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The CK-35: How NOT to Build a Portfolio

The CK-35: How NOT to Build a Portfolio

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By Carol C.

On Monday, June 29th, I sold six holdings from my CK-35 portfolio. For the uninitiated, the CK -35 was a “paper” portfolio (not real money), of individual stocks selected by me, at the urging of GMM head honcho, Gregor Samsa.

CK_Jun30

Personal Portfolio

After a rough start managing my personal portfolio around 2013, I’ve dramatically turned my performance around by devoting the necessary time and effort to learning as much as I can about investing, portfolio management, and the importance of having a disciplined system. I have learned one must clearly define the goals for the portfolio.

First, is define your time horizon. Are you a long term buy-and-hold investor or a short-term trader looking to hop in and out of stocks or ETFs and perhaps scalping few dollars along the way?

Second, is your primary goal capital appreciation (growth), dividend income, or a combination of the two?  I believe a mix of pure growth stocks coupled with select high-quality dividend-paying stocks offers a less volatile, more stable, and sustainable portfolio for the average self-directed investor (SDI).

I plan to address the significance and my preferences in-depth in a future article, as it is a cornerstone of my evolving investment philosophy.

The CK-35:  A Flawed Project

First, a little background on the creation of the CK-35 portfolio.

As a trader his entire career, I finally convinced Gregor that one could make lots of money picking individual stocks with a longer-term buy and hold strategy.  Moreover, it is much less work and aggravation than whipping and driving in the market on a daily basis, especially after the machines are now dominating trading.

After a few exchanges, he convinced me to select my current top stock picks, and after a long debate, we settled on thirty-five stocks as the optimal number of holdings.  We came up with the idea of the CK-35 and then put together the hypothetical portfolio based on some of the top holdings from my portfolio and watchlist of stocks, which I maintain to add at appropriate valuation levels.

Though CK-35 has significantly outperformed the S&P500 for the year, why isn’t this group of high-quality stocks not up more YTD at what appears to the tail end of a roaring 11-year bull market?

There are several reasons.

First, I didn’t take seriously or plan for what Gregor repeatedly tried to warn us all in his January 31st post about some new flu out of Wuhan, China. He speculated it could quickly become a global pandemic, causing both a major supply and demand shock to the global economy.  In hindsight, he was spot-on in his call on what would later become known as the COVID-19 global pandemic.

Gregor also strongly urged all of us to sell our riskier holdings (stocks) and hide out in cash and gold until the anticipated market upheaval had passed.  Dismissing his warning on the pandemic as part of his seemingly (to me, at the time) “perma-bear nature” was one of my first mistakes.

The economic and political consequences of COVID-19, which led to shuttering much of the U.S. and global economy, coupled with my stubborn refusal to take the warnings seriously, hurt the performance of the CK-35 portfolio.

More importantly, however,  the nature of how the CK-35 hypothetical portfolio was constructed does not reflect my investing philosophy or practice.  I would never, for example, buy full positions all at once to create a new portfolio.

I learned the painful lesson long ago that valuation does matter. Part of my due diligence and selection process for stocks is determining what constitutes fair value for a company’s stock.

There are a plethora of finance textbooks devoted to the topic of valuation and won’t go into the myriad of valuation metrics and algorithms.  Nevertheless, I rely primarily on trusted analysts or publications that I have found to have good track records and have helped me make money over the years.

Morningstar Analysis

I generally use Morningstar’s Fair Value price as a baseline, as the firm’s analysts tend to be more conservative in arriving at a fair value stock price.

In the spirit of Benjamin Graham and Warran Buffett, I also look for a valuation cushion in determining a stock’s fair value. My decision to start or add to a position always takes into account the Margin of Safety (MOS) at a given entry price.  Buying high-quality stocks with a reasonable margin of safety assuredly generates better portfolio returns over the long-term.   To reiterate valuation matters and purchasing stocks near or below fair value with a margin of safety is essential to a portfolio’s long term success.

The way the CK-35 portfolio was constructed ignored all of the above.  All the positions were hypothetically purchased in full, with equal weights, at the year-end 2019 closing price.  Most of the stocks were trading at or near all-time highs.

The market continued to rise until February 19th until the traders began to internalize the economic fallout of COVID-19, then sold off fast and furious, setting a record for the deepest sell-off in the shortest timeframe.

Having a well-defined selection system coupled with the patience and discipline to see it through are hallmarks of the most successful stock pickers and investors.

