Seeking Alpha

The Journey And The Destination: Q1 Results And Looking Ahead

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Includes: AAPL, AB, ABBV, AMAT, BKNG, BTI, CAT, CELG, CSX, CVX, DIA, EFC, EQNR, ET, ETN, FFTY, GWR, IAC, JPM, KKR, KLAC, KSU, LAD, LDRS, LMT, MGA, MO, NSC, NYMT, PSP, PSX, SPY, UNP, WBA, WM
by: Michael J. Bernard
Summary

After an early run-up, 2018's market has turned much more challenged.

Whether the market is in a confirmed downtrend or not has often been a matter of perspective.

No matter where we go, here we are.

Introduction

In many matters I often come out looking like a contrarian, or worse, and my return to active participation in The Markets over the first weekend of February of this year probably appears in retrospect to be the most inopportune timing possible.

I had been contributing to my employer sponsored 401k for most of 2017 and ended the year with a 14.38% return using my proactive allocation strategy, and began 2018 with the intention of picking back up with my other investment activities.

Of course Friday February 2 and Monday February 5 would be two of the worst days of the year and if I was a superstitious sort maybe I would have been dissuaded. Instead I began contributing to my Roth IRA in earnest and have positioned myself to be right at the 5,500 maximum contribution for the previous year by the April 17 cutoff.

A collection of the headlines I was reading over that weekend is telling:

It's Looking A Lot Like 2008 Now...

The Big Picture: Stocks Fall Broadly; Is A True Correction Near?

OK, That Was Bad; Where To Now?

Anatomy of the Escalating Bond Bear Market

Wage Inflation is Finally here, and it's Toxic for the Fed

"The Market Is On The Edge Of Chaos, A Zone Where Rare Events Become Typical"

Today's Market Is Anything But Normal

How Worried Should You Be? Traders Confront Inflation's Reality

Q1 2018 Results

Because I did not enter the market with either the Primary Strategy or the Pretty 30 Portfolio (secondary strategy) until the quarter was in motion, the results section for this quarter will be slightly incomplete in comparison to future installments. The above graph shows what the two strategies should have produced using a backtesting tool (Portfolio Visualizer) if both had been in full deployment over the full quarter.

My initial purchase in the Primary Strategy was made on February 12, and the below graph shows its performance relative to the S&P 500 ending on March 29.

Similarly, the Pretty 30 Portfolio has beaten the S&P 500 since it's initial purchase on February 26.

My 401k also outperformed the S&P 500 over the full course of Q1, turning in -0.33% compared to the S&P 500 -1.28%.

Primary Strategy

My Primary Strategy was initially set to be composed of Dow Jones Industrial Average ETF (DIA), S&P 500 ETF (SPY), Innovator IBD 50 ETF (FFTY), Innovator IBD ETF Leaders ETF (LDRS), KKR & Co. (KKR) and AllianceBernstein L.P. (AB). I made the adjustment later to substitute KKR & AB for Proshares Public Listed Private Equity (PSP) since the strategy, for the time being, would be almost exclusively deployed in my IRA and AB & KKR should not be held in a tax-advantaged account due to K-1 tax implications.

Composition as of 4/6/2018:

FFTY: 19.4%

SPY: 19.2%

DIA: 19.2%

LDRS: 19.0%

PSP: 23.2%

A few weeks ago I wrote a focus article on FFTY available here. Some of the discussion that was sparked by this article has been a part of considerations moving forward, including alternative ETF's using the same overall momentum strategy with a lower expense ratio. One of the weaknesses of the FFTY that was brought up by more than one reader is that the IBD 50 -- the tracking index that the FFTY attempts to follow -- can be too late in identifying components and the best upside has been missed. I will continue to watch iShares Edge MSCI USA Momentum Fctr ETF (MTUM) and Fidelity Momentum Factor ETF (FDMO) as possible replacements for FFTY in the future.

As has been pointed out at least once, PSP has some major limitations including a very high fee (~2.3%), net underperformance in comparison to the parent Invesco (IVZ), and fundamentally the investment proposition of investing in public shares of Private Equity companies. Admittedly I chose PSP because it was the only ETF I could find that had exposure to AB or KKR (KKR in this case). Of course, I would have preferred an ETF that had both and in a sizable percentage (PSP only holds ~.72% KKR) but PSP fit at least a part of the bill, and has an ~10% dividend yield which makes up for a part of the lost proposition with AB. I am planning on a full focus article in the very near term that will cover all of the above in more detail, including some alternatives I am considering.

