I last updated this topic here: Update For Portfolio Positioning And Management As Of 10/1/15 - South Gent | Seeking Alpha
I made a lengthy comment to that post that is viewed as important to this topic. I will drag, drop and edit it here.
I make a distinction between market events and economic ones that can impact valuations and growth.
The market events include valuation corrections, flash crashes, an October 1987 one day crash event, temporary price impacts caused by high frequency traders, and herd like behavior by investors who buy or sell because the market or certain stocks are going up or down in price.
I think that we are seeing now some of those market event factors come into play.
The fundamental and rational reason underlying this little dip is a recalibration down, over the short term (meaning 1 to 3 years in this context), of earnings growth due in large part to slowdowns China and other emerging markets. Those markets had been providing most of the incremental growth.
Some evidence of China's slowdown was contained in Alcoa's third quarter earnings report:
"In China, Alcoa lowered its estimate for 2015 automotive production growth to up 1 to 2 percent, from up 5 to 8 percent; reduced its projection for 2015 heavy duty truck and trailer production growth to down 22 to 24 percent, from down 14 to 16 percent; reduced its 2015 commercial building and construction sales growth to up 4 to 6 percent from up 6 to 8 percent; and kept its 2015 packaging estimate unchanged at up 8 to 12 percent."
So that recalibration is a matter of concern and it focuses my attention on those kind of issues to see whether they are getting worse, better or just stagnating. I do not see them getting better and my questions relate more to whether they are becoming worse.
The non-rational market related issues can take stocks down further than can be justified by a balanced assessment of known and material information.
The market was not rationally priced in March 2009, for example, when central banks and governments around the world had taken financial collapse off the table but investors were still projecting current conditions well into the future, as if nothing would ever get better and most likely would get a lot worse.
E.G. 4/2/09 Article on David Rosenberg' Predictions.
A large part of the investor population will project current conditions, good or bad, as a trend that will last into the distant future, when that assumption is rarely, if ever, warranted by history or a mildly rational thought.
The bullish thesis about the parabolic growth in emerging market consumers remains, but it may have just hit a speed bump.
The longer term bullish case for the U.S. economy and U.S. stocks remains in force.
The increases in disposable income after debt service payments is both a long term and a current positive force supporting consumer spending in the U.S. which remains strong. That spending is showing up in a variety of statistics, such as auto and truck sales, but more importantly in an aggregate measure like Personal Consumption Expenditures ("PCE").
This is a quote from the last GDP report:
" Real gross domestic purchases -- purchases by U.S. residents of goods and services wherever produced -- increased 3.6 percent in the second quarter, compared with an increase of 2.5 percent in the first."
I have said many times here that lowering the mortgage debt service payment due to a refinancing is like a stimulus check for that household every month. It is a recurring and long term positive force.
There is a decrease in PCE and retail sales related to gasoline purchases for a positive reason. The price has come down that gives consumers more disposable income to spend elsewhere.
I discussed selling down my foreign stock exposure and making a deliberate decision to focus more firepower on U.S. companies whose businesses are more U.S. centric.
The reason is really simple.
I have far more confidence about the U.S. economy now than foreign economies. I have been discussing that portfolio allocation trend in the Portfolio Updates.
Since that drift away from foreign stocks, I have bought only 30 shares of UL and 100 shares of AEG. The latter company has a large U.S. presence through its Transamerica operations and would benefit in GAAP accounting as well with the USD gaining in value against the Euro. UL benefits from the lower Euro unlike PG who is penalized in its GAAP accounting by the strong USD. I had also sold 130 Unilever shares at higher prices.
The USD has slid some after the last jobs report which caused the market to reassess the possibility of a FED rate hike this year:
U.S. Dollar Index (USD vs. Basket of 6 Foreign Currencies weighted in the Euro)
Trade Weighted U.S. Dollar Index: Broad-St. Louis Fed (currently through 9/30/15)(FRB: H.10 Release--Currency Weights/slight USD downtrend in FED Data Since 9/29 at 121.0451 Through 10/2 at 120.2017 last available data and likely continuing to date: FRB: H.10 Release--Foreign Exchange Rates--October 5, 2015)
I am positive on credit availability and credit pricing by banks.
