Spectrum Live Portfolio Select Monthly Report July Informed Investors Make Better Choices

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Darren Washington
5 years ago
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1 Spectrum Live Portfolio Select Monthly Report July 2013 Informed Investors Make Better Choices

2 1 Contents Income Portfolio... 2 Market Overview... 2 Dividend and Growth Stock Opportunities... 3 Current Holdings Dividend Strategy... 4 Capital Gains Strategy... 5 Current Holdings Capital Gain Strategy... 6 Monthly and Weekly Option Writing Strategies... 7 Spectrum Live Capital Management 2013 P a g e 1

2 Income Portfolio We are pleased to report that we had another month of positive return as the unit price increased 2.57% to 1.047 in the last month.

3 2 Income Portfolio We are pleased to report that we had another month of positive return as the unit price increased 2.57% to in the last month. The strong performance could be attributed to the recovery in dividend stocks and the relatively high implied volatility at the beginning of the month which gave us several attractive option writing opportunities. The fund allocation was much the same with 40 percent allocated to dividend stocks, 10 percent to capital gain opportunities and 40 percent to Monthly and Weekly option writing. Below we discuss a general market overview, and three major strategy components to the income portfolio: Growth and dividend stock investing strategies Capital gain strategies Monthly and weekly option writing strategies Market Overview: Equities recovered from their 5% correction during the month of June and surged as major central banks around the world provided confidence that money will continue flowing steadily. The Bank of England and The European Central Bank were in sync as both announced additional stimulus, with the ECB adding that they may use non-standard tools of monetary policy. In the US, Federal Reserve Chairman Ben Bernanke also dispelled fears of tighter monetary conditions by announcing that stimulus will remain intact for the foreseeable future. In commodities, gold and silver seem to have taken a pause from their recent sell-off and have crept higher during the month. Crude oil broke above the psychological $100 level on supply constriction fears related to the political upheaval in Egypt with the possibility that this could disrupt supplies from the Suez Canal. Money market yields softened across the globe (which translates to bond prices rallying) as traders liquidity concerns eased and these markets consolidated previous gains. Second quarter earnings season has begun in the US. So far only 111 companies out of the S&P 500 have reported earnings and while earning continue to surprise to the upside, the degree of appears to be tapering off with an average earnings upside surprise factor of 2.82%, down from 4.78% last quarter and 3.95% same quarter last year. Nonetheless, it Spectrum Live Capital Management 2013 P a g e 2

4 3 may still be early days as more than three-quarters of companies are still to report earnings. We will have to wait until next month for a more accurate assessment. Dividend and Growth Stock Opportunities Objective The main objective of this strategy is to invest in strong dividend paying stocks that are fundamentally sound and offering relatively good value. It is not our intention to try to pick stocks for short term capital gains. In this strategy we look for stocks of companies that have a fundamentally sound business, strong balance sheet and are actively looking to return excess cash flow to shareholders in the form of dividends and buyback programs. We want to know that these companies have consistent cash flow and are able to pay dividends with a positive outlook for future dividend growth. In any given month whether the stocks rally or fall should be of little concern to us as long as their fundamentals remain strong. The investment horizon on this strategy is medium to long term and we should avoid being caught up in shortterm swings in sentiment. Strategy Discussion The dividend strategy was the top performing component of the overall portfolio this month as markets recovered from the previous retracement last month and continued on to new highs. We were pretty much fully engaged with our dividend allocation since the beginning of the month so we enjoyed the full benefit of the market rebound. Gains from this strategy contributed most of the portfolio gains this month. In terms of trading we only added 2 new stocks into the mix; Yara International and Holly Frontier. We closed out our position in Nu Skin with a substantial profit as the stock jumped 19% on positive earnings guidance. While fundamentally we have nothing against Nu Skin, dividend yields on the stock have fallen to 1.5% (well below our dividend target of 3%) as the stock has risen more than 50% since we first entered into it in April Furthermore, the stock has more than doubled since the beginning of the year. Keeping in line with the objective of this strategy, the stock is no longer offering high dividends and while fundamentals are still sound, the valuation is not regarded as attractive anymore. Therefore we took the decision to exit out of this trade and invest the money elsewhere where our criteria are met. Below is a summary of dividends that we collected or are entitled to collect this month: Code Name Average Entry Price Dividend per Share Yield on Entry Price AGU AGRIUM INC % CAJ CANON INC-SPONS ADR % CHT CHUNGHWA TELECOM LTD-ADR % CHT CHUNGHWA TELECOM LTD-ADR % CSCO CISCO SYSTEMS INC % DBU WISDOMTREE GLOBAL EX-US UTIL % SDIV GLOBAL X SUPERDIVIDEND ETF % XLU UTILITIES SELECT SECTOR SPDR % XRX XEROX CORP % Spectrum Live Capital Management 2013 P a g e 3

5 4 Current Holdings Dividend Strategy Spectrum Live Capital Management 2013 P a g e 4

