Weekly Update, January 28, 2018

Weekly Reads

  • Lance Roberts with a solid risk warning https://seekingalpha.com/article/4140732-davos-warnings
    • Here is a good quote for reference / relative perspective because sentiment (emotions) is probably the wildcard variable in most of our strategies:  “On a weekly basis, a correction back to the 52-week moving average would require a bit more than a -14% decline while a correction back to the long-term trending average would be roughly -28% from current levels.  As I have said before, given we are now in the longest stretch in market history without even a 3% correction, 13% to 14% is going to “feel”worse than it is, and 28% will be equivalent to a full-fledged crash.”
  • Here is slightly different take on the valuation risk
    • A good quote here and will be important to see if after all companies report the revenue growth is similar:  “Earnings Scorecard: For Q4 2017 (with 24% of the companies in the S&P 500 reporting actual results for the quarter), 76% of S&P 500 companies have reported positive EPS surprises and 81% have reported positive sales surprises.”  — Given the level of financial engineering in earnings, i see revenue growth as a more reliable indicator.
    • I tend to agree w/ this point but it is surely painful to hold these now (sigh):  “Sector rotation will continue to rule the day. For those that think the merry go round is about to end, look for money to find a home in the beaten up “safe” world of Utilities and REITs. Then again, that isn’t such a bad move for all to consider now. Dabbling in those laggards now may look like a genius move later.
  • This post is framed in politics which is a distraction imho.  the points about an absence of GDP growth is way more interesting and then complicated by our politics to spin reality https://seekingalpha.com/article/4140683-still-far-short-3-percent
  • A perspective on why rates will continue to rise and yield-based investments will become cheaper https://seekingalpha.com/article/4139445-seesaw-interest-rates-reits
    • I am still not convinced
  • Doug Short published an interesting data set on Durable Goods.  the key point for me was two-fold:  a) a highly unreliable indicator given is level of variance month to month and b) the trend seems to be reversing https://seekingalpha.com/article/4140666-headline-durable-goods-orders-2_9-percent-december\
  • I have not taken the time to walk thru the 19 articles, and probably will not read all, but this is the heart of my financial readings next week (beyond the news) https://www.savvyinvestor.net/blog/portfolio-management-trends-2018
  • A BlackRock post is interestingly not unique and uses language i had to really parse thru due to its thickness and industry complex vocabulary, e.g., …”positions exclusively in positively convex assets”.  i had to read what convex means in this context and the author added a link –  https://www.investopedia.com/terms/c/convexity.asp
    • Here is another quote that i found telling and agree with: “Specifically, long-dated developed market bonds now offer a precarious combination of ultra-long duration and low yields, which may result in carry breakevens that don’t cover even one half a standard deviation move higher in yields. Similarly, low or negative, yields in short-dated European and Japanese government bonds represent essentially no value whatsoever to investors today, in our view. In contrast, the front end of the U.S. rates curve now offers compelling carry with minimal duration risk on the heels of the late 2017 rate backup.”
    • I may be a bit longer than this view with recent purchases at ’26 and ’27 maturities and ETF in 10yr space.  The 2yr treasury ETF is almost interesting too … but my conviction is not there yet.
  • Another BlackRock post that when i read carefully nuances further their expectations on rates (globally and @ US) and bonds.  I am still less positive on US inflation increaes.  https://www.blackrockblog.com/2018/01/23/investing-implications-inflation/
    • But the post also further makes the case for carefully watching of inflation indicators … it’s both a risk mitigation play as well as an investment timing question (put cash to work) if inflation continues flat /dow and disappoints the rate pushers.

