Friday, March 25, 2016

Identifying Recession

In the last post I discussed using VIX to time market dips and what happens when the VIX goes over 50. However, VIX over 50 is not a good indicator of a recession. On 9/11, the VIX went way above 50 but the recession started in 2008-2009.

Today I will discuss what I deemed are great indicators of a recession. They aren't perfect but it's better than yahoo finance daily posts of "recession coming next month." 

Let's define a few things. A recession is

"a period of temporary economic decline during which trade and industrial activity are reduced, generally identified by a fall in GDP in two successive quarters."

Another way to look at a recession is the drying up of capital. American industries require a lot of debt to operate and expand. Bank loans, bond issuance, and secondary equities are common practice in our era. Without shareholders willingness to put our hard earned money in the marketplace I'm not sure if companies like JNJ, KO, or PEP could even function let alone heavily leverage businesses like BGS and KMI. All of these businesses operate on the expectation that tomorrow will pay for today.

What happens during a recession? Capital is pulled back. Companies stop expanding or start cutting to pay back debt. We all love to talk about buying at the bottom but look at how many of us reacted in January/February during the dip. We withheld our buys thinking we could get even cheaper prices (which never happened) or out of fear of losing principal.

But investors are a special breed. We work hard to make money to not spend it and enjoy life; but, to grow it for future endeavors. Even when the world burns the investor still looks for a way to make a buck. I am reminded of an old saying. Nobody is greedy. Only those who have more money than you are greedy.

This leads me to the 10-year treasury maturity minus 2-year treasury constant maturity.

Remember in 2008-2009 when the market crashed? Do you remember what investors did? We didn't hide it in the bank collecting 0% interest rate. No we hoarded our money into treasury bills (t-bills). This is called the flight to quality. we went from

Higher risk stocks to --> lower risk T-bills.



As demand ramps up, the price of the bills increase and the yield decreases. The best indicator in my research is the 10-year t-bill minus the 2-year t-bill. If the difference between the two ever reaches 0%, we are going to have a recession.




This was a picture I stole off seeking alpha because I lack cropping apps. You can find the same data from the St. Louis Feds

https://research.stlouisfed.org/fred2/series/T10Y2Y


    Some key events when the difference reached 0% difference

  • from late 1970s to early 1980s, this was during the Jimmy Carter inflation/recession periods.
  • In 1989, the first housing bubble crashed. 
  • in 2000, the dotcom bubble crashed.
  • In 2006-2007, the second housing bubble crashed.
  • Strangely it went up in 2008-2009 when the financial bubble crashed. I've read online that people who bought T-bills during the housing crashed sold off their t-bills at higher prices and used the money to time the bottom during the 2008-2009 financial crash but that's just speculation.
  • On January 2016, the difference was 1.18. In February 2016, the difference was .96. A month to month change of -0.22%. and in March 2016 it went back up to 1.06 or a +0.10%.
  • Besides the dotcom and the Jimmy Carter era, the average time it takes from a difference of 1% to a difference of 0% is 6 months to 1 year.

So how is this supposed to help you invest and "time the market". In theory

  • When the difference goes down, the market goes down. 
  • When the difference goes up, the market goes up.
  • When the difference hits 0%, a recession is likely to occur somewhere within the vicinity. 
  • The higher the difference the less likely for a recession to occur.
  • The lower the difference the more likely for a recession to occur.  
  • When the difference gets negative (meaning you lose money just buying the T-bill), you are probably in a recession. 

We can see since December 2013, there has been a steady flight to quality. The difference currently hovers around 1%. In most of its history the difference has been around 1%. Rarely does it go to 2% or 3%. 

What does this mean? A recession is possible but unlikely to happen. If we keep seeing a downward trend then history would dictate within 6 months to 1 year from now we will be in another recession.

Because the trend is down and the market has bounced back in March, I am now to store more cash into my bank account. I'm not a doom and gloom but I rather have a large amount of cash just in case of a recession than have no money during buying opportunities. 

