March 6th, 2019

This week saw a dump in Wallgreens on weak earnings. Institutional outflow from Netflix, Tesla stock dropped 10% and it had nothing to do with Musk’s antics for once (the automaker has lost about a third of it’s value in the last two quarters), oh and the financial world is now awash in Brexit flow charts.
Lets get to it.

This Week’s Question – Stop Loss

Spending the week reading about stop losses in the wake of the inversion has been eye-opening. Considering the all the hoopla around the dump in December. Bottom line up front: stop losses are ultimately designed to keep your emotions from separating you from your money. I too am guilty of looking at a trade and not executing a sell based off of what I believe, not what I know. Remember, past performance is no guarantee of future results.

When it comes to a stop-loss, there is no one size fits all approach. There are a few different techniques that have proven results and of course every finical service will try and sell you on why you need to pay them to let you use their software to calculate the best exit point. Some of them are similar but carry different names. I’ll try and sum it up here, but this is by no means exhaustive.

Confluence Stops are best for traders who are looking at highly technical metrics. I am going to avoid getting into the weeds here due to the style of investing this newsletter promotes, but its worth looking at if you’re inclined. Volatility Stops take broader market trends into account when considering the stop range, thus the higher the volatility the wider the range. This tends to favor longer term portfolios in bull markets. Trailing Stop-Losses adjust the sell point based on momentum as well as the technical aspects of value. Jason Van Bergen wrote a great article about trailing stop-losses, so I’ll just direct you there for now.

As a dividend growth investor stop-loss is not a big issue for me. I’m in most of my positions for the long haul and the dividend. Even if they market tanks I still make money. Yet I do hold some Index lower yield positions. Due to the growth of these securities they can account for up to 40% of my holdings at times. I too am often surprised by this number. The takeaway from Q4 and the bond T-note inversion is this. I’ll be setting trailing stop-losses on my indices and big boys and using this as a backstop against a broader market drop. The dividend investments, anything with a yield of 2.75 and up, will stay regardless of broader movement.

This Week’s Conclusion

Keep a sharp lookout on your portfolio. The next major drop isn’t going to bounce back like it has in past years. There will always be good deals out there, you’re just gonna have to do more research on the business end of things. Oh, and if anyone understands Brexit at this point, me know.

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This Week’s Question – Should I invest in index funds or DVG stocks if I’m just staring out?

I got an interesting e-mail this week form a young investor who basically asked the above question. I think the answer sums up my investing philosophy at the moment. The answer is a bit long so instead of including it in the mailer/weekly post, I’m going to publish a portion of my response below.

…to your main question directly, it is assumed that investing in a broader index will return more over time than trying to pick individual stocks. This maximum has shown itself to be true time and again, yet it is not a law of the market. For me, investing in index funds is about retirement.

That being said, in the last few years I have started investing aggressively in dividend stocks. Why? Because a DVI portfolio is about early retirement. My index investing is through a Roth IRA which is great for tax purposes. The catch is, I can’t touch it until I’m 59 1/2. Let’s say that at 45 I have enough saved that I don’t have to put any more money into those accounts for them to be where I want them to be when I’m 60. Now what? Under this scenario I have to continue to work full time while I wait for these funds to reach maturity. With a robust DVI portfolio one can retire early and live off of the dividends.

This is the thinking that prompted me into building a DVI portfolio. Unexpectedly, when I focused on a portfolio that was about income generation with long term value I found that I was able to create a system that consistently beat the market. As a retail investor we have much more fluidity than the big boys.

Lastly, a DVI portfolio is a smart move when considering personal finance. The dividends you make are yours. It’s income. This seems pretty obvious, and a successful DVI portfolio will reinvest those dividends. I know you know this. Psychologically, I know that this income is there if I need it. It has allowed me to prune down my emergency fund which sits in a savings account that earns less than inflation and invest that money. For example, if your emergency fund is $3000 and you are making $200 a month, then you can move that fund down to $2800 and not worry. You can then invest that $200 , and reinvest, and reinvest.

