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The Generation Portfolio: Wells Fargo, Disney, MFA Financial, Bristol-Myers Squibb

Summary Last week provided some good buying opportunities, but they became fewer as the week went along. I used the market volatility to add Disney, Wells Fargo, Bristol-Myers Squibb, and MFA Financial to the Generation Fund. The next two weeks are likely to provide more buying opportunities as the markets strive for clarity from the Fed about the timing of the first rate hike. As I explained at some length in my recent article ” The Generation Portfolio ,” I am managing a portfolio of stocks in which I do not have a personal interest for another party. The goal of the portfolio is to create a low-risk income generating machine populated with a core of Quality Stock plays. I began the portfolio from scratch during the week of 24 August 2015, though it had a large legacy position of Ford Motor Company (NYSE: F ) stock that is untouchable. I will use these updates to show what I have done with the positions and give my general strategy and thoughts on the market. Market Summary The week of 24 August 2015 was volatile. The Friday before, the market sold off heavily, and anxiety built up during the weekend. Monday morning saw a “flash crash” in which stocks and other securities either opened late or opened with unusual drops in price. However, those prices easily were the lows of the entire week. The next several days were extremely volatile, with the market rallying into a status quo Friday. For the week, the market was up slightly, but overall the market remains well off its highs. Long-Range Objective for the Generation Fund I intend to form a hard core of at least 50%-75% Quality Stocks, and around that orbit a number of more speculative REITs and other plays for cash flow. This objective is subject to tweaking. Transactions I was unable to log in first thing Monday morning, like many other traders. Once I got in, the market was too volatile for me to get a good read, so I placed no trades that day. On Tuesday afternoon, the market seemed to be providing some more good opportunities. I placed four limit orders and picked up average-sized positions (as discussed in my previous article) in the following: Wells Fargo (NYSE: WFC ) Disney (NYSE: DIS ) MFA Financial (NYSE: MFA ) Bristol-Myers Squibb Co (NYSE: BMY ) Those positions remain in the account and, including the Ford stock, are the only positions I am tracking here (there also are some other minor legacy positions). Those positions constitute roughly 10% of the entire tradeable funds as of the time of writing, the rest of the Generation Portfolio remains in cash. Analysis of Trades Due to the subsequent market rally on Wednesday and Thursday, all new positions in the Generation Portfolio show a profit. Basically, with few exceptions, the market lifted all boats on those days. This simply illustrates that timing is the most important part of trading, and you don’t need to be much of a stock picker if you can ride the general market waves higher. I placed all the trades on Tuesday, using limit orders. With a few hours left in the trading day I staggered the limit price distance from then-current prices, not expecting to pick up all four unless there was a major sell-off in the final hour of trading. So, one order was roughly .25% below the current price of the stock, the other .50% below, and so forth. Normally, those types of orders would not hit due to lack of volatility. As it turned out, a major sell program hit an hour before the close of trading, and – to my surprise – all four limit orders hit, the final one a limit order I had set a full 1% below the market price at the time, were filled. Reasons for Picking Up Those Stocks Basically, as events subsequently transpired, I could have bought practically anything when I did and the rising market would have turned them into quick winners. I consider BMY, DIS and WFC to be “Quality Stocks” as I have defined that term in my recent article linked above, and all were down substantially from their highs when I placed my limit orders. As for MFA, I recently wrote about that mortgage REIT here . It has been around as long as Annaly (NYSE: NLY ), surviving numerous Fed actions, giving me confidence in its survivability come what may. It also appeared to be heavily oversold on the chart, more so than the other REITs I am interested in. Quality of the Trades Overall, it was a successful week. My intention was to go slower than turned out to be the case in populating the Generation Portfolio, spreading it out over time more with maybe one transaction a week, but the opportunities proved irresistible. As the old military aphorism goes, no plan survives contact with the enemy. Regrets were entirely along the line of missed opportunities. I intended to pick up some Apple (NASDAQ: AAPL ), but never found a comfort zone with it. Most of the huge bargains that some traders were bragging about during the happened only during the first half hour of trading, when I was off-line. Still, I should have grabbed some, and that is the main regret for the week. Overall, only buying 10% of the Generation Portfolio’s tradeable value (less the Ford position) during a week of such bargains may seem like a missed opportunity. Perhaps it was, but I anticipate further volatility ahead, as discussed below. If not, there is nothing wrong with waiting. The Week Ahead The market likely is to be