Trading Update V

Sold some VPU @ 150.40 to buy TSN @ 75.63.

New IRA asset allocation:

This is definitely a stock that I intend to hold long-term. I'm overweighting it and bracing for more pain. Not only has Tyson been in falling knife mode for the past month, but the White House isn't at all happy that the company raised meat prices during a pandemic. Makes inflation look bad, as if there aren't enough reasons already that inflation looks bad.

I suspect that the pace of my trading will soon grind to a halt, now that VPU is down to just 20% of my IRA. The buying and selling seems mostly done. Now it's time for the holding. If I thought that there was even a chance that we'd soon see 1% real yields on the 30-year TIPS then I would not be taking such risks.

Trading Update IV

Sold some VPU @ 151.29 to buy OKE @ 52.68 and KMI @ 16.14.

New IRA asset allocation:

Lured by the high dividends of ONEOK and Kinder Morgan. I'm certainly taking on a lot of risk for an economy in uncharted waters. *shrug*

VPU Performance v.008

Months Elapsed: 8
Total Growth: 12.80%
Annualized Growth Rate: 19.81%
Distribution Yield (TTM): 2.80%

This isn't a sustainable growth rate. There is risk here, especially if inflation isn't transitory and yields don't continue to decay over the long-term. That said, I'm still comfortable holding it.

I did sell about half of my VPU position this month to buy BTI, MO, PM, and VZ. As a group, I'm up 0.66% on those. Would be doing better if I had not overweighted BTI and VZ. No plans to change course though. Feel good about the allocation.

And lastly, also bought platinum Eagles this month. On the one hand, it would cost 3.27% extra to buy them now. On the other hand, I would lose 3.67% if I sold them now. Still fighting the ~7% round trip spread. That was a tough long-term call. Could have bought a platinum fund that charges 0.5% per year instead. I therefore need to hold at least 14 years to make holding the coins the better choice. As an added bonus, holding platinum coins in one's hand beats holding a paper IOU, especially if there comes a time when many paper IOUs become worthless.

Trading Update III

Sold some VPU @ 150.39 to buy VZ @ 55.98.

New IRA asset allocation:

Lured by Verizon's 4.5% dividend that seems reasonably safe, or as safe as an illusion of prosperity blogger could reasonably hope to expect. Safe is relative in a -0.27% 30-year TIPS world, of course.

Once again, not investment advice.

Trading Update

Sold some VPU @ $145.69 to buy BTI @ $37.67, PM @ $100.47, and MO @ $47.97. New IRA asset allocation now looks like this.

Didn't want to sell VPU, but needed to do it in order to buy these three tobacco stocks. The trade was inspired by this post (and quite a few before it) at Credit Bubble Stocks. The temptation to buy has been growing over the past few months, and I finally pulled the trigger.

Part of the appeal of VPU is the addictive nature of electricity combined with relatively high dividends. Adding the addictive nature of nicotine and even higher dividends to the mix seems like more of the same. As an added bonus, it offers more diversification (and potentially greater rewards). I'm no longer relying on just one industry. I anticipate holding all of these investments for at least a decade.

If you are curious as to why I overweighted BTI, I was intrigued by its ultra low 0.14% short interest (according to TD Ameritrade, as of 7/15/21). Shorting a stock with an 8% dividend yield is not for the faint of heart. You better know something that others don't. Apparently, not many think they do. If so few traders want to sell shares they don't own, perhaps I should be willing to buy more. And so, I did.

This is not investment advice.

VPU Performance v.007

Months Elapsed: 7
Total Growth: 8.78%
Annualized Growth Rate: 15.51%
Distribution Yield (TTM): 2.90%

It's just climbing that wall of worry. Thankfully, not much drama nor reasons for regrets. At least not yet.

VPU Performance v.006

Months Elapsed: 6
Total Growth: 4.67%
Annualized Growth Rate: 9.56%
Distribution Yield (TTM): 3.02%

Received a distribution of $1.0140 per share this month which was reinvested at $139.29.