All this being said. There is a question of timing. I think the markets are due for substantial drop. I don’t know when this will happen, but I believe it will be somewhere between 8 and 18 months from now. Currently, I am investing in value dividend growth stocks and when the correction happens I will pivot to back to ETF’s and buy them up on the cheap.

March 23, 2019

Hello Friends! I know, I know, I’ve not been posing for too long, but I was overseas on assignment and despite my intentions to stay up on all the happenings work and travel got the best of me. In any event…

Hope everyone didn’t go too twisted over the market jitters. In general money is still moving out of ETFs, so trim your lines where appropriate. With mid-volume moving through Thursday option puts suggested that traders were looking to a short-term market high breakout, but Friday’s sell off on news that 10-year and the 3-month T-bill inverted caused a market . In case you missed it, Disney acquired Fox for 71.3B making one of the largest media companies in the world. Shares of Disney aren’t moving as much as you might think, I believe this is for the same reason AT&T didn’t jump after the TimeWarner purchase, corporate debt is still a huge concern with long term investors. Thousands of layoffs are expected as Disney pares down duplicate staff.

Lets Get To It.

This Week’s Buy

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This Week’s Question – How Important Was the Inversion?

20th century econonomists would say that this is a big deal. Almost always signaling a recession on average within 311 days. However, these days there is an argument that this bellwether is less reliable because the bond market is so heavily influenced by Central Bank ownership following the 2008 global crisis. I may be able to swallow some of this logic, but not. I expect a shallow market wide correction sometime this winter, but I am interested in central bank bond ownership as a percentage of the total bond market over the last 30 years.

This Week’s Research – How does the D/E Ratio Work?

On its surface, the debt-to-equity ratio is just that, the amount of debt that a company owns divided by the amount of equity available as a result of shareholder investment. Here’s the catch, economists and accountants can sometimes refer to all assets as the sum of all equity and liabilities, including debt. A company can raise capital by either method. Thus, we must be careful to note that these methods don’t raise the value of the company. Taxes, agency costs, asymmetric information, market efficiency all play into how the capital structure is influenced. D/E is an indicator of risk not value.

A higher ratio can be benifitial as the company can use it’s cash flow to increase ROE. This of course incrase the overall risk that a shareholder takes on. The more established the industry the higher D/E ratio is prefered.

When comparing within industy take note of not just the number, but the overall change. Take for note the D/E ratio of he following:

  • SKY – .15
  • JNJ – .46
  • MMM – 1.36
  • F – 2.8

Although it may appear that MMM has far more debt than the other comapnies listed. JNJ has increased its ratio by similar porportions since 2014, and SKY has increased by a higher rate. BSX has paid down its debt in the same time period. Ford on the other hand, has seen it’s ratio decrease as a factor of equity investment as it’s debt levels have declined since summer 2016.

The takeaway here is that although Ford has a huge D/E ratio and its debt remains a concern, it is SKY that throws up the comparative red flag. (Of note, I did not did around for SKY to prove the point of my article, I did a google search for MMM comparable company and SKY was the first the popped up.)

This Week’s Conclusion

The market is bouncing around and landing on zero, so don’t get fooled into selling before you want/need to. The yield curve and debt are big issues moving through 2019 and the investor that is able to understand these issues is the investor who is going to be looking good in 2020. Be smart, not broke.

Good Luck This Week.

Disclosure: This mailer is not to be considered investment advice. I am not a certified finical advisor. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. This article is intended for informational purposes only and is not intended to serve as a recommendation to buy or sell any security or asset.

 

 

Feb 2, 2019

Good Morning Investors –

The market had a good showing this week as the U.S. government reopened, Morgan Stanley’s fantastic M&A team predicts a year of consolidation for utilities, pharmaceuticals, and chemicals, and the Gulf of Mexico is turning into a parking lot for Venezuelan oil.

