Weekly wrap, 8/20-26/2017

Macro and Markets

The week’s low was part of the reversal on Monday. It stopped right at the intermediate trend line and nowhere near to the June low of 2405. Jackson Hole was pretty much a non-event for stocks but gold and bonds were up and the dollar down on the “non-hawkish” Yellen. Next week will be the last chance to take out the June low before the big shots return from summering in the Hamptons. I still see that scenario as more consistent with the post-August “moon-shot” my model has been calling for, but not absolutely necessary.

The Q’s are acting better than the S&P, despite not having leadership from Amazon ($AMZN), Alphabet ($GOOGL, $GOOG) or Facebook ($FB). This rotation is necessary and healthy. It bodes well for the market when the “kings” do return.

Portfolio

For a second week there is no transaction other than the usual 401K/HSA contributions (which ought be assumed as the norm from now on). This level of activity (or lack thereof) is quite normal as my core positions have been established and the time scale of timing decisions are on the order of years. My largest speculative positions are leaps on the Q’s. Once it starts to move the short put legs will require more frequent maintenance but the long call legs will be held for long term capital gains.

Good Reads

None of the above is investment advice, the standard disclaimer applies.

Weekly wrap, 8/13-19/2017


Macro and Markets

As expected the situation in North Korea appears to be calming down, for now at least. Relief for the market was short-lived though when the President’s comments on Charlottesville and the whole-sale defection of CEO’s put the administration’s pro-business agenda in jeopardy. The CNN Money fear and greed gauge was at 19 on Thursday and 17 on Friday, signifying extreme fear. Ironically, taking out the June low (S&P 2405) is probably the best thing that can happen, paving the way for the maniac phase of this bubble. We may get there on next week the way things are looking at Friday’s close. On the bright side, it’ll surely make our more astrologically inclined friends happy.

Alan Blinder was on CNBC talking about the “mysterious lack of inflation”. It seems to me much of the pricing pressure can be attributed to Amazon, with the fear of automation (AI + robotics) suppressing wages. Can it be that obvious? The key take away: he is of the opinion that if inflation stays low, the December hike will be off the table. That will be broadly positive for many assets.

Precious Metals

Spot gold exceeded $1300, for what, 5 minutes (?!) on Friday. I was expecting a pull back above $1300 but not that brief! Though if the stock market tanks next week “traders” (in quotes because those trading gold like stocks don’t last long) will have another chance to load up just in time to be whipsawed again. My main correction targets are $1265/1240. Long term holders need not fret as I believe gold will amble along as the stock bubble enters its mania phase, ready to take over the baton once stocks deflate.

Cryptocurrencies

This is the first truly global bubble where even an Nigerian Prince with an Internet connection and a bank account can participate. The Reformed Broker linked to an interesting video on Bitcoin valuation. I originally bought into cryptocurrencies because I saw the outcome as bi-modal (heaven or earth, nary in-between). Now the positive outcome looks increasingly likely. I expect each of the following to happen at some point: bitcoin ETF, Coinbase IPO, and finally major banks facilitating bitcoin transactions. This is far from the majority opinion as can be seen in this poll. BTW, Mr. Money Mustache is frequented by gen Y early-retirement aspirants. My own expectation is somewhere between the last two choices, or about 1 trillion market cap.

Since the last ramp saw bitcoin going from $1500 to $3000, very simplistically I expect the next pause to be around $6000 which is also Tom Lee’s target for next year. Bitcoin’s daily volatility is hovering around 5-6% vs. about 1% for gold on average. I’m staying with my allocation of 12% to PMs and 2% to cryptocurrencies.

Portfolio

No transactions this week other than the usual 401K/HSA contributions. The July Pimco UNII report came out and numbers were … dreadful. There was an SeekingAlpha article and much discussion on the MorningStar forum. Those funds are indeed black boxes. They have paid off handsomely for me but I harbor no illusion of them being buy-and-hold vehicles. When the credit cycles turns they could drop faster than stocks. That’s the price to pay for reliable increases punctuated by sporadic buying opportunities during more peaceful times. For now I’m holding and watching NAV’s closely.

Among my individual stocks I pay particular attention to the losers believing the winners will take care of themselves. I was relieved that Ross ($ROST) jumped after reporting good numbers on Friday. I’m still vexing over Chevron ($CVX) and Exxon ($XOM), my only energy names. The crude cycle seems finally bottoming but I’m not sanguine about the long term prospects. If I decide to maintain some exposure I’ll switch to a refiner. I’m not terribly inclined to buy into renewables or other “new” energy companies, nor am I looking for yield so MLP’s are out as well. Decisions, decisions.

