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.
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 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.
The short version is that the stock market seems to be continuing along in its uptrend. Despite a few recent bumps and a little volatility the trend is firmly in place. However, and this is becoming a more and more troublesome “however,” there is definitely some signs of worry appearing. You may have heard or read about a selloff in high yield bonds. Or you may have noticed that we sold a large position from your account (BKLN) if you are a client in our Dividend and Growth Strategy. High yield bonds have in the past acted as an early warning signs to trouble in the stock market. A sharp selloff is worth watching.
Specifically in this case, it is my opinion that such a selloff has occurred because there is way too much money in the high yield market that doesn’t really belong there. That is normally “safe” money that would be in bank CD’s or maybe higher quality corporate or even government bonds or mutual funds. But since yields and interest rates are so low, the money has migrated up the risk sladder to grab the 5%+ yields in the high yield market. Money that is stretching for yield is typically skittish – it heads for the exits quickly with a hint of trouble. And that is what we saw at the end of July into early August.
The point of my article is that the same conditions – safe money stretching for return, exists in the stock market. CD money is eschewing sub 1% interest rates for 3%+ dividend yields. Investors have taken out record amount of margin debt (borrowing money using stocks as collateral to buy more stocks). Record high margin levels as we have now were associated with both the Tech Wreck of 2000 and the Financial Crisis collapse in 2007. Although I don’t see a particular reason for a stock market collapse, should a selloff get started it could very easily begin to snow ball, and a “normal” 10% correction could become twice that or more very quickly.
Bottom line. Now is not the time to take on added risk to your portfolios – unless you have a very defined plan to act and act quickly should a market selloff start. We have refocused our portfolios on high quality dividend payers, and have sold our high yield investments. I’m currently targeting a 25% cash position.
Building equity portfolios in a bull market is hard. Clients get caught up in the exuberance and reckon the more stocks they own, the better diversified they are. Protect your stock enthusiasts with a diversified portfolio built on low correlation, low-beta equities, and the appropriate number of asset classes. Your clients will thank you when their mania wanes.
Article posted on Horsesmouth.com July 10, 2014.
On Thursday HorsesMouth.com published an article I wrote on the market’s mixed signals. Despite most predictions to the contrary, interest rates have declined fairly substantially this year. Falling interest rates are usually a sign of (fear) of a slowing economy. The stock market however, despite a short pause in March, has pretty much marched upward in a surprisingly consistent fashion. The stock market is considered a leading indicator for the economy. Therefore a rising stock market portends an improving economy. So which is right?
In the article I reviewed the economic data for May and other indicators. There is no question the economy continues to show improvement, albeit at an unsatisfying slow pace. I believe the bond market sell off is anticipating a rise in short term interest rates IF the Fed were to put an end to their zero interest rate policy (ZIRP). Although the economy shows modest growth, the growth is seen (by the bond market) as too modest to continue if interest rates were to rise.
For investors we continue with our theme of market seasonality. While our portfolios are fully invested, we are in conservative stock holdings pretty much across the board. Focusing on large U.S. stocks and especially dividend payers. It is a strategy that is working well so for this year.
As a side note, I recently talked to a prospect who said the “competition” criticized my recommendations because I did not recommend being “diversified” by holding foreign stocks and bonds (via a mutual fund). After 28 years of doing this, I still don’t get while some people insist on putting money at risk just to be “diversified.” Europe just went to a NEGATIVE interest rate policy. This is extreme, panic type policy. China is in the midst of a slow down as the government cracks down on corruption and lending practices. My suggestion is to keep your money at home, in the U.S. for now. There will be a time to invest overseas, but I will only do so when the risks are much lower.
Past performance is no guarantee of future results. This article contains forward looking statements based solely on the author’s opinions.
With interest rates at near all time lows, many investors are questioning whether they should own any bonds at all. Most financial advisors recommend a portion of an individual’s portfolio be allocated to bonds, and not just for retirees but for younger, more aggressive investors as well. This seems counter intuitive to younger investors who generally feel that they have time to weather investment volatility and should maintain allocations that maximize long term returns.
However in investing timing is always important. While we don’t know when a market correction will come, we know one is inevitable. Think of investments in bonds, not as “safe low earning money” but as “opportunity” cash. I can’t tell you how many times I’ve heard investors say that they wish they had had cash available at some point in their investing lives to make an investment at a specific time. Professionally careers are made by a single investment made at a market bottom.
For more opinions, here is a link to an article I was quoted in on whether a bond allocation makes sense for younger investors.