Getting Ready For 2018: Position Your Portfolio Accordingly And Pick The Right Path For You

by: The Fortune Teller


What can you expect from the upcoming year?

What are the main risks to pay attention to?

What are we focusing on and suggesting ahead of 2018?

There are many paths investors may walk through, but there are very few that really suit your personal needs and goals.

With only one week left till year-end, there's no better time to take action and prepare yourself for 2018.

What can you expect from the upcoming year?

March 9th, 2018 would mark the 9th anniversary since the S&P 500 (SPY) traded at a level of 666 back in 2009. Although the markets don't move up or down based on statistics, it should be noted that the probability of a pullback is getting higher (the higher prices go).

On one hand, picking the red color while sitting next to a roulette table, even after the black color has been winning for nine straight spins, still leaves you with a 1/2 probability ahead of the next spin.

On the other hand, that doesn't mean that when you look back (at the past nine spins), the probability of what you've already witnessed is only 0.1953125% = (1/2)^9; that's about 2 out of 1,000 cases.

If the next spin will end up with black winning again that would mean that you are witnessing something that is happening less than 1 out of 1,000 cases (or 0.09765625% to be precise).

Do you really wish to keep playing the exact same game as you did for so long?... Perhaps you should move to the blackjack table where the odds are much in your favor?... How long do you wish to push it further?... Do you intend to stay awake and play all night long?... Wouldn't it be better to take (at least some of) the chips off the table now that you are way up?... Perhaps getting some rest in your nice and comfortable room upstairs?... Do you at all have an exit strategy?... Can you truly tell/foresee when and how it ends?...

Those are open questions with no straight/conclusive answers, but the analogy is clear (or at least so I hope...)

According to data gathered by Bespoke Investment Group, Wall Street analysts' consensus S&P 500 price target for the end of 2018 is 2,854. That's ~6.3% above the current level of 2,684.57 (12/21/2017 closing level).

Source: Bespoke Investment Group

The good news is that these analysts are usually off by ~5% compare to the actual average annual performance.

The bad news is that these very same analysts are not good (or in position...) to tell you when the market is going down. As a matter of fact, since the year 2000, there hasn't been a single year where these analysts have projected a negative performance for the next twelve months.

We, at The Wheel of FORTUNE, rather not gamble that much/far ahead; neither next to the roulette table, nor regarding where the S&P 500 may be in 372 days. Instead, we try to look at the macro landscape, assess the main risks (and potential rewards), prepare and position ourselves accordingly.

We strongly believe that a good preparation (for the risks ahead) is the best recipe to succeed in the capital markets. Putting it differently, more than accurately projecting the level of the S&P 500 at the end of 2018 - we rather assess the risks for the next year as we view those at the end of 2017.

A good preparation means that you are giving yourself a better chance to win/outperform, regardless of the level where the S&P 500 will be at on 12/31/2018.

You need to make your mind: What is your play? Do you play the...

  • ...Roulette (with the high risks associated with it)?...
  • ...Blackjack (where your odds to win are much better)?...
  • ..."S&P 500 to 3,000" (or 2,854) theme?...

What about you? Do you play the "S&P 500 to 3,000" theme or do you fear the beast (number)?...

What are the main risks to pay attention to?

  • Rich valuations/The good news are already baked in. Even if we assume that earnings are going to rise (mainly thanks to the recent tax cuts), multiples remain high. Furthermore, the assumption that the tax cuts may lead to long-term growth is, how to say it nicely, a wishful thinking at best. Just as Lance Roberts puts it: "There is no supportive evidence that lower tax rates, on either corporate or individual levels, have led to stronger economic growth over time."

  • Not much to expect for after most of the new agenda/bills already been implemented/approved. Stocks are moving up based on expectations. If there's not much to expect to - they may not move up as you may wish/expect them to. The famous catch-phrase "Buy the Rumor, Sell the News" has been created based on experience, not based on expectations...

  • Short-term rates and long-term yields keep moving higher. After pausing/consolidating for few months around mid-2017, the past three months have seen both rates (mostly) and yields moving up. Although thus far stocks haven't been shaken a bit by the rising yields, if this trend continues, one may assume that at some point yields may reach high-enough levels that would start having a negative impact on stocks prices.


3-Month LIBOR based on US Dollar data by YCharts

  • China. The fear regarding China's debt bubble bursting soon is still very much alive; perhaps imminent. While the Chinese authorities try to do everything in their power to take some air out of the credit-inflating balloon, the yield of the Chinese 10-Year note (touching 4% for the first time in more than three years) tells you all you need to know...

