the us makes, the world takes escape the bear trap with ...€¦ · the us makes, the world takes...

(continued)

The US Makes, The World TakesIn 1935, an illuminated sign was

installed on the Lower Trenton Bridge across the Delaware River. It reads: Trenton Makes The World Takes. I have viewed this sign countless times, and its meaning has stayed with me as a call that not only does the industrial city have the capacity to succeed—the US does as well.

This is important right now for the financial markets. The US economy, while many years mature, is the growth engine of the world. GDP growth remains buoyant and is being furthered by regulatory and tax reforms. Inflation isn’t there. Consumers and businesses remain active participants.

Meanwhile, most of the major economies of the world are slowing down or are set for recession, espe-cially in the European Union. Interest rates outside the US are increasingly negative, with over $16 trillion of bonds having yields below zero.

US stock indexes are the champions of the globe by wide margins, while US bond markets continue to pull in capital seeking not only positive yield but opportunities for gains.

But at the same time, leading news providers are publishing an increasing number of stories of pending recession and other disparaging spin on the US economy and markets. While their motivations are uncertain, it is affecting the markets and could eventually result in genuine concern for the direction of US stocks and bonds.

My call at this point is that we need to continue to be diligent about the facts and focus on defensive and substantial companies catering to the US economy, while also capitalizing on the many opportunities in the US bond markets.

September 2019

Vol. 30, No. 9

Escape the Bear Trap with Better Information & DataDear Friend,

We are in the midst of a very challenging time for the economy and markets. The economic data coming in recently have been good. Inflation is very low, with the core Personal Consumption Expenditure (PCE) Index still sitting at 1.60%. And the economy is on track to post gross domestic product (GDP) growth of 2.50%.

Meanwhile, the employment market in the US remains robust, with unemployment at a mere 3.70%, an expanding participation rate of the workforce and a backlog of job openings.

This employment market has wages growing by 3.2%, which is double the rate of core PCE, meaning that consumers have more spending power without creating inflation in the process. And this is showing up in the high level of consumer comfort, as evidenced by the Bloomberg Consumer Comfort Index.

Businesses remain upbeat, with surveys of C-suite leaders showing bullish expectations for their companies’ activities over the next six months—continuing the trend that began at the end of 2016.

Furthermore, with the majority of companies inside the S&P 500 Index having reported for the latest calendar quarter, we are seeing gains in sales and earnings. And current expectations are for further increases to come in the current and pending quarters.

But all of this is being swept aside by more and more media pundits, with a dramatic increase in negative news spin on economic and market data. This could be the canary in the coal mine warning of a coming decline, or it could be merely a “bear trap” to catch the less informed off-guard.

In this issue, I’ll tell you a story of one of the wealthiest families in history and how they furthered their wealth by using the best data and information to buy while the rest of the world was selling. I think this story can provide a good lesson for us as we navigate the current market environment.

Growth StrategiesData Driven Success

Many of you have likely seen the 1987 film, Wall Street. One of its protagonists, Gordon Gekko—portrayed by Michael Douglas—is a Wall Street titan that sought to capitalize on buying the right stocks and even whole companies thanks to his insatiable desire for the right data. One of his best quotes from the film is, “The most valuable commodity I know of is information.”

Even before the movie was released, I abided by a similar mantra all of my professional life. Information and data always beat others’ conjecture hands down. This is why anytime I present an argument for a particular economic or market development, I roll out the facts and figures and provide the evidence for my call.

Data and information are crucial for investing. An even better, real-life example of this comes from one of the wealthiest families of all time—the Rothschilds.

While the full story begins further back, the Rothschilds really got their capabilities underway with Mayer Rothschild, born in 1744 in Frankfurt am-Main. Mayer was a scion of a currency and coin dealer who was quite good at knowing

2 Profitable Investing | September 2019 | profitableinvesting.investorplace.com

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the true values of currencies and especially old coinage.

He and his father caught the attention of the regional governor, who did business with him and empowered him both financially and politically. He went on to sire five sons who he installed in various European capitals as he expanded his currency and financial business while keeping it solely in the family.

They collectively built a network of couriers that would safely transport gold, currency and financial instruments as well as information. It was the information that further developed the family business, as they knew what was going right or wrong in the various kingdoms of Europe and how to best capitalize on the changing values of currencies and other items.

One particular situation involved the United Kingdom during the Napoleonic Wars, in which Mayer largely financed the Kingdom’s war efforts to depose Napoleon. At the Battle of Waterloo, where the Duke of Wellington and his forces were victorious, Mayer had the information of the win from local sources couriered to him before the Crown.

It is disputed when he informed the King, but what isn’t disputed is that he bought up a tremendous amount of the Kingdom’s bonds. They had been depressed on poor expectations of Wellington’s fortunes and, in turn, when the real information eventually reached the marketplace, the vast wealth of the Rothschild family grew even further.

The takeaway here is that market rumors and innuendo are one thing—real information and data are another.

This is not to say that rumors and innuendo aren’t important in the short run. After all, I’ve noted that the fourth quarter of 2018 saw lots of stocks sell off on little more than fear about falling revenue and earnings. But the realities of a growing, low inflation economy with consumers and

businesses engaged swiftly led to the massive rise in stock and bond prices throughout 2019 to date.

Buy the Facts Not the RumorsNow, leading into the fourth

quarter, the Profitable Investing model portfolios were already set up well to deal with risks. We had cash on hand and lots of bonds, and I was heavily recommending real estate investment trusts (REITs) and utilities, all of which either held on better than the S&P 500 Index or gained in total return. With that in mind, let’s talk more about what’s occurring right now.

Going NegativeAs noted, the data and information

on the US economy and markets keep coming in on the positive. However, over the past several weeks in particular, there has been a rising number of news stories not about the silver lining of the data but about the potential of the clouds.

The most recent monthly jobs data are being cited as one metric that is not as good as it could be and has been used to argue that unemployment will come back. Similarly, the quarterly GDP data are being cited as lower than the previous quarter. But that ignores

the fact that it’s continuing a rise that’s the longest in recorded history while the rest of the globe’s economies fester as their governments continue to fail in regulatory and tax reforms.

There have also been stories about consumers and businesses leaders that might change their economic participa-tion, resulting in a recession that could be just around the corner. However, a survey by the National Association of Business Economists (NABE) showed that only a small minority (34%) sees the potential for a recession in 2021. Nonetheless, the headlines focus on just one word: recession.

