Archive for the 'money management' Category



Investment Update

Our largest investment strategy based on assets under management is our Dividend and Growth Plus strategy. I combine for our clients stocks that pay a modest but increasing dividend with stocks that have a high dividend yield, but less likely prospects to raise the dividend consistently over time. The combination provides our clients with a relatively high, and rising dividend stream that can be used for income, or reinvested for growth. I like the idea of stocks that pay us to hold them; it’s a way to add a “company match” to an IRA account.

Below is one of our more popular holdings, Prospect Capital Corporation (PSEC). Shown is a price chart for the past twelve months. You can see that PSEC had a sudden drop in November of 2012. This turned out to be more frustrating than troubling, as the following month, (indicated by the yellow arrows) PSEC actually increased its dividend by 7.8%. Not the actions of a company in trouble as might have been indicated by the November price drop. Since that time the stock has apparently meandered along, while the stock market has risen over 10%.

Chart 1 Prospect Capital Corporation 12 Month Return

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However, what the chart doesn’t show is that PSEC’s current dividend amounts to a 12.03% yield. Pretty healthy by today’s paltry interest rate standards. The stock also sports a lower than market Price to Earnings ratio (P/E) of only 8.49 based on projected 12 month earnings. These are the stocks we love, high yields and low valuations! The only question is, will earnings be stable enough to continue paying that high dividend? If recent results are any indication, the answer is a solid “yes”. The company just announced that their net investment income increased by 43%, year over year for the period ending June 30,2013.

What does this mean to our clients? Not only is the current dividend “safe”, but PSEC also announced that they plan on increasing their dividend payout beginning in March of 2014. When our “high yielders” raise their dividends, we consider that a double bonus.

For more information on how to derive high yields in a rising rate environment, please call the office for a free consultation.

All opinions included in this material are as of August 22, 2013, and are subject to change. All investments involve risk (the amount of which may vary significantly) and investment recommendations will not always be profitable. Past performance does not guarantee future results. 401 Advisor, LLC currently holds shares of PSEC in client accounts and is likely to add to those positions over the next 30 days.

Don’t Rule Out Bonds for Income

I recently posted an column at: MarketWatch.com titled: “Why Individual Bonds Remain Very Attractive” While investors are bailing from bond mutual funds – a wise move,  individual bonds do offer protections against rising interest rates not found in bond mutual funds.

 My overall prediction is that rates cannot go up dramatically. With every 1% increase in interest rates, the added amount the government must pay to just pay the added interest cost on the Federal debt, increases by about $180 billion. For perspective, the “sequestration”, the mandated cuts put into place that get the blame for everything bad in the economy, only cut spending by $42 billion (and prevented another $43 billion of spending increases). Simply put, the government and the Federal Reserve have a lot at stake to keep interest rates relatively low for a very long time. That said, a ½% increase across the board seems likely – but only if the economy continues in a positive direction. I think this is a big “if”.

The short version of the MarketWatch article is that many investors think that a bond’s value is fixed, and that they are stuck holding a bond to maturity. The reality is that a bond’s value will naturally increase in value through the first half of its life. This allows a bond investor to sell their bonds at a profit after a short holding period. If rates don’t increase. But even if rates rise, a bond will likely return to its par value several years before its actual maturity date.

 For example I was recently quoted an Ohio municipal 10 year bond, Aa2 rated and insured, a ten year maturity, and a 3.655% yield to maturity. That is a federal and state tax free interest rate. If interest rates do go up ½%, the face value of the bond will drop below purchase price for the first 3 ½ years or so. But by year 5 the bond should be back to what an investor would pay for it today. So in effect, your 10 year bond has come a 5 year bond – paying 3.655% tax free. That is a pretty good deal.

If you own bonds and want to know when an optimum time would be to sell them, contact my office and we will run the analysis for you. If you need more income, or just want to diversify but don’t know where to go, give us a call and we can explain what bonds can do for you, even at a time when everyone is cashing in on their bond funds.

Caution is Warranted Despite Winning Streak

The Fed-inspired rally continues, however caution is warranted.

