Economics & Credit US in Growth Mode as the World Slumps

[Pages:12]Economics & Credit Economic conditions drive stock and bond prices over the longer term. Growth in the economy works with job creation and household income to spur higher spending, which drives business revenues and profits. Higher profits result in rising business values, which will be reflected in higher stock prices. Bonds are driven by supply and demand. Borrowing by the Federal government, municipal issuers, corporations and mortgage borrowers is met by demand from investors--from institutions and governments to individuals--resulting in stable to rising prices. But if supplies outpace demand, then we get falling prices and higher yields. And conversely, demand that outpaces supply drives prices higher and yields lower. Inflation also factors into yield. Rising costs and rising expectations for inflation increase yields, driving down prices, while the inverse bolsters prices and drives the yields demanded by bond-buyers lower. Right now, the US has rising consumer income and spending. But in the near term, the stock market has to get past recent challenges to investor confidence, such as the economic problems outside the US. The bond market just had a flurry of issuance by the US Treasury, some corporations and announced plans by municipals. On top of this, corporations sold bonds to raise cash for income-tax payments. This was boggled by the Federal Reserve, resulting in a liquidity problem that spooked the markets. However, its resumption of QE has stabilized things for now. The bottom line: Continue to buy US-focused, conservative dividendpaying stocks and quality US bonds for safe growth and reliable income. At the same time, however, I now recommend reducing exposure to energy stocks, which are being impacted by global problems.

Vol. 30, No. 10

US in Growth Mode as the World Slumps

October 2019

Dear Friend, Every market has its own challenges, and there is always a learning curve to

climb. No one knows completely how things will play out even if they know how things should play out.

Right now, the US economy remains in good shape. Consumers, who drive this market, are fortified by a strong jobs market and wage growth, which is near double the core rate of inflation. US personal income has grown by 4.61% over the trailing 12 months.

This is driving spending, which is up 4.21%. And in a recent survey by the Federal Reserve Bank of New York, forward spending expectations for the next 12 months are up significantly over the past two years.

But outside the US, Europe, Asia and beyond are slumping close to or into recession. This is driving capital into the US markets, including a wall of money into stocks and bonds. This should be good news for US markets. But there are problems.

After a prolonged regulatory crackdown on major banks, their ability to provide liquidity in the financial markets despite massive reserves is resulting in the need for the Federal Reserve to resume a form of Quantitative Easing (QE).

And while the energy sector is pumping away, even with an attack on Saudi facilities, global demand is another problem.

In this issue, I'll discuss how the credit markets are evolving and how they will impact the stock and bond markets. I'll also go through the energy markets and how you can best invest in this important sector.

And as always, I'll be presenting and reviewing my full portfolio recommendations for safer growth with more income.

Growth Strategies

What Happened in the Credit Markets?

Many investors are now learning what the repo market is all about and how it impacts the markets and the economy.

In the bond market, a "repo" is a repurchase agreement. It's used by banks, institutions and governments, including the US Federal Reserve, to borrow or lend for short time periods.

Here's how it works: If a bank or financial institution has Treasurys or other bonds on its books and it needs additional near-term cash to meet various demands, such as reserve balance requirements, it will sell its bonds to another institution.

At the same time, it will agree to repurchase (repo) those same bonds in the next day or two at a set price. The difference between the sale price and the repurchase price reflects an implied interest cost to borrow the funds.

The temporary buyer of the bonds enters into what is called a "reverse repo," which garners the buyer with a near-term, yield-bearing asset.

Repos are one of the cornerstones of the credit markets' liquidity. Liquidity

(continued)

allows institutions to manage cash on hand and cash needed as part of normal trading and management of bond and other securities portfolios.

It's also used to meet cash demands for contracts and tax payments. Think of the repo market as a credit line that has to be paid back. Nearly all major financial market participants use it to meet cash needs as part of normal operations.

Recently, a series of unrelated events caused the repo market to nearly stop. First, the US Treasury issued and sold nearly $300 billion of Treasury bonds into the market. The issues were weighted in shorter-term maturities to control the supply of longer-term bonds, particularly in the 10-year maturities, which influences other bond yields (or costs), including mortgages.

At the same time, a series of major corporate bond new issues were announced as corporations started borrowing to raise cash at very low costs or to refinance older, higher-cost bonds.

Third, October is tax time, and many corporations are pulling cash in advance to make their payments to the Internal Revenue Service (IRS), resulting in strong demand for cash, including from the repo market.

Fourth, global institutions and governments are already heavily positioned in US bonds and have increasingly been tapping the repo market for US dollar cash needs that can't be met in their home markets.

