Why dividend investors are selling and why they will regret it

Trader worried
A few last months I noticed that dividend growth investors are selling their stocks and they say it is because of valuation. This post was inspired by them and the latest post by my friend Ferdis publishing at his blog DivGro and his latest post.

The argument goes that the stock market is too high, valuation of the dividend stocks is also too high and by trimming or selling their positions they will be able to buy back later for a lot better price.

Maybe they will be able to do so. Maybe the market will crash in the next few months and they will be able to buy back at a better price.

But this means that you have to go into a business of predicting the market. And predicting the market is a fools game.


 · Why predicting the market will not work


When I started investing into dividend stocks and trading options I believed that I needed a strategy which would help me to predict the market or stocks move and potential trend reversals. I wanted that miraculous trading software, system, or strategy which would predict the trend reversal and I would always, or almost always, be on the right side of the market. I hoped I would be always trading with the trend and spot any reversal on time. Or end of a bull market or bear market respectively.

It doesn’t work.

The longer I am in the market the more I am convinced that you will never be able to correctly and consistently predict the market or end of the trend no matter how much you are going to rationalize your predictions.

If we cannot predict the market correctly how do you know then that your stocks will go down and you may be able to buy cheaper later?

Predicting the market does two damages to you:

1) Psychological damage

By predicting the market you are setting yourself up for a big disappointment. You spend a lot of time calculating your fair value, predicting future sales, revenue, expectations, or goals of the company management. You are even going to defy and ignore political pressure which is strong these days and drive this market higher just to build your bearish case.

Yet, when your expectation goes bust, you will be disappointed or even angry at the market that it didn’t do what you expected, or FED that it rigged this market, or high frequency trading which ruined your gains, or other traders who over-reacted or who traded at unreasonable euphoria and greed.

Everybody will be at fault but you just because you were foolishly setting up your expectations without knowing all variables of the market out there which can change the game at a dime.

Just look at the latest Brexit event.

When the market tanked the first day after the vote, bears were congratulating themselves for the perfect timing of the drop they have been predicting for weeks. Five days later the market was where it has been before Brexit and bears were shocked in unbelief blaming central banks for stepping in. But otherwise, if it wasn’t for the central bankers the market would for sure crashed. What fools!

Unfulfilled expectations and disappointment are a huge emotional blow to your mind which will impact your future confidence. Do you really want to do that?

2) A lost opportunity damage

Besides the psychological and emotional damage you are defying the entire purpose of investing into dividend stocks.

What is the rule or premise of dividend investing? Why did you choose dividend investing in the first place? Did you choose dividend investing for trading the stocks? Because what you are doing now is trading.

I picked dividend investing because I didn’t have to trade those stocks. If I was investing into growth stocks or wanted to be a swing trader (which at some point I wanted to be but failed), trimming of the gains and relocating them to different stocks or better opportunities would have its merit. Dividend stocks are not in that category. You do not trade the dividend stock because of valuation.

In fact, I do not care what the valuation of dividend stocks is after I purchase them. Yes, prior to my initial purchase I try to see if I can buy cheaper or what the fair value is, but once I buy, I leave it. I do not care what the valuation is. If the stock is going down, I am buying more shares, if the stock is going up I am buying fewer shares. But I am not selling because the stocks went up. Not the dividend stocks and not in my dividend growth portfolio.

I learned my lesson on this the hard way.

Markets in Panic

The chart indicates that investors are mostly in bearish mood close to panic. Historically this has been a bullish sign and markets rallied. When you compare this to the sentiment on other websites tracking investors’ sentiment you will find the same results of investors being extremely bearish.

“Ironically, history shows that fear of a crash has a poor track record of predicting crashes. Conversely, some of history’s worst crashes came when no was expecting one.”

“We continue to note that the sentiment backdrop is far from extreme optimism and instead quickly shifts to gloom and doom during market downturns,” Oppenheimer’s Ari Wald wrote in a note to clients. “We saw this again last week as shown by a spike in the number of news stories referencing the words ‘Stock Market Crash’ to its highest level in years. For comparison purposes, there were significantly fewer occurrences of this through the topping process in 2007.”

A couple of years ago I bought shares of Johnson & Johnson (JNJ) stock when it was trading at $58 a share. When the stock moved to $78 a share I decided to trim my position expecting that when the stock falls back down to ~60-ish level I will buy back in.

It never happened. The stock now trades at $122.80 a share. I regret I ever sold my JNJ shares.

Realty Income (O) is another stock I purchased when it was trading at $37 a share. When the stock moved to $52 a share I sold because Realty Income was so overvalued that it was obvious that it would have to go down.

Well, yes it went down to $47 a share. But I never bought back because I expected this stock to go lower. Investors were talking about buying Realty income when it gets below $40. And I foolishly agreed with them.

The stock never reached $40. Today, it is trading at $69.91 a share.

Why selling your winners which are making you money just because you think it is maybe overvalued so it must go down? And even if it does go down, how low would it go? When? And how do you recognize whether a decline is a beginning of something more dramatic or just a breather before the next move up?

