5.5 percent, management has gotten a bit too cocky and may have lost its way. Same-store sales, or SSS, in the U.S. crashed 4.6 percent, far more than Wall Street’s expectation of 1.9 percent – its largest slide in SSS since 2000. And McDonald’s problems are not just in the U.S., because global SSS declined 2.2 percent, versus analysts’ projections of 1.7 percent. Food price volatility, higher labor cost and foreign currency fluctuations are hurting McDonald’s quarter-to-quarter results. And when reading the restaurant’s bloated menu, you’d think you’re in a Chinese restaurant. It can take 10 minutes to decide what to take home for a family of five, which contributes to terrible service. And you’re never sure whether the tattooed kid at the counter took your order correctly. When you get home, you’re usually missing an order of fries, or there’s no cheese on your Big Mac but there are pickles on your cheeseburger. Revenues are also hurt by price wars among the major fast-food service restaurants, plus the lure of newer entrants such as Five Guys, PDQ, Chick-fil-A, Jimmy John’s, Zaxby’s and Firehouse Subs. McDonald’s U.S. president, “Big Mike” Andres, commenting on McDonald’s dismal revenues in a recent email to franchisees, said, “The reality is that our current U.S. structure is not optimized for the customer.” Big Mike is going to optimize to make McDonald’s well again. But what does “optimized for the customer” mean? If Big Mike also talks like that in his conversations with franchisees, I wouldn’t ever want to own a franchise.

McDonald’s has had slippage in the past, and that’s as normal as rain, which is always followed by sunshine. The Marines have a saying: “When things get tough, the tough get going.” And McDonald’s is one tough cookie, so don’t make the mistake of ascribing long-term consequences to short-term events. McDonald’s will prevail, beginning with new initiatives improving U.S. operations, including a more flexible franchisee relationship, an emphasis on food quality, a simplified and customizable menu that also improves McDonald’s glacial service, and a customer-centric marketing campaign that appeals to a broader range of consumers.

And an industry-wide change that will reduce costs, accelerate service and improve order accuracy is on the way. Customers will soon order by tapping on a touch screen to create their own burgers. McDonald’s expects to install these touch screens in 2,000 of its 14,000 U.S. restaurants in 2015 and 2016. The average McDonald’s generates about $2.5 million in annual revenues, and the touch screens easily will eliminate four to six employees, reducing labor costs by more than $110,000, or about 4 percent, annually.

Those changes and others suggest that McDonald’s can return to the lower end of its long-term goals: sales growth of 3 to 5 percent, operating income growth of 6 to 7 percent and 17 to 19 percent returns on incremental invested capital. So, considering McDonald’s impressive, worldwide brand recognition; its 14,000-plus high-traffic, well-selected locations; its history of providing a good customer experience; its locally relevant menu choices; its interior and exterior physical plant renovations; its more efficient kitchens; and that on average 1,400 new locations open annually, McDonald’s will prevail. I think your son has done his due diligence well.

Address your financial questions to Malcolm Berko, c/o The Daily Journal of Commerce, P.O. Box 8303, Largo, FL 33775, or email him at mjberko@yahoo.com. © 2014 Creators.com

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Dear Mr. Berko: I’ve been using Avon’s soaps, skin care lotions and fragrances almost forever, and my neighbors and I believe that the company’s products are just as good or better than those of Revlon, L’OrĂ©al and others. So I bought 200 shares in late 2004 at $46, but it’s never been that high since. I want to buy 200 more shares at the current price ($9.04), which would bring my cost basis down to about $28, but my broker thinks this is a bad idea. She likes Avon’s products as much as I do, but for several years, she has been recommending that I sell my shares and take a tax loss. I don’t agree with her. I feel Avon is undervalued, and so does my husband. And my Avon representative recently purchased 450 shares. Please give me your guidance.

S.D.

Cincinnati

Ěý

Dear S.D.: Recently, Stifel Financial, a classy brokerage headquartered in St. Louis that brags its headquarters are far from the gaseous exosphere of Wall Street, downgraded its recommendation on Avon Products (AVP-$9.04) from “buy” to “hold.” Simultaneously, UBS – a huge brokerage home-ported in Zurich, where analysts wear lederhosen and boast that their culture is pure Wall Street – upgraded Avon from “sell” to “hold.” It’s interesting that two brokerages, worlds apart in distance and culture, issued the identical conclusion: to hold the stock. That’s serendipity!

Lots of folks share your opinion that most of Avon’s fragrances, cosmetics and skin care, personal care and outerwear products are as good as or better than the products of Coty, Mary Kay, Revlon and L’OrĂ©al. So if Avon were to quadruple its prices, I believe that most of those consumers would passionately tell you that Avon’s products are far superior.

But I agree with your broker, who sounds like a smart lady. You sound as if you’ve fallen in love with this stock. The toiletries and cosmetics sector has been in the doldrums for several years, and its timeliness ranks just below “lousy” and “stinks.” In fact, during the past few years, this group has slipped in ranking from the top 10 percent to the bottom 10 percent, and your broker’s “sell” recommendations have been right on the mark.

