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Summary Last week provided some good buying opportunities, but they became fewer as the week went along. I used the market volatility to add Disney, Wells Fargo, Bristol-Myers Squibb, and MFA Financial to the Generation Fund. The next two weeks are likely to provide more buying opportunities as the markets strive for clarity from the Fed about the timing of the first rate hike. As I explained at some length in my recent article ” The Generation Portfolio ,” I am managing a portfolio of stocks in which I do not have a personal interest for another party. The goal of the portfolio is to create a low-risk income generating machine populated with a core of Quality Stock plays. I began the portfolio from scratch during the week of 24 August 2015, though it had a large legacy position of Ford Motor Company (NYSE: F ) stock that is untouchable. I will use these updates to show what I have done with the positions and give my general strategy and thoughts on the market. Market Summary The week of 24 August 2015 was volatile. The Friday before, the market sold off heavily, and anxiety built up during the weekend. Monday morning saw a “flash crash” in which stocks and other securities either opened late or opened with unusual drops in price. However, those prices easily were the lows of the entire week. The next several days were extremely volatile, with the market rallying into a status quo Friday. For the week, the market was up slightly, but overall the market remains well off its highs. Long-Range Objective for the Generation Fund I intend to form a hard core of at least 50%-75% Quality Stocks, and around that orbit a number of more speculative REITs and other plays for cash flow. This objective is subject to tweaking. Transactions I was unable to log in first thing Monday morning, like many other traders. Once I got in, the market was too volatile for me to get a good read, so I placed no trades that day. On Tuesday afternoon, the market seemed to be providing some more good opportunities. I placed four limit orders and picked up average-sized positions (as discussed in my previous article) in the following: Wells Fargo (NYSE: WFC ) Disney (NYSE: DIS ) MFA Financial (NYSE: MFA ) Bristol-Myers Squibb Co (NYSE: BMY ) Those positions remain in the account and, including the Ford stock, are the only positions I am tracking here (there also are some other minor legacy positions). Those positions constitute roughly 10% of the entire tradeable funds as of the time of writing, the rest of the Generation Portfolio remains in cash. Analysis of Trades Due to the subsequent market rally on Wednesday and Thursday, all new positions in the Generation Portfolio show a profit. Basically, with few exceptions, the market lifted all boats on those days. This simply illustrates that timing is the most important part of trading, and you don’t need to be much of a stock picker if you can ride the general market waves higher. I placed all the trades on Tuesday, using limit orders. With a few hours left in the trading day I staggered the limit price distance from then-current prices, not expecting to pick up all four unless there was a major sell-off in the final hour of trading. So, one order was roughly .25% below the current price of the stock, the other .50% below, and so forth. Normally, those types of orders would not hit due to lack of volatility. As it turned out, a major sell program hit an hour before the close of trading, and – to my surprise – all four limit orders hit, the final one a limit order I had set a full 1% below the market price at the time, were filled. Reasons for Picking Up Those Stocks Basically, as events subsequently transpired, I could have bought practically anything when I did and the rising market would have turned them into quick winners. I consider BMY, DIS and WFC to be “Quality Stocks” as I have defined that term in my recent article linked above, and all were down substantially from their highs when I placed my limit orders. As for MFA, I recently wrote about that mortgage REIT here . It has been around as long as Annaly (NYSE: NLY ), surviving numerous Fed actions, giving me confidence in its survivability come what may. It also appeared to be heavily oversold on the chart, more so than the other REITs I am interested in. Quality of the Trades Overall, it was a successful week. My intention was to go slower than turned out to be the case in populating the Generation Portfolio, spreading it out over time more with maybe one transaction a week, but the opportunities proved irresistible. As the old military aphorism goes, no plan survives contact with the enemy. Regrets were entirely along the line of missed opportunities. I intended to pick up some Apple (NASDAQ: AAPL ), but never found a comfort zone with it. Most of the huge bargains that some traders were bragging about during the happened only during the first half hour of trading, when I was off-line. Still, I should have grabbed some, and that is the main regret for the week. Overall, only buying 10% of the Generation Portfolio’s tradeable value (less the Ford position) during a week of such bargains may seem like a missed opportunity. Perhaps it was, but I anticipate further volatility ahead, as discussed below. If not, there is nothing wrong with waiting. The Week Ahead The market likely is to be preoccupied throughout the week of 31 August with the August employment numbers that are due out on Friday. The importance of that report was heightened by an interview given on Friday 28 August to CNBC by Fed Vice Chair Stanley Fischer, and other remarks that he made on Saturday . While, as one would expect, Fischer was cagey about the likelihood of a September rate hike, one thing that he said during his CNBC interview stood out. When asked about the importance of data between the time of the interview and the Fed meeting on 15/16 September in influencing a rate hike at that meeting, Fischer said: Well, we’ve got to take data into account. Those are the only things we really