All of this came together to send the repo market into a cash crunch. The result was a spike in the implied interest rate, as you can see in the chart to the right.

Why the Market Got Stuck

The imbalances were not unforeseen by the Fed, which knows the sale and issuance calendar by the

US Treasury and keeps an eye on tax payments by corporations as well as corporate issuance. But it chose not to step into the market ahead of this confluence of events.

The Federal Open Market Committee (FOMC) oversees the direction of monetary tools and had been scaling back its bond-buying program last year. And the Federal Reserve Bank of New York, with its mission to implement the buying and selling of bonds and other securities, including repos, was caught flatfooted during the liquidity lock-up.

Another primary reason for the crunch is the regulatory clampdown on major banks and financials in the US after the 2007-2008 financial mess. The increase in reserve requirements for banks were significantly hiked, reducing the amount of capital that banks could use for financial transactions, such as repos.

In addition, restrictions in trading by banks furthered the pullback of what was the backbone of repos and other liquid parts of the credit market. Much of this was reversed by Congress last year, but the Fed and its affiliated regulatory arms have been slow to implement more accommodative rules.

So, the market has been hamstrung in providing liquidity.

QE is Back

The Fed's bond-buying program for Treasuries, corporates, mortgagerelated bonds and other securities in response to the capital drain after 2007-2008 was known as Quantitative Easing (QE). It resulted in a Fed bond portfolio that exceeded $4.5 trillion.

That portfolio was allowed to rolloff last year, meaning that interest payments and maturities were not invested. There was discussion of bond sales by the FOMC to normalize interest rates and the credit market, which included the series of hikes in the federal funds rate target range. That didn't go well, and the roll-off contributed to the market selloff in the fourth quarter of last year.

But now, the Fed is back with more QE, and it has been buying billions of dollars' worth of bonds daily to support the credit market and the liquidity of repos. This will continue for a while.

Now, repo rates have fallen back to under 2%, in line with the FOMC's target range for federal funds borrowing rates. And the overall US

Last Price

1.93

High on 09/17/19 8.75

Average

2.43

Low on 09/20/19 1.01

Jan

Feb

Mar

US Overnight Repo Rate

9.00

8.00

7.00

6.00

5.00

4.00

3.00

21..0903 1.00

Apr

May

Jun

2019

Jul

Aug

Sep

Source: Bloomberg Finance, L.P.

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3.30

Jan

Feb

Mar

Apr

22M00a11y99

Jun

Jul

Aug

Sep

bond market is coming back up in price across the board.

This is a good step and will result in a resumption in the buoyant bond market. Further easing in the federal funds rate by the FOMC also will help this process.

That said, while the economics of the US remain good for consumers and for US-focused companies, the globe continues to slow down. This will weigh on big global companies, including energy firms.

In this environment, I'll continue to focus our exposure on US-centric stocks, including real estate investment trusts (REITs) and utilities while cutting global companies at further risk. I also continue to recommend US bonds because of strong ongoing demand by US and global bond investors, along with low inflation.

Proven Growth & Income

Energy is a Global Market

Energy is a global market, not just a US industry. And while the US economy continues to expand, the rest of the globe continues to suffer. The Organization for Economic Cooperation & Development (OECD) has revised global GDP estimates downward again for 2019 and 2020.

The Euro area GDP was cut 0.20% and 0.50% for 2019 and 2020, respectively, with the core economy of Germany suffering losses for this year by more than double.

In Asia, Japan may see some minor improvement for this year, but it's projected to find trouble in 2020. China is projected to slow this year in line with Europe and the same for next year.

This slowdown is impacting the energy markets. To start, global oil demand slows when there is less global economic growth. The current daily world demand for crude is now running at 99.66 million barrels per day (MBPD), down from the fairly strong and continued demand over the past six years.

Meanwhile, supplies of crude

OECD Projected World GDP Growth

MMiidd PPrriiccee

33..1188

33..7700

HHiigghh oonn 1122//3311//1177 33..6688

AAvveerraaggee

33..3377

LLooww oonn 1122//3311//1166 33..1122

33..6600

33..5500

33..4400

33..3300

3333..22..110088

33..1100

22001155

22001166

22001177

22001188

22001199

Source: Bloomberg Finance, L.P.

