Archive for the 'portfolio' Category



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.

Is There Value Left in Low-Beta Market Sectors?

Today’s post appeared at www.horsesmouth.com and is reprinted below for my blog readers and clients, Aug. 9, 2012:

Low-beta stocks have been a good alternative for clients who want safety without going to cash. But value plays in this sector are getting hard to find—even utilities are getting overvalued. Is it time to move to higher beta investments? Here’s what to watch.

Since April we’ve been following our revised “Sell in May” seasonal discipline. Most advisors are probably aware of the Wall Street adage “Go away in May; don’t come back until November.” I adapt the “sell” part to “rotate to low-beta holdings.” While the strategy has worked out well so far this year, there are still nearly three months left in the seasonally soft period before the “buy” signal hits in late October or early November.

At that time I will start looking to rotate into higher-beta holdings. But that leaves the question of what to do with new investors. Is this the time to be committing more money to the same low-beta holdings? The answer provides an interesting look at the markets.

Despite what appears to me as horrid fundamentals, the market, as shown in Figure 1 using SPY, the S&P 500 tracking ETF, is definitely in a technically solid bull trend, and looks like it could challenge the year’s highs set in March.

Figure 1: SPY One Year

Source: http://www.freestockcharts.com

Despite what seems like endless whipsaws from Europe’s news de jour, volatility has actually diminished substantially since the third and fourth quarters of 2011. This can be seen in Figure 1 of SPY as well as in Figure 2 of the VIX.

Figure 2: VIX One Year

Source: http://www.freestockcharts.com

In Figure 3, I have graphed the S&P Low Volatility Index (green line) vs. the S&P High Beta Index (blue line) for the past year. While the low-volatility index is the clear winner for the past year, its relative gains have come from the “sell” seasons, to the left and right of the two vertical lines.

Figure 3: SPLV vs. SPHB One Year

Source: http://www.freestockcharts.com

This brings me back to my specific question “After a run of low-beta vs. high-beta stocks, is there still value to be found in low-beta holdings?” In general, considering the market and macro view as having turned somewhat negative, low-beta holdings can be a source of security in turbulent times. However, if they have become too pricey, could it be a better strategy to literally “go away” into cash? Or, if you see this as a market/economic bottom, is it time to look at higher-beta offerings?

It boils down to P/E

My basic definition of “value” lies in the P/E ratio. Ideally I want to be buying holdings with a P/E somewhat lower than the market. I see this as both offering a bit of a cushion to the downside and as offering greater upside if the P/E rises to a market multiple from “P” expansion relative to the “E.”

In Table 1, below, I have created a chart of the top sector holdings for both SPLV and SPHB. Then I looked at the current P/E ration for each sector, using the SPDR sector ETF or the Vanguard ETF for the Information Technology sector.

Table 1: Select Sector P/E Ratios

Source: Bill DeShurko, http://www.spdrs.com, http://www.personal.vanguard.com

From the table above, we see SPLV is trading at a P/E premium to SPY of 17%, while SPHB is trading at a discount of over 11%. Unfortunately, there is not enough history to the indexes to look at historic relationships, so we’re left to guess at what levels mark over- and undervalued. However, I do think it is a safe conclusion to say that SPLV is getting pricey, and therefore may not be the low-beta play that one might be expecting should we have a market decline.

Delving deeper into the data, in Table 2, I ran a simple screen on utility stocks (the criteria are listed in the footnote on Table 2). Suffice it to say these are pretty simple criteria and rather low hurdles to expect a stock—especially a utility company stock—to clear.

Table 2: Utility Stock Value Screen

Source: http://www.finviz.com

Using the same screener, only screening for U.S. stocks and the utility sector produces a list of 97 potential candidates. Finding only four that meet this screen tells me that utilities are getting overvalued. The last time utilities approached P/Es this high was the end of 2011. As seen in Figure 4, utilities flattened out for the first five months of 2012, the area between the vertical bars, as the “E” caught up with the “P.”