  • The Geopolitical risk hasn't disappeared. Kim & Co. may still wish to pull some muscles... poke an eye out... or just going ballistic again...
    Same goes to Iran... as well as to few other places around us...
  • Soaring debt. While the outcome of the tax cuts when it comes to economic growth is doubtful, it's much more certain that the US national debt will grow substantially. I'm not familiar with a credible analysis that predicts that the tax bill will pay for itself, as the US administration communicates and wishes us to believe.

Quoting the CRFB:

So far, no estimate that accounts for the economic impact of higher debt has found the bill would raise the growth rate by more than 0.1 percentage points per year. Rather, estimates of the growth boost range from 0.03 to 0.09 points per year – not even a quarter of the 0.4-point target.

  • It's hard-to-impossible to beat/outperform (or expect for something similar to) a year where the Dow Jones Industrial Average (DIA):
    i) Hasn't had even a single month ending with a loss.
    ii) Has set more new all-time record highs than any other year in history.
    iii) Has gained more than 5,000 points.
  • Overbought territory is shouting for help/great danger

  • Even a bull like Goldman Sachs (GS) is cautious...

  • How long can this market last without a real correction? Soon we are going to set another historical record...

More than anything... Haven't we benefited enough?...


SPY data by YCharts

All I'm saying is: Watch out below...

...or at least make sure there's a soft landing platform/option underneath...

What are we focusing on ahead of 2018?

Here are few of the main themes that we, at The Wheel of FORTUNE, are running/suggesting these days ahead of the new year:

  • More Income - Less Growth. For example: Lighten up on technology (XLK) in favor short-duration high yielding, e.g., senior-secured loans (e.g., BGB, BGX)
  • Within technology - more innovation, less traditional. We don't imply that Apple (AAPL), Microsoft (MSFT), Alphabet (GOOG, GOOGL) or Netflix (NFLX) are bad choices - not at all! - but Advanced Micro Devices (AMD), Nvidia (NVDA), ROBO Global Robotics and Automation Index ETF (ROBO) or Global X Robotics & Artificial Intelligence Thematic ETF (BOTZ) seem like the real-better deal, if one decides to play the most exciting near-term future of the technology/innovation space.
  • Lower Beta. For example: Sectors like consumer staples (XLP), healthcare (XLV), and utilities (XLU); the latter is a bit more complicated (See next item for more details).
  • Avoid rates/yields sensitive segments. For example: Long-duration credits (TLT, MBB), many equity REITs (VNQ, IYR) and some of the more exposed/sensitive utilities
  • Prefer segments that benefit from higher rates. For example: Lending portfolios of many BDCs (BDCS, BIZD) are linked to short-term LIBOR rates. Furthermore, with the 1-month LIBOR moving higher - many loans that were tied-up to a floor (e.g. usually 1%) have only recently started making bigger bucks (until the base LIBOR rate move above the floor - the loan interest remains the same).
  • Avoid unnecessary, too risky, plays, even if valuations seem attractive. Although brick-and-mortar aren't dead and won't get killed by Amazon (AMZN) and Alibaba (BABA), why put your head to sleep in the retail (XRT) bed that is, undoubtedly, filled with flees?... Call me a coward but Sears (SHLD) or J.C. Penney (JCP) don't do it to me. The (enormous) risk simply ain't worth the (not as enormous) potential reward.
  • Prefer segments that benefit from widening spreads. For example: Financial ETFs (XLF, VFH, KRE, KBE), American banks (JPM, BAC, C, MS, GS, WFC, PNC), Foreign banks (RY, TD, HSBC, BCS, CS, UBS) and even (some of the) mortgage REITs (REM, MORT) continue to be a good - and relatively safe - place to be in while rates move up and spreads (start) widening (again). As for mREITs - this is a more tricky place to bet on and we would be very selective with what we invest or avoid here.
  • Moving up the risk/liquidation ladder. For example: less stocks, more preferred shares (PFF, PGX) and bonds (BND) - but we must whistle the same warning also here: only the right-suitable ones. Bonds, just like mREITs, are a tricky bet to play now and investors should be very minded of the risks.
  • Moving up the risk ladder. For example, favoring investment-grade corporate bonds (AGG, LQD) over high-yield (HYG, JNK) credits, large-caps (SPY, IVV, VOO) over small-caps (IWM, IWO, IWN, IJR), developed (VTI, VEA) over emerging (VWO, IEMG) markets, etc.
  • Play if safer within a safe/preferred sector. In a recent Cheddar TV interview, we expressed our affection to major telecommunication services. Why would I buy into the struggling names (FTR, CNSL, CTL) when I can finds easy-accessible jewels (T, TWX, VZ, BCE)?
  • Preferred shares. Even here, focus on fixed-to-floating rather on fix-rate preferred shares.
  • Distressed valuations. For example: midstream MLPs (AMLP, AMZA), a segment that is trading at lower valuations, even compared to the recent multi-year trough that we witnessed in February 2016.
  • Specific promising plays. This can go into many possible areas, even among unpopular-risky sectors/segments. What comes to (our) mind here are biotechs (IBB, XBI). Obviously, this is an extremely risky segment, but the stocks here are running up or down solely based on their own merits. I wouldn't overdo this (5-10% max of one's portfolio) but building a good mix of 10-15 names may prove itself over time.
  • Using more "By-Passes". Many derivatives, especially options, are available for investors to enhance their income and/or get a better deal. Selling covered CALLs (on stocks you own), selling naked PUTs (on stocks you wish to own) and many combinations in-between may, in many cases, serve one's portfolio, goals and risk aversion much better than straight forward trades.
  • Increasing the safe-haven pockets. You don't have to keep idol cash, but you can/should increase allocations to short-term, secured, plays like iShares 1-3 Year Credit Bond ETF (CSJ-OLD) with 1.73% yield, Guggenheim Enhanced Short Duration ETF (GSY) with 1.37%, or even iShares 1-3 Year Treasury Bond ETF (SHY) with 0.98%.

