Rising Home Prices Keep First Time Buyers in Limbo

With the Real Estate market heating up the last couple of years, first time home buyers are in a bit of a quandary. That 20% down payment that they were trying to save for their first home now seems to be a little harder to reach. The problem is that home prices are moving up in certain parts of the country which forces the new buyer to save more and for a longer period of time to achieve that 20% down payment . Of course, there are other options too, like VA or FHA financing which require less in the way of a down payment.

For future home buyers wondering when to stop saving and get into the housing market, the math is clear: the sooner the better. With home values forcasted to rise in every major U.S. metro over the next year, a 20 percent down payment on the median-priced home today will cost thousands of dollars more just one year from now.

Nationally, the median home will be worth $6,275 more a year from now, according to Zillow®‘s home value forecasts. That means the average U.S. buyer will need to save an additional $105 a month – $1,260 total over the next year – just to account for how much more a 20 percent down payment will cost a year from now.  

In hot coastal markets like San Jose, home values are expected to rise as much as $35,934 by this time next year, the highest annual dollar increase of the metros analyzed. A buyer in 2018 will then need $7,188 more for a down payment on the median home than they would today. For those saving on a monthly basis for a future home purchase, that equates to putting away an additional $599 a month just to keep up with home value appreciation, let alone whatever else is needed for the down payment itself. Future home buyers in Seattle, San Diego and Riverside, Calif. can also expect to spend thousands of dollars more on down payments for the median home a year from now.

Saving for a down payment is one of the biggest hurdles to homeownershipi. That may be why more than half (59 percent) of all first-time buyers today put less than 20 percent down on their home purchase, according to Zillow Group’s Consumer Housing Trends Report 2017. However, a small down payment does not come without risks. The report also found that buyers with larger down payments are more likely to get their offer accepted, averaging just 1.9 total offers before winning their house compared to 2.4 for buyers with lower down payments. When time is money, a low down payment can be costly.

“Sky-high rents and rising home prices are putting first-time buyers in a bit of a catch-22,” says Dr. Svenja Gudell, Zillow chief economist. “Buying now with a low down payment can be riskier, and the offer may not be considered as competitive by the seller. However, a renter who saves for another year to reach a larger down payment may find that the home they love today is outside their budget a year from now. For those considering buying in the next year, getting into the market today may make more financial sense than they think.”

Buyers can use the Zillow affordability calculator to see how much they can actually afford to spend on a home, based on their income, debt and savings. The Zillow mortgage calculator can also provide custom down payment estimates based on home price and interest rates.

Zillow is the leading real estate and rental marketplace dedicated to empowering consumers with data, inspiration and knowledge around the place they call home, and connecting them with the best local professionals who can help. In addition, Zillow operates an industry-leading economics and analytics bureau led by Zillow Group’s Chief Economist Dr. Svenja Gudell. Dr. Gudell and her team of economists and data analysts produce extensive housing data and research covering more than 450 markets at Zillow Real Estate Research. Zillow also sponsors the quarterly Zillow Home Price Expectations Survey, which asks more than 100 leading economists, real estate experts and investment and market strategists to predict the path of the Zillow Home Value Index over the next five years. Launched in 2006, Zillow is owned and operated by Zillow Group, Inc. (NASDAQ:Z and ZG), and headquartered in Seattle.

Zillow is a registered trademark of Zillow, Inc.

i According to the first Zillow Housing Aspirations Report (ZHAR), a semi-annual survey of 10,000 Americans seeking insight into their views on homeownership and their housing plans.



Solid Dividend Yields from Senior Housing

There’s probably no bigger trend right now than the baby boomers reaching the 65 mark. It’s estimated that about 10,000 a day are turning 65 years old and with a myriad of medical issues. Here’s a huge opportunity to cash in to the tune of an 8% yield from assisted senior living centers and senior housing.

I just bought another health care REIT for my income portfolio, Senior Housing Properties Trust (SNH). Like other health care REITs riding the megatrend of growing senior-related health care expenditures, Senior Housing Properties Trust faces attractive long term demand dynamics. The REIT’s shares have dropped off lately which I think is a good opportunity to gobble up shares for an income portfolio.

Senior Housing Properties Trust is not the only health care REIT that made it into my income portfolio this year, but it is the newest addition. Considering that the REIT’s shares are reasonably priced and yield more than eight percent, I think Senior Housing Properties is worthy of a closer look.

Senior Housing Properties Trust – A Snapshot

The health care REIT runs an $8.6 billion property investment portfolio consisting of medical office buildings, or MOBs, and independent and assisted-living facilities. Though skilled-nursing facilities and wellness centers are also represented in Senior Housing Properties’ real estate portfolio, the REIT largely depends on MOBs.

The health care REIT’s portfolio includes 434 properties that are located in 42 states and in Washington, D.C. While widely diversified in terms of geography, medical office buildings account for more than 40 percent of Senior Housing Properties’ net operating income.

Positive Long-Term Trends In Assisted-Living And MOB Segments

Health care REITs such as Senior Housing Properties Trust capitalize on one of the biggest trends of our time: Rising senior-related health care costs tied to an aging population.

As a matter of fact, the 85+ age cohort is one of the fastest growing demographics in the country, and their share of the U.S. population is forecast to increase greatly over the next several decades. Senior Housing Properties Trust is in a good position to capture associated demand growth through its portfolio of assisted-living and MOB facilities.

The MOB segment, the trust’s largest segment in terms of NOI contributions, is set to benefit from a projected rise in health care expenditures which tend to rise with longer average life expectancy rates.

Fortress Balance Sheet

In addition to favorable long-term demand trends, another attractive property of an investment in Senior Housing Properties Trust is that the health care REIT has an investment grade-rated balance sheet. Standard & Poor’s assigned a BBB- credit rating to the health care REIT and Moody’s rates Senior Housing Properties Trust Baa3 due to its low level of debt in the capital structure.

