By Nigam Arora & Dr. Natasha Arora
To gain an edge, this is what you need to know today.
Three Classic Mistakes
Please click here for a chart of NextEra Energy Partners (NEP).
Note the following:
- The Morning Capsule is about the big picture. The chart of NEP is being used to illustrate the point.
- NEP is a publicly traded limited partnership that owns interest in wind and solar projects, and natural gas infrastructure.
- NEP was formed by NextEra Energy (NEE). The largest asset of NEE is FPL which is a regulated utility that serves nearly half of Florida and is the third largest electric utility in the country.
- Both NEE and NEP have been aggressively promoted to investors by Wall Street and newsletters.
- Both NEE and NEP have been favorite investments of the dividend chasing crowd. Many individual investors have a large proportion of their portfolios in these stocks based on the pump on social media and other sites where the dividend chasing crowd congregates.
- The anecdotal evidence is that many such investors did not even read Wall Street’s analysis.
- There is also anecdotal evidence that many such investors do not even have rudimentary risk control.
- The chart shows that NEP has fallen from a 52 week high of $81.32 to $24.50.
- The chart shows that the drop in the stock from the high to about $48 is the first leg. This is due to rising interest rates.
- The chart shows that there is a second leg showing the stock falling from about $48 to $24.50 in four trading days.
- The second down leg occurred because NEP lowered its dividend growth rate due to higher interest rates making it unable to accretively add drop-downs from its parent NEE.
- The stock of the parent NEE has also fallen from the high of almost $90 to about $51.
- Why were investors buying NEP and NEE? They were chasing yields without understanding the business, the financials, and the impact of interest rates. The last dividend provided them with a 5.8% yield on NEP and 2.51% on NEE.
- NEE and NEP are not the only stocks. The dividend chasing crowd is getting burned in many stocks.
- Prudent investors need to make sure they are staying clear of the following mistakes that the dividend chasing crowd has been making.
- The crowd gets very focused on the dividends without understanding the risks. It is important to pay attention to one of the Arora Principles: give precedence to return of capital over return on capital. This principle becomes especially important when the upside rewards are minimal but downside risks are great. How does a 5% dividend help when trying to get this dividend, an investor loses 72% of the value? The dividend chasing crowd has an answer that they believe in religiously. The answer is that the value of their portfolio does not matter; it is only the income that matters. As foolish as this kind of thinking is, it gets even worse for the dividend chasing crowd because ultimately dividends get cut.
- The second classic mistake is this crowd does not keep up with the changing macro environment. The easiest and most time efficient way to keep up with the macro environment is to regularly read the Morning Capsules.
- The third classic mistake this crowd makes is that for information, they rely on those who have an agenda without understanding that their information sources are not objective. The vast majority of this crowd does not subscribe to an objective resource such as The Arora Report.
- The momo crowd was running up stock futures earlier today until yields started rising again and smart money started selling. As of this writing, smart money selling has overwhelmed momo crowd buying.
- It is important to note that smart money holds large equity positions. Smart money is not selling wholesale, but rather trimming at the edges.
- JOLTS-Job Openings report will be released at 10am ET and may be market moving.
- As an actionable item, the sum total of the foregoing is in the protection band, which strikes the optimum balance between various crosscurrents. Please scroll down to see the protection band.
Magnificent Seven Money Flows
In the early trade, money flows are positive in Nvidia (NVDA).
In the early trade, money flows are negative in Amazon (AMZN), Microsoft (MSFT), Alphabet (GOOG), Meta (META), Tesla (TSLA), and Apple (AAPL).
In the early trade, money flows are mixed in S&P 500 ETF SPY and Nasdaq 100 ETF QQQ.
Momo Crowd And Smart Money In Stocks
The momo crowd is *** (To see the locked content, please take a 30 day free trial) stocks in the early trade. Smart money is *** stocks in the early trade.
Gold
The momo crowd is *** gold in the early trade. Smart money is *** in the early trade.
For longer-term, please see gold and silver ratings.
Oil
The momo crowd is *** oil in the early trade. Smart money is *** in the early trade.
For longer-term, please see oil ratings.
Bitcoin
The pattern of bitcoin (BTC.USD) is that whales run it up, often squeezing short sellers. As bitcoin runs up, retail investors get excited and buy at higher prices. It seems that whales take advantage of the strength and sell into it. Bitcoin is pulling back from the rise on short squeeze and retail buying.
Markets
Our very, very short-term early stock market indicator is ***. This indicator, with a great track record, is popular among long term investors to stay in tune with the market and among short term traders to independently undertake quick trades.
Interest rates are ticking up, and bonds are ticking down.
The dollar is stronger.
Trading futures is not recommended for most investors. The purpose of providing this information is to give an indication of the premarket activity that usually guides the activity when the market opens.
Gold futures are at $1840, silver futures are at $21.22, and oil futures are at $88.83.
S&P 500 futures are trading at 4297 as of this writing. S&P 500 futures resistance levels are 4318, 4400, and 4460: support levels are 4200, 4000, and 3950.
DJIA futures are down 165 points.
Protection Band And What To Do Now
It is important for investors to look ahead and not in the rearview mirror.
Consider continuing to hold good, very long term, existing positions. Based on individual risk preference, consider holding *** in cash or Treasury bills or allocated to short-term tactical trades; and short to medium-term hedges of ***, and short term hedges of ***. This is a good way to protect yourself and participate in the upside at the same time.
You can determine your protection bands by adding cash to hedges. The high band of the protection is appropriate for those who are older or conservative. The low band of the protection is appropriate for those who are younger or aggressive. If you do not hedge, the total cash level should be more than stated above but significantly less than cash plus hedges.
It is worth reminding that you cannot take advantage of new upcoming opportunities if you are not holding enough cash. When adjusting hedge levels, consider adjusting partial stop quantities for stock positions (non ETF); consider using wider stops on remaining quantities and also allowing more room for high beta stocks. High beta stocks are the ones that move more than the market.
Traditional 60/40 Portfolio
Probability based risk reward adjusted for inflation does not favor long duration strategic bond allocation at this time.
Those who want to stick to traditional 60% allocation to stocks and 40% to bonds may consider focusing on only high quality bonds and bonds of five year duration or less. Those willing to bring sophistication to their investing may consider using bond ETFs as tactical positions and not strategic positions at this time.
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Nigam Arora
Nigam Arora is known for his accurate stock market calls. Nigam is a distinguished master of the macro. He is a popular columnist with over 100 million page views, an engineer, and nuclear physicist by background. Nigam has founded two Inc. 500 fastest growing companies and has been involved in over 50 entrepreneurial ventures. He is the developer of Theory ZYX of Successful Change Management and is the author of the book on Theory ZYX, as well as the developer of the ZYX Change Method for Investing.
Dr. Natasha Arora
Dr. Natasha Arora has significant expertise in investment analysis especially biotech, healthcare, and technology. Natasha is a graduate of Harvard Medical School followed by a postdoc at MIT. She has published several peer reviewed research papers in top science journals.