World Total Daily Demand (Black) & Supply (Blue) (MBPD)

LLaasstt PPrriiccee OOMMRRSSDD000011 IInnddeexx 9999..6666 OOPPCCBBTTSSUUPP IInnddeexx 110011..2222

110022..0000 110011..2222 1199009900..66..006600

9988..0000

9966..0000

9944..0000

9922..0000

22001144

22001155

22001166

22001177

22001188

22001199

Source: International Energy Agency (IEA) & Bloomberg Finance, L.P.

oil are firmly stronger. Despite implemented production cuts by the OCorMMHHguiiiiggaddnhhnPPtoorrrinniicczieee11a22st//i33ao11n//n11d77oof t1111Ph22220101ee8282tr2323rso(leOuPmECE+x)p,oarsting weAAlvvleerraaasggeeimpaired 99s55u0000pplies due to emLLboowwatootnnle1122d//33p11//r11o66duc77t22i66o88n from West and Northern Africa, Venezuela and the sanctioned Iran, daily supply is now running at 101.22 MBPD.

This demand and supply imbalance comes in part from additional supply from the US thanks to incredible technological investment in shale fields that continue to surge. Monthly production soared over the past six ye22a0011r33s by so22m0011e44 66.24%22.00T1155his has 22001166 made the US the largest petroleum producer, outpacing both Saudi Arabia and Russia.

Prices Will Vary

Crude oil prices were down during the fourth quarter of last year, with

US West Texas Intermediate (WTI) down from $76.41 in early October to a low in December of $42.53. Global Brent crude prices fell from $86.2112290088t22o $50.47 for the same period.

But with the rebound in the US1111000000 stock market as well as US economic growth, both WTI and Brent 1100000000 recovered into April. Since then, oexvpereacltlastiloonwsinfogrgglorobwalthgrhoawvethsaenn99dt000000 prices lower.

The attack on the primary Sau88d00i0000 crude processing plant that prepares crude oil from field production o77n0000i00ts way t22o001177marine ex22p0011o88rt termi22n0011a99ls sent oil prices soaring for a day or two. However, even with that setback in Saudi production, the overall supplies amraeTrshktieisltlmroigeuhatpnt asnCCCCcoLOLOoi11w11nilCCCCg--OOooiMmMmssnBBlddaLLott'tyyCCaatwssoolttammeePPaddrrdgttiisccyyreetdo5656uew8484mn....2222tt4848hailn9898d0000.

Profitable Investing | October 2019 | profitableinvesting.

7700 3

6644..2299

2014

2015

2016

2017

2018

2019

a global economic recovery and advancement commences.

Meanwhile, natural gas prices remain subdued. Right now, prices in the US are running at $2.52 per million British Thermal Units (MBTU), which is down significantly from last November's highs at $4.84 MBTU.

US production of natural gas has surged by 37.14% over the past three years. And exports of US natural gas, thanks to increasing capacity of liquefied natural gas (LNG) processing and export terminals, is up 4,832%. This should continue to expand into 2020 despite the narrowing price gap between the cost of US natural gas and imported LNG prices in Europe and Asia, again reflecting slowing economies.

So, we have a lot more supply of both crude and natural gas from the US and a globe that is demanding less at more subdued prices.

In our model portfolios, we have a collection of stocks and funds in the energy market. But as market conditions are becoming more challenging for this sector, I am changing the focus on our recommended holdings.

Up, Down & Midstream

The overall energy market in the US has been lagging the general stock market. The S&P 500 Energy Sector Index has only returned 9.66% year to date, including the rebound from the end of August through September.

This reflects the challenges not just for the underlying companies throughout the sector, but also the expectations from investors and the market of further growth for energy.

"Upstream" exploration and production (E&P) companies are being challenged. Most of the major companies, including ExxonMobil (XOM), have global operations that are on the front line of global woes. These have been leading the sector lower due to their challenging growth prospects. And with low dividend distributions, their yields do not represent a compelling case to own these companies.

The oil-field service companies

4

Mid Price MHiigdhPornice12/31/17 HAvigehraogne12/31/17 ALovewraogne12/31/16 Low on 12/31/16

US Crude Oil Monthly Production (MBPD)

12082 1122018223 129152030 97520608 7268

12082 12082

11000 11000

10000 10000

9000 9000

8000 8000

7000

2013

2014

2015

2016

2017

2018

2019 7000

2013

2014

2015

2016

2017

2018

2019

Source: Department of Energy (DOE) & Bloomberg Finance, L.P.

