I Found a Gem !

September 13th, 2014

September 13, 2014

Nothing to say following my Post of August 31, except it looks like Mr. V. Putin is giving the market an excuse to catch its breath while October,  and its reputation for sell offs,  begins to rise over the horizon.

Normally, I’d be looking for the slightest excuse to sell stocks, even though my VTI canary is still  chirping away  in the coal mine.  Instead,  not being in the VTI trade,  I am looking for a safe rational way to improve on my VTI and SPY results.  And, lo and behold, I found 3 ETFs that I want to own.

They are PKW. IPKW and SYLD and all their  investments are based on the idea that good things happen to firms that are generating sufficient cash to buy back shares below fair market value.

According tro Morningstar,  PKW with $2.5 billion in assets has outpaced the S&P 500 Index ( SPY ) by 2.4% annualized between December 2006 and June 2014.  Interesting, but why ?,  more risk ?, …not exactly.  This ETF is known as Power Shares Buy Back Achievers targets companies that have reduced their shares outstanding by at least 5% in the previous year. The thinking goes…if a company is buying back shares ( and not borrowing to do it ),  it is doing so with excess free cash it earns from profitable operations after all expenses, including any cash it needs for capital expenditures and research and development.  This same free cash could have been used to pay dividends ( taxable to shareholders ),  fund an acquisition, or build a monument to the CEO on the front lawn.

Of more recent origin is IPKW (Power Shares  International Buy Back Achievers )  This ETF has only  $ 17.99 million under management but follows the same methodology as PKW except the names are foreign.  Its holdings include names such American Movil,  ( Mexico ) , Nippon Telegraph and Telephone,  ( Japan ), Magna  International, ( Canada ),  Westfield Corp, ( Australia ) .  The third buyback ETF, Cambria Shareholders Yield ETF,     SYLD,  follows a rigorous criteria checklist which measures dividend payments, net share repurchases and net debt reduction .  It picks a winning 100 and then equal weights each inclusion.  Also, more recent than PKW.

All the above methodology is based on having a company that is generating more and more free cash, based on operations, and a management  smart enough to know when its shares are undervalued and should be bought back.

Bottom line…these three ETFs appeal to me very much based on the PKW’s  8 year result vis a vis SPY  and the philosophy and methodology they follow.

On Monday morning, or thereabouts, I intend to purchase 300  shares each of PKW and SYLD and 50 shares of IPKW.  And more, once the V.Putin cloud either passes by or causes the market to correct..

 

Richard Maurice Gore

 

PS – I’ve been spending lots of hours turning over ETF stones, looking for  winning concepts,  for more than eight years.  How PKW escaped my attention till now,  I’ll never know !

 

Safe Again

August 31st, 2014

August 31,2014

As of Friday’s close the VTI trade of December 31, 2011 is still open and ahead 69.74%.   That amounts to a 28 month average gain of 2.49% per month,  an average gain  of 29.88% per annnum.

As of today,  VTI ….( Vanguard total USA stock market )….is 7.41% above its 200 day simple moving  average.   VTI is 6.9% ahead since January 1, 2014.  Its beginning to lag the ETF….”SPY” by a bit because ( it is explained that the small cap stocks in VTI will create a drag because small cap  stocks are very reliant on borrowed capital to grow and the market expects their cost of capital ( interest rates ) to rise.  On the other hand SPY , ( the S&P 500 )  contains far fewer stocks needing borrowed money to grow.

Since I’m not in sync with the VTI trade, I use VTI as the coal mine canary indicating its safe to invest in the general market.

Accordingly, on Tuesday,  September 2, I will invest 1/12 of my liquid investment assets to purchase more SPY.

Supporting this decision is my assessment that an analysis of  fundamental factors leads to a clinching conclusion that the widening gap between USA bond yields and USA equity yields is highly favorable to equities.

The only cloud on the horizon is Mr. V. Putin.  I believe that ultimately we will be smart enough to fold our cards,  this hand, because we are over reaching….especially in view of the fact that our European allies have not taken the lead on this.  The longer this goes on , the weaker the Obama administration  is going to look.  Remember we gave Hitler the Rhineland,  Austria and  Chechoslovakia before he went  over the line in Poland.  I think we should acknowledge that this hand  is Putin’s simultaneously putting him on notice that we are keenly interested in how he acts in the Baltic region.  Obama has telegraphed that we are not interested in getting involved  in ground wars.  Do you think Putin considers this  a sign of strength or weakness ?.  Uncertainty over the Ukraine could keep the stock market in check, despite powerful underlying fundamentals which I am positive will reassert themselves as soon as the Ukraine issue is peaceably settled..

