My Investing Journey with Passive Income, Stocks, and Cryptocurrencies!

Category: Investments Page 1 of 14

Correlations in my Portfolio

I decided to do a correlation analysis on my ENTIRE PORTFOLIO of stocks (and some ETF’s). In case you don’t already know CORRELATION measures the possible relationship between two items, in this case their price movements. Keep in mind, correlation isn’t causation and there could be a 3rd (or even more variables) that are influencing these movements.

Also, note, CORRELATION changes over time, it doesn’t stay the same from one week to the next, or in the case of extremely volatile markets, correlations may diverge quickly. In addition, correlation doesn’t tell you anything about the magnitude at which one stock would follow another. Just because one stock goes up 20%, the other will not necessarily follow.

I took the Year to Data data from finance.yahoo and exported into Google Sheets. I then ran correlations using FUNCTIONS, putting the values into the TABLE shown below.

Here is a link to the pdf

Stocks with NO CORRELATION to other stocks

The first thing I noticed was there are some stocks that share no strong correlation with other stocks. Namely, Marten Transportation, Allison Transmissions, Teradyne, Mindmed, and Virgin Galactic. Honestly, I expected Mindmed to be disconnected due to the small size of the stock and the extreme volatile nature of price action. Likewise, Virgin Galactic is similar in behavior, being a company that has yet to generate any revenues, profits, and is a high beta stock. What are the surprises? I fully expected Marten would be somewhat correlated to the Russell 2000, companies of similar market cap, or SAIA (another trucking stock I own). However, this turns out not to be the case. Teradyne is another surprise; I wrongfully assumed this stock would have correlation with other tech stocks in my portfolio. It shows no strong correlation with any other stock in my portfolio.

Are any stocks correlated with TLT?

Seeing as how TLT is one of the few things with a history of negative correlation with the stock market, I was interested to see if anything might follow TLT closely?

One of the most interesting things in the data set is how Chewy shares the most correlation with TLT, a value of .690, Gold is the 2nd highest at .490.

A possible explanation? Last year, Chewy was seen as a stay at home stock, safer from the pandemic exposure. Since the beginning of the year and the opening up trade, Chewy has slid a bit. It appears, there is a small directional movement with TLT, acting as a FEAR trade. This is the only possible explanation I can offer.

On the other hand, look at my REGIONAL BANK, Citizen’s Financial Group; it shows a negative correlation of -.765. One plausible explanation-as yields drop, the price of TLT increases, and Bank stocks inversely drop. It’s assumed banks make more money if interest rates are higher. One might infer that TLT and CFG (or another regional bank stock) may act as a hedge on the other. I know some people like to dabble in trading pairs and this evidence could be promising to do that (outside of my realm).

What about INTERNATIONAL EXPOSURE?

IPAC is the only pure international play I have in my portfolio; exposure mostly to Japan and Australia. .646 with ITOT or the Total Stock Market ETF, .786 with IWM (Russell 2000). This does show that this particular ETF is not as correlated as it has been in the past, so, offering another layer of diversification with the Broad Market.

UBER AND PINTEREST

Uber and Pins seem to be in their own world, the only stocks with somewhat closer correlation with one another. Both big growth stocks, both more speculative and volatile.

Netflix seems to be in a class by itself as well, while it does share some relationship with PINS (.755), it shows no signs of strong correlation with anything.

Gold?

Gold (IAU) and Kirkland Lake (Gold Miner) are closely correlated at .911 as expected. IAU is not closely correlated to the Broader market or The Russell 2000 Index. On the other hand, I did notice there seems to be a somewhat negative correlation to the HOSPITALITY industry. -.656 with Hyatt, -.573 with Ryman Hospitality Properties, -.401 with Xenia Hotels. I currently don’t have much of an answer why gold and the hospitality industry would be negatively correlated. I am not seeing any correlation between inflation fears and gold price at the moment, so it must be something other than inflation/price worries. However, with this data, trading pairs of IAU and a hotel stock might be something someone could play around with? Looking back over the data, I do notice that TLT and the hospitality sector seems to have a very negative correlation as well. Perhaps we are back to the opening up trade again, things like Gold and TLT represent FEAR and the hospitality industry represents SAFE, so they are trading opposite at the moment.

OIL?

I was quite anxious to see if my XLE, oil/energy ETF would have strong correlation with anything other than the broad market. The findings:

The strongest correlation is with my bank stock. Once again, maybe oil and the bank stock are moving in tandem due to interest rate and inflation concerns? I expected it to be correlated somewhat with Eastman Chemicals (.885) as it is an industrial as well.

CLOSING THOUGHTS

This was a fun project. I learned some things I didn’t know about my portfolio, such as correlations existing that I wouldn’t have thought existed. Part of the reason I did this is because I still want to trim my portfolio down. If I have a bunch of correlated stocks, one of them might make a good prospect for being cut from the portfolio. In the future I plan to do a shorter time span correlation analysis to see how the numbers are changing in the last month. We must keep in mind Correlation is not a static number, it changes day to day, environment to environment. Once again, it says nothing about the magnitude of gains or losses. So new data must be taken in and changes made from there.