Lets get to it.

This Week’s Buy

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This Week’s Question – Bull Trap

I think we all know what a bull trap is in theory, but I’d like to consider a stronger definition of the buzz term of the week. In short, there is a technical way to avoid being fooled by the reverse breakout that doesn’t involve hedging on some short options. Look for a open and close that is at or near the same level with low volume. It’s that easy. In case you are wondering, the S&P index SPY is trading at 29.67M. It’s average volume… 97.16M.

This Week’s Research – Interest Rates: The Recession of the 1980s.

In the mid 1970s unemployment around the globe pushed economic instability dangerously high, although under control again by ’79, it started to creep back up causing concerns in the working classes. The winter of 78/79 was considered the “Winter of Discontent” in the UK as millions took the streets to protest the government. In the U.S. an energy crisis that peaked in 1979 created staggflation and voters and policy makers were looking for a way to heat the economy up. The solution, according to Paul Volcker recently promoted to Chairman of the Fed, was that rather than adjusting interest rates, they were going to adjust monetary targets. The next year, inflation soared to 13.5% (we’re at about 2.2% now).

What was Volcker to do? He raised interest rates famously. And by 1982, when the Fed finally reversed its ill fated policy on monetary targets, the inflation rate was at a staggering 21.5%. Despite reversing course rather quickly, the damage was done, unemployment as high as it has been since the Great Depression, pushing 14% in the midwest, with parts of PA reaching 18%. The economy was slammed with a Savings and Loan crisis, billions of dollars were wiped out and the S&L industry was forced to merge as they faced insolvency. By slowly lowering interest rates back down from the US was able to right her economy by ’84.

This Week’s Conclusion

Hey friend, don’t get caught in the bull trap. The uptrend of this market looks very shaky to me. Beyond the technicals the world is doing all kinds of crazy. Russia is making short range Nukes again, Venezuela is self immolating, China is cooling faster than anyone can explain, and the U.S. Government is looking to shutdown again in about fourteen days. If you’re going to buy, buy safe longterm dividend securities. Trading bonds might produce a good return if you want some quick cash, but you’d have to be able to work that black magic during earnings season.

Good luck this week.

Disclosure: This mailer is not to be considered investment advice. I am not a certified finical advisor. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. This article is intended for informational purposes only and is not intended to serve as a recommendation to buy or sell any security or asset.

Jan 26, 2019

Good Morning Investors,

The week saw lots of small stories that had huge ripple effects across the markets. PG&E stock jumped 75% on news that they will not be held liable for the California wildfires, Intel slumped on weak earnings in Asia – a harbinger of things to come with the grinding trade war, Venezuela’s bond and oil markets are the gamble of the week as regime change looms, and Amazon started testing delivery robots, stepping up the AI outsourcing of jobs, finally Singapore looks to be the first big casualty of a global mortgage slow down.  

Lets get to it.

This Week’s Buy

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This Week’s Question – What is PPP?

Purchasing Power Parity is a metric to compare productivity and currencies between different countries by taking a “basket of goods” approach. I find this metric to be best used when comparing non MNC’s. 

A full chart of US PPP’s can be found here

This Week’s Research – Interest – Gap Reporting

Traditionally a metric for banks to evaluate repricing imbalances, investors in sectors other than the finance industry should make themselves aware of gap reporting in times when interest rates are in flux. The 1970’s and early 1980’s was an important time for this metric and there is lots of great data to look at and study if you want to get spun up on how interest rates work as a function of the economic mechanism. 

For fixed rate gap reporting, all one needs to do is compare the sum difference between all interest rates. For example, if you have taken out a loan at 5% interest and are investing in a product with that loan at 5.5% interest, you have an effective gap rate of .5%. Yet, as we know, the world does not work this way in practice.

