Friday, May 31, 2013

Updated performance:

-2.78% vs -0.45% for the benchmark.

No new thoughts beyond what I detailed a few posts ago.  I will be thinking long and hard about duration and my current bond mix.  As well, I will consider the stocks I hold.

My negative performance was due to poor stock choices, and a long duration in my bonds.  Also, a hedge which did not really hedge my portfolio, but did cause losses as the market went up.

Duration is the name of the game this past few days - as in don't get caught with any.  A quick primer for those not laden with arcane financial knowledge, interest rates are connected to bond prices through a mechanism labeled duration.  Generally speaking, the longer a bond's maturity, the longer it's duration.  Other factors come into play, for example. the lower the coupon, the longer the duration (all else equal).

Floating rate bank loans for example can be long in maturity 5-10 years, but have 3 month duration because the rates may be adjustable every 3 months.  The loan funds like VTA and VVR and BKLN have this feature and, assuming rates are going up because the economy is doing better, the yields will go up.

TLT and MHN for example are long duration funds and are getting hit as long term rates are rising due to recent speculation that the Fed will end it's bond purchases and other QE soon.

I am not so sure, but the market is the market and it is "right".  Anything with duration is getting hit.  That includes dividend paying stocks interestingly enough.  Especially utilities where their pricing power is limited by legislative rule.  So the XLU is down 2% this quarter where every other sector is up.

As always, I think moderation is the key.  Don't bet the ranch that rates are going up, or down.  Have a balanced portfolio and try to avoid selling on big down days and buying on big up days.

For me, the balance long term is about 45% equities/45 bonds and 10 cash.  I recently removed my hedges as they were not "hedging" (recall my blogpost about imperfect hedges).  Well, my S&P based hedges were not hedging my dividend heavy portfolio that was going down as the S&P stayed up.  So, I removed the hedge.  Right now, I am about 40% equities and about 30% in bonds.  I don't want to fight the trend in bonds right now, so if anything, I would look to trim my TLT if we get any up move.

Wednesday, May 29, 2013

KMB has been hit hard, down almost 4%.  I believe it is some rotation away from a winner that is hitting it.  I do not agree with this strategy as this is a solid stock that is still fairly (if not cheaply) valued and it's worth owning.  I will probably pick up a few shares here.

RAX  This one has bedeviled me and is a departure from my usual.  I believe in the long term use of the cloud structure.  But, who knows if RAX is the one to fully exploit it.  It is terribly over-valued based on current earnings and there is concern that pricing pressure will reduce profitability going forward.  I think it si still a buyout candidate, but I'm not sure I'm willing to wait it out.  I will look to sell it on the next up day - hopefully soon.

In general, it is very difficult for me to pick winners in the tech space and I should probably avoid the temptation and buy QQQ instead!

Down days like this, it's probably only worth contemplating any purchases one might make rather than selling.

That said, my research comparing earnings yield with next year's returns suggests that we are looking at modest equity returns in the next 12 months.  Right now, earnings yield is about 7% while 10year bond yields are close to 1.9% so the premium is around 5%.  We were last at these levels around 2009.  Stock returns were strong so I am still bullish, but it is a big change from 2012 when this measure was up at 8%!

Miserable performance for me this month as I missed the rally and didn't stay hedged enough all the way down.  In addition, I missed implementing the Aussie dollar trade.  Yuck.

Australian Dollar:
Down about 6-8% since I recommended selling it.  I think it is worth holding the short position, maybe cut it if we climb back into the 98 range.  I could see this extending down in to the low 90's.

TLT now approaching the lows of the last couple of years of around 110.  I still believe we have not seen enough evidence of a pickup in demand to warrant a backing off of the accelerator pedal by the Fed.  If I am wrong, equities will see some more rallies this year, hence my recommendation to be at on'e benchmark equity allocation.  Bonds can diversify and add value to a portfolio.  Notice I did not use the word hedge because they are not a true hedge.  A TRUE hedge moves in lock-step opposite direction to a given asset - for example, a short position in SPY will be a hedge to a diversified large cap equity portfolio.  Over recent memory, long bonds (TLT have had a correlation of about -.7 which is very negative, but it's not -1.  So, it will have a mind of it's own, if you will.  In this case, I think TLT will hedge stocks if we have a bad event, but will also have a positive return regardless (even if stocks go up).

