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TQQQ is Unlikely to Hit Zero in One Session

The following is from the comments section of last Sunday’s Kelly Letter.

Q. Subscriber Kenneth asked:

What happens if the QQQ loses 34% in a day? Does TQQQ go below zero?

A. I answered:

It would bottom somewhere just above zero, effectively eliminating the investor’s position.

However, this is unlikely to happen. From “Research Behind 6Sig and 9Sig” in the User Guide:

“…the maximum historical one-day gain of the Nasdaq 100 was 18.8% on January 3, 2001, and the maximum one-day loss was 17.8% on Black Monday, October 19, 1987. The average daily deviation was 1.14%.”

On top of that, the market now maintains circuit breakers to prevent a plunge to nowhere. From Vanguard’s post on the subject:

“Circuit-breaker points represent the thresholds at which trading is halted market-wide for single-day declines in the S&P 500 Index. Circuit breakers halt trading on the nation’s stock markets during dramatic drops and are set at 7%, 13%, and 20% of the closing price for the previous day. The circuit breakers are calculated daily.”

Thus, while it is theoretically possible for TQQQ to hit zero in a trading session, it is unlikely. We can say the same thing about almost anything in the stock market. For example, it is theoretically possible for GOOG to fall to zero in a session, but unlikely.

Posted in 9Sig, TQQQ | Leave a comment

My Weimar Reference

My reference to Weimar in last Sunday’s Kelly Letter confused a number of readers. Allow me to clear it up. I wrote:

“…a contingent of economists staking careers on inflation warnings willfully ignored, and ignore, assurances from the Federal Reserve and other central banks that it is transitory. It makes perfect sense why early data show higher prices as shutdown bottlenecks reopen and base comparisons exaggerate leaps back into action. I suspect that many showboats intoning about inflation know that the current round of reports represents a fake variety of it, but just could not resist this rare chance to shout ‘Weimar!’ in a crowded theater.”

The Weimar Republic was Germany from 1918 to 1933. Among other things, it’s known for one of the worst bouts of hyperinflation the world has seen. Therefore, people who fret about inflation frequently mention Weimar—even when observing run-of-the-mill inflation or, dare I say, transitory inflation. That was my reference.

In the same way that Godwin’s Law of Nazi Analogies holds that the longer an online discussion goes, the higher its probability of invoking a comparison involving Nazis or Adolf Hitler; Kelly’s Law of Weimar Hyperbole holds that any media obsession with inflation will produce Weimar warnings.

The two laws are connected, given that Weimar preceded the Third Reich. It was the Weimar Republic’s president, Paul von Hindenburg, who appointed Hitler Chancellor of Germany in 1933. From this relationship, the invocation of Weimar enables detractors to affix either or both of two easy labels to leadership they dislike: it is fascist and/or it is inflationary.

When Donald Trump was elected president, pundits invoked Weimar to say America had come under fascist rule. For example, Roger Cohen wrote a New York Times opinion piece in December 2015, “Trump’s Weimar America,” from which:

“Welcome to an angry nation stung by two lost wars, its politics veering to the extremes, its mood vengeful, beset by decades of stagnant real wages for most people, tempted by a strongman who would keep all Muslims out and vows to restore American greatness. … The United States is not paying reparations, as Weimar Germany was after World War I. Hyperinflation does not loom. But the Europeanization of American politics is unmistakable.”

The White House went from Trump to Joe Biden, and fascism fear mongers handed the Weimar baton to hyperinflation hyperventilators. Representative of the new group is Joseph Sternberg, who wrote in a Wall Street Journal opinion piece last February, “What Inflation Debates Miss: Inflation,” from which:

“A consequence of chaotic financial markets [in the Weimar Republic] was a new boom in speculation. The economic miseries of the era were not uniformly distributed, and the divergence between new classes of haves and have-nots stoked political and personal resentments alongside rampant corruption. Does any of this sound familiar?

“In other ways too, faint but eerie echoes of the Weimar era are starting to sound. A curious phenomenon of that time was the emergence of Notgeld, or emergency money, printed by local governments or larger corporations to facilitate commerce amid the collapse of national money. Is Bitcoin the Notgeld of our day?”

No, it is not, partly because it emerged not recently but back in 2009. That’s one slow-moving emergency.

Weimar is a permanent part of the political and economic lexicon, so it’s good to understand what pundits mean when they use it.

It’s also good to know that they’ve been wrong about it applying to the United States ever since the disappearance of the actual Weimar Republic.