Valuation And Yield

Senior Housing Properties Trust affords income investors with an 8.41 percent covered dividend, and the valuation is sensible. The price for Senior Housing Properties Trust’s dividend stream is 10.5x Q2-2017 run-rate normalized FFO and 1.39x book value.

SNH is one of the most competitively priced health care REITs in the sector.

Your Takeaway

I am comfortable owning Senior Housing Properties Trust in my high-yield income portfolio. An eight percent yield is usually far from being safe, but I can sleep well with SNH in my portfolio thanks to the health care REIT’s strong balance sheet. Favorable industry projections also support an investment in Senior Housing Properties Trust. Since shares are reasonably valued and the REIT covers its dividend quite easily with cash flow, the odds are in favor of sustainable long-term dividend income. Buy for income and capital appreciation.


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How to Retire Early with Less Money

“EARLY RETIREMENT”.  It seems to be the most popular phrase in our conversations for many of us. Is it because so many of us just hate our jobs, our bosses and/or our co-workers? Is it all of the above? Maybe you just heard that your wife’s goofy second cousin just retired at 49 with a huge retirement package and that’s driving you nuts. Or it just may be that a large portion our population, The Baby Boomers, are coming to retirement age all at once. Whatever the case may be, if you’re in that age group, you need to start thinking about some of your options for retirement like Social Security, Nursing Homes and other important decisions.

How to retire is one of the most pressing issues of the day. Countless readers have turned to Seeking Alpha to handle the challenges that face retirees today. Retirees need to know how to plan their cash flows, how to build a steady portfolio, and what levels of expectations are sensible. It is painful to hear from retirees who state they “NEED” a 14% return per year. Even with high volatility and risky investments, sustaining 14% annually is an insanely aggressive plan, and it certainly wouldn’t be likely to come in a steady sequence.

Today, I will be using hypothetical situations many readers may face. They aren’t professional investors and don’t have a huge portfolio. It would be easy to plan retirement with $10 million. So instead, let’s make it less: $500,000.

Market environment

The current interest rates available on bonds are low. Bonds are a difficult way to generate income unless it’s with a huge portfolio. The market is seeing all-time record highs day after day. Investing today should be done with caution. The investments I would choose are companies that are large and have a strong track record. A retiree today could invest in an income portfolio and expect solid dividend yields. Large companies with a great track record are unlikely to cut their dividend – even in harsh times. Short-term volatility of the market may be significant, but the income source should remain almost entirely intact.

Nursing homes

Nursing homes, for a prolonged period of time, would almost certainly drive most retirees into bankruptcy or an early grave. Skilled care costs are high enough to decimate a retirement portfolio. If you are considering this option, or know someone who is, please speak with a financial planner about designing a legal structure to protect your capital in the event of a forced bankruptcy.

 Social Security

On a sheer numbers standpoint, there is definitely something to be said about waiting as long as possible to take SS. However, there’s also something to be said about taking it early. A lot of this depends on the individual retiree and what’s important to them. How long do you believe you will live? How will your quality of life be for the years you are not collecting SS? Are you carrying any high interest rate debt? I urge investors/retirees to be honest with themselves.

For this scenario, I will be having the retiree taking out SS as soon as possible. If an investor is unsure of whether they will live to be 65 or 105, taking it early may be wise. Let’s say if an investor at 63 pulled SS today, it would come out to $1,500 monthly. This comes out to $18,000 a year.


Every retiree or future retiree faces their own unique challenges. Being committed to a plan and being frugal is extremely important when planning for retirement. I urge you to be diligent in your planning. Plan for every expense you can think of. After that’s done, see what expenses can be cut/reduced. Every retiree doesn’t get to retirement with $10 million, but we all have the capacity to do our due diligence.

Portfolio investing

Let’s start looking at building a portfolio that is filled with strong dividend investments. An investing strategy should help you sleep at night. Investing should not keep you up at all hours of the night wondering if your 16% dividend yielding company is going to go bankrupt tomorrow. I will be focusing on dividends to supplement income. The plan is to buy and hold 20 of the best dividend stocks on the market.

Let’s begin!

MO and PM

My first and second picks are probably obvious: Altria Group (MO) and Philip Morris (PM). I consider MO’s dividend history applied to PM. Altria Group has raised their dividend for 47 years. Both of these companies have massive market share and sell an addictive market. They are also showing the ability to transition into new products. Philip Morris is testing their new technology in international markets: IQOS. The FDA announced a plan to reduce nicotine in combustible cigarettes. Since then, MO’s price has been down. I believe this is good news for Altria Group. Once MO is cleared to sell IQOS domestically, sales should go up substantially.

PG, MMM, and JNJ

Third, fourth, and fifth picks:

Procter & Gamble (NYSE:PG) has 60 years of dividend increases. 3M (MMM) has 58 years of dividend increases. Johnson & Johnson (JNJ) has 54 years of increases. All of these companies have something else in common: product diversity. Within their sector, these companies are giants. All three have products that are probably in your residence. When it comes to dividend portfolios, these three companies should be at the top.

KO and PEP

Sixth and seventh:

Coke (KO) and Pepsi (PEP) combined come to 98 years of dividend raises. While the growth of either company looking forward is debatable, their ability to give out dividends is not. I’m not thrilled with the direction Pepsi’s management is driving the company in. I did not pick either of these up for excellent growth potential. KO and PEP have a great dividend and they sell junk food. Junk food sales are going down, but KO and PEP are transitioning into healthier products.


LOW and HD

Eighth and ninth:

Lowe’s (LOW) and Home Depot (HD) are the kings of their niche. I find it difficult to believe a new player will be able to come in anytime soon. When I’m deciding which one to shop at, it’s almost always which one is closer.