If and when I see a tightening of bank credit, then the room is going to have some oxygen taken out of it and the odds of a recession will be higher and may reach the probable level depending on how tight.
I am not going to narrow credit availability measures down to junk bond issuers, since that is just one part of the credit availability and pricing and some of those firms need to be suffocated through credit withdrawals since they are so reckless.
A lot of E & P companies who borrowed as if crude's price would remain over $100 indefinitely, a completely irrational forecast, with nothing much done to prepare for crude below $50 (which is not that abnormal) deserve what is coming to them and their yields are sky high now because they are about to receive what they deserve.
There are a lot of material metrics to constantly monitor for potential trouble.
1. Credit Tightening or Overall Favorable Credit Conditions for Consumers and Businesses/Loan Growth
Credit tightening will often occur prior to a recession:
LAST FRB Survey: FRB: Senior Loan Officer Opinion Survey: July 2015
Federal Housing Administration Refinance Reports: Refinance Report - July 2015 | Federal Housing Finance Agency (since 2009 and through July 2015, Fannie and Freddie have refinanced 21,768,284 mortgages)- Reports | Federal Housing Finance Agency
2. Default Rates on Consumer and Mortgage Loans
Look at a ten chart of the S&P/EXPERIAN CONSUMER CREDIT DEFAULT COMPOSITE INDEX
The trend started up in 2007, peaked in May 2009 at 5.51 and is now at .96.
You can also monitor auto loans and mortgage loan defaults at that website.
3. Wages and Disposable Income
4. Financial Stress Indexes:
e.g. St. Louis Fed Financial Stress Index
5. DSR and FOR Ratios (are those important ratios trending down, stable or moving up)
The decline in debt service payments to disposable income is due in large part to the refinancing tsunami of the Indebted Class which is continuing as more homeowners, who do not qualify for refinancing under the HARP program, return to positive equity.
For those households who have already refinanced their main debt obligation at historically low rates, the increase in disposable income each month after debt service is like a stimulus check that can be used to retire higher cost debt, increase savings, and/or spend without incurring more debt for the DPI freed up through lower debt service payments.
And, Mortgage Debt Service Payments as a Percent of Disposable Personal Income - FRED - St. Louis Fed
The DSR ratio needs to be evaluated in conjunction with household debt to disposable income:
It also needs to be recognized that a large segment of the U.S. population own their homes free and clear. Both of the preceding charts include those households. Those households remain in the aggregate free and clear of mortgage liabilities, and that percentage has gone up from 2007 to 2014: American Census Facts: Mortgage Status
2007: 31.65% Free and Clear
Consequently the debt burden was much worse in the period leading up to the Near Depression. And the develeraging reflected in both charts is occurring in that indebted class. The precise magnitude can not be discerned in both the buildup and the deleveraging since the government does not segregate the data in a manner that excludes mortgage debt free households.
There is a clear link to the number of homes owned free and clear and age:
This graph shows a typical pattern, where the number of households with mortgage liabilities start to accelerate in the 30-34 age group and peak in the 45-54 age bracket and then decline substantially starting with the 55-64 age group.
The CB's fact sheets about home ownership can be downloaded by geographic area: 2013 American Housing Survey Factsheets
It is also relevant here to note that the baby boom generation is about to start passing $30T in their accumulated savings to the next generation who will enjoy spending it.
6. Current and Anticipated Inflation Forecasts (problematic inflation is a killer):
I monitor those in the break-even spreads of the TIPs (5 to 30 year maturities).
Low inflation and interest rates are supportive of long term bull cycles, as is declining interest rate and inflation forecasts after a long bout of problematic inflation.
Inflation is predicted to be low in both the 5 and 10 year TIP pricing:
5-Year Break-even Inflation Rate: 1.13% (annual average CPI)
10-Year Break-even Inflation Rate: 1.46%
Problematic inflation is nowhere in sight. While I would prefer to see an average annual inflation rate of 1.5% to 2% over a ten year period, I view 1.46% to be supportive of a stock bull market.
