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The Global X FTSE Portugal 20 ETF: The Case Of The Double Edged Sword

Portugal may have decided to end its EU support too soon. The domestic corporate structure is too diversified, involving many holding companies. The private banking system has remained weakened by a 2014 default. For Europe’s smaller economies, European Union membership, as well as adopting the Euro has been a double edged sword. The idea was for commerce to have the same ease of access similar to the United States of America. Imagine, if you will, what it would be like if goods in Pennsylvania had to make border stops, use passports or visas and pay tariffs as they crossed the New Jersey, then New York, then Connecticut state’s borders! It’s difficult to imagine, but that’s essentially how European nations conducted cross border business before the EEC. Without those ‘technical, legal and bureaucratic barriers’, smaller European economies, such as Portugal, not only had an unimaginably large market for its products, but now had a new employment opportunities for its citizens as well as the potential to expand its manufacturing and financial services base. The ‘icing on the EU cake’ was being able to do away with unstable legacy currencies and adopt the Euro, further leveling the playing field. Indeed, the EU economy expanded pulling along the smaller economies but at an unsustainable rate. When the global credit market collapsed in 2008, the other edge of the sword cut smaller economies to pieces, causing a deep recession, high unemployment and unsustainable debt to GDP ratios, literally putting many governments on the edge of bankruptcy. Since then, the EU has had a slow, uneven recovery. However, having the support of the larger community, many smaller economies have pulled back from the brink of disaster. This is the point: is this the right time to establish a position in the smaller EU economies, such as Portugal? If the investor wished to, there seems to be one available ETF: the Global X FTSE Portugal 20 ETF (NYSEARCA: PGAL ) . The premise for risking your hard earned savings is based on the old Wall Street premise to ” buy low and sell high .” The question is whether the worst is over for Portugal and what the potential is, versus the risk. If a picture is worth a thousand words, the potential for capital appreciation might be interpreted by the fund’s chart since inception in November of 2013. (click to enlarge) The fund closed its first day of trading at $15.05. Within four months the ETF gained 22.8%. At that time, the entire EU economy was struggling with deflation. At the June meeting, ECB President Draghi imposed negative interest rates. Portugal was experiencing a nascent recovery. Portugal’s sovereigns had also recovered. Now able to finance the government on its own to meet its budget the government passed on a scheduled final EU bailout tranche. German Finance Minister Wolfgang Schaeuble noted that: Portugal is now managing without European aid and can stand on its own two feet. That’s a big success. However, within months, a subsidiary of one of Portugal’s major financial institutions missed a debt repayment. Banco Espirito Santo ( OTCPK:BKESY ) , the parent company, had its shares suspended from trading. The Portuguese stock market fell sharply. The default put the entire Portuguese banking system into question. This is an important issue to understand before investing in Portugal through the fund. However, Portugal’s economic stability goes further than the banks. It’s worth examining the fund’s holdings. First, it’s difficult to separate the fund into sectors. For example although classified as a Telecommunications services company, Sonacom (OTC: OTC:SOVTY ) also provides IT services with software and system information services. Sonae Capital (OTC: OTC:SGPMY ) is listed separately as a Consumer Discretionary company and also as a Consumer non-cyclical. Sonae is in the Hospitality and Recreation industry as well as retail food services, superstores, supermarkets, and drug stores. The Sonae brands fall under the management of one holding company. On a larger scale this is not out of the ordinary. However, this seems typical in Portugal’s small economy. Consumer non-cyclical and Discretionary Symbol Market Cap (USD Billions) Yield Payout Ratio P/E Price to Cash flow Total Debt to Equity Primary Business Jeronimo Martins OTCPK:JRONY $7.520 1.86% NA 26.97 13.38 23.84 Retail food, distribution; supermarkets, drug stores. Portugal and Poland Sonae SGPMY $2.00 3.30% 38.03 11.46 6.04 61.62 Retail food; superstores, supermarkets, franchise outlets; sporting goods, fashion and electronics Sonae Capital SGPMY $0.101 0.00% 0.00% 150 6.49 42.82 Tourism and Hospitality; resorts, marina, catering, fitness and golf courses Second, the quality of the Financial Services metrics indicates the underlying weakness in the sector. It was difficult to determine any metrics of Banif Banco Internacion do Fuchal (Lisbon: Banif) as it is a privately held company. The bank provides a broad range of banking services from retail to corporate, as well as asset management and insurance. Another of the holdings is Banco Espirto Santo ( OTCPK:BKESF ) , the bank which