Posted in Inflation | 4 Responses

CLM Is No Panacea

I wrote in last Sunday’s Kelly Letter about a closed-end fund called Cornerstone Strategic Value (CLM $11.50 -2% YTD). It’s one of many securities I’m auditioning to play a part in an Income Sig strategy for retirement.

Please remember that this is a research phase.

None of the funds I’ve referenced is a recommendation. I don’t know yet whether I will reach a level of confidence high enough to release an Income Sig plan at all, much less what specific funds would power it, nor what rules would guide it. The result of this research could be nothing more than a regularly updated table of income assets to accompany a slimmed-down Sig System portfolio for retirement. Please don’t jump the gun and load up on funds I mention during this research phase.

About CLM, I wrote last Sunday:

“If a retiree had put that $1M into CLM at its closing price of $8.02 on 3/30/20, the date our Q1 2020 orders filled, they would have purchased 124,688 shares.

“Those shares would have kicked off a $23,105 monthly income last year and a $19,975 one this year, as the untouched holding grew in value to $1,417,703 today.”

You may wonder, “What in the world could CLM own to kick off that kind of monthly income while also growing capital 40% in a year?”

It does, indeed, look like a free lunch—and you know what they say about those.

The answer: nothing. There is no portfolio good enough to deliver CLM’s results of the past year. The secret to its high yield is that it pays from proceeds of new rights offerings. From Investopedia:

“A rights offering (rights issue) is a group of rights offered to existing shareholders to purchase additional stock shares, known as subscription warrants, in proportion to their existing holdings. These are considered to be a type of option since it gives a company’s stockholders the right, but not the obligation, to purchase additional shares in the company.

“In a rights offering, the subscription price at which each share may be purchased is generally discounted relative to the current market price. Rights are often transferable, allowing the holder to sell them in the open market.”

Such a discounted rights purchase can work out well for the investor. It can also turn into high yield being nothing more than taking money from you, then paying it back and calling it income. Rest assured that I’m aware of this risk with CLM and other closed-end funds engaged in the practice.

CEFs that engage in new rights offerings are not necessarily out of the question for income seekers, nor ineligible for an Income Sig plan, but buying and holding them is generally inadvisable because their price decays over time, as shown below for CLM:

CLM Trailing Price Change
– – – – – – – – – – – – – – –

1-Yr +14.0%
3-Yr -22.8%
5-Yr -29.9%

Now, observe its trailing total returns for the same time frames, which reveal the benefit of its high distributions:

CLM Trailing Total Returns
– – – – – – – – – – – – – – –

1-Yr +34.5%
3-Yr +12.2%
5-Yr +15.3%

Better, but not as good as the general market, represented below by SPY:

SPY Trailing Total Returns
– – – – – – – – – – – – – – –

1-Yr +39.6%
3-Yr +17.4%
5-Yr +17.0%

It’s possible that an investor would value income so highly that they would be willing to watch the value of their CLM position shrink over time while they collected its big monthly distributions. However, this is not suitable to an evergreen Income Sig system.

Another possibility for using CLM-like big payers is swapping them in and out based on a metric or suite of metrics, such as discount to net asset value, yield, and/or price change. Reacting to the latter is the Sig System’s specialty, but it could also react to something else. A CEF study by Matisse Capital found that discounts to NAV correlate with high subsequent total returns, which encourages work in that area.

However, what I have come up with so far is overly complicated for negligible benefit. The investing world is filled with unnecessary complexity. I refuse to compound it.

This drawing board is a long one.

Conclusion: CLM is no panacea.

Posted in Income Sig, Retirement | Tagged | Leave a comment

Tech is Rested and Ready

Since March 20, 2020, the Nasdaq 100 has risen 95% compared with 82% for the S&P 500. Year-to-date, however, they switched leadership positions:

Price Change Since 3/20/20 (%)
– – – – – – – – – – – – – – –

95.3 Nasdaq 100
82.1 S&P 500

Price Change Year-to-Date (%)
– – – – – – – – – – – – – – –

11.7 S&P 500
6.0 Nasdaq 100

Chartist Arthur Hill of Trend Investor Pro wrote a week ago that the S&P 500 via SPY has remained above its 50-day simple moving average, while the Nasdaq 100 via QQQ broke below its 50-day in March and again earlier this month.

Momentum traders look at this and conclude that the tech-heavy Nasdaq 100 is a laggard to be avoided in the near term. Investors looking for longer-term value, however, talk about tech displaying growth at a reasonable price (GARP), a term we haven’t seen in a while.