7. Labor Productivity and other labor related data.
Last BLS Release on Productivity: bls.govpdf
Labor Productivity and Costs Main Page: Labor Productivity and Costs Home Page (LPC)
Productivity has cooled somewhat over the past seven years on average:
8. New Home Construction and Related Activity (mostly a no show for 7+ years and that needs to change)
New One Family Houses Sold: United States: New One Family Houses Sold: United StatesSt. Louis Fed
9. Trends in Home Equity and Housing Affordability:
Housing Affordability Index (still positive but falling): Housing Affordability Index -St. Louis Fed
Households; Owners' Equity in Real Estate, Level (moving in the right direction for now): Households; Owners' Equity in Real Estate, Level -St. Louis Fed
It is very bad for animal spirits to watch your home cave in value.
10. Aggregate Corporate Profits and Cash Flow
This list is not meant to be comprehensive. It just highlights that taking data out of a context will usually end up causing the wrong conclusion or possibly the correct conclusion for all of the wrong reasons, in which case the investor might as well make decisions consulting the stars, palm readers or Yahoo Finance message boards. Massive data accumulations and trend evaluations are critical. Charts help investors to spot the trends.
Some other information include the following:
Total Savings Deposits at all Depository Institutions- St. Louis Fed (NOW OVER $8 Trillion Earning About Zilch Before Taxes and Inflation-7 Years after the Fed launched its Jihad Against the Savings Class)
FRB: H.6 Release--Money Stock Measures, Release Dates (shows risk free savings dollar amounts including savings accounts, checking deposits, CDs and money market funds-all earnings just about zilch for 7 years now)
IMO the recession risk in the U.S. is low for 2016, but has increased due to a worldwide slowdown.
At the current time, I see the U.S. weathering those gathering storms provided they do not get much worse in China and a few other EMs like Brazil. I am expecting another slowdown in Japan. A deterioration in Europe could accelerate EM weakness and that would increase the recession chances.
Generally, I monitor Markit data for Europe and more importantly Eurostat data:
I would not call the Eurostat data encouraging, but there are some green shoots:
Last GDP Release: ec.europa.eu/
Deflation remains a concern as does sticky high unemployment numbers in several EU countries particularly taken in context of the recent immigration wave.
Manufacturing Weakness Continues:
I anticipate that the U.S. manufacturing sector will contract in the current quarter as reflected in the ISM surveys, where numbers below 50 indicate contraction:
Status: Ongoing Phase 1 Unstable Vix Pattern.
After the Trigger Event, the next anticipated event was a return to VIX movement below 20, which started on 10/5/15: VIX Historical Prices
The Model only provides guidelines about the future. The Trigger Event ("TE") has historically been the first salvo in a far more dangerous market for individual investors than the Stable Vix Pattern that preceded it. In that sense, it is a warning signal that investors need to reconsider asset allocations based on their own unique situational risks and risk tolerances. It also requires that investors learn as much as possible about what cause the TE: Update For Portfolio Positioning And Management As Of 9/1/15 - South Gent | Seeking Alpha
The TE ushers in the Unstable Vix Pattern ("UVP"). Phase 1 of the UVP is marked by a whipsaw pattern in the VIX mostly between 20 to 30 with temporary moves over 30 and below 20. Eventually, the UVP will be terminated by the formation of a Stable Vix Pattern ("SVP") that has historically been correlated with cyclical bull markets. Both the SVP and UVP are cyclical indicators and can occur in both long term bull and bear markets.
In the UVP, the trading pattern generally speaking is to buy spikes in volatility and to sell movements below 20. Hedges for stock positions can be bought during the volatility spikes into the high 20s and low 30s and then sold when the VIX returns to temporary movement below 20.
I was buying during the TE and quit buying common stocks, with one minor exception involving less than $500, when the VIX moved below 20 on 10/5/15. That is the pattern that I follow.
Now, my next move will be to be pare stock positions at predetermined SPX levels.
The first level is the closing SPX high on the day prior to the TE's start. The TE started on 8/21/15 and qualified as a TE as of 8/31/15. There were two more days thereafter of VIX closes above 26 which is viewed as more confirmation of a valid TE signal after the initial mechanical and long standing rule requirement was met.
The SPX closed at 2,035.73 on 8/21/15, so that is my first bogey.
In the past, the bulls have gathered their forces and made one last charge after a TE taking the S & P 500 to a higher level than just prior to the TE's onset.
2007 August TE:
The pattern seen starting in August 2007 is a standard phase 1 UVP, where the VIX whipsaws mostly in the 20 to 30 range with temporary movements above 30 and below 20. The phase 2 UVP, the catastrophic phase, starts in mid-September 2008.