 This might be a time to recall the Wall St. adage, “It’s not what you make, but what you keep”. For some time now the only real economic positive (to the stock market) has been the continued monetary policy (QE III) of the Federal Reserve. Low rates have forced many investors out of the safety of CD’s and bonds and into riskier stocks in search of return. Trouble is that policy has only ½ worked.

According to an article at buinessinsider.com, the smart money has been net sellers this year, while the retail (individual investor) has been the buyer. In other words, what Bank of America Merrill Lynch’s (BAML) big clients have been selling, their brokers have been finding buyers among their individual clients. Anyone a client of BAML and gotten a call this year about what a great deal stocks are? Next time you might want to ask why all the big guys are selling if stocks are such a great buy!

 Here’s a piece of the story. And a link to more:

So far in 2013, BAML’s retail clients have put $7.37 billion into equities, while big institutions have taken $10.69 billion out of the stock market, and hedge fund clients have reduced their holdings of the asset class by $423 million. 

Read more

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My Take

I’ve felt for some time that we are just along for the ride. There just aren’t solid fundamentals to justify this year’s gains, let alone a continued rally. However, all year, the “story” has been that the economy and corporate earnings will accelerate into the end of the year and continue through 2014. We have just started 2nd Quarter earnings reports, and along with actual earnings we will hear about outlooks for 3rd Quarter and beyond. This “guidance” hasn’t been great, but we are still early.

The question will be, if the earnings outlook is gloomy, can the Fed’s reassurances that ZIRP (zero interest rate policy) and a continuation of QE III be enough to keep the market afloat and bring back some of the “big” money?

My advice is to have a plan, and stay nimble.

What to Make of the Current Market High

Much is being said about the S&P 500 breaking through its former daily high set in 2007. The question seems to be whether this is the end of a bull market or the start of a new one?

First, let’s put this into perspective. Below is a chart of SPY – the SPDR’s S&P 500 Index tracking ETF showing monthly returns since 1997. Many pundits like to point out that we have been in a four year bull market, and therefore, this rally is extended and due to come to an end. This is simply false.

What we have been in for four years is a bear market recovery, as anyone who invested prior to 2008 can tell you, we have simply had a long 4 year slog to recovery from the financial crisis induced crash.

Figure 1 SPY 1997 – Present, monthly returns.

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Source: www.freestockcharts.com

Second, from a longer term secular reference, we have really been in a 13 year bear market and recovery cycle dating back to the 2000-2002 tech wreck market crash. Since the market peak in March of 2000, we have not gone above, and stayed above that level for 13 years now. This is the definition of a secular bear market.

The good news is that secular bear markets do end.

Below is a chart from Crestmont Research showing the history of secular markets in the U. S. since 1900. As you can see the market’s history consists of long periods of rising markets (green bars) followed by relatively flat periods (red bars). However, “flat” describes the period from beginning to end of the period. Flat periods, or secular bear markets, can be filled with large declines and recoveries.

Chart 2. History of Secular Markets

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Source: http://www.crestmontresearch.com/docs/Stock-Secular-Explained.pdf

So are we going higher? Hard to say.

 I know you want an answer.

My point is not that we are at the beginning or end of a bull market. My point is simply that just because we have re-attained prior market highs, does not in and of itself mean much of anything as to which way this market goes from here. It is simply not that simple. But it makes for good headlines.

What I will say is this: The overall stock market is not “cheap” at these levels – in terms of corporate earnings. However, it is extremely hard to factor in just how much of an effect the Federal Reserve’s series of Quantitative Easings have had on valuations. In English – low interest rates make stocks more attractive. We have extremely low interest rates, albeit artificially low due to the Fed.

If the Fed can successfully keep interest rates low this year, and without a major “event” the market could finally breech its former highs, and stay above them before the next bear market rears its ugly head.

That said, in practice we remain cautiously optimistic. We continue to look primarily for undervalued dividend opportunities in our Dividend Growth portfolios. We are fully invested in our seasonal ETF growth strategies.