If the Realty Income stock drops by 20% on Monday, it would only fall to $55 a share! The stock would have to fall by whopping 47% in order to get to the same price I bought originally. And yet this wouldn’t justify selling this golden goose. If the stock drops by 47% I would still keep my original shares, and buy more even if I had to borrow money to do that.

It took me years to build my portfolio and build my yield on cost and I would ruing it by selling? No way!


 · When do you really sell?


When I started with dividend investing in 2006 the first thing I learned was to pick a good, high quality dividend growth stock, buy it, and never sell. The only reason to sell would be if the company doesn’t rise the dividend, cuts it, or suspends it whatsoever. This would be the only prediction I would agree to do: will the dividend be suspended, cut, or is it in danger? If yes, then maybe sell your stock or buy puts as a protection, just in case.


 · Is valuation a reason for selling?


As I said above I consider valuation important only when buying the stock and opening an initial position. Adding to the stock then can be tricky, but I do not cry over a growing stock. It is good when it is growing, so why bother selling it? I like to be sitting on a large gain built over years. I do not need the money.

But selling because it went up? I gave you two examples when by doing so I lost great opportunity.

The dividend stocks will always tend to be overvalued. Realty Income (O) for example is a stock which will always trade overvalued. Waiting for it to drop to its fair value you will never buy.

Or you might be able to buy only when the market crashes like it happened in 2008. But waiting for such crash may take another five or more years. And yet many investors, even the dividend ones, do not buy because they are scared and run to safety by selling the rest of their positions to preserve cash.

So now you are selling because the stock is overvalued and when the valuation crashes you are scared to death to buy and never get in or too late.

This is emotions!

JNJ trend

If you are investing following this pattern you are dooming yourself to mediocre results never beating the market. Don’t believe me? Then pull out old data from 2008 – 2009 and study them. It happened.

And I must admit it happened to me too! I too was scared to be buying in the beginning of 2009 because I refused to believe that the market really reversed.

And again in 2010.

And again in 2012.

And still I was nervous in 2015 and 2016 when the markets dropped. But fortunately already educated enough not to panic and start selling. At least I had my DRIPping on and reinvesting all my dividends.

Today? I would never sell just because the stock went up. And I would buy more than usual if it goes down.

That’s why I am creating my sub-account named “a great opportunity fund” where I place a couple of thousands of dollars which I won’t use to buy shares on a regular basis but only if any of my stocks crashes and I can buy more than usual.

Many times on this blog I said that I do not care what the value of my stock or entire portfolio is as long as my dividend income is intact. Many stocks in my portfolio actually grew and increased their dividends during selloffs and crashes. JNJ increased dividends twice during 2008 and 2009 when everybody was freaking and selling (from 0.41 to 0.46 in 2008 and 0.46 to 0.49 in 2009).

Of course, I ended up holding a few bags of crap in my portfolio (mostly energy stocks, and prior to them mREITs) which cut their dividends and I didn’t respond to it.

But, nobody is perfect, right?


 · The only valuation that matters is time value


Selling stocks in your portfolio may have its purpose based on in which phase of your portfolio you are.

Are you in an accumulation phase? Or are you a few years prior to retirement?

If I have more than 20 years until retirement selling stocks in my portfolio because the S&P 500 is at 2129 value and that is too high is laughable. What is too high?

When S&P 500 was at 100 in 1969 people thought this couldn’t go higher. When we stalled under 500 during 1993 – 1994 people thought “this is it” we are at all time highs, the market is overvalued. It traded just below 500 for two years before it finally jumped over 500 level and moved higher.

And same happened when we approached 1500 level. Yes we had two major corrections at that level. It took 10 years before we were finally able to move higher, but today we are higher than we were in 2008.

And if you were in this game in 2008 as I was, did you predict correctly the market’s crash? And its recovery?

I wasn’t able to do that. The best approach was to stay through, reinvest the dividends, and eventually buy more shares.

I again have a great example:

I had my ROTH IRA and my 401k accounts riding them through 2007 – 2009 (until today).

In my ROTH IRA I was paralyzed by the events. I tried to trim some of my positions to protect my portfolio and failed to buy back in disbelief of a recovery. The result?

A loss. I sold low and bought high.

In my 401k I continued investing a portion of my salary (with the employer match) and reinvesting all proceeds. The result?

I quadrupled my account (it went from $15k to $73k). Because my ROTH IRA was an experiment to prove that a self directed retirement account investing into individual stocks is better than a mutual fund based 401k I contributed the same amount of money to both accounts to have same starting conditions. Yet, thanks to consistency and sticking to the plan, 401k beat me. ROTH lost money.

This lesson contributed to my final realization, that my dividend investing is like a mutual fund. Consistently invest, reinvest, and never sell. Since then My ROTH kicked in and it is speeding up surprisingly well.

And in the next 20 years, the S&P 500 might be at 6000 value (not a prediction, just a number for the sake of an example), so why freaking today that 2129 is too high?