Avon is one of the world’s largest marketers of personal care and beauty products, jewelry, shoes, and paraphernalia for kids. Last year, more than 6 million active Avon ladies (and a few Avon men) in more than 100 countries sold $10 billion worth of stuff in North America, South America, Europe, Asia, Africa and the Middle East, but Avon only earned pennies a share. In 2015, Avon should retail about $9.2 billion of ephemera and possibly earn a dollar a share. Profits next year will derive from operating cost reductions rather than a sales turnaround. This company is top-heavy with redundant staff, so management will begin by eliminating about 10 percent of the staff in its North American headquarters. Then it must lower its manufacturing cost, seek better prices for raw materials, design ethnic sales kits and product for Latin America, recruit aggressive sales staff in Russia, and design compelling incentive programs to attract more motivated sales reps.

Avon trades at a 25-year low, and most analysts believe that the shares have limited appeal for the near term. Though you’re an Avon aficionado, I suggest you follow your broker’s advice – but with a twist. Consider buying 200 Avon shares at the current market price, which would give you a position of 400 shares. Then, 31 days after this purchase, sell the 200 shares you bought at $46 and take a $7,200 capital loss. So you’d still own 200 shares, though with a lower basis of $10 a share.

However, Invesco, T. Rowe Price, Vanguard, BlackRock and a few others own hundreds of millions of shares. And one of the geniuses I sometimes talk to at BlackRock thinks Avon could be a $35 stock in three to four years. The 24-cent dividend yields 2.4 percent now, and he thinks earnings will turn around strongly by 2017, which might allow the dividend to be doubled.

Address your financial questions to Malcolm Berko, c/o The Daily Journal of Commerce, P.O. Box 8303, Largo, FL 33775, or email him at mjberko@yahoo.com. © 2014 Creators.com

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Dear Mr. Berko: My new broker recommended Finnish, Norwegian and Swedish exchange-traded funds for me, which I have listed here. What can you tell me about investing in those countries? I know what an ETF is but hope you can explain the terms “iShares,” “MSCI” and “capped” to me. As an alternative to these ETFs, could you also recommend two or three stocks from each of those countries? I am 58 and have $385,000 in my rollover individual retirement account, and this broker wants me to have $60,000 in foreign stocks. Is this a good idea?

H.D.

Indianapolis

Ěý

Dear H.D.: Most folks who roll over their retirement plans into an IRA are steered into high-commission, low-performance annuities by their brokers. Your broker is a keeper, and I like his conservative, long-term growth and income recommendations.

The 680 ETFs managed by BlackRock are branded as iShares, derived from “index shares.” So each of BlackRock’s 680 iShares ETFs tracks a specific bond or stock index. MSCI is the index created by Morgan Stanley Capital International that measures equity performance in a global ETF market. And “capped” refers to the weighting of the securities in an index so a single security doesn’t exert a disproportionate influence on it.

The iShares MSCI Finland Capped ETF (EFNL-$32.87) came public in January 2012 at $26. It has a $37 million portfolio, yielding 3.46 percent, and shares have traded between $28 and $38 in the past 12 months. Finland, with 5.5 million Fins and 3.4 percent unemployment, is a highly industrialized and globally integrated economy. Its per capita output is on par with those of Germany, Belgium and France. And its government debt is rated AAA. Two Finnish issues that may do well this year are Fortum Oyj (FOJCF-$22.89) and Nokia (NOKBF-$8.26). Nokia, founded in 1865, is a worldwide $16 billion advanced technologies business with 60,000 employees. Earning 95 cents a share, Nokia trades at eight times earnings, and the 50-cent dividend yields over 6 percent. Fortum Oyj is a $7 billion electric utility with 8,800 employees serving 2.8 million customers. It trades at a low five times its $4.43 earnings, and the $1.50 dividend yields 6.8 percent.

The iShares MSCI Norway Capped ETF (ENOR-$23.80) is a $27 million portfolio that also came public in January 2012 at $26 and yields 3.4 percent. In the past 12 months, shares have traded between $26 and $35. Norway, where all the men are tall and strong and all the women are blond and beautiful, has a 3.1 percent unemployment rate. It’s also considered the world’s least corrupt country, and its bonds are rated AAA by all three services. Two issues that may do well in the coming years are Telenor ASA (TELNF-$21.13) and Gjensidige Forsikri ASA (GJNSF-$16.91). The latter is a $3.5 billion banking and insurance empire with 3,500 employees. It earns $1.43 a share and trades at 15 times earnings, and the 70-cent dividend yields 3.5 percent. Telenor ASA is a $16.5 billion media and telecommunications giant with 34,000 employees. It was founded in 1885. Analysts believe that it could trade in the low $30s next year, and the $1.18 dividend yields 5.4 percent.

I really like Swedish meatballs, and I also like iShares MSCI Sweden ETF (EWD-$33.20), which came public in 1996 at $14. The shares are not capped, but it yields 3.7 percent and has traded between $27 and $38 in the past 12 months. Sweden, with 10 million Swedes and an unemployment rate of 3.2 percent, is an export-oriented economy – primarily autos, engineering, pharmaceuticals, telecommunications and appliances – that most observers say provides the highest standard of living in the world. You might also consider H & M Hennes & Mauritz (HMRZF-$39.49), a $20 billion clothing and household products firm with over 3,200 locations worldwide. The $1.44 dividend yields 3.7 percent. Also consider Atlas Copco (ATLKF-$28.37), founded in 1875. It’s a $12.5 billion industrial products and solutions company that has an impeccable reputation for quality engineering and products. Its 83-cent dividend yields 3 percent.

Address your financial questions to Malcolm Berko, c/o The Daily Journal of Commerce, P.O. Box 8303, Largo, FL 33775, or email him at mjberko@yahoo.com. © 2014 Creators.com

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