My actions and concerns

  • picked up a small position of Berkshire Hathaway 3.12% 2016 bonds … this pretty much fills my ~3% capital preservation tier … next tier will focus is still TBD based on rates and the remaining earnings digestion
  • QTS remains a problem child … $49.50 is my stop loss mark and if price increases, i will up the stop-loss accordingly.  I will not invest more $ at this time.
  • O remains a problem child … not so much on the price but on the long term risk.  my bias is starting to go increasingly negative on triple net regardless of their diversification and quality holdings.  lease renewals are going to be challenging ahead … will swap out to cash most likely in taxable, and look to preferred stock in IRA
  • Struggled to hold my trigger finger on PGX – i concluded that i will use non-taxed accounts for perferred stock and will mostly use ETF approach … watching for lower entry point
  • Additional stop-loss points will be added as well across my portfolio and will once again look to SPY puts

Weekly Update, Jan 21, 2017

There seems to be a lull in the news, analysis and commentary on economy, market, etc … earnings will be in full bore next week and most eyes are focused on US Govt shutdown.  What could go wrong?

Actions and Considerations last week

  • Preferred ETF (PGX) is starting to look interesting … its compliment in my non-taxed account is PFF, but PGX is looking like better entry point – patience here until rates stabilize some and the government goes back to work
  • VGIT – i was tempted to increase my position here, but did below instead
  • Corporate Bonds … i snagged a few Apple 2016 bonds w/ a YTM of >3%.   There is a portion of my capital that i will accept 3% return especially if the capital carries little risk.  I see Apple bonds as better than Treasuries in the 10 year horizon.
  • Problem Childern
    • QTS – this is a ‘don’t lose capital’ situation.  The dividend is too small, the possible growth is shrinking i think.  The big cloud service providers will use lease space as small footprint geo distribution and burst capacity but will continue to create their own top-secret data centers.  Then you can ask – for future growth in the data footprint where will the apps be done?  I think the major cloud folks – Facebook, Apple, Google, Microsoft, Amazon, and then their peers in China – Tencent, Baidu and Alibaba.  I am just really struggling to see enterprise off premise and small cloud providers utilizing the full capacity that exists today … it will really slow down, and then the dividend should be in the ~5% range.  This is problematic for DLR and others I think.
    • HCN – there is just 0 demand for this equity and it’s hanging by its fingertips … i would buy more but am already to my maximum position UNLESS i swing trade this within the quarter (high risk given the macro pricing risk).

Must Read

MarketWatch published an interesting article but placed it in the “Opinion” section which struck me VERY odd https://www.marketwatch.com/story/only-1-sector-has-experienced-real-earnings-gains-in-the-past-12-months-2018-01-16

The article seems like only a data discussion on the delta between financial earnings and GAAP earnings … the mystery of legal financial engineering and its impact on perceived value of companies.  I found this VERY disturbing and will need to get inserted into my value calculations as i start preparing for the bear growling around the corner

Weekly Update, Jan 15, 2018

Set up this week – i am focused on interest rates more than equity risks / opportunities right now, so expect most of the posts to point to interest rate driven assets and not stocks

Interesting reads this week

Actions & Decisions last week

  • Bonds – i did not find any bond bargains i wanted within targeted maturity timelines – prices did not really drop sufficiently and i am not willing (yet) to go out beyond 2027
  • REIT –
    • removed my OHI position from IRA with profits – which was a key target.  I have no confidence in the business model of OHI until US Govt has a believable long-term plan for Baby Boomer healthcare.  I also decided to not increase my position in LTC, regardless of opportunity, for same rationale (the LTC decision to not invest more was difficult, as i have great admiration for the management team)
    • added to HCN in both non-taxed and taxed accounts – seems contrary to above bullet – but i see a huge difference in the business model and their reliance on public payments.  i do, however, acknowledge that HCN is a LONG play and i expect to see my capital decline in short term and i will just keep the DRIP alive
    • My REIT cash reserve is at 0 in IRA and nearing 0 in taxable – though if things continue to bleed in the street i may add to positions in IOT value chain (CCI or DLR)
    • GPT is my watch item in this segment, but i am still a bit cautious, as consumer consumption growth is required in this narrative and i am getting more and more skeptical on continued discretionary consumption growth (at least i am consistent with my rate / inflation outlook)
      • In the process of upping GPT status, i lowered STAG as the age of buildings and the lease durations do not bring the same level of risk mitigation that i see in GPT
  • Stocks
    • lost another bucket of Canada weed stocks due to their correction … i have made enough profit, however, that current positions are all recently acquired profits (last 3 months)
    • problem children
      • QTS – it’s a capital preservation concern … their Q4 earnings conference call should be a good tell for adding to or leaving the investment at lower prices
      • INTC – the security problem is not as conerning as the response to it … do i trust management sufficiently to maintain my investment?