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Rosey Job Numbers Hide Some Disturbing Issues

Stocks surged on Friday after the better-than-expected jobs report came in for the month of May. However, in light of the dismal report released the month before in May, investors may be a little skittish in making sound investment decisions based on these reports.

The number of jobs created during the month of June increased by 287,000. However, a closer examination of the entire jobs reports must be reviewed before being convinced that the important jobs numbers give signs that we are not completely out of the woods.

The unemployment rate ticked up to 4.9% reported for the month of May, when it was 4.7%.

Economists had forecast that nonfarm payrolls in May grew by 160,000, which would have been on pace with the numbers posted for April.

Here’s the issue. As the June numbers showed shockingly higher numbers over those reported just a month before, it must be taken into account the figures that show all is not as grand as those widely reported numbers on Friday.

The number of unemployed rose to 7.8 million, which was an increase of 347,000.
Then there is the issue of the number of people who are not looking for work because they believe no jobs are available for them. Those people make up a group referred to as “discouraged workers.”

The number of people who fall into this category did decline in June by 151,000 to 502,000 people compared to the same period last year.

The decline in the number of people in this group is a positive, but the number of long-term unemployed must also be factored; and that’s when the rosy 287,000 figure becomes less rosy.

Improvement in the outlook for discouraged workers must be acknowledged as a factor that impacts improvement in the overall economy.

At two million, the number of long-term unemployed, which are those who have been jobless for 27 weeks or more, changed little in June and accounted for 25.8% of the unemployed.

Then there is the labor participation rate, which was 62.7% for the month of June, which was just a tad bit higher than the 38-year low of 62.4% reported in September of last year.

As noted above, the May Jobs report was too meager to ignore. A mere 38,000 jobs were created, leading the Fed Reserve Chair Janet Yellen to immediately voice her concerns about job growth and the overall health of the economy.

Another reason investors should view these jobs numbers with caution is how off they are from previous reports.

In The Wall Street Journal last week, this was stated. “Consensus [estimates haven’t] been this off for two straight months in nearly 10 years.”

The Journal noted that this is the biggest gap since 2009. Furthermore, The Journal described the two-month miss as exceedingly rare.

“Combined with last month’s sizable miss, the recent job numbers have now accomplished something we haven’t seen in nearly 10 years,” Instinet’s Frank Cappelleri told The Journal. “The last time we saw the actual number beat by more than 100,000 after missing by greater than 100,000 the month before was in late October 2006.”

While the numbers show that June added a surprisingly strong number of jobs, these other stats throw water on the notion that the economy is moving along full speed ahead. Some observers say the strong jobs report in June helps alleviate fears that the economy was weakening.

Look no further than the surge in the markets after the release of the June report on Friday. Even the downtrodden 10-year Treasury yield reacted strongly, moving above 1.4%.

Be cautious in using the jobs report as your main gauge in deciding to invest. Look for a trend that shows increasing monthly numbers, or at least steady numbers.

Follow the Federal Reserve’s actions over interest rates. Note that increasing the rates may impact consumer spending, especially on big ticket purchases.

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Posted by Martin July 06, 2016
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TRADING RULES – RULE #2 – Trade often

Trade often means that you are trading as often as possible. You want to be soaked into the market and feel its pulse. You want to be always focused.

But how do you do that to trade often and not to break the rule #1 “Stay small?

This can be a tricky part. First you use the rule #1 to determine what you can afford to trade without over trading or opening too large positions. For example, according to the rule #1 you can risk (or commit) a certain cash amount in your account (maybe representing 20% of all your available cash).

Then, when you choose a few stocks you want to trade options against and find out that you can trade for example total of 20 contracts per each selected stock and you plan on trading options against 3 stocks.

Instead of opening one trade of 20 options contracts, you split the number and open one week (or day, or month) one trade with 3 contracts, next week another trade with 3 contracts, next week another trade with 3 contracts, and so on. And you do it again and again as long as you decide to choose a different stock or add more contracts or run out of money.

Wait, did I just say “run out of money”?

Well, yes, sometimes you may experience a situation that your position gets in the money, you will have to roll, and such rolling trade would continue blocking your money so you won’t be able to open a new trade. You ran out of money.

And then you repeat this process like a Merry-go-round. When the old contracts expire or get closed (bought back) you commit that cash in the next trade. And you rotate the trades forever.

Do not compound your trades. Maybe you want to stay at the same level for the entire year although in November you will be able to trade 30 contracts in lieu of 20 as of January, for example.

Why? Why do you want to keep the exact amount of contracts for the entire year or longer (the period depends on you)?

It is psychological. As your account continues growing it may be very tempting to start compounding your trades by adding new contracts because now you can afford it. It will be very easy to over trade and ruin your confidence. One unfortunate blow and you would ruin months of hard work. With the original size of the contracts, the pain will not be as big and you still would survive.


 · Why do you want to trade often?


