Toward the end of the year the thoughts of investors turn to predictions instead of sugar plum fairies. One group claims that there will be a big sell-off for tax purposes in December, causing a downturn in prices. A second group contends that few will sell in December during a rising market, since they will want to defer taxes by taking any profits in the following year.
Yet another group thinks it doesn‚Äôt matter since the market will correct back to the mean in January. Each group has historical data to support its position.
And isn‚Äôt that really the wonderful thing about the market? Like horse racing, you really can‚Äôt be sure who is going to win, who will be right or wrong and what circumstances will cause what results.
Did you see the article in the Oct. 6 L.A. Times business section on actively managed mutual funds? Most of the expertly managed funds did not do as well as investors that just put their money into market indexes. And of course they took out fees as well, in spite of lagging the market.
I have a different point of view.¬† I don‚Äôt really worry too much about whether my portfolio is up or down, or whether it is ahead or behind the various indexes.¬† My concern is with yield.¬† My underlying principal is that the value might be up or down, but whichever it is it will probably be the reverse in time. So yes, I have a few positions, like GDX and copper, which are down now and have been declining regularly over the past year.¬† But I write covered calls on them and end up with a decent yield on my cost. Eventually they will come back.
When I do hit something really good, like I did this year on Bank of America, Green Mountain Coffee, and Whirlpool, I take a profit and move on to something else. I try to keep diversified in a number of different ways so that every few months something hits so that I can continue to take realized profits on a regular basis, even if they are, for the moment, offset by unrealized losses. I balance realized positions between some losses and gains, even if I re-buy 30 days after a close, to limit taxes.
Finding new exciting positions is fun. For covered call option writing I try to maintain positions in very solid stable stocks so that I can benefit from the call premiums without high risk of losing the option profits back in capital losses. So I keep stocks like Coca-Cola, Target, Procter & Gamble, Wal-Mart and McDonald‚Äôs.
At the same time I look for trends. Right now I see natural gas pipelines and MLPs as a trendy position that is looking really good. I see natural gas as something that will be more and more in use.¬† And the high yields these investments offer puts them right into my investment model. KMI, LNG, SE and SEMG are good candidates for natural gas investment. Master Limited Partnerships offer some possible tax advantages, and ACMP EPD, PAA and WES look like good candidates.
I suggested to my broker buying EPD, but he convinced me that the exchange-traded fund MLPFX, which holds significant positions in EPD, but is diversified with other natural gas companies, is a better and safer way to go, and I agree with him. So in the long run I made the biggest commitment into MLPFX.
Other than natural gas, I‚Äôve been looking at chemicals and drugs. RPM International (RPM) is up pretty high, but still seems like a good long-term investment. For option writers it looks like selling a two-part straddle, the 40 calls and the 40 puts might be fun. You collect in $2,500 on 10 positions, and you have a 5-point window.
I watch recommendations from option experts selling their systems on websites. Like the mutual fund gurus they don‚Äôt seem to do too well, but they rarely mention the results of their suggestions. I saw one on Terry‚Äôs tips last month, suggesting call spreads on Nike. They were right that Nike was a good stock, but they underestimated its power, and it broke through the call positions, and went up quickly from 69 to 77, creating a big loss in the short call spread.¬† What they forget to tell the investor is that if you are going to put on option positions, you, or someone on your behalf, has to watch them every day and roll them up or down if there is a lot of price movement.
So what do I think about the market at year‚Äôs end? Last week I took most of my profits off the table in anticipation of the possibility of a December decline.¬† Put another way, as mountain climbers say, “I did it just because it was there.”¬† The S&P was up about 27 percent for the year. I think a lot of other investors will also take their profits and run. The market seems a bit oversold to me, so I‚Äôm pretty sure there will be a correction sometime in the next three months, and I‚Äôll put my cash back in at that time.
And while I‚Äôm a touch negative for the short run, I think 2014 will show solid economic growth, especially in the leading companies in each area, and I intend to be fully invested throughout most of 2014. Happy holidays.
For information about Merv Hecht and more details on the strategies and stocks he writes about in this column, visit his website at DoubleYourYield.com.