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Summary The Generation Portfolio is an account I manage to which I began adding stock positions in late August 2015. During this past week, I added positions in W.P. Carey, AT&T, Verizon And 3M Company. Looking ahead, it appears as if the volatility in the market will remain for the time being due to continued Fed reluctance to normalize interest rates and global economic issues. Background The Generation Portfolio is an account that I manage for others. I discuss its genesis here . I provide weekly updates, such as here , here and here . Previous to my involvement, it was an accumulation of random stocks built up over decades which had no underlying theme, many now worthless. I liquidated (with a few exceptions) those positions in the spring of 2015, and then began adding positions to the Generation Portfolio again in late August 2015. I manage the account for no compensation, but the experience has been very personally rewarding and it does give me something to write about. My hope is that this series will serve several purposes: It will illustrate the implementation of a true “buy on weakness” strategy in close to real time; It may provide some ideas for other investors, who are searching for a strategy or investments of their own and can learn from my successes and failures; Show in deed and not just in word that it pays off to buy Quality Stocks (as I defined that term) on weakness. It is easy to talk a good game about buying on weakness or buying “value” or buying whatever stock serves today’s agenda, mouthing empty words without consequence. That pretty much sums up the story of stock “analysis” on the Internet, and I have been reading about stocks online since 1994. However, my experience is that you usually only hear about great buys made by others long after they turned out well. So-so buys tend to not get mentioned so much, and ones that don’t work out well at all go straight down the Memory Hole from George Orwell’s “1984.” It is an old, old story that essentially never changes except among a very small group of transparent analysts. For better or worse, there is going to be strict accountability in this ongoing series. This series is going to show a specific value/income strategy as it evolves over time, examining both the winners and the losers. I hope it will prove useful to others considering similar strategies in the future. Of course, everyone must do their own due diligence and tailor their purchases and sales to their own goals, outlook and ever-changing market conditions. Previous Purchases During the week of 24 August 2015, I added the following positions: Wells Fargo (NYSE: WFC ); Disney (NYSE: DIS ); Bristol-Myers Squibb (NYSE: BMY ); MFA Financial (NYSE: MFA ). During the week of 31 August 2015, I added the following positions: Omega Healthcare (NYSE: OHI ); Chevron (NYSE: CVX ); Procter & Gamble (NYSE: PG ); CYS Investments (NYSE: CYS ). During the week of 7 September 2015, I added the following positions: Coca-Cola (NYSE: KO ); Medical Properties (NYSE: MPW ); Wal-Mart (NYSE: WMT ); Ventas (NYSE: VTR ); Kinder Morgan (NYSE: KMI ). Entering this week, and excluding legacy positions that I retained but did not initiate, the Generation Portfolio had 13 positions comprising about 26% of available trading funds. Summary of the Past Week The market volatility that began in August 2015 continued, providing some nice buying opportunities in Quality Stocks. As expected, the market was transfixed by the Fed meeting that concluded on 17 September 2015. The major averages rose into the meeting, had a brief but sharp spike higher after the Fed announced no change in policy, and then fell back to conclude the week essentially unchanged. General Strategy During the period of market turbulence that began in late August 2015, after keeping the Generation Portfolio 100% in cash for about six months, I finally began adding positions. I decided to use individual stocks and not just rely on index funds for reasons (among others) that I explained here . The focus of the Generation Portfolio is to provide stability while generating steady income, which to the extent possible will be used to add other positions, pay taxes and so forth. As I discussed in a previous article, I side with those who prefer wide diversification, both between sectors and within them. I would rather own smaller positions of two leaders in a sector rather than just place all of my hopes on just “the” leader. Accordingly, the Generation Portfolio is shaping up to have dozens of positions, each with a projected weighting of 2-3%. I believe in the importance of cash flow, so the overwhelming majority of positions will pay good dividends. I like the tax advantages and strong cash flow of REITs, so they will form a substantial subset of the Generation Portfolio. I have no problem at all about investing in to companies with similar risk profiles. It’s all about tactics, and bad tactics can ruin the best strategy. Most Recent Purchases During the week of 14 September 2015, I added the following positions: W.P. Carey, Inc. (NYSE: WPC ); AT&T Inc. (NYSE: T ); Verizon Communications (NYSE: VZ ); 3M Company (NYSE: MMM ). The Portfolio as it Stands Now Below is how the Generation Portfolio stands now. The Generation Portfolio as of 19 September 2015 Stock Purchase Date Purchase Price Recent Price Change since Purchase WFC 8/25/2015 51.75 51.06 (1.37%) DIS 8/25/2015 98.75 102.80 4.14% BMY 8/25/2015 59.75 65.99 8.03% MFA 8/25/2015 7.05 7.17 1.70% OHI 8/31/2015 33.95 33.93 2.36% CVX 9/02/2015 77.90 77.70 (0.21%) PG 9/03/2015 69.95 70.04 (0.01%) CYS 9/04/2015 7.68 7.51 (2.21%) KO 9/09/2015 38.50 39.01 1.25% MPW 9/10/2015 