US WTI (Black) & Global Brent (Blue) Crude Oil Price

90 Last Price

CL1 COMBLCasotmPdrticye 58.24 90 CCLO11CCOoMmBdtCyomdty 5684..2248 80

CO1 Comdty

64.28

80

70 7604.29 6604.29 58.24 60 58.24 50 50

Sep

Dec

2018

Sep

Dec

2018

40

Mar

Jun

2019

Sep 40

Mar

2019

Jun Source: BloomberSgeFpinance, L.P.

that provide support to onshore and spread measures the overall value of

offshore wells have continued to see refined products against the cost of a

reduced demand as well. With so much shale oil in the US, traditional fields are not justifying capital budget increases. This is showing up in Schlumberger (SLB) stock--one of the segment leaders--which is barely in the black year to date.

"Downstream" refiners in the US are still working out challenges. First, many major coastal refineries were set up years ago to process crude

barrel of crude. But with the sprea5d.00of WoisfnTB'tIraesnnitttoisvnietgtrilnnyegapaLHArLHALraaovviiotgg$seswehhfttrra1aaiPoPoorggt5nrrnnoaeieicc011bueea811l/nn//0e11dd544/m//111$t988ha1er22422422k,...s....5885880ept2472471thrfeiosa544rd...055000 refiners right noLwow. on 08/05/19 2.01 4.00

One of the crucial refined produc4t.0s0 is US gasoline (petrol). Prices are 3.50 currently running at $1.67 per gallo3n.5.0 While this is up from lows in late 3.00

December at $1.25, it's on a downw3a.0r0d

path from $2.13 per gallon in April2..502

from South America and the Middle

The "midstream" pipeline and 2.502

East. But now, pipelines are bringing related toll-takers are where profits2.00

ltwoheweSSleelePpprae-srcmoesv22ita00e11nsn88hBcahlaeesaDiDonepeicclei,rn,pWahreteaisvctuieTlraerxclyrausfdraMMeosaamrr

cMpoipind22et00sli11int99nrueeeacmtooJJmuuEfnnlpnoaewnrg.ieyTshIinendsAeidxleertrtihaaSSnceeekppUs Sth2e.00

from Canadian fields.

market. It has seen a total return of

The "crack spreads" for US WTI 23.59% year to date, vastly outpacing

and global Brent crude have both improved in September, but they still are down from June levels. The crack

the overall energy sector market. 25 Pipelines and related assets,

including gathering facilities from 25

20

Profitable InvestingA|leOriacntMobidestrre2am01E9ner|gpy rInodfeitxableinvesting.investorplace.co20m

Alerian Midstream Energy Index

15

15

Sep

22001188

Dec

Mar

22001199

Jun

Sep

US Natural Gas Price (MBTU)

LLaasstt PPrriiccee

22..5522 55..0000

HHiigghh oonn 1111//1144//1188 44..8844

AAvveerraaggee

22..8877 44..5500

LLooww oonn 0088//0055//1199 22..0011

44..0000

33..5500

33..0000

22..550022

SSeepp

22001188

DDeecc

22..0000

MMaarr

22001199

JJuunn

SSeepp

Source: Bloomberg Finance, L.P.

Alerian Midstream Energy Index Total Return

2255

2200

AAlleerriiaann MMiiddssttrreeaamm EEnneerrggyy IInnddeexx 1155

1100

55

00

JJaann

FFeebb

MMaarr

AApprr

MMaayy

JJuunn

JJuull

AAuugg

SSeepp

22001199

Source: Alerian & Bloomberg Finance, L.P.

US shale fields as well as marine terminals for the increasing exports of US crude, continue to find very strLLoaanssttgPPrriidcceeemand. 8844..2266

RHHiiggehhgoounn l00a66t//33o00r//11y99 re11l00i00e..f5599and reformation havAAvveeerraaaggleelowed mo22r66e..3388efficient maLLnoowwagoonne11m22//33e11n//11t88of --p4488ip..33e00s as well as expanded capacity and new pipes. With the huge production from shale fields, pipelines have been expanding their capabilities to move crude oil and natural gas both for domestic consumption and export.

Pipelines are less at risk of declines in spot prices for crude and natural gas sruinncsetthhreoyuJJgaagnnhetthpeaipdipoFFeneesbbt.hBeuvtotlhuemMMyaaerrarthe22a0011t99 not immune. If prices fall too much, margins can be squeezed for even the more efficient fracking producers.

And if they stop pumping, even if they have contracts with pipelines, the pipeline companies could lose payments

for transport, putting profits at risk. But

the tried and true of the pipes are all the

more battle-hardened from the plunge

in oil and natural gas prices subdued prices into 2016.

in

20141100a00nd

The key to being successful is 8880044..2266

managing counterparty risk, and t66h00 at includes making sure that pipeline capacity is filled through markets44t00hat

are thick or thin.

