Seeking Alpha

Hocus Pocus, Here's My Focus

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Includes: ARCC, BPR, CEN, CGBD, FAM, FCO, FEN, FGB, FSK, HPS, IGR, KYN, NRO, NRZ, OCSL, RFI, TYG
by: Real-Time Retired Guy
Real-Time Retired Guy
Long only, long-term horizon, portfolio strategy, dividend investing
Summary

With the markets being close to all-time highs, there are, in my opinion, few true values to be found.

In this article I will provide my thoughts on the markets going forward.

I will also provide a summary of the sectors that I follow, where I am in my daily research, and what I might consider buying given a favorable market scenario.

With September almost in the rear view mirror I briefly took a look at the stock market's performance (month to date) to see how the "September Effect" has played out for 2019. For those of you whom are not familiar with the September Effect is typically a drop-off in the Dow, S&P and NASDAQ averages. Since 1950, the average September decline for the DOW has been about 0.8 percent, for the S&P about 0.5 percent, and for the NASDAQ about 0.5 percent.

However, over the past few decades the September Effect has become less of a factor. In 2019, from September 1 to date (September 24 as I write this article) the DOW is up 1.7 percent, the S&P is up 2.0 percent, and the NASDAQ is up 1.2 percent. With a week left in the month these figures are subject to change.

Where Are The Markets Headed?

The answer to this question is: no matter what the market "gurus" say - no one knows!

My analyses focuses on individual stock evaluation; when a stock meets my criteria for inclusion in the Protected Principal Retirement Portfolio (PPRP), I follow it on a daily basis. I do however watch the market averages closely in an attempt to determine if markets are overbought or oversold, if long-term trend lines are being violated, or if we are entering (or exiting) a correction. I want to assure myself that to the extent possible, if I make a purchase that I am making the correct decision.

That said, I do not try to time the markets, I do not attempt to buy absolute bottoms or sell absolute tops. I am very comfortable if I miss five or ten percent of a market move so long as I feel comfortable that an uptrend is in place. By the way, I do not, nor ever have shorted a stock - I don't like the prospect of unlimited risk of capital.

Going back about three years the uptrend that was in place for all three market averages was broken in the last quarter of 2018. When the markets bottomed in December 2018, the slope of the previous uptrend line which began in 2016 was lowered, and to date remains in place for all three averages. Coming off the December 2018 bottom, a new, steeper short-term uptrend line began which also remains in place as of today. While the DOW remains comfortably above this line, both the S&P and NASDAQ are closer to breaking it to the downside.

So, for what it is worth (probably not a lot), I think a break of the short-term trend line could signal a new correction, while a break of the three year trend line could mean a somewhat bigger storm.

For almost two years now I have been looking for a significant correction in the markets. We had a correction last December, and I think there might be a bigger one coming. A few months ago I sold several stocks in the attempt to increase my cash position to the 25 percent level. Since then, the markets have made me look bad, but if nothing else, I am patient.

Sector Review

The majority of the PPRP is today composed of MLPs, (owned as individual companies), BDCs (owned as CEFs and an individual company), REITs (also owned within CEFs and a single individual mREIT), and several income-producing CEFs.

Here are my thoughts on each sector:

MLPs

I continue to hold nine MLPs in the PPRP. As I mention in my previous article, this has been a mostly stagnant sector in terms of total return over the past four years, with gains pretty much limited to distributions received. For reasons I covered in a previous article, I am opting to limiting any expansion within this sector to CEFs holding mostly investment-grade MLPs.

Four MLP CEFs are now on my watch list (Tortoise Energy Infrastructure (TYG), First Trust Energy Income & Growth (FEN), Kayne Anderson MLP/Midstream Investment Company (KYN), and Center Coast MLP and Infrastructure (CEN). My intention is to continue to research each, and possibly invest in one (or two) once I can get a better grip on market direction.

BDCs

I am currently under weighted in the BDC sector. This is mostly due to their under performance in 2018 and my not following them as closely as I would have liked to this year. I own First Trust Specialty Finance (FGB) a CEF that has as its largest holdings many of the top-rated BDCs. I have recently taken a position in FS KKR Capital Corp. (FSK), a small, under the radar BDC that I believe might turn out to be a pleasant surprise.

My BDC watch list has expanded somewhat to include Ares Capital Corporation (ARCC), TCG BDC (CGBD), and Oaktree Specialty Lending Corp. (OCSL).

REITs

In the past, I have chosen to own individual equity REITs, and occasionally a single mortgage REIT. I am not very trusting of the mortgage REIT sector after the bludgeoning it received a decade or so ago.

With the numerical expansion of equity REITs over recent years, I have opted to own them through CEFs. I have, until recently owned three such CEFs: Cohen & Steers Total Return Realty (RFI) and Neuberger Berman Real Estate Securities (NRO). Both of these were sold at decent gains when I recently went into cash-raising mode.

On the mortgage REIT side, I have owned a medium position in New Residential Investment Corp. (NRZ) since early 2016. After a series of quarterly dividend increases, the dividend has remained constant for the past ten quarters. I do not have any plans to increase this position unless dividend increases resume.

Going forward, my intent with respect to REITs is to continue to pursue diversification through CEFs (With other sectors to divide my investment capital in, I do not feel that I have enough cash reserves available to secure adequate diversification in the REIT sector through individual purchases). My top choices, when I opt to reinvest in this sector are: (RFI), (NRO), CBRE Clarion Global Real Estate (IGR), and possibly, Brookfield Property REIT, Inc. (BPR).

CEFs

In my recent article on CEFs, I included my current watch list. The list is still intact, and I have added the following (in order to create additional work for myself no doubt): First Trust Aberdeen Global (FAM), Aberdeen Global Income (FCO), and JH Preferred Income III (HPS). For the majority of CEFs the price/discount ratio has contracted (more and more CEFs are approaching premiums to net asset values), and prior to committing additional funds to this sector I would like to see higher discounts.

Conclusion

Since my family is dependent upon dividend income as our primary source of living expenses I am probably overly cautious in my approach to the PPRP. However, my strategy has successfully been in place for about 13-14 years now, and I see no real reason to significantly change it.

Disclosure: I am/we are long FGB, FSK, NRZ. 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.