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Summary This week, I added Williams Companies (WMB) and Main Street Capital (MAIN) to the Generation Portfolio; The nonfarm payroll report on Friday suggested that a rate hike is less likely to occur this year, which helped the rate-sensitive positions in the portfolio and hurt the banks; With earnings season about to start, we should get a better read on the economy and perhaps some more buying opportunities. Background This is the latest addition in a weekly column that I write. The main focus is on a stock portfolio that I manage for others, The Generation Portfolio . I also comment about recent market events and my outlook for the market with reference to the Fed, the global economy and whatever else may impact future share prices. My general theory about the markets is that they have become increasingly herd-like. By that, I mean that the huge growth in index funds is the “elephant in the room” that (to mix analogies) has become to traders like the weather: something that always has an impact but that really can’t be changed. Buy and sell decisions made by index fund holders affect good and bad stocks indiscriminately. Whereas in the past the herd tended to build up speed slowly over time, index funds accelerate waves of buying and selling to daily and, increasingly, intra-day moves that used to take weeks or even months. While I have nothing against index funds, which are perfectly suited to casual investors, their status as a panacea is highly suspect. They are particularly dubious in volatile markets when massive buy and sell orders swamp order desks. This, in my view, has created new opportunities and dangers in the market for the individual, which is to the advantage of nimble investors. Thus, this series focuses on stock-picking, not funds. The Week That Was The week of 28 September 2015 was like the month of April: in like a lion, out like a lamb. The market was down sharply on Monday, serving as an echo of the extreme volatility that has characterized the market since late August. It then stabilized on Tuesday before moving steadily higher for the remainder of the week. The key event was the October jobs report on Friday morning. It missed expectations, and even worse, reduced the jobs for previous months by a total of 59k workers. After a period of volatility, the major averages continued moving higher, closing the week near the highs. Transactions I made the following purchases for the Generation Portfolio this week: Williams Companies (NYSE: WMB ); Main Street Capital (NYSE: MAIN ). I made those on Monday, then sat tight for the remainder of the week as volatility decreased. Generation Portfolio To Date The Generation Portfolio currently stands as follows. The Generation Portfolio as of 3 October 2015 Stock Purchase Date Purchase Price Recent Price Change Since Purchase WFC 8/25/2015 51.75 51.30 (0.95%) DIS 8/25/2015 98.75 103.00 4.30% BMY 8/25/2015 59.75 62.52 4.30% MFA 8/25/2015 7.05 6.89 (2.27%) OHI 8/31/2015 33.95 35.40 3.86% CVX 9/02/2015 77.90 81.55 4.69% PG 9/03/2015 69.95 72.42 3.53% CYS 9/04/2015 7.68 7.41 (3.52%) KO 9/09/2015 38.50 40.39 4.91% MPW 9/10/2015 10.89 10.99 0.92% WMT 9/10/2015 64.40 64.97 0.85% VTR 9/10/2015 52.80 56.06 6.17% KMI 9/11/2015 29.95 29.60 (1.07%) WPC 9/14/2015 56.75 58.12 2.41% T 9/17/2015 32.50 32.64 0.43% VZ 9/17/2015 44.95 42.90 (4.69%) MMM 9/18/2015 139.90 143.20 2.36% JPM 9/22/2015 60.89 60.75 (0.20%) PX 9/23/2015 101.30 101.41 1.83% VER 9/25/2015 7.87 7.75 (1.27%) WMB 9/28/2015 39.48 41.02 3.90% MAIN 9/28/2015 27.47 27.55 0.98% All prices and percentages are those supplied by the broker (TD Ameritrade) as of the close on Friday, 2 October 2015. Percentages may differ from those suggested by the latest closing prices most likely due to after hours action. A large legacy position in Ford Motor Company (NYSE: F ) and some other legacy positions are not shown. There are 15 positive positions at the moment and 7 negative ones. According to a spreadsheet that I maintain, the Generation Portfolio overall currently is up by between 1-2%. This is similar to last week, though then the market closed on a low and this week it closed on a high. The dividend flow, which is one of the prime aims of the Generation Portfolio, has begun. Dividends Received To Date Stock Date Received Type Amount VTR 9/30/2015 Ordinary 146.00 KO 10/01/2015 Qualified 82.50 TOTAL 228.50 For now, at least, I am receiving the dividends in cash and will reinvest them as they accumulate. Some dividends have accrued but have not yet been paid, such as a large dividend for CYS. They will be accounted for as they reach the account. General Strategy The Generation Portfolio was 100% in cash (save for legacy positions) for about six months after I sold off positions in early 2015. During the period of market turbulence that began in late August 2015, I finally began adding positions. As I discussed in a previous article, I side with those who prefer wide diversification, both between sectors and within them. Given a choice, I would rather own smaller positions of two Quality Stocks (as I define them here ) in a sector rather than place all of my chips on just the leader. Accordingly, the Generation Portfolio is shaping up to have about 40 positions, each with a projected weighting of roughly 2% (though that is just an average). It currently has 22 positions, and all pay dividends. In accordance with the overall objective mentioned above, the overwhelming majority of positions will pay solid, dependable dividends. I like the tax advantages and strong cash flow of REITs and BDCs, so they form a substantial subset of the Generation Portfolio. This will give the Generation Portfolio a certain rate sensitivity, which will be somewhat offset by some bank positions. I have no problem at all about investing in several companies with similar risk profiles as long as there is overall diversification. It’s all about tactics, and bad tactics can ruin the best strategy. Analysis of Holdings There have not been any huge surprises yet, but the volatility of some of the