This is the inception edition of the newsletter, so I’ll keep it short.
I’m going to list out the following virtual purchases that will act as the seed positions of these two sample portfolios, which I will then track during each monthly newsletter.
Today is Sunday, December 18, 2016. I will use the closing prices for tomorrow, Monday December 19 for the official position values.
Each portfolio will start today with $100,000 in cash, USD.
Stock Portfolio
This portfolio will consist of individual stocks, ETFs, and will often sell options, when appropriate. This is the more hands-on portfolio. It will start today with $100,000 USD in virtual money.
These are the initial seed positions that I will begin tracking tomorrow, using the market’s closing prices for reference:
-Sell 2 cash-secured puts at a strike price of $55, for March 17, for Realty Income (O).
-Sell 1 cash-secured put at a strike price of $60, for February 17, for Ventas (VTR).
-Sell 1 cash-secured put at a strike price of $77.50 for January 19 (2018, 13 months away) for Magellan Midstream (MMP).
-Sell 2 cash-secured puts at a strike price of $33.00 for January 19 (2018, 13 months away) for HollyFrontier (HFC).
-Sell 1 cash-secured put at a strike price of $45.00 for March 17 for Spectra Energy Partners (SEP).
-Sell 1 cash-secured put at a strike price of $70.00 for January 19 (2018, 13 months away) for Qualcomm (QCOM).
-Sell 2 cash-secured puts at a strike price of $25.00 for February 17, for Cadence Design (CDNS).
-Sell 2 cash-secured puts at a strike price of $35.00 for April 21 for Intel (INTC).
-Buy 100 shares of Traveler’s Companies (TRV), and then sell 1 covered call on the position at a strike price of $140 for January 19 (2018, 13 months away).
-Buy 300 shares of Brookfield Asset Management (BAM).
-Buy 300 shares of the iShares International Select Dividend ETF (IDV).
Sell 6 cash-secured puts at a strike price of $14.50 for March 17 for iShares Silver Trust (SLV).
When these transactions are completed at their market closing prices on Monday, this portfolio will own 300 shares of BAM, 300 shares of IDV, 100 shares of TRV, 1 covered call on TRV, and will have $63,550 in secured cash for these put options. Any leftover amount, as well as the premiums generated from selling these options, will remain in cash for now.
ETF Portfolio
This will be a much simpler portfolio, consisting entirely of ETFs. It will also employ the use of options, which will make it quite unlike most other indexed ETF portfolios around. It will start today with $100,000 USD in virtual money.
These are the initial seed positions that I will begin tracking tomorrow, using the market’s closing prices for reference:
-Sell 4 cash-secured puts at a strike price of $87.00, for March 17, for the Guggenheim S&P 500 Equal Weight ETF (RSP)
-Sell 3 cash-secured puts at a strike price of $82.00, for March 17, for Vanguard REIT ETF (VNQ).
-Buy 700 shares of the iShares International Select Dividend ETF (IDV).
-Sell 1 cash-secured put at a strike price of $105.00, for March 17, for SPDR Gold Trust (GLD)
-Sell 5 cash-secured puts at a strike price of $14.50, for march 17, for iShares Silver Trust (SLV).
When these transactions are completed at their market closing prices on Monday, this portfolio will own 700 IDV shares and will have $77,150 in secured cash for these put options. Any leftover amount, as well as the premiums generated from selling these puts, will remain in cash for now.
Thesis
Currently, the Shiller P/E ratio of the S&P 500 is 28, and the capitalization/gdp ratio is over 125%.
These values indicate substantial market overvaluation, perhaps 20-25% or so.
In addition, we are 89 months into the fourth longest economic expansion in US history.
Every metric is screaming that we’re getting towards the end of the business cycle. Either a market correction or a long, flat, choppy market deflation is likely, if not in 2017 then within the next few years.
I won’t try to predict when the next recession or market correction will occur. I’m simply investing based on how expensive things are, putting downside protection into the portfolios, focusing on income generation, and investing heavily into the areas that are reasonably priced.
For example, due to the fear of rising interest rates, REITs have lost a lot of market value over the last six months. Ventas and Realty Income, which were both overvalued, are now fairly valued. The Vanguard VNQ REIT index has also become attractively priced. So, both portfolios are overweighting REITs right now.
Silver is historically fairly inexpensive, and recently went down in price, and the gold/silver ratio is higher than usual, so I’m going to sell put options to get paid to wait to own it in both portfolios. It’s a volatile metal and can certainly drop further.
Qualcomm is reasonably priced, and so are the energy pipelines and refiners.
I rarely do buy-write strategies, like I’m doing for Traveler’s here. But it makes sense for this case. And the main reason for inclusion is that it helps make the portfolio agnostic towards interest rates. The REITs and MLPs will be negatively impacted by rising interest rates, while Traveler’s will benefit.
The iShares International Select Dividend ETF was selected for both portfolios because it a) has a high dividend yield, b) isn’t heavily concentrated in Japan like most international indices are, and b) has performed poorly recently and is at a low valuation, especially compared to the over-heated US stock market.