*This is my opinion only. Do not rely on it. 

Monday, March 21, 2016

Dips, doubling down, recession, and VIX



In the last post I spoke to you about my crazy $20 a month buys in 16 stocks technique. Today I will talk about my crazy VIX hoarding technique. This topic was brought to you by Div4Son. 

http://div4son.blogspot.com/

This is a long rant. I highlighted the main points for those who hate reading rants.

Here are my rules on using VIX.
  • When the VIX is below 20, I do my ordinary search for cheap stocks. Not really excited about anything.
  • When the VIX is above 20 I get greedy but I let the stocks come to me, 
  • When it breaks 40, I break open the bank and start hoarding equities.
  • But if VIX ever breaks 45, I'm back to hoarding cash.  

What is a market dip vs What is a market recession?

Before we start let's talk a bit about the movers and shakers of the market. I'm no economist nor am I an expert stock broker. (My sister has a PhD in economics but she still thinks only rich people can make money in the market. Just goes to show you never trust experts). I'm just a typical mom and pop investor who finds the market interesting. How a bunch of crazy people doing irrational acts can create wealth is simply fascinating. There have been a lot of talk about "market crashes", "market recession", and "buy the dip." But which one is which one? Today I will discuss with you my novice understanding of what a "dip" is and what a "recession" is in regards to the VIX.

Before we start I would like to talk about the crazy people in the market. In my opinion (and a lot of old investors I speak to), the market is composed of 80% institutional investors (Schwabs, vanguard, state street, etc). These 80% owns your 401ks, etfs, and mutual funds. These people rarely if ever sell anything (most. Some mutual funds trade constantly). They have hearts of steel and veins of lead.

19% of the market is full of speculators. People who want a quick buck. Some are here because voodoo momentum tells them buying when the 20 and 200 crosses equal automatic profit. Some buy with the belief that the stock will eventually rise (me before I became a dividend investor). And some are here because someone told them they could make large amount of money on the market. These people are about principal protection. If they lose even 1 dollar, sell the stock. These people are easily spooked by market noise. For example, when Starbucks revamped their points system (the old was buy 10 cups=1 free cup) CNBC, yahoo finance, and MSN business called it "THE DEATH OF STARBUCKS." The price of SBUX went from the $60s to the low $50s. Now SBUX is near $60 again.

The last 1% are investors. People who will stick with a stock thick and thin even if that's a good or bad thing. Most dividend investors are in this group. (as a side note I try my best to be in this group but every now and then I jump on the 19% bandwagon).

So what does this have to do with dips and recessions? In my opinion those 19%ers control the daily ups and downs of the market. Unless etfs are having a fire sale, the main movers and shakers in the market are those 19%ers.

So how to use the 19%ers to our advantage? In comes the Chicago Board Options Exchange aka CBOE volatility index aka VIX aka the fear and greed index.




So what is the VIX? The VIX is a mathematical formula measuring the volatility of the S&P index for the next 30 days by measuring the puts and calls of the S&P 500. Remember how I told you the 19%ers love quick profits?

All you need to know about the VIX is
  • When the VIX is below 20 it is said that people are greedy. The market is predictable which leads to gains.
  • When the VIX is above 30 it is said that people are fearful. The market is unpredictable and traders exit the market for safe havens.
  • If the VIX hits 50, expect massive liquidation.
  • If the VIX breaks 50, expect people jumping out of windows.  
  • For me, when the VIX is below 20, I do my ordinary search for cheap stocks. Not really excited about anything.
  • When the VIX is above 20 I get greedy. 
  • When it breaks 40, I break open the bank.
  • But if it ever breaks 45, I'm back to hoarding cash. Here's my rational.  
I don't have the software to cut and paste pictures I find online. This is from Wikipedia.


