Weekly Update, February 25, 2018

Weekend Reads

Actions and Plans

  • Traded in and out of QTS with almost a $2/share profit – not ready to take position here but could take another look w/ >5% yield
  • Added to my HASI position below $18 (now my third largest individual holding)
  • Sold out of my very, very small CY trade @ $17 w/ cost basis of $14.55
  • Problem children really remain PEGI and HCN
    • HCN – have not decided if VTR is better for additional capital or add to HCN – decision WIP
    • PEGI – waiting for ER for additional data – PEGI is large position so adding to it will be an exception type decision
  • Bonds – watching for 3.7-4.2% yield in investment grade and in select market / industries … only fire-sales will be considered

Weekly Update, February 18, 2018

Random Weekly Reads – Economy Focused

  • A new author for me posted this and it has echos of “Jubillee” as something in the future – where in the future, who knows  https://seekingalpha.com/article/4147943-worst-threat-face-right-home
    • As with all these Jubilee related posts, i am not suggesting nor planning for this event (yet), but i find these articles incredibly important to understand the logic (lack thereof) behind some of the government decisions and actions.
    • Here is another “Jubilee” like post – the debt must be restructured https://seekingalpha.com/article/4147977-america-go-bankrupt-slowly-first
  • This NFIB report is interesting on several fronts, and many people will focus on the sentiments expressed.  I really latched on to one specific risk to small businesses  http://www.nfib.com/surveys/small-business-economic-trends/
    • Quote:  “Twenty-two percent of owners cited the difficulty of finding qualified workers as their Single Most Important Business Problem (up 3 points), exceeding the percentage citing taxes or the cost of regulation as their top business problem. Thirty-four percent of all owners reported job openings they could not fill in the current period, up 3 points from December.”
    • The employment / jobs challenges are not ‘another pair of hands’ or a ‘warm body’ but specific skills … this is something that cannot be solved w/ higher wages.
  • A dose of fear to keep your due diligence focused  https://seekingalpha.com/article/4145588-think-correction-bad-wait-grizzly-bear-market-arrives
  • This post about real and nominal interest rates gets you thinking in a slightly different way than most people are pontificating on raising rates … https://seekingalpha.com/article/4145670-u-s-rates-real-expectations
    • It may be more of a supply issue than an inflation problem
    • This is going to be very interesting to see how it pans out both in terms of rates moving forward as well as how politicians describe their positions vis-a-vis spending (stimulus) and budget deficits (debt) … i am guess it is going to be hard for conservative republicans to rally the fiscal conservatives
  • Lance Roberts published another provoking post https://seekingalpha.com/article/4147008-will-economic-boom
    • At the heart of Lance’s point is the stimulus introduced by both the tax cuts and the large spending bill just passed in the US will turn out to be more of a drag (boat anchor) on the economy than a catalyst for higher growth
    • Quote:  “The reality is that the majority of the aggregate growth in the economy since 1980 has been financed by deficit spending, credit creation and a reduction in savings. This reduced productive investment in the economy and the output of the economy slowed. As the economy slowed and wages fell, the consumer was forced to take on more leverage to maintain their standard of living, which in turn decreased savings. As a result of the increased leverage, more of their income was needed to service the debt – and with that, the “debt cancer” engulfed the system.”
    • Put this together with the bullet above on supply / demand and interest rates and you have a very, very tenious view of future economic growth in US
  • David Stockton piles on similarly https://seekingalpha.com/article/4146932-swan-song-central-bankers-part-3-goldilocks-economy-delusion
  • This post highlights a nuanced paradox at face value that can be confusing – near term inflation and long term growth; the author uses this to help describe the forces behind flattening yield curve https://seekingalpha.com/article/4147423-yield-curve-flattens-financial-stress-spikes
    • The one piece here for me is to carefully watch longer-term growth measures in US, EU and Asia (Japan, India and China)
  • Jeff Miller’s WTWA  https://seekingalpha.com/article/4147936-weighing-week-ahead-coast-clear
    • S&P Weekly chart  – 5 up days (short term overbought?)
    • Brian Gilmartin on S&P earnings estimates (currently over 20%) http://fundamentalis.com/?p=7557
      • Quote:  “That is a big number, now over 20%, which means that the forward estimate today of $157.78, is 20% higher than the forward estimate of $131.39 on 2/17/17 or 52 weeks ago. … The problem is the bond market: if the 10-year yield continues to rise, the SP 500 will be like trying to push a beach ball under the water – the higher yields will keep a lid on equity returns until there is some sense the rate of acceleration is over.”
    • Inflation break down
    • A good weekly indicator summary from New Deal Democrat  http://community.xe.com/blog/xe-market-analysis/weekly-indicators-payroll-tax-withholding-falls-cliff-edition
      • Quote:  “Because the mixed to negative numbers in several coincident indicators have persisted, and have spread to yet another one, I am downgrading the nowcast to neutral. But because the coincident tail does not wag the leading dog, I still expect this to resolve higher.”
      • 10yr rates continue upward
      • The short term picture is less positive