FED Treasury Securities vs. ITOT price action YTD

In this post, I would like to cover the relationship between the FED’s buying of Treasury Securities and the price of a Total Market ETF.

I chose to use ITOT as my Total Market ETF, as the data was readily available from Yahoo Finance and it’s my favorite Total Market ETF.

I only used data from this year 2021. Later on I will increase the data points to expand back to 2020.

Here is a graph I did of ITOT’s adjusted close vs Total Treasury Securities (in billons of dollars) owned by the FED. Adjusted close was used as it takes into account things like splits, dividends, etc.

The Linear Regression trendline is showing a Coefficient of Determination of .851. This is saying that there is a strong relationship possibly existing between Treasury securities on the FED’s balance sheet and the price of ITOT. To the point-this regression model accounts for 85% of the variability in price. So, as shown, most of the data points are hovered around the trend line:

However, let’s take a look at the precursor data.

Here is the monthly buying of Treasury Securities by the FED. Please note that June 2021 has more than June or July of 2020. This indicates the FED has NOT slowed its buying of Treasury Securities, and expanding its balance sheet.

March and April go off-scale, as they are the outliers here (Immediately after the COVID-19 crisis began). The key here is to determine if the FED is slowing their buying and at what rate. Please note these numbers are pulled directly from the Federal Reserves website. Picture of source below.

Here is the DATA I used from the FED Reserve website, as you can see, essentially a line straight up, showing the rate at which its balance sheet is increasing:

This data is released every seven days.

Here is a youtube video I did also showing the trend in the price of TLT. It is currently up over 6% in the last few months. I personally believe this price action is not only do to the lofty valuations in the stock market, but also the reduced supply from the FED’s buying.

My prediction based on this data is as long as the FED expands its balance sheet with Treasury Securities buying, yields will trend lower and most likely, the price of ITOT will continue to grow.

What is most important here is the RATE at which the FED grows its balance sheet. Last month was over 90 billon dollars worth of Securities. If this slows, then it is very possible we will see a market correction.

BONDS at MAX BEARISH MOMENT

I’ve recently started adding more bond funds to my portfolio. I haven’t done this in about two years now.

This goes against what everyone is saying, it’s assumed both inflation and interest rates go higher from here. Many believe that since the interest rates are already so low, that the upside on bond funds is seriously capped.

However, a few things:

1)The FED is still buying over 80 billion Treasuries a month and has committed to doing this. This will drive interest rates down if it continues at the same pace. My prediction is the FED continues to buy more until it owns an even larger percentage of the Treasuries market (reducing supply).

2)The 10 year is at 1.45% as of today, it can still fall back under 1% and lower. Keep in mind the low last year was around 0.5% I believe people are wrongly discounting that this can’t happen from here.

3)Intermediate and Long-term Treasuries have a NEGATIVE correlation to the stock market. They offer protection and cushion to the OVERALL PORTFOLIO performance.


SO WHAT DID I DO?

I started a new position in TLT. As far as bonds go, this is of course the most risky move, as it is the long-term duration and most sensitive to interest rate rises. On the other hand, it’s the one that stands to earn the most if interest rates fall again. I believe they will.

Just a quick mention, I bought TLT back in December of 2018 and rode it for some INCREDIBLE gains all the way until the end of 2019. Remember this is where the FED tried to raise rates but it caused the market to correct and they were forced the other direction.

My prediction is that something similar will happen over the next year or rates will go LOWER from here. I have no way of knowing for sure, but I suspect some of the inflation we are currently seeing is transitory as the FED has said. Much of it is due to supply line issues, and in some cases, not enough workers available to do the job of getting all of the materials.

I’m also still adding to my VBILX position in my ROTH IRA. This is an intermediate bond fund I’ve had for about a year and half now. This is a much safer choice, although it has a yield of over 2%. This is because the quality of bonds it invests in is a bit lower. VBILX is pretty close to a “cash account” like a savings with minimum downside. To reiterate the risk here is the return gets eaten by inflation.

I will end by saying I don’t think bonds like TLT are something you buy and hold forever. I do strongly believe bonds have a place in anyone’s portfolio and I can’t see myself ever getting rid of them.

“You can’t time the market” is a saying commonly reiterated. Yet, by not holding bonds, one is timing the market. They are assuming the insane bull run of the last decade will continue, they are assume bond yields MUST rise. However, we are in uncharted territory as a nation with the FED expanding is balance sheet to unprecedented levels, with valuations of some stocks at insane levels, with demographics and political tensions we haven’t faced before. Who knows what will happen from here? I don’t. That is why I’m choosing to hold bonds regardless if most are speaking out against them.