Outlook

No change.

Good Reads

None of the above is investment advice, the standard disclaimer applies.

Weekly Wrap, 8/6-12/2017

With this post I’m kicking off a new series of weekly updates to appear each weekend. For now this is a new experiment so the format will be fluid.

Macro

All eyes are on the escalating tension in North Korea this week. If history were any guide, some kind of d├ętente is to be expected. Even if rationality fails to prevail, IIRC, stocks rallied when the bombs started to fly at the beginning of both Iraqi wars. There is the risk of US appearing to sink to the same level as the NK brat with the weird haircut while China and Russia look like adults (may already be the case anyway). But it’s an outcome infinitely more palatable than losing the key strategic outpost (Guam) in the Western Pacific. Conclusion: fade the panic. The bigger take-away is that the rest-of-the-world might continue to diversify away from the USD as a vote of no-confidence in the current administration. Any weakness in the US inflation data will only cement that view.

Precious Metals

Spot gold exceeded $1265 comfortably on the back of several Presidential tweets, and was able to hold above $1280 in recent days. Normally I’m suspicious of geopolitically driven rallies but given the extreme COT readings a while back I think we’re in the clear long term. Short term there may be a pull back around $1300. If that happens, whatever room left in the portfolio will be directed towards miners.

Cryptocurrencies

Bitcoin cleared $3500 this week, a new all time high. The BCH (Bitcoin cash) hard fork turned out to be a free dividend. It does appear that wider adoption is on the horizon but I’ll refrain from giving price targets. I still plan to gradually sell at set intervals. For kicks I calculated the IRR from early March and it was over 3400%.

Portfolio

Picked up more CEFs on Thursday and Friday on their usual “swoon” that occur every several months. Placed additional directional option bets on the Q’s. The initial margin is at about 1/3 of the total equity in the main trading account but I’m already at my volatility limit. On Thursday the total portfolio dropped 1.4%, roughly matching that of the equity market. But that’s with 12% in stable value funds, 5% in cash, 12% in PMs, and 2% in cryptocurrencies. The latter two had strong gains. Anyway, it reflects the additional risk in the options positions. For the last several months, my overall portfolio managed to gain more and lose less than SPY, that’s a trend I intend to continue.

Outlook

I’m now fully “locked and loaded” for the post-August moon-shot I’ve been expecting. Contrarian indicators abound: there is no shortage of gurus urging caution; the sentiment index shown below (source) is another. If the North Korean situation resolves satisfactorily we’ll be off to the races in the blink of an eye. My overall projection has not changed: in round numbers the S&P to 3300-3500 and the NDX to 10K in 12-18 months. This bubble will be another for the history books.

Good Reads

None of the above is investment advice, the standard disclaimer applies.

Performance Tracking July 2017 and One Year Review

For calculation methodology see this post. Tracking growth stocks and fixed income CEFs started in April’17.

July was an excellent month all around. My total portfolio gained 2.22% exceeding both SPY at 2.06% and 60/40 at 1.37%. The active accounts gained 2.65% and the passive accounts 1.87%. YTD the total portfolio is at 10.71% vs. 11.43% for SPY and 7.89% in 60/40. For the actively picked stocks, growth stocks had a blistering gain of 10% only to be weighed down by the barely negative showing from the DGI compatriots. Combined they delivered 2.46% in July well above the SPY. Since April, my individual stocks are 0.6% ahead of SPY which is exceeding my expectations. In the “other” category, leveraged options are starting to perform although with a high volatility as expected. There were responsible for about 1% of the overall gains — nothing to sneeze at. Cryptocurrencies recovered a little, just ahead a controversial hard fork; though I don’t expect them to move much probably until year-end. It looks to me that institutions are managing the price levels to accumulate quietly.

AllocateSmartly is now tracking 39 different tactical and static allocations. In July, 2.22% would have placed my portfolio at 11th out of 39, while 2.65% would have tied for 6th. YTD 10.71% would have been 8th out of 39. The active accounts’ YTD gain of 13.33% would have been 2nd overall.

