Saturday, June 21, 2014

Going a little defensive.

The market's seem a little, well odd at the moment. For the past several years no bit of bad news has shaken equities out of their bull market. Not Crimea, NSA, China slowdown, quantitative easing, Iraq, Turkey, nothing. Every bear case has been ignored and pushed onwards. We are starting to get into high valuations of the market. Note I am not saying we prices. High prices mean NOTHING. Its all about the valuations of price to the fundamentals of an asset and market.

Money seems to be coming back everywhere AFTER a 5 year equity bull market with S&P 500 +7%. Emerging markets are rising with EEM +8.4%. Other assets too are rising, GLD +7%, TLT +9.4%. Normally something should be dropping as money is coming from one asset class to another. All this money seems to be cash that has been idle on the sidelines for years. That's concerning to me as its so late in the game this could be "dumb money" chasing profits and jumping in at the wrong time as its oft to do.

The VIX measures volatility of the S&P500. How fast and how far is it moving. Its at record lows and could dip below 10. During 2008 and 2009 it was in the 60-80 range. Things are quiet out there. Perhaps too quiet.

At this time of year we have "Sell in May and go away" where the volume in the markets drops off for the summer until fall picks up again.

All this can breed complacency which I have come to learn is right when something goes wrong with the markets and people's portfolios. I'm not wanting to flat out sell my positions. Many of them are income that I want to keep for years. However where I will differ from most of my dividend investing brothern is that I don't want to completely ignore my capital gains. I am also seeing things way overvalued in my portfolio that looks like its running out of steam. I'm not ready to put on some SPY puts for defensiveness. I see no reason for the market to go down. All I am acknowledging is that we are in an environment where we have an increased chance of something stupid happening.

I have stop losses on the following positions so that in the case of a general market reversal, drop, crash, freak out, whatever you want to call it, I am ready.

Cemig (CIG) @ $7.99: I am looking at a 45% gain on this one. As you can see from fastgraphs, their EPS is dropping. I'm not worried about that but I am worried about Brazil and their inflation and economic problems. Brazil (EWZ) is up 25% since March. Maybe its on fire and will continue, maybe its going to need a break. CIG has announced their entire yearly dividend will be paid soon vs installments. The exchanges are terrible at recording CIG ex-div dates. I already qualify for the 5% payment but the price has not dropped down. I can get the dividend and the full share price. I'm debating selling it first thing Monday as this is one of my more complex positions and I don't fully understand it.
Not knowing your position, in a foreign market, when you know a 5% price drop is coming with all the above oddities in the markets I am seeing? I don't know if I am willing to risk 45% gains on all that uncertainty.

Coca-Cola (KO) @ $39.59: Every time it rises this far above its P/E it pulls back. 22 P/E.

Potash (POT) @ $33.40 (below the 200 day SMA): Their earnings are a mess due to the breaking up of the potash cartel and I bought after that crash in 2013. I added in later as it looked like the cartel would recombine. Now with Russian potash deals with China and problems in the Ukraine, I don't know anymore. Fastgraphs is showing some big valuation problems. Where it once was undervalued its not getting over its historic P/E range.

Seagate (STX) @ $48.90 (below its recent low): I've enjoyed a beautiful multi-year run with them and have 120% return. But I see its tired and failed 3 times to break and hold $60 range this year. I got into them because of their share buyback program which ends this year. As we can see with fastgraphs, It never really gets to its valuation potential. Most tech companies do not so I am seeing how far it is above its historic P/E range (blue line) and thinking overvalued.

Prospect Capital (PSEC) @ $8.83: PSEC recently had some SEC concerns that they were not reporting earnings correctly. It had to do with how they were reporting their subsidiary profits. PSEC appealed and the SEC withdrew their complaint. There is some concerns that PSEC cannot maintain the dividend and for business development companies? The dividend is everything and I would expect a massive drop to equal the dividend cut.
Note: Fastgraphs doesn't do BDCs because fastgraphs does not report NII, they only do EPS and FFO for reits.

ConocoPhillips (COP) @ $77.90. I'm looking at 50% capital gains and then I look at their valuation on fastgraphs and its looking dangerous.

McDonald's (MCD) sold @ $99.90. This stop got triggered and I am out. I have been with MCD for several years and enjoyed a nice gain. They are having problems breaking through and holding $110. Yes their valuation are rising but I have other places for money then things going sideways.

I don't like trying to time the markets. Nobody can do that consistently and it causes missed opportunities and drag on your portfolio from transaction fees and taxes. However given the environment we are in, the time of the year, and the valuations of the above positions I am comfortable with becoming "defensive".

Disclaimer: The investments and trades discussed are not recommendations for others. I am not a financial planner, financial adviser, accountant, or tax adviser. The financial actions I talk about are for my own portfolio and money and only suited for my own risk tolerance, strategy, and ideas. Copying another person's financial moves can lead to large losses. Each person needs to do their due diligence in researching and planning their own actions in the financial markets.


  1. Good work protecting yourself Pully! I don't think this will go on forever either. I know ETFs have changed some things, but the VIX with a 10 handle?! Ridiculous! The bond market has been pricing in a depression and equities have been pricing in an unending boom. Scares the hell out of me!

    We're keeping our long term dividend grow companies.....and a look of dry powder

    1. Dry powder is exactly what I had in mind. When we do correct then I want to dump my most overvalued and have cash to pick up the undervalueds.

  2. Interesting moves. It certainly is crazy to see the VIX as low as it is. I didn't expect that to be coming especially after the huge bull run in 2013. I guess it just helps reinforce that no one knows what's going to happen in the future. I can't really blame you for taking some off the table, COP's yield of 3.2% seems low although the company has changed a lot by spinning off PSX so the yield is now in the area of CVX/XOM.

    Can we expect some more Warren Wednesdays coming now that it seems you're writing a bit more?

    Have a great weekend!

    1. Funny you mention the Warren Wednesdays. YES they are coming back. I really REALLY like that series and a lot of you guys seemed to enjoy it too.

  3. Happy belated summer solstice. These are great choices. I recently picked up some more shares of POT as well. MCD is one of my favorite recession proof stocks. It's hard to say how much higher the overall market will go but I'm starting to look defensively as well, and recently invested in some fixed income. Be fearful when others are greedy as Buffett would say :)

    1. Thanks for stopping by Liquid. As investors we have to at least consider going defensive BEFORE the market correction and not start to get it after a 10%-30% pullback because we are afraid of a 50% pullback... the damage is already done.

      Buffett is so true with his fearful when others are greedy comment. I see a lot of new people talking up the markets right now when they have had 5 years to do it.

  4. STX great job on holding for the multi year gains!!