WASHINGTON, January 23, 2018: Tuesday was another banner day on Wall Street. Rally 2018 resumed with a vengeance, and Wall Street records were shattered again as both the tech-heavy NASDAQ and the broad-based S&P 500 averages hit new record highs.
Apple (symbol: AAPL) reversed its ownTuesday rally to close down on the day due to brokerage house downgrades. But the tech-heavy NASDAQ composite average hit another record close Tuesday, finishing 0.7 percent higher at 7,460.29. One big influence on that average: the freshly surging shares of entertainment giant Netflix (NFLX).
According to one CNBC report,
“The video streaming giant said Monday after the close that total net adds reached 8.33 million, well above a StreetAccount estimate of 6.39 million. Netflix’s stock surged 10 percent, lifting the company’s market cap above $100 billion for the first time.”
The S&P 500 also benefited from Netflix’ numbers and positive quarterly reports from other large companies as well, although it closed slightly off the day’s high at 26,210.81.
The Dow, for once, closed slightly off, due in part to those Apple numbers as well as a surprise hit in shares of consumer products giant Procter & Gamble (PG). P&G reported improving quarterly profits and earnings. But the Street apparently didn’t love P&G’s margins, so they beat up on the stock anyway. Telco giant Verizon (VZ), another Dow component, also got hit. Sales exceeded estimates but profit numbers didn’t make analysts happy.
Not much to report here for January thus far in terms of this writer’s own portfolios. Given the breadth and scope of Rally 2018 – or Trump Rally Part II if you will – that’s a bit of a surprise. You’d think that with a rally like this one, everyone with excess cash would be buying the dickens out of common stocks.
But that’s just the problem. Rally 2018 is so fire-hot that it’s leaving very few common stocks behind, meaning that if you want to buy the best-performing issues, you always have to chase them, which is rarely a good idea.
Most notable laggards in January 2018 include stocks in the shrinking S&P telco sector as well as stocks in the newly designated S&P property-owning REIT sector. These stocks trade on their high yields. But valuations for these stocks come under pressure when the Fed starts hiking interest rates. Ditto those high-yielding REITs. With threats of at least three more interest rate hikes in 2018, that’s made investing in this area a problem.
On the other hand, big industrials, materials stocks, tech stocks and banking and insurance issues (including mortgage REITs, which are still included in financial indexes) have been driving averages higher, joined more recently by transportation issues and (occasionally tentatively) energy stocks.
Which gets us back to that chasing stocks problem we mentioned a few sentences ago. With a rally this sustained and this hot, longtime investors like yours truly try to take in the bigger picture. Longtime investors already know that frantic rallies often bring frantic corrections in their wake, providing the needed price correction that brings stock prices back into line. That’s when to buy them, when they’re on sale, rather than chasing them on the rally and getting burned when the correction mugs them.
For now, this fearsom Rally 2018 seems highly disinclined to put on the brakes. Even this past weekend’s Keystone Kops-flavored, Federal government shutdown kabuki theater farce only nicked stocks a bit on Thursday and Friday. Markets recovered Monday big time, and (mostly) reprised that move today.
Since Chuck Schumer quickly reneged on his less-than-24-hours-ago promise to fund Trump’s Wall for the opportunity to get a vote on “Dreamers” (read “illegals”) legislation, we might face another Federal shutdown farce on February 8. Maybe we’ll get that market correction then.
Yet when you see stocks you’d love to own racing away from you, it’s hard to resist buying them at any price, since everyone says “this time, the market’s different.” Famous last words. It’s a real dilemma, fiscal as well as emotional. Rally 2018 thus far seems invincible. But history tells us that no rally stays this way forever.
We’ve been trying to game the situation by buying tiny numbers of shares in select ETFs representing large stocks, value stocks and growth stocks. Since our brokerage house, Charles Schwab (SCHW) has its own generally excellent ETFs that customers can trade without commission, we limit our buying to those ETFs (SCHX, SCHV and SCHG respectively). An additional plus: Given the absence of any commission penalty, you can accrue such stocks in tiny increments on down days without commission setbacks.
To our current and growing Schwab ETF holdings, we’ve also added select Guggenheim equal-weight sector ETFs RYF (Financials) and RYT (Tech), which Schwab also offers to trade without commission. No, we’re not getting paid by Schwab to hawk their ETFs. Other discount brokerage houses like Fidelity offer similar commission breaks on their own ETFs and on others’ ETFs that they’ve made an arrangement with.
Finally, although the shares slipped just a bit today, our beleaguered position in Allergan’s convertible preferred “A” shares (AGN/PRA, your brokerage’s symbol may vary) has been in massive recovery mode. The shares gained nearly 30 points Monday in an impressive upward move. Both the preferred shares and the underlying common shares (AGN) have bounced back magnificently from the 2017 year-end tax loss selling that nearly obliterated them.
We’re still in loss mode in these shares. But that percentage figure has improved substantially since those dark days of December when short-selling and tax-loss selling overwhelmed them. At worst, we were holding these shares at a 22 percent loss. As of this afternoon, that negative percentage is down to -9 percent and hopefully dropping lower. Keep it up, guys.
Allergan will have a rocky first half in 2018 as it endures, at some point, the effects of its patent losses on Restasis and perhaps one or two more stalwarts in its portfolio. On the other hand, AGN has plenty of new drugs/treatments in the pipeline, as long as the FDA permits the company to offer them for sale. That should make investors somewhat happier in Q3 and Q4 of FY2018, particularly if Rally 2018 remains in force.
Meanwhile, we’ll continue to hold AGN/PRA. One final dividend remains, as these shares will be going ex-dividend one final time in February. Then, they will mandatorily convert to AGN common shares on March 1. At that point, we’ll become regular Allergan stockholders. Since AGN will almost certainly close below $288 per share on March 1, the complex preferred stock conversion formula listed by the company will almost certainly award AGN/PRA holders with approximately 3.8 shares of AGN per AGN/PRA share held.
Then, who knows? We’ll have to decide if and when to start paring our overly large position in these shares. We don’t want to sell for a net loss, so we’ll likely hold on at least for a bit. We may end up with an impressive profit if all starts to go well in 2018’s second half. This will certainly be an interesting adventure, and I’ll keep you posted.
In the meantime, we’ve already vowed we will never again take such a large position in any stock or bond. The risk multiple is simply too high. If we didn’t know that before, we sure do now.