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DTE Energy (DTE) Q3 2015 Results – Earnings Call Transcript

DTE Energy Company (NYSE: DTE ) Q3 2015 Earnings Conference Call October 23, 2015 9:00 am ET Executives Anastasia Minor – Executive Director, IR Peter Oleksiak – SVP and CFO Jeff Jewell – VP and Controller Mark Rolling – VP and Treasurer Analysts Julien DuMoulin Smith – UBS Dan Eggers – Credit Suisse Matt Tucker – KeyBanc Capital Markets Jonathan Arnold – Deutsche Bank Shar Pourreza – Guggenheim Partners Operator Good day and welcome to the DTE Energy Third Quarter 2015 Earnings Release Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Anastasia Minor. Please go ahead. Anastasia Minor Thank you, Kyle, and good morning everyone. Welcome to our third quarter 2015 earnings call. Before we get started, I’d like to remind you to read the Safe Harbor statement on Page 2, including the reference to forward-looking statements. Our presentation also includes reference to operating earnings, which is the non-GAAP financial measure. Please refer to the reconciliation of GAAP net income to operating earnings provided in the appendix of today’s presentation. We also are now including additional data in the appendix which we have historically provided in a supplemental document. With us this morning is Peter Oleksiak, our Senior Vice President and CFO; Jeff Jewell, our Vice President and Controller; and Mark Rolling, our Vice President and Treasurer. We also have members of our management team with us to call on during the Q&A session. I’d like to turn it over to Peter to start our call this morning. Peter Oleksiak Thanks, Anastasia, and good morning everyone and thank you for joining us today. Those of you who know me know that I always like to start off with a quick update on my Detroit Tigers. The Tigers looked towards the future at the July trade deadline this year, and [indiscernible] best pitcher, outfielder and closer. With that they slipped firmly into last place by the end of the season. I guess all I can say is, there’s always next year and our focus now is on the Red Wings making another playoff run, and I will not be mentioning the Lions or the Pistons on this call. DTE is continuing to have a successful year in 2015. As you know, we raised our operating earnings guidance a few weeks ago at our Analyst Day. I feel very confident that we will be able to comfortably achieve our guidance. We had a very successful third quarter and we expect a solid quarter to finish the year. We also provided a 2016 early outlook during our Analyst Day and I’m confident we can reach our 2016 EPS targets as well. Jeff and Mark will be going through third quarter results in more detail, but before we move on to that, I’d like to do a quick overview of our business strategy as well as some highlights of what’s happening at DTE. Turning to Slide 5, Slide 5 provides an overview of the business strategy and investment thesis. Our growth plans for next 10 years at both utilities are highly visible. Electric utility growth is driven by the renewal of our generation fleet and replacing and upgrading the electric distribution system. Our gas utility growth is driven by infrastructure investments, the mainline replacement, pipe replacement and a system expansion to accommodate the increased volumes for the Nexus pipeline into the rest of pipeline. Complementing our utility growth are meaningful growth opportunities in our non-utility businesses which provide diversity in earnings and geography. The structure of regulatory environment, engaged employees, continuous improvement and top-level customer satisfaction continue to be priorities that drive DTE success. The constructive regulatory environment is important as our two utilities are investing significant capital in the state of Michigan, and we know fostering this environment is a two-way street. I’ll be updating you on some of the regulatory proceedings our utilities are currently working through. Our highly engaged workforce continues to be a key to our success, and we have described our success throughout the year with the recognition we have received from the Gallup organization over the last three years. Our focus on continuous improvement is distinctive in the industry as the utilities continue to be leaders in maintaining costs. The combination of these two, employee engagement and continuous improvement, enables us to deliver both a sustainable COGS savings track record and to consistently earn authorized returns at both of our utilities. We’re also very focused on customer satisfaction, demonstrated by our gas utility currently rating highest by J.D. Power among our peers for business customer satisfaction. Both DTE Electric and DTE Gas are ranked second in satisfaction of residential customers. Rounding out our business strategy is our dividend growth and solid credit rating. Our dividend continues to grow as we grow earnings and our goal is to maintain a strong BBB credit rating. This strategy provides for consistent 5% to 6% annual EPS growth. Slide 6 provides some highlights of progress in 2015. As I mentioned earlier at our Analyst Day, we raised our 2015 operating EPS guidance and provided 2016 operating EPS early outlook. I’ll provide a more detailed overview of guidance in a few minutes. Today we are revising our cash flow and capital guidance for 2015, and Mark will provide more details on this in a few minutes. Regarding Michigan’s energy policy, there is positive momentum for constructive legislation by the end of the year. The governor and other energy leaders have called this a major priority. There is [indiscernible] legislation that has been developed in both the House and the Senate and the more extensive hearings have now been concluded. There have been a dozen hearings in the House on the proposed legislation and eight in the Senate, so this legislation is moving along nicely. Also want to give a quick update on the various rate proceedings for our two utilities. Our electric utility self implemented rates on July 1 for our ongoing generate rate proceeding. We expect to receive a final order by the end of the year. We also implemented the new cost of service rates which resulted in rate reductions for most of our business customers at the same time of self implementation. For DTE Gas, we expect to receive an order this year for an expanded infrastructure recovery mechanism that if approved will allow us to double the annual miles of our mainline replacement program. For next gas general rate case, we are looking to file in late 2015 or early 2016. We’re finalizing our plans. We feel this timeframe is optimal time to file. As you know, we haven’t filed a rate case at our gas utility in nearly four years. We continue to make significant progress in our non-utility businesses. Let me hit on a couple of developments in our Gas Storage and Pipelines business. Millennium is currently working on 200 Mcf/day expansion, which is expected to go on service in the fourth quarter of 2017. In addition, Millennium is constructing an 8-mile valley lateral to supply 130 Mcf to a new natural gas plant in Pennsylvania. This is expected to go in service in April of 2017. We have increased our ownership in the Nexus pipeline project from 33% to 50%, which increases our planned investment to approximately $1 billion. We have executed a number of key milestones, including the contracting for the major pipe materials earlier this month. Our next key milestone on the Nexus project is the FERC filing which will happen later this year. We have commitments. We need to move forward with the construction of the pipe. We have recently signed a number of Tampa interconnect agreements that could provide potential aggregate load across northern Ohio for up to 1.4 Bcf a day. This demonstrates strong market support for the project and also strengthens the longer term earnings potential for the play. And we continue to see increasing production forecast for the Appalachian