triggered Portugal’s banking crises shortly after the government had successfully restored its credibility in the sovereign debt market. Financial Symbol Market Cap (USD Billions) Yield Payout Ratio P/E Price to Cash flow Total Debt to Equity Primary Business Banco BPI OTCPK:BBSPY $1.46 0.00% 0.00% 82.27 9.54 57.63 Banking Services; corporate, institutional, retail, insurance, credit cards. Subsidiaries in Angola and Mozambique Banco Commercial Portugues OTCPK:BPCGY $2.85 0.00% 0.00% 67.95 11.94 149.69 Privately owned; financial services; asset management, mortgages, consumer credit, insurance Banco Espirito Santo Lisbon: BES $0.613 0.00 0.00 NA NA 237.84 Domestic, corporate and retail banking; credit cards, debit cards, savings accounts, management and insurance One bright spot is the Utilities sector, two of the holdings having respectable yields and one of those has a sustainable payout ratio. Utility Symbol Market Cap (USD Billions) Yield Payout Ratio P/E Price to Cash flow Total Debt to Equity Primary Business Energias de Portugal OTC:ELCPF $9.64 5.39% 17.64% of cash flow 11.69 3.62 225.55 Electric and gas in Portugal and Spain Renovaveis OTC:EDRVF $5.22 0.61% 47.56% 34.57 7.25 81.00 Spain based; renewable energy; hydro, wind, solar, tidal and biomass; EU, Brazil, Canada and US Redes Energeticas Naciona OTC:RENZF $0.810 6.14% 14.6% of cash flow 9.52 2.47 206.08 High voltage transmission; electricity; natural gas transmission and storage Portugal’s Basic Materials is concentrated in cements and cement related products. What is a very interesting feature of Portugal’s industrial Sector is its presence in Africa as well as South America, particularly in Brazil. On one hand this is a ‘plus’ as these companies provide their services in regions with a high growth potential like Egypt and South Africa. On the other had the investments in Brazil presents a problem for the fund as Brazil’s economy has recently been brought to a halt, along with a sharp currency devaluation, because of the collapse of commodity prices as well as a political scandal. Basic Materials Symbol Market Cap (USD Billions) Yield Payout Ratio P/E Price to Cash flow Total Debt to Equity Primary Business Portucel Lisbon: PTI $2.68 11.26% 104.94 14.42 9.26 47.89 Paper pulp, craft pulp Cimpor-Cimentos De Portugal OTC:CDPGY $0.320 0.55% nil 17.10 1.58 503.71 Cement and aggregate (clinker); ready-mix; Portugal, Egypt, Cape Verde, Angola, Mozembique, South Africa, Brazil, Argentina and Paraguay The Telecom Services are run-of-the-mill as far as the Telecom Sectors go. However it does present another example which lends to the confusion of how some holdings should be classified. Pharol (OTC: OTCPK:PTGCY ) is described as a ‘capital management company’ with a 27% holding interest in Brazilian Telecom Oi (Brazil: OIBR4) . Pharol seems to be more of a hedge fund specializing in the Telecommunications Services Sector, while also investing in other holding companies. Telecom Symbol Market Cap (USD Billions) Yield Payout Ratio P/E Price to Cash flow Total Debt to Equity Primary Business NOS SGPS OTCPK:ZONMY $3.53 1.86% 72.07% 45.12 8.81 98.06 Cable, Satellite, movies, series sports and children programming, mobile and landline voice, data Pharol SGPS PTGCY $0.338 24.10% NA NA NA 0.00 Capital management of Brazilian and Portuguese Telecoms Sonacom SOVTY $0.598 2.13% 30% of cash flow 14.15 12.63 0.94 Telecom mobile and landline; voice, data, television; also some IT software and system information Portugal’s industrials are focused on paper-pulp manufacturing. There are three paper-pulp manufactures in the fund, two of which fit into the Industrials Sector and one in Materials. There’s one major construction company, Mota Engil (OTC: OTC:MTELY ) providing engineering and construction including transportation infrastructure and then managing those projects after completion. Industrials Symbol Market Cap (USD Billions) Yield Payout Ratio P/E Price to Cash flow Total Debt to Equity Primary Business Correios de Portugal OTC:CTTPY $1.295 4.89% NA 18.95 14.70 0.57 Courier services, parcel delivery; financial services, transfers, money orders, digital mail Altri SGPS OTC:ASGSY $0.890 1.68% 74% of cash flow 9.87 6.56 192.25 Paper pulp; generates electricity from waste biomass Semapa-Sociedade de Investimento e Gestao OTC:SEMMY $0.967 2.88% 40.50 14.29 3.18 NA Paper pulp, cement, pre-casts, recycling of cooking oil. Tunisia, Angola, Poland, France Mota Engil SGPS OTC:MTELY $0.445 5.02% 12.8% of cash flow 15.26 2.50 485.19 Engineering, Construction; Environment and Transportation construction and management Lastly, there’s one position in the energy sector, a holding company, GALP Energia (OTC: OTC:GLPEF ) . Galp Energia produces, refines and markets gasoline and petroleum products. Another segment provides oil exploration services in 40 countries. Energy Symbol Market Cap (USD Billions) Yield Payout Ratio P/E Price to Cash flow Total Debt to Equity Primary Business GALP Energia GLPEF $7.06 3.78% N/A N/A 12.74 65.61 Holding Company, energy exploration, production As far as the fund metrics, management fees total 0.61% compared to the industry average of 0.44%. It’s a small fund with about $37.5 million in net assets. Since its November 2013 