Tag Archives: outlook

Potential Investment Thoughts – May 2016

This post is about potential investments, but first I wanted to address the topic of passive index investments. We have taken some amusing heat, and received some hilarious comments/emails, surrounding our intention to transition a portion of our portfolio to include a larger percentage of passive index equity investments. (Click this link if you want to read about our proposed portfolio allocation.) First, we were teased by readers who thought we were abandoning our dividend growth investing roots. Dividend growth investing is (and always has been) PART of our portfolio, but it is not our sole methodology. Currently, many companies that fall into this group are so astronomically expensive that I would not buy them with your money. (You read that right, not only wouldn’t we buy them with our capital…. but we wouldn’t buy them with yours.) So should we blindly purchase expensive shares, which in my opinion offer poor future returns, just because we previously bought shares in those companies at grossly lower prices? I think not. We will search for other opportunities that offer better value, and wait for those opportunities to materialize. Then, we got another round of comments/emails when we published an article talking about how we wanted to add a couple of Vanguard index ETFs to the core of our portfolio. What can I say, there are a few advantages to investing through passive index funds… and we would like to capitalize on those. As part of this transition, we looked at our investments and determined which ones had the potential to be our “long term holdings”…. and then began selling off the ones that didn’t make the cut. Which takes us to today, except that we haven’t invested very much of the free capital that resulted. So now we are starting to get comments/emails about why we haven’t redeployed all of that capital into the Vanguard index ETFs we specified. The reason is simple, it’s all about price and value. We see the risk/reward balance of most global equity markets being slanted heavily against us. To put it another way, I feel we would be risking a lot in order to potentially gain a little . There are plenty of indicators that suggest the bull market in equities is already over, and we are not going to risk a large amount of our hard-earned capital in order to potentially gain at best a small return. (I am not going to waste your time recounting those indicators today. We each believe what we choose to believe.) Playing to our advantages listed above, that is our prerogative. Unfortunately, many passive index investors are new to passive index investing… and don’t realize that passive index investments can and do decline in value along with their benchmark index. Plus, there are issues with what exactly you are buying… when you buy a capitalization weighted index fund. I predict this will be a hard lesson for them. (I am also humble enough to recognize that I could be wrong.) It probably won’t be a big deal if they don’t panic and sell… but heaven help them if they do. In summary, we have freed up the majority of the capital we intend to… as a result of culling the individual stock holdings that didn’t meet our “long-term holding” criteria. We have not redeployed much of that capital into passive index investments yet, because of the reasons discussed above. We always strive to recognize the things we can control and the things we can’t. This concept is a large part of while this blog has the name it does. In surfing, you have to wait patiently for the ocean to offer up quality waves… then it’s up to you to do something with them . We can’t control the waves we are offered, only what we do with them. Sounds a little bit like investing, doesn’t it? While valuation/price keeps us from buying passive investment at the moment, we see some pockets of opportunity on the horizon. Below are my personal thoughts: Courtesy of Wikipedia Berkshire Hathaway (NYSE: BRK.A ) (NYSE: BRK.B ) – It feels odd to me, to be considering this well-known behemoth at the moment. That being said, Berkshire’s “old world” businesses have reduced company profits recently and along with them… suffered from reduced investor sentiment. Dampening the outlook for the company, Buffett spent quite a while talking about the headwinds facing both the railroad and insurance industries at the Recent Annual Shareholder Meeting . That being said, Berkshire probably has the management team that is most likely to profit from a severe recession or stock market meltdown. Buffett/Munger have exploited market sell-offs several times in the past, and they have plenty of cash to put to work today. I am not a buyer today, with shares in the low $140 range. At this price, the company offers a trailing price to earnings ratio of 14.3, which is that is well below the broad S&P 500. I expect profits to decline again for 2016, and Buffett all but told us as much at the annual shareholder meeting. We will begin accumulating shares below $125, as I believe this level will provide a satisfactory return over the next 20 years…even when reduced profits in the near term are taken into account. Please note that I do not expect Berkshire to put up annualized returns as high as it has over the past 30 years, but I see this group of companies as a