Secondary Strategy / Pretty 30 Portfolio

The secondary strategy is my longer term goal of refining my individual stock picking methodology to achieve S&P 500 market beating results. My initial deployment thus far has not been very much because I have been trying to max out both 2017 and 2018 tax year IRA contributions as quickly as possible, but it is my expectation these will be completed by mid-year then accumulation in taxable accounts -- and thus my Pretty 30 Portfolio -- will begin in earnest.

My long term plan is that, once certain the Secondary Strategy has achieved my goal of consistent S&P 500 beating results over the course of at least 2018 and some or all of 2019, I would replace the SPY and DIA components of the Primary Strategy with the Pretty 30 Portfolio.

You can view the entire portfolio below with the most recent metric analysis (3/24/2018):

Recent Focus articles on Pretty 30 Constituents:

KKR

LAD

AB

BTI

LMAT

Composition as of 4/6/2018:

Booking Holdings Inc. (BKNG): 7.1%

Chevron Corp (CVX): 3.6%

Statoil ASA (STO): 3.6%

New York Mortgage Trust Inc. (NYMT): 3.5%

Lockheed Martin Corporation (LMT): 3.5%

Magna International Inc. (MGA): 3.5%

Kansas City Southern (KSU): 3.4%

Phillips 66 (PSX): 3.4%

Altria Group Inc (MO): 3.3%

AllianceBernstein LP (AB): 3.3%

Ellington Financial LLC (EFC): 3.3%

KLA-Tencor Corp (KLAC): 3.3%

Waste Management (WM): 3.2%

CSX Corporation (CSX): 3.2%

Eaton Corp PLC (ETN): 3.2%

Union Pacific Corp (UNP): 3.2%

Lithia Motors (LAD): 3.2%

Norfolk Southern Corp (NSC): 3.2%

British American Tobacco (BTI): 3.2%

IAC/InterActiveCorp (IAC): 3.1%

Applied Materials (AMAT): 3.1%

Genesee & Wyoming (GWR): 3.1%

Walgreens Boots Alliance (WBA): 3.1%

KKR and Co. LP (KKR): 3.1%

JP Morgan Chase (JPM): 3.0%

Celgene Corp (CELG): 3.0%

Caterpillar Inc. (CAT): 3.0%

Apple Inc. (AAPL): 2.9%

Energy Transfer Partners LP (ETP): 2.9%

Abbvie Inc. (ABBV): 2.5%

The portfolio started out equal weighted, with LMT getting the small percentage remainder. BKNG, due to an order glitch, got double allocated compared to the rest.

As soon as I have the resources to begin allocating to the Pretty 30 Portfolio again I will be making one allocation to even up everything with BKNG, then a second allocation that is going to more heavily weight the 16 stocks that I have identified as metric-favored based on their combination of Analyst Recommendation Score, Dividend Yield and PEG Ratio. These are the 16 stocks that are listed in the above chart above BKNG or at the blog post that details my universe of analyst coverage.

Random Assorted Topics

I spend on average at least 2 if not more hours a day reading almost every single market related article I can find from all sources, whether it is about Macro Views, individual stocks, sectors, geographies, etc -- I like to stay abreast of everything going on everywhere. I am helped in this by the ability to read very fast and retain information at an above average rate. The ability to multi-task also allows me to keep up with the news stream during the work day, listen to Bloomberg T.V. from prior to the opening bell to well after, and watch the DOW, S&P 500 and NASDAQ charts throughout the day.

One of the writers who is probably next to impossible to miss here on Seeking Alpha, and who caters to my sensibility in more than a few ways, is The Heisenberg -- obviously not a unique fact considering the more than 15,000 subscribers. I find his daily market analysis essential reading.

One of my bad habits I would say is that once I read an article I like, I will leave a tab of it open on my computer screen for future reference in an article I expect to or intend to write. Considering I have about 3 times more ideas than I have the patience or inclination to actually get down to working on, I end up with a browser full of random tabs, some of these going back three months now.

Immediately after getting back into the market actively and staring at the charts all day, I noticed a pattern that was not present previously -- every day between 2:30pm and 3:00pm, the market was getting pummeled. I immediately suspected that it was a confluence of algos I nicknamed "The Jersey Boys" -- and it was not until February 26 that anyone published similar observations. Famously the last half-hour and especially the last 10 minutes to the trading day used to buoy even a bad trading session but "The Ramp" seems to have largely disappeared.

I found this take on the difficulties of Warren Buffett to put up returns similar to the 1980's and 1990's interesting. First world problems...

As Matthew Frankel at the Motley Fool points out, were Berkshire to grow for the next 50 years at the same rate as the past 50 years, it would be worth $7.4 quadrillion dollars, which is about 30 times the value of all the wealth of everyone currently on Earth. As good as Berkshire has been for investors over the years, it’s not possible for any single company to make all the money.

