Tips on rebalancing your retirement portfolio


Many investors are in for a rude awakening when they open their year-end retirement plan statements. The bond portion will probably show negative returns. It could even wipeout a good portion of their positive returns from owning equities.

Now, the most common method used in rebalancing your established asset allocation mix would be to reduce the holdings that are up in value (sell stocks) and buy assets that have fallen in price (buy bonds). This practice may have worked very well in the past but interest rates are going up forcing bond prices down.

The chart below compares the S&P 500 with the IShares 20 plus year Treasury bond ETF


“The decades-long bull market in U.S. Treasuries has finally drawn to a close following Donald Trump’s surprise presidential election victory, according to mutual-fund manager Bill Miller.”

“Miller isn’t the first to call time on the bond bull market. Economist Henry Kaufman, the original “Dr. Doom” who is credited with calling the last bond bear market in the 1970s, told the Financial Times this week that the current bull run is at an end.”

In the past, when the Federal Reserve decided it was time to unwind its easy monetary policies, it would raise the federal funds rate fairly quickly. The Fed believes a neutral stance on monetary policy is reached somewhere above the 4% level. The current Federal Reserve is moving slower than normal. Based on an average of three rate hikes per year, it will take the Fed a little over 4 years to normalize interest rates.

Tip # 1

Short-term, reduce or eliminate investing in target date mutual funds since they automatically rebalance from equities to bonds. Plus they increase your bond exposure the closer you are to retirement.

Tip # 2

During a period of rising interest rates, the prudent strategy is to reduce the duration of your bond portfolio. That could mean using a short-term bond ETF or a ladder of GICs both of which would allow you to benefit from an increase in rates.

Tip # 3

If you’re comfortable with a little credit risk, use short-term investment-grade corporate bonds to get a little more yield.

Tip # 4

Cash is by far the safest asset class. Move some of your equity allocation and some of your fixed income allocation to cash. I have my doubts that President Elect Trump can get congress to pass all his stimulus agenda and even economists are unsure if these policies will actual increase economic growth.

Corrections in the bond market are not as uncommon as you think. Most have been short in duration. See the chart below:


Keep in mind that in the past, rate hikes were implemented  at a much faster pace than what the current Fed has purposed. Losses in the bond market could continue for longer than expected.

Bull Call Spread: An Alternative to the Covered Call


Most new option traders start with a covered call strategy. You buy 100 shares of company xyz and you sell one option that has a near month expiry date. One objective of this strategy is to earn extra income from the option premiums which hopefully expires worthless. Short term options decline in value very quickly if the stock price remains fairly flat or falls a little in value.

The covered call strategy is limited by the amount of capital you have to invest. Many popular stocks are trading over $100 like Apple ($114.90), Netflix ($123.75) and Facebook ($119.40) so buying 100 shares of these three companies would require about $35,805 of your capital.

An alternative to writing covered calls, one can enter a bull call spread for a similar profit potential but with significantly less capital requirement. Instead of buying the underlying stock in the covered call strategy, the bull call spread strategy requires the investor to buy deep-in-the-money call options instead.

To illustrate the difference, I am going to select 3 bull call spreads for the above three popular stocks. Disclaimer: These trades are for educational purposes only and are not recommendations.

Quotes as of 10:00 a.m. on Dec 13, 2016

Example #1

Buy 100 shares of Apple at $114.90 sell one call option Jan 20 at $115.00 for $2.60

Call spread: Buy 1 Jan 20 $105 call for $10.45 – sell one call Jan 20 at 115.00 for 2.60

Example #2

Buy 100 shares of Netflix for 123.75 – sell Jan 20 call at $130 for $4.50

Call spread: Buy one Jan $120 for $9.15 – sell Jan 20 call at $130 for $4.50

Example #3

Buy 100 shares of Facebook for$119.40 – sell Jan 20 call at $120 for $3.10

Call spread: Buy one Jan 20 $110 for $10.45 – sell Jan 20 call at $120 for $3.10

Now, the capital required to purchase 100 shares of each of these three stocks is $35,805 minus $1020.00 from selling the covered call options equals $34, 785. The bull call spreads requires a total outlay of $3,005 minus $1020.00 from selling the exact same covered calls equals $ $1985.00

Only time will time if these bull call spreads are good, bad or ugly. Stay tune for a follow-up post in the new year.