inception its cumulative return is -26.85% and an average annualized return of -14.70%. The price to earnings for 2015 is 15.37 and price to book 1.35. When referring back to the price history chart, it looks like the fund might be a really good opportunity for a capital appreciation investment. However, upon closer inspection, it was really too far out in front of its potential when it reached its all-time high of $18.48. Further, the private banking sector really needed a restructuring before the government ended the EU restructuring program, as Portugal’s domestic banking crises demonstrates. Some events of the banking crisis are noted on the chart. The price earnings ratio of the holdings weren’t all that bad. Excluding from the count any holding for which the data wasn’t available, and any extreme numbers, it averaged out to 26.20 which doesn’t seem too bad. However, many holdings would not be marginable in US equities markets, in particular, being priced below $5.00 per share. This raises another point. The combination of a low P/E and a low stock price may be an indication of ‘fair value’. Hence, the fund may be close to fair value at this level. It’s unlikely that Portugal’s economy can generate enough investment interest in the foreseeable future in order for the fund to work its way back to the 2014 high. On the bright side, this is a situation where the EU benefits the smaller economies, as it’s a potential safety net for the economy, if it’s necessary. In the current situation, Portugal is now attempting to restructure a weak banking system without direct EU support. An analogy may be made here between Portugal’s economy and the Greek economy. They are in similar straits; however the Greek government has (with difficulties) stuck with the EU bailout program. Portugal may have to reestablish its commitment to the EU restructuring plan. This would be a good fund to ‘bookmark’, and follow the news and events; however, it might not be the right time to establish a position.

The iShares MSCI Netherlands ETF: A Dutch Treat?

The fund heavily weights Netherlands’ premier global companies. The fund has a consistent positive total returns over its 19 year existence. The main drag on the fund might be due to the strong US Dollar and weak Euro. There’s nothing like getting away to a warm place in the dead of winter. Oh, the idea of heading south to the Caribbean to escape the slush, ice and snarled traffic. Perhaps, Aruba, Curaçao or Sint Maarten? On the other hand, you might get a puzzled look from your co-workers while they’re bundling up for their wintery trek home by announcing that you’re off to the Netherlands for holiday. The fact is you’re actually being quite accurate! Those aforementioned mentioned timeless, carefree, warm, sunny islands are actually autonomously governed members of the Kingdom of Netherlands . The country in northern Europe which might have first come to mind, Netherlands, is actually a forth constituent member of the Kingdom of Netherlands . The Kingdom’s reach doesn’t end there, either! Three other Caribbean islands Bonaire, Sint Eustatius and Saba are special municipalities and its citizens actually have voting rights in Dutch and European election! There’re two details that often confuse people: what’s the difference between Netherlands and Holland ; and who are the people of Netherlands? First, Holland is located in the central region of Netherlands. Second, the people of Netherlands are Dutch ! To put this in perspective, the beautiful cities of Amsterdam, Rotterdam, the Hague, Delft, Leiden and Haarlem are located in Holland, which is in Netherlands. Lastly, Netherlands is governed by a constitutional monarchy, with a bicameral parliament. The monarchy isn’t just a formality, either! King Willem-Alexander actively mediates in Dutch parliamentary politics. At this point there’s a good chance that Netherlands suddenly seems like an interesting place. You might even be asking yourself whether it’s a worthwhile investment. If that is indeed the case, there’s a way you can invest your ‘dollars’ in Netherlands through the BlackRock’s (NYSE: BLK ) iShares MSCI Netherlands ETF (NYSEARCA: EWN ) . According to BlackRock … The iShares (NYSE: MSCI ) Netherlands ETF seeks to track the investment results of a broad-based index composed of Dutch equities. .. The underlying index is Morgan Stanley Capital International’s ( MSCI ) Netherlands Investible Market Index . According to MSCI this index … is designed to measure the performance of the large, mid and small cap segments of the Netherlands market. With 47 constituents, the index covers approximately 99% of the free float-adjusted market capitalization in Netherlands… Although the complete list of holdings and weightings are proprietary information, does indicate the index sector allocation and it is charted below for comparison with the fund’s sector allocation. Data from MSCI The fund’s sector allocations are demonstrated in the pie chart below, and seem to emulate the index quite closely. Data from iShares This fund, like many of the iShares focused funds, has been long established having been incepted in 1996. The fund’s net assets total $169,880,091.00 in US Dollars. It should be noted here that Netherlands