And this is from another website I stole the picture from. https://tickertape.tdameritrade.com/options/2015/12/volatility-year-in-review-46770

What do you notice about the wikipedia picture?
  • Besides three times, the VIX touches 50 and then falls back down. If it breaks 50 all hell is broken loose.
  • Only three times has the VIX broke 50; Black Monday in 1987, 9/11, and the Recession in 2008-2009. Therefore we can say 50 VIX is the resistance between a dip and absolute mayhem. 
Let's take a look at the past 5 years and review the VIX. You can follow with me on yahoo finance. 
  • In July 2011 until January 2012, 
    • The VIX went to 20 and hit as high at 42. Cause? First time fed mentioned stopping QE and hiking interest rates.
  • May 2012-June 2012, 
    • Again the feds meeting and interest rate scare
  • December 2012, 
    • again the feds.
  • October 2014, December 2014, and January 2015, 
    • again the feds
  • August 2015 until early October 2015
    • interest rate threats 
  • January & February 2016
    • china slowing down

What does this tell us? The 19%ers are easily spooked. When they are spooked the VIX goes up. When the VIX goes up the market goes down. When the market goes down, watch the VIX. Watch for a steady increase in the VIX. You should see green days after days meaning volatility is increasing. On the first consecutive red days (meaning volatility is decreasing) I jump into the market and test the waters. If the VIX continues to decrease, I found the bottom. If not I got into a value trap. Good luck finding the bottom though. I still haven't been able to accurately predict the bottom.

Even if you fall for the value trap, the market still rally back in each of these dips and you would have made more money than if you didn't invest. 

How to spot a VIX increase?




Are you spooked yet? The simplest way is to to add VIX to your yahoo portfolio. Another way is to sign up to twitter and link your page to all the major investment sources; MSNBC business, Bloomberg, WSJ, CNBC, CNN money, Yahoo finance, FOX business, etc. Why? Remember when I said the 19%ers are easily spooked? Nothing spooks traders than 20 different websites calling for the death of the stock market. 

Take the 2015 VIX chart for example. Last August the feds mentioned the possibility of hiking interest rates. Within a day I saw hundred of articles on numerous websites calling for the death of the market, corrections, recession, and Yahoo Finance calling it the worst recession you will ever see in your lifetime.

For those who are unfamiliar to American politics. Go to any major media website and look at the news. I bet the majority are anti-trump articles. Have you ever noticed that articles are written in such a slant that it's almost like the author wants you to act and feel a certain way? At first it's "OMG Trump did what." Then people regain their senses and start to ignore the media. 

Leading up to the interest rate hike of 2015 this was the same thing we saw every single freaking day. Every major financial newspaper called it the worst thing to happen since Hitler. From August to September the market went down. It went back up when everybody regained their senses but then crashed again in November and December coincide with the rush of interest rate mania.

What happened? Interest rates increased. China crashed and took the market with it. Buyers were rewarded handsomely and sellers are still crying.

Leading to November of this year look at the winner of the Trump-Hillary election. If Trump wins, the media will probably attack Apple and companies who make parts overseas. If Hillary wins, the media will probably attack the healthcare industry. (Come on $20 JNJ).

What to take from all of this?

  • Markets should be ran by fundamentals but more often than not it's by speculation and fear mongering.
  • When you start seeing a flood of negative market articles from every major news organization get ready.
  • Don't go to the VIX. Wait for the VIX to come to you.
    • If the VIX breaches 20, the market starts to get jittery. You can test the waters now searching for the bottom but watch out for value traps.
  • If VIX breaches 30, get greedy. People are fearful now. Feast on their fears.
    • this is when I start using the consecutive days test. I'm looking for two consecutive red VIX decline. 
    • I make a small order in my Loyal3 and wait and see how the market reacts. 
    • If the decline in VIX continues, I make a large buy. 
  • If VIX breaches 40, I check my bank accounts.
  • If VIX breaches 45, I stop investing.
    • Remember when I said the VIX's has support at 50? From 45-50 is a tough struggle. If 50 breaks, then we are into a 2008-ish recession. From 45-50, it should give me plenty of time to hoard some cash just in case anything bad happens
  • If VIX breaches 50, I hold on to my pants.
  • If VIX doesn't stop at around 50, i stop all activities and wait. This is the point of no return.
Don't take this as I'm some paranoid guy that stalks the VIX. If I notice a large flood of negative articles in my twitter feed, I look at the VIX closing price for a couple of days. VIX 20 rarely happens and leaves as quickly as it comes. But it's best to know that VIX 20 is not a recession. The highest VIX ever got in 2016 January-February was 28.