region. So you can see we have a lot of positive things going on in both our utilities and non-utilities giving us confidence to reach our earnings goals in 2015. I can move on to provide more detail on Michigan’s energy legislation, but before I do that, let me give you a quick update on Michigan’s economy. The state economic indicators are looking very strong. We show some of the actual forecasts and metrics in the appendix but I’d like to highlight Michigan’s unemployment rate for September which was 5%. This is actually lower than the national rate of 5.1%, and it’s worth noting because it’s the first time in Michigan the unemployment rate is below the national average in 15 years. So things continue to move in the right direction in our state. So now let me move on to the state energy policy reform on Slide 7. Slide 7 is a slide you’ve seen before showing Michigan’s leaders who are helping to move the state’s energy policy reform to its completion. We are definitely fortunate to have these individuals who really understand what good energy policy looks like. The governor identified the need for energy policy reform as one of his top priorities and he has not wavered from that all year. He has taken time to study and understand our industry and land on what a good policy moving forward would be. His good advisors were John Quackenbush and Valerie Brader. And with Senator Nofs and Representative Nesbitt, we have two very competent energy leaders in the Senate and the House. So we have a situation where all three entities, the administration, the House and the Senate, are clear that Michigan does need to develop new policy to control its future. There is definitely progress happening. It gives us confidence of a timely resolution to the energy policy reform. Both the Senate and the House energy committee have concluded extensive hearings on the legislative package. Nofs and Nesbitt are working with committee members who would vote in the committee possibly by next month. So I’d like to turn to some specifics on legislation that is under development in the House and the Senate with Page 8, starting with the retail open access. Leadership in both the House and the Senate realized that the current system is broken, so both are proposing reforms. Both proposals as they stand now would cap the current program at 10% but with stricter and more fair provisions. Actually the House until recently had planned to eliminate retail open access altogether, but as part of the alignment process has been now proposing to stay at the 10% cap. But importantly, both the House and the Senate would require one-time election to return to the utility, which means there will be no longer a free option to move back and forth between the marketplace and our regulated rates. To make the cost of capacity more fair and to issue a reliable generation service in the state, the Senate is proposing a three-year capacity commitment, the house is targeting a five-year capacity commitment for those customers who would like to stay on retail open access. Integrated resource planning or IRP is the second key element of legislation. The proposals enable pre-approvals, so once it’s decided on what generation this should be, there will be a process for pre-approving investments and assuring that they are prudent, and similar to our current Certificate of Need process or CON process but on a portfolio basis. This new IRP process will fit nicely into the state’s implementation plan for the clean power plan. Then finally the legislation is going to deal with a number of regulatory reforms. Both the House and the Senate are proposing a move from our current 12 month cycle on rate approvals with a six month sub-implementation, to a simple 10 month cycle. There is also work on establishing a fair net metering policy which I think is important as we head towards building more renewables. Revenue decoupling is also being proposed for electric utilities. We would like to have this option to enable recovery of the impacts of energy efficiency in between rate proceedings. So I think the state of Michigan is well-positioned to have energy legislation by year-end. That’s important so that as a state we can move on in a constructive way to make the investments that we need to transform Michigan’s energy infrastructure. So on Slide 9, this slide shows our EPS history and our target of 5% to 6% growth. As I mentioned before, we expect to grow our dividend with earnings, evidenced by our recent increase which was at the high end of our earnings growth target. The chart shows a revised 2015 guidance midpoint of $4.78 as well as the EPS guidance midpoint of $4.69 for our growth segments. The 5% to 6% future growth I mentioned is off our new 2016 early outlook midpoint of $4.93 per share. The $4.93 midpoint represents a 7% increase from the 2015 original guidance. So let me get into a little more detail on Page 10. Slide 10 shows our current 2015 EPS guidance and our 2016 EPS early outlook. I want to focus on our 2015 guidance. Our current EPS guidance range is $4.65 to $4.91 for total DTE Energy and $4.59 to $4.79 for our growth segments. You can see next to the guidance numbers arrows indicating where we think the year might play out for each segment. We have green arrows up next to all of our non-utility businesses. If these businesses have a repeat of the strong performance in the fourth quarter similar to what we’ve experienced in the first three quarters this year, then we are seeing earnings fall in the upper end of these ranges. For Gas Storage and Pipelines, we are seeing strong performance in both pipeline and gathering earnings. Our Power and Industrial Projects segment is seeing solid performance in our REF business. And we are seeing strong economic performance at our Energy Trading operations. Our Corporate and Other segment is trending towards the lower end of guidance driven by taxes. I mentioned the strong financial performance we have seen this year, so I’d like to turn the call over to Jeff Jewell to provide more details on the earnings results. Jeff Jewell Thanks, Peter, and good morning everyone. I’ll be going over quarter-over-quarter earnings results on Page 12, and on Page 13 I will provide more detail into DTE Electric’s quarter-over-quarter operating earnings variance. Now turning to Page 12, for the quarter DTE Energy’s operating earnings were $252 million or $1.40 per share, and for reference, our reported earnings were $1.47 per share. You can find the reconciliation of the third quarter reported to operating earnings on Page 27. For the quarter, our growth segments operating earnings in 2015 were $75 million or $0.40 per share higher than 2014. The Electric segment was higher by $79 million. This favorability was due to warmer weather, self implemented rates and lower storm expenses in 2015. I’ll provide more detail on Page 13. DTE Gas was higher by $5 million. This was primarily driven by reinvestment spend in 2014 and increased revenue associated with the infrastructure recovery mechanism surcharge. Gas Storage and Pipelines earnings were $7 million favorable to the prior year. This increase was primarily due to increased volumes on the Bluestone pipeline and increased investments in our gathering assets. Our Power and Industrial Projects segment was lower by $6 million versus 2014, due primarily to timing of major coke battery maintenance project expenses and a steel related installment sale contract that ended in the second quarter of 2015. Our Corporate and Other segment came in unfavorable by $10 million versus last year. This variance was mainly due to timing of federal and state tax accruals. These items were considered in our year-end guidance. Again, the overall growth segment results for the quarter were $253 million or $1.40 per share. Energy Trading posted a $1 million operating loss for the quarter and economic net income of $14 million. Both the power and gas business lines contributed to these results. Please refer to Page 