preoccupied throughout the week of 31 August with the August employment numbers that are due out on Friday. The importance of that report was heightened by an interview given on Friday 28 August to CNBC by Fed Vice Chair Stanley Fischer, and other remarks that he made on Saturday . While, as one would expect, Fischer was cagey about the likelihood of a September rate hike, one thing that he said during his CNBC interview stood out. When asked about the importance of data between the time of the interview and the Fed meeting on 15/16 September in influencing a rate hike at that meeting, Fischer said: Well, we’ve got to take data into account. Those are the only things we really have, that and our economic analysis. And if a decision is close, it will be influenced by data that [have] come in recently. Pretty much everybody expects the decision to be “close.” Since the Fed has not made a decision about rates, and Fischer stated that the data leading into the data could be decisive, that puts immense influence on the Friday jobs report. Given that statement by vice chair Fischer, I would not be surprised by some volatility both ahead of the report and immediately after its release. The consensus figure for the September 2015 jobs report is 223k jobs added, up from the 215k figure reported in August. The market easily could interpret anything above 190k jobs added as locking in Fed action. The other major market-moving event in September, aside from the Fed meeting itself, could be the government deadline for raising the debt ceiling. The Congressional Budget Office projects the debt ceiling being hit either in mid-November or December. With several US Senators running for President, Presidential politics could enter the Calculus and cause some posturing that rattles the market as has happened before. One other major factor is the statistical fact that, historically, September is the worst month for stock gains. Combined with volatility overseas in China and other Asian markets, September could provide several buying opportunities. Universe of Stocks Under Consideration The stocks at the top of my list change slightly from week to week: AAPL, MMM, JPM, JNJ, NKE, ABT, UNH, XOM, CVX, PG, PSX, UTX, EMR, PEP, GILD, UNP, RDS.B, KMI, CAT, KO, T, STWD, OXY, COP, KKR, NFLX, WMT, PANW, MO, HD, PBY, EV, SCG, DLR, KSS, BPL, OHI, ETN, PFE, GIS, KMB, CAH, TOL, FCX, CYS, NLY, AGNC. These are stocks that I am most interested in and have performed due diligence on, but market opportunities may present in other stocks as well. Important Upcoming Ex-Dividend Dates 2 September: Baxter International (NYSE: BAX ) PepsiCo, Inc. (NYSE: PEP ) Coca-Cola Enterprises, Inc. (NYSE: CCE ) 9 September: Occidental Petroleum (NYSE: OXY ) 11 September: The Coca-Cola Co. (NYSE: KO ) General Discussion I was caught completely flat-footed by the market break on Monday 24 August 2015. After I finally got into my account, prices were racing higher like a car speeding along without a driver. Charts were taking several minutes to call up, making them useless. Basically, Monday was a lost day for trading, but fortunately there was no harm done. The major lesson of the market during the week was that corporations are watching their stock prices closely for opportunities. The Goldman Sachs buyback desk had its busiest day ever on Wednesday, when the market finally resolved its weakness to the upside. People always talk about a government “plunge protection team,” but the true supporters of the market are companies using cheap credit to buy back their own stock. My sense is that anything related to financials is going to be weak during early September. While some asset classes, such as REITs, appear to have priced in much of a September rate hike, other classes might not have done so yet. When vice chair Fischer said during his CNBC interview that market volatility would play a role in whether the Fed acted, I was surprised. That seems like a screwy rationale for raising or not raising rates. He may have said that just to calm the markets, which seemed to be a major objective of Fed personnel past and present during the week. If the Fed needs market volatility to postpone a rate hike, I’m sure the market would be happy to oblige. The key for the market is the uncertainty about what might happen, not what will actually happen. Fischer eliminated one potential uncertainty when he said that rates would rise in 25 basis point increments, but that was a minor point. At this point, it may be just as important what the Fed says about a second rate hike as whether it does one in September at all. The market hates uncertainty, so my focus this week heading into the all-important jobs number will be on interest-rate sensitive stocks such as banks and REITs. It is more likely than not that a new trading range will develop in the vicinity of current levels. My eye, along with everyone else’s, has been on the energy sector. As usual, the market seized on some transient concern – Saudi Arabian troop movements, a call for an emergency meeting of OPEC – to force shorts to cover. The supply/demand imbalance continues, though, so unless the energy market finds some new worry, the current rally is likely to fizzle. In addition, the Iran deal is a lock, and that will release even more oil into the market, so I am in no rush to add the oil plays I covet, including Exxon (NYSE: XOM ) and Chevron (NYSE: CVX ). The bottom line is that the market has its eye on the Fed, and