Portfolio Update - December: Time for Macro Charts

• Interest rates were pretty strange. Climbed hard, then plunged.
• My cash allocation continued to increase in November. It is now about 24.5%.
• Politics are driving perceptions about the economy. Earnings grow regardless of whether team red or team blue has the White House.
• Earnings forecasts call for material growth in revenue and a substantial increase in profits. We’ve got some nice charts.
• I’ll cover potential upcoming trades in the section for paid members. The rest of the article is available to everyone.

Interest Rates

Treasury rates are actually down over the last month. That feels pretty insane after how much they increased up until the final week of November. 

To help readers isolate the last month and the last week, I’ve marked three dates in the charts:

1. One month ago is highlighted by the vertical bar with the little symbols.
2. One week ago is highlighted by a blue circle.
3. The end of November is highlighted by the white circle.

Obviously, the end of November is also the end of the chart, but the sharp move can make it a bit harder to see precisely where it ends.

We start with the 2-year Treasury:

Source: MBSLive

The 2-year rate is down about 6.5 basis points (0.065%) on the month. 

Next, we have the 10-year Treasury:

Source: MBSLive

The 10-year rate is down 11 basis points on the month.

That should be favorable for our investments since the valuation can be sensitive to interest rates.

However, investors should remember that Treasury rates are still up substantially relative to the end of September. We had a dip in November thanks to the final week, but it wasn’t enough to offset the huge increase in yields we saw during October. Treasury prices are still down over the last two months. However, the iShares Preferred and Income Securities ETF (PFF) still managed to squeak out a positive return over that 2-month period. Seems wild given the interest rate sensitivity, but credit spreads remain very low.

Before touching on my macro views, I want to highlight the absurdity of how most people look at the economy.

In the United States, respondents to economic surveys (also known as “consumer sentiment”) overwhelmingly base their view on the most recent presidential election. I don’t do that, because it’s stupid.

Here’s a chart to demonstrate:

Source: Morning Consult

That chart really demonstrates the “my team good, other team bad” mentality. 

Unlike most respondents, my expectations for the macro economy are not changed substantially by who controls the White House.

Earnings and prices have gone up regardless of which party controls the White House.

Source: Macrotrends

Note 1: The second measurement date is set to December 2019 to remove the impact of the pandemic.

For a bit of perspective, since October 2016, earnings per share for the S&P 500 doubled (up 103.8%) within the chart. However, that chart cuts out in May 2024. The S&P rallied significantly since then and earnings projections continued to increase dramatically. Consensus estimates for S&P 500 earnings suggest strong earnings growth again in 2025.

Data Quality Disclosure: Data may not be entirely accurate. It’s remarkable how much sources disagree on something as simple as the S&P 500 earnings per share. Fact Set should be a more reliable source and I will use them below.

I want to share a few more earnings projections charts. I proactively apologize for the resolution here. FactSet uses PDFs and doesn’t have them scaled for high resolution. I don’t know how that is still a thing in 2024, but it is. 

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By Colorado Wealth Management Fund

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A Moment to Gripe

FactSet is one of the huge data companies. They can afford to do better when producing these reports. 

These PDFs are:

1. About 820 pixels wide.
2. About 673 pixels wide if we exclude the utterly pointless white margins.
3. Don’t zoom well because that’s the actual file size.

It would be possible to store a much better image and just let the user adjust it by zooming. 

For perspective on pixels:

• An iPhone 13 has a width of 1170 pixels (73.8% wider than the charts).
• A Samsung S24 has a width of 1080 pixels (60.5% wider than the charts).

Therefore, they could provide a dramatically less pixelated chart even if they assumed:

1. The reader was on a phone.
2. The reader didn’t know how to spread their fingers on the screen to zoom in on a chart.

I’m constantly blown away by companies intentionally making their product look worse.

Back To Analysis

These are the annual EPS results and forward estimates:

If 2024 plays out according to projections, then earnings will have doubled from 2016 to 2024. Meanwhile, earnings growth is expected to be strong again in 2025.