25 of the appendix to review the Energy Trading standard reconciliation page which shows both economic and accounting performance. Overall, DTE Energy’s operating earnings were $252 million or $1.40 per share for the quarter. Now let’s turn to Page 13 to discuss our Electric performance. Electric segment earnings were $79 million higher quarter over quarter. The variance was driven by three major contributors, increased rates, return to near normal weather, and lower storm O&M. DTE Electric self implemented a rate increase on July 1 as part of its ongoing rate case. This was partially offset by increased rate base growth due to investment in the generation and distribution operations. The next major contributor was weather. If you recall, summer weather in 2014 was much cooler than normal while this summer was near-normal. This resulted in increased sales of approximately 700 gigawatt-hours when compared to the same period last year. Please refer to Page 24 of the appendix for sales variance detail. Finally, we experienced lower storm activity in the third quarter of 2015. This is a significant decrease when compared to 2014 where we saw multiple storms including the storm in September of 2014 that impacted more than 400,000 or 20% of our customers. In conclusion, for the quarter, DTE Electric’s operating earnings were $79 million higher than 2014. That concludes the update for our earnings for the quarter. I’d like to now turn the discussion over to Mark who will cover cash flow and balance sheet metrics. Mark Rolling Thanks, Jeff, and good morning everyone. In addition to the solid earnings results, our cash flow and balance sheet are strong and continue to support our long-term growth plan. Slide 15 lays out our cash flow and CapEx through the third quarter. Cash from operations is $1.5 billion and we saw strong performance across all business units, putting us a little ahead of our plan for the year. We invested $1.7 billion of CapEx through the third quarter, and on the right side of the page you can see the breakout by business unit. DTE Electric is up due to higher operational investments and higher new generation spend with the acquisition of a gas [indiscernible] back in the first quarter, partially offset by the timing of some wind investments between years. And year to date, the non-utilities are on pace with last year. To fund this CapEx program and the refinance maturing debt, we issued $1 billion in long-term debt this year. Let me turn now to Slide 16 and the revised cash flow and CapEx guidance that Peter touched on. As I mentioned a moment ago, we are seeing strong cash flow this year and therefore we are increasing our cash from operations guidance by $100 million. We’re also making a small change to our CapEx guidance, and on the right side of the page you can see the breakout of capital spending by business unit. We still expect to spend a little over $1.8 billion at DTE Electric and $280 million at DTE Gas, and we expect our non-utility businesses to invest $350 million for the year or about $100 million lower than the low point of the original guidance. Now this change captures the timing of some of the growth progress upon industrial and will have no effect on the growth plan that we provided at our Investor Day last month. This brings our total CapEx to nearly $2.5 billion for the year, which is up more than 15% over last year. And back on the left side of the page, we have reduced our debt financing needs to correspond with this $200 million increase in free cash flow. Now I’ll move to Slide 17 with a look at our balance sheet metrics. Our balance sheet remained strong and we project ending the year within our targeted range for both leverage and FFO to debt. We issued $200 million of equity back in the first quarter and that fulfilled our equity needs for this year. At our investor event last month, we disclosed modest equity needs of $800 million from 2016 through 2018. Earlier this year we renewed our credit facility through 2020 and we ended the quarter with $1.8 billion of available liquidity. As we outlined at our Investor Day, we have a financial planning approach that will continue to rely on the strength of our balance sheet to fuel our long-term growth plans. And now I’ll hand the discussion back over to Peter to wrap up. Peter Oleksiak Thanks Mark. Let me finish the presentation with a quick summary on Slide 19, and then we can open the line for questions. We had three solid quarters so far this year and we are confident that this year’s performance will allow us to achieve our 2015 EPS guidance. We also anticipate constructive outcomes this year in both utility regulatory filings as well as the Michigan’s energy policy reform. Our balance sheet and cash flow metrics remain strong and our investments in our utility and non-utility businesses support our target 5% to 6% EPS growth going forward. I thank you all for joining our call this morning and I hope to see many of you at the EEI conference in a couple of weeks. Gerry Anderson will be giving a formal presentation on November 10th that will be Webcasted on our Investor Relations Web-site. So we hope you all can join us. Now I’d like to open up for questions that you have, so Kyle, you can open up the line for questions. Question-and-Answer Session Operator [Operator Instructions] We’ll take our first question from Michael Weinstein with UBS. Julien DuMoulinSmith It’s actually Julien here. So quick first question, perhaps obvious, given the trailing 12 months, what are you thinking here in terms of the fourth quarter and implied results, it seems perhaps it could even be potentially down year-over-year, is there something about reinvestment, [indiscernible] et cetera, you might imagine? Peter Oleksiak I’d like to reiterate that we are kind of confident with the earnings guidance that we’ve put out there. The electric utility in particular last year was in a lean mode. That’s really, if you’re looking quarter over quarter, kind of a fourth to fourth, that’s what you’re seeing emptying there. Julien DuMoulin Smith Got it. So does that actually mean that there is added strength or more of a tailwind that you are reinvesting in fourth quarter into 2016, or perhaps as you just alluded, was in more of a 4Q 2014 phenomenon such that this is more of a normalized pace in 4Q 2015? Peter Oleksiak It’s more the latter, the last year’s fourth quarter phenomenon. Julien DuMoulin Smith Got it, excellent. And then perhaps secondly, just of late any developments on the gathering front with Southwestern? Peter Oleksiak Our gathering business is going very well, and as you know, our raising of guidance in that segment in particular was with the volumes associated with the gathering with the Southwestern Energy. So the well performance is great, the drilling program continues to be strong in that region and our gathering earnings are flowing nicely there. Julien DuMoulin Smith Great. All right, I’ll leave it there. Thank you. Operator We’ll take our next question from Daniel Eggers with Credit Suisse. Dan Eggers Just on the legislation in Michigan with the hearings done, do you guys have a read in when something can get formalized or resolved between the House and the Senate and vote where this finally gets cauterized, is there something that we can look forward or a schedule that you guys see right now? Peter Oleksiak It is not a firm schedule, but as I mentioned, the extensive hearing process is done, and as you know, you mentioned that as well. There’s some finalization of language that will happen both in the committee and the House and then they’ll move it, both the Senate and the House, and from there there’ll be reconciliation. We are anticipating that will start happening as early as next month, early next month, but going more likely into the month of December. Dan Eggers So a conference next month between the House and the Senate and a vote in December seems realistic at this point? Peter Oleksiak Right, yes, that’s a