It’s like practicing trading. You want to be exposed all the time (or as much as possible as I understand that if you trade a small account it will be difficult to be exposed all the time).

It is like if you tell me, a lazy, couch potato person, to go out and run 5 mile marathon. I would die after 100 yards of a heart attack. Before I would be able to run 5 mile run I would have to practice. I would have to run a few yards every day, do it regularly, and slowly increasing the load and run more and more. But you also do not increase the load on a daily basis. First few months you run 50 yards, then after 6 months you start running 100 yards, then 500 yards and so on until you get to 1760 yards (1 mile).
Same goes with trading. If you want to be a successful trader and have consistent winning results, you have to be like me the practicing runner or you can die of a heart attack.
Start small, small trades, even one contract per trade, but trade as often as possible. Increase the load (number of contracts) only after you master the smaller trades and have enough cushion in your account to do that.

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Posted by Martin July 04, 2016
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TRADING RULES – RULE #1 – Stay small

It is easy said than done. What is it “stay small”?

Stay small refers to opening only as many trades and as big so you stay comfortable with it even when the trade turns against you.

You may say that it is obvious but it can be very tempting to break this rule. Let’s say you open a trade which is withing this rule and everything goes great, the market goes up, your trade performs well and you are in euphoria. So you open another trade. What can go wrong here. You will be out of both trades in a no time for a big win.

But the very next day the market crashes and both trades go against you. Your buying power shrinks by 70% and your net-liq by 50% in a day!

How would you feel? Terrible, mad, angry, frustrated, scared? You will feel pain and fear because you know that at some point if the market doesn’t reverse, you will be forced to close your losing positions upon a margin call and you will be helpless. That’s how losses come.

Believe me, I have my own experience and I still fight with my own temptations breaking this rule and then being mad at myself. Don’t repeat my mistakes!

To avoid pain, open only one contract, if you have to, to stay in your comfort zone and wait until its end before you open a new one. That’s the rule #1.

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NASCAR Track Owner Earnings On Tap; Declining Attendance Remains a Headwind

NASCAR Track Owner Earnings On Tap; Declining Attendance Remains a Headwind

The world got the chance to see NASCAR’s Sprint Cup drivers race at Daytona this July 4th weekend. On tomorrow, investors get to see how well the company that operates the renowned Daytona track performed financially over the last quarter.

The Daytona track is owned by International Speedway Corp. (NASDAQ: ISCA). It reports its second quarter earnings for 2016 on Tuesday before the opening bell.

While investing in a race track may seem odd to some, track operators like International Speedway benefit from a wide array of revenue growth opportunities that contribute to their top and bottom lines. Furthermore, they pay dividends, which can be attractive in low yield environments like we are currently in.

 · What makes International Speedway attractive

Like all tracks, International Speedway’s tracks benefit from many revenue growth opportunities. Attendance at the NASCAR races may be the crown jewel, but the tracks’ revenues benefit from many other opportunities as well.

With a market cap of roughly $1.6 billion, International Speedway is the largest among its peers, which include Dover Motor Sports (NYSE: DVD) and Speedway Motorsports (NYSE: TRK). Their market caps are $79 million and $737 million, respectively.

Dover Motor Sports and Speedway Motorsports report Q2 2016 earnings by Aug. 1.
International Speedway boasts being the owner and operator of some of the most popular tracks in the NASCAR circuit, including the flagship Sprint Cup series. The tracks include Daytona International Speedway, Talladega Superspeedway, Darlington Raceway in South Carolina, and Watkins Glen International in New York. Also, it promotes more than 100 racing events a year.

Owning and operating these popular tracks contributes to International Speedway’s strong financials. For example, in addition to the revenue generated through admission sales, track owners and operators like International Speedway also derive revenue from hospitality rentals, souvenir and food concession services, royalties from trademark licensing, and sponsorship fees.

International Speedway also reaps the financial benefits of owning and operating 13 motorsports entertainment facilities, International Speedway also owns and operates Motor Racing Network, which it notes as being the nation’s largest independent sports radio network. It also owns Americrown Service Corporation, a subsidiary that provides catering services, and food and beverage concessions.

 · Financial performance

Analyst estimates show International Speedway’s reporting earnings per share of $.37 on $163 million of revenue for Q2 2016 on tomorrow. The reported EPS for the same quarter last year was $0.35.

The company has seen its revenues grow quarterly and annually over the last several years. Total revenues for Q1 2016 were roughly $143 million compared to revenues of about $137 million in Q1 2015.

Operating income was approximately $31 million during that period compared to approximately $22 million in Q1 2015.

During the first quarter of the year, International Speedway boosted its dividend. It pays $.41 a share, yielding 1.2%. For fiscal 2016, it plans to buy back $50 million of shares.

International Speedway is maintaining its market share. According to Capital Cube, the company’s revenue change during Q1 2016 is in line with the earnings reported for Q1 2015. Also, it is about average among its peer group.