Another suckers rally in oil stocks?


Over the past year there has been a lot of talk regarding the possibility of OPEC either freezing or cutting production. The Organization of the Petroleum Exporting Countries (OPEC) on Wednesday agreed to its first oil production limits in eight years, triggering an oil rally. The new norm for crude prices could be between $50 and $60 going forward.

OPEC has said it is seeking to secure 600,000 barrels per day of cuts from non-OPEC producers, and that Russia has committed to temporarily cut production by about 300,000 barrels per day in the first half of 2017. Russia and other non-OPEC producers are set to meet with OPEC on Dec. 9.

The key to all of this is whether these cuts will be implemented. Plus market watchers are also questioning whether the oil group will cheat. The sharp oil-price rally may well be short-lived, as oil production has been turning the corner in the U.S., with the rig count up 50 percent from lows in May.

Extracting oil from the Permian Basin, which spans west Texas and southeast New Mexico, is less expensive than it is in many major fields.

“Basically, $50 is good for Permian Basin stocks,” said Paul Sankey, senior oil and gas analyst at Wolfe Research. Pioneer Natural Resources and EOG Resources expanded their presence in the region in the last few months, and Sankey said the two companies would also benefit from $50 oil.”

In Conoco Phillips’ third-quarter conference call, management said the company was adding three rigs to its operations in the North Dakota Bakken oil fields for a total of four rigs in the region.

“The Trump Wild Card”

Cutting corporate income taxes will make U.S. shale producers more profitable and they could have extra cash to produce more oil. Less banking regulations could also allow more bank loans to the energy industry. Could Trump impose tariffs on imported oil? He is after all unpredictable!

The oil futures market has quotes for monthly contracts that are being offered at $53.00 for the first quarter of 2017 and $55 for the rest of the year. The trading volumes of contracts changing hands is very low which could be a bullish sign that oil producers believe that higher prices are coming.

Now over the last two years, I have avoided investing in oil stocks and posted many articles regarding the oversupply problem. I am currently doing research on some U.S. shale oil producers. Unfortunately, the fundamentals haven’t changed and most companies are still losing money at current oil prices.

What do you think?

Is this another suckers rally because hedge funds are rushing in to cover their short positions or is this the start of a bull market in the oil patch?






The Trump Rally: Buy on rumor, Sell on news?


Never in a million years did I think that Trump would not only win the election but that the stock market would rally afterwards. It proves once again how difficult it is to time the stock market.

Trump’s promise of a big stimulus package, tax cuts and less regulation has boosted the dollar and triggered a selloff in the bond market. The “Trump trade” has become the reflation trade with investors buying cyclical stocks and selling bonds. Financials have benefited as well as industrials.

The markets have rallied assuming that Donald Trump is pro-growth. However, he was also the same guy who talked about tariffs and tearing up trade deals, things that are anti-growth. The stock market is currently ignoring the negative side of Trump’s campaign promises.

Now, I’m not convinced it’s a one-way street. Under the surface, the trend has certainly changed. Whatever you thought about stocks before the election, you have to like them a little more and whatever you thought about bonds, you have to like them a little less.

Could this be the start of the “Great Rotation’” out of bonds into stocks?

Almost $2 trillion has been wiped off the value of global bonds since Trump was elected as the next U.S. president, sparking a reassessment of growth and inflation views.

JP Morgan notes that over the past week, a record inflow into U.S. equity exchange traded funds (ETFs) was accompanied by a record outflow from bond ETFs.

Within equity markets,  a sharp rotation out of so-called “bond proxies”, dividend-paying sectors such as utilities, telecoms and healthcare which were favored by investors for their yield and a move into more cyclical sectors such as banks, industrials and some commodities-related sectors is already underway.