positions has surprised me. After I picked up WMB on Monday, for instance, it went on a crazy ride due to market reaction to it being acquired. At one point during the week, it was down over 10% and was not looking like a particularly good pickup. However, the deal was valued at well over my entry point, and the market seemed to recognize that more and more as the week went by. Fortunately, the position now shows a nice profit. I wrote an article about MAIN this week which summarized my view of the stock. This position also surprised me with the ferocity of its move to the downside. My analysis of the chart, though, suggested that the move lower would be short and sweet, and fortunately it was. This position also showed a gain after being down several percent. The REITs had a fairly good week due to growing agreement that a Fed rate hike in 2015 is unlikely. There are many good reasons for this, which I summarized here , and the week jobs report on Friday added to that consensus. The banks went slightly lower as anticipated, so those two positions to some extent cancelled each other out in terms of volatility. The big winners to date are Ventas, a health care REIT, and Coke. The Coke position is even better due to the dividend already received. The biggest losers are Verizon and Wells Fargo. I’m not concerned about WFC, which is performing fine as a counterweight to the REITs, but VZ needs to pick up the pace should the market continue higher and leave it behind or else it gets sent to the cornfield. General Discussion The market has remained enthralled by what I kindly refer to as rate hysteria. However, earnings season kicks off this week, with PepsiCo (NYSE: PEP ) reporting on Tuesday and Alcoa Inc. (NYSE: AA ) on Thursday. Next week will see the flood of earnings, so they shouldn’t be a major factor for the time being. So, before the focus really zooms in on earnings, the market may still be transfixed by rates. The FOMC minutes get released on Wednesday afternoon, and the market will probably be somewhat subdued until they are behind us. (click to enlarge) The nonfarm payrolls report released on Friday, at least in my opinion, put the dagger in the heart of the hopes (or fears) that the Fed would begin its rate hike cycle at its meeting later this month. It also severely damaged the view that a rate hike would occur in December. There is no sign of any trend higher in job growth, and in fact, the trend over the past six months has been lower. With inflation remaining quiet and not expected to increase to the Fed’s target of 2% until 2018, it appears unlikely that the Fed would advance its dual mandate of stable prices and full employment by increasing rates now. In fact, doing so would hurt employment by raising the dollar, which would hurt US exports (and thus cost the US jobs) and decrease inflation (by making foreign goods less expensive). A recent Bloomberg article found that opinion is split about when the Fed will raise rates. Economists still think it will happen in December. (click to enlarge) However, as the same article points out, federal funds futures show only a 40% chance of that happening. I said back in February, when many were still expecting a rate hike in March or at the latest June, that all we could say at that time was that it was more likely than not that the Fed would raise rates by the end of 2015. At this point, though, I have to agree with the futures market. The data do not support a rate hike in 2015. Not only is a rate hike unlikely, but the odds of a recession arriving before the end of next year are growing with each weak jobs report. This past week’s report was full of disturbing information disguised by the deceptively low 5.1% official unemployment rate: the number of unemployed persons (7.9 million) remained little changed despite Chair Yellen’s requirement that there be further improvement in the labor market before any rate hike; the number of newly unemployed (less than five weeks) grew; the civilian labor force participation rate fell again, to 62.4%, after holding steady at 62.6% for the previous three months; average hourly earnings were actually down a penny, and the average workweek also was down; the July nonfarm payroll totals were revised down 22k, and August was revised down 37k, suggesting accelerating declines; Average job growth in 2015 so far has been 198k, versus 260k in 2014, a decline of 24%. There was scattered good news in the report – the number of part-time workers forced into that for economic reasons declined – but the report in general was very weak. It would be counterproductive, given all this weakness, for the Fed to raise rates and make it harder for most companies to make money. Since my view is that rates are unlikely to increase any time soon, I feel comfortable maintaining and adding rate-sensitive positions. In general, I am most comfortable with defensive positions that have good brand visibility and pay dividends. The dividends eventually will be plowed back into new positions, in line with my philosophy of treating accounts as businesses requiring both profitability and healthy cash flow. Actionable Ideas I will continue looking for value in Quality Stocks with good defensive attributes. I am eyeing Big Lots (NYSE: BIG ), which I wrote an article about this week and has an oddly high attraction to short sellers. It would have to dip a bit to make it more interesting, though. Some of the stalwarts like General Mills (NYSE: GIS ) also remain on my radar screen, depending upon price action. Conclusion So far, the Generation Portfolio has performed well. It has maintained its value despite the market volatility and begun to produce a healthy cash flow stream. With earnings season right around the corner, the market may finally shift its focus away from the Fed and worries about a rate hike. Earnings should give us a much better view of the real state of the economy, which, from recent data such as the October nonfarm payrolls report, appears to be drifting in slow-growth mode. Scalper1 News
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