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Update For Portfolio Positioning And Management As Of 7/24/16

|Includes: EMR, Enbridge Inc. (ENB), MFC

This topic was last updated here: Update For Portfolio Positioning And Management As Of 7/9/16 - South Gent | Seeking Alpha

My portfolio management goals are described in this 2014 post: Portfolio Management Goals-Snapshots of Performance Numbers YTD, 3 and 5 Years Cumulative.

Instead of discussing recent economic news, I am going to make an effort to ascertain why a Stable Vix Pattern formed on 7/13/16.

I went through the same kind of exercise for the last Trigger Event that ushered in an Unstable Vix Pattern. Update For Portfolio Positioning And Management As Of 9/1/15 - South Gent | Seeking Alpha I would emphasize that the reasons that caused a volatility spike in August 2015 and again earlier this year are still with us. The Stock Jocks simply no longer view them as material or possibly already in the early stages of being corrected anyway . A Trigger Event In The Vix Asset Allocation Model 8/31/15 - South Gent | Seeking Alpha

The Recovery Periods after the August 2015 Trigger Event were unusually long and reached low VIX levels never before experienced during all prior Recovery Periods during an ongoing UVP.

I am not going to dwell on the possible reasons for the SVP formation. Why? I have been discussing for years the long term secular forces that supported what I have been characterizing repeatedly as a long term secular bull market.

I am also going to assume that the Stock Jocks have not gone bananas again.

I am going to assume that they are not delusional and are forecasting a series of positive developments that are about to happen (maybe starting later this year, but this is a future vision thing that we are talking about now that has some current facts supporting the vision) Let's hope the this Vision Thing is not seeing things that are not there or over estimating the current positives, which was the case in the late 1990s- one of the most massive delusional group thinks in world history.

The TTM P/E for the S & P 500 closed last Friday at 24.87, well into the nose bleed section. The forward twelve month "operating earnings" P/E was 18.39. P/Es & Yields on Major Indexes Normally, with those kind of valuations seven years into an economic recovery, the Old Geezer would be running toward the fallout shelter for cover, waiting for incoming to plough throughout Stock Land and for the Stock Jocks to start crying for their mamas-again. And, it does not help matters that earnings are declining as stock prices go up and forward non-GAAP SPX earnings estimates have been coming down throughout 2016.

Estimates 12/31/15:

Estimates 3/31/16:

Estimates 7/21/16:

All of the 2017 estimates have come down since March 31st.

For those who buy into these forward estimates as the Gospel, note just how far off the estimates made on 12/31/15 were for the Q/E 3/31/16.

12/31/15 Estimate vs. Actual for Q/E 3/31/16

GAAP 27.28 21.72

Non-GAAP 28.84 23.97

Maybe they need a new crystal ball. I am not even going mention again how far the 2015 estimates were that made on 12/31/14. Maybe I will:


2015 Actual/Estimated 12/31/14

1st Q: $25.81 vs. $30.58

2nd Q: $26.14 vs. $32.27

3rd Q: $25.44 vs. $33.36

4th Q: $23.06 vs $34.8

Totals: $100.45 actual vs. $131.01 estimated 12/31/14

2015 NON-GAAP Estimated 12/31/14 135.83

Non-GAAP Actual $100.45

Difference in Non-GAAP 12/31/14 Estimate vs. Actual = 26%

Yes, I know that it is really hard to believe that anyone is paid big bucks to come up with these near term earnings forecasts. A thought was just generated by Right Brain which I am reluctant to share in public. What the heck, RB suggested that maybe those analysts are being reward for being outrageously wrong on the high side. The really interesting point is that many will continue to drink the W.S.B.S. with gusto irrespective of the historical accuracy of those estimates.

Let's put all of that aside for a moment and gaze deep into the future without that crystal ball that Wall Street denizens use, keeping in mind that star gazing can result in a falling off a cliff or into a deep hole-possibly even being buried alive.

So what do the Stock Jocks see in the future and it is all about the future?

1. The most important U.S. data series is the substantial and long term increase in household disposable income after debt service payments.