compounding machine whose structure allows management to reinvest earnings in an efficient way for decades to come. Slow, steady, and with fantastic free cash flow Also note, at the start of the year I said as much in Roadmap2Retire’s article on 2016 Investment Picks . Courtesy of NationalWesternLife.com National Western Life Group (NASDAQ: NWLI ) – Regular readers know that we have made several successful deep value swing trades in this company over the past two years. To recap, it is a small insurance company with high insider ownership, no debt, and a history of solid profitability. With a price to earnings ratio below 8 and Shiller price to earnings ratio below 9, we will continue to accumulate shares in this company. We do, however, recognize that given the company’s small market capitalization, share prices may swing wildly over the coming years. We’ll be patient, as always. Unfortunately, none of our long-term holdings are particularly close to levels where I would add to those positions. Wells Fargo (NYSE: WFC ) is probably the closest, but has quite a ways to fall before we start buying again. On the flip side, I see the prices that shares of most utility and consumer staples companies are currently trading… as absolute madness. I continue to believe prices have been bid up over the past few years as a result of bond investors buying these “bond proxies” for steady income. Companies like Procter & Gamble (NYSE: PG ) and Clorox (NYSE: CLX ) do pay a steady dividend… but between high debt levels… high price to earnings ratios… and pitiful earnings/revenues…these shares look particularly dangerous to me. In the coming months, I believe we will get a huge opportunity to invest in emerging markets. We added a few thousand dollars to our holdings in Vanguard’s Emerging Markets Index ETF (NYSEARCA: VWO ) earlier this year at $28.44. I continue to expect the emerging market equities to tumble significantly in the coming months…with the catalyst being currency exchange issues, global slowdown, bond market issues, etc. These are still assets we want to accumulate, and I expect their returns to be significant over the next 15 or 20 years. Courtesy of Wikipedia I am going to go out on another limb here, and talk for a second about real estate investment trusts. We hold a few shares of Vanguard’s REIT Index (NYSEARCA: VNQ ). We have no intention of adding to these shares in the near term. I am starting to see ominous headwinds developing for this asset class, however. While the last real estate crisis was spurred by single family homes, I believe the next one will be the result of two other subgroups. Commercial retail properties and apartment properties. In our part of west central Florida, there has been an apartment building boom for the last 6 years. The narrative went that all those apartments would be filled by all the people who were foreclosed on. Their credit was too poor or they were too scared to buy a home again…so they would rent. Fast forward a few years, and this narrative has overshot as these things often do. Cheap lending and reduced land prices allowed these projects to get off the ground…and they are still being built…but vacancy rates are falling as the finished apartment units are coming online. I suspect rents in my area will begin to contract, which will be the last indicator that some of these projects will default on their debt. I believe the other issue will come in the form of retail commercial properties. It’s been well documented, since at least the mid-1990s, that the United States has more “bricks and mortar” retail properties than any other nation in the world. Over the last few years, we have also seen two huge retail trends. 1) Consumers are spending less money than they used to, and 2) When consumers are shopping… a higher percentage of those sales are taking place online. Americans love their retail, I know it… believe me. I worked as a commercial developer in Florida for a couple of years, and represented developers in Florida for another 8 years. Low interest rates and banks being desperate to lend out their capital has allowed a massive building boom. I’m not saying all American retail is doomed, but there are a lot of lower quality locations out there… which have barely been hanging on. I expect them, maybe 25% or 30% of the total aggregate, to give up the ghost over the next 5 years. If you need a data point to indicate that bricks and mortar retailers are suffering, look no further than their terrible earnings over the last couple of quarters. Please take my thoughts with a grain of salt. All real estate is local, but I noticed similar trends all across the country on our recent (nearly) 10-Week Roadtrip . Some areas like Denver, Colorado, have such an influx of residents that I’m sure they can absorb the new capacity. Many other areas (like our part of Florida or Central Indiana) are in for some pain. Where are you finding value in equity and fixed income markets, currently? What trends do you see developing? Disclosure: We are long WFC, NWLI, VWO. This article is for informational purposes only and should not be considered a recommendation for anyone to buy, sell, or hold any equities. Please do your own research. I am not a financial professional. The information above is provided by Yahoo Finance and Morningstar.com.