The company’s earnings growth was influenced by year-on-year improvement in gross margins from 38.96% to 40.93% as well as better cost controls, notes Capital Cube. This resulted in an increase in its operating margins, which rose to just over 40% from 35% compared toQ1 2015 the same period last year. Gross margins increased to 39.59% from 36%.

 · Sponsorships

Crucial to the operators of these race tracks are their marketing partnerships, or event entitlement platforms. Examples include Coca Cola, which was the sponsor of the Daytona 400 over the weekend.

Race track operators tout these platforms as delivering solid returns on investments for the event partners by allowing them to extend their brands.

For fiscal 2016, International Speedway has agreements in place for approximately 92% of its gross marketing partnership revenue target, which is projected to increase approximately 11% compared to 2015.

 · Trickle down effects from NASCAR

After this 2016 season ends in December, Sprint will no longer be NASCAR’s flagship title sponsor. About eight to 10 companies are reportedly being considered. An announcement is expected in the fall.

For its secondary series, NASCAR signed on Comcast Xfinity to replace Nationwide. It signed a 10-year contract with the high-speed Internet provider in 2014.

According to Sports Business Journal, NASCAR is seeking a sponsor for its top-tier series for as much as $1 billion. That would cover 10 years, in which the sponsor would pay $45 million to $50 million annually in rights fees. That would be 33% more than the deal inked with Sprint (formerly Nationwide).

 · Elephant in the room

Trip Wheeler, president of Speedway Benefits, acknowledged the “elephant in the room” for NASCAR. He told Sports Business Journal that NASCAR needs to take a long-term view when weighing money versus what would be the right fit. He noted the conglomerate should worry more about getting ratings up and should even consider many of the changes it has made that has limited fan attendance growth.

This will indeed be key considering sponsorships have declined over the years. Not only has attendance at races been in decline, but so have television ratings as fans are tuning out. NASCAR has several initiatives under way to curb this trend, including those aimed at diversity to widen the fan base.

Companies are naturally unwilling to part with millions of dollars for sponsorships in the face of declining audiences.

 · Moving forward

As NASCAR works through these issues, tracks like International Speedway must be diligent in making sure there tracks remain profitable from other revenue sources.

I have little reason to think that the company’s momentum slowed over the last quarter. However, NASCAR’s attendance challenges are headwinds that cannot be ignored.

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Lawsuit Over MasterCard, Visa Fee Settlement Creates Uncertainty

What was thought to be a win for MasterCard (NYSE: MA) and Visa (NYSE: V) over the fees they charge merchants who accept debit and credit cards, is backfiring. An appeals court last week found fault in an antitrust class action settlement reached by the credit card networks, which upends the agreement that had pretty much let the credit card networks off of the hook easily.

When investors got wind of the court’s finding, the share prices of these credit card networks fell. Investors were naturally concerned that the nearly decade long effort that led to the settlement to appease merchants, and keep that revenue source flowing, could lead to the fees charged being up in the air again.

 · Interchange fees

Credit card networks typically charge what are called interchange fees to handle plastic transactions, which are those from credit cards and debit cards. The problem stemmed from them charging considerably more to merchants to process credit card transactions than they did for debit card transactions. This practice led merchants to cry foul, ranting that the networks were the benefactors of the higher fees for the credit card transactions, while they were the losers.

Eventually, the federal government got involved, and capped the fees back in 2011.
In 2013, MasterCard and Visa went a step further, and reached a $7.25 billion settlement agreement with thousands of merchants over the fee amounts they had previously charged them.

However, the problem with the settlement, according to the 2nd U.S. Circuit Court of Appeals in Manhattan, was that the merchants covered in the lawsuit had inadequate attorney representation. The law firms involved were accused by the appeals court of not allowing some merchants to opt out of the settlement agreement when the odds of them benefiting from it were minimal.

 · Impact on Visa and MasterCard

These credit card networks had already been complaining about the caps that were put in place on the amount of the fees they assessed. These caps were the result of the Durbin Amendment, which took effect in 2011. It gave some relief to merchants by allowing them to set minimum purchase amounts for credit cards.

Consumers who became accustomed to using their credit cards for small purchases, such as for a $4 cup of coffee, were barred from doing so at some merchants.

However, if they used their debit cards, which cost less for the merchant to process, there was no minimum purchase amount.

Feeling the sting of this, the credit card networks have been vocal. For example, when MasterCard and Visa released its first quarter earnings report for 2016 in April, they noted that whether or not it will be able to achieve its financial objectives is being affected by the legal and regulatory challenges associated with interchange fees.

 · What’s next?

Some observers see MasterCard and Visa appealing the 2nd circuit court’s decision.

I don’t. In fact, I would be surprised if MasterCard and Visa decided to take the battle over the settlement back to court because the odds of them being successful seem to not be in their favor. I see them renegotiating the settlement, and taking into account the concerns that the lawyers made out better than the merchants.

When solely based on this ruling against the settlement, I see no reason to change long positions in MasterCard or Visa.

