Outlook for December 2018

As the year 2018 winds down, the markets keep turning more volatile (and interesting). After a decline in October, things seemed to stabilize a bit in November, but still remained sluggish. The big surprise was the change in tone from Fed chair Powell a few days ago, which hinted that they may be at the end of the cycle for raising interest rates. While it was not explicitly stated or clear in any certain way, the US market rallied ferociously as investors started panic buying. This change in direction & the amount of movement from the largest stock market in the world, based on interpretation of 2-3 words from one person (albeit the Fed chair), shows how broken the system is.

I have been banging the drums on how broken the market is over the past few months. I may have started a tad too early, but the fact remains that this market is completely skewed and warrants extra precaution from investors. To reiterate, a handful of tech companies make above 12% of the overall market – once they start faltering, look out below. This is not something new…we have seen this before.

The other side of this coin is the buyback phenomenon that skews the market. You can get into a chicken-and-egg discussion on the reason for this bull market and how buybacks have an effect on it. The tech companies continue to pile on long term debt and use the funds to repurchase shares (while, sometimes sneakily issuing more shares without the market catching on in some cases). Just earlier this year, Apple announced a $100B buyback – a $ number larger than entire sectors in the rest of the economy! History will not be kind to the executives when this cycle ends and eventual hindsight showing record share repurchases at market peaks. Following chart from ValueWalk paints the picture well.

Outlook for December 2018

I continue to be weary of the tech sector and it is my lightest sector in the portfolio. My focus remains at the bottom of the chart (utilities, real estate & other real assets, materials, energy etc) in the listing above — for good reason. Most of those sectors have been struggling in the last few months/quarters/years and provide better investment opportunity.

I continue to stay on the sidelines with a decent cash position to make moves when the opportunity presents itself. Meanwhile, I am still invested in fairly defensive positions (lots of gold exposure).

As of Nov-30-2018, our overall portfolio diversification is structured as shown below.

Looking for investment ideas? Check out this Top Investment Picks for 2018, where 35+ bloggers present their top pick and a reason to invest in those securities.

What are your thoughts on the points mentioned above? Do you have any specific thoughts on the markets and looking at anything interesting? Share with a comment below.

Full Disclosure: Our full list of holdings is available here.

2 thoughts on “Outlook for December 2018

  1. Hey R2R

    I tend to agree with everything here. Just curious (and im sure you’ve already discussed this) but do you think your exposure to basic materials is too high/do you plan on trimming it down?

    Gold/Basic materials is probably the sector I follow the least/know the least about, so just curious what your long term plan is.

    • Yeah, the portfolio is very skewed right now and I’d like to cut down the exposure. Looking to sell some of the dogs and perhaps even some of the winners. I just wrote a couple of covered calls and if it gets assigned, that should bring the number down a bit.

      Most of the gold/silver exposure is my insurance against a crisis in the markets. Relatively speaking, the sector is down in the dumps, so much better valuations available for investments.

      R2R

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