10.89 11.28 3.58% WMT 9/10/2015 64.40 63.40 (1.65%) VTR 9/10/2015 52.80 56.15 6.34% KMI 9/11/2015 29.95 30.64 1.67% WPC 9/15/2015 56.75 59.16 4.37% T 9/17/2015 32.50 32.50 0.15% VZ 9/17/2015 44.95 44.57 (0.85%) MMM 9/18/2015 139.90 140.29 (0.20%) Recent Prices are those supplied by my broker as of the close on 9/18/2015. A large legacy position in Ford Motor Company is omitted. Percentage changes since purchase are those supplied by my broker. There was a point on Thursday afternoon, immediately after the Fed meeting, when pretty much every single position was showing a profit. I should have taken a picture, because that isn’t likely to happen again any time soon. The percentage changes, supplied by the broker, conflict sometimes with the “last” prices it supplies. For instance, according to the last prices, PG and MMM should show a slight profit since purchase, and T should show as being flat. However, brokers have their ways, and the difference is probably accounted for by after-hours transactions. I am just going with what the broker (TD Ameritrade) reports, for better or worse. The percentage changes also do not account for stocks that have gone ex-dividend. CYS, for instance, went ex during the week, so it shows as a loss. However, when adding back in the dividend, it actually is one of the winners in the Generation Portfolio. Coke, of course, also went ex last week. As time goes by, I will begin accounting for dividends as they are received. With the four purchases made this week, the seventeen positions (less the legacy positions, which are not included in any calculations), based on initial purchase value and not subsequent price movements, now occupy 37.4% of the available trading funds. The position sizes are not all equal, as like most humans I prefer to trade in even lots, but they are of roughly equivalent total values. Analysis of Holdings While it may not appear like it from a quick glance at the table of holdings, it was a good week for the Generation Portfolio. Several positions went up by significant percentages, while the laggards had minimal losses. I went into the Fed meeting expecting no raise in rates, for the reasons set forth in some detail in my recent article “The September Jobs Report Does Not Support A Fed Rate Hike.” As can be seen from the holdings in the Generation Portfolio, it is heavily weighted toward REITs (CYS, OHI, VTR, WPC, MFA, MPW) that tend to benefit in the investing community’s view from lower rates. I even added the W.P. Carey position right before the Fed meeting based on that expectation. Banks can be expected to react poorly to lower rates, and the only such holding is Wells Fargo, which I think is a good value regardless of Fed action. The market, apparently, was leaning the other way, and the Fed non-action took it by surprise. The net effect on the Generation Portfolio was very positive. All of the REITs shot up in value, while the other holdings declined but held their values fairly well. It was amusing watching companies announce their upcoming dividends after the Fed announcement. It appeared that managers did not want to commit themselves until the Fed was out of the way, sort of like the two alternate newspaper headlines in ” Citizen Kane ” depending on whether Kane won or lost his election. W.P. Carey increased its dividend slightly on Thursday, and every little bit helps. The other major star of the week was Bristol-Myers Squibb. BMY rose from under 60 to almost 66, which for a sleepy pharmaceutical is spectacular. The reason appeared to be speculation about a takeover. Guy Adami on CNBC’s “Fast Money” show has been dropping hints about BMY all week. I did not buy BMY as a takeover play, but would be happy to go along for the ride. General Discussion To echo a recent popular tune, it’s all about the interest rates, the interest rates, the interest rates. As I noted in my article about the jobs report, global effects simply cannot be ignored these days. There are very practical reasons for this which the Fed – quite wisely – has begun giving significant weight. The common refrain from bond traders is that interest rates are too low. In fact, they are too high. (click to enlarge) Source: CYS Investments Form 8-K filing for presentation at Barclays financial services conference on the morning of 17 September 2015. While interest rates are at historically low levels for US markets, in fact they are much higher than in other major economies. I discussed the factors affecting Fed policy in some detail in my February 2015 article “The Case for REITS in 2015” and a follow-up in July 2015. To summarize, having US rates out of alignment with global interest rates would hurt US exports by strengthening the US Dollar. With an iffy job market as I discussed in my article on the September jobs report, and no inflation, raising rates could not only not help the economy, it could damage it severely. Simply put, the US no longer dominates the global economy as it once did when other nations had been destroyed by World War II. That decline has accelerated in recent years. The US can no longer simply set its own rules and expect the rest of the world to adjust accordingly. Listening to Fed Chair Janet Yellen’s speech, she emphasized repeatedly that global economic developments and the absence of inflation were the prime factors behind the Fed not raising interest rates. She also said that, ceteris paribus (economist-speak for “all else being equal”), the Fed would need evidence of improvement in the labor market before it would take any action. As I discussed in relation to the September jobs report, not only is the labor market not improving as much as some appear to think, in fact job