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June 2016 trading, investing, and dividends results

June trading exceeded my expectations in generating income. It didn’t seem like I would make as much money as I did. Also Brexit shook with my account in a scary way, but it remained just that – a scary hysteria. The markets recovered all losses in two days.

I learned a good lesson though. In the past I tried to predict and analyze the movement of the market as well as stocks I am about to be trading. It showed to be a useless effort. Every trade, every day is unique and every outcome will be different. No one knows future and no one can predict it. Even if all patterns known to the entire world point to a certain outcome, it doesn’t guarantee that the trade will do exactly what the pattern says it should do.

Predicting future in trading is basically setting you up for a big disappointment.

That’s why I am learning not to predict anything but rather be prepared for everything. If I am ready for any outcome and any outcome makes me happy, then I am able to trade without fear and carelessly (not recklessly). If a stock goes against my trade, I am perfectly OK with that because that presents a new possibility for a profit.

In May 2016 I made $1,262.00 in collected option premiums which was a great result exceeding my monthly goal making $1,000 per month. This month I made even more and finished with $2,331.00 in options premiums!

Hopefully, I will be able to repeat this success next month too!

June dividend income was higher than in May, but still lower than all higher months. The dividend income was $81.68 vs. $57.75 last month.

Options Income = $2,331.00 (account value = $5,589.18 +120.07%)
Dividend Income = $81.68 (account value = $20,143.39 +33.05%)

If you wish to see details about each account, continue reading below.


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Less to Stress About Over Big Banks’ Financials

Bank stress tests for 2016 have been completed, with the Federal Reserve Board finding that the nation’s largest banks have capital planning processes and adequate capital in place to survive a financial crisis like that of 2008 that caused the Great Recession.

The approvals opened the door for those that passed to be able to raise their dividends and increase the size of their share buyback programs. They didn’t waste any time announcing these plans either, as many of them announced their plan increases within hours of learning of their approvals, and they stated their increases would take effect beginning today.

For investors, this is naturally good news, especially those looking for higher dividends. These investors should be aware of the passing banks’ plans to increase their dividends. If that amount is suitable, investors should take note of the ex-dividend dates, which will alert them to the earliest and latest dates they can buy shares and take advantage of the dividend payout.

 · Second leg

The results of the Comprehensive Capital Analysis and Review (CCAR), which is considered the second leg of the so -called stress tests, were released Wednesday. Of the capital plans of the 33 banks reviewed by the Federal Reserve, only two banks have been sent back to the drawing board because the Federal Reserve rejected their plans. One other firm’s plan was not objected to, but the firm is being required to address certain weaknesses and resubmit its plan by the end of 2016.

The largest banks receiving approval were Bank of America (NYSE: BAC), JP Morgan (NYSE: JPM), Wells Fargo (NYSE WFC), Bank of New York Mellon Corporation (NYSE: BK) and Citigroup (NYSE: C). The plans of Morgan Stanley (NYSE: MS) weren’t rejected, but it must submit a new capital plan by the end of the fourth quarter of 2016 to address certain weaknesses in its capital planning processes.

The Federal Reserve objected to the capital plans of Deutsche Bank Trust Corporation and Santander Holdings USA, Inc. based on qualitative concerns. The Federal Reserve did not object to any capital plans based on quantitative grounds.

 · Quantitative versus qualitative assessment

Last week, these banks learned their fates from the first leg of the stress tests. Considered to be the quantitative part of the process, the banks were found to be capitalized enough to make it through another financial crisis of the same, if not worst, magnitude from that of 2008.

The CCAR is meant to be a qualitative assessment of the feasibility of the banks’ capital plans.
Specifically, according to the Federal Reserve, quantitative factors include a firm’s projected capital ratios under a hypothetical scenario of severe economic and financial market stress.

Qualitative factors include the strength of the firm’s capital planning process, which incorporate the risk management, internal controls, and governance practices that support the process. If the Federal Reserve objects to a capital plan, the affected bank cannot make any capital distribution, such as dividends, unless expressly authorized by the Federal Reserve.

 · Banks taking advantage of passing tests

U.S. firms have substantially increased their capital since the first round of stress tests in 2009. The common equity capital ratio–which compares high-quality capital to risk-weighted assets – of the 33 bank holding companies in the 2016 CCAR has more than doubled from 5.5% in the first quarter of 2009 to 12.2% in the first quarter of 2016. This reflects an increase of more than $700 billion in common equity capital to a total of $1.2 trillion during the same period.

JP Morgan’s capital plan includes repurchasing up to $10.6 billion between July 1, 2016 and June 30, 2017. It will continue its dividend of $.48 per share for the third quarter of 2016.

Citigroup plans to increase its quarterly dividend to $.16 per share. It will increase its stock repurchase program to up to $8.6 billion during the four quarters starting in the third quarter of 2016.

Wells Fargo did not change its capital plans, but it will continue to pay its $.38 dividend.

Bank of America increased its dividend by 50%, to $.075 per share. It also authorized a $5 billion share buyback.