2200

What to Buy & Own

00

In the Total Return Portfolio, we --2200 have one upstream investment in Viper Energy (VNOM). But Viper is not--a4400n E&P company. It's a property landl--o66r00d AAppthrr at leasesMMaaiyyts land toJJuuEnn &P comJJpuuall nies. In turn, the tenant E&P companies pay royalty interests to Viper.

Viper therefore doesn't need to spend capital on field maintenance or pay for new wells or equipment. This means it doesn't have to hedge against

oil and natural gas prices to cover capital expenditures and other costs.

And the company can be run with a lower headcount and less overhead, as it merely has to evaluate and manage its tenants to make sure that they are capable of delivering royalties and not at risk of disappearing.

Viper has generated a return of 18.90% year to date, outpacing the performance of traditional E&P companies. It has also been expanding its properties thanks to its affiliation with Diamondback Energy (FANG), which founded the company through a drop-down of property assets to Viper in 2014.

Revenues over the trailing year are up at a robust rate of 67.90%. It has a very efficient business model, with operating margins running at 70.30%. And it has piles of cash and very limited debts.

It also pays a dividend distribution of 47 cents per share, which is up 3.36% for the trailing year, even with lower oil and natural gas prices. That distribution is up over the trailing three years by an average of 36.31%. Currently, VNOM yields 6.33%.

While lower oil and natural gas prices may bring lower or higher distribution amounts from quarter to quarter, the business model is very insulated from a lot of this sector's volatility. VNOM is the one upstream-oriented company to buy and own under $38.00, ideally for a tax-free account.

In the midstream market, the pipeline companies are doing well. This shows the power of cash flowing from the transport of oil and natural gas.

There are four pipelines in the Total Return Portfolio and one in the Incredible Dividend Machine. We own these for their reliable income that supports strong dividend distributions. And this segment should stay strong given the current and prospective market conditions in the US and Canada.

Enterprise Products Partners (EPD) is a massive oil and natural gas pipeline passthrough with related assets, including export-focused

Profitable Investing | October 2019 | profitableinvesting.

5

facilities. It has returned 24.53% year to date. Revenues are up over the trailing year by 24.90%, operating margins are fat at 13.50% and this has delivered a return on shareholder equity of 21.50%.

Ample cash flows and controlled debt give this company the ability to adapt, while its dividend keeps rising in distribution and currently yields 6.01%. EPD is a buy under $31.00, ideally for a taxable account.

Kinder Morgan (KMI) is the converted regular corporation without K-1 tax forms. It has returned 40.33% year to date.

KMI is particularly focused on natural gas, and it's a slower growth company with revenues gaining at a subdued 3.20% over the past year. But its operating margin is a whopping 26.80%. Good cash management and controlled debt make for less risk. The dividend is up over the past year to a yield of 4.80%. KMI is a buy under $21.00, ideally for a tax-free account.

Pembina Pipeline (PBA) is a Canadian company that's benefitting from Canadian and US government assistance in further unlocking crude and natural gas from western Canadian fields. It has returned 30.82% year to date.

Revenues are up 37.60%, with operating margins at 22.10%. And it pays a dividend yielding 4.80%. PBA is a buy under $39.00, ideally for a taxable account given its foreign structure.

Plains GP Holdings (PAGP) is the general partner of the passthrough Plains All American Pipeline LP (PAA) and has returned 17.32% year to date. It manages the LP and collects distributions, which are passed through to shareholders/unit-holders.

PAGP has leading interests in crucial pipes from the Permian Basin, which is ground zero for US shale production. Revenue is up 29.90%, and while margins are narrower at 6.70%, it does fuel a 6.39% yield that's up 10% for the trailing year. PAGP is a buy under $26.65, ideally for a taxable account.

The Incredible Dividend Machine

US Foreign Net Transactions

Last Price High on 06/30/19 Average Low on 12/31/18

84.26 100.59 26.38 -48.30

100 8804.26 60

40

20

0

-20

-40

-60

Jan

Feb

Mar

Apr

May

Jun

Jul

2019

Source: US Treasury & Bloomberg Finance, L.P.

holds Magellan Midstream Partners (MMP) in Cycle B, which has returned 23.21% year to date. This passthrough pipeline focuses on refined products. Its revenues have climbed over the trailing year by 12.70%, and it has fat margins running at 42.30%. The rising dividend distribution yields 6.05%. Buy MMP under $68.00, ideally for a taxable account.