High yield:
I have gotten out of 3/4 of my high yield bonds and have reduced my exposure to credit in general as I believe spreads are not high enough and one is better off in stocks.  Loans are ok, but VTA is better than VVR (which I have been selling) as there is a premium to NAV of over 7% in VVR.  BKLN is a good portfolio with no leverage.  If one is concerned with the possibility of short term rates spiking up, then that is a better play.  The reason is that VVR and VTA borrow very short term and lend out over longer term in order to earn a spread and juice up their returns.  The risk is that their borrowing costs go up and that will cut into their returns.

MHN and all muni funds have suffered with renewed concern over public finances.  I share the concern, but if we are truly getting a bounce back, then tax receipts will go up, right?  So I think the market is missing the linkage a bit.  Perhaps, people are selling muni to buy stocks, but that would be strange to me as the after tax returns are so high!

There is no doubt though, that the muni funds have been moving down dramatically so that has been a hit.  I will hold here and if you have any dry powder, it is worth looking at buying some.

Overall exposure for me is around 23%

MRK was a good buy on the dip and I see that continuing.  It is a solid company that should be bought when it is offered at a discount.

VZ has dropped about 6.5% vs T dropping 3.5% since mentioned swapping VZ for T.  Nice on a relative basis, but still T has lost.  I'm still a believer in the sector, though.

The Miners have been a loser as well with VALE acting like an anchor in my portfolio.  FCX has been good, but CLF has been volatile and a loser.  I will sell my VALE and buy more FCX 

Wednesday, May 22, 2013

I have just raised my equity exposure to about 15%.  Big turn around from this morning.  I don't think there was anything new from the Fed.

I'm still cautious, but this is a huge range that I can try to take advantage of volatility.
Wow, that's some turn around!

MHN is now trading at a 2% discount to NAV or so, I am buying a little bit in here.  TLT is also getting hit and I think it is worth buying some.  Again,the economic news is really just hopeful rather than certain in terms of improvement.  Unemployment is still the key and with the denominator still going down (meaning fewer people in the workforce/stopping the search for work) , the indicator does not give me the warm fuzzy feeling of a recovery.

In a month where the S&P 500 has gained 5.6%, it is reasonable to ask the question about whether there will be a pullback.

I believe the issue at hand is that the public is under-invested.  Stocks represent reasonable value today,  PLUS the ability to grow if things start to improve.

Myself, I have fallen victim to expecting volatility - some down moves to go with all the up moves, but there is no reason we cannot keep going up for some time.  I am reminded of flipping a coin - what is the probability of getting 10 heads in a row?  Very low, but what is the probability of flipping heads the 10th time after nine in a row?  Still 50%.

I am proceeding cautiously here because I am trying to run my money like a hedge fund that is intolerant of losses.  My equity exposure is effectively ZERO.  This goes against my long term view that I should be at my benchmark weight, so it goes without saying that I am very uncomfortable here.

But, there is no use crying over spilt milk.  All we can do as investors is review the past mistakes and improve for the future.

Right now, I am looking to pare back high yield  exposure and replace with stocks.

Wednesday, May 15, 2013

The market is definitely overextended- up close to 17%.  That said, it can continue that way for some time.  My exposure is basically nil and I have added to my volatility position and bought January 180 SPY calls.  These positions are hedged so they do not affect my exposure today, but as the market goes down, I will get short.  If the rally continues, then I will get modestly long.

I am debating whether to wager my current years performance on this idea of getting "long volatility".  It is a bit bold only in the sense that summer is coming up and often the market can get caught in a doldrums of sorts and not really go anywhere.

We have a situation right now where there will be no new earnings for a while and the economic news is getting better on the domestic front with tax receipts causing the deficit to be less than anticipated.  So congress will be out of the news for a bit perhaps (negative for volatility).

Tuesday, May 14, 2013

Right now, I am not participating in any of this rally.  My exposure to equities is down to about 7% as I have started buying TLT on the move to 118.  I now have about 15% of my portfolio in TLT.

I want to make an important distinction between what I am doing (trading) and investing.