Weekly Update, January 7, 2018

  • Brian Gilmartin posted an update on S&P earnings horizon https://seekingalpha.com/article/4135755-q4-17-earnings-upon-us-earnings-releases-will-packed-financial-info
    • i took away an important point burried in the comments – while estimates keep going up and the experts are trying to discern tax reform impact … it may take awhile before there is clarity, and the most reliable news will be from the companies themselves when they report
    • also appreciated Brian’s point about Morningstar and their valuation work taking on longer duration values than quarter to quarter
  • Jeff Miller’s always valuable WTWA
    • Doug Short’s team’s view of the week.  if this does not make you scratch your head and wonder a bit … is the same drivving force in play here as in Bitcoin?
    • As would be expected, much discussion of the jobs data … it’s confusing and for some reason i cannot figure out it allows for multiple interpretations of the same data … the inflation question / answer is why everybody is laser focused on jobs …. there are some very smart and strong voices on both sides of the argument
    • Weekly scorecard – look at the 10yr note and the anticipated inflation numbers – interesting that the QtoQ delta is the same for both measures
    • In closing comments, Jeff added a great reminder:
      • The biggest mistakes people make about inflation are assuming it occurs without any accompanying economic changes, expecting this to be the only Fed focus, and using their personal experience to opine about overall levels.
  • Lance Roberts has surfaced as the writer most aligned with my thinking and i appreciate his in depth data analysis … https://seekingalpha.com/article/4135756-exuberance-marks-start-2018
    • i am nervous
    • i am placing stop-loss orders on anything i will not keep (meaning i have 30%+ profit and it pays >3.5% dividend with >5% dividend growth expectations
    • i am watching 10year treasury ETFs
    • I am watching investment grade corporates within 15 years
    • I am struggling to respond to REIT downslides – especially LTC
      • came to conclusion that i will not sell now (will allow a 5-7% decline of value) and will DRIP it but not add new capital
      • HCN will be target for new capital
      • OHI is an exit
  • I agree w/ this article from Blackrock https://www.blackrockblog.com/2018/01/04/continued-calm-stocks/ 
    • In fact, i am so keyed into to rate spreads, that i am tracking opening, closing and spreads on 2, 10 and 30 year rates (it laborious, but it forces me to pay attention to rate changes)
  • Crossing Wall St posted a bit on consumer stable stocks … CHD is an interesting one epecially if it tumbles with some of the macro walls fall … i am going to add it to my list (i like it better than PG) http://www.crossingwallstreet.com/
  • One topic that i have not gotten my head fully around (and given my background, one would think it would be easier than it has proven to be) – INTC and the security issues (or lack thereof)
    • this is a big deal for INTC and even in some ‘best case’ scenarios it will make selling data center / cloud CPUs harder – there are scenarios that also point to lower MSS and / or margins over the near term
    • when Linus chimes in publically it’s time to pay attention … there are few people who understand kernel science as well as he and his army does
    • i will be looking at least to hedge my INCT position and possibly trim it by 50%
  • Canada Weed stocks took a brief rest as a result of Sessions tirade this last week
    • TWMJF – i still hold a small position but sold 1/2 of the position via stop loss – (cost basis around $14)
    • APHQF – i still hold a position but sold 1/2 of that position via stop loss – i am still up over 100% (cost basis around $6)
    • Both of these positions are pure speculation and a play on Canada market and international but NOT US … too soon i think for that but am starting to think about a ‘picks / shovel’ play