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Stock portfolio repairs: Digging in for turbulent Q2 2018 trading action 

Written By | Mar 30, 2018
stocks obliterated, oil price war

Vintage, out-of-copyright Yellow Kid cartoon from late 19th-early 20th century. Verbiage updated by T. Ponick to reflect current stock market conditions.

WASHINGTON, March 29, 2018: In our previous column Thursday, we provided a quick rundown on what’s been happening with U.S. economic growth and the economy in general. We also explored the stock market’s Q1 crash and burn, which affected our own portfolios as well. Logically, we now turn to the crucial matter of making stock portfolio repairs. If we’re successful, we should be able to profitably ride out the slings and arrows of  a volatile Q2 2018.

For active traders, the real problem with U.S. stock markets this quarter was the failure of the longtime, standard “buy on the dip” meme. That worked for years. But going forward, this reflexive buying habit may be less reliable. That was certainly true in February and March. For that reason, we plan to be very picky regarding our ongoing stock portfolio repairs.

One distraction we try to avoid during our repair efforts: We don’t worry unduly about point declines in stocks or averages. Instead, we examine percentage losses. So many stocks today – as well as the averages that track them – have become expensive in dollars-per-share. Regarding averages, a 400+ point decline in the Dow, such as we recently experienced would have been a disastrous 50 percent correction in the late 1970s. With today’s averages so much higher, that 400+ decline in the Dow today was roughly a 1.5 percent decline.

Q1 2018 closeout action

We’ve been steadily paring the size of our portfolios since the  hit the fan in February. We are still likely in correction mode as April begins. But preversely, all three major averages rallied fairly convincingly before the long Easter weekend began.

Last week, we dumped all our tech stocks in order to take the profits that remained in them. They rallied Thursday, of course, just to irritate us. But we think most techs are still too far ahead of themselves (overbought) for their own good. But the three we sold – Apple (symbol: AAPL), Cisco (CISC) and Intel (INTC) – may be worth climbing into again on any further pullback. Analysts undervalue their sustained earning power.

Big time stock portfolio repairs: The problem with China

Given current market volatility, however we want to wait before re-entering tech positions until we get more clarity regarding the current China-U.S. trade flap. For starters, no matter what TV’s business network idiots tell us, President Trump is right to go after the Chinese right now, less for aluminum and steel than for their broad-based attack on our leading tech companies.

The Chi-coms have been either stealing or co-opting our technological advances for years. They re-engineer software and products alike. Next, they creat their own tech products using stolen or co-opted U.S. technology. They create “new,” cheaper Chinese knockoffs of those U.S. products and sell them back to American consumers at low, low price points. That’s not only killing U.S. incentives to innovate. It’s also killing U.S. jobs, effectively forcing many tech and tech-related companies to offshore those jobs to third-world, lower wage countries. Like China.

Many U.S. tech jobs continue to head for China and other East Asian countries

Meanwhile, the Chinese cleverly hamstring our own companies and products in their own country, even as they continue to steal their technologies via one-sided “cooperative ventures.” It’s these “co-operative” factories and assembly plants (see GM), that allows, via majority control, the Chinese to control profits, technologies and who owns what. That already defines the term “trade war” for this writer. Apparently it doesn’t affect most of the #Resistance morons writing for NBC and CNBC.

If current Chinese-U.S. trade negotiations turn sour, it’s tech and auto companies that will actually have to worry. While they threaten retaliatory tariffs on U.S. farm products, it’s U.S. tech companies and technologies the Chinese Communists want to steal own. Look for tech stocks – already overpriced – to get hammered again and again if the bilateral trade situation here doesn’t work. One of our major stock portfolio repairs was our exit, for now, from individual tech stocks. Too dangerous until we get some kind of new trade agreement out of China.