High-Quality Stocks

Nevertheless, there are some stocks, which almost always seem to trade at a premium to their fair value price.  Most are high-quality names, which rarely experience the outside or extreme drawdowns, as was the case for many in the February 19th to March 23rd  30 percent plus market sell-off and the 2018 Nightmare Before Christmas mini bear market.

In these stocks, I don’t have a problem paying a premium and keeping some dry powder to deploy the cash and pick them up on the rare pullback during market sell-offs.

Remaining Cautious – Pandemic And Politics

Most states are now at some level of economic reopening, with several, including Florida and Texas, now backtracking as their COVID cases spike.

I anticipate extreme volatility through the summer and fall months. I suspect the Q3 earnings reports will come in weaker than expected as more of the uncertainty and economic fallout of the COVID crisis is realized in the bottom line of publicly traded companies.

Moreover, the markets will have to come to terms with the likely outcome November general election, which results in Biden victory and the Democrats taking back the Senate.

There is also heightened political risk of a contested election, a low probability/high impact event given the current polls, however.

A Democratic sweep of both houses of Congress and the White House will result in higher corporate and capital gains taxes in 2021.

Candidate Joe Biden has unequivocally stated, if elected, he will seek to raise the corporate tax rate from 21% to 28%, which is not good, to say the least,  for U.S. based companies.  He is also on record in favor of making the capital gains tax similar to personal income tax rates.

The market seems to be betting on the Republicans holding the Senate, which can block the Biden tax plan. Still, as we move closer to the election day, I suspect volatility will pick up, and some significant tax selling to take place in the late Q3 and into Q4.

Sectors

Nevertheless, I believe the technology and healthcare sector will outperform throughout the rest of the year as many companies will continue to thrive regardless of any economic fallout brought about by the pandemic or politics.    I am less comfortable with the financials, industrials, materials, and consumer discretionary sectors, with a few notable exceptions.

Again, I want to thank Gregor and the staff at Global Macro Monitor for providing me this platform to share my ideas and help self-directed investors, such as myself, to achieve their financial goals by focusing on high quality, long term equity investments.

While we plan to shutter the CK-35 hypothetical portfolio, I hope you will stick with me as I plan to write a series of posts sharing some of my favorite stock ideas along with my equity selection process from start to finish.  In all things from constructing a screen to identify stocks for a more in-depth research dig, and my due diligence algorithm for constructing a watchlist of vetted stocks and ETFs to purchase attractively valued shares.

The information in this post represents our own personal opinions and are not investment recommendations.  We may or may not hold positions or other interests in securities mentioned in the post or have acted upon what has been written.  

All information posted is believed to be reliable and has been obtained from public sources believed to be reliable. We make no representation as to the accuracy or completeness of such information.

 

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Realtor.com Reports Active Inventory UP 13.9% YoY; New Listings up 9.5% YoY

Realtor.com has monthly and weekly data on the existing home market. Here is their weekly report: Weekly Housing Trends View — Data Week Ending February 10, 2024• Active inventory increased, with for-sale homes 13.9% above year ago levels.

For a 14th …

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Realtor.com has monthly and weekly data on the existing home market. Here is their weekly report: Weekly Housing Trends View — Data Week Ending February 10, 2024
Active inventory increased, with for-sale homes 13.9% above year ago levels.

For a 14th consecutive week, active listings registered above prior year level, which means that today’s home shoppers have more homes to choose from that aren’t already in the process of being sold. The added inventory has certainly improved conditions from this time one year ago, but overall inventory is still low. For the month as a whole, January inventory is down nearly 40% below 2017 to 2019 levels.

New listings–a measure of sellers putting homes up for sale–were up this week, by 9.5% from one year ago.

Newly listed homes were above last year’s levels for the 16th week in a row. While the jump was not as big as the one we observed in the previous week (12.8%), it was still an encouraging rate, which could further contribute to a recovery in active listings meaning more options for home shoppers
Here is a graph of the year-over-year change in inventory according to realtor.com

Inventory was up year-over-year for the 14th consecutive week following 20 consecutive weeks with a YoY decrease in inventory.  

Inventory is still historically very low.

New listings really collapsed a year ago, so the YoY comparison for new listings is easier now - although new listings remain well below "typical pre-pandemic levels", new listings are now up YoY for the 16th consecutive week.