O and NNN

Tenth and eleventh:

Realty Income (O) and National Retail Properties (NNN) are two of the strongest REITs on the market. Both are exceptional at choosing tenants. In a market that is seeing harsh criticism, both are putting up extraordinary numbers. When it comes to yields near 5%, these are two of the best. Exceptional management and a strong dividend history separate these two from most REITs.

T and VZ

Twelfth and Thirteenth:

AT&T (T) and Verizon (VZ) are the two gatekeepers of mobile internet access. If telecommunications can be too big to fail, these would be the first players to receive the designation. These are leaders in their sector with strong dividend yields and cheap P/E ratios.



It’s hard not to put Apple (AAPL) into a retirement portfolio. The dividend yield isn’t all that high, but best of luck finding a safer one. Easily covered dividend, massive company, and a tech allocation is good for diversification. Apple saw a significant rally in price recently, but long-term, this is one of the safest tech options.



Exxon Mobile (XOM) is a huge oil company with low beta. XOM is a good fit for almost any dividend growth portfolio. XOM’s enormous size gives them political influence. It would be hard for oil to become obsolete when oil donates heavily to congress.

V and MA

Sixteenth and Seventeenth:

Visa (V) and MasterCard (MA) are another two companies that dominate a sector. Visa is the leader in electronic payments. The company is “everywhere” and we are moving towards a cashless society. The service Visa provides is difficult to replicate. MasterCard is a strong competitor of Visa.



Wal-Mart (WMT) is arguably the king of retail. They’ve shown great progress in the e-commerce market. I believe WMT is protected if retail continues to fall off. Wal-Mart’s rapid growth in e-commerce makes them second only to Amazon (AMZN).




McDonald’s (MCD) is the king of fast food. The company also has 40 years of dividend raises. The dividend isn’t as impressive as some on the list, but the consecutive raises are impressive. MCD may have questionable future growth with competition from mobile ordering making other food more accessible. However, I don’t see the dividend going anywhere.



Simon Property Group (SPG) is still going to be around decades from now. Investors are generally terrified of the mall REIT space. Anything associated with retail gets hammered. However, the malls in SPG’s portfolio are exceptionally strong and maintained well. Even as e-commerce grows, the malls are not going to die. Stores will be replaced, but the landlord should be fine.


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GE Stock Just Circling the Drain

This is the time of year when major corporations issue their third quarter earnings and for some it can be like an early Christmas with all the smiling faces and anticipation of dollar signs dancing in their heads. For others, not so much. It’s more of the same, with just a few lumps of coal in a plain brown paper bag. GE has been heading for the drain for about a year now and it looks like there’s more bad news coming soon. It may be time to rethink your positions in GE.

General Electric’s new CEO John Flannery did not pull any punches when delivering the company’s 3rd quarter results recently. Flannery stated the following on the conference call:

While the company has many area of strength, it’s also clear from our current results that we need to make some major changes, with urgency and a depth of purpose. Our results are unacceptable to say the least… Everything is on the table and there have been no sacred cow.”

General Electric’s earnings were a disaster. The game of whack-a-mole continued. Strong performance in a majority of segments was more than offset by poor results in the Power, and Oil & Gas segments.

The stock immediately began to plunge. The selloff was violent and abrupt. Nonetheless, by the end of the day, the stock made it all back and then some ending the day in the green. Even so, I chose to sell out of my position at the $23-mark. Here is why.

The rebound was most likely short covering

Even though it appeared the selloff was the final capitulation in the stock, with investors swooping in to buy at bargain basement prices, it could not have been the case. The reason is Flannery left too much unsaid on the earnings call. Too many major issues remained unanswered. These unanswered questions regarding the dividend, potential divestitures, and 2018 guidance are to be answered at the November 13th reset meeting. On a side note, the more I have thought about the timing of the November 13th meeting, the more I believe it was a huge mistake. Flannery should have just laid out the entire plan at the earnings call. Now, the stock is sliding downward on the daily basis due to the fact no one has any idea what is about to happen. I have no idea what General Electric is going to do as well with the exception of one item. The dividend is going to be cut, for sure.

The dividend will be cut

The dividend is going to be cut. By how much I do not know. Yet, based on what Flannery stated, and counterintuitively did not state regarding the dividend, I am 100% positive the dividend will be cut and realigned with 2018 guidance. The more important point is what will occur to the stock price in the aftermath of the cut. One of the first rules of investing I learned from my investing mentor Joe Terranova of CNBC is sometimes it is best to get to the sidelines.

Hurricane Katrina lesson learned

In Terranova’s groundbreaking book, “Buy High, Sell Higher,” he makes the case that when you have limited visibility regarding a future event that could have drastic consequences regarding your investment capital, it’s not about making money, it’s about preserving capital. Terranova states regarding the Katrina hurricane:

The professionals understand that at times like Katrina, it’s not about making money; it’s about preserving capital. The goal was to reduce our risk – to manage our risk first – which is what the vast amount of investors don’t understand. Manage your risk first, and you are sure to come back and fight another day. The is the number one priority with something as big as Katrina, or even with something as small as a quarterly earnings report from a company in which you own the stock.”

I feel this statement definitely applies to the current state of affairs for General Electric. I was surprised by the depth of the issues at the company. I thought Immelt’s known blunders were bad enough, yet Flannery’s commentary on the company was a huge eye-opener. When the stock was down 8% after earnings, I was holding on. I have learned over time that selling out as the stock is cratering is more often than not a bad idea. Many times I used this opportunity as a chance to improve my basis by doubling down. Nonetheless, I could not do that this time due to the fact so many questions remained unanswered. Hence, the reason why I think performing the reset weeks after earnings was a bad idea. Furthermore, based on Flannery’s comments, I was sure a dividend cut was on the table.