S & P 500 Closes
Trigger Event Period: 8/9/2007 through 8/21/2007
Closing Low During Trigger Event 1406.7 on 8/15/2007
Closing High Thereafter 1562.47 10/10/2007
Spring 1987 TE Using VIX Model and VXO Data for the S & P 100 (referred to as a powerful TE):
It took a long time for volatility to move below 20 after this kind of traumatic market event.
TE Start Date at 4/9/1987
SPX: 292.86 on 4/8/1987 Historical Prices | S&P 500
VXO Recovery Period 7/7/87 to 8/10/1987 (25 days of movement below 20):
SPX High During Recovery Period: 328 on 8/10/87
The Bad Thing: VXO Crash Data
|Oct 27, 1987||101.56||106.77||93.43||97.51||0||97.51|
|Oct 26, 1987||105.83||116.04||104.83||113.33||0||113.33|
|Oct 23, 1987||97.51||102.79||85.73||98.81||0||98.81|
|Oct 22, 1987||54.83||116.04||54.83||102.22||0||102.22|
|Oct 21, 1987||138.32||138.53||73.91||73.91||0||73.91|
|Oct 20, 1987||171.52||172.79||138.50||140.00||0||140.00|
|Oct 19, 1987||71.33||152.48||62.48||150.19||0||150.19|
|Oct 27, 1987||227.67||237.81||227.67||233.19||260,200,000||233.19|
|Oct 26, 1987||248.20||248.22||227.26||227.67||308,800,000||227.67|
|Oct 23, 1987||248.29||250.70||242.76||248.22||245,600,000||248.22|
|Oct 22, 1987||258.24||258.38||242.99||248.25||392,200,000||248.25|
|Oct 21, 1987||236.83||259.27||236.83||258.38||449,600,000||258.38|
|Oct 20, 1987||225.06||245.62||216.46||236.83||608,100,000||236.83|
|Oct 19, 1987||282.70||282.70||224.83||224.84||604,300,000||224.84|
|Oct 16, 1987||298.08||298.92||281.52||282.70||338,500,000||282.70|
|Oct 15, 1987||305.21||305.23||298.07||298.08||263,200,000||298.08|
|Oct 14, 1987||314.52||314.52||304.78||305.23||207,400,000||305.23|
The intra-day low of 216.45 was 34% below the recovery period high. There followed a multi-year churning period with the SPX returning on a sustained upward movement above the recovery period high in 1991. Historical Prices | S&P 500 Churn is generally the best option for buy and hold investors when the first phase burst of a long term secular bull market goes too far up:
Lift-Off for 18 Year Long Term Bull Market: August 17, 1982
Close on 8/16/1982: 104.09
Closing High Before Crash: 336.77 on 8/25/1987
Percentage Gain: 223.54%
The October 1987 crash was just about the worst way for investor psyches to resolve an overvaluation issue taken in the context of competing yields at the time and inflation.
The 10 year Treasury was hovering around 9.5% in late September 1987 and went over 10% shortly before the crash: research.stlouisfed.org
October/November 1997 TE:
TE Start Date 10/27/1997 (VIX Leaped to 31.12 from 23.17)
SPX Close on Monday 10/27/1997: 876.99
SPX Close on Friday 10/24/1997: 941.64
Recent Prior Closing High Prior to TE on 10/7/1997: 983.12
Recovery Period 2/12/1998-3/23/1998
SPX Best Closing High in Recovery Period: 1099.16 on 3/20/1998
Lowest SPX Closing in Last VIX Spike During UVP: 797.9 on 7/23/2002
VIX: 44.92 close on 7/23/2002
The high close during that last VIX spike before the SVP formation was 45.08 on 8/5/2002: VIX Historical Prices
This last VIX spike during the October 1997-November UVP started on 6/19/2002 (close at 26.02) and ended on 4/10/2003.
On 4/11, the VIX started to work its way back into the low 20s and started to form a SVP on 6/26/2003. VIX Historical Prices
1. Pared GE By Selling 240 Shares at $28.05:
Close Today: GE: $28.07 +0.04 (+0.14%)
I sold every share that has an average cost basis of $19 or higher. Since I had some shares that were bought prior to Lehman's failure, my overall profit was just $135.23.