The FAANGM stocks dominate the Nasdaq 100, as follows:

Nasdaq 100 Component Weight (%)
– – – – – – – – – – – – – – –

10.9 AAPL Apple
9.7 MSFT Microsoft
8.4 AMZN Amazon
7.7 GOOG Google
4.0 FB Facebook
1.7 NFLX Netflix

These are their year-to-date price changes:

FAANGM Price Change YTD (%)
– – – – – – – – – – – – – – –

+37.5 GOOG
+20.0 FB
+13.2 MSFT
+0.1 AMZN
-4.4 AAPL
-7.3 NFLX

But these are their EPS growth estimates for the current fiscal year, according to Yahoo Finance:

FAANGM Earnings Growth Est (%)
– – – – – – – – – – – – – – –

73 NFLX
58 AAPL
50 GOOG
35 MSFT
33 AMZN
30 FB

Tom Essaye at Sevens Report Research wrote that, “Considering the pace at which [these stocks] are growing earnings and the long-term prospects for these companies,” valuations are attractive. He thinks they’re the current GARP part of the market, about to retake the performance baton from smaller caps.

If he’s right, it bodes well for our 9Sig plan. Even at 3x leverage, its TQQQ stock fund has trailed 2x MVV and 1x IJR this year:

Price Change YTD (%)
– – – – – – – – – – – – – – –

+33.5 MVV (2x)
+19.4 IJR (1x)
+12.0 TQQQ (3x)

9Sig may be primed for another leadership phase.

Conclusion: Tech is rested and ready.

Posted in Technology, TQQQ | Leave a comment

Yes, You Can Retire On $1M

On Monday, Maryalene LaPonsie asked in US News, “Can You Retire on $1 Million?”

She quoted a New York City advisor, Brent Lipschultz at accounting and advisory firm EisnerAmper, saying $1M would last about 20 years. Drawing on data from the Bureau of Labor Statistics, which shows that people age 65 and older have annual expenses of about $50,000, he “assumed inflation would be 2.9%, investments would earn 4% each year, and a person’s state and federal tax rates would be 30% combined.”

SmartAsset makes plain in an interactive map that location matters. The site tallies average expenses for housing, food, health care, utilities, and transportation to estimate how long a $1M retirement fund will last. Samples, in round numbers:

Number of Years a
$1M Retirement Fund Will Last
–  –  –  –  –  –  –  –  –  –  –  –  –  –  –

32 in McAllen, TX
29 in Statesboro, GA
25 in Orlando, FL
21 in Denver, CO
19 in Chicago, IL
17 in Portland, OR
16 in Los Angeles, CA
14 in Seattle, WA
12 in San Fransisco, CA
10 in New York, NY

Lipschultz estimates that a retiree needs to save an additional $765,000 to fully fund a 35-year retirement.

Two endeavors to improve your odds:

1. Grow your nest egg as much as possible.

2. Derive as much retirement income from it as possible.

With enough income generated and reinvested, your retirement stash could avoid a steady decrease from withdrawals, providing you with peace of mind for the duration.

My core Signal plans—3Sig, 6Sig, and 9Sig—are superb growth systems for pre-retirement investing. They’ve made many millionaires already and are in the process of making more. To complete the Sig journey from cradle to grave, an Income Sig plan is needed to provide income and inflation-beating growth. Although I’m still researching the plan, early signs are promising.

I wrote in last Sunday’s Kelly Letter that investing $800K in Omega Healthcare Investors (OHI $36 -1.4% YTD) at its current yield of 7.5% would produce an annual income of $60K. Upping the $800K to the $1M of LaPonsie’s story would up OHI’s annual income to $75K. That’s 50% more than the $50K the BLS estimates as annual expenses for people age 65 and older. The extra could go back into OHI or other income vehicle(s) to maintain growth. With a Signal plan, it would go in price opportunistically.

While we can do better than simply owning OHI or using it alone in a Sig plan, even considering it solo suggests it’s possible to retire comfortably on $1M. According to Morningstar, OHI averaged a total return of 10.8% annually over the past 10 years. The following are its recent total yields:

OHI Recent Total Yields (%)
–  –  –  –  –  –  –  –  –  –  –  –  –  –  –

9.2 in 2017
7.5 in 2018
6.3 in 2019
7.4 in 2020

This reveals that, even in this era of low yields and interest rates, enough yield exists to provide a comfortable retirement. I hope to devise an Income Sig plan that provides a boost on top of it.

Conclusion: Yes, you can retire on $1M.

Posted in Income Sig, Retirement | Comments closed
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