Top Dividend Picks for Retirees – 2013

I am of the firm belief that the only way for a retiree to invest with an anticipation of receiving a life-time income from their investments is to buy dividend paying stocks. Ideally, big blue chip stocks with not only a history of paying dividends, but of increasing their payouts as well. We know the names; IBM, P&G, Coke a Cola (KO), Exxon… Unfortunately, many retirees having seen incomes frozen for a decade and portfolios ravaged by two bear markets, find that the 2%-3% dividend yields offered by these companies is just too little to pay today’s bills and enjoy even a modest retirement. To accommodate retirees with higher income needs I try and mix in a combination of the tried and true blue chips with a few “high yielders” to bring up the overall portfolio yield. I define “High Yielders” in today’s market place as stocks with a minimum of a 5% yield (more than double the S&P 500) and still hope to stretch that into the 7%+ range without adding too much risk.
So with that in mind here are two of my top picks, one in each category for 2013.

McDonald’s (MCD)
When looking for sustainable and increasing future dividends stodgy and boring, and needed is a very good thing. While food in general is a need, some might question the “need” behind a Big Mac. But ask any working single mom, and “Kid’s Meals” is on the need list. While third quarter 2012 saw an uncharacteristic slow down in earnings, for retirees we are looking at cash flow. Even with a drop in share price over 17% at its lowest, MCD announced an increase in their quarterly dividend in November from $.70/share to $.77/share. This marked the 36th consecutive year of increasing their payout.
Fundamentally MCD is an all weather stock. In poor economic times harried workers “downsize” their eating out bills by going from the mid-tier Applebee’s and Olive Gardens to McDonalds. Also expect more competition for Starbucks as MCD develops their “Café” identity. MCD has a strong international presence for growth in developing markets, and offers a currency hedge to the dollar.
Their payout ratio is modest at 52%, P/E at the market level at 15.35 for 2013, and modest growth expectations in the high single digits for 2013. MCD is a solid 3.47% yielder providing income stability and a likely raise well into the future.

SeaDrill Limited
While SeaDrill Limited (SDRL) provides a wild ride (Beta 1.97) it can be worth it for the investor needing a little extra juice in their dividend payouts as SDRL has a current yield of 9.21%.
SDRL is in a solid and growing business. They provide deep water and submersible rig platforms for oil and gas drilling and exploration. Their largest division “Floaters” are fully leased for 2013.
Of course no company sports a (%+ yield without their being question marks. For SDRL there are two major market concerns. The first is debt. Simply put SDRL is considered a “highly leveraged” company.
This is fine as long as cash flow can support the debt. Recently SDRL’s stock took a tumble when they agreed to sell their tender rigs division. While accounting for a small portion of cash flow, any disruption is seen as a concern. However, SDRL also announced that they plan on using the proceeds to invest in more floaters – a higher revenue source per rig, and as mentioned above, their current inventory is fully leased. Bottom line, by the end of 2013 revenues should be up, not down without an increase in debt.
Market concern two is that SDRL paid two dividends in December 2012. Their normal December dividend and a prepayment of the March 2013 dividend. For new investors, if SDRL maintains their 2012 payouts, this would mean a yield of about 6.14% vs. the reported yield of 9.21%. However with a projected P/E of 11.61 for 2013, and earnings growth potential, I see SDRL as a way to boost income in a very solid industry and a very solid capital gain potential as new rig development and leasing accrues revenue to their earnings.

Portfolio Alert

In my last post I said that we were growing increasingly concerned over the deteriorating market since last week’s election.

A key area of support historically has been the 200 day moving average (DMA). The DMA is just the average price of a stock or an index for the past 200 market days, or approximately one year. When the current price drops below the average price of the past year, it has been common to see a much deeper decline. While it is always tempting to say, “This time is different” things rarely really are different. The reasons the market may go down, or up, will always be different, but the actual market cycles are really fairly consistent.

As of the market close on Thursday the 15th, SPY – the S&P 500 tracking ETF, has closed below the 200 DMA for 4 of the last 5 days. We consider this to be a very bearish sign. So far, we have sold 20% of our most volatile holdings in our ETF Seasonal Growth strategies leaving us with a 25% cash position. In our income strategies we have sold up to a 20% position and have also kept that in cash. Our smaller growth accounts that only trade one security are all in cash. Our 401(k)’s are still fully invested. Due to the trading restrictions in 401(k) plans we do delay our buys and sells to try and avoid “whipsaws.” That is getting a signal to get right back into the market after a sell signal. This can result in trading restrictions from the 401(k) plan.