Hitting A Home Run With Our SPY Put Spread

We have another home run here, a 13.02% profit in only 6 trading days. Friday the 13th seems as good a day as any to take a profit. Also, we are realizing 87.17%of the maximum potential profit in the S&P 500 SPDR’s (NYSEARCA: SPY ) May , 2016 $210-$213 in-the-money vertical bear put spread. In the highly unlikely event that we have a major rally in stocks next week, we now have new dry powder to play with, having cut our net short position in the from 40% to 20%. If you have the ProShares Short S&P 500 Short Fund ETF (NYSEARCA: SH ) (click here for the prospectus here ), or the ProShares Ultra Short S&P 500 Short Fund 2X ETF (NYSEARCA: SDS ) (click here for the prospectus here ), keep them. We are going lower. This trade takes our performance up to a blockbuster 10.37% so far in May, and 11.58% since the beginning of 2016. These are numbers almost anyone would kill for. I never bought this week’s rally in the Dow Average for two seconds. No volume, no news, and no cross asset class confirmations meant it was not to be believed. It was just another opportunity for the high frequency traders to pick the pockets of hedge funds by squeezing them out of their shorts, which they have been doing on a weekly basis all year. That conviction allowed me to hang on to my aggressive 40% net short position, until now. This takes my Trade Alert performance to a new all time high of over 203.26%. Better yet, WE ARE POISED TO MAKE AS MUCH AS A 14% PROFIT BY THE END OF NEXT WEEK WITH OUR REMAINING POSITIONS! To remind you of why we are short the S&P 500 in a major way, let me refresh your memories. It’s all about the strong dollar. A robust buck diminishes the foreign earnings of the big American multinationals, major components of the S&P 500. I think it is much more likely that stocks grind down in coming weeks to first retest the unchanged on 2016 level at $2,043, and then the 200-day moving average at $2,012. Share prices are anything but inspirational here. Price earnings multiples are at all time highs at 19X. The calendar is hugely negative. Soggy and heavily financially engineered Q1 earnings reports came and went. Huge hedge fund shorts have been covered with large losses, and no one is in a rush to jump back into the short side. Oh, and the is bumping up against granite like two year resistance at $2014 that will take months to break through in the best case. Did I mention that US equity mutual funds have been net sellers of stock since 2014? This position is also a hedge against what I call “The Dreaded Flat Line of Death” Scenario. This is where the market doesn’t move at all over a prolonged period of time and no one makes any money at all, except us. If I am right on all of this May will come in as the most profitable month for the Mad Hedge Fund Trader Trade Alert Service in more than a year. For new subscribers, your timing is perfect! To see how to enter this trade in your online platform, please look at the order ticket below, which I pulled off of optionshouse . The best execution can be had by placing your bid for the entire spread in the middle market and waiting for the market to come to you. The difference between the bid and the offer on these deep in-the-money spread trades can be enormous. Don’t execute the legs individually or you will end up losing much of your profit. Spread pricing can be very volatile on expiration months farther out. Here are the specific trades you need to execute this position: Sell 37 May, 2016 $213 puts at………….….……$8.40 Buy to cover short 37 May, 2016 $210 puts at…..$5.45 Net Cost:…………………………………………………..$2.95 Potential Profit: $2.95 – $2.61 = $0.34 (37 X 100 X $0.34) = $1,258 or 13.02% profit in 6 trading days. Time for Some Downside Protection Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

When You Exit The Stock Market, Don’t Let The Door Hit You On Your Way Out

You cannot make this stuff up. The median stock in the S&P 500 has never been more overvalued on price-to-earnings growth (PEG) and price-to-sales (P/S). On a forward price-to-earnings (P/E) basis – where profitability expectations already reflect pie-in-the-sky speculation – the median company’s shares trade in the 96th percentile. That’s pretty darn pricey! Credit Goldman Sachs for the assessment. For that matter, give the financial conglomerate kudos for acknowledging the strong possibility that one might be wise to “sell in May” after all. Hedge fund legend Stanley Druckenmiller , who spoke at an investment conference in New York last week, forcibly advised exiting stocks as well. One of his reasons? The stock market in 1982 versus the stock market in 2016. He said, It is hard to avoid the comparison with 1982 when the market sold for 7-times depressed earnings with dozens of rate cuts and productivity rising going forward vs. 18-times inflated earnings, productivity declining and no further ammo on interest rates. Granted, overpriced stocks cannot and will not tell anyone the near-term direction of the market. What’s more, ultra-low borrowing costs a la