The Bottom Line

Sometimes the best thing to do is get to the sidelines so you can live to fight another day. I have been bullish on General Electric since the stock was trading at $16. So when the stock recovered from the drastic drop post-earnings, I saw this as an opportunity to preserve and protect the capital I have invested in General Electric. Each individual investor has to make their own decisions based on their own particular circumstances. I never in my wildest dreams believed the situation was so bad the company would consider cutting the dividend. Yet, after listening to Flannery speak on the conference call, I am 100% sure a dividend cut is on the way. I am happy to wait and see how things turn out. If the event turns out to be a positive for the stock and the stock rebounds, I may consider buying back in after taking time to consider what exactly was presented. Many say that the dividend cut must be priced in at this point due to the precipitous drop in the stock since earnings were announced. I don’t think so. Those that are stating you should buy ahead of the November 13th reset may be correct, yet they are not investing, they are gambling. That is something I don’t do. I have no idea at this time regarding how much the dividend will be cut, what businesses the company may divest, or what Flannery will say regarding 2018 guidance. Therefore, I cannot in good conscience put my capital at risk. Those are my thoughts on the matter. I look forward to reading yours. Please use this information as a starting point for your due diligence and consult an investment adviser prior to making any investment decisions.


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Crypto Currency Basics- How to not Lose Your Shirt

The Crypto Currency market has been around for several years now and although it’s not considered by some as part of the mainstream markets, there’s plenty of money to be made. One of the main attractions of this market is that you can be a player for only a small investment,  as low as $500. But on the negative side, this market is known for it’s extreme volatility and you really need to educate yourself before you jump in up to your ears.

Cryptos are volatile

In our previous article, we briefly described, in layman’s terms, the technology underlying cryptocurrency. Then we described how to get started with your first cryptocurrency purchase. In this article we want to characterize the crypto trade so you can begin a journey toward successful trading. Cryptocurrency is a very volatile asset and perhaps the most volatile asset we have seen. We expect it to remain this way for some time.

On any given day, we might see certain cryptos move 100% or more. 10% moves in small cap coin are quite pedestrian. 3-5% daily moves in the larger coins are common. Therefore, the returns, both positive and negative, outstrip the stock market by many fold.

Furthermore, it is a market that never shuts down due to automation, as exchanges trade 24 hours a day, 7 days a week. There is nothing like waking up one morning to find out traders in another country had pushed the market more than you expected- for a gain or a loss.

Contrary to the ‘get rich quick with crypto’ talk pervading the media, we suggest that most traders put very little of their overall asset value at risk in this market.

Accelerated Pace

We also characterize the crypto market as operating on an accelerated time scale. While using our Fibonacci Pinball method works quite well through all time frames, it simply moves much faster than any other market.

To put the speed of this market in context, Coinbase founder, Fred Ehrsam, gave an interesting perspective in a recent interview. During the interview, he was asked whether cryptos were in a bubble. In response, he said he’s seen several boom and bust cycles in only his seven years in the business.

That’s right. Several boom and bust cycles in seven years.

Looking over the chart of Bitcoin, which started in 2010, we find two bear market drops of over 90%. 30% to 50% drops over a month or more have been very common.


Ryan got his feet wet trading Ether very early in its history. Within months of his first trade in early 2016 it was three multiples higher. Yet, by December 2016, it lost 60% in a six month bear market . Ryan exited his positions at the time after it broke bull market support. Ryan re-entered the market in the $7 to $10 dollar region after it presented with a new impulsive structure. It is now hovering around $300.

Through the lens of the Elliott Wave Principle we call the current rally under way in Ether the third wave, based upon our Fibonacci Pinball method.

Let’s compare the third wave in Ethereum, still in progress, to the great bull run of the stock market. We are comparing 84 years in the S+P to just over six months in Ether. And, in that six months, as you can see, Ether has outperformed the S+P500 by many fold. This evidences the accelerated return in time, but one must realize that also means the ‘busts’ come with similar acceleration.

How You can Succeed

Ryan learned early that the best to way to manage this volatility is to start small. He personally started with $500 and readily recommend new subscribers to our service consider a similar modest start. If you can manage the trade well, you can grow that immensely. More is not needed, but one may choose to add as they develop a comfort with the market.


Elliott Wave and CryptoCurrency

The key to trading this market well is to identify points where the market may turn. We use Elliott Wave analysis to do this in cryptos just as in any other asset.

Sentiment rules all markets and Elliott Wave is the best discerner of market sentiment I have come across. If you believe there is no fundamental value in cryptocurrencies, then you must believe that these markets are purely sentiment driven. Furthermore, the Fibonacci Pinball rules we use have worked quite well identifying support and resistance levels in cryptocurrency.

Of course, newer assets have little price history to build the most confident count, but we’re tracking many older large cap coins with very reliable counts.

Among the smaller cap coins, Ryan is seeking out the next coin that can enter a massive third wave to rival that of Ether’s and Bitcoin’s monstrous climbs. He has identified a few candidates we are tracking them in our small cap portfolio. Once the chart is ripe enough for higher confidence, we will consider writing a public article on the specific coin.


More on Crypto Currency with Avi Gilburt

Big Jump in Oil Prices on the Horizon

Nothing lasts forever including low oil prices. The price of crude oil has been at historically low prices for several years now and for some investors these prices are looked at as the new norm. But volitility is everywhere in the markets and some experts predict a major shift is coming soon.

“Perfect storm” is a terrible way to start a title. It sounds cliche, unoriginal, and attention grabbing, but that’s exactly what we believe will happen – the perfect storm is coming.

The foundation for why we believe oil prices will rise higher are based on the following theories:

  1. Overconfidence in the U.S. shale industry, which leads to capital expenditures being diverted from supplies that would have guaranteed more stable long-term supplies to short-cycle supplies;
  2. Lack of capital investments in global oil supplies, resulting in faster decline rates;
  3. Years of low oil prices fueled demand spikes that will be inelastic to oil price rises in the future;
  4. The fall in the U.S. dollar is a natural boost to global demand; and
  5. High storage leading to complacency on geopolitical risks boiling in the Middle East.