possibility. Dan Eggers Okay. And then I guess your second question, when you think about the – it looks like you’re going to the idea that Choice has to get a firm capacity kind of somewhere between three and five years, is that something that you guys would look at providing or are you not going to be in the business of offering capacity to those customers? Peter Oleksiak No, we are not in the business of offering capacity to those customers. We’ll offer to our customers. Dan Eggers Okay. What is the year to date weather benefit on that after the good third quarter? Peter Oleksiak Jeff, if you have that? Jeff Jewell Ask that one more time, just make sure we’re answering what you’re looking for. Dan Eggers How much year-to-date weather benefit have you guys gotten? You gave the quarter, I don’t know if you have the year handy. Jeff Jewell So for the full year, if you go back to Page 24 in the pack, I think that’s what you’re asking, so I’ll just guide you back there. So the first is – I’m on the left-hand side there in the middle, DTE Electric 2015, you can see what that was for the quarter and we talked about that. And for the year to date, you can see it’s at $12 million. Dan Eggers Got it, thank you. I should’ve [looked it up] [ph] myself. Jeff Jewell [Indiscernible] was down negative $17 million for the year. Dan Eggers Okay. And my last question just on the pipeline tap-ins now that you’re 1.4 Bcf of potential customers, when do those start converting either into contracts or something more substantial and what should we be tracking other than just kind of these quarterly updates? Peter Oleksiak That will happen over time as the pipe gets built. That 1.4 Bcf is non-binding but we do anticipate that a number of that will potentially turn into nice investments for us, lateral or gathering couple of opportunities. They are more likely – that will happen once we are done with the construction of the pipe. Dan Eggers Okay. Thank you, guys. Operator We’ll take our next question from Matt Tucker with KeyBanc Capital Markets. Matt Tucker Just wanted to follow-up on the guidance and the full year guidance kind of implying that the fourth quarter would be down year-over-year, you already commented on some reinvestment at Electric. It looks like the non-utility segments, the guidance also implies earnings would be lower year-over-year. Could you talk about what might be driving that or should we kind of expect that the Electric reinvestment could offset some of the earnings there? Peter Oleksiak The electric utility, I mentioned I’m feeling comfortable with the guidance range we have out there. There was a phenomenon last year fourth quarter around lean. We’re in a normal investment cycle this year in the fourth quarter. But our non-utility businesses are performing strong. On a year to date basis, there is strong performance, and if that strong performance continues in the fourth quarter, those businesses will more likely end up in the upper end of those ranges. Matt Tucker Great, thanks. And just hoping you could provide a little more color on the change in timing in the CapEx at Power and Industrial Projects. Peter Oleksiak Mark, you want to take that one? Mark Rolling Sure. So that as you mentioned is timing related. When we did our original guidance for the year and we provided a range this year on the non-utility businesses, recognizing that those businesses and the timing of the project show-up has some variability. As we are close to the year-end, we have better visibility as to what’s going to occur here in late 2015 versus what may occur early in 2016. So it’s a timing related item at Power and Industrial. Specifically, if you step back and look at our early outlook for 2016 and our growth plan that we provided at our Investor Day, this has no impact on any of that, it’s really the timing item. Matt Tucker Got it. And is there any specific projects that you did highlight there? Peter Oleksiak I’ll add just a little commentary to Mark’s comments. Power and Industrial Projects in particular, we do have an acquisition strategy there where if opportunistic we’ll acquire small on-site related projects, and they have the tendency to be kind of lumpy in terms of when they show up, and when they do show up – we had one back a few years ago with the Duke project on the on-site project. So there, I don’t want to be too concerned. When they do show up, sometimes they show up and they are relatively sizable. We like to have a placeholder in with a capital for that business unit in particular. So it’s really just timing related to these small acquisitions related to in the Power and Industrial segment. Matt Tucker Understood. Thanks guys. Operator [Operator Instructions] We’ll take our next question from Jonathan Arnold from Deutsche Bank. Jonathan Arnold I just wanted to revisit just timing of the legislature. I know you’ll lay that when you know the steps, you see it. Are there some deadlines that we need to hit in order for this to be all accomplished in calendar 2015, when do the session end and at what point would we need to see it out of conference, how much wiggle room is there I guess? Peter Oleksiak It is not a firm schedule. The augment deadline was before they moved to the holiday break and which would be the back half of December, but the momentum we are seeing right now with the hearings being concluded, they said there’ll be some tweaking of the language in both the House and the Senate, and then at that point a reconciliation. The good thing is both the House and the Senate, essentially with Aric Nesbitt’s move to move a bit closer to where Mike Nofs is at, I see that process hopefully happening relatively quick once it starts. Jonathan Arnold Okay. Thank you, Peter. That was it. Operator We’ll take our next question from Shar Pourreza with Guggenheim Partners. Shar Pourreza Just one question on the decoupler, I know it’s a little bit preliminary, but Peter, are you looking for a full decoupler which takes any kind of load out of your earnings mix or sort of more of a partial decoupler that accounts for energy efficiency in DSM? Peter Oleksiak We’ll explore all the options. First is to kind of get that option for the electric utility to have a decoupler in legislation. That’s being proposed right now. So we like that to give us that option of flexibility. As we are thinking about it, we really would want it fully focused on the energy efficiency, that’s our early thinking at this moment. Shar Pourreza Got it. Okay, so you have some potential leverage to macro probably, okay. And then just on the pipe, 1.4 is non-binding, it’s a little bit preliminary, but is there any indication that you could reach that to laterals and compressors from a demand side or it’s too early? Peter Oleksiak The overall pipe we are putting in is 1.5 B, that’s expandable to 2 B with compression. The major market when this pipe first was put in was Dawn, and Michigan is Michigan, goes from a coal plant to gas plant conversion. So it’s really nice. Actually this Ohio market is actually showing up as well that wasn’t originally anticipated. We kind of knew that when we placed this pipe, we deliberately placed it in the Northeast Ohio around these industrial centers. So we are hoping that this 1.4 B, a portion of that gets converted over to this industrial load, which then once we [indiscernible] to get a lateral in gathering, but we feel comfortable right now that we’ll be able to expand the pipe to meet that. It will be a nice problem to have. Shar Pourreza Yes, exactly. Thanks Peter. Operator We have no further questions in queue at this time. I would now like to turn the call back over to management for any additional or closing remarks. Peter Oleksiak I’d like to just thank everybody for this morning joining us on the call, and once again we’re going to be at EEI and hope to see many of you there. Have a great day. Operator This does conclude today’s conference call. Thank you all for your participation. You may now disconnect.

