Monday, January 13, 2014

Obviously, the low employment number last week was a negative.  We will have to wait and see if there is confirmation one way or another.  I'm betting on a weather related impact and that we see a bounce back.

Nice surprise for MRK and I am taking this opportunity to sell.

I have sold my position as the Christmas season bump failed to be sustained.  This will be a volatile stock this year.

Thursday, January 9, 2014

Happy New Year!

Updating the performance numbers...

We are in an economic healing environment.  It is important to make sure we look at how the market is actually trading versus how we think it should trade.  Currently, the market is hitting anything with interest rate sensitivity - dividend payers for example like the telecoms, CLX, LO, GE.  I believe this to be misplaced (at least with LO and VZ and GE) as better economic growth will help these companies as well and I don't see the interest rate sensitivity outweighing the good.  But... it is expensive to "fight the tape".  Better to wait until the market stops the activity and then jump in.  So while I would like to buy more LO for example, I will wait.

I am looking to pitch out ATT.  I am no longer persuaded by it's yield and cheapness relative to VZ.  The growth potential that I see is not really looking too likely and the landline forms too large a part of their business.

I have been buying this emerging market fund.

Developed Europe is looking interesting to me as a cyclical bet.  They have been behind us on the mending front, so it may be interesting to add exposure there.

Friday, December 20, 2013

Reviewing the current state of valuation:

10 yr Treasury:  2.94%
S&P 500 PE 15  (forward earnings $120, index level around 1810)
E/P is 6.66%

S&P 600 (small cap) has a PE of around 18.
E/P is 5.55%

Small cap E/P tends to be smaller because the growth expectations are larger.

So with the S&P 500 spread of earnings yield  to 10 yr treasuries of 3.7%, that puts us in a favorable range for stocks going forward.  Anything below 2.5% and I would increase my bond weighting.  Right now, the indicator is pointing to increased equity, though it is now the lowest in the last few years.  But still a huge positive versus where we saw the indicator in 2007 and 2008 (around 0% risk premium for stocks).

Thursday, December 19, 2013

Today, I am buying some VWO.  Emerging markets getting hit as investors reassess whether China will keep growing.  That is always a question and we know that it is a managed economy, a monumental change and subject to many potential issues.  But, that is why it is called investing.

MHN has made some recovery, but it is still cheap.  I was able to buy a bit more of the preferred stock ETF's but haven't sold anything yet.

I am looking at the problem with a buy first and wait to sell mentality.

Wednesday, December 18, 2013

The Fed's decision to start reducing it's purchase rate, while notable, obscures the fact of the overall indebtedness being taken on in the name of trying to jump start the economy.

I guess any movement towards a more normal policy is welcome but I still come away with a lot of uneasiness.  Jim Grant, most lately, and others have been discussing the asset inflation that is the result of the Fed's activities.  If a small percentage own the lion's share of the assets and the fed is trying to push asset values up by lowering the rate at which cash flows are discounted then it stands to reason that the wealthy are obviously getting more so.  He points out that records are being set in purchases of rare automobiles and art.  All true, and all signs that inequality in economic outcomes is increasing and to me this is depressing.  I would hope that the rising tide lifts all boats, but I fear that many are left behind.

But, as investors, we need to invest based on the information in front of us and not what we might hope it would be.  I do not see anything currently standing in the way of asset prices continuing to go up.  My equity allocations are going to be going up.  But, and I think this is important, I will be reducing my corporate fixed income exposure.  I have written about PFF recently and it is clear to me that these instruments are sub-optimal for a growth portfolio and even for an income portfolio as I have been trying to build.  Right now, we need to invest for growth and that means equities.

But hold your horses! We do need some balance.  Usually fixed income is the way to balance a portfolio, but I would posit that we should only consider government bonds.  Further, because of the future potential dangers of the Fed's path and it's implications for the US dollar, it will be important to mix in global equities and perhaps global government bonds (the only real alternative in my eyes are German or Swiss bonds).

For now, enjoy the upswell and use it to sell any positions that are not your favorites in particular on the fixed income side.  I still like JPS, MHN and VTA but largely because they are at such massive discounts to net asset value (NAV).  But, reviewing my holdings, while I think T is a bit cheap versus VZ, it is not a favorite and I would rather hold a bit more emerging markets equity VWO.

Thursday, December 12, 2013

A lot of good thoughts here in this article:

In particular the thinking behind not holding cash.  In practice of course, we should hold at least some percentage in order to be able to react to any bargains out there.  That said, there should always be a competition in one's portfolio.  No investment should have a locked spot.  Of course, there can (and should) be factors other than pure value (diversification is an obvious one).

I do like the idea of not getting caught being too macro in thinking.  The reality is that none of us know the future, so we make the best decision we can with the information we have.  Solid companies that are managed well, in a growing market are probably good long term bets and short run swings should not dissuade us.  As I've said before, we can't invest for the end of the world (well, you can, but it's a bit extreme IMHO).  I fall prey to this thinking as well, but playing too defensively is not a good long term recipe for success.

MHN has gotten to a fairly large discount to NAV (-10%).  I am buying some more here.  Even with Puerto Rico and other muni risk, I think it's a good reward/risk ratio.

I ave also bought some TLT using Jan 2015 options (a 1x3 risk reversal if you care).  This will give me some exposure if we get a downdraft in growth expectations.

In addition, I am buying some VWO and other international exposure.  Emerging markets have not done well this year , but if growth prospects improve globally, they should reward investors handsomely.

Wednesday, December 11, 2013

I think this is an excellent synopsis of the "risk" case to the current market.

In particular, there are 2 graphs that I find telling - the job #'s from Russell 2000 companies and the the gap in loans versus bank assets.  It is frustrating to say the least that the stimulus is not finding it's way into the economy.

To me, it is clear it is pushing up asset prices - and here I am not talking about only the bond purchases, but the low rate environment.

It is a very thorny problem.  Does one go to cash to protect their position and potentially miss out on a continuation of the bull market?  It is very difficult to stand on the sidelines and watch the market go up every day and not participate.

No easy answer here.  I am uneasy, but also look at the objective numbers and find nothing wrong about the valuations, but that is relative to where interest rates are.  Recall that I look at earnings yield relative to 10 year bonds.  Right now, we stand at about 6.25% versus the 10 year at 2.75, so the spread at 3.5% would have me in stocks.  But, what if rates were at a more "normal" level?  say 4% (growth of 2% plus inflation 2%).  Well, that would put stocks at a not so cheap level.  To normalize to the current 3.5% spread, that would put the multiple at 13.33 and with earnings around 110, then the index at 1466 (or about 20% lower).

Unfortunately, this type of analysis can make one a chicken little.  Markets can stay irrational longer than one thinks.

So do we ride the wave?  Or batten down the hatches?