I am extending my work time on this week’s update thru Monday … i am refining tactics and tools some and taking the holiday downtime to refresh, test and possibly share
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?
- A big walk around a host of indicators with opinions … much of this aligns with my thinking currently https://seekingalpha.com/article/4112279-hated-bull-market-ever
- Another week view from Doug Short and another week of steady incline … with a Friday rest period
- Rail traffic seems to be in decline … source Steven Hansen (GEI) … i’d like to see this compared to truck traffic in US … if both are flat / declining, how can manufacturing and consumption be increasing?
- Jeff Miller’s weekly indicators … not much of surprise that most indicators are materially flat except S&P 500 (for insight there, i recommend reading my first bullet from Lance Roberts
- Brian Gilmartin shared this from Bespoke … the overbought condition is a given, what happens next is the mystery and i continue to hedge on preparing for the downside eventually … taking profits, taking way defensive positions (bonds and preferreds) when i can find bargains for the income stream i require (e.g., >3.7% on 10yr investment grade corporates and >5% on investment grade preferreds).
- Trying to quantify the potential S&P benefits of the tax reform proposal … if GS analysis is close to accurate, from an S&P perspective there is not much to get excited about in the best scenario. https://seekingalpha.com/article/4112249-heisenbergs-ice-cream-shop-much-s-and-p-upside-tax-reform
- Comment: there seems to be a huge valuation bet that exceeds the best possible outcome … disappointment will be harder to measure / quantify
- A new author for me … while this article seems focused on the investment opportunity of the container shippers, i found the recent demand picture very interesting and hard to balance with the declining train freight in US — unless the container demand growth is really going somewhere else — who are buying? https://seekingalpha.com/article/4112037-container-shipping-demand-making-splash
- Here is a great article on interest rates / FOMC … but you have to read the comments to … there’s a great “what if” around if low rates are not the product of FED but inspite of the FED working so hard to keep rates from going lower … not sure i agree, but an interesting take https://seekingalpha.com/article/4112165-fomcs-missing-inflation-mystery-part-2
Actions this week
- Liquidated TJX position with small gain
- Initiated small position in ILP-D (preferred)
Business transformations are hard; i’ve watched a couple attempts from the senior executive offices and my portfolio has several, e.g., INTC, CSCO, T, VZ and GE. Of this list GE is the one that i have the least handle on and the least confidence. I have a cost basis of $17.54, but … the industrial IOT digital transformation was the narrative behind the long-term hold. Here is my dilemna: IBM looks interesting from both a transformation target (Big Data, Cloud Security) and a >4% dividend, BUT how many such transformations can i really manage in my portfolio? Can IBM pull off a similar transformation as MSFT? I decided to be a bit patient and see where the greatest discounts surface.
I found this article interesting and well written. Obviously given the topic, i believe hard ‘recommendations’ are not possible, but better understanding is a good thing …
Generalization summary but probably the best possible (without a crystal globe of all-knowledge of future, and if you had that, why worry?): “The most important point in this article is that the Fed’s ongoing rate hike program, while accomplished in a non-traditional manner, is unremarkable (and probably long overdue) in its effects on the economy and markets. The winners include banks and savers in money market funds; losers include borrowers at money rates. That describes a well-known situation.”
- At least 1 trusted advisor is pointing at Q2 earngings as a up-coming key indicator – https://seekingalpha.com/article/4083742-get-s-and-p-500-earnings-worries-forward-estimate-revisions-still-look-good
- Slow and persistent wins the race – https://seekingalpha.com/article/3176586-dividend-growth-investing-requires-perseverance
- Commentary: i had this problem like April rain this week … watched both TSCO and TJX continue to fall cutting my fingers with every $1 decline. Both are now cost basis negative by ~6%. TSCO will be discarded at 7% but TJX may be the persistency call. I also executed my typical buy-down contingency and am close to my position limits on both, but would overextend TXJ.
- Black Rock on bonds and credit … where is one to look for fair low risk yield? I have started to re-look at local Muni and investment coporate bonds within 7 years to maturity, but the yield is poor and the capital risk before maturity is high. https://www.blackrockblog.com/2017/05/19/bond-markets-reflation/ … a different Block Rock author threw in some ideas – the emerging markets also have my attention – https://www.blackrockblog.com/2017/05/12/opportunities-fixed-income/
- This is such corporate speak, but i will summarize and paraphrase: “the market valuations could be too high and are being maintained by the promise of continued S&P earnings growth … so watch to see if earnings growth slows” https://www.advisorperspectives.com/commentaries/2017/06/23/schwab-market-perspective-shifting-sentiment
- Templeton has an interesting take on non-US value opportunities, and i was thinking similiarly but focusing more on emerging markets (not Japan nor EU / UK). https://www.advisorperspectives.com/commentaries/2017/06/22/value-update-where-is-the-next-pocket-of-opportunity
- Here’s another view on same topic https://www.advisorperspectives.com/commentaries/2017/06/21/where-in-the-world-can-value-be-had-in-the-equity-markets
- While i bailed earlier on KR, is it time again to evaluate at this step function lower valuation? https://www.gurufocus.com/news/535435/the-world-might-be-ending-but-not-before-a-dividend-increase-and-a-1-billion-share-buyback
- I have not seen this type of analysis before, and not sure i agree, but interesting nonetheless – (maybe suggests that i hold my TSCO regardless as a bet on the heartland?) http://www.financialsamurai.com/focus-on-investment-trends-why-im-investing-in-the-heartland-of-america/
With all that to think about, the week ahead for me is cautiously looking for building floors on profits and potential losses, as well as further research into: a) emerging value, b) muni / <10 yr corp debt and c) building better alerts on news and press releases.
