The 3's Report
From timely to timeless, the 3 most important points we can make about stocks, bonds, ETFs, markets and investing...updated weekly
SUNGARDEN YARP PORTFOLIO: NEW INVESTMENT GROUP COMING TO SEEKING ALPHA VERY SOON!
Starting within the next 2-3 weeks (or sooner), my investment process and my personal YARP active, risk-managed, dividend and total return portfolio will be available as a Seeking Alpha Investing Group subscription service. And the first wave of subscribers will get a significant discount.
Thanks to all of you who joined us for the Zoom call yesterday, in which we reviewed our investment philosophy, and introduced the new home for the bulk of my investment research and portfolio management work.
We are so grateful for the active, open discussion and all the questions and comments we were able to answer. And we are thrilled that so many of you have already agreed to be part of our group.
Based on the strong feedback we received during that session, it seems obvious to us that the best next-step, rather than supplement our 2 subscription services on Substack with the new Seeking Alpha service, we should transition out of the former to the latter. So that’s what we are planning to do ASAP.
We recorded the entire video session, including all of the Q&A which was about half of the call, and included all of the slides I presented. So if you missed the event or want to replay it, just click HERE. We also posted it to the home page and Media & Learning section of SungardenInvestment.com on Substack.
Here’s are a few of the slides I presented, showing some of the key conclusions we had reached, and which attendees yesterday confirmed for all of us:
ROAR Score weekly update
Our Reward Opportunity and Risk (ROAR) score remains at 20 for the 4th straight week. This means a 2-ETF portfolio that can only be allocated to SPY and BIL would be 20% SPY and 80% BIL.
That simple little 2-ETF portfolio has outperformed a “60/40” portfolio while taking a fraction of the risk (standard deviation of 4%, about equal to a 5-year US Treasury Note). We think that indicates the power of true risk-management in modern markets.
More on my updated market views below.
3 Quick Thoughts on markets
If there were ever a time to throw out a lot of the traditional approaches to investment analysis, this is it. At least for a week or so. The U.S. Presidential election is squarely on the brains of investors. There are plenty of other stimuli, such as a deluge of earnings reports this week and next, highlighted by the daily drama of quarterly reports from big tech stocks. And, there’s a Fed meeting next week.
Amidst all the emotion of November 5 (which would have been the 93rd birthday of my father Carl, who taught me stock charting when I was kid), I have my eye on something else. The long-bond is getting crushed. Since the Fed raised short-term rates 6 weeks ago, the 10-year US Treasury has vaulted from 3.6% to 4.3%. How can that be?! See previous sentence: the Fed does not directly control anything other than very short-term rates. Traditionally, the whole bond yield curve has moved in sync. But not when the market is so concerned about the enduring US debt, and the failure of both sides of the Congressional aisle to do much about it.
I felt compelled to fill the stock chart section below with another 3 episodes of my new mini-series, “WHY I HATE EARNINGS SEASON.” If you missed parts 1-3 (it’s just 3 quick stock charts), see last week’s issue of the 3s Report. The reality of quarterly earnings announcements, and how they can impact portfolios, is not lost on me. Not one bit. I see it every day in the stocks I own and those I don’t. It is a casino. That doesn’t mean the odds are against us. But we can’t just “wing it.”
Modern markets are different, and someone has to shout about that, since so many investors are still stuck using outdated rules, only to regret it later. So I’m the guy shouting LOL.
3 ETF (or index) charts I’m watching
Note that this week’s stock section (below the ETF section) is essentially a primer on my dividend stock approach, with timely examples. We figured this was a good time to show those to our entire audience, as much of this section of the weekly letter will likely move “behind the paywall” at Seeking Alpha in the near future.
CRYPTO TO THE MOON?
Last week I posted a small table of the few ETFs from my list that stood out as potential high reward/moderate risk situations. One week and an 11% gain later, BKCH has apparently left the barn. Bitcoin ETFs look even better. There’s a bit of a hurdle here, but all I’ll say is that while I am not a fan of crypto, nor an expert in it, I like to make money. And so that market segment is intriguing, at least to the trader part of my brain. This one invests in blockchain stocks, so it is indirectly tied to the cryptocurrencies themselves.
BOND MARKET WARNING: PHASE 2?
In my experience, I have observed that bond market trouble comes in phases. Phase 1 is when the yield on long Treasuries starts to rise in earnest. Check.
Phase 2 is when the lower-credit bonds weaken as well. Not shown here, the chart of LQD, which tracks corporate bonds rated AAA-BBB, is dipping with Treasuries. But that’s still high quality. Below is the biggest junk bond ETF. It is not there yet, just hinting a bit. So I’m watching to see how the post-election market treats these higher-income/higher risk bonds. Like small cap stocks, they tend to be the ones most injured by higher Treasury rates, since that raises their borrowing costs. And they are all about borrowing to try to grow, even survive in many cases.