is a member of the European Union as well as a Eurozone member; hence the currency of Netherlands is the Euro. This is an important point. Without getting too sidetracked, it suffices to say that it’s likely that the US Dollar will strengthen against the Euro within the next few quarters. This means that the values of individual holdings will decline in dollar terms, even if the individual companies are doing well. This shouldn’t put off the long term investor, but its good practice to be aware of the currency risks, at least in the near term. The fund has 6.8 million shares outstanding, is marginable and has a reasonably good 20 day average volume of over 77,000 shares per trading session. The fund is passively managed and management fees are slight higher than the industry average 0.44%, totaling 0.48%. The present annualized yield is given as 2.47% and the fund is currently trading at a 0.48% premium to NAV. The fund’s P/E ratio is given as 23.64% and a price to book value multiple of 2.14. The total number of holding is 48, which includes a small cash/derivatives holding. A quick overview of the major holdings with some key metrics, in order of sector weightings is presented below, starting with Consumer Staples. Although there are several ways to measure a company’s financial stability, the ‘Quick Ratio’ is included when available. In brief, Investopedia defines the ” Quick Ratio ” as … an indicator of a company’s short-term liquidity… …a company’s ability to meet its short-term obligations with its most liquid assets … … a quick ratio of 1.5 means that a company has $1.50 of liquid assets available to cover each $1 of current liabilities… Ah! Before continuing, please note that you will often see the Dutch word ” Koninklijke” preceding the company name or brand. It’s equivalent to “Royal Dutch”, like in ‘ Royal Dutch Shell ‘ (NYSE: RDS.A ) Consumer Staples 32.0171% Exchange and Symbol Fund Weighting Dividend Yield Payout Ratio Market Capitalization (in USD Billions) Quick Ratio Primary business Unilever UL 19.074% 3.05% 41.40% $131.00 0.47 Personal care, foods, refreshments, home care with 400 brand names. Services over 190 countries globally. On par with other global giants, Nestles (OTC: OTCPK:NSRGF ), Proctor and Gamble (NYSE: PG ) and the like. Heineken OTCQX:HEINY 5.439% 1.49% 33.42% $52.321 0.55 Beer brewing with over 50 brand names and global distribution in 75 countries Koninklijke Ahold OTCQX:AHODF 4.7393% 2.50% 50.53% of EPS $14.54 0.65 Food retail brands and Supermarkets in the USA New England area, Netherlands, and Czech Republic; total stores number, approximately, 3200 Heineken Holdings OTCQX:HKHHF 2.0859 1.62% 33.33% $19.11 0.55 Holding 50.005% of Heineken; the holding company segments and manages the Heineken brands by geographical region. There are in addition, three smaller Consumer Staple holdings accounting for 0.6789% of the fund’s total holdings. They are Corbion ( OTCPK:CSNVY ) , 0.3648% of the fund, providing bio-based food additives, emulsifiers, frozen doughs and vitamin premixes; Koninklijke Wessanen ( OTC:KJWNF ) at 0.2069%, which manufactures and markets organic food products, spreads, honeys, cereals, and dietary solutions; Amsterdam Commodities ( OTC:ACNFF ) at 0.1072%, which trades, transports and distributes agricultural products. All three companies contribute to the fund’s overall dividend. There are 9 financial holdings. The smaller holdings: Wereldhave ( OTC:WRDEF ) at 0.6159%; Eurocommercial Properties (Amsterdam: SIPFC) 0.5529% ; Vastned Retail REIT ( OTC:VSNDF ) 0.231%; NSI ( OTCPK:NIUWF ) 0.1405%, all totaling 1.3998% of the fund’s total holdings, are REITS. Delta Lloyd ( OTCPK:DLLLY ) 0.4364% and Binckbank ( OTC:BINCY ) 0.1274% provide traditional banking services, annuities, manage pension funds and online banking. All of the above contribute to the fund’s overall dividends. The lion’s share of financial holdings, at 19.2501%, is summarized below. Financials 21.3515% Exchange and Symbol Fund Weighting Dividend Yield Payout Ratio Market Capitalization (in USD Billions) Quick Ratio Primary business ING Group ING 14.3798% 2.18% 35.20% $48.335 NA A global player in banking, providing global retail service, investing, insurance as well as commercial service Aegon AEG 2.8773% 4.10% 63.78% $11.42% NA Insurance, pension management, Europe, North, Central and South Americas, U.K.; Expanding into Central and Eastern Europe and Asia NN Group OTC:NNGPF 1.9903% 3.49% NA $9.17 NA Insurance, investment management, annuities, reinsurance. Europe and Asia The fund holds 13 industrials, however, the top four account for over 10% of the fund’s holdings and well over 75% of the total industrial holdings. Industrial 13.6886% Exchange and Symbol Fund Weighting Dividend Yield Payout Ratio Market Capitalization (in USD Billions) Quick Ratio Primary business Koninklijke Philips PHG 6.5413% 3.28% 154.09% $23.81 0.86 Called ‘Philips’ in the US: Imaging systems, diagnostic imaging, x-ray equipment. Consumer lighting, appliances personal care products. Randstad Holdings OTCPK:RANJY 1.9134% 2.39% 56.95% $8.963 NA Staffing service, temporary and permanent, payroll services, outplacement, and workforce solutions. Koninklijke Baskalis Westminster OTC:KKWFF 1.0719% 