Binary World

We just came up for air, and realized that it’s been two weeks since we last posted on the I is my intention to post a minimum of once per week, so I apologize for the delay. Over the past two weeks we have been preparing the house to sell, getting over yet another cold, and trying to move past the loss of friends/family. You’re not hear to read a sob story, so I won’t pour it all out….but with the loss of a kid I helped raise and a colleague……the last few weeks has definitely taken the wind out of our sails.

That said, we are slowly moving forward. The house is almost ready for sale. Three more weeks until it hits the market. We are spending some good quality family time, with plenty more to come over the Christmas holiday. Ideally, I would be pouring myself into my development consulting work and equity investment research……but I feel more than a little out of sync at the moment. I am adult enough to admit that I don’t know what to make of the stock market over the past 6 weeks, or the comments from America’s president elect. I am a little relieved to notice that I am not the only one having trouble reconciling the activity in the stock market though, as investing friends have made similar comments lately……and the “experts” on CNBC are down right laughable. The best I have heard yet is the clip below, in which an expert from Bank of America/Merrill Lynch predicts that the S&P 500 may go as high as 2,700 in 2017…..or perhaps as low as 1,600. (Note: I read those comments to suggest that there is a lot of uncertainty surrounding the president elect…..and the “experts” don’t have a clue either!) Perhaps we can all agree that global equity markets will be up a bunch, or down a bunch in 2017?!

Would such a result be that different from the past two years, when many stock markets were both? The chart below shows the movements of the S&P 500 over the past two years, using SPY as a proxy.  We were fortunate to benefit from much of the volatility, although it doesn’t look like our portfolio will be outperforming the S&P 500 this year.  (The post election rally has done us in.)  Perhaps the late J.P. Morgan said it best when asked to predict the stock market’s future movements…..and he said merely that it would fluctuate. At current prices, we are neither buying or selling anything. That being said, a few investments are more attractive than others.

Courtesy of Yahoo Finance

Courtesy of Yahoo Finance

REITs– Real estate investment trusts have experienced a sharp sell off as of late, as bond yields have climbed. Some investors have been using REITs as a bond proxy for the last few years, and that trend appears to be reversing. I like that REITs provide consistent income and have a built in inflation hedge. The risks surrounding the sector is the remarkable amount of debt that they collectively need to roll over in the next 2.5 years. Cheap debt over the last few years has encouraged the group to go on a buying binge, but rolling over that debt at higher rates will likely hamper the cash flow of the underlying assets. I am trying to capitalize on this change, as well as the limitations of what many publicly traded REITs can own, and we’ll see if an investing friend and I can’t scoop up some bargains in the real world. So far as paper assets are concerned, we are looking to start averaging into a REIT index like Vanguard’s REIT Index ETF (VNQ) again…..starting in the low $70s. That’s a ways below today’s price, but it will get there quickly if bond yields start climbing again.

Precious Metals-The gold/silver space just might take the cake for the wildest run over the last year. 12 months ago the space was left for dead, before rallying straight up in the first half of 2016. Since its late summer peak, gold and silver prices have slowly been drifting lower. I am interested in the space, but fully expect gold/silver prices to continue to decline for a bit longer. I could be wrong, but I expect this slide to be capped with some form of capitulation selling…..likely between $1,100 and $1,000. The Federal Reserve announcing its intention to raise rates 3 or 4 times in 2017 would be a likely catalyst, as it would strengthen the dollar and put downward pressure on gold. Either way, if we get the global inflation and fiscal stimulus that the bond market seems to be pricing in, gold and silver will substantially benefit. Silver will also benefit from its industrial applications, should actual growth materialize.

Johnson & Johnson (JNJ)– Our portfolio has included shares of JNJ for 10 years now. The company is a dividend stalwart, and a steady grower. The company’s share price has been under pressure for the last few weeks because of its pharmaceuticals business. Institutions have been indiscriminately selling the sector, for various reasons. I believe there is fair value in Johnson & Johnson shares, relative to the shares of industrial companies or oil/gas. Prices aren’t quite low enough for us to buy JNJ shares today, but they soon will be if the current trend continues. A sell off could easily push the price down into the $90s, and I will be paying very close attention.