Richard Maurice Gore

 

PS…This is my 97th post since I started this blog August 2010.  I don’t know how helpful its been for you…I hope it has been….but, its been a big help  for me in terms of organizing my thoughts before action.

 

 

 

 

 

A Remedy for Low Interest Rates ?

August 15th, 2014

August 14, 2014

Just finished listening to a debate on CNBC relating to the likelihood of a 10% market correction even though this market is generally considered healthy and probably is  headed higher.

Lets leave out Vlad Putin , third world debt,  surprise terrorist attacks etc,  all of which have the capability of triggering a temporary  selloff.

Lets say you have $ 97,400 of  IRA  money invested in the market ETF , ” SPY,” ,  ( 500 shares ) and you are nervous because of all that correction talk.

Leaving all other equity  and  ETFs aside, ( assuming all boats go out with the tide ),  the two  obvious paths to follow  are

1 ) You can bail out  of SPY , ( $  194.84 per share ) and invest the proceeds in money market, CDs or other instruments yielding probably less than 1% and thereby insure your capital will shrink in purchasing power.

2 ) You can leave your investment alone assuming the market will come back if it sells off. ( the wait can be 10 years or longer )

3)  You can establish a tighter than normal ” stop loss ”  that will allow your investment  to run and get you out reasonably intact if there is a sudden drop.

If you follow any of the above three courses you will be considered an ” investor ”

But, what would you be called if you followed the path outlined below ?

Here’s the deal.

You sell your 500 shares of  SPY and allow your broker to segregate $87,500 of the sale proceeds from your control to protect his firm against what you intend to do next.

You sell ( write ) 5 Put contracts on SPY….namely the December expiry  $175 contract.  ( 5 Puts = 500 shares ). This gives your counter party the right to assign 500 shares of SPY to you at a price of $175 if by December 19 the price of SPY is $175 or less.  ( todays price $ 194.84 ).  He hopes that by December 19 the price of SPY is ….say $156 per share….a 20% correction.   He would buy 500 shares somewhere  at $156  and turn around and sell them to you at the $175 price you agreed to. ( you assumed the correction would not be more than 10% ) and you liked the premium you received for selling a Put at that level……$1,225 (  $2.45 for each of the  500 shares ).  You were  paid that money upfront when your broker  simultaneously closed  down your access to $87,500 of your money to make certain you had sufficient funds to buy the 500 shares of SPY at $175 if they get assigned..

The day the Put contract expires, December 19,  ( providing you didn’t buy back the contract in the interim ) you will either recognize the gain of $1,225 ( because the Put expired worthless ), or your broker will use the $87,500 set aside, to purchase the 500 SPY assigned to your account. In any case , you keep the $1,225.

Let’s say you get assigned the shares.  You now have two possible paths.  You can sell the 500 SPY and recognize a loss of $ 9,500 or,  you can sit with the shares hoping that the market rebounds to at least $175 or beyond.  If you hold tight you will collect a $3.75 annual dividend per share ( 1.8% per annum ).  Of course there is nothing to say the market won’t continue to head even lower at that point.

But,  if the correction comes , and its only 10%,  you will look brilliant for having been paid $1,225 to have  bought SPY at $175 per  share instead of sitting with it at  $194.84. and taking the ride to $175.

One thing is for sure, I’d rather own SPY at $175 than at $194.84.

If  you told anyone about this transaction you would probably be considered a ” speculator ” .. at best ,  because you ” play ” with options,.

I don’t agree with this characterization.  Why buy SPY today @ $195 if you think there is any chance of a correction.   Why not get paid to buy SPY now but at the price you wish it was today ?

Over the years, I have lost a LOT of money writing Put options on individual stocks.  My most recent loss was on J.P. Morgan, delivered to me at $52.50 per share. And then , they reduced the dividend.  So there I sat with 500 shares  well above the market and no way out for years and years.  That is the danger of writing ( selling )  Put (assignment ) options on individual stocks.  I think writing an option on a share that combines the top 500 stocks in the US stock market is far less risky on a relative basis.

