Category: Finding Benjamin

Worldwide Sectors Extreme Makeover One-Year Results

As promised, we’re staying on the theme of providing some strategy updates for current clients as we cross into the new quarter.  For those in the know, our long-standing Worldwide Sectors stock strategy was redesigned at the end of September 2016.  One year later, we’re very pleased with the results of the changes.  Many of our current clients have an allocation to this strategy so it would be worth your time to understand why we made these changes, how the strategy works and the results of our work.

Evolution is Necessary

If you ever run into a money manager that says, “I’ve always done things one way because it always works”, you should run away.  Wouldn’t it be nice if that were actually true?  Students of market history know better as the markets are always changing and evolving in how they work, speed, products, information and so forth.  For instance, computer trading has replaced pit traders almost entirely. Algorithm-based decision making has created quant monsters in our industry and flash crashes are the unfortunate response in prices.  Exchange Traded Funds are now replacing mutual funds altogether.  Portfolio construction theory is changing all the way down to High school academics – “Modern Portfolio Theory” is on the way out.  There are now more indices than stocks available on the exchanges.  What worked in the 90’s, doesn’t work anymore.

Many of our strategies were in operation and running in the late 90’s, including Worldwide Sectors.  It performed incredibly well until the end of 2014, when the strategy began to uncomfortably lag the benchmark stock indices, even accounting for the lower risk profile.  In 2016, we decided to tear apart the strategy in an effort to discover what we could do to improve our results and frankly keep better pace with strong bull markets in stocks.  Here’s what we found.

The Main Problem

The main issue we discovered, early in 2016 was that the strategy was working hard to adjust our net exposure according to perceived market risks. We found that we were carrying too much cash overall through the year in a stock model where investors should be willing to tolerate more daily and weekly volatility.  This was especially the case near intermediate-term lows in the market.  As the speed of the markets has accelerated dramatically in moves both up and down in the last couple years, we couldn’t adjust our net exposure fast enough to provide any positive value in risk mitigation. Most of our holdings were individual stocks as well, making these changes costly and time-consuming.   In the end, the performance of Worldwide Sectors started to fall behind that of any major stock index and we felt compelled to take a hard internal look.  After many months of working through options, we thankfully landed on a few concrete changes to the design and execution of the model.

Start By Setting Goals

Our first task was to set a higher bar for returns but specifically for an improvement in our asymmetric returns.   Practically, that means we wanted to “capture” more of the market’s upside gain without a commensurate rise in downside losses.  We began tracking our quarterly upside and downside capture ratios relative to our benchmarks to create a baseline against which we could judge the outcome of our redesign.  We established that we are seeking at least 75{1de7caaf0b891e8de3ff5bef940389bb3ad66cfa642e6e11bdb96925e6e15654} of the market’s upside gain while avoiding at least 50{1de7caaf0b891e8de3ff5bef940389bb3ad66cfa642e6e11bdb96925e6e15654} of the market’s downside losses.  We calculate these metrics quarterly in order to reduce the amount of noise that comes from weekly or even monthly data.

Redesign Details

In order to keep more money invested when the markets were in bull market uptrends, we had to widen out our parameters a bit to let prices move more without triggering a sell signal.  At the same time, we added more weight in our Net Exposure model to the basics of price trend, effectively reducing the noise that comes from more subjective indicators.  We are trend followers, so let’s follow the trend! Keep it simple right?

The other main changes we made beyond our willingness to maintain a fully invested posture during bull markets, was the split between stocks and index-oriented ETFs.  After careful consideration, we chose to allocate up to 70{1de7caaf0b891e8de3ff5bef940389bb3ad66cfa642e6e11bdb96925e6e15654} of assets in the Worldwide Sectors strategy to domestic “sector” investments, mostly in individual securities, paying special attention to our weightings in the three main food groups found among stocks:  Cyclicals, Interest Sensitives, and Defensive relative to those found in the S&P 500.  Sector stock picks are based on our longtime model of Selectivity, which chases down leadership and leans on growth companies selling at discounts (Growth at a Reasonable Price).

The remaining 30{1de7caaf0b891e8de3ff5bef940389bb3ad66cfa642e6e11bdb96925e6e15654} of assets is now dedicated to “World Stock Indices”, which can include both domestic and international indices.  Admittedly, during strong bull markets, index investing in low or no cost ETFS is just hard to beat.  Of course, in a bear market, everything beats a low-cost stock ETF.  Timing is everything.  So for this side of the strategy, we are hitching our wagon to the market, naturally reducing our tracking error and improving our “capture” ratios.

Together the two sides of the strategy now complement each other nicely between individual stocks, world stock indices and appropriate sector exposure.  While the market has not challenged us on the downside literally since we made these changes, we can say that the upside results have been fantastic.

Results after 12 months

Please take a second to review our composite performance disclosure regarding the calculation of returns by following the disclosure links on our website. Given that these are unique date ranges based on our redesign from 9/28/2016, we can show only unofficial, internal results.  From that date, through the end of September, the results are as follows net of all fees and expenses.  Graphically, Worldwide Sectors is shown in Red and the S&P 500 is shown in Green.