The Bank of New York Mellon will repurchase up to $2.14 billion of its common stock. It will increase its dividend by 12% $0.19 per share.

 · Watch for the ex-dividend date

If you want to take advantage of these banks’ capital plans to raise their dividends, you should be aware of their ex-dividend dates and record dates.

According to the U.S. Securities and Exchange Commission, when companies declare a dividend, they set a record date when investors must be on the company’s books as shareholders in order to receive the dividend.

Once the company sets the record date, the ex-dividend date is set based on stock exchange rules. The ex-dividend date is usually set for stocks two business days before the record date. If you purchase a stock on its ex-dividend date or after, you will not receive the next dividend payment. Instead, the seller gets the dividend. If you purchase before the ex-dividend date, you get the dividend.

 · More improvements still needed?

I wonder when, and if ever, the banks will have enough capital on hand to satisfy the Federal Reserve. The board has noted that, despite general progress, banks still need to improve internal controls around various elements of capital planning.

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Darden’s Earnings Momentum Slows for First Time in Two Years

Darden Restaurants (NYSE: DRI) reported its fiscal year 2016 and fourth quarter earnings today, and while revenues were up for its flagship brand, Olive Garden, they were up even more at some of its other brands, like Seasons 52 and Bahama Breeze.

This is interesting considering that Darden’s quarterly estimates had been up for the past six quarters. That had been touted as being largely due to the strategies implemented that focused on boosting sales at Olive Garden.


 · Earnings’ results

The fourth quarter of last year included an extra week of operations resulting in a 53-week fiscal 2015. Darden blamed that extra week of operations included in the fourth quarter of fiscal 2015, as the reason its revenue dipped 4.7% to $1.79 billion. If the impact of the extra week were excluded, the company stated that its total sales increased 2.1%.

During Q4 2016, Darden reported diluted net earnings per share of $1.10, which beat analysts’ estimates by $.02. However, the $1.79 billion in revenue it reported for the year missed estimates by $20 million. Noteworthy is its EPS of $1.10 increasing 19.6% in Q4 2016, compared to Q4 2015, when it was $.92.\

All told, Darden’s revenues were down 4.7% for the three months ended May 31, compared to the same period in fiscal 2015. That includes all of its brands.

For the entire fiscal 2016, revenue increased 2.5% to $6.9 billion, from the roughly $6.8 billion reported for fiscal 2015. Darden noted that the results for the three and 12 month periods ending May 31, 2015 include the additional week of operations.

While revenues for the fiscal year were up 1.7% at Olive Garden, they were up 5.4% at Bahama Breeze and 3.7% at Seasons 52. For the quarter, they were up 2.4% at Olive Garden,4.7% at Bahama Breeze, and 5% Seasons 52.

The fact that the brands outside of the flagship Olive Garden are posting increases in their sales should be considered to be good news. All of them are contributing to Darden’s continued revenue growth.

Back in 2014, activist investor Starboard Value raised its stake in Darden and its actions set the company’s stock price on an upward path of growth.

Starboard implemented a series of operational changes, including what I’ve called “breadstick gate.” After kicking out all of Darden’s board members, Starboard set about dallying around with food preparation, including the restaurant brands’ signature breadsticks.

Little did I know that the change, as well as many others, would be just the right recipe to grow Darden’s shareholder value. The company boasts a market cap of $8.2 billion driven by the performance of hundreds of restaurants throughout the world, including Bahama Breeze, LongHorn Steakhouse and Seasons 52.

 · Starboard to the rescue

In mid-July of 2014, prior to Starboard’s changes being fully implemented, Darden’s stock was trading around $44 a share. On Wednesday, it closed at $66 a share. In fact, the company has risen almost 50% since Starboard’s intervention, outpacing the S&P 500’s gains of just 6%.

Investors have cheered small and large steps made by the relatively new Darden, as far as its board members are concerned. For example, pre-Starboard intervention, Olive Garden waiters doled out breadsticks to as many requested by diners. The problem with this was diners didn’t eat them all, leaving them to grow cold and less appetizing, leading to waste. To stop this, the company leaned hard on restaurants to serve only one breadstick for every person in the party, plus one.

Furthermore, “refills” were only to made on request; no more of just bring them out to diners because the bread basket was empty.

In addition, to addressing that waste, Olive Garden chefs were introduced better recipes to improve the breadsticks.

The breadstick improvements were listed as part of an extensive plan to cut costs and improve sales. Those changes include whetting the alcohol buds of diners by offering customers who must wait for a table a discount on a glass of wine in hopes that they will order more when they are seated. For a reason beyond my understanding, the Italian-themed restaurant had started offering non-Italian meals. Recognizing that was somewhat counterproductive, Starboard got rid of those menu items.

 · What makes Darden attractive

In addition to the latest increase in Darden’s revenue, there are several other factors that make it attractive. Many of them were pointed out over the past few weeks by analysts who upgraded the company.

