Trade Executed

Earlier this week we bought the iShares DJ US Medical Device ETF (IHI) for most of our large accounts (large being defined as making economical sense for the client to own mostly individual stocks and some narrow based ETFs).

The first top down catalyst here is the idea of being late in both the economic and stock market cycles. The market is over three years from what appears to be the trough for both the S&P 500 and GDP growth combined with what for now is a still viable fiscal cliff. This makes the case for increasing exposure to more defensive sectors.

This is something I’ve been talking about for a while and started to implement quite a few weeks ago. We’ve brought the volatility down a little, increased the yield some and this trade although not much for yield does increase exposure to a generally defensive sector.

When the SPX briefly breached its 200 DMA a couple of weeks ago we were faithful to it but measured in only selling one very volatile stock that no longer really fits in with what I believe is going on with the market which is that we are muddling. There has been some volatility in the last few years of course but as a recurring theme to the blog we are not making much progress at the index level with the volatility and so now I think we will move to a stretch of little index progress but with a lot less volatility.

Perhaps this environment (if the thesis turns out to be correct) will then shed more light on the aging demographic theme that underlies many segments of the healthcare sector including medical devices. During the last decade plenty of things did very well and the index made no progress and so as we still appear to be in an era of no progress, there will be things that work. You know the population is aging and they will need more medical attention, even if it is getting more expensive, so there is a fundamental tailwind. I would note that this tailwind existed in the last decade without necessarily leading to Brazil-like (300%) returns.

We owned Stryker (SYK) in years past, this name is in the top ten holdings of IHI, but it was a very unremarkable hold, it did not hurt anyone but did not deliver much to the portfolio. The diversification available in the ETF has been a better way to access the space than a lower vol name like Stryker. More importantly is that I think it will be a better way to access the theme going forward due to the growthy nature of a couple of the larger holdings in the fund.

I expect we will move a little further into lower volatility and higher yield for the portfolio but will adapt if market action dictates.

12 Comments

  1. Roger
    tx for sharing top down process. There is alot of study and observation to come up with such analysis. And further must be knowlageble about past history. Backing up to a few post back. What would trigger a downfall of a company and how would an analyst reconise such using analytical data or other data such ad company activity. For example too much dept – can look at yahoo stats – or too many acquisitions – follow company news – . When will a company like aapl one can reconize it’s potential top as a company making the comparison with dec. And how can you tell if a company is able to survive and be viable like ko.
    I know it is a loaded question, but shedding some light is much appriciated.
    Tx
    jeff from nyc

    Reply
  2. Thanks for today’s insights, Roger.

    I’m not one to try to predict economic and stock market cycles. In fact, I agree with Jim Cramer’s thesis that there’s always a bull market somewhere.

    Nevertheless, I full agree with your assessment of the aging population and inevitable need for more medical care. My only concern would be ramifications from the upcoming Supreme Court ruling on healthcare insurance.

    As an aside, Roger, navigation on your site with my iPad is still being hijacked by touch.com.

    Reply
  3. jeff your question might make for a good blog post. I will try to write one up but the short answer from here is there is no single answer.

    Anon, I don’t have a tablet. Can you give me a description of what you mean that I can then pass on to the company that serves my ads. They are the ones who created touch.randomroger.com.

    Reply
  4. anon 6:47 here, Roger. Maybe I should apologize; I didn’t realize that touch.com was intentional! Anyway, here’s my take.

    When accessing your site in the past, I could read the day’s post, read comments, leave a comment, etc., all on one screen. Now, when I access your site, I get a screen of all your recent posts (very well done, btw). I have to touch on one to read it, then swipe to another screen to read comments. Each comment then requires its own touch to bring it up. I’m unable to leave a comment unless another reader has done so first, or at least I can’t figure out how to as the page is blank, except for the header.

    I guess my point is that the whole process has become much less reader friendly unless I’m on a PC. I’m no techie, so maybe I’m missing something that is obvious to everyone else.

    Reply
  5. this is good feedback for me to pass along. Not sure what they can do but we can try.

    Reply
  6. FWIW, viewing your blog comments on the Kindle web browser is not possible (that I know of). The browser is rudimentary at best, but I use it traveling when I don’t want to lug a laptop around.

    Reply
  7. I have a small position in IHI. I think a decent cross section of these companies is better than betting on one or two.

    Off topic, finally had the opportunity to tour and see a game at Fenway Park. Hat tip to one son who got his MS in Diplomacy so we were near Boston for the event. Funny how one can live in Havana and online, with a brief residency, earn this degree.

    I know you’re from the Bahstan area.This was my first time to spend a few days there. Loved it. A great walking museum with great restaurants, especially in Little Italy and Chinatown. And the “Chowdah…”. Stayed at the Parker House.

    My only concern any company connected with the medical field, is that there will come a time when price controls are enacted to stifle the cost of care. Doctors are already getting hosed on Medicare fees and many are simply refusing to accept new senior citizen patients.

    T

    Reply
  8. T, glad to hear you had fun at Fenway and with Boston. We are going there for a couple of days this fall.

    Reply
  9. to anon 6:47’s point, it does seem like an odd trade this close to the pending Supreme Court decision, are you expecting something there or think that it is already baked in? Just curious, this seems different from your usual approach somehow.

    Reply
  10. The Obamacare/supreme court issue strikes me as being similar to CEOs having to sign off on their company’s earnings–far more concern ahead of time than was warranted. Additionally if there is any real threat here it would be toward insurance companies and hospital management companies.

    Reply
  11. A better way to say it might be noise versus something real. I think the Obamacare is more like noise for most slices of the healthcare sector.

    Reply

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Trade Executed

Earlier this week we bought the iShares DJ US Medical Device ETF (IHI) for most of our large accounts (large being defined as making economical sense for the client to own mostly individual stocks and some narrow based ETFs).

The first top down catalyst here is the idea of being late in both the economic and stock market cycles. The market is over three years from what appears to be the trough for both the S&P 500 and GDP growth combined with what for now is a still viable fiscal cliff. This makes the case for increasing exposure to more defensive sectors.

This is something I’ve been talking about for a while and started to implement quite a few weeks ago. We’ve brought the volatility down a little, increased the yield some and this trade although not much for yield does increase exposure to a generally defensive sector.

When the SPX briefly breached its 200 DMA a couple of weeks ago we were faithful to it but measured in only selling one very volatile stock that no longer really fits in with what I believe is going on with the market which is that we are muddling. There has been some volatility in the last few years of course but as a recurring theme to the blog we are not making much progress at the index level with the volatility and so now I think we will move to a stretch of little index progress but with a lot less volatility.

Perhaps this environment (if the thesis turns out to be correct) will then shed more light on the aging demographic theme that underlies many segments of the healthcare sector including medical devices. During the last decade plenty of things did very well and the index made no progress and so as we still appear to be in an era of no progress, there will be things that work. You know the population is aging and they will need more medical attention, even if it is getting more expensive, so there is a fundamental tailwind. I would note that this tailwind existed in the last decade without necessarily leading to Brazil-like (300%) returns.

We owned Stryker (SYK) in years past, this name is in the top ten holdings of IHI, but it was a very unremarkable hold, it did not hurt anyone but did not deliver much to the portfolio. The diversification available in the ETF has been a better way to access the space than a lower vol name like Stryker. More importantly is that I think it will be a better way to access the theme going forward due to the growthy nature of a couple of the larger holdings in the fund.

I expect we will move a little further into lower volatility and higher yield for the portfolio but will adapt if market action dictates.

Submit a Comment

Your email address will not be published.

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