The refinancing of the primary household debt obligation at historically low rates has the same impact as a monthly stimulus check. The savings in debt service payments can be used to pay down higher cost debt, freeing up more disposable income after debt service payments, to spend without incurring more debt, and/or to save.

Long Term Chart 30 Year Mortgage:

30-Year Conventional Mortgage Rate-St. Louis Fed

Long Term Chart: Mortgage Debt Service Payments as a Percent of Disposable income

Mortgage Debt Service Payments as a Percent of Disposable Personal Income - FRED - St. Louis Fed

Increasing household disposable income through whatever means is extremely important in a consumer led economy.

Long Term Chart: Personal Consumption Expenditures as a Percent of GDP

Personal Consumption Expenditures/Gross Domestic Product - St. Louis Fed

Household Debt Service Payments as a Percent of Disposable Personal Income-St. Louis Fed

Household Financial Obligations as a percent of Disposable Personal Income--St. Louis Fed

Raw Data: FRB Household Debt Service and Financial Obligations Ratios

2. For four decades are so, a major headwind for the U.S. economy has been stagnant or declining real wage growth impacting a majority of U.S. households. Adjusted for inflation, the federal minimum wage is worth less than 50 years ago; For most workers, real wages have barely budged for decades | Pew Research Center; Wage Stagnation in Nine Charts | Economic Policy Institute; Harvard Business Review Profits Without Prosperity; A Detailed Look at Wages and Earnings

The growing wage gap between the top 20% and everyone else was an underlying cause for households to assume more debt as a percentage of household disposable income and to spend that debt. It is also contributing now to middle class blowback in the political arena.

The Age of Consumer Leverage started a few years after the commencement of Real Wage Stagnation:

Liability Level to Disposable Personal Income -St. Louis Fed

Was that a mere coincidence in timing? I don't think so. Money had to be borrowed to maintain the same standard of living and to replace or repair expensive items, particularly for those households where major expenses were increasing at a far faster rate than inflation (e.g. medical costs, health insurance, college tuition, etc.)

When my much older brother started to attend Vanderbilt in 1964, the tuition was $1,100 which is equivalent to $8,552.96 now. Inflation Calculator: Bureau of Labor Statistics Perhaps a parent for a Freshman starting there next September should offer to pay the 1964 inflation adjusted tuition amount for an entire year's tuition and hope for the best. Costs for 2016-2017 | Office of Financial Aid | Vanderbilt University

The preceding chart needs to evaluated with the consistent statistical data that almost 1/3 of U.S. homes are owned free and clear of any mortgage. If those households were excluded from this chart, the true picture of the Indebted Class would be revealed and it was much worse leading up to the Near Depression than depicted on the preceding chart.

Eventually that build up in debt led to the forced de-leveraging process and the popping of the housing price bubble created by the improvident granting of mortgage credit irrespective of price or the ability to service the loan.

Financing consumer spending through the accumulation of increasing piles of debt can fuel an expansion, as it did starting in the 1980s, but it also a long term undesirable source of consumer spending. The far better long term sourcing for consumer spending is simply from increases in disposable income after debt service payments.

There has been recently an upturn in real wage growth and that needs to continue for a healthy economy that benefits everyone including the rich even though anyone actually paying that higher wage is probably complaining about it and fails to see any benefit to them. The long term benefit on an aggregate level involves increasing private demand in a benign way for the economy.

Wage Growth Tracker - Federal Reserve Bank of Atlanta

The Atlanta FED calculation of real wage growth is the "median percent change in the hourly wage of individuals observed 12 months apart." Based on the data for June, the real wage increase number Y-O-Y is 3.6%. It is my understanding that the BLS uses a different methodology and arrives at a lower number. One Measure of U.S. Wage Growth Just Hit a New Post-Recession High - Bloomberg ("Bespoke Investment Group argues that the Atlanta Fed wage growth tracker "is probably a better snapshot of wage growth than average hourly earnings," which is published by the Bureau of Labor Statistics in the non-farm payrolls report. . . the BLS print would show that average hourly earnings declined in the event that a baby boomer retired and was replaced by a millennial working for three-quarters of that pay. The Atlanta Fed, meanwhile, tracks how wage pressures for the same individuals evolve over time, thereby removing this cohort effect.")

