My Dear Investors Letter
By Eliseo "Jojo" Prisno, CRPC, MS
The New Year took an interesting turn when the 2nd month of the FED tapering came in, taking havoc on Emerging Markets. Currencies in Argentina and Turkey took a beating, forcing their Central Banks to raise interest rates drastically creating a more pronounced volatility in the global markets. Obviously, being the world's biggest economy we still influence the money flow. Let me share my latest "Dear Investor Series" (I normally write this as an advisory to clients to make sure they understand the market environment and how it relates to their investment portfolio) so I can articulate further what happened to the sudden market correction in January and 1st two weeks of February.
Since the past week, the market has been challenged due to the EMERGING MARKET sell out. This sell out is mainly due to the FED's tapering of the monthly purchases on bonds. Given this tightening policy institutional investors are leaving the EM space. Where will the money go? I believe they will consolidate here in the US. This month of January another round of cut was made by the FED and if this continues on, by around end this year, the "cheap money tricks" of the FED will be gone. My thoughts on this is simple, given that most economists are forecasting our domestic growth at 3% for 2014, equities will gain value based or economic merits (real recovery from the great recession) and not on superficial availability of money which tend to create a push in the stock market. With the projected inflow from the EM exit, this will fuel further the growth on domestic equities. It is clear however that the FED rates will remain still near to zero over the next five years.
I had projected this since mid-2013 thus the reason why our E-Trade portfolio's design was geared towards this scenario.
Asset Allocation: Our asset allocation is 60% Large Cap Core (companies with more than $20 Billion is Capitalization and dividend yields of at least 3.5% annually), 17% Small and Mid-Cap Mix, 5% International and 16% Alternatives (Exchange Traded Funds) and the rest are in cash.
Obviously I underweighted our international exposure because I expected this tapering (most money managers would recommend 15-25% on international exposure and the reasoning behind is the weakening of the dollar). As far as currency hedge, since our Large Cap Exposure are mostly global multinationals (Merck, Intel, JP Morgan Chase, Cisco, General Electric, Dupont, Pfiezer, McDonalds, Microsoft) where the business structure is at least 40% ex-US, they already cover the international exposure needed in an efficient portfolio. Whatever happens, we are already guaranteed with a 3.5% dividend return or cash flow.
Sectors: Our sector exposure (our growth kicker) is geared towards Technology, Biotech and Alternative Energy. This is covered by our ETF placements namely QQQ (Nasdaq Index), ICLN , FAN and Gilead Scientific.
International Placements: The 5% international hedge is geared towards the developed economies i.e. Germany (EWG) and Japan (SCJ). Though I tend to be bias on the South East Asian Emerging Markets (namely the Philippines, EPHE and Indonesia EIDO), the reasoning behind is the robustness of these economies in terms of cash reserves (less prone to currency speculation) and potential short term (3-5 year) growth prospects.
Margin: We are still working on margin given the margin rates are at an all-time low. With the FED's near zero interest policy over the next 5 years, this is a steal. This of course gives a pressure for our portfolio to perform however since we only operate on a $1 to $1 ratio (for every dollar invested, we borrow an equal dollar) despite E-Trade's offer of $1 to $3. This way, our margin strategy is safe and technically the cost of borrowing can be covered by the dividend yield. A $1 to $1 operation gives us a $2 cushion on a margin call if this ever happens. To give you a good perspective, the DOW JONES is at 15,750 (high of 16,570 in end 2013) as of this writing, it has to go down to 7,000 before we tap in additional dollars to our portfolio. I can guaranty we will be out of equities before this will happen. Our support level is at 14,000 (point of exit).
Options: We still operate on upside targets thus the reason why we employ "covered call" positions. This is the safest position in an option trade since we own the assets (thus called "covered"). Our duration works on a 6 month maturity and the premium payments to us is averaging 1%. This way, I'm working on my fees and not charged to the portfolio.
Short Speculative Positions: We will still allocate 7% of the portfolio on short term speculations. We had great 90 day wins last year, i.e. Twitter which we bought at $44 on its IPO and we sold it at $58 after 9 weeks, ZLTQ which had a growth of 73% in 45 days, FSLR which gave us 24% in 7 weeks.
The current market situation simply validates my portfolio strategy however I am extra vigilant on the market (not so much to brace on the down side) so as not to miss opportunities. Most analysts still project a 2,100 S&P500 index by year end and I still subscribe to this forecast. There will be pronounced volatility in this first quarter but I simply look at this as a trading opportunity.
Always bear in mind that INVESTING IS AN ACT OF FAITH and just like in our spirituality, if we have sound fundamentals we should be fine in the long run.
Eliseo Jojo Prisno CRPC,MS
Disclaimer: Eliseo Jojo Prisno is a Chartered Retirement Planning Couselor and for over a decade has managed the wealth of select families and business owners. He founded P/E Capital Investments in 2009 and is the current Managing Director and Senior Investment Advisor of the firm. Mr. Prisno also manages a Fund of Funds Portfolio with Ameritas and runs an All Equity Growth and Income Portfolio in Separate Accounts via E-Trade Financial. If you have questions
of your retirement readiness, email j.prisno@PEcapitalinvestments.com or call toll free to 1-888-929-2825.