6 5 Capital Gains Strategy Objective The allocation of this section of the portfolio is deep value equities or commodities where we feel a probability exists of significant gains in the long term (we define long term as trades lasting longer than 12 months and in most cases over 2-5 years). The key point here is to target an asymmetric return where we risk a small limited amount but expose ourselves to the possibility of making a large return payoff. To achieve our objective, we aim to meet three broad criteria when selecting trades in this strategy: 1) Market value of the underlying equity or commodity is significantly mispriced. 2) Implied volatility is low, which gives us a better reward to risk ratio. 3) The options we buy have long enough time to expiry to allow our outlook to likely come to fruition. Strategy Discussion Last month we had a case where the bond component of this strategy did very well but the equity component was lacklustre as the broader market pulled back. This month the performances were reversed as equities did particularly well while bonds had a modest retracement. In particular, our best performer this month was the call option on Euro Stoxx 50 which we bought pretty much at the bottom of the recent correction. The next best performer was the call option on KRE, the regional bank ETF. We bought this just as the ETF was breaking out and the stock continued on rallying another 8% during the month and gave us a decent return on the call options. Bond yields on the other hand had a modest retracement as Bernanke from the Federal Reserve and Draghi from the European Central Bank both assured the markets that monetary policy will remain accommodative and rates will remain low for the foreseeable future. While we are not certain that what they say is what they will actually do, traders took this chance to profit-take and cover short positions after the sharp plunge last month. Nonetheless we are in this trade for the long term as our outlook is that rates will continue to drift higher even if they do not do so in a straight line. This month we also took a bearish position on China by buying long term puts on DBC and EEM, the commodity tracking and emerging markets ETFs respectively. As mentioned in last month s report, there are some early signs of trouble emerging in China as its economy slows and liquidity dries up. Being one of the largest economies, there is always the fear that a downturn in China could lead to contagion elsewhere in the world. If China does get into trouble, we think that DBC and EEM would fall the hardest having the most correlation to the Chinese economy. We think these trades will provide a good hedge in such a scenario. Spectrum Live Capital Management 2013 P a g e 5

7 6 Current Holdings Capital Gain Strategy Spectrum Live Capital Management 2013 P a g e 6

8 7 Monthly and Weekly Option Writing Strategies The VIX index 1 continued falling after the spike late last month making it difficult for us to find option writing opportunities during the month. There were some occasional quick spikes in premiums from time to time and we were able to act on these opportunities as we monitor the markets daily. From the 40 percent allocated to option writing strategies, we used around 25 percent of that as margin for the monthly strategy. While monthly premiums were relatively more attractive compared to the past few months, especially at the beginning of the July, they are still below levels where we are willing to be more aggressive. We remained cautious on the weekly strategy as weekly premiums are still quite low. Overall the option writing strategies returned a good profit this month. Monthly options: We allocated more money for margins on monthly options compared to weekly options as premiums were more attractive at the beginning of the month compared to during the month. We closed a few positions during the month as we adopted an extra cautious approach, especially in the case of GLD which gapped down twice in recent months. Capital protection is paramount for us in this short volatility strategy. Stock Strategy Strike Return on margin Notes on the trade AAPL Naked put % Strike below recent pullback, considered a safe trade. AMT Naked put % Deep in the money strike, high premiums on options, possible mispricing as no significant news was known to impact company performance. Closed earlier due to analyst downgrade. AMZN Naked put % Strike below recent earnings pullback, considered safe trade as stock is stable. AMZN Naked put % Strike below recent earnings pullback, considered safe trade as stock is stable. APC Naked put % Straddle. Strike very deep ITM. We split our capital between this strike and the 75 strike for more returns while still being conservative. APC Naked put % Straddle. Strike still deep ITM. We split our capital between this strike and the 70 strike for more safety. Subsequently increased our position on this strike since the return on the 70 strike was too low. BEAM Naked put % Strike below strong support levels. Significant buffer at entry. BEN Naked put % Strike below strong support levels. Significant buffer at entry. 1 VIX measures the implied volatility of S&P500 options and is often used as a gauge of the overall level of option premiums. Spectrum Live Capital Management 2013 P a g e 7

9 8 CAM Naked put % Straddle. Strike well below the 58 support. CL Naked put % Strike at long term support. We split our capital between this strike and the 52.5 strike for more return without, we believe, compromising the safety of the trade. CL Naked put % Strike below the recent pullback. We split our capital between this strike and the 50 for more safety. CNX Naked put % Stock plunged during the month. We closed before it hit our strike. We had a small capital allocation on this position, limited impact on the overall return. DVA Naked put % Strong support. Stock owned by W.Buffett. The news of a proposed spending cut on the service provided by the company caused a price gap. We closed our position immediately. DVA Naked put % Strong support. Stock owned by W.Buffett. The news of a proposed spending cut on the service provided by the company caused a price gap. We closed our position immediately. EL Naked put % Traded above strike since the beginning of GLD Naked put % Gold price gapped soon after we entered. Closed our small position after the first move. GLD Naked put % Gold price gapped soon after we entered. Closed our small position after the first move. IOC Naked put % Strike below recent support/pullback. IP Naked put % Straddle. Strike below recent pullback level. We split our capital between this strike and the 40 for more return without compromising safety. IP Naked put % Straddle. Strike at a recent pullback level. We split our capital between this strike and the 39 for more safety. KLAC Naked put % Strike at recent support. KMB Naked put % Strike at previous resistance level before recent rally which should turn support. Strike considered safe for this stock. MA Naked put % Strike below support and quite conservative, stock has strong momentum. MUR Naked put % Strike above 2013 support at 58. Spectrum Live Capital Management 2013 P a g e 8