until that clarifies, the trend into the end of the year will remain unclear. Actionable Ideas I still will be keeping an eye on Apple for any buying opportunities. The REITs such as CYS, NLY and AGNC are buys on dips, as is OHI. Realty Income (NYSE: O ) I would like in the low 40s. PEP will be of interest on a dip into the 80s, where it has support. MMM around 140 would be interesting, as would JP Morgan (NYSE: JPM ) in the low 60s. Looking through the charts, there still are a number of stocks near enough to their peaks that further distribution would not be unusual at all. September definitely is a month to be opportunistic. Conclusion Last week was a successful week of trading, but volatility still looms from multiple sources. Anyone thinking that we are headed straight back to all-time highs is much more bullish than I am. The next two weeks are more likely to be a good time to be opportunistic and grab some plays on dips, especially as the market dates of doom – the jobs report and the Fed meeting – approach. Disclosure: I am/we are long CYS. (More…) 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. Additional disclosure: The positions being discussed are for a portfolio I manage for someone else, not my own holdings.

After The Fall: The Dividend Aristocrats Detailed

Summary Loss averse investors with long-run horizons should not be heading to the sidelines, but rather looking to buy quality businesses on weakness. An index tracking the Dividend Aristocrats has outperformed the S&P 500, producing higher average returns with lower variability of returns over the trailing quarter-century. This article details the components of this index, with current valuation and year-to-date performance, to highlight companies that may outpeform through the next bout of volatility. In yesterday’s article entitled ” Stocks Will Go Higher “, I showed readers that over ten year periods, stocks almost invariably produce positive returns, and suggested the readers plan to buy high quality businesses on weakness and be prepared to hold these investments for long time periods. If history is a guide, such a strategy is very likely to come out a winner. (click to enlarge) Sources: Standard and Poor’s; Robert Shiller (Blue Line is price returns and pink line includes dividends) That article was spurred by a recent quote by famed investor and CEO of Berkshire Hathaway ( BRK.A , BRK.B ), Warren Buffett, who stated in an August 10th interview on CNBC that ” Stocks are going to be higher, and perhaps a lot higher 10 years from now, 20 years for now .” In this same interview, Buffett went further stating that “my game is to own decent businesses and decent prices and you are going to make a lot of money over time.” A strategy populated by good businesses that have generated market beating returns over times is the Dividend Aristocrats. The Dividend Aristocrats are S&P 500 (NYSEARCA: SPY ) constituents that have followed a policy of increasing dividends every year for at least 25 consecutive years. To be included in this index, these companies, at a minimum, have paid increasing dividends through the Eurozone Sovereign Crisis, the Global Financial Crisis, the Tech Bubble, and the early 1990s recession. These are the types of businesses that would be likely to produce market-beating risk-adjusted returns through the next downturn as well. Heeding Buffett’s advice, perhaps buying these businesses on weakness will spur market beating returns prospectively. Demonstrating this success, below is the cumulative total return of the S&P 500 Dividend Aristocrats Index, which is replicated by the ProShares S&P 500 Dividend Aristocrats ETF (NYSEARCA: NOBL ). (click to enlarge) Source: Standard and Poor’s; Bloomberg The Dividend Aristocrats have produced higher average annual returns, outperforming the S&P 500 by 2.5% per year. This approach has also produced returns with roughly three-quarters of the risk of the market, as measured by the standard deviation of annual returns. This long-run outperformance saw this strategy included in my “5 Ways to Beat the Market .” Given the weak domestic equity market performance in August, I wanted to detail the Dividend Aristocrat components for Seeking Alpha readers with current P/E ratio and year-to-date performance. (click to enlarge) For the broad “Investing for Income” community on Seeking Alpha, I have also sorted the list of Dividend Aristocrat constituents descending by dividend yield. (click to enlarge) If you are a long-term investor, looking to buy solid businesses on weakness, perhaps this list of companies who can weather another bout of market-related volatility. If readers find this helpful, I will also put together a list of the constituents of the Low Volatility Index, another factor tilt towards high quality businesses that has generated long-run alpha. Disclaimer: My articles may contain statements and projections that are forward-looking in nature, and therefore inherently subject to numerous risks, uncertainties and assumptions. While my articles focus on generating long-term risk-adjusted returns, investment decisions necessarily involve the risk of loss of principal. Individual investor circumstances vary significantly, and information gleaned from my articles should be applied to your own unique investment situation, objectives, risk tolerance, and investment horizon. Disclosure: I am/we are long NOBL, SPY. (More…) 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.