The person to whom you sold the Put has the possibility of a much larger return on his $1,225 investment,  But, his risk of failure is greater also.  As soon as you inject December 19 into the risk equation, the odds change in your favor.  Its one thing to say a bridge will collapse because you think its unsound.  But, its quite another thing to ” bet ” on the collapse by December 19…..unless you intend to intervene or know something not in common knowledge that tilts the odds irreversibly in your favor.

It all boils down to your appetite for risk…. and your psyche.  There  ARE alternatives to low interest rates.  Is it better to be totally ” safe ” ie. receive money market type interest rates that don’t  even come close to covering mild inflation, ….a sure loser…..OR,  risk being accused of ” playing ” with options for  being paid  $1,225 ( 4.2 % per annum) up front to buy SPY  at a price 10% lower than today’s price !

What do you think ?

 

Richard Maurice Gore

 

July 31 All Clear

July 31st, 2014

July 31, 2014

No black swans in sight.

My technical barometer, the Vanguard VTI ( total  stock market ) trade of December 30, 2011 , in which I have no investment, is now 647 days old and returning 66.36%.  For my purposes it confirms stock market trend until August 31.  At that time, I’ll look to see if VTI’s price is still above it’s 2oo day moving average.  If it is, my technical barometer signals positive.  If VTI’s price is below it’s 200 day moving average, I sell everything and wait at least  until October 1, for  a safe to re-enter signal.

Confirming my technical barometer is my take on global interest rates.  European central banks are attempting to reflate similar to our early QE  efforts. by pumping money into their economies.  This money  will flow to the highest return ( after considering risk ).  That means that the US 10 year treasury note ( yielding 2.5 % ) is competing for new money with say  Spain’s risky debt at  approximately  the same interest rate.  Let’s say ( and I do say ) it is  logical for a lot of this new money to flow here to relatively risk free instruments. In this market, the yield on bonds competes for money with the earnings yields  ( earnings divided by price )  on stocks..  As more overseas investors move money the Dollar will strengthen, the Euro will weaken and Gold will weaken and bond yields will exhibit a downward bias as bond prices are bid up.  Now entering the ring is USA stocks whose earnings yields are widening in relation to USA bonds  ( whose yields are under downward pressure because of increased demand and shrinking supply) .  And the winner is…..USA stocks.  For me, this is additional confirmation that the positive trend for stocks continues.

My QQQ/Zacks theoretical  portfolio of February 18, plus 10.2%, is outperforming  SPY. But, this is momentum stuff and can turn on a dime and underperform SPY on the downside.

But, this outperformance has caused me to invest ( as of yesterday ) $28,000 in the seven Zacks number 1 rated equities which appear as a component of the QQQ 100. How is that for no research !  Just Zacks opinion and being a component of the outperforming QQQ 100…since April 30. I invested $7,000 apiece in  Avgo Technologies, Broadcom Corp., Celgene, Charter Communications, F5 Networks, Intel and Nividia. This portfolio will be on a very short leash.

I will continue to Dollar Cost Average into SPY….( 1/12 of my remaining cash ) using VTI rules.

I will continue to monitor daily  volume activity of a whole host of  equities and ETFs I’m interested in.

And I will get back to you, new IRA investors,  to let you know what I’m up to and why.

 

Richard Maurice Gore

PS – With the market falling today as a result of overseas debt problems – I will postpone my SPY purchase for a day or two to see if I can purchase at a more attractive price. My thesis still stands.  Fear money arriving from Europe will only serve to lower US Bond yields making US stock yields even more attractive on a relative basis.  The dollar is strengthening as the fear level rises. Here comes the money !

PS 2-  I don’t see Argentina and Portugal as Black Swan events because third world debt problems are no surprise to the global market.  Maybe this is a good opportunity to shake equities from weak hands.  The 200 day moving average model is good till August 31.  Could be a long 30 days. !

PS3 – According to Friday NY Times , citing Bloomberg as its source,  the yield on the 10 year Treasury note is less than half it’s fifty year average.  Compare that to the projected earning yield on USA stocks and I think it makes a pretty compelling case for the continuance of the USA bull market  ..especially against the backdrop of Europe creating even cheaper money to spur reflation.