3.60% 27.42% $5.09 0.37 Dredging and earthmoving, maritime infrastructure; management of oil and gas terminals TNT Express OTCPK:TNTEF 1.0647% 1.04% NA $3.827 1.20 Express carrier for documents, parcels and freight. Offices in 60 countries with a delivery reach in 200 countries globally Four companies comprise the Information Technology allocation. The topmost are most significant ASML (AMSL) and Gemalto ( GTOFF) accounting for 9.8634% of the fund and over 90% of the IT holdings. The smaller holdings are ASM International, (ASMIY) at 0.5154%, a manufacturer of wafer processing equipment and BE Semiconductor ( OTC:BESVF ) at 0.1657%, a manufacturer of semiconductor back-end and packaging equipment. All four holdings pay dividends. Information Technology 10.5445% Exchange and Symbol Fund Weighting Dividend Yield Payout Ratio Market Capitalization (in USD Billions) Quick Ratio Primary business ASML Holdings ASML 8.5177% 0.79% 21.65% $41.945 1.77 Semiconductor lithography systems for integrated device manufacturing, flash and DRAM memory. Gemalto GTOFF 1.3457% 0.69% 19.53% of EPS $4.897 1.20 Digital security: mobile, machine to machine, transactions There are three significant holdings for the Consumer Discretionary and two smaller holdings. The smaller holdings are TomTom (TOMAF) , the well-known navigation equipment manufacturer, at 0.2914% and Accell Group ( OTCPK:ACGPF ) at 0.1167% of the fund, manufactures exercise equipment, particularly bicycles and bicycle components. Consumer Discretionary Exchange and Symbol Fund Weighting Dividend Yield Payout Ratio Market Capitalization (in USD Billions) Quick Ratio Primary business Relx RELX 4.5121% 2.62% 65.37% $17.592 NA Information Solutions for science, medical and technical for professionals and students Wolters Kluwer OTCPK:WTKWY 2.7013% 1.68% 48.17% $8.73 0.69 Information software and services legal, business, accounting, medical and healthcare Altice (classes A and B) OTC:ALLVF 2.1537% 0.00% 0.00% $15.92 0.56 Media provider and services, cable TV, broadband internet, telephony Only four companies comprise the Materials Sector holdings, the two most significant are Akzo ( OTCQX:AKZOF ) and Koninklijke DSM ( OTC:KDSKF ) . The two smaller holdings are OCI ( OTCQX:OCINY ) 0.5894% which seems to be as much an industrial by way of its infrastructure construction and project management as well as manufacturing materials, particularly fertilizers. It is a subsidiary of Orascom Construction (Cairo: OCIC) . The second is Koninklijke Ten Cate ( OTC:KNKCF ) 0.1908% manufactures advanced textiles and composite materials. Materials 7.71% Exchange and Symbol Fund Weighting Dividend Yield Payout Ratio Market Capitalization (in USD Billions) Quick Ratio Primary business Akzo Nobel AKZOF 4.4598% 2.24% 36.27% $14.74 0.90 Paints, coatings, specialty chemicals, marine coatings, metal coatings, vehicle finishes. Also food additives, detergents, cosmetics. Koninklijke DSM KDSKF 2.47% 3.32% 366% of EPS $8.21 0.97 Nutrition, vitamins and nutrients, carotenoids. Also performance materials plastics, resins, polymer materials There’s only one telecom holding, Koninklijke KPN (OTC: OTC:KKPNF ) at 2.9527%. KPN has a $12.61 billion market cap and pays a 3.51% dividend. The company is pretty much a broad based telecom service provider whose primary business is integrated information and communication technology for mobile, residential and business. The least weighted sector is in energy with three holdings each has a weighting of less than one percent. Energy 1.7472% Exchange and Symbol Fund Weighting Dividend Yield Payout Ratio Market Capitalization (in USD Billions) Quick Ratio Primary business Vopak VOPLY 0.7454% 2.29% 43.5% of EPS $4.57 NA Storage of oil products, liquid chemicals, bio-fuels and vegetable oils as well as shipping terminal to terminal. SBMO OTCPK:SBFFF 0.6601% 0.00% 0.00% $2.52 2.02 Offshore energy, floating production and mooring systems, terminals and service Fugro OTCPK:FURGF 0.3417% 0.00% 0.00% $1.37% 1.49 Geotechnical Interpretation services providing information of the Earth’s surface and subsurface. Geosciences and Surveys for the oil and gas industry The fund has a respectable track record, with a consistent distribution as well as positive annual returns since inception, the only exception to that is the -1.59% negative return over the past 52 weeks. Since inception the fund has a total return of 4.98%; over the past ten years, 4.74%; five years, 4.98% and three years, 9.98%. Hence, the fund has a pretty consistent positive return, over different time frames, over the life of the fund, with the exception of the past year. (click to enlarge) The fund has several real global heavy-weight champs with distribution in the world’s best performing economies, like the USA, the U.K. and Germany. Further, the fund is smartly structured to top-weight these premier companies. Hence, it’s not unreasonable to assume that the poor performance over the past year may be currency related , particularly when it comes to US Dollar strength combined with Euro weakness. Should the US Fed raise its benchmark rate, or the ECB weaken the Euro in the coming months this might present an excellent buying opportunity for the investor with a long term outlook.

