Proprietary investment strategy
401 Advisor, LLC specializes in building client portfolios using dividend paying stocks due to their long term history of providing superior returns over non dividend payers. I recently contributed to an article posted by U S News on their web site. The article highlights warning signs that a stock may be cutting their dividend in the future.
I recently had a conversation with a client about the strategy for his account in 2015. He indicated that since the market is at an all time high, he expects the market to crash by the end of summer as the Fed raises interest rates. And he would like to adjust his holdings accordingly.
Many of you are probably nodding your head in agreement with this sentiment.
However, please let me remind everyone, that if it was that simple and obvious to predict the economy, let alone the market with that much accuracy there would be many more rich people walking around than there are today! The only thing that is certain, is that what seems “certain” rarely is!
Case in point is a part of an email I received from Fuller Treacy Money, their comment of the day. For those who want the short version it is this: the article sites two economists from Harvard. They are very well known and respected economists. They have nearly opposite opinions.
The point I hope is obvious, if such esteemed economists with the same background, see the world so differently, how can any of us, without the resources and time to study these things as professionals do, be so sure that our opinions will be the ones that in fact pan out in the year ahead?
We just don’t know what the future holds and the best investment strategy is to listen to what the market tells us as we go along, use tried and true investment strategies, and always be aware…and have a strategy…for when things do change!
Below is the piece from Fuller Treacy.
A standing-room only crowd packed a hotel ballroom on Jan. 3 to hear…Professors Lawrence Summers of Harvard University and Robert Gordon of Northwestern University in Evanston, Illinois, defend their views.
“Just because we have 5 percent growth doesn’t mean we are out of the woods,” Summers, a former Treasury secretary and senior White House official, told the American Economic Association meeting in Boston, alluding to the U.S. economy’s pace of expansion in the third quarter.
He rattled off a variety of reasons for caution. Among them: the risk of financial bubbles, the difficulties the Federal Reserve may face in raising interest rates back to more normal levels, and continued excess capacity in Japan and Europe.
Summers also compared the euro area’s situation today with that of Japan in the late 1990s, before it slipped into a deflationary funk, and warned that the U.S. could be in for an extended period of a “dismal growth rate below 1-1/2 percent.”
Fellow Harvard professor Greg Mankiw took issue with that gloomy prognosis as far as the U.S. is concerned. In particular, he highlighted the improving labor market, where unemployment is at a six-year low and wages have begun to rise.
“We are returning to normalcy,” said Mankiw, who is also chairman of the economics department at Harvard in Cambridge, Massachusetts and a former chief White House economist.
One of our more popular holdings, McDonald’s (MCD) has come under a bit of pressure lately – both in the media and on Wall Street. After reaching a high near $102 a share in May of this year the stock price has dropped to below $90 a share in October. The media has pounded their menu saying that the younger millennials are avoiding MCD for healthier alternatives. And yet I’ve doggedly held their stock in many client accounts.
While the jury is still out, we are starting to see the reasons for holding and our continued purchase of MCD. First, MCD is held in our Dividend and Growth strategy accounts. Their dividend has been above 3% even at its peak price. More importantly the dividend has been increased for 38 consecutive years and in this area MCD did not disappoint – they announced a 5% dividend increase payable to shareholders at the end of November. This brings their current yield to 3.59% as of market price on 11/6/2014 and annualizing the dividend.
Part II of my thesis is that McDonalds is still a cherry job for anyone in advertising. Their contract has to be one of the largest in the advertising world. Money buys the best and the brightest. MCD will find a way to come back into the good graces of the fast food consuming public. Survey’s are already showing some in roads from campaigns such as this social media campaign that coincides with the relaunch of the McRib sandwich.
MCD is a great example of an investing concept I will come back to in future posts: the difference between buying a company and buying a stock. Stock buyers look for price appreciation in the near term. The media is created for stock traders. Investors like the Warren Buffets of the world buy companies. Companies generate cash flow that is unaffected by stock price that allows them toraise dividends by 5% even when their stock price slides by 12%.
While I’m not happy with the stock, I am happy owning the company, mainly because they pay my clients a 3.59% dividend while we wait for their stock to turn around. And next year we will likely get another raise.
The stock market has had a five week “correction” followed by a one week recovery – that recouped 70% of the corrections losses. While sentiment has seemingly shifted from an extreme doom and gloom outlook over the past few weeks, statistically the stock market retests its lows about 67% of the time. Meaning we will likely give up this week’s gains.
aWhile I remain cautious, we did buy a couple of holdings for our portfolios this week. Notably P&G for our dividend strategies. P&G is THE dividend aristocrat based on its history of paying a dividend every year since the mid 1890’s (that’s not a typo!). P&G just hasn’t been cheap enough to meet my criteria. Yesterday I gave in and took a position across our dividend portfolios. P&G released earnings this morning and we were rewarded with a 3% gain in early morning trading.
Our growth portfolios are also seeing changes. We will focus more on individual stocks as we rotate into the “Buy in October” seasonal strategy.
