2013: Breakout Or Comeuppance? (GGE, DBC, XLP, XLI, VEU, MRK, PFE, KO, JNJ, CVS, MO, WMT, PEP)
Joseph L. Shaefer: I believe the answer to the question posed will most likely be: “Both.” No one has a functioning crystal ball, but my best guess – among the thousands of predictions being offered by all and sundry – is that we will climb a Wall of Worry so convincingly that many will assume the new secular Bull Market has begun. After all, we are only 269 points away from the old Dow high of 14,165 reached on October 9, 2007.
If we should push through that in spite of all the chartists warning it looks like a double top, Wall Street traders could easily throw caution to the winds and push it up another 500 or more points. Remember, these guys have no skin in the game. If they lose, their salary still comes in, so they personally lose nothing. If they win, they can get bonuses in the millions of dollars. With incentives like that, what would you do?
But even if we push through and the media is filled with breathless “20,000 is Next!” articles, there are no guarantees. Remember, within 18 sickening months of making that new and powerful 2007 ascent, the market finally bottomed at 6547 on March 9, 2009.
I don’t believe the underlying fundamentals of the nation justifies an “off to the races” without another scary decline along the way. Since most years after a presidential election tend to be under-performers as the politicians try to do every hare-brained thing they promised us they would, this will be as good a time as any to get lots of bad news out and ill-thought-out, undebated and expensive programs pushed down our throats.
If it’s any consolation – my best guess again – I think the next nail-biting decline will likely be the last gasp of this secular 14-year-old Bear, then we’ll begin the halting process of beginning a new secular Bull, during which every monthly or quarterly pause within it will be heralded by the financial press as “proof” that we are doomed to be mired forever in some “new reality.”
There are no “new realities” – only the old ones recycled in new form for every new generation. Bear markets move up, down and sideways; Bull markets ratchet up and down, but almost always ratcheting higher with each gyration. You read it here first. Now let’s get on to the much more important business of how we position ourselves.
Balanced Funds Equivalents
We like balanced funds in one form or another. I say it that way because, while Seeking Alpha doesn’t feature or discuss mutual funds, they do cover both closed-end funds (CEFs) and ETFs well. To gain the balance of a mutual fund that itself rebalances regularly to some standard allocation (most often something close to 60% equities, 40% bonds; the more conservative may choose up to 60% bonds, 40% equities) you can buy CEFs or ETFs that do the same thing.
Two interesting choices in the CEF arena are Calamos Strategic Total Return (NYSEARCA:CSQ) and Guggenheim Enhanced Equity Fund (NYSEARCA:GGE).
CSQ currently holds about 52% stocks and 43% corporate bonds, with roughly a quarter of those convertible securities. The rest is government bonds and cash equivalents. The largest equity holdings include Merck (NYSE:MRK), Pfizer (NYSE:PFE), GE, Coca-Cola (NYSE:KO), Johnson & Johnson (NYSE:JNJ), Qualcomm (NASDAQ:QCOM), and Microsoft (NASDAQ:MSFT). It sells at a discount to net asset value (NAV) of 5.2% and yields just over 8%annually (paid monthly.) To achieve that kind of yield in a non-managed-distribution fund means they have to take some risk somewhere. In CSQ’s case, 78% of their fixed income holdings are rated “BB” or less, making it an interesting combination of high-yield bond fund and ultra-conservative equity fund.
Expenses are high at 1.9% but since this is not a managed-distribution fund, management is not paying themselves out of your capital, but out of those high-yielding bonds…
An equally high-priced spread is the Guggenheim Enhanced Equity Fund . But, like CSQ, this is not a managed-distribution fund, so management is not paying themselves out of your capital, but out of written call options and other derivative products that have increased their yield to over 10% annually, paid quarterly. Yet they sell for a discount of 7%.
GGE writes 98% of these options not against common stocks but against ETFs that cover broad indexes. This alleviates individual company risk while still providing enough volatility to get good premiums on written positions. Their biggest holdings include the SPDR S&P 500, SPDR Dow Jones Industrial Average, iShares Russell 2000 Index, Health Care Select Sector SPDR, Technology Select Sector SPDR, and Industrial Select Sector SPDR.