And of course, there were a brief few minutes earlier this month when the US Treasury yield curve became inverted. The 2-year Treasury yield went above the 10-year Treasury yield by a few basis points only to swiftly return to a normal curve. That opened a firehose of stories purporting that this was definitive proof that the US is recession-bound. (For more on why this isn’t proof of much of anything, read my Q&A from the August issue.)

Ac-Cent-Tchu-Ate The PositiveThe 1944 song, Ac-Cent-Tchu-

Ate The Positive, written by Harold Arlen with lyrics by Johnny Mercer

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Profitable Investing | September 2019 | profitableinvesting.investorplace.com 3

and later made more famous by Bing Crosby, has another lesson for us. The core lyrics go like this: “You’ve got to accentuate the positive, Eliminate the negative, Latch on to the affirmative, Don’t mess with Mister In-Between.”

Now, I’m absolutely not a Pollyanna. I understand that the US economy does have challenges. The trade negotiations with China are far, far from done. Many of the globe’s economies aren’t in good shape, which means that many global companies could have troubles. But meanwhile, consumers are spending, as proven by a string of impressive quarterly reports from leading retailers like Target (TGT), Walmart (WMT) and others that have been adapting to the markets.

It’s clear that US-focused companies are faring better. In this issue, I’ll present a core group of them that are thriving by cashing in on a big, traditional sector that was strangled by past government interventions. And with inflation down and yields attractive in the US, bonds continue to work even better. I’ll focus your attention on the ones you need to buy and own.

Lastly, the opportunities that worked through the challenging market of last year, including REITs and utilities, are still working and should continue to deliver even if we get a downturn. The bottom line is that we will continue to follow the data in order to grow our portfolios, not predictions of doom & gloom or euphoria.

Proven Growth & IncomeBankers, Be Very Afraid

Every industry has its disruptors. When old and established leaders get comfortable doing things the same way, the disruptors come along with new ideas and approaches. New technologies can mean completely new ways of operating.

Banking is moving in this direction as well. Financial technology (fintech) companies continue to rapidly rollout non-bank payment, loan and deposit apps, which are increasingly making consumer banking with traditional banks less necessary. You can even apply for or refinance a mortgage via

an app on your phone.But it’s three obscure bits of

Congressional legislation that are really beating banks: The Investment Companies Act of 1940, The Small Business Investment Incentive Act of 1980 and The Cigar Excise Tax Extension Act of 1960.

The Investment Companies Act established holding companies and funds, which allowed companies to own financial assets beyond just plants and equipment, like operating companies.

The Small Business Investment Incentives Act provided companies beyond banks the ability to lend and own loans and other financing instruments from public and private companies to bring needed loans to a stifled banking market.

And the Cigar Excise Tax Extension Act had embedded in it the legal and tax structure that enabled real estate investment trusts (REITs).

Business DevelopersBack in the late 1970s, inflation was

out of control, driving interest rates to the moon and driving banks to slow lending, not knowing what to expect in return. In 1980, the Small Business Investment Incentives Act legislation allowed non-banks to operate as invest-ment companies that could make loans and invest in loans and other financing facilities. This began what are known as Business Development Companies (BDCs), which also don’t have to pay traditional corporate income taxes.

The BDC has been a very successful business model since then. You can see the strong performance of BDCs

in the chart of the S&P BDC Index above, which has generated a return of 19.92% year to date. Banks have been strangled with low interest rates, which limit their net interest margins (NIM)—the difference between what they pay in deposits and what they earn from loans. Regulations post 2007-2008 have stifled them with costly compliance. Even with relief over the past three years, much still needs to be done to unburden banks.

BDCs are outside those regulatory purviews. Yet they also participate in the business loan market as well as in senior loans, which continue to perform well even with the pullback at the end of last year.

In the Total Return Portfolio, we have a great BDC in Hercules Capital (HTGC). It focuses on technology companies and makes loans and provides other financing. It also takes equity participation in its portfolio companies, then works to guide them along to an exit strategy.

NIM is ample at 8.90%, and the efficiency ratio is strong at 52.50% (the lower the ratio, the greater the profitability). Revenues are up 8.80% for the trailing year and are feeding a nice dividend yielding 9.81%. Buy HTGC under $14.50, ideally for a taxable account.

In Cycle C of the Incredible Dividend Machine, we have Main Street Capital (MAIN). This BDC focuses on more mundane small- to middle-market companies. It has wide financial margins, an amazing efficiency ratio of 8.20% and pays a dividend of 5.63%. Buy MAIN under

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a raised price of $46.00, ideally for a taxable account.

Incredible Dividend Machine newcomer TPG Specialty Lending (TSLX) provides financing and capital to a variety of companies. It’s part of the famous TPG Capital—formerly called Texas Pacific Group and one of the largest and more successful private equity firms in the world. TPG Specialty draws great talent and resources from its affiliate.

Revenues are on a tear and have climbed over the trailing year by 24.20%. Its NIM is running at 10.00%, and it keeps its efficiency ratio humming at a profitable 31.50%.

It pays regular quarterly dividends providing a yield of 7.52%. But it also regularly pays additional dividends from ongoing profits throughout the year for a current annual yield of 8.77%. TSLX is a new buy in Cycle A of the Incredible Dividend Machine under $22.00, ideally for a tax-free account.

A REIT DisruptorBanks used to be big in the mortgage

business. Now others have stepped into the space. Inside the Total Return Portfolio is MFA Financial (MFA), which is structured as a REIT but owns and runs a mortgage portfolio, fueling an ample dividend yielding 11.02%.

Over the past 10 trailing years, MFA has delivered a return of 213.48% for an average annual equivalent of 12.09%. Buy MFA under $8.00, ideally for a taxable account, as 20% of its dividends qualify as deductible from income tax liabilities.

More Growth & IncomeBuy & Own Bonds

Stocks get more attention than bonds in the financial media. Earnings, sales growth, mergers and acquisitions—stocks have a lot going on.

But that changed this month, as the media grabbed onto the concept of the inverted yield curve. An inverted yield curve is when the 2-year Treasury yield is above the 10-year Treasury yield. As I write this, it only occurred ever so briefly on Tuesday, Aug. 13, just past 6:00 a.m. ET.