Part of the reason for recent real wage growth is the low inflation rate. A mere 2.5% increase in wages can produce real wage growth of 1.5% at a 1% inflation rate. Using the Atlanta's Fed Wage growth number of 3.6% Y-O-Y, and the BLS unadjusted 12 month CPI of increase of just 1%, the real wage growth for the 12 month period ending in June was 2.6%. My inflation rate is much higher due primarily to insurance costs that have a far higher rating in my CPI than the BLS derived national average.

The third leg for increasing disposable income would be a return to something resembling normal returns on risk free savings. Over $10 trillion in household savings is in savings accounts, bank CDs, money market funds, treasury bills and other short term securities that have been earning close to zilch for an extended period of time.

Chart for Savings Accounts: $8.4831 Trillion as of 7/11/16

Chart Sourced From: Total Savings Deposits at all Depository Institutions-St. Louis Fed

How much disposable household income would be created each year with an average 3% return on risk free savings rather than the near zero amounts over the past 7+ years?

Chart Data Sourced From: FRB: H.6 Release--Money Stock Measures, Release Dates

Many predicted using econometric models that the U.S. recovery would be slower than usual in large part due to the Fed's Jihad Against the Savings Class. (e.g. Quantitative Easing Helps the Big Wheels and Hurts Everyone Else - The Big Picture and discussed at The Downside Of Monetary Easing - Forbes)

There is a balancing act. The positive impacts of abnormal monetary policies outweighed the negative ones starting in 2008 through 2011, and at least arguably for 2012. IMO, the CBs are causing far more harm than good now and will be mostly responsible for any adverse economic repercussions and periods of financial instability related to continuing their abnormal policies for far too long.

The trifecta is achieved when debt is refinanced long term at historically low rates, real wage growth occurs for the majority of households rather than just the top 20%, and a real rate of return is generated on risk free savings.

3. Another critical component is persistent low inflation expectations. Both major asset classes will fail during periods where inflation is persistenly problematic.

The persistenly low inflation numbers during the 1949 to 1966 period needs to be contrasted with the period between 1/1/1966 through July 1982:

S & P Total Average Annual Returns Adjusted for Inflation:

1/1/1949 through 12/31/1965= +14.183%

1/1/1966 through 7/31/1982= -1.813%

S&P 500 Return Calculator, with Dividend Reinvestment

A key component of current stock market multiples is the anticipation that low inflation will persist for 5, 10, 20 and 30 years, as reflected in the prices of TIPs with those maturities.

With 2% or so average annual real GDP growth, low inflation and interest rate expectations streching over a long period of time, stocks become more valuable to investors. What is the value of a dividend growth company, currently paying a 3% dividend with a TTM GAAP P/E of 25 that is able to grow both earnings and the dividend in the low single digits when the 10 year German government bond has a negative interest rate?

The current break-even spread on the U.S. 20 year TIP is 1.43%.

7/22/16 Nominal 20 Year Yield = 1.9%

Daily Treasury Yield Curve Rates


7/22/16 20 YEAR TIP REAL YIELD = .47%

The break-even spread for the 20 year TIP was 2.41% as of 1/2/13. A 2.41% average annual inflation rate over twenty years would be well below the 3.3% annual average rate between 1914 through 2015.

The Atlanta Fed's GDP model is currently predicting 2.4% real GDP growth for the second quarter. GDPNow-Federal Reserve Bank of Atlanta

So low inflation until the end of days and real growth of about 2% on average is the Godilocks scenario for stocks that is enhanced now given the current bond yields.

4. Historically large stock repurchases are providing fuel for the market's rise.

There is a strong incentive for publicly traded corporations to repurchase shares. The simple reason is that stock options become more valuable and profitable as the price increases, particularly to those receiving most of them and who are responsible for the capital allocation decisions.

It really does not make any difference that the buybacks are at historically high valuation levels, think of Cisco's buybacks from the late 1990s, since somce options can be sold to harvest risk free profits virtually every year.