The language news sources choice matters … significantly in my opinion. Here are the framing assumptions:
- Many people (investors too) read headlines and snippets and few take the time (or have the time) to read the full text and try to comprehend the nuance
- All stories, investment stories too, have nuance
- The language used in headlines creates and demonstrates the bias of the writer and perhaps “the street” for investments
Here is a good example from Briefing.com … “…worse than expected earnings and a 3.0% decrease in comparable store sales” … this just feeds the negative bias for retailers. When actually, the earnings were $0.01 from consensus, and revenue (which i find most important) was about 1.0% ($6.2m) above estimates. But that was not mentioned. So income missed, revenue exceeded, but the headlines completely avoided the positive (revenue).
For the headline readers, continue selling the retailer. For those of us who actually read the details and try to understand the nuance, we will do our best to take advantage of your headline only ignorance / actions.
This week’s review is going to be a bit different as i try to wrap my actions / thoughts around different articles i found useful … this may be a bit longer than my typical posts.
- Favorite SA author, Jeff Miller, pointed me here – I was quite focused last week taking advantage of the over-reactions to news rather than solid fundamentals. Here is a quick list of my actions
- Sold GIS – i finally cut the cord to processed food and packaged cereals … the growth potential here is neither terrible nor great, but the social impact is not something i can support. A good social / financial convergence and decision made.
- Bought TSCO – This was just too cheap and i have a very hard time seeing how AMZN will start selling farm equipment and other essentials for rural survival. Fundamentally, TSCO is solid for 5+ year investment. I was interested around $60, but picked up at $58.5 basis
- Bought more TJX – This is my favorite retail / consumer company. They too fell from the AMZN will conquer the world. Read their quarterly update and pay attention to the inventory numbers. Add that to their customer experience (my wife is a tough tough consumer, but loves TJX)
- Bought more VZ – This was just too cheap. I realize they have a buying splurge that may / may not make complete sense and their debt is high. I see no other players in the 5G space in USA outside of T and VZ. I will be patient, and the dividends are now >5%.
- Bought more DSW – This is in my daughter’s account. 10+ years. Foot locker news drove it even lower and piled on the AMZN killer thesis. ~3.5% dividend, an aggressive corporate strategy, and … how many people still want or need to try on shoes before buying?
- So for the week … my cash position across ETF, REIT and Stock portfolios has dropped from >15% to ~10%. This is my ‘fully invested’ position at this time. I am an often vulture investor, and keeping 10% cash is comfortable right now.
- Which is more important, revenue or income? … my corporate experience tells me … longer term, both need to converge. short term, revenue trumps income (too many dials can be turned to modify income a couple of pennies) … see this: http://fundamentalis.com/?p=6940
- Brazil story has a couple of good nuggets: a) traders dilemna (sell now to remove risk, hold for greater potential returns – i find that i always follow the first fork in the path … take smaller profits and limit risk); b) ETF exaggerations and c) interplay between politics and financial fundamentals https://seekingalpha.com/article/4074319-brazil-crashes-lessons-learned
- This chart is a weekly inclusion from Jeff Miller, but the point to highlight this week is the delta in the 10yr Treasury (while not much change from last month, look at the weekly delta)
Later in the day update
- A bit of history and a bit of expanding our investment targets more globally – http://awealthofcommonsense.com/2017/05/think-global-to-avoid-the-shrinking-u-s-stock-market/
- A view of bond traders as the better gauge of future investment directions – especially w/ interest rates. Not sure i buy this argument fully, but i do think the bond folks merit equal attention to the stock pickers – https://www.blackrockblog.com/2017/05/19/bond-markets-reflation
- Just ‘follow the money’ – https://www.advisorperspectives.com/commentaries/2017/05/18/fund-managers-current-asset-allocation
all need to work thru the confusion for ourselves … https://seekingalpha.com/article/4073716-technically-speaking-market-confusion
I sold my position in GIS, as i just could not get my head around an easy future with processed and packaged food. I bought it several years ago rode it up, and down, but just got exhausted – did not make much money above the dividend. I took the money and bought a similar position in TSCO. TSCO is one of my 2 favorite retail companies with the other being TJX (i will write on that one after earnings call transcript is published). TSCO is a big bet on rural america; like my new focus on FPI in my non-taxed account.