It moved back to normal but is now very flat, with the difference in yield between the two maturities barely discernable. But this doesn’t cause a recession, nor does it alone signal the inevitability of a recession or a bear market for stocks.

What it does show is that US Treasuries are in demand, with longer-term bonds being preferred. Longer maturities provide not just a longer-term stream of locked in yield but also more duration, which is part of the calculations for price movement potential against yield changes. The bigger the duration, the bigger the price movement for a movement in yield.

Inflation is the nemesis of bond investors. And inflation is just not in the US. That makes bonds all the more valuable for their future interest (coupon) payments in current dollars. While the US doesn’t have inflation, it isn’t alone. Other major markets have

similar characteristics. But beyond the US, bond-buyers are

increasingly getting stuck paying to own bonds with negative yields. The amount of global bonds with negative yields is now up to $16.15 trillion. That means that US bonds, with our low inflation and positive yields, make for a huge bargain.

That’s what is driving longer-term US bonds lower in yield and higher in price. Be they Treasuries, municipals, mortgage-backed securities or corporates, they are valuable assets for positive income and growth in price.

Inside the model portfolios, I have been recommending individual minibonds, preferred stocks that are bond-like investments as well as bond funds. And all of them continue to perform very well.

Last month, I added the BlackRock Credit Allocation Income Trust (BTZ) to the Total Return Portfolio. While it

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might not sound exciting, the closed-end bond fund has delivered a return of 2.84% so far, which equates to an annual equivalent return of 44.15%.

The fund focuses on US corporate and other bonds and has an effective duration of 6.88 years, meaning that the portfolio should gain more as yields fall further and bond prices rise.

The fund is also a great value. Its stock is now trading at a discount of 8.93% to the net asset value of its portfolio. That tantalizing discount has continued to narrow since late last year and is now about 50% smaller than when we started the year. In other words, investors are buying in.

The US corporate and other bond sectors continue to perform, delivering a return for the trailing year of 12.92%. The underlying bond portfolio for BTZ, as tracked with a delay due to reporting, is up 11.70%

given the greater diversity of the bond assets of the fund. But the return on the fund is 16.47%, reflecting the closing of the discount.

There is a risk for the stock price if the general stock market slips significantly and drives the discount to bigger levels, but the underlying assets should perform well and will deliver a good income stream with the yield sitting at 5.93%.

With a net asset value of $14.89 and a current stock price of only $13.64, buy the BlackRock Credit Allocation Income Trust (BTZ) under $14.00, ideally for a tax-free account.

Total Return Portfolio

What do investors want the markets to do? That seems to be the big question that could continue the strong perfor-

mance of US stocks…or send the S&P 500 Index down like we experienced in the fourth quarter of 2018.

I pose the question because the major underpinnings of a good stock market should reflect rising demand for goods and services, which boosts corporate profits. Nearly 70% of US GDP comes from the consumer.

And the forward-looking indicator for consumer spending—the Bloomberg Consumer Comfort Index—is still running at 61.50. Despite being down a bit from recent highs at the end of July, that’s 7.14% higher than it was in January. Furthermore, business expectations for orders and sales activity over the coming six months ticked up in August and are now up 44.62% from February of this year.

However, we still face a number of challenges. Uncertainty over US-China trade relations is a big one. Then there is the news media, which are calling for recession for a variety of reasons, ranging from inverted yield curves to the end of capitalism to a collection of Business Round Table billionaires calling for the end of corporations’ focus on shareholders.

The media take hold of these stories and roll out all sorts of doomsday forecasts for the economy. That sets off investors and causes traders to push their sell buttons.

However, there is some disconcerting data beyond just a negative press. It comes from the Institute for Supply Management (ISM) in its surveyed indexes for manufacturing and non-manufacturing. Both remain positive for forward expectations, but they have been slipping this year after climbing significantly from the end of 2016 through 2018.

Challenging SignsThese surveys include many

major global companies that are being negatively impacted by trade talks. They’re also impacted by the slowdowns in all of the major economies beyond the US. With Europe in trouble, Asia slowing and Latin America in a deepening hole, things don’t look good for your prospects if you’re a major global company.

But if you’re a US-focused company, the economy is good, and your

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prospects remain positive. This means that we need to continue to largely focus on US-centric companies with few specific exceptions.

Buy, Hold or Sell?Right now, many of our stocks and

funds are doing well. And so too are bonds.

Despite the negative Nellies, I see more upside from here. In the Indexed Equities segment of the Total Return Portfolio, the Vanguard Utilities ETF (VPU) has returned 17.48% for the year to date. Continue to own this defensive market segment. Buy VPU under a raised price of $140.00, ideally for a tax-free account.

Also in the utilities sector is NextEra Energy (NEE), with its regulated power and huge wind and solar assets. It has returned 29.33% year to date and should continue to perform. Buy NEE under a raised price of $226.00, ideally for a tax-free account.

In consumer goods, some companies failed to turn around brands and imple-ment control costs. But many did and continue to improve. Nestlé (NSRGY) has returned 39.36% year to date, and I’m expecting more gains to come. Buy NSRGY under a raised price of $112.00, ideally for a taxable account.

Procter & Gamble (PG), a company that I came close to selling last year, has also provided proof of its efforts. It has returned 30.39% year to date. Buy PG under a raised price of $119.00, ideally for a tax-free account.

The problem-solvers are among the exceptions to our US focus. And Zoetis (ZTS), with its livestock and pet vaccines and medicines, keeps working for eager agricultural and domestic consumers. It’s posted a return year to date of 44.60%. Buy ZTS under a raised price of $130.00, ideally for a tax-free account.

REITs continue to rule during volatile markets and global woes. And one of the very domestic-focused companies in self-storage is Life Storage (LSI), which has generated a return year to date of 15.30%. Buy LSI under a raised price of $105.00, ideally for a taxable account.

Global oil and gas companies are running into economic headwinds,

while domestic toll-takers and royalty companies keep the cash pumping. For now, I’m placing the Energy Select Sector SPDR ETF (XLE) on hold. In the next issue, I’m going to do a full review of the industry from well-head to the refiners.

To wrap up the stocks segment, today I recommend selling Starbucks (SBUX). Revenue growth has slowed quite a bit over the past four years, and this last quarter was no exception. The US market is saturated, and its bet on China is not going well despite massive attempts there. The stock has returned 81.69% since it was added to the portfolio in February 2018.

