Update for Portfolio Management as of 12/28/18: HMMJ:CA

I will be starting 2019 in my most defensive posture since I went to a zero stock allocation in 1999. 

I discussed my current positioning in an August 2018 post: Update for Portfolio Positioning and Management as of 8/23/18

Then as now, the defensive posture was due in substantial part to the robust stock market rally that preceded the repositioning. 

I viewed the stock market as ridiculously and obviously overvalued in 1999. The ensuing 50% decline took the S & P 500 to a forward non-GAAP P/E that was higher than the modern historical average at that time.  

The market is not overvalued now IMO based on what I would call reasonable earnings expectations, but that does not end the inquiry. What is a reasonable forecast now may not be reasonable in a few weeks or months.  

The stock market was not overvalued in 2007 when using forward estimated earnings as of 9/30/07. What made the market overvalued in 2007 is that the forward estimates were way off and investors did not understand the extensive rot that was growing exponentially barely underneath the surface. 

Until last October, the Stock Jocks have been ignoring every piece of bad news and had consequently projected into the future robust earnings growth that was not reasonable IMO, even before factoring in a mild recession, which was assigned a zero possibility as the SPX made its move to 3000. 

While it is normal for the Stock Jocks to make overly optimistic earnings growth projections, they have been bailed out over the past several years by an unusually prolonged economic expansion cycle that was supported by abnormally low interest rates engineered by central bankers.

The interest rate suppression over the past decade has resulted in a massive misallocation of resources. 

Rather than expanding their businesses with internally generated cash flow, public companies have resorted to using free cash flow and borrowed money to increase dividends and stock buybacks. 

Other non-productive uses of cash involved purchases of other companies at inflated prices. Write-downs of those acquisitions are now occurring frequently since the acquired businesses are not producing the results previously anticipated and are consequently worth far less than the purchase price. This is just one way corporate Boards incinerate investors' capital. 

It is easier to expand a business through acquisitions rather than to generate new businesses, products and/or services in-house. Generally speaking, however, it is far cheaper to develop products internally rather than to acquire them through acquisitions which frequently results in overpaying for revenue growth. 

The recent setback in stocks is a garden variety valuation reset of future earnings expectations based on a more realistic future forecast than the one being made just prior to the valuation reset. 

Will the current valuation reset morph into a long term secular bear market? There is nothing specific that would lead me to that conclusion at the present time. 

At the moment, I would classify the downturn as a cyclical bear market in an ongoing long term secular stock bull market. 

However, it is important to keep in mind that the last recession, which I call the Near Depression, was largely caused by too much debt and the cure for that economic catastrophe was the accumulation of vast amounts of new debt. 

In that sense, the potential for a major slide in economic conditions is greater now than in 2007. It is just a question of when an accelerant in thrown onto the dry brush and dead or dying trees. 

I did perform a reallocation out of stocks starting in late 2006 and continuing throughout 2007. I was anticipating a bear market, but not a catastrophic event which I call the Near Depression. The shift was into short term "A" rated or better corporate bonds and cash. As it turned out, the shift was not large enough or structured particularly well. 

One structural problem was that the cash was shifted into money market accounts which were yielding about 4% or so in 2007, which seemed reasonable when the shift was made, but turned out to be non-advantageous from an income generation objective. Those funds would soon go from 4% to near zero. Most of the cash raised from stock and stock funds sells went into money market funds. 

In the more recent shift out of stocks, I reduced my percentage allocation more than I did in 2007 when I kept around 1/3rd of my investable assets in stocks. 

I am now at around a 11% allocation to common stocks, mostly high yielders, but that 11% is larger in dollars than the 1/3rd allocation in 2007. I have increased that allocation from around 10% since that August 2018 post. 

I am using an increasing amount of bond and CD redemption proceeds to buy stocks and will probably pick up the pace of common stock purchases with further declines in whatever I chose to buy. I am using my small ball strategy for adds which restrains buying. 

I will consider selling some securities bought within the past 30 days or so when and if the S & P 500 makes a move back to 2,632, the major support line that was broken decisively in early December. S&P 500 Chart-Yahoo Finance

About 89% of my brokerage assets are in bonds and CDs with a tiny allocation to equity preferred stocks included in that total. 