How I Created My Own Portfolio Over A Lifetime – Part IX

Summary Introduction and series overview. Creating my son’s first plan. Future income streams. Summary. Back to Part VIII Introduction and Series Overview This series is meant to be an explanation of how I constructed my own portfolio. More importantly, it I hope to explain how I learned to invest over time, mostly through trial and error, learning from successes and failures. Each individual investor has different needs and a different level of risk tolerance. At 66, my tolerance is pretty low. The purpose of writing this series is to provide others with an example from which each one could, if they so choose, use as a guide to develop their own approach to investing. You may not choose to follow my methods but you may be able to understand how I developed mine and proceed from there. The first article in this series is worth the time to read based upon some of the many comments made by readers, as it provides what many would consider an overview of a unique approach to investing. Part II introduced readers to the questions that should be answered before determining assets to buy. I spent a good deal of that article explaining investing horizons, including an explanation of my own, to hopefully provoke readers to consider how they would answer those same questions. Once an individual or couple has determined the future needs for which they want to provide, he/she can quantify their goals. If the goals seem unreachable, then either the retirement age needs to be pushed further into the future or the goals need to become attainable. I then explained my approach to allocating between difference asset classes and summarized by listing my approximate percentage allocations as they currently stand in Parts III and III a. Part IV was an explanation of why I shy away from using ETFs and something akin to an anatomy of a flash crash. In Part V I explained the hardest lesson about investing that I have had to learn: why holding cash is not a bad thing at certain times. Part VI was an explanation of why and how I sell long-held positions. Part VII was about tax efficiency to give readers some sense of what I put in which account and why. Part VIII was about building a plan for saving and investing, identifying reasonable goals and setting milestones to track progress. In this article I will do my best to explain how my son’s original plan was developed and then how we adjusted it to accommodate a change in his career plans. It is easier said (or written) than done, but it is a worthwhile task for anyone do undertake, especially for those early in their investing experience or even for those in the thick of it yet struggling for clarity of purpose. Creating my son’s first plan We started off talking about his horizon which is a difficult concept to grasp right out of college. For now, since he is single and focused on getting started off on the right foot, we stuck to what is important to him. He would like to retire by the time he is 60 and knows that if he does not start planning and saving now his chances could be less than desirable. He is also aware of how inflation will require him to need more nominal income in retirement and that he will, because of advances in medical technology, live considerably longer and need sustainable income streams that will keep him ahead of inflation after retirement. He believes that having the equivalent of $60,000 in annual income (in today’s dollars) will be sufficient to retire on. He is also keen on a career in the Air Force as an intelligence officer. So, that is where we started. First, we looked up the officer pay schedule on airforce.com which lists the starting pay and in-grade increases for years of service. He would start at $33,941 in his first year as a second lieutenant. His cousin is a major after serving ten years and a couple of my friends retired after twenty and thirty years of service, respectfully at the ranks of lieutenant colonel and colonel, each having spent more than five years in grade at the time of retirement. With that information and a reasonable assessment of my son’s intelligence, attitude, and work habits, we made some assumptions about how his career would progress. Obviously, this is more predictable than most careers are likely to be but it is a good way to start the process. It seems apparent from both experience of people we know and the pay schedule that the Air Force does not expect an officer to remain below the grade of captain for more than five years. It also appears that a promotion to major should happen within the first twelve years. If the officer is hard working, learns fast and evolves into a valuable asset (which is what my son intended) one could expect to be a lieutenant colonel by year 15 and a full colonel sometime before year 22. After that point we assumed he would probably not make it to general, so the expected salary at the time of his retirement would be $126,688 before inflation. His income would increase from $33,941 to $126,688 (before inflation) over 30 years. Formula = ((33941/126688)^(1/30))-1 But we know that the pay schedule gets updated regularly to account for inflation, so we assumed an average two percent annual adjustment. That would create a six percent annual compound rate of growth in income and we end up with a final annual pay of about $183,906 per year 30 years from now. That probably sounds a lot better than it will feel. We assumed that he would make the maximum contribution (ten percent) to his 401K plan (Thrift Savings Plan) right from the start and that the Air Force would make a five percent matching contribution. We also assumed that the maximum contribution threshold would be indexed to allow him to not exceed the maximum amount allowable by law. In the end, assuming a relatively cautious, but flexible allocation that should result in a six percent compound annual rate of return, he would end up with $593,952 at the end of his 30 year career. At that point, he would retire from the Air Force and seek a better paying position in a private firm for the next ten years. He changed his mind on retiring at the age of 60 once I explained that he may need to work in the private sector for ten years (to record 40 quarters of paying in) in order to be eligible for social security. With that in mind we made the first adjustment, extending his expected working career by two years. He will make the determination when he is approaching retirement as to whether social security benefits will be worth the additional effort. Extending his retirement savings in to the new 401K plan, making the maximum contribution allowed by the employer and assuming a continued five percent matching contribution while, at the same time allowing the Air Force plan to continue to grow until he retires completely, we estimated that his total savings in the two plans would aggregate to a total of $1,587,338 by the time he reaches age 62. Notice what happened over the last ten years; without changing the rate of growth and by merely continuing to contribute the same percentage of a gradually rising income, the total increased by 167 percent from just under $600,000 to almost $1.6 million! That is the power of compound interest (growth) over time. Next we assumed that he would begin putting the maximum allowed contribution into an IRA at the end of his first year in the Air Force, or $5,500. We assumed a slightly more aggressive allocation to achieve an annual compound rate of return of eight percent. We did not make any assumptions about inflation or future increases to the maximum allowable contributions. Thus, this should be a conservative estimate. If he is consistent in contributing the maximum amount each year until age 62 when he plans to retire, we estimate that his IRA(s) should have a total of $1,494,117 accumulated. As I pointed out in the precious installment, he plans to contribution initially to a Roth IRA while his income tax rate is still below 30 percent. At the point at which his incremental tax rate (combined for federal and state) hits 30 percent he will switch his contributions to a traditional IRA to save on taxes if he feels he needs the relief to accommodate his lifestyle. But, we also discussed that his income will probably be high enough in retirement that his income tax rate may be more than 30 percent. One never knows what will happen to income tax rates in the future so having as much tax-free income as possible is a good thing to plan on. The thing to remember is that we are trying to create multiple streams of future income. So far we have developed two future sources of income from savings. But wait! There’s more! Yes, as I mentioned in the previous segment of the series, we assumed that he would not be able to save much in a taxable account during the first 17 years. Why? Well, he will need transportation, entertainment, and who knows but that he might even get married and have children. Then there’s the house, another car (or a van), saving