 

 

 

 

 

 

 

 

Second Thoughts on Gold

July 4th, 2014

July 4, 2014..

I think my GLD position needs to get skinnier.  So skinny,….. it disappears.

True, GLD is on a mechanical buy signal, as are SPY and VTI.  But, if my thinking about why stocks will head higher is correct,…..(yield differentials among USA bonds , European bonds  and the earnings yield of USA stocks.) then,

1 ) The USA dollar will appreciate against  the Euro and Yen.

2) Gold will fall against the dollar.

3) I should exit GLD and eat a small loss ( $169 of a $25,000 position ) before I end up shaking hands with myself on SPY and VTI but biting my lip on GLD.

Thursdays abbreviated stock market session confirmed that yield differentials are widening and the markets are reacting as I thought they would.  If what I see is true, GLD can’t  move higher unless a Black Swan suddenly appears from behind the curtains.

For now overseas QE is the theme and that could make for a fun SPY ride.

 

Richard Maurice Gore

 

 

Buy Signal – Gold ( GLD )

July 2nd, 2014

July 2, 2014

Today is day one for a GLD buy trade.  GLD ended June 30 above its 200 day moving average.  But, I only have a 2.5% portfolio exposure at  $128.01 instead of 5%..

The back testing results for a GLD trade ( month end price above 200 day moving average  ) are not as compelling as the results for SPY and VTI.  The last five trades closed  March 31, 2014 ( loss 3.14%  ), January 31, 2013 ( loss 1.84% ) , March 31, 2012 ( loss 4.25% )….But, before that December 31, 2011 ( plus 37.4% ) and August 31, 2008 ( plus 75.67% ).

In my opinion, at present, there are too many political, monetary, cultural and speculative forces at work to say why a GLD  position will prove profitable  But, I do  like the idea of having some exposure to GLD and I do  prefer to  rely on mechanics to  control my impulses.

As for VTI and SPY….They sailed through June 30 safely in buy territory.  So, as mentioned in my last post I bought more SPY and will continue to accumulate at each month end.  It is outperforming VTI .  My present position is more than 1,000 shares of SPY at a cost basis of $ 190.89.

What is giving me courage  to invest  more money into the market monthly is my expectation that USA bond interest yields, although low, will continue to attract more money from the rest of the world where interest rates are even lower.  And, USA bond yields  offer less than formidable competition to USA  equity yields ( earnings divided by a stock’s price ).   I’ll do this ( average into the stock market via SPY ) despite lower than average  market  volume….I’d probably go all in now  if equity market  volume ( conviction ) picked up significantly. That is the wind I’d like to feel in my sails !  Well at least we are moving in the right direction.  Although strong economic numbers could raise inflationary fears, I believe low interest rates will count as the  stronger driver in the market

And, as long as our low interest rates remain relatively high versus Europe….the dollar should strengthen ( yep, versus gold too) , and that’s another reason for my skinny GLD position.

And, while you are at it, keep an your eye on our ( USA ) 10 year Treasury yield versus the S&P 500 twelve month projected earnings yield.

Nice little jig saw puzzle.

I hope I have all the pieces !!

Richard Maurice Gore

 

Cautious Me

June 11th, 2014

June 11, 2014

Considering  present equity market data, I’m glad my bias is toward trend following rather than predicting the  market’s direction. And, I’m very happy that I’m so mindful of Investing Rule number one…..preserve capital.

Given the foregoing  and, recognizing  I can be very emotionally receptive and reactive to both positive and negative noise ,  please understand how difficult it should be  for me to contain my enthusiasm for equities at the present moment.

Dan Sullivan, the highly  esteemed editor of ” The Chartist” newsletter ( I subscribe ) indicated in his June 5 mutual fund  hotline that the market is signaling it intends to trend higher.  He cites the recent series of new S&P 500 highs in 7 of 8 sessions, that the Dow Industrials and Dow Transports have made new bull market highs (  A Dow Theory buy signal ) and that the 200 day trend line of the Advance / Decline line is moving higher remaining well above its 200 day moving average.  All positive signs.

Add to this,  the very good news relating to employment, GDP gains, Putin and earnings forecasts.

