Keys to the Kingdom

 

January 1, 2015

When it comes to New Years Resolutions ,  the words of my 8th grade teacher, Sister Monica, always point me toward more effort.

Master Gore,  remember….” Good, Better, Best, Never let it Rest, till your Good is Better and your Better is your Best “.

With this in mind, and with her admonition to avoid  becoming  an idler, I now refocus for a better performance in 2015’s stock market.

But before that, I do hereby resolve to change ” Ready, Fire, Aim ” …….into ” Ready, Aim, Fire “.  And for me, that isn’t easy !

Before I “pull the trigger “, each and every time I need to ask my self the following questions:

Question # 1.  Should I be investing in this market, or not.

Answer: For me –

A1 – Is VTI above its 200 day moving average as of the last day of last month ?  If ” yes ” proceed ( 10 years, 5 trades, all winners )

A2- Follow the Money.  Water is always wanting to flow lower.  Money is always wanting to flow toward the highest risk and inflation adjusted return. Example: Is money leaving Russia ?  Yes .  What is happening to its stock market, its currency and the bond yields on its debt Negative Action.  Is money flooding into the USA .  YES !  What is happening to the USA’s stock market, its currency and the yields on its 10 year debt. Couldn’t be better!

A3-  What is the differential between the earnings yield on 10 year Treasuries and the Stock Market’s earnings yield….2.3% versus 5% plus . Very positive for equities.

A4- Where are we in the calendar year….November 1 to April 30 ( generally, full speed ahead ). May 1 – October 31 ( caution sharp curves  ahead )

 

Question 2 – If I am to invest, should it be in Index ETFs, Sector ETFs or Individual Stocks or all  three to some degree.  The answer depends on my risk / reward tolerance and how much time I can spare to follow my  investments….bearing in mind that the amount of time I spend may sometimes carry an inverse correlation to a positive  result.

For me….I prefer a blend as follows:

Index ETFs  (    40%  )

Sector ETFs  (    10%  )

Fixed Income ETFs  ( 10% )

Individual Equities   ( 40% )

Sectors need to be ahead of SPY and answer  the question …WHY ?  Examples

IYT ( Dow Transport Index )  Cheaper Fuel,

XLU ( Utilities ) Cheaper fuel,

VNQ ( REITS ) lower interest rates equal lower borrowing expenses  ,

FBT ( BIOTEC ) Rx for Empty pharma pipelines,

XLV  ( Health Care )  Do you actually  believe the Lobbyists will allow the profit to be drained from Obamacare ?

XLK ( Technology ), the Cloud, mobile devices, etc. ,

XLF ( Finance ) With the “push out” voided from the Omnibus Bill, and housing needing more of a jump start, the Big Five Too Bigs will be back with more collateral debt games and  not so much leverage,… at first.

Not VDE ( Energy )   For the moment I believe supply has the upper hand.

Question 3….What about Equities ? 

For me ? I’m only interested in USA equities doing business principally in the USA.  The strong dollar will have a negative impact on USA companies competing overseas.  I like DFS, TWX, DIS, RTN, HCA, CVS, UA, LUV, DAL, and UNH until they get overvalued ( in my opinion ).

Question 4. What about other equities. if I’m too busy or too lazy

Unless I believe I can outperform SPY what is the point ?  So my search starts with equities which are already outperforming SPY  and which conform to smart criteria such as

1) the ratio of price to free cash flow,

2) growing revenues based on an organic competitive advantage ( I don’t like companies that grow only by acquisition because to me it means that the original advantage has hit a ceiling ),

3 )very little or no debt ( I don’t like buybacks or dividends financed by borrowing ),

4) the ability to hold or raise prices in the face of competition,

5) sustainable and growing operating margins,

6) very reasonable cap ex requirements,

7) shareholder friendly managements with skin in the game.

A good place to start ?  I am continuing to cherry pick candidates  from PKW  which is an ETF focusing on holding equities embodying the attributes such as enumerated above  Or, if I’m too busy, or too lazy, I can simply purchase PKW and know it will give SPY a very good run for the money.

 

Happy hunting in 2015. !

Richard Maurice Gore

 

 

 

 

 

 

 

 

 

 

 

 

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