I see that with a price-to-book value at 70.74 times, an actual net negative book value per share of -$3.58 and a price-to-sales ratio at 4.57 times (sales are slowing), the stock is really beyond the realities of the underlying company. Sell Starbucks (SBUX).

Buy US Bonds I’m maintaining my call to buy US

bonds. They have been working for income and growth, and they will work if the stock market slips again. Note that I have raised the buy-under prices for a collection of our bond funds in the fixed income section on page 7. In particular, buy the BlackRock Credit Allocation Income Trust (BTZ) under $14.00, ideally for a tax-free account. It is still trading at a big, but narrowing, discount.

Incredible Dividend Machine

We continue to get paid each month from the strong collection of dividend-paying stocks within the three cycles of the Incredible Dividend Machine.

However, one company in Cycle A that is having challenges is Cisco Systems (CSCO). It’s a leading networking equipment company, but it is struggling to transition its revenue from one-off purchases of individual equipment to recurring revenue sources from its services, including cloud computing.

The posterchild of this reformation in the technology space is Microsoft (MSFT) in the Total Return Portfolio. It went from selling boxed software to

all sorts of recurring revenue sources, from subscription software to its Azure cloud services, and now rivals Amazon (AMZN) and Alphabet (GOOGL).

Cisco has been bundling services and offering some subscriptions for its core and expanding product lines. Revenue in its fourth fiscal quarter expanded by 6%. But like other technology companies, it has some issues with China. The company sources products from and sells into this market, and the trade war is taking its toll. On the latest earnings call, Cisco forecasted sales will either remain flat or barely improve.

This isn’t what I wanted to hear from management. I wanted a plan of action. The company has been paying a good dividend of 35 cents, for a yield of 2.87%. And the payout is up 9.68% over the past year. But without a better plan or proof that the status quo is working, we need to sell it. Since it was added to the portfolio in June 2017, it has generated a return of 58.72%, which is over twice the return of the S&P 500 Index. Sell Cisco Systems (CSCO).

Replacing it in Cycle A is the alt-financial company discussed earlier in this issue, TPG Specialty Lending (TSLX). Set up as a business development company (BDC), it is a well-run alternative to commercial banks, with the backing of private equity company TPG Capital (Private)—formerly known as Texas Pacific Group.

It pays its regular dividends every January, April, July and October, with additional special dividends regularly paid throughout the year. The annual dividend yield is now running at 8.77%, which is a nice jump from that of Cisco Systems. Buy TPG Specialty Lending (TSLX) under $22.00, ideally for a tax-free account.

TPG Specialty Lending joins Main Street Capital (MAIN), in Cycle C, as the other alt-financial BDC in the Incredible Dividend Machine. This market segment continues to perform as they take the business of lending away from traditional banks and other financials. Main Street has generated a return of 26.51% since it was added to the Machine in January 2018, and it

(continued on p. 8)


TOTAL RETURN PORTFOLIOStocks (56%)Indexed Equities (18%) Symbol T/TF

Entry Date

Fwd. Yield

Buy Under Comments

Energy Select SPDR ETF XLE TF 5/21/18 3.96% HOLD Global oil not working as well, US shale and toll-takers look like better dealVanguard HealthCare ETF VHT TF 3/16/16 2.72% $176.00 Healthcare stocks remain defensive with steady profitsVanguard High Dividend ETF VYM TF 6/21/16 2.90% $90.00 A tick more defensive than general S&P 500 Index with incomeVanguard Info Tech ETF VGT TF 8/20/18 1.19% $225.00 China trade is a risk for technology but profits still comingVanguard Utilities ETF VPU TF 9/24/18 2.85% $140.00 US-based utilities remain a haven plus benefit from lower ratesGrowth & Income Plays (18%)Alliance Bernstein AB T 11/19/18 7.99% $33.00 Great passthrough asset manager with fee income feeding dividendCompass Diversified Holdings CODI T 5/21/18 7.65% $22.00 A smaller and better managed Berkshire with big dividendCovanta Holdings CVA TF 3/26/19 5.88% $18.50 Problem solver turns trash and non-recycled waste into cash from power generationFMC Corporation FMC TF 4/25/19 1.86% $88.00 Problem solver for profits in crop protection and farm yield enhancementHercules Capital HTGC T 6/25/18 9.81% $14.50 The alternative financier for technology companiesHormel HRL TF 4/17/17 2.05% $42.25 Company shows where the meat is and shareholders benefitMicrosoft MSFT TF 11/30/12 1.33% $140.00 Delivering with higher revenue from cloud and other business linesNestle NSRGY T 12/17/08 2.32% $112.00 One of the few global consumer goods companies working wellNextEra Energy NEE TF 9/8/08 2.26% $226.00 US-based utility is a haven with reliable cashflows and growth in renewable power Procter & Gamble PG TF 12/17/08 2.50% $119.00 Proving it can be successful in consumer goods and the market likes itViper Energy VNOM TF 7/23/18 6.43% $38.00 The company still gets paid and shares with shareholders whether oil is up or downZoetis Incorporated ZTS TF 5/28/19 0.51% $130.00 Great problem solver for animal viruses and disease including African Swine FeverReal Estate Investment Trusts (8%)American Campus Communities ACC T 7/12/18 4.01% $49.00 REIT focused on valuable student housing marketDigital Realty Trust DLR T 2/9/18 3.50% $125.00 Cloud computing is driving data-center demandLife Storage LSI T 12/26/18 3.84% $105.00 Self-storage remains a defensive REIT sector for bull and bear marketsMedical Properties Trust MPW T 2/26/19 5.44% $19.50 Top-performing REIT in rising medical properties market with yieldW.P. Carey Inc. WPC T 1/3/14 4.68% $89.00 Big diversified REIT with able management keeps delivering rising dividendsMFA Financial MFA T 6/25/18 11.02% $8.00 The alternative financial for mortgages with proven dividend yieldWorld Class Franchises (6%)Starbucks SBUX TF 2/8/18 1.50% SELL Take profits and sell—Revenue growth continues to slow, stock hugely overvaluedUnited Technologies UTX TF 8/6/14 2.31% $127.00 Raytheon coming and Otis and Carrier leaving; need better guidance from managementWalgreens Boots Alliance WBA TF 4/7/17 3.60% $55.00 A bargain-priced pharmacy with growth potential and heavy management ownership