The Generation Portfolio: Rate Fears Consume The Market

Summary Since my last update of the Generation Portfolio, I have added two positions: American Capital Agency Corp. and The Hershey Company. The market had a seesaw week, during which rate hike fears reappeared, but the Generation Portfolio continues to show solid gains. The market’s conclusion that a Fed rate hike is now likely may be premature, and it remains wise to look at oversold sectors such as Energy and Health Care. Background This is a continuation of a series of articles in which I update the progress of a portfolio that I manage for others. You may read my last article in the series here . This is my way of providing a different view of the trading experience apart from close examination of individual securities, and in a sense is a trading diary. The Generation Portfolio has an income focus, with every position paying a dividend. It is not meant to represent a completely diversified portfolio, but only that part devoted to income plays, and is provided for educational purposes. In these articles, I update the progress of the portfolio and give some thoughts on its aims and overall market conditions that affect it. Sector Opportunities There has been some obvious sector rotation over the past year, as shown in the current (as of this writing) chart below of the performance of the 9 Sector SPDRs over the past 52 weeks. I am going to use two sectors, Energy and Healthcare, to show how I use this information. The sector breakdown is a pretty good way to determine what is in favor at the moment, and what is out of favor. However, if you have a long-term focus, it also gives a clue as to long-term possibilities. Everything depends upon time frames, and comparing them can show what may be a good value relative to the overall market. While the energy sector has done poorly over the past year, there are signs that it is in a bottoming process. Changing to the six-month sector chart shows that the energy sector also is down for that time frame, and by almost as much as the 52-week time frame. At this point in the process, the energy sector looks like a bad place to consider putting any funds. An object in motion tends to stay in motion, and when the market moves against a sector, that view can last for a long time. With a long-term view, however, the important thing is to look for changes in sentiment. Let’s look at the three-month chart. The three-month chart shown above tells a much different story than the previous charts. Not only is the energy sector up, it is the third-best performing sector out of the nine total. On the other hand, health care, which was the third-best performer over the past 52-week period, now is at the bottom of the list, with the largest loss. Turning to the one-month period shows the influence of the market’s strong October, which was the strongest month of gains for four years. The three-month data shows that Energy has continued its rebound. In fact, all of the gains from its rebound have been in this time period. Heath care also has rebounded, but not enough to overcome the losses of the past six months. There are many ways to read the fluctuations in the sector data. It is interpretation more than science. You can draw vastly different conclusions based upon your overall outlook. That, as they say, is why they make markets. My take is that energy is in the middle stages of a bottoming process. It still has a long way to climb back to its position of a year ago, and could fall back down to its lows. However, its steadiness over the past three months in addition to the past month suggests to me that downside risk at this point is minimal. Healthcare also appears to be in a resting phase. It is basically flat over the past six months despite its recent bounce. It is in my view in an earlier stage of the bottoming phase than energy. The healthcare sector is likely to grind along the bottom for a while. It could offer some good values during this process. Since the sector already has pulled back, you are not buying at the top, though any sector can fall further depending upon news. Over time, the sectors have offered positive returns, as shown by one more chart of the five-year period. To me, the five-year chart is the most important of all. I have a long time frame, and am not too concerned about the usual short-term fluctuations of the market. Regarding the energy sector, this chart suggests to me that energy overall is not the best long-term growth opportunity. However, even despite the losses of the past year, it is slightly positive. The long-term trend remains higher, and recent losses have done nothing but erase past excesses without actually sending the industry into decline. My conclusion is that the losses of the last year are a buying opportunity for energy stocks, though we already may have seen the bottom. As for healthcare, the five-year chart shows that it is in a massive secular uptrend. It is the biggest gainer of the past five years out of all nine sectors. Global demographic trends support the view that healthcare is not a short-term fluke in terms of growth opportunities, but a long-term opportunity. The media focuses on individual U.S. health care laws and particular