We also hold two energy funds in the portfolios. In the Niche Investments, there is the Alerian MLP ETF (AMLP), which has returned 14.39% year to date. It works for those wanting MLP investments without dealing with K-1 forms. AMLP is a buy under $11.20, ideally for a tax-free account.

And in the Ten-Minute Retirement Portfolio, there's the closed-end Goldman Sachs MLP Income Opportunities Fund (GMZ). This fund has returned 8.67% year to date and works for tax-free retirement accounts since it avoids K-1 forms. GMZ is a buy at market prices, ideally for a tax-free account.

What to Sell

My focus for energy is in the cash-flow-rich sector and companies in the US market, as the global energy market is being challenged with slowing global growth. This is why I placed the Energy Select Sector SPDR ETF (XLE) on Hold in the Total Return Portfolio, the Hassle-Free ETF Portfolio and the Ten-Minute Retirement Portfolio in

the September issue. I also placed the Fidelity Select

Energy Portfolio Fund (FSENX) and the Vanguard Energy Fund (VGENX) on Hold in the All-in-the-Family and Fund Supermarket Portfolios.

I now recommend selling XLE, FSENX and VGENX across all of the model portfolios that hold them. Read on to the portfolio discussions for my reinvestment recommendations.

Total Return Portfolio

With slowing global growth, it's all about the US economy and market right now. Major economies in Europe and Asia as well as other developing economies are all either slowing, headed into recession or are in recession already. Most major stock indexes continue to trail the S&P 500 Index in price and total returns in US dollar terms.

The US is also the destination of choice for investment in the bond market. With over $14 trillion of bonds in Europe and Asia sporting negative yields, the US continues to offer more attractive yields for Treasuries, corporates, municipals and other bonds. Add in low-to-lower US inflation, as measured by the core Personal Consumption Expenditure Index (PCE) at a mere 1.58%, and US bonds look even more attractive.

As a result, global investors are

(continued on p. 8)

6

Profitable Investing | October 2019 | profitableinvesting.

Stocks (56%)

TOTAL RETURN PORTFOLIO

Indexed Equities (18%)

Entry Symbol T/TF Date

Fwd. Buy Yield Under Comments

Energy Select SPDR ETF

XLE

TF 5/21/18 3.66% SELL While US grows, the globe slows, dampening oil demand. Focus on US pipelines instead

Vanguard HealthCare ETF

VHT TF 3/16/16 2.71% $176.00 Healthcare stocks remain defensive with steady profits

Vanguard High Dividend ETF

VYM TF 6/21/16 2.79% $90.00 Leading dividend-payers inside S&P 500 Index

Vanguard Info Tech ETF

VGT

TF 8/20/18 1.18% $225.00 China trade risk a hinder, yet profits still pile on for technology

Vanguard Utilities ETF

VPU TF 9/24/18 2.74% $145.00 US-based utilities remain one of the best investment sectors

Growth & Income Plays (18%)

Alliance Bernstein

AB

T 11/19/18 7.65% $33.00 Great passthrough asset manager with fee income fueling high dividend

Compass Diversified Holdings CODI T 5/21/18 7.56% $22.00 The stock that most ignore with great investments and a big dividend

Covanta Holdings

CVA

TF 3/26/19 5.64% $18.50 Turns US trash and excess recycling waste into profits with clean power generation

FMC Corporation

FMC TF 4/25/19 1.80% $90.00 Go-to company for crop protection and farm-yield enhancement

Hercules Capital

HTGC T 6/25/18 9.57% $14.50 Alt-financial for technology companies with ample dividend

Hormel

HRL TF 4/17/17 1.97% $45.00 Pig prices are soaring and this company delivers the bacon

Microsoft

MSFT TF 11/30/12 1.32% $140.00 The go-to tech company delivers higher revenue from cloud and recurring sales

Nestle

NSRGY T 12/17/08 2.28% $112.00 The proof that you can sell consumer goods profitably

NextEra Energy

NEE TF 9/8/08 2.22% $226.00 A favorite US-based utility with additional green energy growth

Procter & Gamble

PG

TF 12/17/08 2.42% $125.00 After years of poor management of iconic brands, it now shows it can get the job done

Viper Energy

VNOM TF 7/23/18 6.33% $38.00 Oil & natural gas prices up or down, Viper gets paid and sends investors ample checks

Zoetis Incorporated

ZTS

TF 5/28/19 0.52% $130.00 The leader in pet and livestock medications and vaccines including for ASF

Real Estate Investment Trusts (8%)

American Campus Communities ACC

T 7/12/18 3.98% $49.00 Sole public REIT focused on student housing market, increasing property portfolio

Digital Realty Trust

DLR

T 2/9/18 3.42% $127.00 You can't have successful cloud computing without data-center properties

Life Storage

LSI

T 12/26/18 3.84% $105.00 Self-storage remains a defensive REIT sector for bull and bear markets

Medical Properties Trust

MPW T 2/26/19 5.45% $19.50 Medical properties market REIT leader with good yield

W.P. Carey Inc.