VIX is good to determine dips but not very good for determining recession. I'll write another article on that later on this week.



*these are my opinions. don't you dare rely on them!

Saturday, March 19, 2016

Question: Can you blindly buy stocks and retire?


Here's an interesting question. Let's say you're not a skilled or experienced investor. You don't know all the lingo and still look up words to read balance sheet. But you don't want to pay somebody a good portion of your paycheck to invest for you. Can you still have a good retirement/dividend income by buying the largest cap stocks with a long history of dividend growth at arbitrary prices?

Reason for this question: 

My workplace has a 401k plan but does not allow for individual stock purchases. Rather, it uses a variety of equity etfs, bond etfs, and treasuries. One good thing about owning these etfs is the ability to see their buys and sells. I've noticed that my dividend etf buys large cap dividend stocks with a long history of dividend growth (KO, MCD, PEP) monthly if not weekly. It will even buy these companies at all time high even though analysts, SA commentators, and multiple investing websites call them overvalued. During market corrections my ETF will flood the market with buys. They rarely if ever sell. My etf is not alone. Many other large etfs like Vanguard, State Street, and Charles Schwab are doing the same.

Approximately a year ago I decided to copy these etfs techniques in my Loyal3 account. At first I used only KO, PEP, K, KHC, and UL. Over time I did my research on new corporations and added eleven (11) more stocks for a total of sixteen (16). 

Here were my rules 

1) buy $20 worth of every sixteen dividend stocks listed below on the 15th of every month no matter the price. 

2) reinvest the dividends into the stock on the following months. For example, UL pays $6 for X month. On month X+1, I will invest $26 into UL.

3) invest large sums of money into my core consumer staples during market dips. For example, $1000 into KO when it reached $38.00 and another $1000 into UL when it reached $40.00.

4) Unless there was a SEC violation. DO NOT SELL. EVEN IF THERE IS A DIVIDEND CUT.   


My Loyal3 portfolio is now composed of KO, DIS, K, KHC, SBUX, PEP, MDLZ, NKE, YUM, AAPL, MCD, UL, WMT, DPS, VFC, and HSY. Here is a summary as of March 19, 2016.


TickerNumber of sharesContributionGain/lossPercentage G/LDividend per year
KO75.0077$3,033.00$387.3513.00%$105.01
DIS5.5567$600.00-$48.78-8.00%$7.89
K7.6276$510.00$70.9214.00%$15.26
KHC14.4097$1,011.43$102.5810.00%$33.14
PEP7.5179$720.00$41.496.00%$21.13
SBUX12.5483$683.00$66.1310.00%$10.04
UL51.3961$2,087.00$223.7711.00%$67.84
WMT41.8539$2,548.00$254.1210.00%$83.70
DPS1.1389$100.00$2.903.00%$2.41
APPL2.0472$225.00-$8.16-4.00%$4.26
VFC6.6413$420.00$21.655.00%$9.83
YUM2.7867$200.00$18.239.00%$5.13
MCD0.5032$60.00$2.444.00%$1.79
MDLZ4.2947$184.00-$9.03-5.00%$2.92
HSY3.7958$340.00$5.342.00%$8.52
NKE3.0253$190.00$0.560.00%$1.94
$12,911.43$1,131.519.00%$380.81total
2.95%percentage

Like my etf, I blindly bought the market at all time highs, lows, and everywhere in between. Even after blindly investing, I now own a mix of steady dividend stocks, value dividend stocks, higher dividend growers, and blended investments.