In addition to these closed-end funds, our client portfolios include sector bets in ETFs like IQ Real Return (NYSEARCA:CPI), Powershares Commodity Index (NYSEARCA:DBC), Emerging Markets Telecommunications & Infrastructure (ETF), the Indonesia Fund (IF), Global’s Norway 30 (NYSEARCA:NORW), Petroleum & Resources (NYSE:PEO), and Vanguard All-World Ex-US (NYSEARCA:VEU).
Now, I have been to two dog shows and a goat-roping so I understand most people use the term “sector” more narrowly. Companies roll up into industries and industries like, say, hospitals, senior living, pharmacy management, ethical drugs, etc. roll up into a sector like Health Care.
In my view, however, a sector can also be any large play that encompasses a number of industries. That’s why I include NORW as a “sector” – it is the 30 largest companies in Norway, arguably the nation with the most transparent and responsible governance anywhere.
It’s also why I would include a single-industry ETF like energy services; you own 75 companies with very different business approaches and far-flung subsidiaries in an ETF, I consider it worthy of consideration for sector rotation. For purposes of this allocation, I also consider market-capitalization-based ETFs and funds to comprise a reallocable sector.
That’s why I also include among this small the SPDR Consumer Staples Select Sector ETF (NYSEARCA:XLP) This sector includes food and staples retailing, household products, beverages, tobacco and personal products. The fund was launched in December 1998, carries an expense ratio of just .19%, end enjoys daily trading volume of 7,000,000 shares. The largest holdings are in household names like Procter & Gamble (NYSE:PG), Wal-Mart (NYSE:WMT), Coca-Cola Co , CVS Caremark (NYSE:CVS), Altria (NYSE:MO), Colgate-Palmolive (NYSE:CL), Pepsi (NYSE:PEP), and Costco (NASDAQ:COST).
We also own the huge-cap SPDR Industrials ETF (NYSEARCA:XLI) comprised of Huge industrials like GE, United Technologies, UPS, 3M, Caterpillar, Boeing, Union Pacific and Deere. This sector has lagged the market most recently and I think it’s ready for a turnaround.
For our small-cap ETF, we own Schwab Small Cap (NYSEARCA:SCHA.) This ETF uses an index of the stocks ranked 751-2500 by market cap. The expense ratio is a miniscule 0.13%. True small-caps, but not unknowns: top positions include Thomas & Betts, Gartner, Taubman Centers, and so on. Small caps often do best early in the year. I think this year will be no exception. And if I’m correct about that hopefully-final decline of this dying secular Bear, you’ll want to gather ye profits while ye may…
Joseph L. Shaefer is the CEO and Chief Investment Officer of Stanford Wealth Management, LLC, a Registered Investment Advisor. A retired General Officer, he spent 36 years of active and reserve military service, the first six in special operations, the next 30 in intelligence. He is professor of Global & Security Studies (Intelligence, Counterterrorism, Illicit Finance, etc.) at American Public University / American Military University. He analyzes the Big Picture first, then selects asset classes, sectors and individual securities.
Transparency & Governance Disclosure: As Registered Investment Advisors, we see it as our responsibility to advise the following: we do not know your personal financial situation, so the information contained in this communiqué represents the opinions of the staff of Stanford Wealth Management, and should not be construed as personalized investment advice. Past performance is no guarantee of future results, rather an obvious statement but clearly too often unheeded judging by the number of investors who buy the current #1 mutual fund only to watch it plummet next month. We encourage you to do your own research on individual issues we recommend for your analysis to see if they might be of value in your own investing. We take our responsibility to proffer intelligent commentary seriously, but it should not be assumed that investing in any securities we are investing in will always be profitable. We do our best to get it right, and we “eat our own cooking,” but we could be wrong, hence our full disclosure as to whether we own or are buying the investments we write about. © J L Shaefer 2011