Archive for November, 2014

Who is Afraid of the Big Black Swan ?

Friday, November 21st, 2014

November 21, 2014

Not me !  I’ve got the Fed on my side, and if you will read on you will see why I feel so confident.

There  is a well known saying in the stock market ” Don’t fight the Fed “.  The reason for this is that the Fed uses  interest rates to fight inflation and foster full employment,  And, their fight can impact  stock prices  in a very significant way.

Inflation is not a threat  at this point in time ( 2% is considered benign ), so the quest for full employment is at the top of the Fed’s  “To do ” list.   And, this is where the linkage to the stock market really starts.

Full employment needs employers who are  sufficiently confident to expand operations. And that, in turn , depends on consumers acting with  confidence.  How to make the consumer confident ?  You can make the consumer confident by creating the  “wealth effect”  which gives the consumer the confidence to increase spending.

How to create the ” wealth effect ” ?  Easy. – lower interest rates to the point where the stock market is the only logical place to put money and lower interest rates to the point where housing activity begins to lift off.  There is nothing like a rising stock market and increasing  housing   prices to make a consumer feel wealthy. It begins to feed on itself.  And, once this phenomena begins to gain momentum, don’t get in the way

And, Europe  and Japan are making it possible for the Fed to have even more of a free hand in its interest manipulation activity because Europe and Japan want to lower their own interest rates to head off deflation.  If you step back you will see that money leaving the very low, but riskier,  interest rate environments of  Europe and Japan will end up allowing the Fed to keep rates low for a long time because this money will end up in New York and  further depress the interest rate  ( yield ) of our 10 year Treasury Note ( 2.34% ).  All this can go on and on until our  economy regains its strength and eventually overheats.  Since it is starting at zero the Fed has plenty of time to sit on interest rates and create the wealth effect both in the stock market and in housing.

What all of this means to me is that I shouldn’t let temporary stock market  dips of dubious sponsorship unhinge me.  I should buy the dips until I see the economy beginning to overheat…indicating a black swan named “Inflation ” is about to float by.  I’ll be watching the Fed standing watch.

These posts are being written for me , (with you privy to my thoughts ) to give me  (and the rest of you newly minted IRA investors),  the courage to withstand all the market gyrations  by those intending  to create trading opportunities for their own benefit..

Richard Maurice Gore

The Race is On

Wednesday, November 19th, 2014

November 19, 2014

As of today, with the Dow and S&P 500 making new highs almost every day, its no surprise that the December 30, 2011 VTI  “buy” signal is looking good as we head toward month end.

Nevertheless, I wanted  to see how my selected sub-sectors are holding up versus the widely acknowledged market performance benchmark….SPY.

Here is the result ( since November 3 )

SPY ….  1.87%,    Momentum Stocks  ( such as AAPL, TSLA, BIDU, NTES, AOL  etc. )….  3.99%,  //  Smart ETFs  (  such as PKW, MOAT, SYLD  etc. )….   1.58%,

Smart Equities    (   such as CVS, SNE,UNH, BX, TWX etc.  )…   1.65%,   //  Dividend ETFs  (  such as VNQ, XLU, VYM  etc. )…..  0.70%

Energy ETFs        (  such as VDE   )….  -0.23%,   // Sector ETFs   (   such as DXJ, FBT, XLV etc. )….   0.52%

 

The average gain of  all  sub-sectors versus SPY is 1.37% versus SPY’s 1.87%.  I didn’t say this would be easy !

In terms of intellectual effort versus financial reward,  MOMENTUM equities are the only sub-sector outperforming SPY.  But, these same equities will most likely outpace the market to the downside when the market turns.  The missing consideration here is high anxiety.  If I had all my liquid net worth in these stocks I would be a nervous wreck.   The key to surviving here is to be very, very nimble and have a trailing trigger on the whole portfolio.  Maybe I can do that.  Worth considering expanding my allocation from 3.3% of  my liquid assets to 10%. Before I do anything, it would pay me to direct some effort toward establishing and testing this escape route.

SPY is outperforming everything else,  and standing behind it is my back tested VTI escape methodology.  That is why my SPY allocation is 58% of my liquid assets.

Performance aside, what I find rewarding about following these sub-sectors is that it is enabling me to have a better understanding of the downstream impact of a strong dollar and a better sense of where the arriving overseas money wants to go.