Figure 4: XLU One Year

Source: http://www.freestockcharts.com

Conclusion

The market has gone into a “risk on, risk off” mode for the last couple of years. You can see the cycle by comparing Standard & Poor’s Low Beta and High Volatility indexes. Clearly, on a one-year basis (as seen in Figure 3), the low-volatility index is the clear winner. The question is, can low-volatility sectors, and stocks still outperform, or do they need to correct to bring valuations down?

The answer to where to invest lies in your macro view of the market. As long as uncertainty persists, (fiscal cliff, election, Europe, slowing global economies), there will always be demand for lower risk investments. And in a near-zero interest rate environment, low beta stocks have offered an investment option. But after a solid run, relative to higher risk (higher beta) stocks, are lower risk holdings setting up for a normal mean reversion correction?

Conversely, if your confidence is high that we somehow muddle through our current list of problems, valuations are getting very compelling, as historical “growth” sectors are becoming value plays.

In digging deeper into the index holdings, there do appear to be a few value plays left. Personally, I’ll try to continue to find the individual stocks that meet my criteria in the low-beta sectors. But I’ll be watching my screens carefully for SPHB to gain solid momentum over SPLV. Historically the market is positive after presidential elections, and SPHB being both a bullish play and an undervalued bullish play could add some pop to client portfolios for the year.

Covestor Interview

I was interviewed by Mike Tarsala for a recent Covestor.com blog on current market conditions. The entire post can be found here.

What’s Wrong, What We’re Doing About It, and When Will it All End? Part I

I’ve been suffering some serious writer’s block lately. Just can’t seem to come up with the right words to express the current condition we find our condition to be in.

Now usually in the movies, when the main character is a writer suffering from the blank page syndrome, something dramatic happens. Either he goes off to the woods to find inspiration and instead finds a gang of crazy zombies trying to break into his house and kill him. Or, typically after a bottle of bourbon, he makes a deal with the devil – inspiration for his soul. Or even worse (that is if you’re the movie watcher looking for a good action flick on a Saturday night) he finds the “love interest,” and the whole thing just turns into another weepy chick flick.

But as luck would have it, I didn’t need to recluse myself to the woods, or make a deal with the devil. Instead I had the good old European Community to snap me out of my doldrums. You see this past weekend, the G-8 world leaders met, and emerged with what had to be, one of the single most bizarre statements ever made in political/economic history. Since this incident received minimal coverage, let me set the stage and explain.

So picture the G-8 leaders (the leaders of 8 of the largest 12 world economies – they still won’t let the non-white guys in, or Russia which are basically white guys that don’t count), sitting around a table agonizing over unemployment across the EU, lack of economic growth, trillions in deficits, the Greeks are dumpster diving for food, the Spanish are turning back the clock 200 years as young men are flocking to be sheep herders – one of the few jobs available in their new “austerity” economy. Then in the midst of gloom, up pops Eddie Haskell aka French President Hollande, and he says. “Hey Beav, let’s just change our policies to “growth” and our economies will grow again!” The Beaver, played by ECB Chief Mario Drahgi, replies, “That’s a great idea Eddie, why didn’t we do that before!” Then in unison, the rest of the G-8 leaders have their V-8 moment, slap their foreheads with the palm of their hands and, in unison, exclaim, “Yes, we’ll just grow our economies!” They proudly emerge from the conference and announce to the press that they will implement a balanced approach to austerity by adding in growth measures for their economies. The world applauds, and global stock markets rally…for a day.

The immediate reaction to this “Eddie Haskell” moment, was relief. (For both of you readers that are too young to appreciate the Leave it to Beaver references, you can go to youtube.com to see what you missed). The ECB would just give growth a chance, before giving Greece, Italy, and Spain the boot. But seriously, if growth was just a matter of politicians sitting around and agreeing to implement growth strategies, what the heck have we been doing for the past decade(s)?!? You mean we needn’t go through business cycles? Booms and busts? All we have to do, to have consistent sustainable growth, is to say “Make it so”?

The reality is that growth strategy is synonymous with government spending in politician speak. The entire European Union has been implementing “growth strategies” since the formation of the EU. If deficit spending truly resulted in sustainable economic growth then Greece would have the fastest growing economy on the planet, followed by big brother and big sis, Spain and Italy. They have cumulatively spent their way into deficits that are 200% or so of their GDP, saddled their banks with bad debt, and killed off their private sectors in return for the Euro, and more cheap borrowing. You simply do not keep feeding a drunk alcohol to cure alcoholism.