10 9 NOV Naked put % Strike well below the 64 support level. NOV Naked put % Strike well below the 64 support level. Higher strike than the previous trade as the lower strike wasn t returning an acceptable yield when we wanted to increase our position size. PG Naked put % Strike below January s gap after strong earnings. Since then it stabilised at the 76 price level. RL Naked put % Strike below the 160 support level. SPY Naked put % Entered in multiple legs while equities were rising. Overweight this position as it is a market index. SPY Naked put % Entered in multiple legs while equities were rising. Overweight this position as it is a market index. SPY Naked put % Entered in multiple legs while equities were rising. Overweight this position as it is a market index. WHR Naked put % Stock trading around 130 when we entered but soon plunged $20 for no particular reason. We closed all our puts as the price reached our 110 strike. WHR Naked put % Stock was trading around 130 when we entered our position but soon plunged $20 for no particular reason. We closed all our puts as the price reached our 110 strike. XLE Naked put % Strike above recent pullback. Diversified energy ETF, strike considered safe. XLE Naked put % Strike above recent pullback. Position entered few days after the previous one as lower strike was not yielding a good return anymore. XOM Naked put % Regarded as a very conservative trade. Overweight between the two strikes. XOM Naked put % Regarded as a very conservative trade. Overweight between the two strikes. APC Naked call % Straddle. Return looked subpar but we added the bulk of our position 2 weeks to expiry so incomparable to those entered with a full month. CAM Naked call % Straddle. Strike well above all time high. IP Naked call % Straddle. Strike above all time high. Closed 5 days to expiry as price approached strike. Spectrum Live Capital Management 2013 P a g e 9

11 10 PG Naked call % Straddle. Closed 5 days to expiry as price approaches strike. Return on total margin incurred: 3.73% Weekly options: Four weekly options cycles were traded this month. The first ended in a loss due to a naked put on gold which was closed soon after entering as the gold price weakened again. The other three weeks ended with profits. Expiry 28/6/2013: Stock Strategy Strike Return on margin Notes on the trade GLD Naked put % Gold gapped during the week. We immediately closed our position. AAPL Naked put % Strike well below recent pullback. AMZN Naked put % Strike below latest drop after earnings which we regard as the new support. GOOG Naked put % GOOG has been holding above 850, strike considered safe. Return on total margin incurred: -2.65% Expiry 05/07/2013: Stock Strategy Strike Return on margin Notes on the trade GOOG Naked put % GOOG has been holding above 850, strike considered still safe. Return on total margin incurred: 1.05% Expiry 12/07/2013: Stock Strategy Strike Return on margin Notes on the trade AAPL Naked put % Strike at the recent pullback; strike considered safe for AAPL. Return on total margin incurred: 1.18% Spectrum Live Capital Management 2013 P a g e 10

12 11 Expiry 20/07/2013: Stock Strategy Strike Return on margin Notes on the trade GOOG Naked put % Strangle. Earnings play. AMT Naked put % High option premiums. We took advantage of the mispricing when the stock rallied. Closed earlier to be conservative. AMT Naked put % High option premiums. We took advantage of the mispricing when the stock rallied. Closed earlier to be conservative. AAPL Naked put % Strike at recent pullback; strike considered safe for AAPL. GOOG Naked call % Safer strike entered after the stock fell. GOOG Naked call % Strangle. Earnings play. GOOG Naked call % Strangle. Earnings play. Return on total margin incurred: 1.64% Disclaimer: This report has been prepared by Trading Pursuits Investment Services Pty Ltd (ACN ) on behalf of Spectrum Live Capital Management Pty Ltd (SLCM) (ABN ) which is an Authorised Representative (No ) of Gleneagle Asset Management Limited (ABN ) AFS Licence No The information provided in this report is general in nature and must not in any way be construed or relied upon as legal, tax or personal financial advice. All information in this report has been prepared in good faith and based on research conducted prior to or at the time of preparation and does not purport to include all relevant information in respect of the financial products to which it relates. While due care has been exercised in its preparation, no guarantee is given that the contents of this report are without material errors or omissions. Any projections are estimates only and may not be realised in the future. Past results are not indicative of future performance. Any use of or reliance upon this (or any previous or subsequent) report is subject to the terms, conditions and disclaimers of Trading Pursuits Investment Services Pty Ltd and Spectrum Live Capital Management Pty Ltd, full details of which can be found at and respectively. Spectrum Live Capital Management 2013 P a g e 11

Weekly outlook for June 5 June

Weekly outlook for June 5 June 9 2017 TREND DIRECTION S&P 500 Oil Gold Short Term Intermediate-Term Long Term Weak buy buy neutral neutral sell buy buy buy Summary The S&P500 index is expected to hold