Looking forward, we will continue to sell holdings in our growth strategies, and buy a “short ETF.” A security that goes up, when the market goes down, to further hedge our accounts. Our dividend portfolios will go short with 20% of their holdings. I’ll also look at holdings and focus on defensive industries. Currently we are over weighted in energy and I plan on continuing that overweighting. I would expect the 401(k) accounts to go to cash in the next couple of trading days, unless we see a dramatic improvement in the market.

Look for future posts as we do make portfolio adjustments.

Post Election Outlook

US markets have sold off since Tuesday’s election. At this point I’ll take a politically neutral stance and repeat what I said before the election. The market wanted to see a “mandate” win. And while the electoral college spread was fairly wide, the popular vote was very close. It is now a wait and see game on whether the Republicans feel as if they had enough support to threaten blockage of any tax increase proposals to deal with the fiscal cliff. Or if they feel the better strategy is to acquiesce to the victor. Until this issue is resolved the markets will probably stay unhappy.

In addition, with 24/7 election coverage over, there once again has been a realization that we are not alone in the world. Europe is back to the forefront as well as the Middle East and China.

Last week the S&P 500 breached its 200 DMA and closed just below that level. As a function of our strategy and remaining disciplined to that strategy we expect to start the process of taking defensive action in accounts if it looks like the market will close below the 200 DMA consistently this week.

As a side note, I have said repeatedly that the specific strategy that one uses to trigger defensive action isn’t crucial because no single strategy can be the best for all occasions but they can be reasonably effective in protecting against large declines. For example the RBS Trendpilot funds take action after five days below the 200 DMA, Jack Ablin from BMO waits until the SPX goes 5% below the 200 DMA. Our actual sell signal uses the SPX Total Return Index which adjusts for dividends reinvested in the index. This too gives us a delayed signal.

In terms of thinking about what sort of defensive action to take, a reason to give the market the benefit of the doubt and not get too aggressive is that the 200 DMA is still sloping upward and likely to do so for quite a while yet. One reason to not give the market the benefit of the doubt is that in terms of normal cycle duration (both for the economy and the stock market) we are late in the cycle. There is no way to know with certainty if we are at the end of the cycle but by definition if it is late in the cycle then it is close to the end of the cycle.

Right here right now there is no way to know if the market is on the verge of going down a lot. We may all have an opinion, or not, and some will be right and some will be wrong. Being right is far more difficult than the simple action of sticking to whatever strategy was laid out before the market started going down. The idea there is that a strategy laid out before the market started going down was done so with no emotion involved. Anyone may or may not have an emotional reaction but the important thing is not succumbing to the emotion, all that needs to be done is to remain disciplined and we all have more control over that than being correct right now about whether this is or is not going to be a large decline.

Hopefully the market will take back its 200 DMA this week and we won’t have to deal with this now but the important thing is the no matter what we might want we will take action consistent with being disciplined to our stated strategy. I will disclose any defensive action we take on the blog.

Rally or Top?

The markets have had a very nice rally since mid July when Mario Draghi, ECB Head, gave a speech indicating that the ECB will do “whatever it takes” to keep the Euro together.

This week has brought a modest pause to the advance. The question now becomes, “Is this a pause, or the beginning of the end to the rally?” Unfortunately, in today’s politically charged environment judgment can be clouded. And global events certainly add an additional interesting backdrop for today’s investors.

The chart below is from http://www.chartoftheday.com. The chart plots all major market rallies of the last 111 years. Each blue dot represents the rally’s total return and the length of the rally. The “You Are Here” dot is in the bottom left corner.

The question I am asked frequently is whether the market is “too high” since we are approaching all time highs. From the chart below, it is evident that, by historic market rally standards, this rally has just begun.

Unfortunately, investing is never that clear cut.

If you look just above the “You Are Here” dot, you’ll see the label for “2002”. The post “tech wreck” rally was slightly less in return and slightly longer in duration than where we are now. And as we all now know, the 2002 – 2007 rally ended most unhappily.

Conclusion: If this is another “Bear Market Rally” i.e. Similar to the 2002 – 2007 rally, we are likely looking at an over extended market.

But if this is truly the beginning of a new market cycle, then we are just at the beginning.