Betting Against Brazil? Get Paid To Limit Your Risk.

Summary According to data released Friday, Brazil’s economy has entered a recession. The country has been plagued by economic and political turmoil recently. The 2x inverse Brazil ETF BZQ had the highest potential return of any ETF in our universe on Friday. We present a way an investor can be positioned to capture BZQ’s potential return while getting paid to limit its downside risk. Dark Days For Dilma In a recent article about Donald Trump’s new development in Brazil (“Trump Hotel Goes Up, And His Latino Views Barely Raise Eyebrows”), the New York Times noted that, in an interview with the Brazilian magazine Vega last year, the real estate mogul was asked if he’d met with Dilma Rousseff. “No,” Trump replied, “who is he?” The Times informs readers not in on the joke that Ms. Rousseff is, of course, a woman, and the president of Brazil. But if Trump had asked that question to his Brazilian interviewers today, they might have answered that she is also possibly the least popular politician in the country. According to a Reuters article published earlier this month (“Brazil Leader’s Popularity Sinks in Political Crisis: Poll”), Rousseff had an 8% approval rating, in part due to the corruption scandal at the state-owned oil company Petrobras (NYSE: PBR ), which has prompted calls for her impeachment, and in part due to the “worst economic downturn in 25 years” in Brazil. Brazil Enters Recession Rousseff received more bad news on Friday, as official figures showed the Brazilian economy had contracted 1.9% in the second quarter, as reported by BBC News (“Brazil’s economy enters recession”). BBC News also reported that Brazil’s first quarter GDP had been revised downward to -0.7%, from an initial estimate of -0.2%. The official figures probably came as no surprise to Brazilians, as the BBC elaborated: Most people have already been feeling the economic downturn long before today’s figures were out. Unemployment has risen rabidly while inflation was over 12 months is running above 9% – twice the government’s target. More worryingly, analysts believe growth might not return until 2017. Gloomy Outlook From Goldman Sachs Monday brought more potential bad news for the Brazilian economy, as Goldman Sachs lowered its GDP forecast for China, which is Brazil’s largest export market (buying 19% of Brazil’s exports, per the CIA World Factbook ), as CNBC reported (“Goldman takes a knife to China GDP forecasts”): The bank on Monday marked down its 2016, 2017 and 2018 projections to 6.4 percent, 6.1 percent and 5.8 percent, respectively from 6.7 percent, 6.5 percent and 6.2 percent, previously. Government Ineffectiveness Economic weakness in its largest trading partner, combined with a recession at home, would be challenging for any government, let alone one whose leader’s approval ratings are in the single digits. But Brazil’s government showed a worrying sign of ineffectiveness recently, in a trial run for the much-anticipated 2016 Summer Olympics. The World Junior Rowing Championships, held earlier this summer in the same waters in Rio de Janeiro where next year’s Olympic rowing events will be held, were marred by pollution (AP via NY Post: “US rowing team has vomiting, diarrhea after event at filthy Brazil lake”), despite tests going back to March “showing dangerously high levels of viruses from sewage in all Olympic venues.” Investors may wonder how well a government that couldn’t keep the sewage out of its showcase city’s waters during an international athletic competition will be able to handle its current economic challenges. Betting Against Brazil Given Brazil’s current economic and political challenges, and its sensitivity to economic weakness in China, some investors may consider betting against Brazilian stocks. One way to do that would be by buying the ProShares UltraShort MSCI Capped ETF (NYSEARCA: BZQ ), which seeks results corresponding to twice the inverse of the performance of the MSCI Brazil 25/50 Index. That index , which is designed to measure broad-based equity performance in Brazil, includes among its top holdings several Brazilian stocks that also trade in the U.S.: in addition to Petrobras, it includes Itau Unibanco (NYSE: ITUB ), Banco Bradesco (NYSE: BBD ), and Vale (NYSE: VALE ). The “Capped” in