Once variables come into play, one needs to define interest rate reference over projected time bands. This makes forward projecting more of an exercise in forecasting. An effective sensitive projection will include liquidity projections. Thus, your 5% interest on $100,000K to make 5.5% interest on $10K is a net loss, unless you can project interest and liquidity changes that produce otherwise. 

These projections are referred to as Gap Reports. They are generated to take into account assets, liabilities and all off-balance instruments into maturity segments that project out a Cumulative Gap within the predefined maturity segments. A sound Gap Report should at the minimum have segments of quarterly rates for the first year, and yearly segments for the next five.  In this way an institution, or individual, can project and manage interest rate risk.

When investing in a market where interest are increasing in volatility consider looking at a gap report schedule, if available, to help make the most informed decision. For example, when I did my side by side this week with VTR and WELL, although I was unable to obtain a detailed schedule for either, I was able to compare their asset breakdown and used this to eyeball a version of my own. What VTR had that WELL did not, was a generative income from non-fixed loans. This indicated to me that VTR was much better suited to keep tight their interest gap profile moving forward as the Fed continues to raise rates. 

This Week’s Conclusion

Unrest in Venezuela

Kind of a boring week, but lots of little details were out there under the radar. And as we all know, the devil is in the details. Pay close attention to the price of oil as Venezuela is rife with turmoil. The U.S. is trying to pull out of the shutdown, you might see a bump in the indexes if a long term deal is reached. Finally, the airline industry is effected by both of these factors, someone out there is going to make a lot of money off next week, you just got to play your cards right on this one. 

 Good Luck This Week.

Disclosure: This mailer is not to be considered investment advice. I am not a certified finical advisor. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. This article is intended for informational purposes only and is not intended to serve as a recommendation to buy or sell any security or asset.

Jan 20, 2019

Good Morning Investors,

The market had its second up week, low volume has the more bearish economist worried, but the biggest news this week was the passing of economist, philanthropist, author, and one of the worlds most respected capitalist John C. Bogle. Mr Bogle invented of the index fund, founded of Vanguard, and promoted charitable institutions and democracy around the world. One of the most striking aspects of this humble giants success, is outside of certain circles, most Americans had never heard of him. Please take a moment to check out his amazing blog, it is worth your time. 

Lets get to it.

This Weeks Buy

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This Week’s Question

Well investors, you see the stork buys a commercial property and establishes a trust fund that can then be sold on the open market. All kidding aside, did you know the fairy tale of storks involved kidnapping a dead baby

If that wasn’t weird enough, REITs actually come from the Cigar Excise Tax Extension of 1960, fun. See section II for the details.

The first REIT,  community shopping malls was offered in ’61; railroad real estate followed in ’67. REITs now cover all kinds of offerings from Self Storage properties, to prisons (yes, you can invest the real estate of correctional facilities). Most recently electronic transmission lines are a bundled option available.

This Week’s Research – Interest Rates

“There is no sense in liquidity, unless expectations are uncertain”

John R. Hicks

Neoclassical Economist Irving Fisher (1867–1947) developed a relation between nominal and real interest rates. This relation is a bit basic, but I think it will help you to get a start on thinking about interest rates over time as  macroeconomic theory. His equation is notated as:

r = i –  πͤ 

Real interest rate ( ) is the nominal interest rate ( i )minus the inflation rate or the expected inflation rate. Thus, the higher the Fed raises rates the lower your real interest rate goes. This is good if you own debt, bad if you are looking to add to your debt. Change in purchase power derived form an investment based on shifts in the rate of inflation is reflected by the change in the balance of these rates.

The Fisher equation uses ( πͤ  ) in this equation as the expected inflation rate. Thus, as the nominal interest rate rises or falls, the expected inflation rate does the same to equalize the the real interest rate.

To calculate this rate over time, one would have to factor out the real interest rate with the expected rate in proportion to… the… nominal interest rate (I knew you’d get it). This can be easily expressed:

1 + i = (1 + r) * (1+ πͤ

It is important to note that the above is an approximation, and falls apart under larger time frames or interest rates. For more accurate expressions look to models that include LM factors that were developed post 1970s.