have, that and our economic analysis. And if a decision is close, it will be influenced by data that [have] come in recently. Pretty much everybody expects the decision to be “close.” Since the Fed has not made a decision about rates, and Fischer stated that the data leading into the data could be decisive, that puts immense influence on the Friday jobs report. Given that statement by vice chair Fischer, I would not be surprised by some volatility both ahead of the report and immediately after its release. The consensus figure for the September 2015 jobs report is 223k jobs added, up from the 215k figure reported in August. The market easily could interpret anything above 190k jobs added as locking in Fed action. The other major market-moving event in September, aside from the Fed meeting itself, could be the government deadline for raising the debt ceiling. The Congressional Budget Office projects the debt ceiling being hit either in mid-November or December. With several US Senators running for President, Presidential politics could enter the Calculus and cause some posturing that rattles the market as has happened before. One other major factor is the statistical fact that, historically, September is the worst month for stock gains. Combined with volatility overseas in China and other Asian markets, September could provide several buying opportunities. Universe of Stocks Under Consideration The stocks at the top of my list change slightly from week to week: AAPL, MMM, JPM, JNJ, NKE, ABT, UNH, XOM, CVX, PG, PSX, UTX, EMR, PEP, GILD, UNP, RDS.B, KMI, CAT, KO, T, STWD, OXY, COP, KKR, NFLX, WMT, PANW, MO, HD, PBY, EV, SCG, DLR, KSS, BPL, OHI, ETN, PFE, GIS, KMB, CAH, TOL, FCX, CYS, NLY, AGNC. These are stocks that I am most interested in and have performed due diligence on, but market opportunities may present in other stocks as well. Important Upcoming Ex-Dividend Dates 2 September: Baxter International (NYSE: BAX ) PepsiCo, Inc. (NYSE: PEP ) Coca-Cola Enterprises, Inc. (NYSE: CCE ) 9 September: Occidental Petroleum (NYSE: OXY ) 11 September: The Coca-Cola Co. (NYSE: KO ) General Discussion I was caught completely flat-footed by the market break on Monday 24 August 2015. After I finally got into my account, prices were racing higher like a car speeding along without a driver. Charts were taking several minutes to call up, making them useless. Basically, Monday was a lost day for trading, but fortunately there was no harm done. The major lesson of the market during the week was that corporations are watching their stock prices closely for opportunities. The Goldman Sachs buyback desk had its busiest day ever on Wednesday, when the market finally resolved its weakness to the upside. People always talk about a government “plunge protection team,” but the true supporters of the market are companies using cheap credit to buy back their own stock. My sense is that anything related to financials is going to be weak during early September. While some asset classes, such as REITs, appear to have priced in much of a September rate hike, other classes might not have done so yet. When vice chair Fischer said during his CNBC interview that market volatility would play a role in whether the Fed acted, I was surprised. That seems like a screwy rationale for raising or not raising rates. He may have said that just to calm the markets, which seemed to be a major objective of Fed personnel past and present during the week. If the Fed needs market volatility to postpone a rate hike, I’m sure the market would be happy to oblige. The key for the market is the uncertainty about what might happen, not what will actually happen. Fischer eliminated one potential uncertainty when he said that rates would rise in 25 basis point increments, but that was a minor point. At this point, it may be just as important what the Fed says about a second rate hike as whether it does one in September at all. The market hates uncertainty, so my focus this week heading into the all-important jobs number will be on interest-rate sensitive stocks such as banks and REITs. It is more likely than not that a new trading range will develop in the vicinity of current levels. My eye, along with everyone else’s, has been on the energy sector. As usual, the market seized on some transient concern – Saudi Arabian troop movements, a call for an emergency meeting of OPEC – to force shorts to cover. The supply/demand imbalance continues, though, so unless the energy market finds some new worry, the current rally is likely to fizzle. In addition, the Iran deal is a lock, and that will release even more oil into the market, so I am in no rush to add the oil plays I covet, including Exxon (NYSE: XOM ) and Chevron (NYSE: CVX ). The bottom line is that the market has its eye on the Fed, and until that clarifies, the trend into the end of the year will remain unclear. Actionable Ideas I still will be keeping an eye on Apple for any buying opportunities. The REITs such as CYS, NLY and AGNC are buys on dips, as is OHI. Realty Income (NYSE: O ) I would like in the low 40s. PEP will be of interest on a dip into the 80s, where it has support. MMM around 140 would be interesting, as would JP Morgan (NYSE: JPM ) in the low 60s. Looking through the charts, there still are a number of stocks near enough to their peaks that further distribution would not be unusual at all. September definitely is a month to be opportunistic. Conclusion Last week was a successful week of trading, but volatility still looms from multiple sources. Anyone thinking that we are headed straight back to all-time highs is much more bullish than I am. The next two weeks are more likely to be a good time to be opportunistic and grab some plays on dips, especially as the market dates of doom – the jobs report and the Fed meeting – approach. Disclosure: I am/we are long CYS. (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: The positions being discussed are for a portfolio I manage for someone else, not my own holdings. Scalper1 News
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