for the upcoming week beginning Sept 19, 2016
With Market Questions and Answers
It has been close to a month since I last prepared a full newsletter. There are a few things to cover, but the essence of my views remain as previously shared: We are at a level in the equity markets that poses greater risk then reward.
Before I move further into the newsletter, I need to recognize that some friends have commented to me that my writing and subject matter is a bit complex and not always easy to interpret. That defeats the purpose of composing this letter, which is to educate and help others make informed investment decisions. So, I will take a bit of a different tone and approach and would appreciate any feedback from those that wish to help guide me and make this a better tool for all.
First up, where am I allocating my capital, why, and how confident am I about the market’s future direction.
Where am I allocating my capital?
• I have made new investments in Gold, Silver and the companies that mine for Gold and Silver. These investments now represent the largest dollar concentration of my current investments. The actions taken are as follows:
o I have purchased physical Gold in the form of one ounce coins and bars. They are safely stored in a vault. I want some small amount of my precious metal investments to be in physical form and so have done so.
o I have increased my equity investments in precious metal miners by buying the stock of: Alamos Gold, Gold Corp, Harmony Mining, Hecla Mining, New Gold, and Pan American Silver. I have also purchased the right to buy more stock of Gold Corp and New Gold at pre-set prices in the future. I did this by buying what are called “Call Options” on the stock of these two companies.
• I have made investments that will increase in value when the equity markets decline in value. I have principally done this by:
o Selling futures contracts on the S&P 500 equity index at a preset price. If the S&P 500 index declines, I will then have the ability to buy the index at a lower price. My goal, because I believe the equity market is at a level that is too expensive, is to have the selling price I contracted at to be higher than the future purchase price, and this occurs if the S&P index declines below the level of the price I agreed to sell the index. The Future sale price for delivery in the month of December 2016 that I contracted for is 2,130. Presently the S&P 500 Index is at 2,134.
o Buying the right to sell the S&P 500 equity index at a fixed future price. I have done this by buying what are called “Put Options” on the S&P 500 index that lock in a sale price of 2,150. This right expires in late October, so if the index declines between now and then I will profit, but if it does not decline, I will lose the investment premium I paid for the right to sell the index.
o Buying shares in an ETF that goes up in value when the stock market declines and falls in value when the stock market goes up.
o Selling short shares of stock in Netflix and Microsoft. Selling short is a way through your brokerage account that you can profit from individual stock declines in price. Effectively, it is a way to sell a stock that you do not own at today’s price with the expectation that you will be able to buy it back in the future at a price below the price at which you sold the stock. I believe that Netflix is over-valued given the cost of programming it is committed to buy. I like Microsoft and in fact it is a core holding for me. However, its recent run to the above $55 per share price level gave me the opportunity to hedge my position without disposing of the MSFT shares I own in my core portfolio. Should the MSFT price decline, I will lose money in my core portfolio, but will offset that loss by the gain from the short position in my brokerage account.
• I have decided to hold my core equity portfolio steady at its current level. These investments are not held in a trading brokerage account. The investments are through a trustee that enables direct investments in each individual company at levels I choose, some with minimums as low as $10. These company investments enable me to enroll in each company’s Dividend Reinvestment Plan so that quarterly dividend payments are used to buy more stock of the specific dividend payor.
• Finally, my 401-K/IRA account is effectively 100% in cash. I will reallocate this cash to investment choices other than cash when the market has returned to what I consider to be more rational and reasonable values.
Why have I allocated my investment portfolio in the manner described above?
It is because I assess the current equity market to be extremely over-valued. Additionally, I view the low and negative interest rate environment that is supported by the Central Banks of the world to be negative for paper currencies and positive for hard assets such as Gold and Silver. I do not see these Central Bank policies changing anytime in the near future and therefore expect the prices of hard assets to rise in relation to the buying power of paper currencies such as the Yen, the Dollar, the Euro and the Chinese Yuan.
How confident am I in my belief that the stock market will decline from its current levels? I am highly confident that over-valued environments eventually correct to lower valuations. The question of when is the truly most difficult one to answer, but the current movement in the market’s momentum away from an upward direction indicates to me that the decline I expect is not far off. The ground is shifting under the market’s feet and this new instability is the pre-cursor to a market decline that I have been waiting for. This is why my investment positions that increase in value from a stock market decline have expiration dates of October thru December. I expect a material decline during this period.
Hopefully, the above adds some clarity that may have been absent in the prior letters.
As always, be careful out there.
Finally, the detail analysis section that includes my YTD portfolio performance vs the market and the relative measures of market value with trend data will be posted over the weekend after the market closes.
All the best,