demographic groups such as “Boomers,” who are retiring every day. However, as a global issue, the opportunities in health care are not dependent upon domestic political issues, but rather upon a secular upswing in the need for provider services around the world. Thus, pullbacks in the sector also are buying opportunities for the long term. In the financial media, all you hear about are the big social media stocks that have been outperforming, the so-called FANG stocks: Facebook (NASDAQ: FB ), Amazon.com Inc. (NASDAQ: AMZN ), Netflix Inc. (NASDAQ: NFLX ) and Alphabet Inc. (NASDAQ: GOOG ). They indeed have done well this year, and for several years, in fact. However, there also are interesting long-term opportunities in sectors that don’t get nearly as much press, such as health care. I could go through analyses of all the sectors like this, but these are the two that stand out right now. They are good examples of how I approach the sector issue, and new data always influences my views. Investing in the right sectors often turns out well in the end. The Week That Was If October was a great month, November is shaping up as a more mixed affair. Stocks were up on Monday and Tuesday, in a continuation of the market’s good times from last month. However, on Wednesday, Fed Chair Janet Yellen testified by a House Committee that the December Fed meeting is “live,” and that rates could rise. This sent the market lower. Friday’s jobs report showing unexpectedly large jobs gains of 271k solidified the market’s concerns. Transactions I have made two transactions since my last Generation Portfolio article: Added American Capital Agency Corp. (NASDAQ: AGNC ); Added The Hershey Company (NYSE: HSY ). Further details are below. Generation Portfolio To Date Below are the transactions and positions to date in the Generation Portfolio. Below are the transactions to date in the Generation Portfolio. The Generation Portfolio as of 17 October 2015 Stock Purchase Date Purchase Price Latest Price Change Since Purchase WFC 8/25/2015 $ 51.75 $ 55.87 7.92% DIS 8/25/2015 $ 98.75 $115.60 17.13% BMY 8/25/2015 $ 59.75 $ 65.11 9.48% MFA 8/25/2015 $ 7.05 $ 6.81 (3.36%) OHI 8/31/2015 $ 33.95 $ 32.36 (4.21%) CVX 9/02/2015 $ 77.90 $ 94.03 20.71% PG 9/03/2015 $ 69.95 $ 75.57 8.03% CYS 9/04/2015 $ 7.68 $ 7.53 (1.95%) KO 9/09/2015 $ 38.50 $ 41.96 8.99% MPW 9/10/2015 $ 10.89 $ 11.13 2.20% WMT 9/10/2015 $ 64.40 $ 58.88 (8.73%) VTR 9/10/2015 $ 52.80 $50.95 (3.75%) KMI 9/11/2015 $ 29.95 $ 26.14 (12.99%) WPC 9/14/2015 $ 56.75 $ 62.04 9.23% T 9/17/2015 $ 32.50 $33.16 1.98% VZ 9/17/2015 $ 44.95 $45.76 1.81% MMM 9/18/2015 $139.90 $158.73 13.84% JPM 9/22/2015 $ 60.89 $ 68.72 12.92% PX 9/23/2015 $101.30 $113.58 12.12% VER 9/25/2015 $ 7.87 $ 8.25 4.83% WMB 9/28/2015 $ 39.48 $ 37.98 (3.80%) MAIN 9/28/2015 $ 27.47 $ 29.87 8.74% PFE 9/28/2015 $ 32.69 $ 33.72 3.79% TGT 10/16/2015 $ 75.15 $ 76.69 2.75% ABR 10/20/2015 $ 6.38 $ 6.58 2.82% AGNC 10/30/2015 $17.84 $ 17.77 (0.34%) HSY 11/06/2015 $85.45 $ 86.16 0.83% Latest prices and percentages are those supplied by the broker, TD Ameritrade, as of the close on 6 November 2015. A large legacy position in Ford Motor Company (NYSE: F ) and some other small legacy positions are omitted. Kindly note that percentage changes include the impact of reinvested dividends since the beginning of November, so they will not always correlate with the price changes of the stocks. There currently are 27 positions in the portfolio. Of these, 8 are positive positions and nine are negative (I go strictly by the broker’s calculations of gain and loss as of the close, as they know best). According to a spreadsheet that I maintain, the Generation Portfolio overall currently is up between 4% and 5%, a slight drop since the last article. Some dividends are not accounted for in the percentage changes because I only switched to reinvesting dividends recently. Losses in a couple of the energy stocks and interest-sensitive plays were largely balanced by rebounds in bank, retail and entertainment positions. Dividends One of the aims of the Generation Portfolio is to generate dividends, hence the name. Several dividends came in this week and were reinvested. Dividends Received To Date Stock Date Received Reinvested VTR 9/30/2015 No KO 10/01/2015 No CYS 10/14/2015 No VER 10/15/2015 No MPW 10/15/2015 No WPC 10/15/2015 No MFA 11/02/2015 Yes JPM 11/03/2015 Yes T 11/03/2015 Yes VZ 11/03/2015 Yes BMY 11/03/2015 Yes The dividends are split about equally between qualified and non-qualified. Analysis of the Holdings This week confirmed one thing in my mind: that the Fed gets government data well before it releases it to us. One thing that I constantly have to remind myself of is that the market is always right. Trying to argue against price moves is like arguing about the weather: you may have an excellent case, but it is going to rain whenever it wants to anyway. The consensus in the media – and the market – is that the latest jobs numbers were blow-out figures that do not just suggest that the Fed will raise rates at its next meeting, but demand it. That is the consensus view, and it has a lot of merit to it. After all, the numbers did beat expectations. I recently have been in the camp that thought that the economy does not need