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EU Markets Not Immune From New World Disorder Of ‘No Article V’ Trump Office

EU Markets Not Immune From New World Disorder Of ‘No Article V’ Trump Office

By Teeuwe Mevissen, Senior Macro Strategist at Rabobank

This…

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EU Markets Not Immune From New World Disorder Of 'No Article V' Trump Office

By Teeuwe Mevissen, Senior Macro Strategist at Rabobank

This week shocked European leaders from Helsinki to Brussels and back via Berlin to Warsaw without skipping any of the other European NATO member capitals in Europe. What happened? During one of Trump’s campaign rallies Trump said that he would sort of encourage Russia to do whatever it wanted with NATO members that have not been meeting their defense spending fair share of 2% of GDP.

While this remark directly undermines NATO’s most crucial article V - which calls for military involvement of all NATO member countries if one of its members were to be attacked - it could hardly be real news for most of those ‘shocked’ European ‘leaders’.

Indeed it was nobody else but Trump who already told von der Leyen in 2020 that: "You need to understand that if Europe is under attack we will never come to help you and to support you," .

While it is no secret that Von der Leyen already failed miserably during her term as a minister of defence for Germany, she apparently failed again in taking Trump's words seriously back in 2020. While Trump’s recent NATO comments are everything but helping to advance America’s position on the global stage, Von der Leyen and many of her colleagues in Brussels and other mainly Western European leaders, failed to do what is necessary to prepare for a potential return of Trump or the return of his ideas embodied by someone else. They may now be coming around of that view, seeing Von der Leyen’s interview in the FT today, but precious time has been wasted.

Now imagine that Trump would win and would return to pro-fossil fuel policies that would make the US largely if not totally independent from any fossil fuels from abroad. He might pursue an isolationist approach here too, leaving the EU to scramble for much needed cheap energy from the Middle East.

Could the EU protect crucial sea lanes on its own?

That is doubtful, to say the least.

So what European leader could step up and take the lead in the much needed process to get Europe ready to engage effectively in a mass military build-up campaign fast should that turn out to be necessary?

That certainly does not seem to be Rutte as he has been responsible for the most dramatic cuts of the Dutch defence budget during his record long rein in the Netherlands.. Still he is the top favourite in securing the role of head of NATO. However, it must also be said that he has been on the forefront in supporting Ukraine and was one of the first Western leaders to provide Ukraine with fighter jets. Still it sometimes seems that for people who govern, failing to do your job properly is no barrier to continue to govern. And to be very clear, the very same goes for Trump. All of this seems to be indicating that international anarchy and global chaos resulting from it might be here to stay for the foreseeable future and markets will not be immune to this new world disorder.

One example of how for instance increasing rivalry between the West and China continues to plague companies that do business in China, was yesterday’s news regarding Germany’s automobile giant Volkswagen. Yesterday saw German luxury cars being impounded by the US after it became known that subcomponents in those cars were coming from the Xinjiang autonomous region and made by forced labour.

Or what to think of the fact that the large asset manager JP Morgan hires former chairman of the Joint Chiefs of Staff Mark Milley to advise the bank’s board of directors, senior leaders and clients on dangers around the world.

Does anybody need more proof that markets will not be immune to a new world in disorder? 

Turning back to Europe, it remains to be seen what the impact will be of Europe seriously stepping up its efforts to rebuilt a defence industry but it is likely to be an increase of taxes and a decrease of the welfare system. On a 'positive' note: The European Council and Parliament reached a provisional agreement on new budget rules last Saturday that would give member states more budgetary leeway if they carry out reforms and invest in the green and digital transition, strengthening social resilience and, where necessary, defence.

One thing is sure, peace dividend will be something of the past and again certainly European financial markets will not be immune for a new world disorder.

Looking at what is happening today we saw UK retail sales coming in much higher than expected. Overall retail sales gained 0.7% y/y where a decline of -1.6% was expected. On a monthly base the rise was 3.4% vs an expected rise of 1.5%. However looking at those volumes the data shows the picture that measured in volumes, retail sales are still below pre pandemic levels. EUR/GBP therefore moves slightly up today mainly indicating a weaker pound with the current EUR/GBP exchange rate approaching the level of 0.86.

Next to that were the final inflation figures from France, which confirmed earlier estimates that prices declined  0.2% m/m but on a yearly base (3.4%) still exceed the ECB’s target level of approximately 2%. It must however be said that the data includes January discounts which are reflected by a sharp decline of prices for shoes and clothing (-9.2% m/m) although prices for transport also dropped with 4.8% m/m.