The fifth item above is just a matter of time. With relatively low global supply disruptions in the oil markets today, it can almost be forgotten that there are conflicts in the Middle East, but that’s exactly what we are seeing. The premise for oil prices to move higher is not contingent on war, nor does it require there to be war. But a close study of the geopolitical landscape of the Middle East causes us to arrive at a different conclusion.

In this article, you will see a step-by-step walk-through of how we are envisioning the world’s response, and how the U.S. shale landscape will play out.

U.S. Shale: The Shine Is Fading

Central to the “lower for longer” thesis is the ability for U.S. shale producers to push the global oil markets back into oversupply the moment oil prices rise. The consensus represented by big Wall Street banks says that at $60/bbl or $70/bbl, U.S. shale can grow – and not just a few 100k b/d either, but 1 million b/d year over year. As the story goes, if demand grows at 1.2 million b/d, that doesn’t leave much room for other producers to grow. As such, oil prices will remain range-bound.


On paper, this theory sounds attractive. “Lower for longer” – it allows the strongest shale producers to raise external capital, which then translates into fat investment banking fees. It’s a win-win, right? Wall Street banks get paid their underwriting fees, and U.S. shale producers get to drill.

Not so fast. Does U.S. shale have the potential to throw the world back into oversupply?

The shine on the U.S. shale industry began to change at the start of 2017. Even as oil prices remained resilient, U.S. shale producers saw their equity prices decline by more than a quarter. External financing essentially ground to a halt, with a dismal $6 billion raised this year. Why would you raise equity when your stock price has halved, right?

Then came the EIA 914 monthly surveyed production reports. People started to ask questions, like “where’s the shale growth?”

Some supporters of the “lower for longer” thesis will say, “Well, oil prices dropped, so that’s why production disappointed.” But those who have used that excuse as a reason are disregarding the fact that for the first six months of 2017, WTI averaged $50/bbl – smack in the middle of where the “shale band” is supposed to be.

There’s a saying that bad things happen in threes. Well, EIA’s latest STEO said that U.S. crude production should be 9.24 million b/d in July and 9.2 million b/d in August. That’s greatly understating where the weekly productions are, and puts U.S. oil production as essentially flat for the last eight months – a fact that will soon be impossible to refute by the “lower for longer” crowd.

The third bad thing to happen to the U.S. shale story will be the dismal well performances in Eagle Ford. We wrote in our flagship report, “Shattering The Consensus View On U.S. Shale,” that the premise that Eagle Ford production will grow rapidly will prove to be where the “lower for longer” crowd downfall stems from.

 When thinking about the U.S. shale industry, there’s one important insight to remember: In order to grow, you need to drill and complete more wells than you did before. Unlike conventional production, where the decline rate is low and one location can be upgraded to produce more oil, U.S. shale is like an assembly line. More and more wells need to get completed and drilled every year just to grow, and that’s where the logical issue lies.

For the Eagle Ford to complete and drill more wells, it will compete against the Permian for workers. Think about it for a second: Why would service crews go to Eagle Ford when the Permian pays more? How does Eagle Ford then attract the attention needed to get the workers to come? It’s all about the Benjamins, and that will inherently push the shale “breakeven” higher.

On Friday, we read an interesting report by Rystad Energy. The report noted that the EIA’s recent downward revision for U.S. oil production was in line with its original estimate. We checked their May oil market report and saw that that was flat-out false.


Read more on rising oil prices

Investing in the markets can be a confusing, complicated journey with a learning curve that can take years. There must be a thousand different trading systems out there and all of them proclaim to be “The Answer”. Sometimes the best way to go about anything is to just use a simpler approach. Here’s a method  that uses just two funds and it’s been beating Vanguard Funds and ETFs.

In Oct. 2015, I wrote A Simple SPY Top-Off Portfolio, proposing a simple 2-fund strategy that should outperform the S&P 500 by a few percentage points a year. The idea is simple: allocate 1/3 of your assets to a 3x daily S&P ETF (e.g. the ProShares UltraPro S&P 500 ETF (NYSEARCA:UPRO)) and the remaining 2/3 to some sort of bond fund to generate additional returns.

In that first article, I suggested using a short-term bond fund like Vanguard’s Short-Term Bond Index Fund (MUTF:VBISX) to get a safe 1-3% annual advantage over the S&P, but also noted that you could “up the ante” by using a longer duration bond fund. The trade-off is that you’re more likely to occasionally underperform the S&P, since longer duration bond funds are more volatile than short-duration ones.

I actually implemented a 1/3 UPRO, 2/3 long-term bond fund (VBLTX) strategy for quite a while in my own portfolio, with excellent results. I recently decided to split the 2/3 allocation between VBLTX and the Vanguard High Yield Corporate Fund (MUTF:VWEHX), but that’s another story.

Performance vs. all Vanguard funds and ETFs

I’m still really high on the 1/3 UPRO, 2/3 bond idea, so I decided to look at how its performance compares to Vanguard’s entire lineup of mutual funds and ETFs. UPRO was introduced on June 25, 2009, so I’ll look at performance since then.

For Vanguard mutual funds and ETFs, I got a comprehensive list from Vanguard’s website: Of the 176 products (55 ETFs and 121 non-money market mutual funds), 129 operated during the time period of interest and were thus included.

UPRO/VBLTX had better raw returns than all 129 of the Vanguard products. Its CAGR was 21.3%; the top 3 Vanguard CAGRs were the Vanguard Consumer Discretionary ETF (NYSEARCA:VCR) at 19.8%, Vanguard Information Technology ETF (NYSEARCA:VGT) at 18.3%, and Vanguard Industrials ETF (NYSEARCA:VIS) at 17.7%.