a rate increase, and that the data does not justify it. Back in February, I took a long look at the situation and decided that my own thinking is that there probably will be some small rate hikes beginning at some point late in 2015, and probably only one tentative rate hike in 2015. So far, if the market consensus is proven to be true, I was spot on with that assessment. I don’t mind being proven right, especially considering that when I made that prediction, the market was pricing in three rate hikes over the next year. Traders see a roughly 70% chance of a rate hike at the December meeting. However, we could all still be wrong. There remains a roughly 30% undercurrent of thought that the Fed won’t raise. I’m not so sure that means anything, because the consensus about this has been wrong all year long (and in 2014, too). However, the traders with such a poor track record sometimes are right, and they are betting with real money, so their view must be respected. Since the media has concluded that the Fed will act, how can this be? (click to enlarge) The graph above of the jobs data over the past decade shows that there was indeed an uptick in the employment numbers last month. However, when you look at the overall trend, does it look as though much has changed? To me, it appears that the jobs numbers have been treading water since 2010. They have settled around an average gain of 200k per month. The variations have declined, so that there is a tighter fit to the trendline in recent months. Completely overlooked by most of the financial media was that the change for September was revised downward, from +142,000 to +137,000. Thus, the jobs gains in October were a bit less than the +271k figure would suggest. As the report also noted that, after all the revisions, “Over the past 3 months, job gains have averaged 187,000 per month.” This compares with another sentence from the report in a different location, “Over the prior 12 months, employment growth had averaged 230,000 per month.” I don’t know about you, but I do see a trend there – downward. Also noted in the report is that “Hourly earnings have risen by 2.5 percent over the year.” Many feel that this cinches the case for a rate hike, because it suggests that the inflation rate – the other arm of the Fed’s dual mandate – must follow suit. The Fed all along has said that it considers 2% inflation to be its threshold for raising rates. So far, that threshold has not been met. Also completely ignored by the media was that “The average workweek for all employees on private nonfarm payrolls remained at 34.5 hours in October.” That is not a sign of a tightening labor market. (click to enlarge) Strangely enough, though, even after this “hot” jobs report, the very same market consensus that is pricing in a December rate hike also continues to price in inflation expectations well below 2% (though they have ticked up slightly). That this is an internal contradiction does not seem to have occurred to many people. The bottom line is this: recall that the Fed has two mandates, not just one, and neither is really justifying a rate hike right now. All of these quibbles, aside, the media has decided that the market has decided that the Fed will raise rates in December, to wit: It’s interesting to note that before this week, everyone who was predicting a rate hike in December was saying that there needed to be two hot jobs reports before then to justify such a hike. Now, apparently, the market has concluded that only one seals the deal. And that is all well and good, but for one nagging detail: this latest jobs report was not “stellar,” it was barely above average for the past year. Apparently one good, not stellar, jobs report is all the market needs now to consider the economy to be on fire. Times have changed. The market has been manic on this issue for years now. It see saws between unblinking conviction that a rate hike must happen, and now, and complete certainty that the economy would not support one. The truth lies in between. A rate hike may be on the table, but then, it has been all year and nothing has happened. With earnings season now largely behind us, it’s time again for Fed frenzy. The Fed can and will do what it feels best. My analysis from February easily could be proven right in the end, and there will be one Fed move in 2015. Personally, I wish the Fed would raise rates and get it over with, the suspense and uncertainty has been far worse for capital allocation than past rate hikes have proven to be in actuality. Whether the Fed actually does raise rates, though, remains very much an open question. The best move in this uncertain environment is to stay diversified, hedge your bets and watch your sectors for opportunities. Conclusion The Generation Portfolio remains solidly in positive territory, and the dividends have begun rolling in. After a spectacular October for the market, prices retreated as the odds of a Fed rate hike grew. However, Fed action is not a certainty, and there is another jobs report left before the December Fed meeting. This remains a good time to maintain a diversified portfolio that takes into account all possibilities, and to watch for undervalued sectors which may pay big gains over the longer term.