Worldwide Sectors                                                + 15.12{1de7caaf0b891e8de3ff5bef940389bb3ad66cfa642e6e11bdb96925e6e15654}

S&P 500                                                                + 16.03{1de7caaf0b891e8de3ff5bef940389bb3ad66cfa642e6e11bdb96925e6e15654}

MSCI ACWI (All Country World Index)                   + 18.43{1de7caaf0b891e8de3ff5bef940389bb3ad66cfa642e6e11bdb96925e6e15654}

While we are not outperforming any one index, we are certainly keeping pace with a very strong market and doing so with statistically lower weekly volatility and lower risk exposure than any fully invested stock index.   For any risk manager, that is an enormous accomplishment and we’re proud to see the fruits of our labor in upside returns.  However, the next major test for this strategy will most certainly be about capturing these gains and avoiding losses so the story is not yet finished.

Next up – Gain Keeper, the surprise behind our variable annuity’s performance.

Stay tuned.

Sam Jones

The final moves up in the broad US stock market last week brought all the bells and whistles of a near-perfect technical push out to new highs. Ten years ago, exactly (10/10/2007), we saw the same thing happen. It was the last day of the bull market and the S&P 500 went on to lose -56{1de7caaf0b891e8de3ff5bef940389bb3ad66cfa642e6e11bdb96925e6e15654} through March of 2009. This is not meant to scare but simply to remind all that markets can and will do what they want, when they want for seemingly little or no reason. Today, we have conditions that are not unlike other bull market peaks. We have spoken to this reality many times this year. For this update, we’ll add a few more grains of sand to that pile of evidence.

Blow Out in Investor Sentiment 

Sentiment surveys are contrarian in nature. While we know that this indicator is contextual and less of an exact trading tool, it is meaningful. As of last week, our sentiment indicators showed that bullishness is finally back while bearishness has taken a back seat. The spread between the two is not yet at the extreme where we tend to see immediate intermediate term tops but it is now in the danger zone from the perspective of our model criteria. As such, as of the end of last week, our Net Exposure model lost 2 points (from a positive 6 to a positive 4). Any positive reading suggests we remain fully invested but the deterioration in our model while prices made a new high is noteworthy. When everyone is bullish and has burned their fuel in the form of buying this or that, there isn’t much thrust left to take prices higher. So for now, we’re adding back a bit of concern regarding the potential for at least a short-term correction in stock prices.

Debt Getting Out of Hand Again

As investors and consumers feel more comfortable with their financial situations, they tend to take on more and more debt. It’s just a human defect that we can’t say no to more buying power (and buying more stuff) as we feel financially strong. It’s called a wealth effect when a rising stock market creates a feeling that we can afford to buy more, borrow more, take more chances.  Some of these gauges of personal debt have been accumulating for a while but others are just starting to accelerate now. We’ll give you a few examples, provided by InvesTech in their recent bulletin.

• Student loan balances are up 150{1de7caaf0b891e8de3ff5bef940389bb3ad66cfa642e6e11bdb96925e6e15654} in the last decade now passing $1.4T
• As of September 2017, Credit Card debt approached the $1Trillion level
• US household debt in aggregate just surpassed the previous record on the back of auto loans and credit cards.
• Security-Based Loans and Lines of Credit are back in vogue. Investors effectively put their bloated stock accounts up as collateral to their brokerage in return for ready cash. Another obvious train wreck in the making.
• Margin debt (leveraging investments) also just hit a record high last week as well as its Percentage of Nominal GDP (below)

Of course, debt is not solely the domain of the common households but also of global governments (US, Japan, and Europe mostly) which now owe a collective $15 Trillion. The ECB seems to be working to round up all of their collective debt. Why? Are they planning some sort of restructuring? That wouldn’t surprise us in the least.

Puerto Rico’s debt is going to zero as they actually (or perceptively) default on their general obligation bonds. Puerto Rico is almost a micro version of the US in aggregate. They also ran up huge debt, they failed to manage aging utility infrastructure for years and failed to create a diverse and resilient local economy as nearly 1/3 of their greying population has moved away. The recent hurricanes just pushed them over the edge perhaps a little faster than what was inevitable. It is sobering to hear what has become of this non-state piece of our country and our hearts go out to the people who are in the dark, without power, water or electricity. Puerto Rico should also serve as an example of what any state in our country might expect if they fall on hard times in the way of Federal support. Very little! We’re on our own folks, that much is clear.

Ok so what if debt is out of hand across the board?

Practically, all investors must then understand sensitivity to rising interest rates, aka borrowing costs. Some say that rising interest rates don’t matter much from this historically low level. Based on the above, I would argue the opposite. With so much debt accumulated, any change in rates, which shows up as rising costs, will have real and immediate effects on daily cash flow, ability to repay, and solvency. It’s a hurricane to those who must pay on their debt.