Note: Far be it from me to correct someone on math, but the report also says analysts are forecasting earnings growth of 15.0%. I can do elementary math. $275.16/240.09 = 1.14607. That rounds to 15%, but it doesn’t round to 15.0%. Don’t add a decimal just to abuse it.

If we look at the individual quarters, we can see that the projections are really picking up some steam around Q2 2025:

Will that all happen?

Who knows.

I’m highlighting the earnings because it’s relevant to the broader economic environment. The multiples on the S&P 500 are much higher than on REITs. That makes sense in the perspective of extremely strong growth in earnings. But how long can the entire S&P 500 grow earnings at this rate?

Can I say something that will bother some people? Of course, that’s my job.

Let’s break it down by year:

• 2014 to 2016: Earnings were relatively flat.
• 2017: Pretty strong growth. Earnings up 11.9%.
• 2018: Earnings surge. It’s the first year of the tax cuts. Earnings up 20.9%. You might even think companies were manipulating their accounting to push profits into 2018. 
• 2019: Earnings growth drops back to almost nothing. Earnings up 0.9%. The lack of growth this year supports the idea that 2018 included some 2017 profits.
• 2020: Pandemic drives huge deficit, but accounting negatively impacts earnings.
• 2021: Massive deficit continues. Earnings surge relative to 2019. Earnings up 27.8% over 2 years.
• 2022: Deficit plunges. Still huge, but vastly lower. Earnings growth moderates. Earnings up 5.1%.
• 2023: Deficit begins to rise, but smaller deficit from 2022 still felt. Earnings growth flat lines. Up 0.4%.
• 2024: Deficit projected to rise again.

That deficit situation is interesting. Will the deficit actually be tackled?

• In 2009, the United States ran the largest federal deficit in the history of the country (in nominal terms): $1.413 trillion.
• In 2022, the deficit was slightly smaller in nominal terms at $1.376 trillion. It was quite a bit smaller adjusted for inflation.
• In 2023, it was back to $1.695 trillion.
• In 2024, it is projected to be around $1.9 to $2.0 trillion.

Fun fact: The smallest deficit since the GFC (Great Financial Crisis) was from 2014 to 2016. 

If we actually see the deficit plunge, that could negatively impact earnings. I’m not trying to forecast where earnings will be next year or some other future year. I’m just a bit cautious about the surge in earnings expectations. The companies are supposed to collectively grow revenues by 5.7% and earnings by 14.6% or 15.0%. They can’t grow all that revenue from charging each other, because then it would just be shifting the earnings. That leaves generating higher margins on sales to the government or sales to consumers.

Portfolio Updates

You can find prior installments of the Portfolio Updates on the Portfolio tab of our website.

Older editions of the Portfolio Update are unlocked for everyone. The newest release reserves the foreshadowing section for paid members (for a couple of weeks).

Trade Alerts

We have a page on our REIT Forum website to link all trade alert articles.

Here are The REIT Forum’s trade alerts.

Layout - Modified Order

To keep things simple for our investors, the rest of the portfolio update is divided into several segments. We run the same segments (with new content) each week. 

We usually maintain the same order from month to month, but I revised the order to work better with free previews. Eventually, the order will be locked in again.

1. Returns on Total Portfolio
2. Sector Allocation
3. Reminder About Cash
4. Housekeeping
5. Recently Closed Positions with Returns
6. Recently Opened Positions with Returns
7. All Open Positions by Sector with Returns
8. Outlook
9. Foreshadowing Potential Trades (paid section)

This layout maximizes transparency while keeping the foreshadowing of our potential trades within the paid section. It also loads the images together at the front, while putting the text-heavy sections together at the end.

Returns on Total Portfolio

Note: The presentation of the charts was modified slightly to enable running it through Google Sheets instead of Excel to reduce transferring data.