The reality is, the entire G-8 has financed a global boom with massive government borrowing. The end result is that private sector growth has been stunted as capital has been siphoned off to the public sector. Now, when the accounting numbers no longer add up, debt needs to be repaid, there is just not a large and vibrant enough private sector (translation: not enough jobs and the jobs we have don’t pay enough), to generate enough tax revenue to maintain our bloated public sectors AND maintain payments on our accumulated debt. The only difference between us and Europe is that they are further down the road then we are. When the dust settles in Europe, it will be our turn. Pay attention. This is a rare opportunity to watch your future unfold before your eyes.

Why is my adrenaline flowing? Why am I worked up? Here is a quick story: A couple weekends ago I was asked to speak at a conference in Atlanta. It was hosted by one of the largest clearing firms in the US. One of the other speakers was a chief equity analyst for a very big domestic investment company that we all know and love. In addressing the European situation, he said “We see about a 5% chance that the Euro will break up”. I challenged that assessment, asking for his data that would suggest the anyone has enough money to actually get all of Europe solvent again. His reply, and I paraphrase was, “ We really don’t have any data, we just believe that a breakup of the Euro would be so catastrophic, that it just won’t happen.” Really. As he spoke visions of Wall Street bankers flashed through my head, circa 2007, and I wondered how many had said those exact same words referring to mortgages and the mortgage backed securities market?

Here is the bottom line. Risk is not about the odds of something happening. It is about the consequences if it does. The question you should be asking yourself is not whether the Euro fails or not. The question is, what happens to my investments, my retirement, my kid’s education, my sanity, if we go through another market crash as seen in 2000-2002, and 2007-2009. And if you are not willing to accept the consequences of another 50% loss or so to the equity portion of your portfolio, you need to take steps now. Either get out, lighten up on risk, or plan an exit strategy. If Greece exits, the global financial markets will be in trouble. If Europe holds it together, we will be knocking on the door of the next secular bull market – you’ll have 15 – 20 years to make some serious money. Being on the sidelines for the first 3 – 6 months or so, would really not be a big deal.

Up next: The indicators we’re watching and how we’ve prepared our portfolio’s.

2012 Outlook

This article originally appeared January 12, 2012 at www.citizen-usa.com. I wanted to post it here as I will start taking a look at how my outlook for the year is panning out, and how I may be adjusting our client portfolios.

After a multi month hiatus, I hope to be back as a regular contributor here at Citizan-USA.com. The last half of last year got a little crazy, both at work and at home. Net, everything was good, just too many distractions to keep up with the blog. On the business front, I did add MarketWatch.com to my writing work. At MarketWatch I write regularly for their “Trading Deck” feature and write specifically on dividend investing and the strategies we incorporate at 401 Advisor, LLC. After 25 years in business, it is nice to be recognized as an “expert” in one of the areas of investing that I am very passionate about.

With that, I have procrastinated enough, it’s time to layout my outlook for 2012. While I’m probably obsessing way too much over this, as no one will really remember a thing in this blog by the end of the year, my current outlook is relevant to our current clients. Our current strategy’s allocations do depend quite a bit on the near term outlook for the markets and global economies. (We’re pretty much “fully” invested, but sleeping with one eye open!).

But first, I have to take a quick look back at January of 2011, and see how my predictions panned out. My “Outlook 2011” article can be found here.

Here are the bullet points:

1. Earnings are key and momentum is positive.
What Happened: Earnings growth stayed strong through the year, but did decelerate.

2. Fed and Federal stimulus would prop up the market.
What Happened: After the early drop, the markets were whipsawed, mainly on the news of the day from Europe. But money printing came to the rescue, this time by the ECB instead of the U.S. Fed, and the market came back to a breakeven point by year end.

3. GDP will come in at 2.5% and “Unemployment will stay above 8% for the next several years.”
What Happened: The Federal Reserve predicted GDP for 2011 would be between 3% and 3.5%. I predicted 2.5%. While actual GDP is not yet known for the 4th quarter, through the first three quarters GDP growth has averaged 2.2%. Latest unemployment came in at 8.5%.