Toll Takers (6%)Enterprise Products Partners EPD T 2/22/05 6.01% $31.00 Expanding pipeline network and related assets keep delivering more revenues and dividendsKinder Morgan Inc. KMI TF 11/28/14 4.90% $21.00 Alternative to MLPs for investors in infrastructure without K-1Pembina Pipeline PBA T 8/14/12 4.98% $39.00 Canadian government delivering to pipeline companies by working to expand networksPlains GP Holdings PAGP T 3/10/17 6.35% $26.65 The Permian Basin keeps pumping oil and gas and this is the go-to pipeline

Fixed Income (44%)Cash (11%)Synchrony Bank high-yield savings account 7/31/15 2.15% Market 2.15% yield—call 866/226-5638 to orderIntermediate Credit Bonds (7%)BlackRock Credit Allocation Trust BTZ TF 7/26/19 5.93% $14.00 Great collection of higher-yielding corporate bonds at a discountDoubleLine Total Return Bond Fund DLTNX TF 7/22/14 3.49% $10.90 Bonds are the other market success story for further growth & incomeSPDR Interm-Term Corp. Bond ETF SPIB TF 4/21/17 3.03% $36.00 This ETF provides easy means to grab bond market opportunities right nowMultisector Bonds (8%)Osterweis Strategic Income Fund OSTIX TF 4/19/18 4.63% $11.67 Well researched and managed bond portfolio companyPreferred Shares (7%)Seaspan 7.875% SSW.PH TF 1/22/19 7.84% $25.50 CUSIP# 81254U304Teekay LNG Partners 9.00% TGP.PA TF 1/22/19 8.65% $26.00 ISIN# MHY8564M1131NuStar Energy 8.50% NS.PA TF 1/22/19 8.90% $25.00 CUSIP# 67058H201iShares US Preferred Stock ETF PFF TF 3/9/17 5.30% $38.00 Preferred stocks should be a go-to for all portfoliosFlaherty & Crumrine Preferred Opp. Fund PFO TF 7/23/18 5.99% $11.75 Great closed-end fund from good management team; watch buy under priceMinibonds (3%)JMP Group 7.25% 11/15/27 JMPD TF 1/22/19 7.55% $26.25 CUSIP# 466273109 Cowen Inc. 7.75% 06/15/33 COWNL TF 1/22/19 7.91% $26.00 CUSIP# 223622804US Cellular 6.95% 05/15/60 UZA TF 1/22/19 7.15% $25.00 CUSIP# 911684405Municipal Bonds (4%)Blackrock Municipal Income BLE T 4/23/18 6.94%* $15.15 Discount now gone for great tax-free yield and bonus dividendNuveen AMT-Free Credit NVG T 4/23/18 7.23%* $17.00 Discount to NAV dropping to 3.57% with monthly tax-free dividendsNuveen Municipal Credit NZF T 4/23/18 7.45%* $17.00 Discount dropping to 3.39% as investors are buying and portfolio performsTreasury Bonds (4%)Two-year Treasury Bond T 12/24/18 1.53% Market Buy US Treasury with current coupon (interest rate) near 1.53% at market price

At least 10% below buy-below price as of the publication of this issue T: Buy in taxable account for best results TF: Buy in tax-advantaged account (IRA, etc.) for best results *Taxable-equivalent yield


pays a dividend yielding 6.70% on an annual basis along with its own special dividends. MAIN is a buy under a raised price of $46.00, ideally for a taxable account.

Also in Cycle C is Pfizer (PFE), which is not delivering for us. In July, the company announced a deal with Mylan (MYL). In it, Pfizer will spin off its off-patent and generic drug products and combine them with Mylan’s similar products to form a new, separate company. Pfizer’s shareholders will get 57% of the new company, which is projected to have sales nearing $20 billion. In addition, the new company will issue debt projected to be around $12 billion, which will be paid to Pfizer to reduce its own debt.

This will allow Pfizer to be more focused on higher-margin new product development and improve its pipeline of pending patented drugs. The new company will become more of a cash cow with older drug products, including Lipitor and Viagra. Like with other deals involving spin-offs, there are some unanswered questions as to how the dust will settle for shareholders. When the deal was announced, I saw it as an opportunity for us. But so far, the stock market has thought differently.

I am currently projecting that Pfizer will eventually reduce its dividend, but more dividend income will come from the new spin-off company. And I would expect that this should not be a taxable event. I’m placing Pfizer on hold for now and will make my final call to buy or replace it soon.

In Cycle B, General Mills (GIS) is managing to better deal with changing customer tastes. Consumer goods companies have become bifurcated between those that have done something to turnaround their product offerings while controlling costs and those that are flailing. Revenue is up over the trailing year by 7.10%, and with cost controls, operating margins are now running at a healthy 14.90%. That’s driving a return on equity at a very strong level of 26.60%.

The stock is valued at only 1.90 times trailing revenue, making it a value in the market despite its improving stock price. I’m keeping an eye on its work to modernize further. Buy General Mills

(GIS) under a raised price of $55.00, ideally for a tax-free account.

Niche InvestmentsThe Niche Investments Portfolio is

all about bringing you opportunities in particular market sectors to nibble on as I review them for potentially larger roles in either the Total Return Portfolio or the Incredible Dividend Machine.

To arrive and stay in the Niche Investments, an investment needs to keep proving itself and deliver consistently for both growth and income.

One of the stocks that is doing that now is Franco-Nevada Corporation (FNV). This Canadian gold and mineral royalty company is providing exposure to the improving market for gold while paying a modest dividend. Year to date, FNV stock has generated a return of 37.89%. I’m raising the buy-under price to $99.00, ideally for a taxable account.

Utilities were a haven market last year. And they keep performing this year with dependable dividends and growth. With that in mind, I’m raising the buy-under price for Alliant Energy (LNT) to $53.00, ideally for a tax-free account.

Eversource Energy (ES) is a buy under a raised price of $81.00, ideally for a tax-free account. And the buy-under price for Xcel Energy (XEL) is being raised to $64.00, ideally for a tax-free account.

REITs, like utilities, did well last year and should continue to do well. Corporate Office Trust (OFC) has a good mix of corporate and data center properties, and its clients include Amazon (AMZN). OFC is a buy under $32.00, ideally for a taxable account.