NOTHING SAYS WAITING FOR EARNINGS AND THE ELECTION LIKE…
This chart of QQQ. As a dividend investor, the Nasdaq 100 index is not my primary focus. However, so much money is “chasing” it via ETFs and other forms of passive investing, I have come to the conclusion that the long-term path of the stock market goes through QQQ. Sort of like the path to winning the next Super Bowl goes through Kansas City (where the Chiefs are going for their record 3rd straight NFL title).
On QQQ, the optimist would say “look at that seemingly unbreakable up trend” and the pessimist would say “but it spent most of 2024 going nowhere.” Indeed, from the start of March through Labor Day, it was flat.
But a 9% rally to start the year, and a monster 5-week, 11% run from early September to mid-October accounts for virtually all of the 22% year to date advance in QQQ. Let’s see what happens next.
3 stock charts I’m watching
WHY I HATE EARNINGS SEASON (part 4)
Tired of political ads? Here’s a different type. This earnings season has been like an advertisement for tactical dividend investing, or as we call it here, YARP. Central to that approach is a willingness to think of a stock position in 2 complementary ways: some long-term shares and some short-term shares. That’s my tilt on "buy and hold" investing. Here are few recent examples:
Corning: Long-term, a very nice pattern that has yet to break. I’m up a lot since initial purchase, and increased my position from 1% to 3% back in August, shortly before it went ex-dividend. So I’m playing with “house money” in a sense, and earned a lot of income back then.
But earnings announcements are fraught with risk, and so I had to decide whether to keep the 3% weighting (1% to 5% is my range), or reduce it. The chart checked out, and the cushion I had from the strong unrealized gain allowed me to keep the position size high, so when the stock popped on this morning’s announcement, it added another 5%+ to my gains. Next decision on this one: it goes ex-dividend again in a month and at just a 2.4% yield, I’ll need to continue to favor the chart pattern in order to stick around at that 3% weighting. To be determined.
But that’s how YARP works, in a nutshell, and sparing you the details (but that’s what we’ll be adding to the new subscriber portal in the new Seeking Alpha investing group service).
WHY I HATE EARNINGS SEASON (part 5)
Stanley Black & Decker: And then, there are situations like this one. I actually like telling this “story” more than the one above. Because THIS is what risk management is to me (and to YARP).
I bought SWK for the first time on 9/20 around $106. A 3% position, whereas I normally start at the minimum 1%. I felt like a genius…for about 3 days! A nice 5% rally in no time, and a potential breakout. Nope.
And as earnings approached, I saw too much potential risk developing. Essentially, what I saw when I analyzed it and then bought it may still be intact, but over a much longer time frame. That’s good enough for me to own 1%, maybe even 2%, but not 3%. So I sold it down from 3% to 1% a week ago, at $105, just about where I bought it.
So when it lost nearly 1/10 of its value this morning, I spared myself having to absorb that with 3 times the amount of SWK shares I owned a week ago. Of course this is not an exact science, but the idea is to, over time, achieve a good “batting average.” A big part of that is being willing to rent in addition to owning shares of stock. At $93.50 a share as I write this, SWK now trades at the same price it did this past March. And in September of 2022. And in April of 2020. And way back in 2014! This is why I own AND rent. This one will require patience. And with a 3.2% yield, I’ll have to see how much patience I have, versus alternative stocks. For now, no change. Just happy to be at 1% and not 3% or 5%.
That’s how my approach has evolved with modern markets.
WHY I HATE EARNINGS SEASON (part 6)
3M: This one reported last week, so it won’t thrill us that way again until January. So why highlight it here? Because while its earnings report did create the typical chaos (it traded between $131 and $141 on 10/22, the day of the announcement), I had sold out of it earlier in October. I did so reluctantly, but more importantly because I’m not greedy. I can’t be in this process. No room for that.
The purple marks my buy point and the blue is the sell point, but I owned anywhere from 1% to 5% in between. But MMM was not supposed to rally like this so quickly, and it is probably way ahead of itself. I see this much more frequently than in the past with dividend stocks. How much does that 2-3% yield on a stock mean when it gyrates like that? It is down 5% since I sold it, but that’s not the point. What is? That these are just stocks. I don’t “own the business” in a meaningful way.
I just use the markets as a tool to pursue what I want: income and price appreciation. But to those who insist on sticking it out in the name of “long-term investing,” I say good for them. Not for me. Because if I do reach the point where MMM looks to go much higher, it is still very much on my watchlist. Or, if it tanks as it did prior to my purchase earlier this year, my guess is it will flash green to me as it did then.
Again, it is not about this stock or that one. It is about a series of decisions, all connected, with my eyes on the prize, so to speak. That’s portfolio management to me.