Before you jump on the bandwagon, there’s a flood of economic data in the week ahead

  1. update to third-quarter GDP on Tuesday
  2. OPEC meets on Wednesday and it will decide whether to curb output
  3. Thursday is ISM manufacturing data and November auto sales
  4. jobs report on Friday expected to show 175,000 nonfarm payrolls

Now, the bond market has already priced in expectations that the Fed is on track to raise interest rates Dec. 14 by a quarter point. Next week’s economic data will be evaluated to determine future rate hikes for 2017. If inflation expectations are overhauled than so are perceptions about the rate outlook. Money markets are starting to price in one or more Federal Reserve rate hikes for next year.

Good economic numbers could cause a further selloff in the bond market next week which would be positive for U.S. stock markets. Plus many active fund managers have underperformed their benchmarks, there could be some performance chasing until year end.

Unfortunately, President Elect Trump is unpredictable and somewhat scary. If he shuts the borders because the anti-trade Trump comes out, we’ll have a recession and the market will go down. If that side stays quiet and he manages to convince congress to cuts taxes, it could be up a lot.

My gut tells me that we could be in over bought territory and that we could see some market consolidation. My fear is that Janet Yellen could spark a stock market selloff like she did in December 2015 when she indicated the possibility of 4 rate hikes for 2016 which didn’t materialize.

Are you buying into the Trump rally or are you a seller?




Trump economics could be hazardous to bonds and dividend stocks

Trump’s stunning victory for the White House may mark the long-awaited end to the more than 30-year-old Bull Run in bonds, as bets on faster U.S. growth and inflation led investors to favor stocks over bonds.

There has been a sentiment shift in the bond market. The stampede from bonds propelled longer-dated U.S. yields to their highest levels since January with the 30-year yield posting its biggest weekly increase since January 2009. The 10-year German Bund yield rose to its highest level in eight months, while the 10-year British gilt yield climbed to its highest level prior to Britain’s decision to leave the European Union on June 23, known as Brexit.

“I’m the king of debt. I’m great with debt. Nobody knows debt better than me,” Trump told Norah O’Donnell in an interview that aired on “CBS” “I’ve made a fortune by using debt, and if things don’t work out I renegotiate the debt. I mean, that’s a smart thing, not a stupid thing.”

Global bond markets worldwide have already lost more than 1 trillion dollars.  Speculation is that Trump’s tax cuts and stimulus spending could increase the national debt by trillions of dollars. The chart below is the iShares 7-10 Year Treasury Bond (IEF)



TIPS appeal

While investors dumped most types of bonds after Trump’s victory, they piled into Treasury Inflation-Protected Securities as a hedge against a pick-up in inflation. Investors poured $1 billion into TIPS in the week ended Nov. 9, the second-biggest inflows since records began in October 2002, data from Thomson Reuters’ Lipper service showed on Thursday.

Higher bond yields could have a negative effect on dividend stocks

Bonds have historically enjoyed a lower risk premium than dividend stocks. Higher bond yields could attract investors away from owning dividend stocks. Consumer staples and utility stocks have already fallen based on the Fed raising interest rates in December. Some experts believe that the Federal Reserve will be forced to increase rates even more in 2017.

The good news is that this could be just a knee jerk reaction to the shocking election results. In a subtle effort to lessen fears, President Obama suggested Monday that the office of the president has a way of opening one’s eyes to the realities of governing and decision making.

“Regardless of what experience or assumptions he brought to the office, this office has a way of waking you up,” Obama said.

“My advice, as I said to the President-elect, was that campaigning is different from governing,” Obama said Monday. I think he recognizes that I think he’s sincere in wanting to be a successful president. I think he’s going to try as best he can to make sure that he delivers not only for people who voted for him but the people at large.”

It remains unclear how Trump’s promises translate into policy and the degree to which they would affect the economy. So far, the rally in U.S. stock markets suggest whatever Trump may do with the help of a Republican-controlled Congress would give a lift to the U.S. economy, which is growing at about 2 percent this year.

cautionHigher interest rates could cause a U.S. recession!