Our current tech strategy

In the meantime, we retain a general presence in tech by holding a modest position in the Guggenheim S&P 500 Equal Weight Tech ETF (RYT). It’s a proxy for tech in general. But, being an equal-weight rather than a cap-weighted ETF, it’s not as volatile as individual tech stocks. That’s generally your key to not losing money in these treacherous times. On the other hand, “equal weight” means that you won’t make as much money in this one as you would in the hottest tech stocks.

A plus with RYT: It’s one of many ETFs we can trade without commission with our discount brokerage firm. Check with yours, as there are likely to be equally attractive commission-free alternatives.

More stock portfolio repairs: Our Allergan problem

Our huge position here in Allergan’s high-yielding preferred shares was once the pride of our portfolio. That was before Allergan (AGN) ran into a tsunami of issues regarding various patented drugs. The common shares were hammered ruthlessly, driven down some 30 percent in an epic bloodbath.

Our preferred shares fared somewhat better, given their larger dividend payout. Yet we still suffered severe damage, with the preferred shares down some 24 percent at their worst. Normally, preferred shares don’t work like this. But convertible preferred shares do. That’s because your ability to convert them to common shares links them directly to those shares. So they trade both on their interest rate return and also on their convertibility value.

Unfortunately, that convertibility value took a huge hit when the common shares got taken out back and shot. Making things worse, these shares were mandatorily convertible on March 1, 2018. That gave us an unpleasant choice. Do we dump the convertible preferred shares for a horrendous loss? Or do we let them convert and ride out the unpredictable action in the common shares?

Our final Allergan solution. Sort of

Reluctantly, we chose the latter, as we had no intention of taking a big loss. Some stock gurus will tell you that this is following one kind of foolishness with another.

Allergan is a genuinely fine pharmaceutical giant that stumbled badly in 2017 for a variety of reasons – not all of them under their control. On March 1 we said goodbye to our preferred shares and hello to our converted Allergan common shares. A few days later on another dip, we bought just a few more of these common shares to round up to round lots, i.e., multiples of 100 shares.

It’s been a yo-yo market ever since. However, the shares are slowly, painfully recovering. We’re now down “only” 17 percent. We don’t expect to break even until 2019.

Lesson learned: We’ll never establish a position that huge again.

Everything else

We decided to increase our positions in ETFs and decrease them in individual stocks, as we’ve mentioned in earlier columns.

Sector-specific and equal weight ETFs are the best short term market response enabling us to ride out the current turbulence. ETFs are not perfect. Some could experience (and already have experienced) problems. But right now, many well established ETFs are a safer way to participate in stocks themselves, particularly in the tech and industrial sectors. So that’s the way we continue to evolve.

Read also: Freaky February is at it again, as frustrating yo-yo stock market goes nowhere fast

Rounding out our series of stock portfolio repairs are a selection of preferred and term-preferred stocks, a tiny selection of REITs (which, we think, have bottomed here). We’ve also returned to AMLP, an ETF-style investment that holds a batch of currently out-of-favor Master Limited Partnerships (MLPs) in oil and gas.

Wrapping up our portfolio revisions

As we wrap up our series of stock portfolio repairs and tweaks, we’re re-shaping our portfolios to be more ETF-centric and preferred stock-centric. We prefer decent yields right now, favoring them over the whipsawing risks plaguing our current,  highly politicized market.

Have a great Easter Weekend, and we’ll be back to opine again next week.


Terry Ponick

Biographical Note: Dateline Award-winning music and theater critic for The Connection Newspapers and the Reston-Fairfax Times, Terry was the music critic for the Washington Times print edition (1994-2010) and online Communities (2010-2014). Since 2014, he has been the Senior Business and Entertainment Editor for Communities Digital News (CDN). A former stockbroker and a writer and editor with many interests, he served as editor under contract from the White House Office of Science and Technology Policy (OSTP) and continues to write on science and business topics. He is a graduate of Georgetown University (BA, MA) and the University of South Carolina where he was awarded a Ph.D. in English and American Literature and co-founded one of the earliest Writing Labs in the country. Twitter: @terryp17