I am trading for volatility - meaning that I am looking to time the market's up and down moves and positioning myself accordingly.  Generally, markets don't move in such a simple way.  My best guess is that we are seeing the effects of the general investing public being underinvested in stocks.

Stocks are still the way to go and if one is investing for long term, then allocations should be at your target or more.

Right now, I feel I am trying to get too cute and time this market too much.  The reality is that the down moves have been small and the buying opportunities mercurial.  TSLA continues to mock me and goes up 10% a day.

Materials have still not rebounded and that if that holds that may be a troubling sign in terms of global growth.  Watch CAT as well.

My AUD (Australian dollar) idea has been working well - too bad I never got into it AAARGH.

Investing can sometimes be like batting as I have previously hinted. The game is mainly about getting up to bat and finding a way to hang in there.  Of course, also like hitting, there are hot streaks, and cooold streaks  - which is, I believe, where I find myself right now.  The good news is while I am not making money, I am not losing it either.  If we get a small down move I will get back in and bat again!

I still like rotating out of high yield bonds and into some of the loan products like BKLN or if you like a bit more risk (because there is leverage), VTA.

If there is anything in your portfolio you are negative on, then this is the type of market to get out of it.  You can always replace it with SPY or IWM (if it's a small company) in equal dollar amounts.  The downside may be paying taxes now (if it's in a taxable account), but you can weigh that against the potential downside.


Thursday, May 9, 2013


What can I say, I am a glutton for punishment.  I just bought some in here and looking to double my position at the lows around 38.5.  I guess the good news is that I cut my position at much better levels and am now looking to get back in.  The company is growing rapidly 20% revenue growth and while the PE is high, I still feel the opportunity is there.  I believe the Cloud structure is the real deal and they are the leaders.  Perhaps, RAX will be a buyout candidate at some point.

I am sick that I have missed this stock as I love the product and believe that electric cars will have a place in the future.

I decided to buy a little in here around 120.5 because I am so underweight.  I can see it going lower perhaps, but that will be an opportunity to buy a bit more.

Overall,  I am banking on a pullback as my equity exposure is down to about 12%

Wednesday, May 8, 2013

RAX. Ouch.  'Nuff said.

Good piece by Bill Gross of PIMCO.  I agree with most of his conclusions, except for maybe the shortening duration part.

I think the longer durations (as long as they are in government bonds) will be ok.  Should not be a big position either way.

Right now, my exposure to equity is about 24%.   I have participated a little in this month's rally, but just in keeping with the exposure.

My materials allocations have been working nicely (CLF, FCX and VALE) and AAPL showing signs of life.

RAX also has popped up along with some rumors about a buyout and maybe good earnings tonight.  We shall see.  Very speculative right now and I have cut my exposure accordingly.

On a separate note, I have noticed quite a few stories regarding banks not lending.  I will repeat that my believe is that right now, it is not about lending standards.  indeed, even people with good credit are being turned down.  It is about the absolute level of interest rates.  Banks will only lend if they can sell the mortgage immediately and earn a spread.

If I see one flaw in Bernanke's plan, it's this.  He is helping asset prices, but it is not flowing into the economy, save for the wealth effect and that is not a stable source.

Stocks are still cheap relative to the options out there and also relative to their earning power.  I do have to believe, however that there will be pullbacks.  The problem is will investors have the gumption to get in on smaller than hoped for drops in stock prices?

It is difficult to find stocks that have not participated in this run up but still have liquidity.  Aside from the sectors I have pointed to previously, FEZ (Euro Stoxx 50) which represents large cap Europe could be a candidate, but we have to be a bit careful with currency exchange risk.  IWM, small stocks have not participated quite as much as the large cap names, but historically have done well.