On the one hand, it was a bit disappointing. The distribution was down from $1.2578 in June of 2020.

On the other hand, VPU distributions were extremely volatile in 2020. Last year's abnormally high distribution (as seen here) made for a very difficult comparison this year. In theory, this September's upcoming distribution should have a much easier year over year comparison.

In any event, overall performance is more than safisfactory so far. As a long-term Treasury bond substitute, I have no complaints. At least not yet.

Firmly HODLING with cast-iron hands. They are strong hands, but they're also brittle and prone to rusting. ;)

VPU Performance v.005

Months Elapsed: 5
Total Growth: 6.65%
Annualized Growth Rate: 16.70%
Distribution Yield (TTM): 3.13%

5 months down, 195 to go. I'm thankful that it's much like watching paint dry, at least so far. Definitely not looking for any drama here.

VPU Performance v.004

Months Elapsed: 4
Total Growth: 9.20%
Annualized Growth Rate: 30.22%
Distribution Yield (TTM): 3.06%

The 30-year Treasury yield has risen from 1.67% in December to 2.30%. In hindsight, investing in utilities was a much better plan than locking in a 1.67% yield (the red target in the chart). Since I am not even remotely convinced that the long-term bull market in government bonds is over, those locking in 2.30% today might not be similarly disappointed though. That said, it would take a lot to be similarly disappointed. 30 years at 1.67% nets so much less than 30 years at 2.30%.

I suspect one short-term tailwind for utility investors to diminish as Treasury yields stabilize. Picture a recent safety-seeking retiree invested in low-yielding bonds who is looking at massive losses on those bonds, while also watching higher-yielding utilities actually going up in price. Painful. Is it any wonder that some therefore sold government bonds to buy utilities? As utility prices rise and Treasury prices fall, there is a growing temptation for me to sell utilities to buy government bonds though. The 30-year TIPS yield is currently only 0.02%, so the temptation is still very minimal.

4 months down, 196 to go.

Tech vs. Utilities (Musical Tribute)

The following chart shows the QQQ to XLU ratio since 1999.

Chart courtesy of StockCharts.com.

The ratio peaked in 2000. 21 years later, we've almost come full circle. What good fortunes will the next 21 years bring? Fully autonomous self-driving cars? Better late than never. Am I right?



This is not investment advice. As a utility investor, I am indifferent when it comes to how utilities perform relative to tech stocks from here. That said, it would not surprise me in the least if utilities outperform Tesla. Keep in mind that I want Tesla to succeed, just as I would have wanted Ford to succeed in the early days if I would have been a gasoline investor.

As a side note, my first mower was gas-powered. My next mower was battery-powered. I really liked how quiet it was, but I did not like that, as it got older, it took more than one charge to mow my lawn (nor did I like that the battery was not easy to swap out). My current mower is gas-powered. Spent more than an hour today cleaning its carburetor. My next mower may be battery-powered, again. As much as the thought of a fully-autonomous self-driving lawn mower appeals to me, I don’t think I’m emotionally prepared to risk having it mow over things that randomly might appear in my lawn completely unsupervised though. You know, like the neighborhood kids and pets.

I’m not even emotionally prepared to risk owning a fully-autonomous self-driving vacuum. We have two dogs and a cat. All it took was one poopocalypse story involving a Roomba to cure me of that desire.

Mining Productivity Miracle

The following chart shows the mining industrial production index divided by the number of mining employees (thousands).

Bagger 293

Bagger 293 is 96 metres (314.9 feet) tall (Guinness World Record for highest terrestrial vehicle, shared with Bagger 288). It is 225 metres (738.2 feet) long (same as Bagger 287), weighs 14,200 tonnes (31.3 million pounds), and requires five people to operate.

At what point are these fully-automated and/or self-replicating?

VPU Distribution History

This chart is one reason why I am mostly comfortable holding VPU over the long-term. I say mostly comfortable because:

1. Past performance is not necessarily indicative of future returns.

2. Exponential trends eventually fail. This one will be no exception.

3. VPU's distributions held up great during the Great Recession. However, had the fund existed during the dotcom bubble collapse, it would not have done well. XLU investors buying utilities in 2000 were no doubt greatly disappointed in 2003. Both the price and the distributions fell over the period, and not by a trivial amount. See data here.