This is the 1-year anniversary of this blog which means there is 12 months worth of return data. My portfolio is still suffering from last July to November such that the 12-months performances are still lagging. On the other hand, the YTD numbers are excellent all around, both absolutely and risk-adjusted. The reason for this improvement is several-fold. Adjustments were made in the composition and location of CEFs that I have written about. In individual stocks, greater emphasis was put on growth over current dividend payout. Lastly, the relative performance of the precious metals was a large contributor to “tracking error” — I put that in quotes since the differential in performance is entirely intentional. PMs reached a peak in July 2016, declined hard for the rest of 2016 and are relatively stable in 2017. Below are two summary plots for my main taxable account at InteractiveBrokers. In terms of account value, today it’s over half of my active accounts, So it’s quite representative of the qualitative behavior of my total portfolio.

Both figures cover the period from the end of 2015 to 7/28/2017. The first shows the cumulative gain vs. SP/EFA/VT. My portfolio outdistanced the benchmarks from the start and never looked back. The decline from July-November 2016 is visible. Then the climb resumed and appeared to be accelerating in the last month. The acceleration is due to the leveraged option positions that I initiated at the end of June and continued adding to in July. If the market continue to behave as my model predicts, the out-performance should pick up momentum. Looking at the relative performance of passive with and without PMs (at parity YTD), PMs appear to have finally turned the corner from the decline going back to July 2016. While I expect a lengthy build-up to a blow-off phase in several years time, PMs should no longer be a detractor for performance for the rest of 2017.

The distribution of monthly returns in the second figure is rather interesting. First of all, international (EFA) was bipolar in the last two years. It was barely positive(?) in 2016 and tremendously strong YTD. As such it had both large gains and losses. My portfolio had positive skew and less big monthly losses than the benchmarks. I dare say these were the return characteristic that professional managers would be proud of.

Portfolio Review July 2017

This is my second portfolio review on the verge of the one year anniversary of this blog. The inaugural edition can be found here. Some background can be found here and here.

Overview

First of all, I want to update the table in the Financial Independence Progress Report.

The portfolio is well on its way to achieving the moderately aggressive goal of “Financial Security” by the end of this year. This milestone is defined as having 20X in the “Total Invested”; where X is, with some padding, the projected post-retirement annual spend. I’d still have a mortgage balance but 20X is such that even if I were to lose my job we would still be able to survive. There would be some painful belt-tightening but at least we wouldn’t end up in the street. YTD, the portfolio has already matched last year in percentage gains (10.87%) as calculated by the simple Dietz method. It’s currently positioned to take advantage of accelerating gains, especially in technology stocks.

“Total Invested” in the table includes the “Total Portfolio” as tracked in this blog as well as the 529 accounts for my daughters and the cash value of a small pension from my wife’s previous employer. “Total Portfolio” is about 90% of “Total Invested”. Networth is defined as “Total Invested” + home equity. We don’t own any investment real estate. I also find it too cumbersome to track the worth of miscellaneous items. The two pie charts below break down the location of various assets.

We’ve always maximized contributions to tax-advantaged vehicles for as long as I can remember. Since my wife is a SAHM these days, current contributions are for my 401K, HSA, and two backdoor Roth IRAs. The backdoor Roth is one reason we kept my wife’s 401K with the previous employer, besides the outstanding stable value fund and other low-fee index vehicles there. Taxable is just shy of half of “Total Invested”, to be drawn upon in early retirement. In a typical year, our taxable contribution outweighs the tax-advantaged kind by some margin, but it does vary since a large part of my pay is incentive-based. Unfortunately I already know 2017 will be leaner than any of the 3 previous years — that I’m still confident about hitting the year end goal is testament to the strength of this market.

Portfolio Strategy Diversification and Asset Allocation

There are two ways to cut across the total portfolio, the first is by different strategies, whether active or passive. Passive stands at just over 40%, active at 56% and the emergency fund (EF) occupies 4%. During the past year, I moved a portion of EF into active accounts due to higher confidence about my position with my employer. The EF is equivalent to about 10 months of current expenses, including potential outlay for medical insurance if I were to be laid off. Total portfolio returns are calculated with cash drag from the EF. The total portfolio and its subcomponents are compared against the benchmark 60/40 SPY/AGG each month.

Before going into each of the passive and active strategies, there is another, more conventional way to look at the overall asset allocation. By that measure I’m at 56% equities, 24% fixed income, 12% precious metal (PM) bullion and miner (miners are not counted towards general equities), 6% cash (includes EF and undeployed cash in active accounts), and finally 2% other that includes cryptocurrencies and options (marked to market). It is difficult to gauge the risk level of this portfolio using conventional stock/bond metrics. 56% equity is very conservative for my age; 24% fixed income + 6% cash is in-line with main stream recommendations. But the fact is I’m already close to the far end of my risk scale since there are assets that are, shall we say, quite volatile. I’m currently underweight PM, 12% with partial hedge vs. 15% target. In addition, I may take on additional option positions. These changes should be completed by the end of August.