4. Stock market would rally into second quarter, however things got “foggy” for the second half with all the international economic concerns. And investor would likely have to endure a fare amount of pain to realize nominal gains.
What Happened: The market did rise just over 10% by mid-May, however stock market investors had to endure a 20% drop, to finish the year with a virtual 0% return (based on the S&P 500).

So, over all a pretty good track record for last year. But that’s not the purpose of rehashing old news. The point is not to see what was right and what was wrong, but why, and how we can do better for this coming year. So here is my outlook for the year to come.

1. Let’s start with the earnings. Forget all the noise from the talking heads, the stock market will follow earnings. This could be my downfall for the year’s predictions, as earnings are still growing, but at a slower pace. Slowing earnings growth is a red flag and could doom a stock rally before it really gets going.

Prediction: Earnings will be “choppy” but overall positive for the first quarter. However, guidance will suggest optimism for the second quarter. Earnings growth will bottom in the first quarter and then accelerate, albeit modestly into the third quarter.

2. Official Fed Reserve stimulus will be minimal.

Prediction: While the administration will spend what they can prior to the election, very little of any kind of legislation will get through congress. However, the big wildcard is Europe. Greece is a mess, stores are running out of products, pharmacies can’t even get aspirin on their shelves. Greek unemployment will continue to skyrocket. The ECB will be guilted into action and we’ll see their printing presses going at full bore. The ECB stimulus will be enough to keep Europe’s problems from pushing the rest of the globe into a recession…for 2012.

3. GDP growth will accelerate through the first three quarters, back up to the 3% maybe even 3.5% range.

Prediction: After 3 years of subdued spending, pent up demand for cars, appliances, home improvements…consumer spending will surprise most pundits to the upside. Three years of recession, $4.5 trillion in Federal deficit spending, and $2 trillion of Federal Reserve stimulus is enough time and money for the economy to start coming around. All recessions eventually end.

Part of my conclusion comes from talking to local businesses. Dayton Ohio hasn’t made any lists of “Economic Hotbeds” that I’ve seen. But several business people, in very economically sensitive businesses, that I’ve spoken to are doing very well. The biggest problem facing manufacturing is “finding people to show up to work every day, and being sober.”

4. The Stock Market.

Prediction: Through the first three quarters this will be the year of U.S. economic re-emergence. Earnings will be good, stock market valuations are reasonable, and (and this is the big factor), there will be just no other reasonable place for global investors to put their money, other than in the U.S. Certainly not Europe, China will see economic improvement but political turmoil, emerging markets will do ok, but global growth will be too tepid to see a boom in commodity prices that drive most emerging market economies. Expect a choppy market with a modest pre-election gain. We’ll finish the year with a 20% plus gain in the S&P 500.

5. Ok, it’s an election year, so just for fun here is my election wrap up.

The stock market and GDP growth look good through the first two quarters. President Obama’s approval ratings rise enough to quell any movement to add Hillary Clinton to the ticket. However, the U. S. dollar has risen throughout the year, killing exports and causing congressional rumblings about trade sanctions against China. Oil prices are spiking due to the turmoil in the Mideast and third quarter GDP estimates are getting chopped. Republicans campaign on images of Greek riots as “the U.S. future” if we don’t reign in spending. Ron Paul has enough delegates to influence the GDP platform. Voters are just starting to get comfortable with the recovery, and vote for Romney partially due to some “isolationist” type language added to the platform by the Ron Paul camp. Romney wins in a close election. Obama just can’t rally voters for the large turnout he needs for re-election. In hindsight he should have added Hillary. (If Mrs. Clinton does join the ticket, he wins in a landslide).

The one thing I am absolutely certain about, is that this will be another “crazy” year. Things aren’t settling down. We will have plenty of news to digest and argue about on a daily basis.

With that, it’s time to get back to work.

MarketWatch.com article

I have a new article at MarketWatch.

The article looks at Annaly Capital Management (NLY), a common holding in our portfolios and how we manage to harvest its attractive 13%+ dividend and manage the risk.