Weekly Reads – Company Focused

Actions / Plans

  • Continue vigilence with stop-loss orders on VZ, O
  • Purchased MSFT 2027 3.30% bond w/ 3.34% yield – hitting my mark for >3.3% w/ AAA rating … i will continue to look for another couple bond positions but only as value surfaces within my return guardrails for capital preservation – >3.0% income
  • IOTS and CY are both interesting but need much lower entry points

Portfolio Allocation and Rate of Return

I recently restructured my investment portfolio management schema (no actual sells / buys to redistribute) to better focus and track my different investment categories and the expected rates of return – as result of risk management.

The four categories selected are working well (Cash, Capital Preservation, Income Growth, & Capital Growth); but, a simple method of calculating and monitoring the internal rate of return did not receive any thought.  Upon reflection, each category has a targeted overall annual rate of return (i.e., respectively, 0%, 3%, 5% and 8%).  I will defer discussion on the correctness of those values for now.  The internal “Return on Capital” is the best metric i can see as of now.  I want to preserve the ability to move capital to any category based on my strategic guardrails (% allocated to category) and especially to where the best values are presented.

Metric will be Internal Rate of Return on Capital – total value / invested capital.  New investments in the category will impact the annual rate of return, but over the long-term that should balance out in the noise (unless materially valued capital is introduced newly to the specific category).  Tracking this will require a bit more work, and i will focus on quarterly changes, not daily / weekly / monthly.

 

interesting data bite

https://www.marketwatch.com/story/industrial-output-edges-down-in-january-ending-streak-of-four-monthly-gains-2018-02-15

Capacity utilization edged down to 77.5% in January from 77.7 in the prior month. The capacity utilization rate reflects the limits to operating the nation’s factories, mines and utilities. It’s still well below pre-recession levels, above 80%, that could fan production costs and prices

Weekly Update, February 11, 2018

Weekly Reads

Plans and last week’s actions

  • Buy More list (new positions would only be considered with abnormal spikes):  equity – PEGI, HCN, EFV, IOTS and CY; bonds – ~10 year Apple, Kaiser, Berkshire and Kroger (investment grade above A with the exception of predictable cash flow generator like Kroger)
  • Watch to sell for capital preservation:  PFE and VZ
  • Unable yet to decide needed actions if any:  VGIT and VCHS
  • Sales last week as part of either a) capital preservation or b) change horses
    • LTC, O and T – capital preservation
    • LTC (IRA) changed horses to HCN based on lower SNF exposure and broader segment diversification (not a growth story, but a share accumulation story via reinvested dividends)

Cynical View of Interest Rates

What is driving higher rates …

  • Central Banks realizing that they have 0 tools left if things go bad fast – economic cycle turns
  • Governments are running on debt that is so irrational that they only way they can sell their debt is to inflate the yield (lower price)

This could be a train wreck … if economy slows and debt spending continues to increases, the deficit balloons beyond our imagination … a jubilee?

Weekly Update, February 4, 2018

Sure feels like my view of interest rates, inflation and income investments was hazy at best after this last couple of weeks.  But my fundamental view remains that the US economy at least does not have the demographic, political or economic ability to accelerate sustainable growth to the levels people fear, >2%.

Actions past and future

  • Reduced my LTC holdings at loss in non-taxed account and reinvested at better value in BEP
  • Tried to purchase Kaiser 10yr bonds, but seller would not meet my bid (that was NOT irrational)… seems that bond trader did not see materially lower rates … i will keep poking at 10 yr A rated or better … Apple, Berskhire, Kaiser, Kroger and Nordstrom with the latter two being lower quality have been pick ups in last few months
  • Reduced PFE due to stop loss (50% of my position)
  • Problem children:  PEGI and IOTS … as well as O (cannot decide what to do w/ it) … PEGI all hold unless really bad, IOTS is an add <$6.00
  • Canada Weed companies, Canopy and Aphria, are again getting interesting for speculative positions … i have sold all of mine but very small positions purchased with speculation cap gains