Worried about higher interest rates de-railing  the uptrend ?  Forget it.  An explanation has emerged as to why the USA bond market is rallying and not at the expense of stocks. The explanation is that  European ECB action is forcing European bond yields lower than USA bond yields ( Example: Spain where it’s risk laden 10 year bond is being offered at a lower yield than the risk free 10 year USA Treasury Bond. )  This is causing European bond investors to invest in higher yielding USA bonds driving USA bond  yields lower. Plus, the supply of USA government bonds is shrinking in the face of this growing overseas demand. Since USA bond yields compete with equity earnings yields for investment dollars,  lower bond yield expectations competing with higher earnings yield expectations can be very , very bullish for equities.

This morning I heard a guest analyst responding to another guest’s comments on the advanced age of this bull market by saying market ends are not date driven, they are data driven  and not to be surprised if this bull market goes on for another 2 or 3 years

So…..why am I  not ” All In ” ?

I’m not arguing with any of this.  All I am saying is that as  equities grind higher,  why is the climb being supported by fewer and fewer stocks participating in terms of  making new 52 week highs ?   And, why is daily volume so low in relation to 30 day normal volume?   I like to think of volume as  conviction, as thrust,  and as the wind in the market’s sails. Prices are moving higher but daily volume is not anywhere near 30 day volume averages.  Nobody seems to be saying anything about this.  But, I don’t like it.  So, I can’t be ” All In ” . In fact, as of this moment, the morning of June 11, 2014,  I’m only 35% invested in US equity ETFs ,  42% invested in Bond and Income ETFs and 23% in Cash.

Maybe lower than normal  market volume and narrower  participation in making new 52 week  highs means only that there will be a ” normal ” ” healthy ”  10% correction.  That’s perfectly OK , but corrections, healthy or not , are not my thing.

But, because I want to be ” All In ” and not  ” Miss Out ” on all the fun to be had and profit to be made, my plan now is to take out 1/ 12 of all non-equity money ( including cash ) on the first trading day of  each month and invest it in SPY, VTI , and  QQQ,  exiting these and  all investments by going to cash ( the money market )  when the 200 day moving average of VTI is above its price as of a month end close.  Then, re-entering the market ” All In ” when VTI next finishes above its 200 day moving average at a month end.

Richard Maurice Gore

May ” Go Away ” Update

May 31st, 2014

Saturday, May 31, 2014

 

May is in the books and VTI ( Vanguard Entire USA Stock Market )  is still on the buy signal that sounded December 31, 2011.   This trade is now 605 days old and shows a positive 62.04% return,  an average gain of 2.14% PER MONTH !   Since January 1, 2014 VTI has gained 4.2%, with half the gain in May.  This says to me the bull case is still viable and , for the moment, its OK to be in the water……but not  deep water,  because second tier indicators are signaling loss of thrust and potential stallout.

Although the NYSE  advance / decline line is making new highs  ( as are the Dow Industrials and S&P 500 ) ,  Volume is missing and fewer and fewer stocks are making new 52 week highs.  So, I’m keeping my powder dry ( 20%  invested in ETF equities, 40% fixed income ETFs and 40% cash. ) Next review date is  at June 30 close.

GOLD: Still on the March 31 sell signal.  On March 31 I took a $3,000 loss, selling GLD ( ETF =physical gold  bars )  at $123.79.    Todays price is  $120.43. I’ll invest again at the first monthly close when GLD finds itself above its 200 day moving average.

FIXED INCOME ETFs : There has been more and more talk about money flowing away from equities and into bonds….primarily the ten year US Treasury.  The ETF ” IEF ” represents 7 to 10 year US Treasuries.  There is talk from respected pundits and players saying the new normal for the ten year Treasury is not 3% but a less robust 2%, reflecting less than world beating growth by China, the US consumer and US housing.   It  has been suggested to buy ten year Treasuries at 3% and sell at 2% because 2% is where the yield will head given  lackluster economic growth conditions.  At present the 10 year Treasury yield is about midway between 2% and 3%.  The price of  IEF, $103.98 is about midway in its 52 week range of $98.60 ( low ) and  $107.59 ( high ).  Making a prediction of the future ten year Treasury  yield and IEF  price is beyond my physical risk tolerance. I’ll respect the direction if it is clear and supported by trading volume.

