Investment Crisis

I’ve been having a crisis over the past two months in my main investment account. Performance has been lagging for a year and it isn’t one stock. I have exactly one strategy that now appears to not be working. I really didn’t have a backup plan so I have decided to take on some risk.

Part of the portfolio has been dedicated to FAANG and BAT stocks. This consists of Facebook, Amazon, Apple, Netflix, and Google along with Baidu, Alibaba, and Tencent. It has been interesting to watch these stocks rise aggressively (in aggregate) since my purchase. Some are neutral which is heavily offset by the rapid rise in Netflix.

The rest of the portfolio got trimmed down and I started to notice a trend. Some stocks would get hit with a bad news report. I began to look at history and noticed a lack of positive news articles. It seems my technical indicators are finding companies with non-top tier management teams.

It occurs to me that I should be looking for the best management teams in selected sectors. Yet while I can pick the sectors based on macroeconomic situations, I do not have the ability to select management teams. Okay, scrap that idea.

Today, I re-joined the American Association of Individual Investors (AAII) after a several decade absence. They have a model portfolio that looks really good on a ten-year basis but is below average on an eleven-year basis. The portfolio had a 50% loss in 2007. That is a nasty performance to overcome. Recently the portfolio has severely lagged as several stocks have had negative surprises. Technically I called these oval events due to the oval pattern that forms on their Bollinger Bands.

I am going to allocate a modest percentage to selected companies in the portfolio. This will be a test year.

It is interesting trying to figure out how to invest in a market where the Federal Reserve is raising interest rates, reducing its balance sheet, and the Federal Debt is rising at an accelerated rate. Add in an administration that is starting a trade war and the result is a situation that I am unfamiliar with.

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Learning Plan

I’ve been told at work to spend some time learning additional topics at home on my own time. My primary focus for this year will be Docker and Kubernetes. From what I have read so far, both will be a challenge. I have become accustomed to configuring and using virtual machines over the past five years. I even have a document to guide me through creating one which takes about one hour.

Docker will eliminate the need for a virtual machine while Kubernetes will eliminate the need for the crontab I have on the VMs.

On the personal side, I have been working through Python and Django. While I am okay at Python, Django will be new to me. I took a class three years ago on PHP and learned enough to create a web page that interacts with a MySQL database. I have been working through the Django class for far too long and new to complete it early this year.

I have also decided to add on two other technologies. The first is Flask. This will be more useful at work than home, but it is not a suggested item at work. I am interested in making some RESTful APIs for some common data collection routines. We’ll see if the class will get me to my objective.

The second class is on D3. D3 (Data Driven Documents) is a JavaScript library for visualizing and interacting with data on the web. I attended a Data Jam session yesterday which was my first encounter with D3. The library is more complicated than I imagined and after a few hours, I decided to utilize the sale at Udemy and purchased a class.

That is quite a bit of learning that needs to be accomplished this year. I have come to a loose grip on the lack of free time I have access to during the week. It’s tough to accept since it puts pressure on the weekends. Dealing with my self-created deadlines will be my personal maturity achievement for the year.

Applicability

I have encountered the word in the title of this post twice in the past week. It isn’t a word used often and the circumstances were so different that i decided to write about it.

The first occurrence was at work where I saw one person succeed with a simple and elegant solution to a problem while another person struggled significantly. From my perspective, they were using a multi-tool for a solution that only needed a hammer. They spent the majority of their time configuring the multi-tool while the person with the simple solution continuously refined their initial solution.

The problem was a categorization problem with a small dataset. Because the categories were known and there were only three, the multi-tool solution quickly showed it wasn’t the right way to tackle the problem because it got bogged down by the simplicity of the problem. It wasn’t applicable to the dataset. It was used because that was the only tool the person knew.

It seems the field of data science is so broad right now and I only know a few of the tools necessary to solve problems. I have encountered a few instances where I have defined what solution is necessary and told the person with the problem which person to talk to.

It is interesting to me that we are starting to reach a point where we have to solve every problem placed in front of us. Similarly, when did we have to have an opinion on every political situation in front of us?

There seems to be so many issues that I am being asked my position when it has no applicability to me.

By the way, when did the question become about my position rather than my opinion?

When I mention it has no applicability to me, I immediately get hit with the pronouncement that I have chosen the opposite side and my apathy will lead to the destruction of all we hold dear. I reject the existentialism that gets thrown at me. I do not think I have the power to exhibit that type of conclusion.

Take a breath. Find your center. See the other side.

December 2016 CPI

Yikes! I skipped the November release of the Consumer Price Index. I think I was still in election mode or caught up in the end of the school semester. Nevertheless, the December CPI was released last week. Time to catch up.

The incoming Trump administration is talking about major changes to the government and fiscal spending. This will affect what the Federal Reserve does. The widely anticipated rate hike in December was performed and there are expectations of three rate hikes in 2017. I mentioned in the commentary on the October release the Federal Reserve was falling behind. Let’s look at December.

The year over year CPI rose from 1.45% to 2.07%. The 2.07% level hasn’t been seen since June of 2014. The annualized ten-year rate of change fell from 1.98% to 1.96%.