Friday, May 3, 2013

FYI, some sector numbers quarter to date and year to date.  Good numbers today.  For me, the surprise will be increased global growth.  One way to participate if we get growth is to invest in materials and energy which have underperformed.

averages                                                                                         2.59% 14.44%
                                                                                                                   qtd ytd
iShares Dow Jones U.S. Aerospace & Defense Index Fund ITA         2.60% 12.71%
iShares Dow Jones U.S. Basic Materials Sector Index Fund IYM   0.24% 2.04%
iShares Dow Jones U.S. Broker-Dealers Index Fund IAI                 1.44% 19.60%
iShares Dow Jones U.S. Consumer Goods Sector Index Fund IYK 3.56% 17.90%
iShares Dow Jones U.S. Consumer Services Sector Index Fund IYC 4.22% 17.46%
iShares Dow Jones U.S. Energy Sector Index Fund IYE                 0.07% 11.04%
iShares Dow Jones U.S. Financial Sector Index Fund IYF                  3.61% 16.16%
iShares Dow Jones U.S. Financial Services Index Fund IYG                  2.16% 14.21%
iShares Dow Jones U.S. Healthcare Providers Index Fund IHF          3.97% 16.52%
iShares Dow Jones U.S. Healthcare Sector Index Fund IYH                  4.19% 20.67%
iShares Dow Jones U.S. Home Construction Index Fund ITB       5.73% 19.38%
iShares Dow Jones U.S. Industrial Sector Index Fund IYJ             0.75% 12.53%
iShares Dow Jones U.S. Insurance Index Fund IAK                          4.47% 20.71%
iShares Dow Jones U.S. Medical Devices Index Fund IHI                  0.00% 13.21%
iShares Dow Jones U.S. Oil & Gas Exploration & Production IEO -2.33% 12.95%
iShares Dow Jones U.S. Oil Equipment & Services Index Fund IEZ  0.58% 13.29%
iShares Dow Jones U.S. Pharmaceuticals Index Fund IHE                  3.15% 16.77%
iShares Dow Jones U.S. Regional Banks Index Fund IAT                 -1.25% 9.98%
iShares Dow Jones U.S. Technology Sector Index Fund IYW 2.09% 6.11%
iShares Dow Jones U.S. Telecommunications Sector Index Fund IYZ 10.12% 10.90%
iShares Dow Jones U.S. Utilities Sector Index Fund IDU                  5.05% 19.13%

CAT is a stock I have used in the past as it is a mostly pure play on global growth.  The price is reasonable here at $86 if we get a surprise on the upside for growth.

Of course, the REAL issue if we get growth is that bonds will get smacked.  Today we are seeing some of that.  Government bonds (TLT) down almost 2%.  If it drops into the 118 range, I will be a buyer.  High yield bonds still doing ok as they should because if the economy does well, companies do not default and keep paying high coupons.

Wednesday, May 1, 2013

I am doing a bit more work on the HYG,JNK high yield sector.  These funds have done remarkably well, but they are not the only game in town.  here's an article with a bit of research into some mutual funds for comparison.

I agree with the writer that high yield is very idiosyncratic and a smaller fund can be more nimble and thus have a little more protection on the downside.  I also agree that now is not the time to add money to this sector.  I think the yield spreads are too compressed to treasuries.

Today, both are down about 0.5%.  If they get any bounce today, I will sell 1/2 as I have a fairly over-weight position in high yield.

Right now, my preoccupation is with bonds.

As followers may note, I am very underweight and this despite my being bullish on them.  My main case is that growth will be low and so bonds (in particular long bonds) offer reasonable value even though rates are very low.

My problem is that I sold them at a good time on a rally) but then never bought them back when we got the dip.  I was waiting for a slightly better price and lost the forest for the trees.  In trading parlance, I was being (my apologies in advance for any young readers) -  a d**k for a tick.

This rather harsh self-assessment is always a hindsight reflection and is of dubious help in doing better next time.  Nevertheless, I find myself in a difficult position because, looking at TLT as a guide, this is where I sold my bonds and I find it difficult to buy them back right here because there could be a pullback to the 118-119 level.  My rationale is:  US government bonds are safe haven assets and part of their bid recently is money fleeing Europe which is still in a difficult spot.  I do not expect that to completely go away, but I was thinking that we may get some good news for a few days and our bonds would get hit, creating the buying opportunity.  The other possibility for a down draft would be asset allocation away from bonds and to equities as they keep marching to new highs.

Probably the smart thing to do would be to buy some TLT here to reduce the size of my bet, but I'm going to wait it out.  In the meantime, I run the risk that some pice of bad news will get TLT to much higher levels.

MRK, getting hit today.  Good current results, but they guided expectations down for the balance of the year.  I look at this is a quality stock on sale.  Buy it almost 5% cheaper than yesterday.  I like adding here.