Over the weekend I’ll work on a new post outlining our current strategy as we head into the years final quarter.

Bottom Line: There is plenty of time for patience to pay off. Being conservative is not such a bad idea. More aggressive investors might want to start looking at building there “market rally” portfolio, if they haven’t done so already. With cash on the sideline, I think it would be prudent to see how earnings season plays out before committing. If in the market, I’d plan an exit strategy now

Investment Outlook – September 2012

Our portfolios have lagged the overall market since mid-June when the recent market rally started. The portfolios have continued to hold our “low beta” selection of dividend paying stocks and ETF’s.

The rationale to remain in “coast” mode is that it is my opinion the rally has been primarily fueled by Mario Draghi’s comment that the ECB stood ready to take “any action necessary” to preserve the Euro and by extension the EU, including Greece. The problem is that the ECB does not have the authority to follow through on such statements. Simply put, the ECB is prohibited from “printing” the money they would need to implement a U.S. style round of quantitative easing (QE). It is pretty well accepted, that absent such action, there is just not enough economic backing to backstop the financial bleeding in Europe.

The bull argument continues with the “bad news is good news” theme. With China’s economy softening, U. S. economic data “softening” at best, the economic stage is being set for a global simultaneous easing from China, the U.S. and Europe.

The best bull argument is that things are getting worse, so there has to be Fed intervention which would fuel a global rally. I am not willing to buy into that scenario. However, if we actually see such action come to fruition, we will change the look of our portfolio, jump on the bandwagon, and look for higher beta (more aggressive holdings) to capture gains if the rally truly emerges. With the risk to the markets extremely high if such hopes don’t materialize, I will wait for the Central Banks to literally “show me the money” before making a commitment with client’s hard earned investment dollars.

Below is a screen shot from covestor.com comparing my Dividend and Income Plus Portfolio (Dark Blue line labeled “Manager”)to the S&P 500 for the prior 90 days. While the underperformance is clear, so should be our lack of volatility. In fact the portfolio sports a beta of .63, or a volatility measure of 37% less than the S&P 500. And even with our 20% cash position, the portfolio is sporting a very healthy 4.5% dividend yield.

 

Combining the low volatility with the dividend yield, we are extremely happy with our overall performance, especially for the risk adverse income investor, such as a current or near retiree. Furthermore looking at the graph below, again from covestor.com, I zoom in our recent performance.

Since the recent market peak on August 17, the portfolio has outperformed the market by .7% over just two weeks.

Our ETF Seasonal Growth Model has had similar relative results.

Mario Draghi has “leaked” his plan for ECB bond buying and the reaction has been a big yawn. I expect September to be a volatile month and expect to close the recent gap in relative performance with the S&P 500. Primarily by maintaining value while the S&P 500 corrects.  I hope to be true to our motto, “It is not what you make, but what you keep that matters”.

Looking a little further out I do expect the post election rally. I have picked more aggressive investments to rotate into our portfolios if the rally does materialize. Until then patience is prudent.

Individual performances will vary depending on timing of investments, withdraws, specific holdings and allocations. Past performance does not indicate future results. All investing involves risk. Please consult with your financial advisor on suitability of any investments specifically mentioned prior to investing.

It’s All About the Bazooka

The markets have been rallying since June 26th when Mario Draghi, the ECB President, announced that the ECB would do “ whatever it takes” (or as Wall Street terms it “will bring out the bazooka”), to save the Euro. Add in the fact that August has been the number one month for the NASDAQ and Russell 2000 indices in election years, and this month’s rally has come as no surprise.

But remember in investing, it is not what you make but what you keep that matters. The following is from Megan Greene, of Roubini Global Economics, and reprinted in John Mauldin’s “Outside the Box” Newsletter.

As usual, this has been a lazy August, but we do not expect the quiet to last. Indeed, for the second September in a row, developments in the eurozone (EZ) have the potential to be highly dramatic.

Greece: The troika is due to return to Athens in September and make a ruling on whether to release additional tranches of funding to Greece. If the troika decides to cut the taps off—and we don’t think it will—then Greece would default and exit the EZ. The Greek government aims to renegotiate the second bailout program when the troika returns to town in September. If the troika plays hardball and does not grant the Greek government any concessions, then the governing coalition would likely collapse. Also in September, the Greek parliament will have to pass a number of measures to generate €11.5 billion in savings for 2013-14. With a high degree of austerity fatigue in Greece, we can expect social unrest.