zero percent interest rate policy largely drove risk assets like stocks to unbelievable extremes. On the other hand, front-loading investment returns over the past seven years has pilfered the potential gains one might have anticipated over the next seven years. The Federal Reserve’s own Richard Fisher confirmed the central bank’s front-loading endeavors back in January. Consider an analysis by Steve Sjuggerud. He analyzed data going back to 1870 with respect to what happened to annualized returns after seven incredible years like the current bull market. The anticipated gains over the next one, three, five and seven years were not particularly promising. In essence, the past’s remarkable returns confiscated the prospects for the future. In contrast, the worst decile rank for seven-year periods served up enhanced annualized gains going forward. Are these results surprising? Not really. It tells investors what they should already know; that is, the rewards for holding stocks at higher elevations are dismal, whereas the rewards for acquiring stocks at lower elevations are admirable. Virtually everyone who has ever looked at the relationship between high valuations and future returns understands that higher prices today imply lower future outcomes (and vice versa). Quantitative easing (QE), zero percent rate policy (ZIRP), negative rate policy (NIRP) did not alter the long-standing relationship; rather, central bank shenanigans pulled the gains from the future into the present, while decimating the hold-n-hope possibilities for the future. If I readily acknowledge that valuations alone do not predict the near-term and that stocks could “grind higher,” why have I been so adamant about maintaining a lower risk equity profile over the last 12 months? Weakness in the global economy, deterioration in market internals (including credit spreads) and the Fed’s directional shift since QE ended (December 18, 2014) have combined to create a toxic brew for “risk on” asset performance. Is it true that riskier stock assets have bounced back from two corrective beatings? In August-September of 2015 and again in January-February of 2016? Yes. Still, the percentages do not lie. Less risky asset types are clearly outperforming riskier ones… and that does not happen in powerful bull market uptrends. We should also be cognizant of the reason(s) for risky asset recovery. Is it because there has been widespread buyer demand from “mom-n-pop” retail investors, institutional advisers, pensions, mutual fund managers and/or hedge funds? On the contrary. Each of these groups have been “net sellers” for 16 consecutive weeks. Corporations are the only net buyers of their own shares and they remain the biggest source of stock demand. However, that dynamic may be changing. Corporations have started to slash spending due to revenue and profit weakness. Not only did the number of firms that cut dividends reach a seven-year high, but according to Bloomberg, corporate buybacks are set to fall below $600 billion for the first time in three years. Get a gander at the table below that shows the possibility of a slowdown based on announced buybacks over the first four months. Click to enlarge In earlier commentary, prior to the available buyback data from Bloomberg, I suggested that corporations would be incapable of perpetually spending 100% of free cash flow after dividends to artificially support share prices. The practice of ignoring capital expenditures has almost certainly hindered business growth for years to come. Take a look at the chart on corporate borrowing below. Corporations spent the majority of borrowed money on buying or maintaining land, buildings, and equipment in the 90s. Today? Most of the debt was spent on non-productive financial engineering. In other words, not only did corporations double their total debt levels since the Great Recession ended, but they barely spent any of that debt on anything other than stock buybacks or acquisitions. Click to enlarge Let’s review. Valuations sit at historic extremes. “Risk-off” has outperformed “risk-on” for an entire year. Buybacks have been remarkably influential in propping up the benchmarks, but may be less likely to do so for the remainder of 2016. Factor in global economic weakness that is showing little signs of turnaround as well as election uncertainty, and it is easy to see why preservation may be more critical than appreciation pursuits. I do not advocate getting out of stock assets completely. A tactical asset allocation shift that lowers one’s risk exposure is typically more beneficial than an “all-in” or “all-out” approach. That said, if you have not reduced your exposure yet, you might want to do so now. Otherwise, there’s a good chance the stock market door will hit you on the backside when you eventually scamper for cover. Click here for Gary’s latest podcast. Disclosure: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc, and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert web site. ETF Expert content is created independently of any advertising relationships.