Picking the right path for 2018

Last week, we started a series of "Getting Ready for 2018" articles where we touch upon many sectors, segments and groups within the capital markets.

The first part, featuring "Solid-Rock Dividend Payers" is available on the free section. Nonetheless, all other parts are exclusive to The Wheel of FORTUNE subscribers.

In each article, we're introducing out top (usually 10) picks for 2018 within the following sectors and segments:

  • Solid-Rock Dividend Payers - done
  • Biotech (sub $1B market-cap) - done
  • Master Limited Partners ("MLPs") (AMLP, AMZA) - done
  • Business Development Companies ("BDCs") (BDCS, BIZD) - early next week
  • Energy (non-MLPs)
  • Financials
  • Healthcare (non-biotech)
  • Utilities and Telecommunication Services
  • Technology
  • Mortgage REITs ("mREITs") (REM, MORT)
  • Equity REITs ("eREITs") (VNQ, IYR)
  • Fixed-to-Floating Preferred Shares ("FtFPS")
  • Fixed-Rate Preferred Shares ("FRPS")
  • Mega/Large Caps (that don't fit any of the above) / optional
  • Small Caps (that don't fit any of the above) / optional
  • CEFs

Principally, for each of the above sectors/segments, we create an A-Team that we will follow throughout 2018. If you liked our original A-Team - this is your opportunity to take a look at our new-additional A-Teams.

Btw, the original A-Team most recent update can be found here. We intend to publish one-last update about it during January 2018 and let it go.

Picking the right path is never easy and requires a lot of thinking, analyzing and most of all - asking the right questions as well as searching for the right answers. The right answers are those that suit your investment profile - risk aversion, target return, broader/general goals, investment horizon, etc.

There are many paths available for investors.
There are many paths you can walk through.
Nevertheless, there are very few paths that will provide you with the right combination of risk and reward that suits you and serves you best.

Putting it differently, instead of this path/wheel:

You may wish to consider this one:

Pick a path that leads to the (Wheel of) FORTUNE

The Wheel of FORTUNE is a large supermarket, filled with products of all kinds, where shoppers/subscribers choose what to take off the shelves. We aspire to be the Costco (COST) of the Marketplace; a place where all products - sectors, segments and stocks - are available.

Reading reviews written by subscribers who share their first-hand experience is an important tool in your decision-making process. It's enough to look at the past week reviews that capture very accurately what the service is all about.

  • Wide coverage/universe.
  • Making money.
  • Clarity and diversification.
  • Absolute and relative value.
  • Less words, more actions.

We started this article with spinning the roulette and we are ending it with spinning the Wheel... While the former is an almost-certain way to lose money, the latter is a much more reliable way to protect and enhance your fortune.

Merry Christmas and Happy New Year!

Disclosure: I am/we are long AMD, NVDA, T, TWX.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.