200 days of pain? That sounds manageable but I'd like to know -- how many days are we in already? Asking for a friend...

‘‘People are incrementally more agitated than they were during February’s leg down because everyone believed the coast was clear. People are optimistic by nature, so when corrections hit, they are largely unexpected and emotionally jarring.”

However bad it feels, it’s a long way from the worst. While the S&P 500 has risen or fallen by more than 2 percent six times this year, it swung by twice that amount nine times in October 2008, the depths of the financial crisis.

I have accumulated $240 in my Acorns account since starting on February 9. I advocate micro-investing as a means to raise funds almost invisibly and painlessly for IRA allocation and/or investing for folks who have a hard time saving otherwise. Micro-investing is especially appealing to younger people who have yet to try out stock investing. Micro-investing in one easy way to achieve the "Save $1000 a year, retire a millionaire" strategy.

Maybe Bill Ackman's fall did not come swiftly enough, but it most certainly came.

About two-thirds of the capital that investors could withdraw from Pershing Squareprivate funds was redeemed at the end of last year, according to a person with knowledge of the matter. Blackstone Group LP has been pulling its money, while JPMorgan Chase & Co. has removed Bill Ackman’s Pershing Square from its list of recommended funds for clients, the person said.

I never thought I would say this -- literally, never-- but SoftBank has certainly made a case for taking the mantle from Nomura for being "The Worlds Stupidest Investment Bank". Among recent "successes": a horribly advised purchase of Fortress Investment Group then taking it private, giving $100 million to Theranos that will be exactly impossible to recoup, putting $6 billion into Uber, and many many more. Almost every day I see some headline regarding SoftBank that makes me laugh.

Of course the weekend just before the Facebook (FB) implosion I had on my to-do list to write up at least a blog post with my short thesis, which in many ways resembles this write up, and I did not get around to it. FB is going to die sooner or later. Do not be the last person you know using FB, but even more importantly, do not be the last person you know invested in FB.

Always on the lookout for new ideas, these two articles jumped out at me with ideas on how to re-approach the Primary Strategy if I saw the need to in the future: 5 Dirt-Cheap Index Funds That Invest in Dividend Stocks and 10 stocks most loved by hedge funds...

One writer I follow as closely as possible is Wolf Richter and I found this most recent take on the long-running saga of LongFin (OTCPK:LFIN) the most hilarious yet. Wolf Richter and The Heisenberg are quite similar, and I also enjoy Zero Hedge but limit my reading of the site due to it's tendency to freeze my browser.

One thing I have found I am missing now that I am fully immersed in the markets again at the expense of all else is that I lack "entertaining" media to keep me occupied. During College Football season I have Shutdown Fullcast, The Solid Verbal, and other stuff to keep me entertained. Now, once Bloomberg changes over from live market coverage to whatever it is they are doing with their evening programming I have no noise for my background. What I would really like is an investing podcast that mixed elements of Wolf Richter, The Heisenberg and Zero Hedge with a host who yells things like Alex Jones crossed with Jim Cramer....

In any case, I have been told I should just do my own podcast doing the above formula and while this sounds like a good idea, I don't know how to do podcasting just yet. Also, I am not sure I could actually listen to a podcast of myself.... So in the meantime I do enjoy the Animal Spirits Podcast, The Index Show, and Tracy Ryniec's Value Investor.

Q2 Outlook

Looking at the charts for each of the Primary Strategy holdings, I see each is entering either a confirmed downward trend or very near so. I am of the expectation that the immediate future will continue to see the market continue to hover just around the area above a confirmed downtrend -- be it breaking below all the widely recognized technical barriers, the Dow Theory Sell Signal, the IBD Market Trend, etc -- for the next several weeks to months as the daily gyrations of the political and financial landscapes give some hope and take some back. This idea is supported by Sam Eisenstadt, former Research Director for Value Line, who does not see market upside until at least October.

An inverted yield curve, QE unwind, trade wars real and imagined are all serious issues that could derail any market positive developments. Even earnings season this spring seems to be secondary to all of the machinations that are completely out of market participants hands. By the time these bigger picture issues could be nearing resolutions good or bad, the political calendar will be fully in mid-term season.

As if we are cursed, we truly are living in the most interesting times right now.

Disclosure: I am/we are long FFTY, SPY, DIA, LDRS, LMT, KLAC, AMAT, NSC, ETN, WM, MO, CSX, JPM, ABBV, GWR, CAT, UNP, IAC, BTI, AAPL, CVX, WBA, KKR, LAD, AB, KSU, PSX, CELG, STO, NYMT, MGA, ETP, EFC, BKNG,PSP. 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.