As for max drawdown, only 39 of the 129 Vanguard products had a smaller MDD. At 14.3%, UPRO/VBLTX actually had a considerably better MDD than the Vanguard S&P 500 ETF Index Fund (MUTF:VFIAX) (18.7%).

My UPRO/VBLTX strategy also had an excellent Sharpe ratio of 0.097. That was better than all but 16 of the 129 Vanguard products. Notably, the 16 products with better Sharpe ratios all had much smaller raw returns than UPRO/VBLTX. The Vanguard Wellesley Income Fund (MUTF:VWINX) had the highest CAGR at 12.2%.

On backtesting/overfitting

A natural criticism of these results is that I developed the strategy in Oct. 2015, but the time period examined here goes back to June 2009. In general, it’s fairly easy to develop strategies that beat pretty much everything looking backwards. Prospective outperformance is harder to achieve.

Compared to VFIAX, the UPRO/VBLTX strategy had a higher CAGR (20.6% vs. 16.9%), smaller MDD (11.3% vs. 12.7%), and better Sharpe ratio (0.111 vs. 0.091).


Compared to all 129 Vanguard funds, UPRO/VBLTX had the 9th highest CAGR, 49th smallest MDD, and 4th highest Sharpe ratio. Again, none of the products with a higher Sharpe ratio had anywhere near the CAGR of UPRO/VBLTX (VWINX highest at 8.8%).

I would also add that this strategy is very simple and, in my view, theoretically sound. All I’m doing is using a 3x daily ETF to free up 2/3 of my assets to generate additional returns. It does not require “optimizing” any parameters using historical data that might be sub-optimal going forward. I suppose the choice of VBLTX is somewhat tied to the backtested time period, but VBLTX is not some obscure fund that happened to perform well since 2009; it is one of three Vanguard bond funds that targets a particular duration.

Driven by a bull market?

Skeptical readers might also point to the fact that we’ve been in a raging bull market in both stocks and bonds since 2009. Conventional wisdom says it’s easier to beat the market during a bull market than during a bear market, and I would agree with that.

I want to point out that while my strategy uses a leveraged ETF, its net leverage is no greater than the S&P’s. In fact, its net beta is slightly less than 1, since VBLTX has negative beta. So it’s not simply that the markets have been hot and therefore my high-beta strategy outperformed. If that were the case, my risk-adjusted returns would probably not be better than the S&P’s, and certainly not better than 87.6% of Vanguard’s products.

Fixing what isn’t broken?

As I mentioned earlier, I recently decided to split up my 2/3 bond allocation between VBLTX and the high-yield VWEHX. The rationale is robustness; it’s less likely for two weakly correlated (0.05) bond funds to hit a rough patch than it is for one. One drawback of VWEHX is that it isn’t nearly as negatively correlated with stocks as VBLTX is. However, it has a higher dividend yield than VBLTX (SEC yield 4.41% vs. 3.49%).


More about the two fund strategy

Is Southwest Worth Holding?

Southwest hasn’t exactly had a stellar performance record so far this year and so of it can be attributed to the cancellations because of the hurricanes this year. They’re about to release their earnings report for the third quarter in a couple days and the expectations are some what muted.

Southwest Airlines Co. (LUV) is scheduled to report third-quarter 2017 results on Oct 26, before the market opens.

In the second quarter of 2017, the carrier’s earnings per share (on an adjusted basis) of $1.24 surpassed the Zacks Consensus Estimate of $1.20. The bottom line also improved 4.2% on a year-over-year basis. Operating revenues of $5,744 million was marginally above the Zacks Consensus Estimate of $5,733.2 million.

However, this Dallas-based low-cost carrier is likely to face turbulence in the to-be-reported quarter. The company’s third-quarter results are expected to be hurt due to the recent hurricanes (Harvey, Irma and Maria) and the earthquake in Mexico. These natural disasters have forced the airline to cancel approximately 5,000 flights. Markedly, the negative sentiment surrounding the stock can be gauged from the fact that the Zacks Consensus Estimate for third-quarter earnings has moved down 22.3% over the last 90 days.

Consequently, the stock has struggled so far this year underperforming the Zacks Airline industry  over the last six months. Shares of Southwest Airlines have gained 5.1% compared with the industry’s rally of 5.9%.

Let’s delve deep to find out the factors likely to impact Southwest Airlines’ third-quarter results.

Owing to the multiple flight cancellations, the company expects third-quarter operating revenues are likely to be hurt to the tune of $100 million. Moreover, the carrier expects operating revenue per available seat mile (RASM) in the quarter to be flat to down 1% year over year. The Zacks Consensus

Estimate for third-quarter passenger unit revenues is pegged at 12.33 cents, lower than 13.03 cents reported in the second quarter of 2017.

Increased costs (fuel and labor) are expected to hurt the bottom line. Cost per available seat miles, excluding special items, is estimated to increase between 3% and 4%. Fuel price per gallon is anticipated between $2.00 and $2.05 in the quarter. The Zacks Consensus Estimate for third-quarter fuel price is pegged at $2.00 per gallon, higher than $1.93 reported in the second quarter of 2017.

Apart from Southwest Airlines other carriers like American Airlines Group (AAL – Free Report) and JetBlue Airways (JBLU – Free Report) are also likely to be hurt by the natural calamities.

We are, however, appreciative of the company’s efforts to enhance its shareholders‘ wealth through dividends and share buybacks. At its annual meeting of shareholders, Southwest Airlines announced that its board of directors approved a new share repurchase program worth $2 billion. Notably, share repurchases benefit a company’s earnings per share by lowering outstanding share count.

What Does Our Model Say?