Looking for yield; Beware of return of capital


This low interest rate environment has encourage the investment industry to invent investment products that have yields that seem too good to be true. A warning bell should go off when you see a yield of more than 7 per cent. Some investors are so blinded by yield that they ignore everything else, even their own better judgement.

As a retiree, I understand the need for steady monthly income but it pays to be skeptical. It is important to read the fine print on how the income is being generated. I recently did some research on iShares Canadian Financial Monthly Income ETF. (Trades on the Toronto stock exchange ticker FIE)

According to FIE’s website, the ETF’s investment objective is to “maximize total return and to provide a stable stream of monthly cash distributions.” The ETF’s list of holdings includes Canadian banks, insurers, asset managers and real estate investment trusts, plus exposure to preferred shares and corporate bonds through two other iShares ETFs. The fund’s “distribution yield,” as of Nov.  7 was 7.17 per cent.

Right away, a yellow flag should go up. Canadian banks and insurance companies generally yield between 3 per cent and 4 per cent, and the REITs and preferred shares in the fund yield, on average, about 5 per cent to 6 per cent. How is the fund able to distribute more than 7 per cent?

You won’t find the answer on the ETF’s main web page. You have to click through to a PDF of the prospectus where, on page 46, you’ll find the following:

“If FIE’s net income and net realized capital gains in a year are insufficient to fund the regular distributions [of 4 cents a month or 48 cents annually], the balance of the regular distributions will constitute a return of capital to unitholders.”

Return of capital, or ROC, is the portion of a distribution that doesn’t consist of dividends, interest or capital gains triggered by the sale of securities. In FIE’s case, ROC represents a huge part of the fund’s distribution – about 35 per cent in 2015, 52 per cent in 2014 and 66 per cent in 2013. Again, you have to dig for this information, which can be found under the “distributions” tab using the “calendar year” and “table” views.

Now we know how FIE is generating that juicy yield of more than 7 per cent: it’s giving back a portion of unitholders’ capital in the fund. This is cash that would otherwise remain invested in the fund’s securities to grow and generate more income.  

How do you suppose all of those hefty ROC distributions have affected FIE’s unit price over the years? Well, on the fund’s inception date of April 16, 2010, FIE closed at $7.10. Six and half  years later – the units closed at $6.74. So, an investor who held the units since the beginning would have collected the monthly distribution but taken a loss on the unit price.

The lesson here is that ROC is not a free lunch. In exchange for getting a higher yield now, investors sacrifice some or all the unit price appreciation over the long run. The problem is that many investors don’t take the time to understand where their distributions are coming from. If you own a fund whose yield seems too good to be true, chances are you are paying for that yield out of your own capital without even realizing it.

Skill-testing question: If a Canadian investor were to sell the units today would it be a capital gain or loss? Answer: he or she would still likely have to report a capital gain. That’s because ROC distributions are not taxed immediately but are subtracted from the adjusted cost base of an investment for the purposes of calculating capital gains or losses.

Keep in mind that return of capital isn’t necessarily a bad thing. There are cases, for example, in real estate that return of capital comes from tax savings from depreciation of some new properties.


Could President Trump cause another Great Recession?

Republican presidential nominee Donald Trump shakes hands with Democratic presidential nominee Hillary Clinton following the second presidential debate at Washington University in St. Louis, Sunday, Oct. 9, 2016. (AP Photo/Patrick Semansky)

Being Canadian, I am not trying to influence any of my American readers on who they should vote for next Tuesday. However, my investment portfolio is heavily invested in the U.S. stock markets, I shudder at the thought of what could happen under President Trump. Naturally enough, investors and analysts hate uncertainty. Hillary Clinton largely represents the status quo. Mr. Trump is more like Forrest Gump’s box of chocolates “You never know what you’re going to get.”

What exactly happens the day after? To markets? To the economy?