WPC T 1/3/14 4.60% $92.00 A favorite REIT since its IPO with able management keeps raising dividends

MFA Financial

MFA

T 6/25/18 10.61% $8.00 Alt-financial for mortgages with proven dividend even in 2007-2008

World Class Franchises (6%)

United Technologies

UTX TF 8/6/14 2.17% $127.00 Raytheon acquisition, Otis and Carrier spin-off should be good, yet management needs a plan

Walgreens Boots Alliance

WBA TF 4/7/17 3.37% $55.00 Stock priced at discount to sales, working through acquisitions

Toll Takers (6%)

Enterprise Products Partners

EPD

T 2/22/05 6.01% $31.00 Proven pipeline operator for oil and natural gas during good and bad times

Kinder Morgan Inc.

KMI

TF 11/28/14 4.80% $21.00 Alternative to pipeline and related asset MLPs without K-1

Pembina Pipeline

PBA

T 8/14/12 4.80% $39.00 Canadian and US governments aiding pipeline expansion for more cashflows

Plains GP Holdings

PAGP T 3/10/17 6.39% $26.65 The Permian Basin keeps pumping oil and gas, and this pipeline company keeps cashing in

Fixed Income (44%)

Cash (11%)

Synchrony Bank high-yield savings account

7/31/15 2.00% Market 2.00% yield--call 866/226-5638 to order

Intermediate Credit Bonds (7%)

BlackRock Credit Allocation Trust BTZ

TF 7/26/19 7.39% $14.00 Great collection of higher-yielding corporate bonds at a big discount to NAV

DoubleLine Total Return Bond Fund DLTNX TF 7/22/14 3.40% $10.90 Buy bonds right now for growth & income

SPDR Interm-Term Corp. Bond ETF SPIB TF 4/21/17 2.98% $36.00 This ETF provides easy means to buy US bonds right now

Multisector Bonds (8%)

Osterweis Strategic Income Fund OSTIX TF 4/19/18 4.39% $11.67 Well researched bond portfolio fund company

Preferred Shares (7%)

Seaspan 7.875%

SSW.PH TF 1/22/19 7.77% $25.50 CUSIP# 81254U304

Teekay LNG Partners 9.00%

TGP.PA TF 1/22/19 8.53% $26.50 ISIN# MHY8564M1131

NuStar Energy 8.50%

NS.PA TF 1/22/19 9.04% $25.00 CUSIP# 67058H201

iShares US Preferred Stock ETF PFF

TF 3/9/17 5.13% $38.00 Preferred stocks should be a go-to defensive income generator for all portfolios

Flaherty & Crumrine Preferred Opp. Fund PFO TF 7/23/18 6.13% $11.75 Great closed-end fund from good management team; watch buy under price

Minibonds (3%)

JMP Group 7.25% 11/15/27

JMPD TF 1/22/19 7.55% $26.25 CUSIP# 466273109

Cowen Inc. 7.75% 06/15/33

COWNL TF 1/22/19 7.91% $27.00 CUSIP# 223622804

US Cellular 6.95% 05/15/60

UZA TF 1/22/19 7.15% $25.00 CUSIP# 911684405

Municipal Bonds (4%)

Blackrock Municipal Income

BLE

T 4/23/18 7.20%* $15.15 Discount to NAV is back for great tax-free yield and bonus dividend

Nuveen AMT-Free Credit

NVG

T 4/23/18 7.28%* $17.00 Discount to NAV with monthly tax-free & AMT-free dividends

Nuveen Municipal Credit

NZF

T 4/23/18 7.51%* $17.00 Discount to NAV with tax-free monthly dividend checks

Treasury Bonds (4%)

Two-year Treasury Bond

T 12/24/18 1.63% Market Buy US Treasury with current coupon (interest rate) near 1.63% at market price

At least 10% below buy-below price as of the publication of this issue T: Buy in taxable account for best results TF: Buy in tax-advantaged account (IRA, etc.) for best results *Taxable-equivalent yield

Profitable Investing | October 2019 | profitableinvesting.

7

pouring capital into the US. Net foreign transactions, as measured and tracked by the US Treasury, have turned very positive. US stocks and bonds gained a monthly inflow of $84.26 billion for the most recently reported month, which is significant and shows a building trend of net inflows.