But just because you are a REIT doesn’t mean that you own and run the right properties. Healthcare Trust of America (HTA) has medical offices that should be doing well, but the company continues to disappoint. Compared to Medical Properties Trust (MPW) in the Total Return Portfolio, it is a big laggard. Sell Healthcare Trust of America (HTA).

Similarly, Office Properties Income Trust (OPI) should be doing much better with its significant collection of government tenants. But it continues to

lag Easterly Government Properties (DEA) in the Incredible Dividend Machine, even with its reorganization last year. Sell Office Properties Income Trust (OPI).

Pipeline toll takers are pumping cash to shareholders with nice dividend income. However, with the general energy market not performing as well and given global economic challenges outside the US, some of these mid-stream firms are sagging in price. Energy Transfer LP (ET) is lagging and underperforming better toll takers in the Total Return Portfolio, such as Enterprise Products Partners (EPD). Sell Energy Transfer LP (ET).

Meanwhile, ETF alternative Alerian MLP ETF (AMLP), with its 8.35% yield, is still a buy under $11.20, ideally for a tax-free account.

Model Mutual Fund Portfolios

I continue to maintain the overall allocations to stocks at 56% and fixed income at 44%, with 11% of that in cash—right in line with the allocations of the Total Return Portfolio.

I believe that this has helped to defensively capitalize on what the stock and bond markets have been doing right, while also providing protection against negative gyrations like those that we’ve seen during the month of August.

But one of the sectors that I have had across the Model Mutual Fund Portfolios is giving me pause, and that is the energy market. As a surrogate for this sector, the Energy Select Sector SPDR ETF (XLE) has generated a year-to-date return of 2.67%, which is well behind the S&P 500 Index.

Last year, it had generated a 7.01% return up to Sept. 30, but it ended up losing 18.21% for the full year following the selloff in many growth-focused stocks in the fourth quarter.

The problem with this sector is that it includes a lot of companies involved in the global energy market and not just the cash-cow companies in the US pipelines or royalty-earning companies like Viper Energy (VNOM) in the Total Return Portfolio.

With many of the major economies outside the US not faring well and their


markets reflecting this, the big energy companies aren’t generating the returns from what should be a good longer-term growth segment. While alternative energy is growing now, oil, gas and other traditional energy markets still rule the globe for the long term. But I’m reviewing this allocation across all of the Model Mutual Fund Portfolios.

For now, I’m putting all of the general energy market allocations on hold. In next month’s issue, I’ll provide my in-depth analysis of the segment and the companies that we hold in this space. That will allow me to make my full call for all of the related funds and ETFs in the Model Mutual Fund Portfolios.

All-in-the-Family Portfolio• The Fidelity Select Energy

Portfolio Fund (FSENX) is on hold.

• The Vanguard Energy Fund (VGENX) is on hold.

Fund Supermarket Portfolio• The Vanguard Energy Fund

(VGENX) is on hold.Hassle-Free ETF Portfolio• The Energy Select Sector SPDR

ETF (XLE) is on hold.The Ten-Minute Retirement Portfolio• The Energy Select Sector SPDR

ETF (XLE) is on hold.• The Goldman Sachs MLP

Income Opportunities Fund (GMZ) remains a buy.

Fixed Income is Far from FixedThe US bond markets continue to

be a great source for not just income but growth as well. Inflation remains low, with little substantial evidence of rising prices. Core PCE remains well below the stated 2.00% target range of the Federal Reserve’s Open Market Committee (FOMC).

In addition, the FOMC has already made one corrective cut to its target range for the federal funds rate, and from what Fed Chairman Jerome Powell said recently, it should make further cuts in its remaining meetings this year as needed.

This is providing a good backdrop for the bond markets. Demand for yield by institutional, governmental

and individual investors remains robust, while issuance in many of the bond market sectors remains subdued. Add in improving credibility in the corporate bonds and municipal bonds, and this is further aiding bond prices.

Overall, the US bond market—as tracked by the Bloomberg Barclays US Aggregate Bond Index—has seen a year-to-date return of 8.42%. The corporate high-yield market—as tracked by the Bloomberg Barclays Corporate High Yield Index—has generated a return of 10.56% so far this year. And the municipal bond market—as tracked by the Bloomberg Barclays Municipal Bond Index—has generated a return of 7.43%.

As mentioned, each of the Model Mutual Fund Portfolios have an allocation of 44% fixed income, with 11% of that in cash. While I’m not increasing this allocation, continue

to buy and own each of the open-end mutual funds and ETFs, including those with bond-like preferred shares. All of these holdings are working now, and if there’s a downturn in the stock market, they’ll provide significant outperformance versus the broad market.

Note that I continue to maintain this recommendation even if you hold municipal bond funds and ETFs in tax-free accounts. While you may be giving up the tax advantages, the overall positive returns of this market justify buying and owning them.

Finally, it has been a few months now since I began to hone the focus of the Model Mutual Fund Portfolios. I made several adjustments to the holdings so that each of the portfolios more closely followed the general themes and allocations of the main Total Return Portfolio.

In addition, due to some of the open-

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end mutual fund companies making erratic and seemingly capricious changes to funds, including closing some, opening replacement funds and changing terms, I have found that it makes more sense for longer-term investors to have similar and often superior ETFs from the same mutual fund companies.

The results have been that the Fund Supermarket, the Hassle-Free ETF and the Ten-Minute Retirement Portfolios largely hold either very similar or the

exact same ETFs and funds. I’m thinking about combining these

three portfolios into one. I believe that this will better serve you and allow me to provide more in-depth review and analysis of the holdings in each issue. But I want to hear your thoughts and concerns before I make this move.

In addition, I believe that the All-in-the-Family Fund Portfolios serve an important purpose, as many subscribers have accounts, particularly retirement accounts, that are domiciled at either

Fidelity or Vanguard. But in surveys, my team and I have learned that T. Rowe Price is not widely used, if at all.

In addition, T. Rowe Price doesn’t provide much flexibility in their funds, which continues to be a problem in my being able to provide the appropriate allocations to the right market sectors. I am thinking of wrapping up this portfolio.

I recently discussed these proposed changes with many subscribers firsthand at the San Francisco MoneyShow and was met with positive responses. But again, I want to hear from you first.

Please let your thoughts, suggestions and concerns be known to me and my team. You can email my team at [email protected] (put Profitable Investing or Neil George in the subject line) or call us at 1-800-211-8566.