Besides MDLZ, DIS, and AAPL, I am in the positive with thirteen of my stocks. I have a capital gain of over 9% and my portfolio produces $380.81 a year or 3%. In a fifteen (15) month time period i have received 12% return on my investment (9% cap+3% dividends). 

According to Yahoo, the SPY (that thing every investor loves) has a -6.2  1-year total return. https://finance.yahoo.com/q/pm?s=SPY

Which means by blinding buying stocks and following the four criteria, I have almost beaten the SPY 3x over from January 1, 2015 to March 19, 2016. This is even a better return than my dividend etf. 

All this experiment shows is blindly buying large caps could potentially lead you to have enough money for retirement. Sure I could have gotten more cap gains if I bought at the lowest point; but, just by copying etfs strategies I have created a monster portfolio that trumps the SPY.   

I have no idea how this portfolio will last in a bear or recession but I will keep this experiment going as long as I can. Spin offs will get the same treatment $20 a month.

Either this strategy is the best ever or I'm the craziest person on the market. You know the drill. Do not take my advice for anything. I'm just some guy on the interweb. 

Monday, March 14, 2016

Buy: BGS Food Inc.



On March 14, 2015, I bought 32 shares of BGS Food Inc at 34.56 per share. This adds $53.76 to my forward dividend income. 

I spoke to my mentor yesterday on the importance of DCF, forward P/E, and TTM P/E. Based on my calculation BGS is trading at fair value. I'll write another post on this. 

I am now at 2408.18 + FCISX + SCHD distribution. 

Thursday, March 10, 2016

B&G Foods, Inc: A risky food company


In my search for safety I found this interesting stock; BGS.

B&G Foods Inc & its subsidiaries manufacture, sell & distribute a portfolio of branded shelf-stable foods across the United States, Canada & Puerto Rico. The Company's brands include B&G, B&M, Brer Rabbit, Cream of Rice, & Cream of Wheat among others.

What does BGS do?

Investors often say BGS follows the harvest strategy. Other companies worked hard to market their brands (Green Giants, Mrs. Dash, Ortega, etc); however, these brands are now slow growth (if any) cash cows. Instead of paying for increasing advertising and manufacturing costs these companies simply sell them off. BGS buys these brands, strips off their manufacturing and advertisement costs, and make them permanent members of the BGS cash cow.

Simple explanation: The Green Giant buy.


General Mills Benefits
BGS Foods Benefits
  • Sold Green Giant to BGS in 2015 for $765 million to pay for acquisitions and operating costs.
  • Green Giant barely grows 1-2% per year. It would cost too much money to place ads and increase manufacturing efficiency.
  • Little to no advertising cost. Everyone knows Green Giant.
  • BGS may repackage the brand and sell it in the same exact market.
  • Little to no manufacturing expenses. The plant that makes the food and the shipping pipelines were already done by someone else.
  • Expected $57 million in increased annual revenue.
  • Slow growing cash cow.

As of this article BGS is trading at $33.97, with a PE of 28.3x, and dividend yield of 4.84%, and EPS payout ratio of 113.11% FCF payout ratio of 71.13%, and has been a dividend increaser for five (5) years.

Revenue vs Net margins


As stated above, BGS collects cash cows. Every since IPOing in 2007, BGS has been collecting unwanted “orphan” products and increasing their revenue in kind. As you can see their net margin is very low.


In 2008 BGS hit a 2% net margin and had to cut its dividends. BGS highest net margin was 2012 when it hit 9.35%. Over recent time it has dropped back down and improved again in 2015 with a margin of 7.15%. BGS margins depends on 1) how much they sell, 2) their cost of making such products, and 3) cost of recalls. Yes, this is a food company. Recalls tend to happen quickly and often.

Dividend

BGS IPO’ed in 2007 and paid a heavy $0.212 per quarter for the last two quarters of 2007. In 2009 they cut their dividend and froze it for 2010. Since then they have been increasing their dividends ever so gently. For the first few years after the recession BGS increased their dividends twice per year. Recently they have gone back to the traditional one raise per year model. But just how safe are their dividends?