But the US markets are not all milk and honey. Trade negotiations with various nations, including China, Japan, Canada and Mexico, still persist. While there have been glimmers of easing tensions, they continue to provide uncertainty.

And as discussed earlier, the squeeze in the US credit market caused some near-term challenges. That is being finally addressed by the Fed as it resumes a form of QE, providing repo transactions daily amounting to $75 billion. There have also been discussions of resumed longer-term bond purchases. In turn, US bonds are regaining in price.

The global slowing is also impacting the global energy markets. Last year, I removed some individual energy stocks, such as Schlumberger (SLB), from the portfolio but kept the Energy Select SPDR ETF (XLE) in the Indexed Equities section. I placed that ETF on Hold last month.

But as I discussed earlier, the global slowdown is and shall further negatively impact many to most of the major energy companies. I now recommend selling XLE and redeploying the proceeds into the rest of the US-focused stock portfolio allocations.

In the meantime, Permian Basin landlord Viper Energy (VNOM) continues to be cashflow positive, with rising revenues and ample dividend distributions. I see this company continuing to deliver dividends even with more global energy market challenges. VNOM remains a buy under $38.00, ideally for a tax-free account.

Our toll-takers also continue to deliver dividends and stock price performance, as the US and Canadianfocused pipeline companies remain more insulated from global troubles.

Continue to buy Enterprise Products Partners (EPD) under $31.00 in a taxable account, Kinder Morgan (KMI) under $21.00 in a tax-free account, Pembina Pipeline (PBA) under $39.00 in a taxable account and Plains GP Holdings (PAGP) under $26.65 in a taxable account.

REITs & Utes

Real estate investment trusts (REITs) and utilities continue to deliver gains and have been holding up even on bad days for the general stock market. This has been the trend in past downturns as well, including during the fourth quarter of 2018. The dividend income remains attractive, with REITs adding the benefit of the 20% tax deduction from dividend income as part of the Tax Cuts & Jobs Act of 2017 (TCJA).

There are two utility investments to focus on this month. The indexed equity play on this sector is the Vanguard Utilities ETF (VPU). This ETF has returned 22.95% year to date and provides a yield of 2.74%. VPU remains a buy under a raised price of $145.00, ideally for a tax-free account.

The second is the individual utility, NextEra Energy (NEE). This utility has regulated power operations in Florida as well as unregulated wind and solar operations throughout North America. The stock has delivered a return of 32.07% year to date and yields 2.22%. NEE remains a buy under $226.00, ideally for a tax-free account.

Bonds, Buy `Em

While there was the aforementioned glitch in liquidity in the credit markets, US bonds remain great performers for the year to date. In the Fixed Income allocations, we have a collection of funds, individual preferred stocks, individual mini-corporate bonds and, of course, high-performing closed-end municipal bond funds.

Continue to buy and own all of these holdings. Bonds are benefitting from demand by US and global investors and are being aided by low inf lation.

In particular, focus your attention on the BlackRock Credit Allocation Income Trust (BTZ). This closedend fund has a great collection of bonds, which has the fund's stock price trading at a big 8.65% discount to the net asset value (NAV) of the bond portfolio. That's currently a big bargain, and it yields 7.39%. BTZ is a great buy under $14.00, ideally for a tax-free account.

Model Mutual Fund Portfolios

My goal for the Model Mutual Fund Portfolios is to largely match up their allocations with the Total Return Portfolio. To this end, I continue to recommend a 56% stock allocation to funds and ETFs and a 44% fixed income allocation to funds and ETFs, with 11% overall in cash.

Earlier this year, I worked to more closely align these portfolios to the sectors represented in the Total Return Portfolio's individual stocks and other investments. The goal in both of these steps is to provide mutual fund investors with similar returns to the main portfolio.

In the Total Return Portfolio, we have a good collection of tolltakers, which operate pipeline and related midstream assets in the US and North American market. And we have one upstream company in Viper Energy (VNOM), although it isn't an exploration & production (E&P) company but rather a landlord of oil- and gas-rich properties. Both Viper and the midstream companies continue to provide strong total returns year to date with high dividend income.

However, as I write in this issue, the rest of the global energy market continues to run into increasing headwinds of slowing economic growth outside the US, bringing expectations for subdued demand for oil and gas. This is weighing on traditional E&P companies as well as oil-field service companies. The refineries have other challenges, as discussed earlier.

8

Profitable Investing | October 2019 | profitableinvesting.

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