4. A return to the 1970s era, which I am not at all predicting, could make the dotcom bubble's utility pain potentially seem tame by comparison. My comfort level is therefore tied to the belief that rising inflation will be transitory and that long-term yields will begin to fall again at some point in the next few years.

My expectations are low. Not trying to hit a home run here. I'd be perfectly happy walking to first base. This investment is mostly just a bond replacement in a TINA world, at least to me. Anything more than that is just a bonus. That said, there is a definite possibility of a substantial bonus, assuming the wheels don't fall off.

VPU Performance v.003

Months Elapsed: 3
Total Growth: 5.23%
Annualized Growth Rate: 22.60%
Distribution Yield (TTM): 3.17%

VPU paid a $0.9851 dividend today (a 9.5% increase from 2020 Q1). It was automatically reinvested through a DRIP @ $139.874. VPU closed @ $140.51.

From down 4.59% last month to up 5.23% now, it's been quite a volatile start. Live by the sword, die by the sword, live, die, and so on.

3 months down, 197 to go.

VPU Performance v.002

Months Elapsed: 2
Total Growth: -4.59%
Annualized Growth Rate: -24.59%

Thanks to rapidly rising long-term interest rates, the unmitigated utilities disaster in Texas, and possible increased national regulation due to the mostly man-made Texas disaster, it’s now looking more like a crime scene photo than a picture of paint drying.

2.09% of the 4.59% loss happened just today. Perhaps it is a sign of capitulation and March will be better? In any event, I’m in it for the long haul but bracing for more pain.

2 months down, 198 to go.

VPU Performance v.001

As some of you may know, I decided to go all in on the Vanguard Utilities Index Fund (VPU) inside my IRA at the end of December 2020. This is a long-term investment. All dividends will be reinvested back into the fund. I intend to provide an update at the end of each month to show its performance since the purchase was made. This is the first update.

The red target is the 1.67% 30-year Treasury Bond yield at date of purchase. The yellow target is the 3.53% EE Savings Bond yield (if and only if held a full 20 years). The green target is a 6.0% growth rate that combines a 3.1% dividend, 2% inflation, 1% real yield growth, and 0.1% fund expenses.

Since I am using this fund as a bond replacement in a ZIRP world, my expectations are very low. Riding the yellow target would be satisfactory. Anything more is just a bonus. Anything below the red target would be unsatisfactory. Falling off the chart to the downside would clearly be an epic failure.

Months Elapsed: 1
Total Growth: 1.00%
Annualized Growth Rate: 12.67%

So far, so good. One month down, 199 to go. Apologies if this feels like watching paint dry. It is my hope that it will be similarly uneventful for the next 16+ years. One can always hope.

Charting VPU

 

This chart shows the adjusted close (adjusted for dividends and stock splits) of VPU since the depths of the Great Recession. It is plotted on a log scale so that constant exponential growth will appear as a straight line. I have added a trend channel in red for your consideration.

I offer no predictions on where this fund goes from here. I’m simply offering a glimpse of history. As they say, past performance is not necessarily indicative of future results. I think that would be especially true in this case.

My expectations remain low. I do not expect VPU to permanently stay in the channel. However, it is my hope that this fund will outperform the 1.64% 30-year treasury bond if held the full 30 years, and I intend to personally test the theory to its ultimate conclusion.

The ability to easily and safely make money off of money continues to become both more difficult and less safe. Unfortunately, this is a trend that I do not see improving within my lifetime.

The source data for this chart can be found at Yahoo Finance.

Thoughts on VPU

 From MarketEdge:

“Until VPU can find a price level that supports the stock, further price depreciation is probable. Momentum is negative. Wait for accumulation indicators to turn positive as a sign that demand for the stock is improving.The stock has underperformed the market when compared to the S&P 500 over the last 50 trading days.”