Passive Accounts

Passive accounts is where I use Vanguard or equivalent index funds for the equities including REITs. The discussion in May is still current. Target allocation is 55% equities, 30% fixed income (stable value funds only) and 15% PM (mostly bullion). At the start of each year, I conduct a review and set the asset allocation for the rest of the year. Mid-year changes are allowed as long as they are part of the yearly plan. Changes are usually in 5-point steps and there is a maximum swing of 15 percentage points from equities to fixed income. I’m already at the most aggressive stance in my passive accounts and cannot take on any further risks.

Within equities I take a mild slice and dice approach. US is slightly tilted to small and international moderately tilted to EM. The split between US/international is 50/50, and there is a dash of REITs since I don’t have any in my active accounts.

Active Accounts

The active accounts are purely discretionary. They are currently allocated at like this: PMs, 11% actual vs. 14% target; fixed income CEFs, 22% target and actual; growth stocks, 14% actual vs. 15% target; DGI stocks, 45% target and actual; other, 4% actual and target; and cash, 3.5% actual vs. 0% target. Among these categories, I expect the “other” which is cryptocurrencies and options to drift away from the target and I’d be quite alright with that.

In a previous post I spoke of structuring the portfolio to take advantage of both asset bubbles and the supposedly “normal” markets. Given the very nature of bubbles the portion devoted to them needs to be small. Right now that function is taken up by the “other” category which is a combination of cryptocurrencies and directional option combos on tech stocks. My posts on cryptocurrencies can be found here. They are known for extreme volatility. For example, the daily volatility of bitcoin is over 4%, or about 4 times that of gold. Other coins such as Ethereum are even more volatile. So to make the volatilities equal the cryptocurrency position needs to be less than a quarter of the gold position, assume zero correlation. Although I have been writing more about cryptocurrencies lately, larger return potential ought to lie in the developing tech bubble, most likely with AI as the major meme. My chosen vehicles here are option combos that offer high leverage. Similar option strategies were discussed here. Besides cryptocurrencies and tech stocks, I also expect PMs develop into a full-fledged bubble but maturing after the tech stocks.

The rest of the active accounts is geared towards a “normal” if growth-biased market with the same broad categories as passive: PMs, fixed income, and stocks but with more risk. For example, miners, i.e. GDX/GDXJ are a large part of PMs, and they are leveraged to gold price by a factor of 3-4. Fixed income consisted of all leveraged CEFs, which are diametrically opposed to the stable value funds in risk. One major portfolio shuffle this year was to reduce the muni allocation, as it was one source of the major hit last November, increasing taxable CEF allocation in tax-advantaged accounts and move all DGI stocks into taxable accounts. The taxable CEFs have had outstanding performance YTD. This too will one day pass I’m sure, but for now the CEFs are the most reliable performer I have.

At a combined 60% of the active accounts, the actively picked stocks are the largest segment in my portfolio. Performance of the DGI stocks have been tracked since blog inception and I found them rather disappointing to tell you the truth. After the portfolio shuffle, the growth stocks are also being tracked and so far the combined performance just about matches that of SPY. That underscores again how difficult it is to beat the index. I have given myself all the advantages of low cost (one time transaction fee much less than 1 basis point), long holding period, balance between diversification and concentration (~30 stocks total). Of course, there is still the issue of positive skew to contend with. The main advantages I can really see for active stock picking are:

  • More opportunities to sell options
  • The blended dividend rate of the DGI and growth stocks are currently under 1.6%, lower than that of SPY or VTI, so there is some tax savings.
  • It potentially allows me to be more nimble when the market peaks.

The last point is purely hypothetical for now. At any rate, I don’t expect any appreciable out-performance over the index. Below is the sector weight vs. that of S&P. This is something I monitor only, the market weight is not being viewed as a target. If anything, I’m interested in avoiding the under-performing sectors such as energy. Even though the energy sector may have reached a short-term bottom, I’m not optimistic about the secular trend, at least as far as the most vanilla holdings that I have: Exxon and Chevron.

So that’s it, a comprehensive view of the current portfolio. It feels like the major pieces are all in place. With luck, we’ll have the wind behind us for the next 12 months and I’m stoked to see how far it can go.