for the kids’ college expenses, and all the extra expenses that accrue to a family with children. He will be saving in a taxable account, but I explained to him that he would probably not be able to hold onto much of it for quite a few years. There will be a down payment for car(s) and car payments, a down payment for a house and the additional maintenance expenses, and family vacations can be expensive (four people usually costs nearly four times as much as one). It will be hard, but eventually his income (and that of his wife if she works) will grow enough to allow for additional savings that can targeted for retirement. One other item that we discussed is that he needs to build a savings account as a buffer for emergencies. If he gets laid off or his wife does and there is a need to meet expenses while searching for employment, he will need to have an emergency fund to draw from. My wife and I have tried to keep the equivalent of six months living expenses in our emergency savings account. We have needed it several times for things like moving, a new HVAC system for the house, a new roof, a new appliance, etc. It gets drawn down and then we build it back up again. After talking it through my son understood the need for an emergency savings account. We decided, after some negotiation, that he might be able to begin saving for retirement in a taxable account in about 18 years. He, of course, is hoping to get there sooner but we agreed to 18 years for the plan. So, he will be saving in that taxable account for 22 years before retirement and we assumed an annual compound rate of growth of seven percent to allow for paying taxes on the dividends, interest and gains when necessary. His plan calls for him to save $5,000 in the first year and then increase the savings by $1,000 each year ($6,000 in year two, etc.) until he reaches $10,000 per year. He plans on continuing to save $10,000 per year until retirement. We estimate that he should accumulate $506,565 by age 62 in his taxable account. His total savings from all three sources (401K, IRAs and taxable savings) should be $3,448, 769. Future income streams After concluding his savings plans we moved onto identifying all future streams of income for retirement. The Air Force has a generous retirement plan. I am not certain but believe it pays two percent per year of service time the average of the high three years of salary. We estimated that the average of his last three years of income from the Air Force would be about $180,000. Thus, two percent times 30 years of service is 60 percent of that amount to calculate his annual pension. That results in a first year pension of about $108,000 that he could begin to draw at age 52. We assumed an annual average of two percent cost of living adjustment until his death. If I am wrong and the Air Force has adjusted the pension to be one percent of the high three years average, then his pension would be half as much. Still, it is just one stream of future income. There are more. The second potential stream of income would be social security. This one is tough to estimate because we assume that there will need to be adjustments made to the plan and benefits (probably later age requirement and reduced benefit). So, we tried to be conservative and estimated that he would be eligible for approximately $18,000 of annual benefits in today’s dollars and that he would not be able to begin receiving benefits until he reaches 65 years of age. We also assumed that over that time the cost of living adjustment would average two percent. At age 65 he would be able to collect $41,350 (adjusted for inflation) and that amount would increase to $55,652 by age 80. That makes two income streams so far. Now we need to look at the retirement accounts for additional income for when it is needed. The first one we will look at is the taxable account since it does not continue to accumulate on a tax-deferred basis like the IRAs. My son will probably roll over his 401K savings from the Air Force into a traditional IRA account. Whether he rolls his private employer 401K over into a traditional or Roth IRA account will depend on the options he has when he begins his employment. If they offer a Roth 401K, he may go that route. Whatever is the case, he will likely roll over each account to an IRA of similar tax treatment. Likewise, which account he decides to draw from will depend on what his marginal tax rate is during retirement each year. The Roth IRA income will be tax-free. It went in after tax and as it comes out there are no taxes owed (unless Congress decided to change the rules). The withdrawals from the traditional IRAs will be fully taxed as earned income. The taxes were only deferred. None of the savings in the traditional IRAs will have had any taxes paid until the withdrawals begin. We decided, for simplicity, to combine the 401K and IRA accounts into one stream and labeled it retirement savings income. He will take what he needs from whichever account makes the most sense to him at the time of withdrawal. Of course, there is a required minimum withdrawal that he will need to make from the traditional account(s) once he turns 70 1/2, so the IRS will have its say in at least part of the decision. We assumed that he would have at least a two percent annual return from those accounts including dividends and interest, and that income would likely increase each year. We also assumed that there would be some appreciation, but that he would be investing very conservatively (read: mostly fixed income), so we also assumed that he could take out three percent each year and that he could increase his withdrawal by two percent per year. Our reasoning is that at such a low rate he should not need to draw down principal, making his savings last indefinitely. He has no idea how long he will live! If he begins withdrawals at age 62 he could add a third retirement income stream of $90,278 per year. Adding the incomes together, we get a total of $224,572 per year. If we adjust for and average rate of inflation of three percent that would equal about $70,909 in today’s dollars, more than his goal. That is good because it is always more realistic to aim a little high and hope you come close. If he wanted, he could simply use only $158,351 in his first year of retirement. That is how much $50,000 would equal at a three percent average annual rate of inflation. Now, if I was wrong about the Air Force pension plan and his income would be calculated at the one percent rate instead of two percent, then his income in his first year of retirement would be $157,425 in year one. Funny how that is less than six tenths of one percent from what his original goal. Summary The point of this exercise and the series is that a well-defined plan, consistent execution and reasonable goals can work for most people resulting in financial security. Obviously, there are setbacks and no plan will work perfectly but as shown here, even if he fell well short of his goals and got behind his milestone targets, my son would still end up in relative good shape. If he had no plan and started later in life, as most people do, he would probably not come close to achieving the wherewithal to retire as comfortably. Everyone will have different long-term objectives and goals. Thus, everyone needs to create a plan that is personalized and can help them achieve those goals. A person who has lesser ambition and expectations will, nonetheless, need a plan to be able to retire at their own level of comfort. It will not be any easier just because someone needs less to make them happy. No plan, haphazard savings or swinging for the fence with every investment are all sure fire ways to end up with less than one needs. I had hoped to include how we adjusted my son’s plan to accommodate his change in career paths, but the article is getting too long. I will cover that in the next installment and then I will cover how I determine with relative confidence when the market is likely to have changed trend directions. Readership of the series continues to fall off with each new installment. Thus, I will probably wrap up the series with eleven parts. I had wanted to include a few installments that pertain to how my version of buy-and-hold investing has worked over the years by highlighting the performance of some of my holdings, but I believe those might do better in separate articles with titles unrelated to this series. I will add link to those articles in the instablog I created for the series, though. The instablog for the series can be found by clicking on the following title, ” How I Created My Own Portfolio Over A Lifetime .” As always I welcome comments and questions and will do my best to provide details and answers. This is one of the best aspects of the SA community. We can learn from each other and share our perspectives so that other readers can benefit from the comprehensive knowledge and experience represented here. That works out to a compound annual increase of four percent over 30 years.