I’ve also added an article on the bond market that was published yesterday at horsesmouth.com. The main takeaways are 1. While the stock market can’t decide if the economy is too strong (meaning the Fed will start raising interest rates) or too cool (economy drops to recessionary levels) the bond market seems pretty convinced that the economy will continue in the “just about right” pace. And 2. Even if the Fed raises short term rates, longer term rates aren’t likely to keep pace. While the economy is growing it is too soft to support a sharp rise in long term interest rates. While Fed action could spark a recession it is likey 4- 5 years out. My caveat to that is Europe. Major European bank failures will roil our market and economy. PDF: Horsesmouth _ Bonds
The take away is this. Many advisors are recommending clients move into short term bonds as a defensive move against rising rates. However, the bond market is telling us that intermediate bonds – in the 8 – 10 year maturity range may actually be affected less if the Fed starts to raise short term rates.
Here is an article that posted on www.horsesmouth.com today.
One advantage technical analysis has over fundamental analysis is that it should take the emotion out of investment decisions. Graphs and charts don’t lie, they are what they are. And what they are now is pretty darn ugly. For a full review read the entire article can be downloaded: Spooked Markets.
The short summary is that we have been selling our more aggressive holdings for a month now. We will be moving all 401(k)’s 50% into a cash position, raising another 20% cash in our Growth” strategy and will likely look to hedge our Dividend strategies with a “short” ETF.
For sometime now we have remained fully invested, but very nervous. Starting in mid-September, I have been cutting back on our risk exposure. Our Seasonal Growth model has been in more conservative (lower beta) equities since May. In addition we are now about 25% in cash as well. For our Dividend portfolios I started moving out of some of our more cyclical stocks in September as well. While we may look fully invested, the Toews High Yield Fund is currently 100% in cash. Additionally I continually look at our holdings and am only looking to buy stocks that are particulary cheap.
For those that enjoyed this week’s red moon/lunar eclipse, you might (or might not) enjoy this bit of stock market history from thedailypfennig.com:
“As it happens, we find ourselves smack in the middle of an astronomical/market phenomenon known as a “Puetz window.” In the early 1990s, researcher Steve Puetz looked into eight epic market crashes — starting with Holland’s tulip mania of the 17th century, ending with Japan’s meltdown in 1990 and including the U.S. crashes of 1929 and 1987.
Turns out every one of them took place within a few days of a full moon/lunar eclipse. And each time, that lunar eclipse took place within six weeks of a solar eclipse. (We’ll spare you the suspense: A solar eclipse is
coming up on Oct. 23.)
Puetz ran the numbers and concluded the odds of these circumstances being sheer coincidence were 127,000-to-1.
We leave it to others to debate the validity of the “Puetz window” as a useful forecasting tool. We’ll note here the current one continues through the end of the week. We’ll note further that while epic crashes tend to occur during Puetz windows, not every Puetz window results in a crash.
The next Puetz window, you wonder? Early next April. About six months from now.”
(photo from nasa.gov)
While the markets have shown some recent volatility, the one thing we can count on is our dividends and dividend increases. One of our popular holdings, Microsoft (MSFT) announced a dividend increase yesterday. Their quarterly payment has been upped from $.28 to $.31 giving investors an 11% raise in their income. When is the last time you received an 11% raise?
For more information on how to have a life long stream of rising income schedule a free portfolio analysis today!
Here is a link to an article, Biotechnology ETFs Show Rebust Health In August I was quoted in posted at investors.com – the online publication of The Investor’s Business Daily (IBD). Short article focusing on two of the hottest market sectors, biotech and solar/green energy. My take is that it is mainly a consequence of a “risk on” market attitude that comes from global central banks jointly adding money into their respective economies. “Don’t fight the Fed” is particularly appropriate when multiple Fed’s are all pursuing the same easy money policy. Especially now that the ECB has decided to join the party.
Below is an excerpt from our Monday report from Sterne Agee, (emphasis added):
“Fed Chair Janet Yellen gave a balanced assessment of the labor market in her keynote speech at Jackson Hole last week, according to Standard and Poor’s Economics. She said there is no “simple recipe for appropriate policy.” She indicated that the economy is improving and that the FOMC now is questioning the degree of slack, and repeated that faster progress toward the employment and inflation goals could speed up rate hikes. She also reminded us that if progress is disappointing, then the accommodative stance could remain intact longer. In other words, the Fed remains data dependent.
What does all this mean for the timing of the exit from zero interest rates? We still think it is likely to come sometime in the second quarter of 2015.
During the next round of rate increases, investors appear to be fairly confident that equity prices will hold up, theorizing that an improving economy…should help support, if not boost, share prices. In addition, they point to two prior Fed tightening periods in which the S&P 500 held up remarkably well.”
Now let me translate. The consensus amongst Wall Streeters is that rates will increase in the second quarter of next year. This is a case where perception is far more important than reality as this could change if the economy progresses or regresses at a faster pace than anticipated. So “Data dependant” means that moderately bad economic news – the economy is growing, but at a slower pace than expected, will continue to be good news for the market as that would lessen the odds of a near term rate increase. But really bad news, as in recessionary news, or really good news (faster economy = faster rate increases) will be bad news for the stock market. In other words, we are in the bad news is good news market cycle.
Without extreme news, expect a continuation of the stock market rally from here into the end of the first quarter of 2015. The key to a rally continuation will come from first quarter 2015 earnings results. The question will be if an accelerating economy and theoretically rising sales can offset rising pressure on wages and rising costs from interest expenses.
401 Advisor, LLC’s position in our Dividend Income Plus strategy is currently 100% invested, with a rotation to what we deem to be higher quality issues. While the media focus is on the middle east and domestic turmoil, the real issues are Europe’s economy heading to recession, and China’s aggression in the far east. We’re invested…but nervous with the bailout plan in place.