The chart below shows our performance since we began preparing for The REIT Forum at the start of 2016 through the end of the latest month:

There are four major index ETFs we use for evaluating performance. They are:

• (MORT) $MORT - Major mortgage REIT ETF
• (PFF) $PFF - The largest preferred share ETF
• (VNQ) $VNQ - The largest equity REIT ETF
• (KBWY) $KBWY - The high-yield equity REIT ETF most retail investors follow

Annual comparison vs. each ETF:

Our performance vs. the average of the ETFs:

We evaluate alpha based on performance against the ETFs because it strips out the general change in our sectors.

We delivered a respectable gain in August, but the indexes took the lead. Trailing this late in the year has been a rare occurrence.

The next chart shows the change in the value of our portfolio from month to month. We strip out the impact from contributions made during the month because, obviously, contributions are not returns.

The prior year is included as well to help investors see how the calculations work.

If anyone is confused by these calculations, let me know. I believe this transparency is crucial, so I’ll include an example showing every calculation if I hear that readers have any difficulty following it.

Sector Allocation Chart - 

The sector allocation chart helps to explain how we are thinking about risk and seeking returns:

Reminder About Cash (repeated)

I normally keep at least 6 months or more of living expenses in “cash”.  If you normally keep around $40k to $50k in “cash”, the difference between getting paid 5% and 0.2% is around $2k per year. 

I’m using (SGOV), (SHV), and (BIL) as my cash substitutes. These are short-term Treasury ETFs. Prices are extremely stable. Liquidity is excellent.

I use a Schwab business account that is not part of my portfolio. The only assets it holds are actual cash and cash substitutes (those 3 ETFs). 

Nearly all my expenses go through my credit card already (paid off in full each month).

I still have my checking through USAA because of the long history on those credit cards. If I need cash, I can sell Treasury ETFs and transfer the funds to my USAA account.

It takes a few days, but that’s fine.

This is a pretty nice return for cash I was going to have there anyway. 

Note: Some people think you don’t need a strong credit score after getting a mortgage. I disagree. The long history on those cards is extremely useful if I want to boost someone’s credit score. If I add someone to my card, their next update will show they have a card with 20 years of perfect history.

You can get scammed this way. You are liable for the bill. They can just charge the card and walk away. This doesn’t concern me because I keep a lower limit (such as $10k) on those cards and I’m only doing it for people I trust. If one of those people betrays me, I’ll count myself lucky that I found out for only $10k. For people who can’t afford to risk that money, this would be too dangerous. 

Housekeeping

We used to have a repeated section on strategy, but I wanted to shorten the update. 

I’ll be posting an article that covers our strategy in greater depth and just adding a link to that post.

We have a project underway to update our guides and improve the organization.

Recently Closed Positions with Returns

These are the positions closed during the prior calendar month. If you want to see positions that were closed before that, you can see the prior portfolio updates or use the Google Sheets. 

If we didn’t close any positions for the sector during the month, then the image will be blank. 

Note: By loading the Google Sheets, you can still see all of our closed positions. We only include the recently closed positions to reduce the size of the article:

Recently Opened Positions with Returns

All Open Positions by Sector with Returns

We will start with the open positions as of the end of the month. It often takes a few days to prepare this article, but the screenshots below are from the end of the prior month.

The cell with the ticker is grey if the position is in a taxable account. This was a request by a few members and there was no drawback to adding the information. All of the taxable positions are in equity REITs.

Preferred shares and baby bonds:

Equity REITs:

Mortgage REITs and BDCs:

Other:

Subsequent Changes

None so far.

Foreshadowing Potential Trades

This section is usually prepared shortly before publishing. The goal is to quickly cover ideas for trades. We aim to foreshadow our trades here, though the market may move in surprising ways. While the article takes days to prepare and documents prices and performance from the end of the month, the potential trades section is written last to provide the most up-to-date pricing.

Based on the change in relative prices as of 12/03/2024 here are some of the trades on my radar. 

Note: Some prices are end of day, some are during trading. It takes a bit to prepare this section for subscribers.

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