You Have Questions, I Have Answers

I always appreciate your queries and comments. Please keep ‘em coming! You can reach us at the email address and phone number listed above.

Here are some of the questions that I recently received:

Q: Do you ever consult stock price charts and technical indicators before making a buy or sell recommendation?

A: Yes, I do. Long ago, I was trained by some great technical analysts, including John Murphy,

Fidelity (800/544-8888) T. Rowe Price (800/638-5660) Vanguard (800/662-2739)Stocks (56%) Stocks (56%) Stocks (56%)iShares Core High Div ETF (HDV) Equity Income (PRFDX) High Dividend Yield ETF (VYM)Real Estate Investment (FRESX) Value (TRVLX) Real Estate ETF (VNQ)Select Utilities (FSUTX) Growth Stock (PRGFX) Utilities ETF (VPU)Select Software & IT Svcs (FSCSX) Real Estate (TRREX) Information Technology ETF (VGT)Select Energy (FSENX)—HOLD Science & Technology (PRSCX) Energy Fund (VGENX)—HOLDSelect Health Care (FSPHX) Health Care Fund (VGHCX)

Fixed Income (44%) Fixed Income (44%) Fixed Income (44%)High Income (SPHIX) Spectrum Income (RPSIX) Intermed.-Trm Inv.-Grade (VFICX)Principal Preferred Securities (PRFCX) Cash (11%) iShares Pref. and Income Secs. ETF (PFF)Intermediate Municipal Income (FLTMX) Tax-Exempt Bond ETF (VTEB)Cash (11%) Cash (11%)

All-in-the-Family Fund Portfolios

The Incredible Dividend MachineCycle A (January, April, July, October) T/TF Buy UnderBCE Inc. (NYSE: BCE, 5.06%) TF $46.50 Cisco Systems (NASDAQ: CSCO, 2.87%) TF SELLEPR Properties (NYSE: EPR, 5.96%)* T $80.00 Merck (NYSE: MRK, 2.53%) TF $87.00 Mondelez International (NASDAQ: MDLZ, 1.92%) TF $55.00 PPL Corp. (NYSE: PPL, 5.54%) TF $33.00 South Jersey Industries (NYSE: SJI, 3.64%) TF $36.00 TPG Specialty Lending (NYSE: TSLX, 8.77%)** TF $22.00 Cycle B (February, May, August, November)AT&T (NYSE: T, 5.80%) TF $37.00 Colgate-Palmolive (NYSE: CL, 2.37%) TF $74.00 General Mills (NYSE: GIS, 3.60%) TF $55.00 Magellan Midstream Partners (NYSE: MMP, 6.03%) T $68.00 ONEOK Inc. (NYSE: OKE, 5.00%) TF $72.00 Realty Income Corp. (NYSE: O, 3.74%)* T $75.00 Verizon (NYSE: VZ, 4.26%) TF $62.50 Cycle C (March, June, September, December)Dominion Energy (NYSE: D, 4.77%) TF $78.00 Duke Energy (NYSE: DUK, 4.14%) TF $91.00 Easterly Gov’t Properties (NYSE: DEA, 5.07%) T $21.54 Main Street Capital (NYSE: MAIN, 5.63%)* T $46.00 Pfizer (NYSE: PFE, 4.13%) TF HOLDPublic Svc. Enterprise Group (NYSE: PEG, 3.19%) TF $62.00 Ventas (NYSE: VTR, 4.36%) T $73.00 *Monthly dividend payer, **Annual Yield


Martin Pring and Steve Nison, who pioneered Japanese Candle Chart analysis. I’ve also had plenty of substantive conversations with Robert Prechter and with my long-time friends Mary Anne & Pamela Aden as well as the departed Ian McAvity. While I don’t believe that you can make repetitive successful market calls just using charts, I do firmly believe in their overall value.

It works because so many in the market pay attention to technicals. In doing so, the prices of stocks and other securities will hit levels of interest. I look at charts after I’ve done my fundamental research. This is very important to how I set near-term buy price recommendations.

I also look at where a stock price might be supported in a downturn. And if those prices are breached, then I rethink my valuation of the stock and the risk and reward in owning it based on technicals.

Q: What is happening in the oil and gas markets? Should we be exiting this space?

A: Crude oil has been settling into a range between roughly $50 and $60 per barrel for US West Texas Intermediate (WTI), and global Brent Crude has been coming down a bit into the upper $50 range as WTI is increasingly becoming globally available.

This tightening in the price spread has come as the Organization of Petroleum Exporting Countries and

others have held to their needed production constraints and newer and expanded US pipes have unlocked shale oil for export. This is very helpful for efficient producers in the US, and it means that the US is becoming the source that sets the price.

I see oil remaining generally supported at prices that favor the right producers. This trend supports royalty payments to Viper Energy (VNOM), which we hold inside the Total Return Portfolio. And it favors the toll-taker pipelines for transport revenue.

As for gas, the rapidly developing market for US liquefied natural gas (LNG) is setting up more opportunities that I’m working on, and I will be presenting those to you soon.

Q: What are the risks of leverage inside closed-end funds?

A: Because of their fundamental structure as investment companies, closed-end mutual funds can and do use funding sources to borrow money as part of their asset management. They do so with preferred shares,

which act like a form of a bond for longer-term financing as well as other lending facilities.

Technically, this is a form of leverage. And for many, leverage is synonymous with risk. However, it doesn’t have to be.

Leverage aids liquidity, as fund managers can continue to own performing stocks and bonds while meeting near-term needs for cash, such as operating expenses. Leverage also allows managers to take advantage of interest rate spreads much like any bank or financial company if their investments yield more than their cost of funding.

In addition, given the current interest rate environment, the cost of funding for quality, well-run companies—including closed-end investment fund companies—is very low, aiding yield spread and overall returns.