the name of the ETF refers to a methodology the index uses to keep any one stock from dominating the index due to its market cap weighting. As of Friday, BZQ was 1st among ETFs and 32nd among all securities in Portfolio Armor ‘s daily ranking by potential return. Every trading day, Portfolio Armor uses an analysis of historical prices as well as option market sentiment to calculate potential returns, which are its high-end estimates of how a security might perform over the next six months. In a previous article (“Backtesting The Hedged Portfolio Method”), we went into a bit more detail about how we tested that ranking system, and tested the performance of hedged portfolios as well. When it creates hedged portfolios, Portfolio Armor is agnostic about whether a security is a stock, ETF, or inverse ETF. Instead, it goes by each security’s potential return, net of hedging costs. BZQ probably wouldn’t have made the cut on Friday, based on its net potential return, but investors who want to buy it as a bet against Brazil can use Portfolio Armor’s hedging tool to find an optimal hedge for it. Adding Downside Protection To BZQ One way to add downside protection is with an optimal collar. A detailed explanation of optimal collars is available here , but, to summarize, a collar is a strategy in which an investor buys a put option, which gives him the right to sell a security for a specified price (the strike price) before a specified date (the expiration date), and, at the same time, sells a call option, which gives another investor the right to buy the security from him at a higher strike price, by the same expiration date. The proceeds from selling the call option offset at least some of the cost of buying the put option. An optimal collar is a collar that will give you the level of protection you want at the lowest price, while not capping your possible upside by more than you specify. Since you are capping your possible upside when using a collar, it can make sense to set that cap at your estimate of the security’s potential return, so, in a bullish scenario, your security doesn’t get called away before you capture that potential return. Since we calculated a 13% potential return for BZQ, we’ll use that as our cap, but, if you feel that, based on the bad news out of Brazil, BZQ could go higher over the next six months, you could enter a higher number for the cap. The other piece of information we’ll need to input here, in addition to the ticker symbol and the number of shares to hedge, is the “threshold”: that’s our term for the maximum decline in the value of the position that an investor is willing to risk. Since that’s based on an individual’s risk tolerance, it will of course vary based on the risk tolerances of individual investors. For the purposes of this example, we’ll use 13% as the threshold as well as the cap. You could use this same process with different values, but, in general, the lower your cap percentage and the higher your threshold percentage, the less expensive it will be for you to hedge An Optimal Collar to Hedge BZQ This was the optimal collar, as of Friday’s close, to hedge 1000 shares of BZQ against a greater than 13% drop before mid-February, while capping the investor’s potential upside at 13%. As you can see in the first part of the image above, the cost of the put leg of this collar was $19,500, or 14.78% of position value. But as you can see below, the income generated from selling the call leg of the collar was $20,500, or 15.54% of position value. So the net cost of this optimal collar was negative, meaning an investor would have collected more for selling the calls than he paid for buying the puts. 1 Essentially, he would be getting paid to hedge. 1 To be conservative, this optimal collar shows the puts being purchased at their ask price, and the calls being sold at their bid price. In practice, an investor can often buy the puts for less (i.e., at some point between the bid and ask prices) and sell the calls for more (again, at some point between the bid and ask). So the actual cost of opening this collar would have likely been less (i.e., an investor would have likely collected more than $1000 when opening this hedge). Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) 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.