Our quantitative model does not conclusively show an earnings beat for Southwest Airlines in this quarter. This is because a stock needs to have combination of two key ingredients – a positive Earnings ESP and a Zacks Rank #3 (Hold) or better – to increase its odds of an earnings surprise. However, this is not the case as highlighted below.

Zacks ESP: Southwest Airlines has an Earnings ESP of -0.61%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: Southwest Airlines’ Zacks Rank #4 (Sell).

We caution against stocks with a Zacks Rank #4 or 5 (Strong Sell) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

A Transportation Gem

With Southwest Airlines likely to disappoint, investors interested in the broader transportation sector may consider Norfolk Southern Corporation (NSC – Free Report) as our model shows that it possesses the right combination of elements to post an earnings beat in the current reporting cycle.

Norfolk Southern has an Earnings ESP of +0.59% and a Zacks Rank #3. The company is slated to release its third-quarter 2017 results on Oct 25.

More on Southwest here


Warren Buffett, the man, the legend, is now 87 years old, has some history with cancer and is well aware that his best days are behind him. Rumors are flying that he’s been negotiating with God himself to continue running Berkshire from the grave-at least that’s the word on the street but I can’t verify that.  I suspect that the real plans involve mere mortals.

Warren Buffett is deservedly known as the greatest investor of all time. His track record with Berkshire Hathaway (BRK.B) (BRK.A) is remarkable. And yet, for investors, that track record isn’t necessarily enough to justify purchasing the stock. As everyone who has ever looked at a mutual fund knows, past performance is no guarantee of future results. As Buffett himself put it a bit more cheekily:

That may seem easy to do when one looks through an always-clean, rear-view mirror. Unfortunately, however, it’s the windshield through which investors must peer, and that glass is invariably fogged

Source: The Snowball, by Alice Schroeder

Why Would the Market Pay Extra for Buffett?

When trying to determine whether the value of the company (and thus the stock price) will drop after the death of Mr Buffett, it is worth inverting (as his partner Charlie Munger always says). The question then becomes, why is the market paying up for him to be running things.

Let’s think about the sources of value inside Berkshire Hathaway. There are insurance operations which earn money year in and year out on underwriting. He doesn’t do the underwriting but has created a great corporate culture. Probably Ajit Jain and Co. are adding the value here. The company has wholly owned subsidiaries in the utility, railroad, industrial, consumer product, financial, and media spaces. Given the size of the company, he isn’t actively running any of these businesses. There may be a bit of a halo effect, but I doubt it moves the needle. The final sources of value are investments and cash. Some of the investment have appreciated so much that it would be tough to sell them due to taxes owing (I’m looking at you Coca-Cola (NYSE:KO)), but new investments of cash are definitely the place where Buffett adds the most value.

More broadly, his value add is in capital allocation, which is basically the art of determining what to do with cash. He is objectively superior at that, which increases the likelihood of the company’s cash balances (and future cash income streams) being invested to earn a high return. That increases the present value of that cash to investors, and I believe is the primary source of any “Buffett premium.”

As someone who frequently writes on and invests in microcap net-nets, I am deeply aware that the market does not always value a dollar of cash at a dollar of market capitalisation. In Berkshire’s case, the huge cash pile is likely valued at a least a dollar for every dollar, because the market believes Warren Buffett will use the money effectively, as well as effectively allocate the significant cash flow that the business throws off each and every year.

Some of that Buffett premium is likely to disappear when Buffett passes away, and that day is inevitably getting closer. With Buffett now 87 and having had prostate cancer, he is certainly much closer to the end of his investing career than the beginning. Berkshire had the following to say about the matter in the Risks section of its most recent 10-k.

We are dependent on a few key people for our major investment and capital allocation decisions.

Major investment decisions and all major capital allocation decisions are made by Warren E. Buffett, Chairman of the Board of Directors and CEO, age 86, in consultation with Charles T. Munger, Vice Chairman of the Board of Directors, age 93. If for any reason the services of our key personnel, particularly Mr. Buffett, were to become unavailable, there could be a material adverse effect on our operations. However, Berkshire’s Board of Directors has identified certain current Berkshire subsidiary managers who, in their judgement, are capable of succeeding Mr. Buffett. Berkshire’s Board has agreed on a replacement for Mr. Buffett should a replacement be needed currently. The Board continually monitors this risk and could alter its current view regarding a replacement for Mr. Buffett in the future. We believe that the Board’s succession plan, together with the outstanding managers running our numerous and highly diversified operating units helps to mitigate this risk.


It has called out its succession plan as a mitigating factor to this risk, and when Buffett dies, I believe the successor(s) will be announced very shortly thereafter. However, there is one other big reason I am not very concerned about Mr Buffett’s eventual death, and that is I believe that capital allocation is actually getting easier at Berkshire Hathaway for a number of important reasons.

Reinvestment in Berkshire’s Owned Businesses

The simple fact is that he has, over the last 15 or so years, designed Berkshire to be able to reinvest a material portion of its excess capital internally. Capital-heavy acquisitions like Burlington Northern and its utility subsidiaries have a continual need for more capital and are a great way to reinvest the capital that comes from the other businesses and portfolio dividends without needing to make as many acquisitions.

The utility businesses especially are a great place to put new capital, because new capital investment in regulated utilities earns a regulated return. Thus, Buffett’s successor has a home from money that will earn a guaranteed rate of return that is generally around the cost of equity, or high single digits to low double digits. That will help take the pressure off.

The other thing that will help is that Berkshire has been acquiring companies that themselves grow by acquisition. The utility subsidiaries are the biggest example of this group, but there are a number of others. As a couple of examples, the Marmon group of companies regularly makes acquisitions, and Berkshire purchased Precision Castparts for a relatively full price, partially paying for its ability to grow its earnings using Berkshire’s capital. These (and many other) subsidiaries making tuck-in acquisitions will help Buffett’s successor effectively allocate capital by reducing the amount of money they need to allocate.