Considering the strong dollar and its impact on hard assets (  including oil ),  and our 10 year Treasury Note yield, I am better at appreciating what is driving equities beyond earnings yield.  I am becoming more and more convinced that the real equity drivers are a combination of rising earnings, sustainable and defensible profit margins, no to low debt,  increasing cash flow per share by virtue of buybacks and finally…dividends.  Believe be, if you can isolate equities by these criteria you have a fighting chance to outperform SPY over the long haul.

But, all bets are off when the market turns and the ride is temporarily over.  Then, the only rational reaction is to point your surfboard toward shore and leave the water as quickly as your plan allows.

Richard Maurice Gore

 

Nov 1, 2014 / April 30, 2015 Portfolio

Sunday, November 2nd, 2014

November 2, 2014

VTI closed October still on a ” buy ” signal……713 consecutive days without a trade…..Total Return, including dividends, 70.74%.

But, if you put on this trade January 1, 2014,  the result , (with no trades ) is 8.9%. year to date

I use VTI as my buy / sell the market signal and SPY as my market entrant, ( year to date 9.7%  ) unless the medium and small caps included in VTI really begin to assert themselves in which case VTI will outperform SPY.  Lately the small and medium caps included in VTI  have served as a drag on VTI, but I’m watching for a resumption of small cap momentum.

Bottom line, I’d like to squeeze north of 10% from my market investments even if that involves more work for me.  Analytical plus clerical.

The question is how much more work and,  will it be possible for me to beat the SPY benchmark irrespective of how much work I put in.  SPY has a well documented  reputation for defeating smarty pants professional advisors and analysts.

For doing nothing,  SPY’s  9.7% is a pretty acceptable alternative to less than 1% in savings and money market accounts.

I’ve constructed an alternative portfolio to run against SPY ( starting at $201.16 ) for  the period November 1, 2014 to April 30, 2015 ( sell in May ).

SPY should represent 58% of this portfolio,  except it won’t.  It will be excluded from the portfolio because I don’t like the present price of SPY,  $201.16, and I have decided, at least till year end, that I would rather purchase SPY at a much lower price,  if possible,  and be paid to be patient to do so.  This means  I intend to write promises ( puts ) to purchase SPY on December 20th for prices in the $180 to $ 195 range …IF on the expiry date of the promise ( or before )  SPY is selling below the price(s)  I promised to purchase at.  My reward for making the promise is being paid a premium upfront, just as an insurance company is paid its premium upfront by you before you have an accident. I am the insurance company writing a policy against anything nasty happening to SPY.  I intend for the premium to amount to be  roughly 5% to 7% per annum.  Plus, the extra return I would make by purchasing ( being assigned ) SPY at say $180 instead of  $ 200.  Yes, I would feel much more comfortable owing SPY at $180 instead of $201.16.

Also excluded is the 5% I would normally invest in fixed income  ETFs as a cash reserve. So, the total excluded is 63% of my investible funds.

Therefore, I am starting with a real money portfolio amounting to 37% of my investible funds.

At the end of the story, I will confess how much money ( as a % ) I made or lost  trading SPY and add or subtract that from the results of my 37% portfolio.

Then, I will compare my result to a theoretical investment in SPY at $201.16  starting as of Monday, November 3.

The make up of my 37% alternate portfolio is as follows. ( 37% = 100% )

 

SMART ETFs …..27%

PKW, SYLD, MOAT…equal dollar amounts

 

SECTOR ETFs……13.5%

DXJ, FBT, IYT, XLV, VWO, FEZ…..equal dollar amounts

 

SECTOR ENERGY ETFs…..13.5%

VDE

 

EQUITIES……..23.5%

ITT, TWX, DIS, DFS, VZ, CVS, UNH, GLW, SNE, HCA…….equal dollar amounts

 

MOMENTUM EQUITIES……….9%

TSLA, FB, BIDU, AAPL, NTES, MU, UA, and AOL…equal dollar amounts

 

INCOME ETFs……13.5%

VYM, XLU, VNQ, DTN………equal dollar amounts

 

FIXED INCOME ETFs….. 13.5%  ( plus any money not  invested  or segregated  for SPY options ). On a market sell signal, all positions come here.

IEF,  BND, HYS, SHYG, VGSH, SHY, HYG and JNK …equal dollar amounts.

I’m using Friday’s closing prices to make it a little easier on myself, clerically.

This is what I am doing….I don’t advise you to do the same.  What I do advise is that you research each of the above symbols and then decide for yourself… This is me covering my rear end.

 

Richard Maurice Gore