Portfolio Management as of 7/27/18

I am managing my portfolio with the anticipation that interest rates throughout the maturity spectrum will gradually trend up into the 2019 first half. 

Upward pressures for increases in U.S. interest rates include the following: 

1. An acceleration of U.S. budget deficits to $1 trillion per year; 

2. Fiscal stimulus through tax cuts and federal spending late in an economic cycle;  

3. U.S. tariffs on imported products which increase the costs of those goods for American consumers and further provide a price umbrella for U.S. manufacturers to raise price; 

4. The U.S. Federal Reserve responding to inflationary pressures by gradually increasing the federal funds rates which is still at an abnormally low level; 

5. The U.S. Federal Reserve, formerly a major buyer of U.S. securities and mortgage backed securities, starting to reduce its balance sheet by $50B per month; 

6. The possibility that foreign countries, particularly China, may sell U.S. treasuries in response to Trump's tariffs or reduce or eliminate new purchases which is more likely; 

7. The possible increase in crude oil prices from current levels as supply fails to match growing demand; 

8. Other central banks moving away from extremely abnormal monetary policies including an abandonment of QE programs and a gradual increase in short term benchmark rates; and

9. A tightening labor market in the U.S. that fuels above average increases in wages. Real wage growth may however remain relatively stagnant due to an increase in inflation 

Several of these issues relate to the growing supply and demand imbalance. The world is already awash in trillions of new debt since the last debt implosion which has to be refinanced along with new debt issuances to fund accelerating government budget deficits.

Countervailing trends include excess worldwide capacity and the possibility of a recession that reduces demand. Excess capacity can be reduced simply through the erection of trade barriers. A country with a surplus and the best price for a product may not be able to sell the product elsewhere due to tariffs and other trade barriers.

I am continuing to address this anticipated trend through managing the duration of my fixed income portfolio and through the use of a bond/CD ladder strategy that results in $40K+ of maturing securities each month.   

Currently, I am dissatisfied with short term CD rates that have come down in yield. My inclination is to allow proceeds to build up for several weeks before redeploying.

CD interest rates for 6 and 9 month maturities have fallen over the last two weeks or so to about a 2% average, even though the last reported annual increase in CPI rose to 2.9%: 

Better rates can be found by buying U.S. treasuries at auction through a Treasury Direct account or a broker who does not charge a commission. The 6 month and 1 year treasury bills closed yesterday at 2.2% and 2.42% respectively. Daily Treasury Yield Curve Rates

It is also possible to buy treasuries in the secondary market with higher yields, even when buying in a 1 bond lot which has the lowest yields available:

Investment grade corporate bonds maturing in 6 to 12 months will have higher yields than the treasuries even after adjusting for a $1 per bond brokerage commission.

JPMorgan's Michele's Conviction Calls Include 3.5% to 4% 10-Year Yield within 12 months-Bloomberg (JPM predicts four more .25% hikes than a pause, with the quarter point hikes occurring in September, December March and June)

The major risk to stocks and bonds is a persistent rise in interest rates caused in part by a greater than expected rise in inflation and inflation expectations. The second major risk to stocks is an acceleration and expansion of the U.S. initiated trade war which also feeds back into an acceleration of inflation.  

The stock market remains in a Stable Vix Pattern as defined in my Vix Asset Allocation Model, which is defined as an investable cyclical bull market in stocks Vix Asset Allocation Model Explained Simply With as Few Words as Possible

The last Stable Vix Pattern was formed in July 2016: Update For Portfolio Positioning And Management As Of 7/24/16 - South Gent | Seeking Alpha

The last disruption in the Stable Vix Pattern occurred with a Trigger Event in August 2015 which ushered in the Unstable Vix Pattern. A Trigger Event In The Vix Asset Allocation Model 8/31/15 - South Gent | Seeking Alpha That Trigger Event terminated a Stable Vix Pattern that started in September 2012. Stable Vix Pattern as of 9/26/12

The prior Stable Vix Pattern started in January 2004 and was ended by a Trigger Event in August 2007. Vix Charts from 2004 2005 2006 Stable VIX Patterns Phase 1 and Phase 2; VIX Chart from 2007: Alerts and Triggers Major Disruption of Cyclical Stable Bull VIX Pattern; More on VIX AND ASSET ALLOCATION 

Trading Strategy Vix Asset Allocation Model Part 2: Hedging In An Unstable Vix Pattern - southgent1951 | Seeking Alpha; Trading Strategy Under The Vix Asset Allocation Model: Part 1 - southgent1951 | Seeking Alpha; More on the Vix Model: What it Does not Predict is as Important as What it Does/Parallels to VXO 1987-1988; SEPTEMBER 2008: FORMATION OF THE DEADLY PHASE 2 OF THE UNSTABLE VIX PATTERN; When VIX Model Gives A Signal To Change Asset Allocation-Each Individual Needs to Assess Their Own Situational Risks

Stable and Unstable Patterns generally last for longer periods, but the model is agnostic on the length of time. VIX and S & P Compared 1990 to 1997

Bull Market Could Last Another 2.5 Years, JPMorgan's Azzarello Says

As I have noted, I do not need to take risks with my capital so I have reduced the risk component of my portfolio by taking profits. Each investor needs to make realistic assessments of future expenses, including expenses after retirement, in designing the risk side of their investments.

While I have been a net seller of stocks and stock funds, I have increased my purchases in income producing stocks slightly through the purchases of BDCs and REITs.

I am continuing my trading activity in the "small ball buying program".

The following list contains the lowest price paid for each stock that is currently in that program. Future buys have to be below the prices shown for each stock.