In maintaining its outperform rating on Darden, Oppenheimer found the company to have limited risk to the companies estimates for fiscal 2017. Also, it was believed that Olive Garden will continue to outperform the industry.

Tigress Financial last week upgraded Darden to buy from neutral. Last month, Piper Jaffray upgraded the company to overweight from neutral. It set a price target of $67 to $78 a share.

Deutsche Bank maintained its “buy” rating and $76 price target on the stock ahead of the results.

 · Attractive dividend

Also attractive for Darden is its dividend. It pays a $2 dividend, with a yield of 2.99%.

Compared to the dividends paid by its competitors, Darden’s is less than stellar. this is despite it having a sizable market cap of $8.2 billion.

For example, DineEquity (NYSE: DNI) pays a $3.68 dividend with a 4.42% yield. Its market cap is $1.5 billion. It owns the International House of Pancakes and Apple’s Neighborhood Grill & Bar.

Another competitor is Brink International (NYSE: EAT), which owns Chili’s Grill & Bar and Maggianos Little Italy. Brink’s market cap is $2.6 billion. Its dividend is $1.28, yielding 2.77%.

 · What’s next for Darden

This was not exactly the quarter that had been anticipated for Darden, especially considering the EPS miss. However, to its credit, I reiterate that investors should take some solace in the restaurant operator’s ability to raise revenue at
its other restaurant brands.

Investors should also take note of the company’s share buyback program. During Q4 2016, repurchased approximately 0.7 million shares of its common stock for a total cost of approximately $45 million. This leaves roughly $315 million remaining under the current $500 million repurchase authorization.

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Zooming in on Cash Flow to Debt Ratios to Determine Company’s Value

Zooming in on Cash Flow to Debt Ratios to Determine Company’s Value

A significant measure of a company’s financial health is reflected in its cash flow to debt ratios, and based on a recent report, investors should pay particular attention to the amount of debt some S&P 500 companies are amassing.

While their cash balances are growing, so too are their debt levels. During the first quarter of this year, debt levels reached highs that had not been seen for at least a decade, according to FactSet, a finance research firm.

Despite this unsavory trend, there are some companies that are managing to keep their debt levels low, making them ideal candidates for those who use cash to debt ratios in determining how to invest. These include a couple of tech giants, which are a part of the information technology sector that has historically had cash balances that grew more than debt levels.

 · Importance of cash to debt ratios

Cash to debt ratios show how much cash a company has to pay off its debt. Investors want to see high ratios, which indicate that the company is well-positioned to pay off its debt. Furthermore, if that company needed to borrow more, the impact would not be as significant as it would be for a company with low ratios.

Many investors place more reliance on price to earnings ratios to measure a company’s financial health. However, some observers think that cash flow ratios are a better measurement of a stock’s value.

The metric can be particularly helpful due to the accounting method a company uses, such as GAAP, to report their earnings. The company may report strong profits, but through the lens of GAAP reporting, that amount could be less. Investors get a truer look at a company’s cash flow by look at their earnings based on GAAP.

Investors can also look learn more about a company’s cash flow-to-debt ratio by reviewing its EBITDA. The method is not considered as liquid as cash from operations, notes Investopedia. It also points out that without further information about the makeup of a company’s assets, it is difficult to determine whether a company is as readily able to cover its debt obligations in this method.

 · Cash versus debt

FactSet found that the growth in aggregate debt has outpaced that of cash among the companies in the S&P 500 index. Specifically, during the first quarter of 2016, debt grew to $4.2 trillion for the index, which was an increase of 9.9% year-over-year. That’s also an uptick of 3.3% from the fourth quarter of 2015.

Furthermore, the S&P 500 cash and short-term investments balance amounted to $1.45 trillion in the first quarter, according to FactSet. That marks a 5.7% increase from the year-ago quarter and a 1% jump from Q4 2015. Also noteworthy is that the balance in Q1 represented the largest cash total in at least 10 years.

Lastly, the cash to debt ratio fell 3.8% to 34.7% in Q1, which marked the lowest ratio since Q2 2009. The 10-year average cash to debt ratio is 36%.

 · Sectors, stocks with low ratios

Now that we’ve gotten all of those numbers out of the way, let’s get to the sectors and stocks that have attractive cash flow to debt ratios.

Six out of the nine sectors of the S&P 500 saw decreases in their ratios compared to the year-ago quarter, according to FactCheck. Those sectors were consumer discretionary, consumer staples, healthcare, information technology, telecom, and utilities.

The information technology sector maintained the largest cash balance, at $603.8 billion by the end of the first quarter. The sector saw its balance grow 20.1% compared to the first quarter of 2015. That was more than any other sector.

Microsoft (NASDAQ: MSFT) and Alphabet (NASDAQ: GOOG) topped the list of companies ranked by quarterly cash and short-term investments. At the end of the quarter, Microsoft and Alphabet had cash balances of $106 billion and $75 billion, respective.

If long-term investments are included in the company’s cash total, then Apple and General Electric top the list with balances of $232.9 billion and $129.7 billion, respectively.

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