growth has declined in recent months. It is hard to see how conditions overseas that prevented a Fed hike in September are going to mysteriously clear up by December. It also is difficult to predict that conditions in the labor market will improve significantly in that time. To be fair, inflation may appear to pick up in coming months as the dramatic declines in energy prices of late 2014 roll off the annual price increase measures. However, the Fed is smart enough not to rely on such obvious statistical artifacts in making long-term, forward-looking policy. Chair Yellen said that the Fed does not expect inflation to hits its 2% target until 2018, which implies that there will be no need for a rate hike any time soon, and certainly not in the near term. There is a conundrum here, as Janet Yellen’s stated reasons for no hike in September conflict with her abstract comments that the Fed Board of Governors still expects to raise in 2015. You cannot expect a short-term reversal of long-term trends such as global deflation. In other words, the uncertainty continues. I play it as it lays, to use a golfing term. The Fed, despite all “moral suasion” to the contrary, is in no hurry to raise rates. Whether or not I agree with that is irrelevant, but I will point out that uncertainty about rates leads to mis-allocation of capital. It would be better for the economy if the Fed either set some kind of firm data requirement for it to take action (“when the CPI tops .3% for three months in a row” or something along those lines), or stopped its members and Chair from implying that it might raise rates under some ambiguous and nebulous “analysis” of its own devise. However, it is possible to make a judgment based on what the Fed has done instead of said. Unless there are significant improvements in the stream of economic data that the US government releases in coming months, and that places like China release as well, I expect no rate hike in 2015. Put me down firmly in the 2016 camp. One other consideration is the status of the current business cycle. The economy is chugging along, slowly but steadily. The current expansion, as the White House likes to note , now has hit 66 months (omitting the quarter of negative GDP growth in early 2014). This is far longer than the post-war average of 58 months. If you go back further in time, the length of the current expansion appears out of alignment with historical precedent. One can make the argument that modern economic policy has lengthened the business cycle, that specific policies can stretch out the length of an expansion at the cost of its strength, and that the sharp recession of 2008-2009 laid the foundation for an especially prolonged period of growth. However, at some point the economy will experience weakness again, and the market will start noticing. Thus, I will remain very conservative in my stock choices for the time being and avoid growth stocks that pay no dividends. Stocks Under Consideration This is a general list of the stocks I am considering. While I also watch other stocks and am opportunistic, these should give some idea of what is near the top of the list. Many of my previous buys have come straight off this list. (NYSE: ABT ), (NASDAQ: AGNC ), (NYSE: BPL ), (NYSE: CAH ), (NYSE: CAT ), (NYSE: CL ), (NYSE: COP ), (NYSE: CSX ), (NYSE: CY ), (NYSE: DE ), (NYSE: DLR ), (NYSE: EV ), (NYSE: EMR ), (NYSE: FCX ), (NYSE: GE ), (NASDAQ: GILD ), (NYSE: GIS ), (NYSE: GS ), (NYSE: HD ), (NYSE: HON ), (NYSE: JNJ ), (NYSE: JPM ), (NYSE: KKR ), (NYSE: KMB ), (NYSE: LMT ), (NYSE: MAIN ), (NYSE: MO ), (NYSE: MS ), (NASDAQ: NFLX ), (NYSE: NKE ), (NYSE: NNN ), (NYSE: NSC ), (NYSE: O ), (NYSE: OXY ), (NYSE: PANW ), (NYSE: PBY ), (NYSE: PEP ), (NYSE: PFE ), (NYSE: PM ), (NYSE: PSX ), (NYSE: RDS.B ), (NYSE: RTN ), (NYSE: SCG ), (NYSE: STAG ), (NYSE: KSS ), (NYSE: SDRL ), (NYSE: STWD ), (NYSE: TOL ), (NYSE: UNH ),(NYSE: UNP ), (NYSE: UTX ), (NYSE:), (NYSE: XOM ). Actionable Ideas Given my judgment that the Fed will keep rates low for the foreseeable future, I will continue to emphasize rate-sensitive stocks such as REITs in the Generation Portfolio. However, banks sold off hard after the Fed announcement because investors perceive them as being the beneficiaries of higher rates, so there may be opportunities in stocks such as GS, JPM and MS after the market fully digests the Fed decision. In addition, general market weakness may provide some opportunities in stocks like GIS and CL. Energy stocks remain at the top of the list due to their astounding sell-off over the past year. Earnings season now is just around the corner, and the prospect of a government shut-down looms, so the market volatility should continue and provide good stock-picking openings. Conclusion As expected, the Fed did not raise interest rates in September 2015 due to global economic issues and the lack of domestic inflation. Those issues do not appear likely to evaporate any time soon. Following a preference for rate-sensitive REITs has paid off for the Generation Portfolio, and there is no need to alter that strategy. However, opportunities in the banking and related fields may present themselves in coming days and weeks as the market digests the lack of Fed action. With earnings season coming up, it is a good time to review lists of candidates for addition to the portfolio and plan accordingly. Disclosure: I am/we are long CYS, MPW, WMT. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Additional disclosure: While I personally only own the stocks listed in the disclosure, the Generation Portfolio which I manage owns all the stocks indicated as such in the article. Scalper1 News
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