They rate VPU as avoid, for the same reasons I rate it as attractive. I’m not a momentum trader. I seek value. Heaven help us all if utility stocks outperform the market over the long-term.

I do expect VPU to outperform the 30-year treasury over the next 30 years though. VPU’s dividend yield is about 3%. The 30-year treasury now yields just 1.64%. My expectations are set very low. Not feeling any exuberance.

I had similar expectations for the one long-term TIPS bond filling my retirement account. For years, it poked along exactly meeting my low expectations of 2% per year plus inflation. Was happy holding to maturity. This year, money flooded into bonds though. The market made me an offer I couldn’t refuse. In theory, the same thing could happen to utilities. All it would take is more safety seeking low expectation “savers” to someday make the same decision I have recently made. And if they never do, that’s fine too. As one who is reinvesting the dividends, I’m not going to complain much about cheaper share prices to keep buying.

Setting expectations below what is likely means life is often filled with pleasant surprises. It is ultimately more rewarding to me to invest in something mundane that turns exciting than something exciting that turns mundane.

Note that I chose to buy mundane utility stocks over shares in a very exciting $669 billion car company. Perhaps too exciting. That’s roughly equivalent to a $2000 stimulus check for every man, woman, and child in the United States. How many more times do Tesla investors realistically think it can double from here? Dare I ask?

Trading Update Part 2

I slept on yesterday’s purchase decision and am reasonably comfortable with it.

Used the remaining cash in retirement account today to buy VPU @ 134.748. I’m now all in on the Vanguard Utilities ETF. Other than reinvesting dividends on autopilot, the only trading I intend to do in this account is withdrawing to meet minimum IRA distributions. That starts in about 14 years.

This also means that I’m officially an old geezer. Don’t expect any more fireworks in my retirement account, unless the entire United States power grid someday fails. Of course, in that instance cash would have hardly been a much better investment. I only half-joke. *cringe*

Still intend to use money outside my retirement account to buy more savings bonds. That part isn’t changing.

Trading Update

Bought shares of VPU @ 134.325 inside my retirement account today, bringing the cash in that account down from 100% to just 29%. I expect VPU to be a very, very long-term holding.

I would prefer to buy long-term TIPS instead at some point, but that party appears to be over. I’m reasonably convinced that this economy can never survive high real yields again with all this debt.

For more than a decade, I’ve believed that our ultimate destination would be nearly permanent ZIRP. Not seeing anything that would change my mind.

My next purchases will be more I-Bonds and EE-Bonds next month, outside of my retirement account. Not expecting much from 0% I-Bonds in a potentially low inflation environment. The EE-Bonds doubling in 20 years appeals to me much more (but lack safety if inflation does somehow accelerate).

The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves. - Alan Greenspan (1966)

May we live in interesting times.

The Sweet Spots for the Global Economy

May 26, 2016
Wall Street Journal: Oil Prices Poised to Hit Sweet Spot for Global Economy

Range of $50 to $60 a barrel represents ‘goldilocks’ scenario for consumers, industry and the oil industry alike

What's the sweet spot for illicit drugs?

June 30, 2005
UN report puts world's illicit drug trade at estimated $321b

Annualized  worldwide illegal drug sales are greater than the gross domestic product of 88 percent of the countries in the world...

Just look at that GDP!

The bulk of the money, $214 billion, was made at the retail level; drugs sold in streets and back alleys.

Most investors love to see a good retail sales report. There is no reason our streets and back alleys can't become the envy of the world, more so than they already are.

Most of the buying was in North America, with 44 percent of all estimated sales, followed by Europe with 33 percent.

Looks like we're already in the sweet spot. That's fantastic! Now we just need to work on the other sweet spots.

Coal? It's too expensive. Nobody will be driving coal powered cars until the prices come down.

Nuclear weapons? Shouldn't cost more than a suitcase if we want consumers to buy and use them.

Human trafficking? Life is priceless. So what, maybe $15 per hour?

In all seriousness, Americans are driving 3.2 trillion miles per year in total. How much is enough?