The conventional wisdom is that a Trump victory would lead to a swift, knee-jerk sell-off. Many investors will choose to sell stocks and ask questions later. The Mexican peso would most likely fall on fears of a trade fight along with ETFs that contain Mexican stocks. Some insurance companies could tumble on the uncertainty of what would happen if Obamacare was repealed.

A worst case scenario is Mr. Trump’s anti-trade policies would send shock waves around the world. Add a stock market crash and it would plunge the world into recession. Europe’s economy is very fragile and it wouldn’t take much to tip Europe back into a full blown recession. This would lead to a serous banking crisis that could spiral into emerging markets.

The biggest test for the stock markets might be pegged to the future leadership of the Federal Reserve. There is much more uncertainty regarding who Trump might nominate, though he has made it clear he would not re-nominate Chair Yellen.

Now, a handful of economists have suggested that despite all of the promises made by both candidates, odds are high that whoever the next president is, they will preside over a recession. They argue that we are in the second-longest bull market of all time and the eighth year of this economic expansion. It is hard to believe that we will go through the next four years without a hiccup. If merger activity is a gauge of the market’s cycle, the recent spate of deals suggests we’re closer to the ninth inning than the first.

In reality, it’s impossible to predict how the markets would settle after an initial sell off. It will take time for investors to truly make sense and “math out” how his policies would affect the economy. Now, Trump’s bark will be a lot worse than its bite in terms of actual implementation of his anti-globalization position. Hopefully, a split in the congress and the senate will stop Trump from carrying out any outrageous election promises.

Am I worry about the U.S. election? Not really because I am an option trader. I have sold covered calls to protect most of my U.S. stocks. I have sold only a few cash secured puts on stocks that I am comfortable holding long – term. Plus, I have some extra cash just in case of a market sell-off. I am very comfortable switching from selling cash secured puts to buying puts if there is a bear market.

Where am I going to be next week? On vacation from the markets in Orlando, playing golf with my golf cronies. Hoping that they don’t ask for any financial advice and looking for another hole in one.



Rolling options can turn a profitable option trade into a loss


One of the hardest things to do as an investor is to control your emotions when making investment decisions. It is even more difficult for option traders because all options have an expiry date. Plus option prices are very volatile which can be difficult to ignore.

My dollar cost average using an option strategy for buying 200 shares of Royal Caribbean has been an emotional roller coaster ride. I took a position on Oct 11 with the intention of either making 11.2% return in 38 days or owning 200 shares at an average price of $68.84 per share. The chart below illustrates the price movement over the past 16 days.


I get nervous when a stock price falls 3.5 % two days before earnings are released. I seriously thought about buying back the call & put options and selling my shares for a loss. However, the whole point of this strategy was to own 200 shares of Royal Caribbean. Nothing really has changed, under normal conditions I would have bought 100 shares at $72.22 on Oct 11 and bought another 100 shares at $68.00 for an average price of $70.11 per share.

My option strategy, up until Oct 27 has reduced my paper loss to $68.84 – $68.00 = $0.84 divided by $68.84 or 1.2% compared to $70.11 – $68.00 = $2.11 divide by $70.11 or 3%. The next day, RCL released their earnings that surprised on the upside. See the chart below: 


Now I am faced with more challenging set of opportunities.

  1. Do I buy back the Nov 18 call & put options which brings my cost base down to $69.92 and I hopefully sell my 100 shares on Monday for $74.40 ( 6.4% return)
  2. Do nothing for the next 22 days and hope that the shares don’t fall back below $72.50 and make 11.2%
  3. Do I roll my options forward by buying back the Nov 18 options and sell the Dec 16 $72.50 call for $4.10 and Dec 16 $72.50 put for $2.20?
  4. Do I get greedy? Buy back the Nov 18 options and sell the Dec 16 $75 calls for $2.64 and the puts for $3.30?

Analysing the risk / reward of rolling my options to Dec.

Scenario (1): What happens if the shares of Royal Caribbean are trading below $72.50 on Dec 16?

