Preparing for the New Year
- claybaker
- Dec 27, 2018
- 6 min read
Mother's Little Helper portfolio was UP today +249.82 (+0.25%)
Overall GAIN/LOSS YTD: -$13,526.81 (-12%)
Our benchmark index, the S&P 500 is DOWN Year-To-Date (-6.91%)
"Markets don't go to zero...Accounts do.”
-Clay Baker
I made my buys for the year on December 28, 2017, see the new portfolio here (Click Here).
Volatility
2018 has been a year that will be remembered by investors for extreme volatility. Yesterday a new point record was set when the DOW rose 1,021 points and today, on no news fell to a low of 361 points then rose at the close with a total swing of 900 points. Break out the Dramamine. While the last two days have been unusual, they do reflect the character of the market for the whole year.
See the bottom of the page for changes to the 2019 portfolio.
What Happened in 2018
From January to August investors were relying on the 'Global Growth' story to keep pushing stock prices up. In fact the macro economic data was supporting a strong and growing stronger global economy. By October the Global Growth story was dead, not because the data turned negative, not because the U.S won't see further growth, but because the global economy was slowing down and central banks everywhere had begun to get more hawkish and were in fact tightening monetary policy. In short, the days of zero percent rates and easy money were over.
2018 went from being a strong bull market to a rolling bear market. My biggest mistake in 2018 was to not change my position on global growth when investors negative sentiment became stronger than the data. Since October 2018 it seems to have been impossible to convince even a bullish investor that the economy is doing fine. Heck, that's why the Fed raised rates, but few investors believe the Fed either. The glaring examples in the portfolio are the positions in commodities (agriculture, oil & gas and emerging markets). The VIX is a way to measure investor fear, often the VIX is called the fear gauge, but the VIX alone doesn't tell the whole story. Because the VIX is showing investor sentiment in the here and now by looking at PUT options (negative trades) we're only seeing behind door number one. To see what's behind door number 2 we need to look at the VIX futures too. The gap between these two measurements can tell us a great deal. When the VIX futures are pricing in greater value than the VIX the market is oversold. The greater that gap is the more oversold the market is. Yesterday we saw this play out when the gap got very wide and the market rallied over 1,000 points.
Even with the current administration I have to remove politics and politicians from developing a portfolio, I just don't know how to invest around the whims of politicians. However, it is possible to look at the trade war with China and make a reasonable call that investing in China stocks or companies with a large exposure to the Chinese economy is probably dead money until the trade war shows real signs of turning positive. Rhetoric won't cut it anymore, we need real action to invest. The Chinese companies I would be most interested in; Alibaba, Baidu, NetEase and BeiGene.
A major disruption in the market became a bigger disruption in 2018, algorithmic trading. Specifically news reading algo's that can trade large volume in seconds has become an accelerate, sort of like gasoline on a fire, causing buying and selling to accelerate. We've always had computer trading, just think back tot he flash crash in 1987 and a few other flash crashes that were caused by manipulation of price by high speed computer traders. My biggest issue with algo's is that the normal process of price discovery is removed from the market and in its place we have investors who swing from a 'fear of losing everything' to a 'fear of missing out' condition. Neither creates a healthy stock market. To suggest that news reading algos that can make large trades in milliseconds is not market manipulation is absurd; but it's here and with us for the time being. When I started this blog algo's were about 20% of the market volume, today they are about 60-80% of the trade volume.
2019
Readers have made it clear that the 2018 portfolio was a downer. I've been listening and it's clear that readers want stock picking, so 2019 will be a year of stock picking, at a time when the market should favor stock pickers. My position has not changed, I think every investor should own index funds, at the very least buy the VTI, the Vanguard S&P 500 ETF. The 2019 portfolio will be posted by the last trading day of the year.
With just a few days left in the year I will be selling off most of the funds in the portfolio but keeping the VTI and the GLD. I might even add to the GLD if it looks like the dollar will continue to show weakness.
While the portfolio will be mostly stocks and we will buy and sell throughout the year, this is not going to be a trading account. In general I will be looking for stocks that can deliver growth, hold them to a price target and sell to put the capital work in other growth stocks. The way to look at 2019 is a year of recovery from 2018 losses and a year where we can all practice a more active type of investing. I still strongly believe that buying great companies at low prices and holding long term will deliver an investor the greatest returns. One way to achieve that on your own is to simple by shares of Berkshire Hathaway (BRK-B). The 2019 portfolio is for that portion of your portfolio where you're comfortable taking some risk. Let's be clear, what I will present is not meant to be a complete portfolio that's diversified across sectors for safety; this will be a higher risk growth portfolio.
Every investor must look at their own time horizon and tolerance for risk before making any investment decision. An older investor should be focused more on income producing investments while a younger investor can take more risk. The stock market will always be the greatest wealth creating machine, but I have to say, cash investments look pretty good right now. CD's in particular are great short term investments that are starting to pay a decent return with no risk.
Stay Invested,
Clay Baker
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Keep Me Honest
I am attempting to keep track of my calls and predictions by logging them at the bottom of every post.
Bond prices will decline as a result of rising rates and a Dollar Shortage.
Invest in China stocks. NetEase, YY, JD, Baidu, Alibaba, mobile phone services and makers, and China BioTech
Invest in Whirlpool (see Whirlpool caveats above), Kohl’s, Costco Wholesale, Home Depot, Dollar General and Casey’s, Ingersoll-Rand, Illinois Tool works, Paccar, Honeywell, and DowDupont, PayPal, Square, Goldman Sachs, Citibank, Bank of America, JP Morgan, DBC, Apple, Microsoft and Caterpillar.
Goldman Sachs slides to around $210/share
Proctor & Gamble, Coca-Cola, Merck and Pfizer will go lower as rates rise.
The Chinese yuan will replace the dollar in international trade. Not this year, but it will happen in coming years.
The DOW will close the year with 9-10% gain.
The S&P 500 will close the year at 2900-3000.
The portfolio will generate about $2,065 in dividends.
M&A of drug companies will increase over the next 24 months.
Healthcare, technology, industrial's and financials should outperform through the remainder of the year and into the high of next year.
JP Morgan, SunTrust, KeyBank and Visa perform well through remainder of 2018.
Disclosure: I am personally invested long in some or all of these funds that appear in the Mother's Little Helper portfolio or manage these investments for my Mother's portfolio and may purchase or sell shares within the next 72 hours. I am also invested in other stocks and funds that do not appear in the MLH portfolio but may be mentioned or related to this article. It is not my intention to advise or encourage the purchase or sale of any security. Since I may on occasion discuss Bitcoin and other cryto currencies I disclose here that I personally own investments in the cryto-currencies listed here: AMZN, DBC, VTI, VWO, VEA, VIG, XLE, MUB, TBT, GLD, Bitcoin, LiteCoin
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. This article is not intended to offer investing advice, guarantee 100% accurate predictions, or to be interpreted as providing a personal recommendation.
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