Tyler Durden Fri, 02/16/2024 - 11:40

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Fed Chair Powell Just Said The Quiet Part Out Loud

Fed Chair Powell Just Said The Quiet Part Out Loud

Authored by Lance Roberts via RealInvestmentAdvice.com,

Regarding the surprisingly strong…

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Fed Chair Powell Just Said The Quiet Part Out Loud

Authored by Lance Roberts via RealInvestmentAdvice.com,

Regarding the surprisingly strong employment data, Fed Chair Powell said the quiet part out loud. The media hopes you didn’t hear it as we head into a contentious election in November.

Over the last several months, we have seen repeated employment reports from the Bureau of Labor Statistics (BLS) that crushed economists’ estimates and seemed to defy logic. Such is particularly the case when you read commentary about the state of the average American as follows.

“New Yorker Lohanny Santos publicly vented her frustration after her attempts to go door-to-door with her CV in hand in the hope of finally landing a job were unsuccessful.

It would appear that other young jobseekers could relate to Lohanny’s struggles. The USA and Canada rank fifth out of seven when it comes to youth unemployment and third when it comes to total unemployment, according to World Bank data based on an International Labor Organization model for 2020, as per Statista.” – Business Insider

Even M.B.A.s are finding it difficult.

“Jenna Starr stuck a blue Post-it Note to her monitor a few months after getting her M.B.A. from Yale University last May. “Get yourself the job,” it read. It wasn’t until last week—when she received a long-awaited offer—that she could finally take it down.

For months, Starr has been one of a large number of 2023 M.B.A. graduates whose job searches have collided with a slowdown in hiring for well-paid, white-collar positions. Her search for a job in sustainability began before graduation, and she applied for more than 100 openings since, including in the field she used to work in—nonprofit fundraising.” – WSJ

These stories are not unique. If you Google “Can’t find a job,” you will get many article links. The question, of course, is why individuals with college degrees, no less, are having such a tough time finding employment. After all, aside from record-smashing employment reports, we also continue to see near-record low jobless claims and high numbers of job openings, as shown below.

The Washington Post touched on part of the problem and why the unemployment rate for college graduates is higher than for all workers.

“Part of the problem is that the industries with the biggest worker shortages — including restaurants, hotels, daycares, and nursing homes — aren’t necessarily where recent graduates want to work. Meanwhile, the industries where they do want to work — tech, consulting, finance, media — are announcing layoffs and rethinking hiring plans.”

As the Washington Post summed up:

“The result is yet another disruption for a generation of college graduates who have already had crucial years of schooling upended by the pandemic. In interviews, many said they’d struggled to adjust to remote-learning in early 2020 and felt like they had missed out on opportunities to forge connections with professors, employers and other students that could have been crucial in lining up for postgraduate work. Now, as they enter the workforce, they say they’re feeling increasingly disillusioned about the economy, which is fueling political discontent and causing them to rethink the financial independence they thought they’d achieve after college.”

Of course, it isn’t just the shuttering of the economy and the shift to working from home causing the problem. It is also the shift in demand from consumers to more service-oriented conveniences, combined with the need by employers to maintain profitability.

Fed Chair Powell Says The Quiet Part

Since the turn of the century, the U.S. economy has shifted from a manufacturing-based economy to a service-oriented one. There are two primary reasons for this.

The first is that the “cost of labor” in the U.S. to manufacture goods is too high. Domestic workers want high wages, benefits, paid vacations, personal time off, etc. On top of that are the numerous regulations on businesses from OSHA to Sarbanes-Oxley, FDA, EPA, and many others. All those additional costs are a factor in producing goods or services. Therefore, corporations needed to offshore production to countries with lower labor costs and higher production rates to manufacture goods competitively.

During an interview with Greg Hays of Carrier Industries, the reasoning for moving a plant from Mexico to Indiana during the Trump Administration was most interesting.

So what’s good about Mexico? We have a very talented workforce in Mexico. Wages are obviously significantly lower. About 80% lower on average. But absenteeism runs about 1%. Turnover runs about 2%. Very, very dedicated workforce.

Which is much higher versus America. And I think that’s just part of these — the jobs, again, are not jobs on an assembly line that [Amerians] really find all that attractive over the long term.

Fed Chair Powell emphasized this point in a recent 60-Minutes Interview. To wit:

“SCOTT PELLEY: Why was immigration important?

FED CHAIR POWELL: Because, you know, immigrants come in, and they tend to work at a rate that is at or above that for non-immigrantsImmigrants who come to the country tend to be in the workforce at a slightly higher level than native Americans. But that’s primarily because of the age difference. They tend to skew younger.