FactSet released a report last June that compiled current and historical data just for stock repurchases made by S & P 500 companies. This report covered buyback activity through the 2016 first quarter when SPX companies spent $166.3B to repurchase shares. For the 12 month period ending in the first quarter, SPX companies spent 72.9% of their net income on share repurchases.

In that report, there is a chart showing how buybacks declined precipitously when prices were cheap (2008--2000) and then started to accelerate in 2006 and 2013 during major stock bull runs. Buy High and Higher/Do Not Buy Low and Lower. It does not have to make any sense long term. It is only necessary for the program to increase management's current compensation levels by helping to fuel a stock frenzy.

Corporate America's buyback binge feeds investors, starves innovation

5. For those believing that conditions are ripe for a long term secular bull market in stocks, and I have been on that list for several years now, there is a belief that the rapidly growing emerging market middle class consumer will fuel above average growth rates in the coming decades. The news out of China, including its potential debt bomb issues, has cast a negative spell on that narrative, but it is still there, though in temporary hybernation.

China is sort of out-of-sight, out-of-mind now and the Stock Jocks have convinced themselves that China is moving toward what will relatively soon be a consumer led economy. If that hard landing story is placed in the dustbin of history soon enough, then the gloom and doom narrative is replaced with a more positive one long term.

While no one expects much out of Europe and Japan, it is important for those countries to at least avoid being a drag on worldwide grwoth. I do not see that happening for Japan, but Europe is at least taking baby steps in that direction.

6. Other than write-downs in credits improvidently granted to E & P companies, the potential debt implosion, far worse than the 2008 experience, is not yet on the horizon. So the party can last for maybe 10 to 15 years before the piper has to be paid in blood.


Examples of Portfolio Positioning and Management

USD Priced Canadian Income Stocks:

1. Added 50 MFC at $13.1:

Trade Snapshot:

Averaged Down From Prior Purchase: Item # 1. Bought 50 MFC at $13.78: Update For Portfolio Positioning And Management As Of 3/13/16 - South Gent | Seeking Alpha

Company Description: Manulife Financial (NYSE:MFC) is a life insurance and wealth management company based in Canada. MFC acquired John Hancock in 2004. Manulife: Company Overview

Dividends: Manulife has been increasing is dividend in Canadian Dollars since a slash in 2009 that cut the quarterly penny from C$.26 to C$.13. The current dividend is C$.185 per share which was raised from C$.17 effective for the 2015 third quarter.

Manulife: Dividend Rates

That link also provides the USD equivalent penny rate.

CAD/USD Exchange Rate at the Time of Purchase: .7666

Manulife did report its first quarter results after my last purchase, so I will discuss that report here:

Earnings Report for Q/E 3/31/16: MFC 1Q16.pdf (all amounts in Canadian Dollars)

MFC reported first quarter E.P.S. of $.51, up from $.36 in the year ago quarter. Core earnings was reported at $.44 per share up from $.39 per share.

Manulife: Credit Ratings

5 year MFC Stock Chart: Ugly

Analyst Earnings Estimates:

2016 $1.52

2017: $1.6

If those prediction prove prescient, and I would not count on that, the forward P/E at a $13.1 price would be about 8.19 based on the 2017 estimate.

Life insurance companies need a rise in interest rates to perform better and the recent decline in rates has caused them to significantly underperform the market.

MET Total Return YTD: -6.9%

PRU Total Return YTD: -5.92

MFC Total Return YTD: -3.48%

SPY Total Return YTD: +9.19%

Sourced: DRIP Returns Calculator | Dividend Channel (through last Friday 7/22/16)

Routine Paring of Highest Cost Shares:

1. Sold 50 SE at $36.78:

I previously sold 102+ Shares in my Schwab taxable account: Item # 2. Pared Spectra Energy (NYSE:SE): Update For Portfolio Positioning And Management As Of 4/29/16 - South Gent | Seeking Alpha (profit snapshot +$93.95)

Trade Snapshot:

Profit Snapshot: +$74.65

I now own only a 50 share lot purchased at $29 plus a few shares bought with dividends.

I can now buy back the 50 shares sold when and if the price declines below $29.