Portugal: With Portugal starting to slip on its fiscal targets, we expect Portugal to begin negotiations on a second bailout package. Currently, Portugal is meant to return to the markets in 2013 but, with bond yields well above sustainable levels, we regard this as highly unlikely.

Spain: The auditors Deloitte, KPMG, PwC and Ernst & Young are due to present their full reports on the capital needs of Spain’s financial sector in September. The findings of this report will be used to determine the exact amount the Spanish banking sector will need to borrow from the EZ’s bailout fund, the European Financial Stability Facility (EFSF).

Italy: The Italian general election campaign will begin in earnest in September. Although polls point toward a center-left-led coalition, Italian politics is at its most fluid state since the early 1990s and, with so many voters still undecided, it is impossible to call the election.

Germany: The German constitutional court is due to vote on the legality of the ESM (the successor to the EFSF) and the fiscal compact on September 12. We expect the court will deem the ESM legal but, if this does not occur, it would serve a major blow to EZ policy makers, who have committed the ESM to potentially purchasing sovereign debt in the primary markets.

France: The French government is scheduled to unveil its 2013 budget in September. Markets will be disappointed if it does not include large spending cuts, but the announcement of further austerity risks riling trade unions and stoking civil unrest.

Netherlands: A general election is scheduled for September 12. Recent opinion polls suggest the ruling right-of-center VVD will be unable to form a right-of-center majority
government. Consequently, coalition negotiations are likely to be protracted. The left-wing, euro-skeptic SP may win enough votes to be the second-biggest party. This would make it more difficult for the new Dutch coalition to secure parliamentary support for additional support measures for peripheral EZ countries.

Eurozone: There is a progress report on establishing the ECB as a single banking supervisor due out in September. Given that many details have not been hammered out yet, there is a chance that the progress made on this first step toward a banking union will disappoint.

In terms of the broader EZ developments, we expect the Greek government to collapse by the end of the year, and a Greek exit in early 2013, followed by an exit by Portugal by end-2014. Moreover, we expect Spain to receive official support from the EFSF/ESM in late 2012 after the ESM has been fully ratified (the second half of September at the earliest), while Italy will hang on longer but will eventually need support as well.

Add in that seasonally September is one of the worst months for U.S. markets and September could bring back a level of volatility that we have not seen for awhile. While I have been in the camp that just can’t comprehend how Europe holds the Euro together – the amount of money involved is truly staggering, even by U. S. debt and bailout standards, I do think German Chancellor Merkle acquiesces and gets out of the ECB’s way. In other words after a month of haggling, name calling, bluffs, and counter bluffs, the ECB turns on the printing presses before year end. Greece may or may not be invited to the party. But not sure it matters in the medium term.

I have done a 180 and think that even Greece will stay in the Euro. Consider down the road five years if Greece leaves, devalues their currency and now “competes” with the rest of Europe. Shipping costs, one of Greece’s actually industries, plummet due to the devalued Drachma, which revives the glory days of Greek shipping. Tourism is flourishing as it costs have as much to vacation in Greece as anywhere else in the Euro controlled Europe. Wouldn’t Spain, Portugal, Italy, and Ireland all be looking on and reconsider their own Euro status? Just sayin’.

Back to matters at hand. For lots of reasons, including those already mentioned, I think this rally is getting a little long in the tooth. I wouldn’t be jumping in now. Let’s get into September, see if we can find a better entry point, but be ready to invest aggressively in October.

October, November and December are traditionally strong months, especially in election years. If Draghi gets the green light to bring out the bazooka, i.e. print endless amounts of money, the big worry over the market will be lifted. Fiscal cliff will be put off, and China will be priming their pump over the winter. Forget politics, focus on the markets and we could have a strong fourth quarter, but expect things to get worse in order to make them better.


bill@401advisor.com • 937.434.1790

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Charles H. Dow Award Winner 2008. The papers honored with this award have represented the richness and depth of technical analysis.

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