Pending clearly confirmed  directional movement,  I’ll just sit here on my surf board ( in 3 feet of water ) with my eyes glued to the horizon searching for ” rollers ”  and / or fins.

Richard Maurice Gore

 

 

Still Water Runs Deep and ……..?

May 21st, 2014

May 21, 2014

That’s the way I’d describe what is transpiring in this market  ( January 1 ,2014 till May 20 close )  Still water and ideal for saltwater Crocs.

Forgetting the risk(s) associated with individual stocks and focusing entirely on market risk, holders of ETF market index baskets  have seen the following progress since January 1: DOW – 1.2%,   S&P 500 index +1.3%, NASDAQ -1.9%.  On the other hand, those who invested in the fixed income ETF…..I shares / Barclays 7 – 10 year US Treasury notes ” IEF ” have enjoyed a market gain of 4.4% not considering a 1.9% per annum dividend.  A shift.

On top of this, I have noticed that the equity market’s engine…volume…has been far, far less than what I would describe as ” robust “,  giving rise to my suspicion that money is leaving the equity market and flowing….?  Money flow analysis  aims to track this as a momentum indicator that uses price and volume to PREDICT trend.  This is done  by comparing positive money flow versus negative money flow..  It is described as a more rigid indicator than Relative Strength because it is volume weighted.

I don’t do this type of formula driven analysis..  I track about 50 stocks each night for price / volume and then look for follow  through in subsequent days.  This gives me a sense of thrust or no thrust.  I act on a reasonable suspicion that thrust has left the market.  Over the past week, I have gradually decreased my market exposure to 20%  ( SPY, VTI, RSP, RPG ) with 60% in fixed income ETFs ( BOND, HYS, VCIT, LQD, HYG, JNK ) with 20% in CASH.

I believe that in terms of price and volume, this market would qualify as being ” dull “.  The common phrase when dealing with a dull market is ” Never short a dull market ”  Some believe dull markets indicate that energy is being stored for a rally……Really ?  Since my number 1 rule is to preserve capital, I’d say it would be reckless of me to assume that the energy being stored is for a trip north rather than a trip south.

That’s what makes me a trend FOLLOWER rather than a trend PREDICTOR… I’d rather give up some profit before jumping aboard .  My goal is to hop aboard BEFORE the train reaches full speed  and AFTER I know its direction is north rather than south.

Richard Maurice Gore

Mea Culpa

May 12th, 2014

May 12, 2014

If you have read my posts, you know how dead set I am against investing in individual equities.  This is  especially true of  those equities which can be characterized as ” momentum ” stocks.  The risk of market direction ..ie .Market Risk… is way safer than the Specific Risk associated with owning all the possible  surprises  that go with owning a  specific equity.

The more diversification in your portfolio, the more you are aligned with Market Risk and separated from Specific Risk.

Not only that; in today’s USA market, diversification comes cheap.

You can buy the ETF….”. SPY “…. A basket of 500 stocks…By paying a commission as low as  $7  you own all 500 stocks in the basket.  To buy each of these stocks separately, to create your own basket, and it will still involve a commission of $7 ……FOR EACH OF THE  500 PURCHASE TRANSACTIONS …Total cost $3,500  versus $7. !

Despite this knowledge , I took a realized loss of $11,000 this morning because I exempted myself from taking my own advice.  Why ? I didn’t see myself as an average investor ( hubris ) and couldn’t resist the lure of TESLA and FACEBOOOK.  I strongly believe in their future. BUT, that has nothing to do with making  money by owning them now. And, for me, the future is now !

So, I stepped up and took my loss,  understanding ( I hope forever ) that I am nothing more than the average investor, maybe with  a little more knowledge,  but sporting  a set of emotions that can easily nullify that advantage ).  It isn’t the loss that’s bothering  me.  Its that I broke my own rule #1  one for capital preservation.

Now that I have paid $11,000 for my hubris,  I feel relief  about confronting myself and taking the loss, rather than continuing to hold these stocks and inviting an even deeper loss..

In time I will forgive myself.  I just better realize I  am an average investor.  All I should aim for  is an average return….3x  rate of a 10 year government bond plus an inflation kicker. And,  forget about hitting for the fences.

Richard Maurice Gore