Under choice # 3, call option expires and I buy 100 shares at $72.50 bring down my purchase price per share to $66.20 for the 100 addition shares plus 69.92

Under choice # 4, I still buy 100 shares at $72.50 bring down the purchase price per share to $66.56

Scenario (2): What happens if the shares of Royal Caribbean are trading above $72.50 but below $75.00 on Dec 16?

Under choice # 3, I sell my 200 shares for $$14,500 – $6,620.00 – $6,992.00 = profit of $888.00 or 6.72%

Under choice # 4, I will own 100 shares at $69.06 plus my 100 shares at $69.92

Scenario (3): What happens if the shares of Royal Caribbean are trading above $75.00 on Dec 16?

Under choice # 3, nothing changes, I still make $888.00 or 6.72%

Under choice # 4,  buying back the Nov 18 options, I reduced my cost base on the 100 shares to $69.92 – the Dec 16 put option of $3.30 – call option for $2.64 = $63.98 per share. I will be force to sell at $75.00 for a profit of $11.02 or 17.2% 

Two factors that I am weighting are the Fed is considering raising interest rates in December combine with tax loss selling could spark a market correction. Now, Choice # 3 is out of the question, less change of being profitable than choice # 2, 6.72% in 48 days compared to 11.2% in 20 days.

Now, I still have until Nov 18 to decide if I want to change the perimeters of my original trade. However, I do run the risk that the purchaser of the Nov 72.50 call option will force me to sell my 100 shares before Nov 18th if the stock price continues to the upside.

What choice would you make if you were in my shoes?

Remember this old saying “Bulls & Bears make money and Pigs get slaughtered.”

Looking for option trades on the Time Warner takeover by AT & T


AT & T has reached an agreement in principle to buy Time Warner for about $85.4 billion, Time Warner shareholders will get a combination of cash and AT & T stock for a total purchase price of $107.50 per share.  AT&T is confident that they will be able to win U.S. antitrust approval for the deal, but regulators would likely put some conditions on getting approved. The whole process could take around a year to complete.  

Why is the stock price of Time Warner trading so far below $107.50?

Although the deal have been announced, Wall Street believes that there is less than a 50% chance that this deal will actually get done.  A year is a long time to wait for Wall Street traders, they don’t like the fact that AT & T will borrow 40 billion and issue more shares to finance this deal.  Plus, Donald Trump has already promised to stop this takeover from going through if he was elected.

Time Warner share price closed today at $ 86.74 down $2.74 which is a far cry from the takeover price. The average daily trading volume on this stock is around 4 million but 46 million traded today. This represents a lot of early profit taking by Wall Street. The risk reward of buying some shares of Time Warner is very tempting. If the deal goes through, the upside is just over $20.00 a share.  I think that the downside is somewhere between $7.00 to $10.00 per share.

Three possible trades that I am considering:

  1. Buy 300 shares of Time Warner at $86.75 and sell 3 April $90 call options for $3.00 each. This reduces the adjusted cost base to $83.75 and I am hoping that these call options will expire worthless. This would allow me to repeat this type of trade again in April. (Total investment of $25,125 U.S.)
  2. Buy 100 shares of Time Warner at $86.75, sell 1 April $90.00 call option for $3.00 and 1 April $85.00 put for $3.80 reducing the purchase price to $79.95 a share. ($86.73-$3.00-$3.80 = $79.95) (Total investment $7,995.00) Downside I will own  200 shares at an average cost of $82.48, upside if both options expire worthless is gain of $6.80 or 7.85%
  3. Buy 10 Jan $97.50 call options for $3.50 that expire in 2018. If the deal goes through, these options could be sold for $10 each. (Total investment of $3,500.00) Potential gain of $10,000 – $3,500 = $6,500 or 186% however the potential loss is 100% or $3,500 if deal is cancelled.

Before I decide to initiate a trade, I like to look for any unusual option trading volumes for both April 2017 and Jan. 2018.   I found that 4,000 April call options and 2,000 April put options traded today.  The Jan 2018  calls to puts was a lot closer, 7,000 to 5,700 traded.

With the U.S. election just two weeks away, which trade if any who you recommend or would you wait?