I quit reinvesting the dividend in 2013.
I had one successful flip in GE shares during 2008 after liquidating my position in 2007. I then went back to the well one too many times and consequently became an involuntary long term holder of those shares with red marks in the far right column.
By selling every share with an average cost of $19 or higher, I did lower my average cost per share to $14.1:
The 291+ remaining shares were purchased after Lehman's failure using cash flow and reinvested dividends:
I also sold the 30 share bought recently in a ROTH IRA. Bought General Electric In Roth IRA At $23.86 - South Gent | Seeking Alpha (post dated 2/3/15)
I discussed my long history with this stock in that post. That post also has a snapshot of the taxable account position as of 2/23/15 which showed an average cost per share of $20.21. I have now reduced that number to $14.1.
GE is currently paying a quarterly dividend of $.23 per share: GE Stock Quotes, Dividend History and Stock Information
When I bought those share pre-Lehman BK, the ones with the red marks, GE's quarterly dividend was $.31 per share.
Without cutting executive compensation or perks, as far as I have been able to determine, GE cut its quarterly dividend to $.10 per share effective for the 2009 second quarter. That 67.74% slash goes under the "unforgivable" category.
On the positive side, I sold my highest cost shares profitably and reduced by average cost per share to $14.1. The current $.23 rate, which is 25.8% below the 2008 penny rate and 1 cent above the rate prevailing in 2005, does translate into a 6.52% dividend yield at that total cost number. Hopefully, the yield will expand with increases hereafter as my average cost number remains constant at $14.1 per share. Given my numerous and frequent criticisms of GE's management, going back to Welch and including Immelt of course, another option would be to harvest my profit on the remaining shares.
The dividend is not likely to be raised this year or next year as GE continues its restructuring.
Rationale: I was going to pare this position as noted in prior posts when I could sell the highest shares profitably. The recent rise in GE shares brought me close enough to that bogey.
The triggers for paring now was the Trigger Event in the VIX Model and the spurt in GE's stock price occurring after Nelson Peltz disclosed that his firm had taken a $2.5B ownership stake.
That disclosure came on 10/5/15 before the market opened for trading:
GE Prices: Open/High/Low/Close/Volume/Adjusted Close (N/A)
|Oct 8, 2015||27.63||28.20||27.43||28.03||50,995,600||28.03|
|Oct 7, 2015||27.50||27.77||27.32||27.77||65,671,000||27.77|
|Oct 6, 2015||26.99||27.41||26.96||27.29||70,409,000||27.29|
|Oct 5, 2015||26.37||27.20||26.22||26.82||103,735,400||26.82|
|Oct 2, 2015||24.87||25.49||24.83||25.47||42,508,500||25.47|
So the sale's price of $28.05 represented a 10.13% gain since the close on the previous Friday, and that was sufficient under the circumstances which include GE's dividend history, lackluster performance, uncertain future after selling most of GE capital, and the Trigger Event signal to reduce my stock allocation.
The shares were ex dividend on 9/17/15.
The current consensus E.P.S. estimate for 2016 is $1.54. At the $28.05 price, the P/E would be 18.21. Honeywell closed last Friday at a forward P/E of 15.14.HON Key Statistics United Technologies (NYSE:UTX) was at 14.19. UTX Key Statistics
I will discuss two minor trades made today in subsequent posts.
Disclaimer: I am not a financial advisor but simply an individual investor who has been managing my own money since I was a teenager. In this post, I am acting solely as a financial journalist focusing on my own investments. The information contained in this post is not intended to be a complete description or summary of all available data relevant to making an investment decision. Instead, I am merely expressing some of the reasons underlying the purchase or sell of securities. Nothing in this post is intended to constitute investment or legal advice or a recommendation to buy or to sell. All investors need to perform their own due diligence before making any financial decision which requires at a minimum reading original source material available at the SEC and elsewhere. A failure to perform due diligence only increases what I call "error creep". Stocks, Bonds & Politics:ERROR CREEP and the INVESTING PROCESS. Each investor needs to assess a potential investment taking into account their personal risk tolerances, goals and situational risks. I can only make that kind of assessment for myself and family members.
Disclosure: I am/we are long GE.