Diageo (DEO)– Regular readers of my posts will remember that I have been watching Diageo’s stock price since the summer, but have yet to execute the buy. The company owns one of the best stable of liquor brands in the world, and I am bullish on the spirits business long term. Lets see if a short term sell off prompts me initiate a position.

Emerging Markets– Vanguard’s Emerging Markets ETF (VWO) is the largest single holding in our portfolios. That being said, we have only half of the desired allocation currently. EM stocks, in general, were in a multiyear downtrend until early 2016. I expect that trend to reverse itself soon (if it hasn’t already), but geopolitical uncertainty and the strong US dollar have been pressuring the sector. Let’s see how the Federal Reserve’s interest rate increase, and associated language, affect EM currencies and flows. Our cost basis is below today’s levels, but we’ll be looking to add on any meaningful sell off.

Well there you have it. I am skeptical of the price moves of many of the US based industrial and energy companies, but I see a great deal of potential in the coming months. On average, I think we’ll start putting new money to work in the ideas above……. 8-10% below current prices. As always, I’ll send out an email to all the people on our mailing list before any new transactions. (If you’re interested in joining our mailing list, sign up in the box in the top right corner of this page.)

Where are you seeing value in global markets today?

Disclosure: We are long the investments/companies mentioned in this post. This article is for informational purposes only and should not be considered a recommendation for anyone to buy, sell, or hold any equities. I am not a financial professional. Please do your own research and consult a professional before making any investment decisions.

5 thoughts on “Binary World

  1. Roadmap2Retire

    Thanks for sharing your thoughts, Bryan. Some great names and themes suggested and I am with you on that. Just like you, I have no clue what to make of this market. This market is confusing as hell and trying to make sense of it just seems to be frustrating. I am waiting for a meaningful pullback to deploy my cash as well and at the moment I am happy to sit on the sidelines and make a small purchase here and there.

    I dont really pay attention to the talking heads on CNBC — the guests are just terrible, but I have more of a problem with the hosts. The questions are phrased to corner the guest into making a statement one way or another and when the guest is smart enough to skirt it, words are also put into their mouth and they are forced to say whether a yes or no. I also just happened to watch Robert Schiller’s interview on CNBC from this morning and it was exactly the same problem — this same host, trying to force Prof Schiller to make a commitment and paint a doomsday picture for the viewership.

    For the most part, its better to ignore what the media feeds you and do our own research and come to conclusions that make sense to us.

    Roadmap2Retire recently posted…Passive Income Update – Nov 2016My Profile

    1. Income Surfer Post author

      Thanks for taking the time to read and comment R2R. I found the Shiller clip after reading your comment. Funny how the mainstream press wants huge and decisive calls. Dow 50,000 or 600 on the S&P 500. There is no room form moderate views on CNBC, plus 8 out of 10 always seem to be very bullish. Better to ignore the noise. I am going to spend some time this weekend digging into deep valued small cap companies again. We had some great luck in that arena earlier this year. Hopfully I can uncover some buried treasure. Have a great weekend buddy

  2. Jay

    Great post Bryan – nice to get an update on how things are going over there! I appreciate your take on the markets too (as always).

    It’s pretty funny how well stocks have done, considering all the doom and gloom that was prognosticated prior to Trump’s victory. I agree with your assessment on REITs, precious metals and bond yields. The moves in the latter in particular have been staggering. I’m a bit skeptical of emerging markets primarily because of the large amounts of USD-denominated debt, but keeping an eye on the EEM ETF in case I’m wrong.

    Overall, I agree that value is tough to find. I did pick up some JPM shares this week because if you put a gun to my head (or gave me a blog to comment on) I would tell you that I think these big bank stocks could run for a few years if the yield curve stays steep.

    Thanks again for the update and have a great weekend!
    Jay recently posted…Trend Following Stock Trade Ideas for December 2016 (Part 1)My Profile

    1. Income Surfer Post author

      Thanks for taking the time to read and comment Jay. Congrats on your JP Morgan purchase. The banks should continue to benefit from better spread lending margins. Also, I’ve read the JP Morgan has less exposure to auto loans than many of its peers! We’ll have to see how things go, but 2017 should be a wild year in the investing world :)

      Have a great weekend

  3. Amber tree

    My eyes are on a few Belgian stock that are priced attractively due to some market reactions. On of them being ABInbev. I feel a little sad I am likely to be called away on my RDSA stock…


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