Weekly Outlook

The following piece came in my email this morning. I could have re-written it and put my name on it to sound really smart, but instead I will give credit where credit is due. This is from Steve Reitmeister Executive VP, Zacks Investment Research.

I really could not have described our investment policy at 401 Advisor, LLC any better than this. Added emphasis is mine.

Discretion is the Better Part of Valor

Italy’s senate approved a series of austerity measures on Friday. Investors were obviously pleased given that their 10 year bond rates continued to drop from a peak of 7.25% down to 6.45% in just two days. And this movement back from the brink = stocks up in Europe = stocks up in the US.

Unfortunately that is in the past. And it will not help us navigate the market this week. That is because for every problem solved, a new one emerges. Like…
• “Core” Euro nations are contemplating a breakup of the EU
• Slovenian bond rates cracked 7% intraday on Friday
• Spain’s GDP fell to 0%. Not good with 20%+ unemployment and staggering debt load
• French bond rates are steadily rising too
• Italian bond rates can ratchet back up as fast as they came down.

Given the whip-sawing action in Europe, I do not yet feel confident in moving away from my net neutral portfolio strategy. That’s because there are landmines on either side of the equation. Meaning if you step too bullish or too bearish you could be dead meat. This is a time when “Discretion is the better part of valor.”

For clarification at 401 Advisor, LLC our dividend portfolios are currently fully invested. However we are seeing some troubling movement in yield spreads between high and low credit bonds. This may cause us to go into a 25% cash position if the spread continues to widen. Newly acquired accounts, our Cyclical Growth and 401(k) accounts are either in cash or bond funds.

So How’s That Asset Allocation and Diversification Working Out For You?

Since the market top in 2007 adherents to a buy and hope investment strategies have been pretty disappointed with their results. Headlines have asked “Is Buy and Hold Dead?” Trading has become king.

The whole idea of a buy and hope with a diversified portfolio is that in using different asset classes, or types of investments, while one might be in decline, another will rise to smooth out the overall portfolios’ performance. Trouble is there hasn’t been much smoothing going on. Everything has been zigging and sagging at the same time. While this has been painfully obvious to those of us that watch the markets daily, it is always nice when someone actually runs the numbers and verifies what I’ve been observing.

Below is a chart from www.chartoftheday.com who always seems to come up with a good chart to show what’s been happening in the markets. The blue line shows the correlation among the stocks in the S&P 500 since 1980. Correlation is how closely  different stocks in the S&P 500 move together. Over the past month the correlation coefficient has popped up over the 80% level. Levels last seen during the stock market crash in 1987. There hasn’t been much zagging to offset the zigging since the pre-2006 time frame.

What’s this mean to the average investor? Risk management is changing. The “easy” strategies that work in bull markets are falling apart. Partly due to the overall bear market, but also guilty is the advent of the high frequency traders. Traders that trade hundreds of thousands of shares a day making small per share profits, but on huge volumes of shares.

The warning signs are clear, as we saw in the last post volatility is high and correlations are high, the only tools to reduce risk are hedging strategies, dividend strategies, and holding cash that all help to dampen volatility. Strategies that we use at 401 Advisor, LLC for our client portfolios.

Market Outlook

A strong technical indicator looks to be approaching fast – the 200 day moving average as seen in the Chart below. From a technical perspective, in a declining market the 200 SMA is seen as the last line in the sand. The bullish view is that the market will “bounce off” and start a new rally. The bears see a cross over, or drop below the 200 SMA as the start of a major correction – defined as a 20% drop. Of course there are two ways to play it. The Bulls will recognize that there is likely to be selling if SPY crosses under the 200 SMA and will see this as a significant buying opportunity. Bears will see this as the final line of support, and if it is crossed, they will accelerate their selling. Either way, I don’t see any reason to stand in the way; this is not a time to buy as an investor. Better to sit back for a week or two and see how this unfolds.


bill@401advisor.com • 937.434.1790

Enter your email address to subscribe to this blog and receive notifications of new posts by email.

Join 504 other followers

Go to webpage:

Go to webpage:

Follow me on Twitter

on Amazon

Link to my weekly column.

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

Archives