This Week’s Conclusion

Bad news about Brexit and the Wall/Shutdown (Both of which had their bleakest weeks yet) did little to flap the markets. This suggest to me that unactionable events will no longer register on the street. Perhaps the law of diminishing returns is in effect here. In any event, I continue to play it safe and build the REIT up. This provides a great base for passive income and is a stable investment when things go sideways. 

Good Luck this week.

Disclosure: This mailer is not to be considered investment advice. I am not a certified finical advisor. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. This article is intended for informational purposes only and is not intended to serve as a recommendation to buy or sell any security or asset.

Jan 13, 2019

Sorry for the late notice this week. I’m down at the souther US border and this has thrown a loop in my general schedule. The market made modest gains this week, CES kicked off with an unusual guest, a massive storm sent most of the country indoors, while progress in the US-China trade deal has created mixed reactions to Asian markets. 

Lets get to it.

This Week’s Buy

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This Week’s Question – What is AFFO?

Adjusted Funds From Operations, is a metric that is often used in Real Estate investing. It is a more precise measure used to conduct analysis from the operating funds as it accounts for (subtracts) capital expenditures from the operational cash flow that a property or collection of properties generates. When considering to participate in a Real Estate investment, consider the growth of both the FFO and the AFFO in relation to comps to get the best idea of the scope of the property portfolio’s ROE.  

This Week’s Research – Interest Rates

It all comes down to interest rates. As an investor, all you’re doing is putting up a lump sum payment for a future cash flow.

-Ray Dalio

Assuming we all know what interest is, my first question to kick this series off is: where do interest rates come from? The answer is a mix of three sources. 

The first and most dramatic source is the central bank of a nation. In the U.S. our central bank is the Federal Reserve which sets the Federal Funds Rate (FFR). This is a benchmark rate that fluctuates over time with the intent “to promote maximum employment, stable prices, and moderate long-term interest rates in the U.S. economy.” 

Secondly is investor demand for US treasury notes and bonds. Bonds are driven by the open market. The price is influenced by supply and demand, credit ratings of the issuing entity, and the age-to-maturity ratio. The interest on the bond is fixed, opposed to its yield which changes. Thus, investors in the bond market are looking for the highest yielding bond to its face value and the assumption of its yield change as it approaches maturity.

Lastly, banking industry loans and mortgages. The most obvious place we see this in action is in Credit Cards. The APR of your card is tied to an interest rate. Mostly likely the prime rate, which is tied to the federal funds rate. Commercial banks are going to do what they can to maximize profits. They are regulated to different degrees depending on what type of interest rate they are setting. For example, the rules governing a Student loan are not the same as those governing a Small Business loan.

These three systems are all working in tandem. While the goals of the Central banks are very different from the goals of Commercial banks, both want to ensure the healthiest economy possible. Bond market investors, who like the Commercial Banks want to maximize profits. Any product that you purchase, be it a house or a stock, is going to be effected by all three of these groups. The deeper your understanding of how they work and why will help you to maximize your investment returns over the time of your ownership of that investment instrument.

This Week’s Conclusion

A good deal still rests on the shutdown. As it drags on with no end in sight most folks are going to be hunkering down for a wait and see approach to investing. Modest weekly gains, flat weekly gains will be the norm, this mixed with deep drops as bad news comes in. Many market watchers want to claim that the Bull is still in, and on a purely technical basis this may be true. For me, the movement in the markets is nowhere near where it should be to make the kind of bold investment moves that carry the risk/reward levels for serious wealth generation.

Good luck this week.

Disclosure: This mailer is not to be considered investment advice. I am not a certified finical advisor. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. This article is intended for informational purposes only and is not intended to serve as a recommendation to buy or sell any security or asset.