I break out the components of the index into three groups. The first group consists of components experiencing increasing inflation (this is the second derivative where the rate of change is increasing). The components of this group constitute 77.9% of the index and on a weighted basis have a year over year inflation rate of 2.71%. The weight of this group increased from 65.9% last month and the weighted rate increased from 2.33%. The components in this group are Housing, Apparel, Transportation, Medical Care, Recreation, and Other.

The second group is the decreasing inflation group (this is where the first derivative is positive and the second derivative is negative). For the first time in two years, no components were members of this group.

The third group is the deflation group (this is where the first derivative is negative). This group includes 25.2% of the index and has a weighted inflation rate of -0.16%. The weight of this group is down from 40.5% last month and the inflation rate is up from 0.44%. Members of this group are Food and Beverage, Apparel, and Education and Communication.

Apparel is in both the increasing inflation and deflation groups because it is increasing, but it is also still negative.

From my perspective, the Federal Reserve is justified to raise rates again soon. Looking at the changes in the groups leads me to think there are increasing price pressures in the economy that need to be arrested. I know there are significant delays in the impact of rate changes, but the Fed was already behind and now needs to catch up. I suspect there won’t be any change expected until the March meeting. I will look forward to a change then.

Update: It occurs to me there are core items that I skipped talking about. Core items are different from Components in that Components are subsets of individual measures and Core consists of four categories: Food, Shelter, Medical Care, and Energy. There are two Core items that merit attention due to their differentials. Food is currently in the Deflation group while All Items Less Food is in the Increasing group. Energy is in the Increasing group while All Items Less Energy is in the Slowing group. Energy is now up 5.4% year over year. The time when Energy was a key measure that was slowing the entire index has passed.

Every Account Needs a Job

One of the consequences of having two jobs is a lack of time to spend reading. I subscribe to several free economic and investment newsletters. Thus, when the quarter ends, I spend some time catching up. It was yesterday afternoon when I read an essay by Ben Hunt of Epsilon Theory. He was writing on how every part of a portfolio needs a job. This was intriguing to me because I have been caught in the past with accounts trying to serve the same purpose.

My investing philosophy has evolved significantly over the years. I now have multiple accounts with distinct purposes. The latest account is with Lending Club. I had originally designated this account as a fixed income account, but I think that is changing slightly. I was surprised to see how quickly rates can change on the platform. I had assumed they would change as market rates change, but it appears they change with risk as well. Recently, there has been an increase in losses by investors. As a result, interest rates on new loans has increased. While I am pleased to see this reaction, I am forced to acknowledge the heightened risk in the investment. Because I am making a new investment each week, the possibility of changes in interest rates paid on principle has me considering this is no longer strictly a fixed income investment.

Instead, this is a counter cyclical investment. When the economy is doing poorly, interest rates on new investments will rise. When the economy is doing well, interest rates on new investments will fall. That should be the opposite of the two equity investment accounts I have, providing a level of stability to the overall portfolio. 

July 2016 Wrap

After announcing that I had no interest in making purchases on the secondary market, less than one week later, I had made two purchases. Prices on the secondary market are really quite diverse. There are some extraordinarily large premiums associated with some loans and some have very low premiums. I looked at the list of offered securities twice in the month and found none that were offered below par.

While I did purchase two very small loans, each had a premium of less than 2%. While that wasn’t a threshold, I now have an understanding of the secondary market. Purchases settle the next business day, which is as expected. These two fractional loans had a low premium even though the credit rating of the underlying payer had improved. I spent some time trying to figure out prices, but seemingly they were random. Maybe someday I will attempt to sell a loan and see if the system reminds me to update my price. My point being that perhaps these prices were stale.

Of course, people may have placed high prices on their loans just in case someone else was willing to pay it. Like a couple of homes in our neighborhood, it seems the seller is willing to sell but only at a specific price. Zillow calls that the Make Me Move price. I could put an amount on our home, but my wife and I are not at that point. Still, what would be the harm in placing a price that is double the current estimated value?

The new issue that I posted about two weeks ago was funded and issued. That means my portfolio consists of fractional ownership in three loans. My target is to have a portfolio of loans maturing monthly spread across 36 months. By purchasing a new issue plus another on the secondary market with 24 months to maturity, I can reduce the time to create the duration based portfolio from three years to two years. I could reduce it to one year by purchasing loans on the secondary market with one year left to maturity, but the market had extremely small principle amounts for sale. Constructing a list of fractional loans to reach my monthly principle objective seemed too time consuming. For now, I will accept the hole in the duration portfolio. Perhaps looking at the secondary market in August will provide a clue on how to work through the construction of that point in the duration curve.

To close the month, one of the loans purchased on the secondary market had a payment due. It successfully was paid on time. Lending Club takes a fee from the borrower upon loan origination and from the lender at each monthly payment. The loan origination fee seemed high to me and the monthly processing fee seemed low. Of course, the monthly fee happens every month, which is one of the annoying features of our banking system. It was too much for me to hope that Lending Club would be that different.