Routine Averaging Down:

1. Bought 30 EMR at $53.88:

Trade Snapshot:

I bought 50 shares of EMR at a less than optimal price: Dividend Growth Strategy: Bought 50 EMR At $64.37 I have been reinvesting the dividend to buy more shares.

Emerson is a fine company but it has exposure to the energy sector as I pointed out in that previous Instablog and apparently did not heed my own warnings. ("EMR's products are used in the energy sector and the recent decline in oil prices could have a negative and material impact on EMR's profits, a point highlighted by management on the recent earnings call. Conference Call Transcript - Pg.5 - TheStreet") GE, which I also own, is facing the similar headwinds.

Recognizing an existing risk to earnings, and then downgrading it, is part of what I call "error creep". Or maybe I was influenced by my prior 50 share trade, which netted a $600.28 profit (snapshot in prior EMR post); and that led me to try again for a repeat performance. I can not remember which error caused me to buy at $64.37.

Notwithstanding the recent earnings decline, EMR has continued to increase its dividend but the rate of growth has slowed to a crawl: Dividend History | Emerson The current quarterly rate is $.475 per share or about a 3.53% yield at a $53..88 total cost per share. The dividend has been raised annually for 59 consecutive years, starting when Eisenhower was President.

There are a number of articles here at SA that discuss EMREMR Stock News - Emerson Electric Co. Stock | Seeking Alpha. My discussion will be limited to the preceding comments, a few quotes from the recent earnings report, and some brief summaries of analyst recommendations:

Emerson Reports Second Quarter 2016 Results ("earnings per share decreased 60 percent to $0.57.Adjusted earnings per share increased 2 percent to $0.66 excluding ($0.09) for separation costs and a $0.77 gain on the sale of the power transmission solutions business in the prior year. . . Operating cash flow increased 101 percent, due to improved working capital performance. The Company remains on track to generate $3+ billion of operating cash flow for fiscal 2016, excluding the impact of separation costs related to the portfolio repositioning. Reported operating cash flow will be approximately $2.8 billion.")

For the fiscal second quarter, net sales "were down 9 percent, with underlying sales down 5 percent excluding unfavorable currency translation and an impact from divestitures of 2 percent each. As anticipated, oil and gas and industrial end markets remained under pressure during the quarter but within our expectations. Underlying sales for both Process Management and Industrial Automation decreased versus the prior year, but improved slightly versus the previous quarter. Climate Technologies and Commercial & Residential Solutions reflected modest levels of underlying growth supported by favorable conditions in global HVAC and U.S. construction end markets. Network Power underlying sales were down modestly, but order rates for data center and telecommunications infrastructure improved, setting the segment up for positive sales growth in the third quarter."

So some business segment trends are improving but oil, gas and industrial end markets remain "under pressure".

" Emerson Electric in bid for Pentair's valves business-sources" 7/22/16 Reuters

"3 Top Dividend Aristocrats to Buy Now" -- The Motley Fool

Morningstar: EMR ★★★★ (FV $62)

Rated 3 Stars by S & P as of 7/16/16 with a $55 12 month price target (noting that EMR bought back $2.5B in stock during F/Y 2015 and anticipates a $3.29 E.P.S. for the F/Y 2017)(S & P reports are available at all of my brokers)

Rated at Sell by Zachs as of 7/15/16 ("company saw negative growth across 4 out of its 5 business segments in the last reported quarter" (the Zachs report is available to Fidelity customers)

Credit Suisse has EMR rated at outperform as of 6/21/16 with a $59 target price (report available to Schwab and TDAmeritrade customers)

Argus rates EMR as a buy as of 5/10/2016, with a $61 target price (Argus reports are available to Schwab customers)

BMO's 'favorite ideas for new money'-Seeking Alpha

I would not be enthusiastic about EMR yet which explains the temerity represented by a 30 share average down.

Transitioning International Trading to Lower Cost Broker:

1. Sold 1000 Asaleo Care Limited at AUD$2.28 and Immediately Converted Proceeds into USDs:

Trade Snapshot:

Profit Snapshot: USD$191.95

Item # 3 Bought 1000 Asaleo Care at AUD$1.86 (2/28/15 Post)

I did receive some dividend payments that amounted to A$.1524 per share or A$152.4 for my 1000 share lot.