Companies can pay their dividends with earnings per share or they can pay with free-cash-flow per share. I rather prefer EPS payout because my dividends are paid by actual profits. Generating a large amount of free cash is great but the question is am I getting a dividend in benefit of the stock or in detriment of the stock as FCF is used to pay debt, expand, etc.

BGS annual dividend exceeds its EPS for the majority of its history (besides 2010 and 2012). Why? Because BGS acquires products by issuing mass amount of shares to pay down its debt. As of today, March 10, 2016, BGS has 57.98M outstanding shares. BGS just announced an additional 4 million shares to pay for its Green Giant debt and for future acquisitions. I am of the opinion BGS wants to grow fast and will dilute its EPS in the process. Maybe someday when it reaches midcap will we finally see dividends covered by EPS...

But for now BGS is only able to pay its dividend using FCF. But just how much?


Let’s look at the recession. In 2008 and 2009, BGS paid out over 300% of its EPS; 99.51% and 51.13% of its free cash flow. Fearful of exceeding its FCF BGS cut its dividend in 2009 from $0.212 to $0.17 saving ~45% of its FCF. My interpretation is to be careful of that FCF payout ratio. If another recession occurs and the FCF payout reaches 100% or in the high 90%, expect another dividend cut. In 2014 BGS touched 91.28% and fell back down in 2015 to 71.13%. BGS goal is to return 60% of its FCF to investors as a form of dividend.  

Risk

  • DEBT!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

You know who loves debt? BGS. In 2014 BGS had $1.03 billion in debt. In 2015, $1.76 billion. It currently stands at 8.8x leverage. To put that into perspective, BGS has a market cap of $1.97 billion. It would take 89% of its market cap to pay for its debt in a day.

  • Integration


BGS makes it money on product integration...unfortunately BGS has a history of bad product integration. For example the Rickland orchards integration. Rickland was started in 2012 and bought by BGS in 2013 for $57.5 million. At the time Rickland was already producing $50 million in revenue per year. In the first half of 2014, Rickland made $15 million…and BGS wrote it off...

For BGS size at the time a $50 million integration was a huge deal. The Green Giant deal is supposed to produce 50%+ of its current sales. Will this be done quickly or will this become another Rickland Orchard?

  • Currency issues

Green giant manufacturing plant is in Mexico. BGS sells a bunch of its product in Canada. In Q4 the Canadian dollar crashed verse the US dollar. The maple syrup division increased its revenue but the currency exchange made it look like BGS lost revenue.

  • Free Cash Flow
Live by the free cash flow die by the free cash flow. As stated above, BGS pays its dividends exclusively on FCF. Many people will argue that this is a food company there is no way a defensive stock could lose its FCF. Never say never. Competition, recession, recalls, or agriculture cost could easily derail BGS' FCF. Compound by its high leverage I wonder how BGS will manage paying both its dividends and matured debt during tough times.


Fair value

Yahoo
  • High Target: $45.00
  • Mean target: $39.63
  • Medium target: $38.50
  • Low target: $37.00

Voodoo target

Every four years or so BGS dips to 20-21x PE. Using the TTM EPS of $1.22 gives me $24.40~25.62. If you don’t want to wait another four year BGS is currently trading to its peers at 28x PE.

Thompson Reuters give BGS a neutral rating of 5 with the targets
  • High: $45.00
  • Mean: $39.60
  • Low: $37.00

My non-professional opinion: If BGS goes down to $30 and the market is not crashing it comes an interesting buy. If it reaches $28.00 then I think I have enough cushion for a speculative play. I like BGS strategy and its products; but, my question is how will it handle integrating something as big as Green Giant. At a price of $28.00 or below I would feel comfortable investing in this company but I would not buy this company as a buy and hold. If integration fails this company could literally go into bankruptcy.

*As you know I’m not an expert on anything. Don’t trust this article. I’m just some guy on the interweb.