The Generation Portfolio: Target

Summary The quarter’s first full earnings week treated the Generation Portfolio kindly with the exception of Wal-Mart, whose unexpectedly dismal report blew a hole in the entire retail space. I took the sympathy weakness in big box retailers to add some Target Corporation shares, given that it is a recovery play whose situation is unrelated to Wal-Mart’s issues. Looking ahead, the Fed appears to be on hold for the time being, which is affecting the REIT and banking sectors. Background This is a weekly column that I write about an account that I manage for others, which I call the Generation Portfolio . I also discuss the current trading environment, my general investing philosophy, and any other ideas that seem relevant. Last week , for instance, I threw out some ideas about the herd-like mentality that has taken over the market due to the growth in index funds . To summarize that discussion, I have nothing against index funds in theory, and in fact own a few myself . In practice, though, the mass popularity of index funds tends to create distortions in the market. They are not quite the panacea that many would dearly love to believe they are, though they serve many investors well. The Generation Portfolio is built of stocks, not funds, because I find stocks to be easier to analyze and better suited to my cash flow objectives. So far, that strategy has worked as intended. The Importance of Cash Flow Regarding my income objectives, I have written about my own views of the importance of cash flow before . My theory is that a portfolio should be run like a business, with the cash that it generates reinvested into the enterprise whenever possible after you take out whatever expenses you need to cover. Thus, it is essential for a portfolio to generate enough cash flow to fund continuing operations – which, in the context of a portfolio, means the addition of new sources of cash flow which will keep the business thriving. It is a variation on the “buy low, sell high” mantra. The objective, in fact, is not to buy low and sell high, though of course that’s always preferable. I think that confuses some people, as not having as your objective the sale of what you buy at a higher price seems vaguely un-American or something. So, let me explain what I mean by that. The “buy low, sell high” objective is for speculators, or to use another word that annoys some people, “gamblers.” Nothing wrong with gambling, and life itself is a gamble. Some people are very good gamblers, and everyone has their own talents. However, for most people, you need to arrange matters to give you better table odds than they typically give you in Vegas (or the market) if you want to succeed at investing. My own view is that if you speculate enough and don’t have a good dollop of luck or some edge, you will speculate all your money away eventually. I’ve heard enough stories from people who have blown out accounts to reinforce that view. The speculator table is tilted against you because powerful, well-funded market interests collectively have more of whatever it is that you, the individual investor, can ever bring to the table – knowledge, brains, experience, capitalization, research tools, anything that makes a difference. They can outlast you, they have research and algorithms you’ve never heard of, and they can react faster than you. You may beat them sometimes because everything in the market is about probabilities, and even the biggest investment firms can’t control those. Those victories, though, just encourage you to continue onward until you aren’t quite so lucky. The odds are always in the house’s favor, though by a slim margin. Those with the odds in their favor are the ones with the fancy office buildings and slick marketing tactics. Some folks just learn that too late, or deny it forever. So, instead, if you want to win, the objective (as I see it) for the core of a prudent portfolio (there is always room for some fun speculation) is not to buy low and sell high, because that game is for likely losers. As the classic poker saying (repeated by Warren Buffett) goes, “If you don’t know who the patsy at the table is, it’s you.” Instead, my objective is to buy growing, dependable, and in other words quality cash flow cheap and then keep it so long as it remains quality. If you do that, the “selling high” part will take care of itself. And, best of all, you may not need to sell at all. However, you will have to ride out the shifting currents and forget about current prices except in a grand strategic fashion. That’s tough to do. There are many ways to build cash flow, and some investors just don’t like dividends. Those folks usually have studies from this, that or the other place to back up the theory that it is better to sell part of your portfolio to generate cash flow rather than rely on dividends for it. It’s a valid strategy, though I could spin out all sorts of issues with it. Whatever works for you is terrific. My preference is to generate cash flow by collecting dividends from Quality Stocks . Dividends are automatic and don’t require any transactions or thought, and the less thought I have to devote to a mundane task, the better. If you have sufficient funds to diversify across and even within sectors, that also is a good strategy to put into practice to minimize risk. Thus, the Generation Portfolio pursues an income strategy across companies and sectors that is designed to generate reliable and growing cash flow and minimize damage from random stock disasters. “It is a market of stocks, not a stock market.” If you’ve been following the market long enough, you have seen someone go on one of the financial channels and grandly announce, “it is a market of stocks, not a stock market.” Broadly speaking, my interpretation is that people who say that mean to emphasize that stock picking is still important. I tend to agree, because someone has to choose among and between stocks. Plus, there are so many index funds these days that advising someone to buy an index fund is pretty meaningless. If everyone simply bought the same index fund, there wouldn’t be much of a stock market left, and different index funds can have vastly different performance. If everyone buys different index funds, that creates the same type of performance differentials between them that individual stocks themselves offer. Ultimately, the whole rationale behind index funds collapses and you get a market of stocks, um, funds again. As the monastery leader in James Hilton’s “Shangri La” said, “moderation in all things.” This week was a good example of the need for such moderation. The herd was moving one way – the broader market was up – but parts of the herd went the other way (down). The biggest part heading lower was being led by a mad cow, and if you had all your calves in that particular group, your family wound up in the prickly bushes. Ultimately, the misled followers will rejoin the main herd, but it’s a painful experience until they do. I think you’ll figure out what I mean by all that by reading on. The Week That Was The market dipped slightly in the middle of the week. Ultimately, though, it surged higher despite some earnings weakness. The move higher was likely due to growing consensus that the Fed will not raise interest rates in the current weak economic environment. The market now has been up for three straight weeks, but the losses of August and September have not been fully recovered. The Nasdaq is up 3.2% this year, but the Dow is down 3.4%, and the S&P 500 is down 1.3%. Transactions I prefer to buy on weakness and the overall market didn’t provide much of that this past week. I did pick up some Target Corporation (NYSE: TGT ) due to its price decline following a terrible Wal-Mart Stores, Inc. (NYSE: WMT ) earnings report. Target is recovering from its Canadian discontinued business charges, but its core operations appear sound. Generation Portfolio to Date Below are the transactions to date in the Generation Portfolio. The Generation Portfolio as of 17 October 2015 Stock Purchase Date Purchase Price Latest Price Change Since Purchase WFC 8/25/2015 $ 51.75 $ 52.88 2.18% DIS 8/25/2015 $ 98.75 $108.16 3.26% BMY 8/25/2015 $ 59.75 $ 64.49 7.93% MFA 8/25/2015 $ 7.05 $ 7.03 0.28% OHI 8/31/2015 $ 33.95 $ 36.28 6.86% CVX 9/02/2015 $ 77.90 $ 91.20 17.19% PG 9/03/2015 $ 69.95 $ 74.90 7.08% CYS 9/04/2015 $ 7.68 $ 7.93 3.26% KO 9/09/2015 $ 38.50 $ 42.02 9.14% MPW 9/10/2015 $ 10.89 $ 11.73 7.71% WMT 9/10/2015 $ 64.40 $ 58.78 (8.56%) VTR 9/10/2015 $ 52.80 57.09 7.90% KMI 9/11/2015 $ 29.95 $ 32.43 7.55% WPC 9/14/2015 $ 56.75 $ 61.46 8.30% T 9/17/2015 $ 32.50 33.78 4.09% VZ 9/17/2015 $ 44.95 44.80 (0.56%) MMM 9/18/2015 $139.90 $148.66 6.29% JPM 9/22/2015 $ 60.89 $ 62.43 2.87% PX 9/23/2015 $101.30 $109.43 