The equity preferred stock allocation has been steadily increasing. 

Recently, I have been purchasing preferred stocks issued by hotel REITs, probably the riskiest equity REIT sector during a recession. 

The bond allocation is weighted heavily in "A" or better rated bonds. 

A significant change compared to 2007 reallocation out of stocks involves what I term "structure".  

I did build a short term bond ladder in 2007, but it was relatively small at around $50K. 

My current short term bond/CD ladder is over $1M. 

The structure of the current short term ladder is to have a continuous flow of maturing securities throughout every month compared to one maturity every quarter or so which was the case in the 2007 short term ladder build. (I ended up selling all but one of those short term bonds that had not yet matured in early 2009 in order to buy stocks.)

The purpose of the new structure is to generate more cash flow that can be redeployed more quickly without having to sell something to buy something else (e.g. sell a bond to buy a stock) and without having to dip into my cash allocation anytime soon. 

Cash is close to 15% of investable assets held in brokerage accounts, mostly held in the Vanguard Prime Money Market fund that provides me with the highest yield compared to other alternatives. The 7 day yield is currently at 2.41%. 

VMMXX - Vanguard Prime Money Market Fund | Vanguard

I hold some cash in other brokerage sweep accounts and in foreign currencies that I will periodically trade and/or use to buy securities on foreign exchanges. The largest current foreign currency position is in CADs which I last pared profitably when the CAD/USD went over .8. Item # 1 Bought $15,000 U.S. Dollars with CADs (8/31/17) 

For short term speculative trading on the Toronto exchange, I have limited myself to moving in and out of the Horizons Marijuana Life Sciences Index ETF (HMMJ:CA); Horizons ETFs - HMMJ. I have two prior round trips this year that netted a C$673.5 profit (snapshots at HMMJ:CA). This ETF has a lot of fast movement up and down, with my last sell being 50 shares at C$23.29 on 9/10/18.  I bought that lot back yesterday at C$13.95 or a 40.1% decline from my last exit price.

At some point, I will likely become an involuntary long term holder as I go back to the well one too many times.   

At the moment, I am buying CADs only with dividend payments made by securities bought on the Toronto exchange. This is mostly now an average down process since the Canadian dollar has been falling in value against the U.S.D. Each CAD dividend payment is assigned a USD value when made.     

In my Fidelity taxable account, I am keeping cash near zero. A steady stream of redemption proceeds provides me with options on new investments. That stream will be $18K between 12/31/18 and 1/15/19. 

I mentioned in a recent comment that I was running low and was looking to raise some cash by selling a bond. Treasuries are the easiest bonds to sell and settle in one day. I sold 1 bond yesterday that was bought in May 2018 which gives me some extra cash today in case I want to redeploy more: 

No Commission is Charged by Fidelity 

I am using my Vanguard taxable account now to buy commission free ETFs. That firm currently offers commission free trading on over 1800 ETFs. The commission free trades allow me to average down using small lot trades on a cost effective basis. 

While my focus is on creating a steady stream of dividend and interest payments, I do attempt to supplement that income with trading profits. The general goal is to generate anywhere between $15K to $25K in trading profits each year. Portfolio Management (1/4/18 Post) I have exceeded amount this year. Last year, the total was over $48K, but 2018 will be several thousand under that amount.   


Disclaimer: I am not a financial advisor but simply an individual investor who has been managing my own money since I was a teenager. In this post, I am acting solely as a financial journalist focusing on my own investments. The information contained in this post is not intended to be a complete description or summary of all available data relevant to making an investment decision. Instead, I am merely expressing some of the reasons underlying the purchase or sell of securities. Nothing in this post is intended to constitute investment or legal advice or a recommendation to buy or to sell. All investors need to perform their own due diligence before making any financial decision which requires at a minimum reading original source material available at the SEC and elsewhere. A failure to perform due diligence only increases what I call "error creep". Stocks, Bonds & Politics: ERROR CREEP and the INVESTING PROCESS Each investor needs to assess a potential investment taking into account their personal risk tolerances, goals and situational risks. I can only make that kind of assessment for myself and family members.