Decred Cryptocurrency

DECRED: Why This Cryptocurrency is my favorite

1)A FIXED SUPPLY-21 MILLION TOTAL SUPPLY. With 57.49% staked that leaves only around 5.4 MILLION Currently left to buy. However, this is not counting those that are in wallets that have not been staked. So, that means even less DCR is available for purchase. This makes it potentially more scarce

2)Top of it’s class GOVERNANCE-Decred makes you feel like a partial owner because you get to vote and have a say in things happening on its blockchain. With many blockchains, the developers and people in charge make it up as they go along with no input from coin owners. Regardless of how much you own, you don’t have a say in so many other crypto projects. Governance is there to prevent things like FORKS.

3)SECURITY-Since Decred is a hybrid blockchain, both Proof of Stake and Proof of Work, this makes it incredibly secure. It is 41 times more resistant to a double spend attack!

4)NOT TRYING TO BE EVERYTHING TO EVERYONE-Some projects lack focus because they are trying to do everything. For example, Decred isn’t trying do smart contracts, privacy, oracles, no fees, etc.

5) DEX-The Decentralized Exchange. I believe this is important because otherwise Exchanges have too much power, basically, in power to choose which projects get listed and which don’t (possibly affecting the success of some). The Decred DEX currently offers free trading withstanding a one time sign on fee, this fee is simply to prevent spammers. Pretty soon, you will be able to get into the Decred Wallet and access the DEX via your mobile wallet, how cool is that!

For me, the reason I’m such a fan of a DEX is because I’m tired of KYC requirements every time I want to buy a new coin on a new exchange. I do believe that there will still be a place for centralized exchanges in the future. For example, off ramping into your bank account/fiat.

6)SELF FUNDED-Yes, DCR has finally reached the point of being self-funded. This is super important because if it required outside funding, what happens when that funding dries up?

7)Has it’s own WALLET-A 3rd party wallet can be a security risk as well as conflict of interest risk. I like having an official wallet to go with my coin of choice.

8)UNDERVALUED price-wise. Comparing it to other projects standardized at a 21 million coin supply, you are paying less for 1/21 millionth of the supply. In other words, your money is getting you more of the TOTAL SUPPLY on a percentage basis.

I am not a financial or investment advisor, I am simply sharing my own positions and the reasons why I decided to buy them. Please do your own research.

INSANE Returns

All I can say is the returns lately have been absolutely INSANE.

I want to highlight some picks over the last six months here:

1)CHEWY-Chewy just had a fantastic report and is seeing numerous upgrades and higher price targets. I think we go even higher from here. Every time I drive around I see Chewy Boxes at people’s houses to be recycled. Most importantly, they have great customer service and people love this company (and their pets). I have literally been buying more shares every month. I’ll be holding this one a long time! Currently up 46%

2)HOOKER FURNITURE COMPANY-Out of nowhere this has been my turnaround kid. The last six months has just been INSANE with this company. I went from being down in this stock in 2019 to now I am up almost 30%, some tranches up over 120%. This past earnings report was incredible and they just raised the dividend by 12%. I will be holding this smaller cap stock a very long-time as well. Their social media presence really shows the strength of this company with it’s customers.

3)VIRGIN GALACTIC-This is by far one of my riskiest investments. At the same time, the returns have been incredible. I am now up 57%, with some tranches up 85%. At the moment, the company isn’t bringing in any revenues but I think this one could go to outer space sure enough.

4)KAISER ALUMINUM-If you’ve watched this blog, you know I’ve been in and out of this stock many times over the last two years. After the March Crash I saw an opportunity, the stock was at a NINE YEAR LOW. So I dug in and I kept adding. Well, they made an acquisition of a can company; this resulted in the stock going up 10% in one day and another 12% the next. I am now up over 40% in KALU. I knew it would be some nice gains but I thought it would be years before I saw this. I’ll take it!

5)CITIZENS FINANCIAL GROUP-I’ve never bought a bank stock before, I’ve been leery of them for years. However, I kept running numbers/figures on CFG and just firmly believed it was undervalued, trading under Tangible Book value. Turns out I was right and now I’m up over 26% in this one as well, not counting those dividends. What a dividend! It was yielding over 5.5% in some of my tranches. I believe the banking sector is going to be fine with these low interest rates. CFG reported a 1% reduction in interest rate income but non-interest rate income was up over 30%. These banks are going to find plenty of ways to make money.

In summary, this is the strongest my portfolio has ever performed. My Brokerage account which has under performed for awhile is now the HUGE outperformer. On a 3 month basis my brokerage is beating the market by 12%, on a 1 month basis it is beating it by 4.20%. My IRA has slid a bit (underperforming the market by about .5%). However, YTD it is ahead by just a small bit.

I’m anxious to see how I do in 2021. So far 2020 has been a huge success. I firmly believe this is because in my IRA I pulled out before the March Crash and then I went back in buying hand over fist things like Stanley Black & Decker at rock bottom prices. My brokerage account performance was greatly enhanced by my sell of Eaton Vance (Up 53%) and it was my 4th largest holding.

Looking forward to the rest of the year and 2021!!!!!

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