How Berkshire’s Buyback Plan Helps Allocate Capital

I believe the company’s buyback plan is also built to help Buffett’s successor allocate capital. If Berkshire’s stock falls on Buffett’s death and goes below the board’s buyback floor, the successor will have an easy way to accretively use Berkshire’s capital. There would be no reasonable way for anyone to criticise buying back Berkshire stock at a level previously endorsed by Warren Buffett himself.


The successor (and board) could also begin paying a dividend, although I think that is less likely. While a dividend has the attraction of being able to use an unlimited amount of capital in an intelligent way, it is also (at least indirectly) an admission by the successor of not being as savvy a capital allocator as Mr Buffett. Now, that is an admission that basically anyone should be happy to make, but for market confidence reasons, I can see why the board may not want to do so.

See more on Warren Buffett




Zacks Top 5 Value Stocks for a Bull Market

With all the leading indicators being in tune with a great economic maestro, this current bull market has just been chugging along like a well oiled machine for over eight years now. Interest rates are low, inflation is lower, unemployment is almost a non factor and housing is rebounding to keep fueling this rising market. With all these factors moving in the plus side, it becomes a little more difficult to find those undervalued stocks but here’s a few picks to get you started. 

We are 8.5 years into the current bull market, so every now and then, somebody raises a red flag, and for a few days we are treated to reports about the possibilities of the next recession that could usher in another bear market. But that just doesn’t seem to be happening.

For one thing, the unemployment rate is at a 16-year low. For another, personal income and personal disposable income are both on the rise according to the Bureau of Economic Analysis. Rising prices, especially for food and energy did however result in a 0.1% decline in real income in August.

The Michigan Consumer Confidence Index (MCCI) suffered a slight setback in September due to concerns about the economy in the wake of hurricanes Harvey and Irma, dropping from 97.6 in August to a still-high 95.3. “Renewed gains in incomes as well as rising home and equity values have acted to counterbalance the negative impacts from the hurricanes,” Richard Curtin, chief economist for the Surveys of Consumers, said in a statement.

The housing market is in a multi-year expansion, partly because of the growing population and partly because millennials are finally settling down. The production side hasn’t been able to keep up, resulting in tight inventory and high prices. Hurricanes Harvey and Irma just made matters worse, further pressuring labor and materials supply and making production that much more difficult. While these factors made for a significantly weaker September, PWC principal Scott Volling expects a flatter market here on out with a rebound in the spring 2018 selling season.

As far as industrial production indicators are concerned, the ISM report has PMI, new orders and production indexes at 60.8%, 64.6% and 62.2%, all of which expanded from August to September. A contraction is not normally indicated until the PMI falls under 50%.

Why Value Investing Makes Sense Now

Value investing presupposes that there are companies out there that are capable of better and also taking the necessary steps to get there. So the idea is to build position in these stocks before the rest of the market does, thereby gaining the most from any subsequent upside. Naturally, the strategy is not for the rookie, but folks who have done the necessary research to identify these companies. The higher profits and ability to absorb volatility are the rewards.

Finding these stocks in a bull market can be tricky since valuations are generally on the high side. That’s where the Zacks Style Score system comes in handy. Coupled with a Zacks Rank #1 or #2 (buy rated stocks), a value style score of A or B should be able to help you make more money while avoiding value traps (getting into stocks with low valuation but because of limited potential).

5 Value Stocks to Buy Today

Here are some stocks that are worth looking at because they have a Zacks Rank #1 (Strong Buy) and Value Score A.

Alliance Resource Partners, L.P. (ARLP)

Alliance Resource is a diversified producer and marketer of coal to major U.S. utilities and industrial users. It currently operates mining complexes in Illinois, Indiana, Kentucky and Maryland. Some of its mining complexes are underground and one has both surface and underground mines. It produces a diverse range of steam coals with varying sulfur and heat content, which enables it to satisfy a broad range of specifications.

Bellway plc (BLWYY)

Bellway plc is engages in the building of residential houses and conducts associated trading activities. The company provides houses which includes detached, semi-detached, terraced properties, as well as town houses, apartments, bungalows and five-bedroom family homes. It operates primarily in England, Wales and Scotland. Bellway plc is headquartered in Newcastle upon Tyne, the United Kingdom.

Beijing Enterprises Holdings Ltd. (BJINY)

Beijing Enterprises Holdings Limited distributes and sells natural gas in the People’s Republic of China. Its city gas segment is a natural gas supplier and service provider. It also has other operations. Water and environment-related services include investments, design, construction and operational management as well as production of key equipment and facilities and related overall engineering works.

The toll road business is made up of three major highways, including the Beijing Capital International Airport Expressway, Airport North Freeway and Shenzhen Guanshun Road. The beer business is an important revenue center for Beijing Enterprises Holdings.

The technology business of Beijing Holdings is comprised of a combination of electronic payment and information technology, with a portfolio of investments in solid waste disposal, environment-related services and technology incubation. Beijing Enterprises Holdings Limited is based in Wanchai, Hong Kong.

Signet Jewelers Limited (SIG)

Signet Jewelers Ltd. is engaged in retailing of jewelry, watches and associated services. The company operates primarily in the United States, the United Kingdom, the Republic of Ireland and the Channel Islands. Signet Jewelers Ltd., formerly known as Signet Group PLC, is based in Hamilton, Bermuda.

Santander Consumer USA Holdings Inc. (SC)

Santander Consumer USA Holdings Inc. is a technology-driven consumer finance company which focused on vehicle finance and unsecured consumer lending products. The company’s vehicle finance products and services include consumer vehicle loans, vehicle leases and automotive dealer floorplan loans. Santander Consumer USA Holdings Inc. is headquartered in Dallas, Texas.

Zacks Value in a Bull Market


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