Should you buy Asaleo Care Ltd for its 5.3% dividend? | Motley Fool Australia

Fidelity charged an AUD$32 commission and another 1% to convert AUDs into USDs, knocking a hole in my profit. The 1% currency fee cost about $17 on top of the commission. Both expenses were applied for the purchase and the sell transactions. Altogether, Fidelity's fees cost me about $82.

IB would have charged $2 for each currency conversion, saving about $30. Commissions | Interactive Brokers The AUD commission rate would have been A$52 less than Fidelity. This one trade would have resulted in about $73 more in profit using IB rather than Fidelity. A $264.95 profit is better for me than a $191.95 profit.

I will reproduce a comment that I recently made about Asaleo here:

Under the heading of blind squirrels finding that nut or being right for the wrong reason, I sold on 7/14 1000 shares of Asaleo Care at AUD$2.28. I realized a USD gain of $191.25 plus I received in dividends of A$152.4 since my purchase on 2/25/15.

Why did I sell? The shares were owned in my Fidelity account and I have fired that broker for my international trading. Consequently, I am gradually selling my international positions held at Fidelity and transferring the funds to the significantly lower cost Interactive Brokers.

Asaleo was sold at A$2.28 as part of that process. It had nothing to do with what I knew about the company on 7/15/16. Instead, I would consider buying back the security in my IB account at some point. {It was far too much trouble to transfer an international stock position from one U.S. broker to another U.S. broker}

Moving to lower cost and less problematic brokers is part of portfolio management which is why I am discussing Asaleo in this post.

I noticed last night, when opening my Australia stocks monitor list, that Asaleo was cratering:

AHY.AX Asaleo Care Limited
Closing Price: A$1.505 -0.635 or -29.67%

The company issued an earnings warning last Friday.

Some of the problems appear to be transitory"

(1) Higher pulp costs as a result of weaker A$ and NZ$ and (2) one-off costs associated with the activation of the Every Day Pricing (EDP) strategy with major retailers in the Australian Feminine Care and Incontinence Care markets.

The larger issue is lower revenues due to competitor discounting and the more "trade spend required to support market share" .

I can not link the announcement here, but it can be downloaded here: Asaleo Care 7/22/16 Release

Another company that I have owned in the past, Svenska Cellulosa Aktiebolaget, had a 34.7% ownership stake in Asaleo at the end of 2015.

Page 118: sca-annual report-eng-2015.pdf

Bought Svenska Cellulosa (OTCPK:SVCBY) at $22.27

I started to buy AUDs in my IB account on 7/22/16. I used USD $2,000 to buy A$3,000 at AUD/USD .7468. The exchange rate includes the $2 commission:

Another recent sell, followed by an immediate conversion from AUDs to USDs, was discussed recently here: 2. Sold 600 IAG:AU at AUD 5.79: Update For Portfolio Positioning And Management The AUD/USD conversion was then .7752 that was adjusted down to .767+ by Fidelity to account for its 1% currency conversion fee. So, I was getting knicked by Fidelity at 1% when I converted USDs into AUDs and then again when I converted AUDs back into USDs. It adds up and made worse by the much higher commission rate for the round trip trade.

I am now focused more on buying AUDs opportunistically rather than on using the AUDs to buy income securities on the Australian exchange.


If the stock market rally continues into next week, I will consider selling $5k of the Vanguard Equity Income Fund;Admiral Fund (MUTF:VEIRX) which is my largest mutual fund position. Owned Stock ETFs And Stock Mutual Funds As Of 6/23/16 - South Gent | Seeking Alpha

I may plow some of those funds into the Fidelty Contrafund Fund (MUTF:FCNTX) when and if there is a dip back below 2100. (Morningstar Report: What Makes Fidelity Contrafund Different)

The current seven day yields on money market funds:

Vanguard Prime: .45% Taxable Money Market Funds - V

Fidelity Prime MM: .42% Taxable Money Market Funds - F

Vanguard Tax Exempt: .33% Tax-Free Money Market Funds - V (Alphabetically) - Barron's

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 MFC, SE, EMR.