The suppression of wages, increased productivity to reduce the amount of required labor, and offshoring has been a multi-decade process to increase corporate profitability.

A Native Problem

Following the pandemic-related shutdown, corporations faced multiple threats to profitability from supply constraints, a shift to increased services, and a lack of labor. At the same time, mass immigration (both legal and illegal) provided a workforce willing to fill lower-wage paying jobs and work regardless of the shutdown. Since 2019, the cumulative employment change has favored foreign-born workers, who have gained almost 2.5 million jobs, while native-born workers have lost 1.3 million. Unsurprisingly, foreign-born workers also lost far fewer jobs during the pandemic shutdown.

Given that the bulk of employment continues to be in lower-wage paying service jobs (i.e., restaurants, retail, leisure, and hospitality) such is why part-time jobs have dominated full-time in recent reports. Relative to the working-age population, full-time employment has dropped sharply after failing to recover pre-pandemic levels.

However, as noted, full-time employment has declined since 2000 as services dominate labor-intensive processes such as manufacturing. This is because we “export” our “inflation” and import “deflation.” We do this to buy flat-screen televisions for $299 versus $3,999. Such is also why the economy continues to grow slower, requiring ever-increasing debt levels.

For recent college graduates, this all leads to a more dire outlook.

Immigration Is Needed, But It Has Consequences

To keep an economy growing, you must have population growth. In other words, “demographics are destiny.” As such, there are two ways to obtain more robust population growth rates – natural births and immigration. As shown below, the fertility rate in the United States is problematic in that we aren’t producing enough children to replace an aging workforce.

Such is particularly problematic given the rapid aging of older adults versus a declining working-age population. Such means the underfunding of entitlements will continue to grow, requiring more debt issuance to fill the gap.

However, there is a vast difference between immigration policies that import highly skilled workers, capital, and education versus those that don’t. Merit-based immigration policies bring workers who earn higher salaries, create businesses, employ labor, and create tax revenues and other economic contributions. However, current policies are creating a rush of lower-skilled, uneducated labor that will work for cheaper wages, produce less revenue, and are subsidized by tax-payers through welfare programs. As noted above, these workers tend to fill the jobs in the service areas of the economy, thereby displacing native-born workers. Such was a point made by the WSJ:

“Before the pandemic, foreign-born adults were almost as likely as the overall population to hold at least a bachelor’s degree. This was mainly because of higher educational attainment among immigrants from Asia, Africa, and Europe, which offset lower levels of schooling among people from Mexico and Central America.”

Post-pandemic, this has not been the case, which is impacting native-born employment. This is not a new issue, but one addressed by Bill Clinton in the 1995 State of the Union Address:

“The jobs they hold might otherwise be held by citizens or legal immigrants; the public services they use impose burdens on our taxpayers.”

Such is the natural consequence of a change in the economy’s demands and the need for corporations to maintain profitability in an ultimately deflationary environment.

Conclusion

While there is much debate over immigration, most of the arguments do not differentiate between legal and illegal immigration. There are certainly arguments that can be made on both sides. However, what is less debatable is the impact that immigration is having on employment. Of course, as native-born workers continue to demand higher wages, benefits, and other tax-funded support, those costs must be passed on by the companies creating those products and services. At the same time, consumers are demanding lower prices.

That imbalance between input costs and selling price drives companies to aggressively seek options to reduce the highest cost to any business – labor. Such was discussed in our article on the cost and consequences of the demand for increased minimum wages.

  • Reductions in employment would initially be concentrated at firms where higher prices quickly reduce sales. 

  • Over a longer period, however, more firms would replace low-wage workers with higher-wage workers, machines, and other substitutes.

  • As employers pass some of those costs on to consumers, consumers purchase fewer goods and services.

  • Consequently, the employers produce fewer goods and services.

  • When the cost of employing low-wage workers rises, the cost of investing in machines and technology goes down.” – Congressional Budget Office.

Such is why full-time employment has declined since 2000 despite the surge in the Internet economy, robotics, and artificial intelligence. It is also why wage growth fails to grow fast enough to sustain the cost of living for the average American. These technological developments increased employee productivity, reducing the need for additional labor.

Unfortunately, these tales of college graduates expecting high-paying jobs will likely continue to find it increasingly complicated. Particularly as “Artificial Intelligence” becomes cheap enough to displace higher-paid employees.

Tyler Durden Fri, 02/16/2024 - 11:00

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