The true risk comes if management fails to manage their funding, rollovers or the assets that they currently own. But the closed-end funds that I put in

Fund Supermarket Portfolio

Stocks (56%) Vanguard High Dividend Yield ETF (VYM)Vanguard Real Estate ETF (VNQ) Fidelity Select Utilities Portfolio (FSUTX) Vanguard Health Care Fund (VGHCX)Vanguard Energy Fund (VGENX)—HOLDFidelity Select Software & IT Services Portfolio Fund (FSCSX)

Fixed Income (44%)Osterweis Strategic Income Fund (OSTIX)iShares Preferred and Income Securities ETF (PFF)Fidelity Intermediate Municipal Income Fund (FLTMX)Cash (11%)

Hassle-Free ETF PortfolioStocks (56%) SPDR S&P 500 ETF Trust (NYSE: SPY) Vanguard Real Estate (NYSE: VNQ) Vanguard Utilities ETF (NYSE: VPU) Vanguard Information Technology ETF (NYSE: VGT) Energy Select Sector SPDR ETF (NYSE: XLE)—HOLD Vanguard Health Care ETF (NYSE: VHT)

Fixed Income (44%)SPDR Bloomberg Barclays Intermediate-Term Corporate Bond ETF (NYSE: SPIB) iShares Preferred and Income Securities ETF (NASDAQ: PFF) SPDR Nuveen Bloomberg Barclays Municipal Bond ETF (NYSE: TFI) Cash (11%)

The Ten-Minute Retirement PortfolioStocks (56%) SPDR S&P 500 ETF Trust (NYSE: SPY) Vanguard Real Estate (NYSE: VNQ) Vanguard Utilities ETF (NYSE: VPU) Vanguard Information Technology ETF (NYSE: VGT) Energy Select Sector SPDR ETF (NYSE: XLE)—HOLD Vanguard Health Care ETF (NYSE: VHT) Goldman Sachs MLP Income Opportunities Fund (NYSE: GMZ)

Fixed Income (44%) Osterweis Strategic Income Fund (OSTIX, $5,000) iShares Preferred and Income Securities ETF (NASDAQ: PFF)SPDR Nuveen Bloomberg Barclays Municipal Bond ETF (NYSE: TFI)Cash (11%)

the model portfolios are chosen for their managers’ proven skills in this regard.

One Final ThoughtDisruptive Markets Drive Opportunities

The stock market is unsettled. Despite much of the underlying US economy being supportive, with consumers and businesses doing their part, there are (as always) offsetting bits of data that could hinder a further rally. And those counter points continue to fuel a bevy of negative narratives that the US economy and stock market are set for a fall.

But lessons learned from the both the recent and distant past should help us to focus more on the correct data and information to make the right choices for our portfolios as we head toward 2020. By being open to information that is disruptive to popular beliefs, we can still navigate through the volatility for more growth and income.

Start with the alt-financials. US banks are not set for better times, particularly with lower interest rates squeezing margins. But that’s not their only challenge. Financial technology developments and better and more efficient companies are eating banks’ lunches in corporate and other lending practices. They are above the legal and political wrangling and are capitalizing on their own lower funding costs.

Then, buy and own bonds. US bonds have been working for more income and price growth for some time. Lower inflation helps, as do improving credit conditions. But with the world slipping further into negative yields, positive US yields are increasingly making US bonds the only market to be in.

In our model portfolios, I present plenty of individual bonds, preferred stocks, discounted closed-end funds, great open-ended funds and ETFs. Continue to buy and own them. Not only will they work, but they will also provide offsetting income and hold their value if the stock market falters.

And while I must sound like a broken record, continue to buy and own the more US-focused companies that are insulated from global woes and trade tirades. This includes REITs, with their solid real assets and tax-advantaged dividend income. Despite their strong performance last year and this year, they are still good values and pay higher-than-average dividend yields.

It’s the same story for US utilities. Again, solid assets, regulated and assured profit margins and the benefits of additional unregulated businesses goosing returns make US utilities a go-to sector, especially during disruptions in the general stock market. Despite gains in their stock prices, US utilities remain good buys based on asset values and stock valuations.

Reformed US consumer products companies are also regaining their ability to be dependable stocks for both positive and challenging times. And while the global energy markets have been disrupted, there still are US companies that generate lots of cash and pay it out to shareholders. That said, we’re taking a step back from the broader energy market this month, and I’ll be doing a full rundown on the energy markets in the next issue.

Lastly, please continue to send in your comments and queries. They are tremendously helpful for me and my team as we work to make the most of Profitable Investing. This is particularly important when it comes to potential changes to the mutual fund portfolios. If you have a comment or suggestion, I want to hear it.

Feel free to email my team at [email protected] (put Profitable Investing or Neil George in the subject line) or give us a call at 1-800-211-8566.

All My Best,

Neil George

NEIL GEORGE began his financial services career in 1987 with Merrill Lynch International Bank in Vienna, Austria and subsequently held senior positions at what are now US Bank and globally-based Investec PLC. Neil’s long

career has included stints as a bond trader and the manager of a fixed-income fund worth over $1 billion. An income hunter at heart, he’s also the former editor of several successful investment advisories dedicated to finding Wall Street’s best yields. Neil earned an MBA in international finance from Webster University in Europe and a bachelor’s degree in economics from King’s College. His market commentary and insights have been featured in the Wall Street Journal, Barron’s, Bloomberg, CNN and NBC.

Actions to Take This Month

1. In the Total Return Portfolio:• Buy HTGC under $14.50 (T)• Buy MFA under $8.00 (T)• Buy VPU under $140.00 (TF)• Buy NEE under $226.00 (TF)• Buy NSRGY under $112.00 (T)• Buy PG under $119.00 (TF)• Buy ZTS under $130.00 (TF)• Buy LSI under $105.00 (T)• Buy BTZ under $14.00 (TF)• Hold XLE• Sell SBUX

2. In the Incredible Dividend Machine:• Buy TSLX under $22.00 (TF)• Buy MAIN under $46.00 (T)• Buy GIS under $55.00 (TF)• Hold PFE• Sell CSCO

3. In the Niche Investments:• Buy FNV under $99.00 (T)• Buy LNT under $53.00 (TF) • Buy ES under $81.00 (TF)• Buy XEL under $64.00 (TF)• Buy OFC under $32.00 (T)• Buy AMLP under $11.20 (TF)• Sell HTA, OPI and ET

4. In the All-in-the Family Portfolio:• Hold FSENX and VGENX

5. In the Fund Supermarket Portfolio:• Hold VGENX

6. In the Hassle-Free ETF Portfolio:• Hold XLE

7. In the Ten-Minute Retirement Portfolio:• Hold XLE• Buy GMZ

SUMMARY

the us makes, the world takes escape the bear trap with ...€¦ · the us makes, the world takes...

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