8.03% VER 9/25/2015 $ 7.87 $ 8.34 5.97% WMB 9/28/2015 $ 39.48 $ 42.28 7.09% MAIN 9/28/2015 $ 27.47 $ 29.32 6.73% PFE 9/28/2015 $ 32.69 $ 34.41 5.26% TGT 10/16/2015 $ 75.15 $ 75.05 (0.13%) Latest prices and percentages are those supplied by the broker, TD Ameritrade, as of the close on 16 October 2015. A large legacy position in Ford Motor Company (NYSE: F ) and some other small legacy positions are omitted. There currently are 21 positive positions and three negative positions in the Generation Portfolio (I go strictly by the broker’s calculations of gain and loss, as they know best). According to a spreadsheet that I maintain, the Generation Portfolio overall currently is up between 5-6%, just as it was last week. That does not include dividends received to date, and some of the positions may have gone ex-dividend but not yet paid the distributions. Dividends One of the aims of the Generation Portfolio is to generate dividends, hence the name. Some will hit the account this week, but there was no change from last week. Dividends Received To Date Stock Date Received Type VTR 9/30/2015 Ordinary KO 10/01/2015 Qualified CYS 10/14/2015 Ordinary VER 10/15/2015 Ordinary MPW 10/15/2015 Ordinary WPC 10/15/2015 Qualified For now, at least, I am receiving the dividends in cash and will use them opportunistically as they accumulate. Analysis of Holdings While there were many earnings reports delivered during the week, the only one that really rocked the establishment was Wal-Mart’s on Wednesday. In some ways, that one should have been the most foreseeable, but it took everyone by surprise. Wal-Mart is the country’s largest private employer , and giving even a fraction of its workforce a raise will always have consequences for its bottom line. Those consequences did show up in its lowered guidance for the next few fiscal years. Wal-Mart gave no updates to its guidance before earnings to suggest this, which puzzled some analysts. Wal-Mart is the best possible example of why I keep individual positions relatively small and diversify. Since Wal-Mart dragged the entire big box retail sector lower, I decided to take advantage of the lower prices and add some Target. It may not have been at an ideal price, but Target’s issues are completely different than Wal-Mart’s. I had to ignore headlines such as “Wal-Mart’s Disappointing Sales And Earnings Forecasts Spell Doom For The Industry,” but someone has to provide goods to communities across the country. I wrote up an article on my reasons for adding Target here . Aside from Wal-Mart, my personal biggest surprise of the week was how well oil/gas energy stocks held up after their bonanza performance a week ago. Just goes to show how oversold the entire sector was. The REITs also are moving higher, which is gratifying. I’ve spent the past year studying them, and they appear to have stabilized for now. The banks had some difficult moments during the week after Generation Portfolio stock JPMorgan Chase delivered a sketchy earnings report . As I have written elsewhere, my view is that REITs and banks will tend to move in opposite directions . Bank weakness was in part due to the growing belief that the Fed will remain on hold at least until next year; banks want higher interest rates to increase their spreads. However, another factor behind their stability was simply that banks were already oversold and haven’t really recovered like some other sectors since the August sell-off. General Discussion This is the section where I basically just ramble on about what I am seeing in the investing world that might affect my investments. I don’t expect everyone (or anyone) to agree with my perspective, but it is how I see things right now. There is growing saber rattling in the world. Events in Syria are in flux, Putin is on the loose, North Korea is making its usual noises. Defense stocks have been showing some life recently. That also, in my opinion, is why oil stocks have recovered a little ground despite the continuing supply/demand situation; good sectors to be in if things get worse. The key to the next Fed move in my view lies in the next two jobs reports. If those reports are strong, the Fed may gather up its courage and raise rates. In my humble opinion, that would be the wrong move, but they typically don’t ask me. However, I don’t expect strong reports and don’t expect the Fed to raise rates. Taking a more strategic perspective, in my opinion, the next Fed move is completely up in the air now. Everyone assumes that the Fed will raise rates. However, the market has forced treasury yields lower recently, not higher. That is not a good environment for the Fed to raise rates, because they would be fighting the market. That can lead to an inverted yield curve, as in 2004-2006, which can be a precursor to a recession – as in 2004-2006. (click to enlarge) As the chart shows, the 10-year Treasury bond yield has fallen recently. It currently sits at 2.04%. Not only is it down from the heights of the summer, but it is even down slightly from its 2.06% rate at the end of the third quarter just a few weeks ago. I can’t tell you how many times over the past year someone has said to me with great authority that rates are headed higher, and soon. The simple fact is that, at least so far, they’re not trending higher unless you cherry-pick dates. Whenever I see someone state with great confidence that the Fed’s next move must be to raise rates, because everyone says that and we are all supposedly waiting in great trepidation of the great event, I like to pose a simple question: what if the economy weakens further? What does the Fed do then? Raising rates in the teeth of a weakening economy or, knock on wood, a recession would be foolhardy. It’s simply unrealistic at the moment. If the economy does weaken for whatever reason, the Fed doesn’t have a lot of tools left to fulfill its dual mandate of stable prices and full employment. It does have one that it could always resort to again that nobody seems to expect: another round of quantitative easing. Since nobody is talking about it, it can’t happen – right? We shall see. Returning to energy stocks again, I find it amusing that now some folks are starting to question the viability of the entire solar sector. This is one of those hot-button cult areas that invites negative comments whenever I go near it, but I like to provide alternate viewpoints and welcome them in comments. Solar has its place, but it is not quite the end-times panacea its proponents wish. Back in 2014, when I wrote my positive article about Hawaiian Electric – shortly before it rose about 50%, that is – people were predicting the doom of the entire utility sector and lambasting me for questioning the inevitable hegemony of solar and the temerity to recommend a dinosaur utility in a Mesozoic-era industry. Now, strangely enough due to events in Hawaii , that wheel has turned. Go figure. Actionable Ideas l have been watching defense stocks such as LMT and RTN closely, and would add one on a buying opportunity. I also have a couple of more high quality REITs on the radar screen, there still are some good values in the sector. The healthcare sector also still has some opportunities, though the Generation Portfolio has a couple in there already. Still, I’m not averse to over-weighting a defensive sector that is undervalued. I am watching a few other stocks like Honeywell International Inc. (NYSE: HON ), which sold off despite a fairly decent earnings report, and a few other big names. So far, earnings reports for the third quarter have been a touch weak, which fortunately were somewhat expected . The market can handle anything, it just doesn’t like unnecessary surprises (Wal-Mart). We’ll see how the coming week’s earnings go, led by IBM (NYSE: IBM ), Google’s parent Alphabet (NASDAQ: GOOG ), Microsoft (NASDAQ: MSFT ), Boeing (NYSE: BA ), GM (NYSE: GM ) and Caterpillar (NYSE: CAT ). Of particular interest to the Generation Portfolio will be: Verizon Communications on Tuesday before the open; Coca-Cola Company on Wednesday before the open; CYS Investments, Inc. after the close on Wednesday; 3M Company on Thursday before the open; and Procter & Gamble Co. and Ventas, Inc. before the open on Friday. Conclusion It was an upbeat week for the market despite some weak earnings reports from industry bellwethers. A dismal earnings report from Wal-Mart sent it sharply lower and induced sympathy selling in other big box retails. I took the weakness as an opportunity to add some Target stock $10 below its very recent price. Looking ahead, the Fed appears to be on hold for now, which should give some strength to interest-sensitive sectors such as REITs. Overall, the Generation Portfolio had another good week despite the Wal-Mart disaster, and dividends are starting to accumulate.