We can’t say how this will play out in detail, as we’ve never been in a debt situation like this before. We’ve seen what default looks like with corporate debt and household debt but could developed countries default on their debt? The Federal Reserve is working hard to talk us through reducing their balance sheet starting this month (code word for selling mortgage-backed securities at $10 Billion/ month). Yellen promises it will be like watching paint dry. Hmmmmm

Market Trends are Too Good

While I love to see all the strength in stock prices and positive technical support, I do have that nervous knot in my belly when things seem just too good. Investors are being drawn into stocks, from virtually everywhere else including bonds, cash, commodities, housing, etc. This is the great sucking sound that happens near all major peaks and it has begun. Statistically, we haven’t yet seen the huge inflows into equities that tend to accompany the final price peaks but I’ll bet that is in the works now. These are the melt up environments combined with very high bullishness that leads to huge inflows into equities, right into the final highs. I’m having a de ja vu moment with years like 1999 or 2007. In fact, Bespoke just reported that the gains in the last five years are nearly the same as those leading into the final peak in 2007 (100{1de7caaf0b891e8de3ff5bef940389bb3ad66cfa642e6e11bdb96925e6e15654}), ten years ago today. Again, this is not a prediction, but rather an awareness to check your expectations.

All said and done, trends and market momentum are all still very strong today. No signs of weakness, literally. These issues are not by themselves the root cause of a pending or immediate bear market but rather signs of an aging bull market and an aging economic recovery. So, while we remain almost fully invested and making money weekly along with the markets, our level of skepticism is also on the rise. It is our nature to get uncomfortable when consensus lies in overconfidence.

As I said clearly in the piece on the 3^rd Great Investment Opportunity,

“If you do not have a robust risk management system or process in place, you need to find someone who does before you are raking leaves”. 

There are a lot of leaves in my lawn.

It was great to see so many of our clients at our first annual client appreciate night. Some loved the illusionist; some couldn’t stand it very long. I’m not sure I’ve decided myself but it got me thinking along with our theme of “All is Not As It Seems”. We’d love your feedback if you were willing. Please send us an email with your thoughts.

Stay tuned

Sam Jones

Switching gears a bit, we’re going to spend a little ink working through insights into our various strategies.  Quarter-end is always a good time for these sorts of things but more importantly, October marks the end of our first full year of results following some necessary redesign work done at this time in 2016.   We think you’ll be pleased to see that the changes we made are paying off nicely.

New Power Expanding Investment Universe (again)

In late 2012, regular readers know that we made a notable change to the New Power strategy.  Specifically, we expanded the universe of investible options to include “Game Changers” from sectors outside of clean and renewable energy.  This is a blurb from our new website, describing the evolution of the strategy since inception in 2004.

Our “New Power” Evolution

Our firm took an early stand in the renewable energy and cleantech sector in 2004 using public securities and exchange-traded funds before the emergence of any “green” mutual funds or ETFs. In 2009, our New Power strategy expanded beyond pure-play cleantech and alternative energy to include healthy lifestyle companies; including organic food producers, clean air and water filtration companies, even distributors of green products. Finally, in 2013, we again expanded the universe of options to include “Game Changer” companies from sectors outside of the energy complex as innovators are rapidly challenging incumbent leaders in their own business models. Over the last decade, New Power has evolved from a bright green fund to a bleeding edge, disruptive-technology fund of choice for discriminating investors in a time of great change across many industries. This is an investment strategy that captures great entrepreneurial passion for the future. Above all else, the New Power strategy has a mandate to avoid investments with unaccounted-for negative external costs to society. We are determined to use the New Power strategy to expose our investors to the incredibly powerful positive changes occurring globally.

Strangely enough, the New Power strategy was born in concept to capture opportunities in the energy sector alone.  What we didn’t know at the time was that the energy revolution was just the tip of the iceberg for massive dynamic change that was about to occur across multiple sectors.  Yes, there are waves to innovation cycles.  The last one ended in the mid 90’s with the emergence of the internet as a common household tool.  Of course, the internet itself became an enabler for the current wave of innovations that has far greater, deeper implications surrounding a fast moving, more knowledgeable and highly connected world; literally the “Internet of Things”.

New Power is sitting squarely in the surge of this new wave as we have expanded the universe of investible options yet again to include next-generation technologies, specifically those that provide positive value and benefit to society without leaving a trail of external costs (think smoking, firearms, abusive products or services, addiction, gambling, etc.).  Examples include cyber security companies, big data networking, robotics and artificial intelligence, smart cities and smart grids, new person to person payment systems, Blockchain technology applications, virtual reality, 3D printing and more.

We are seeing older brand name companies like Cisco, GE, Microsoft and Whirlpool who are quite suddenly buying start-up companies by the week to position themselves for the coming wave.  Companies still held privately are leading the charge, too many to count.  This is going to be big.  Many more are poised to go public in the next couple years creating more liquid options in this space for our New Power strategy.

Results for New Power since we made the first expansion in 2012 have been strong.  Looking back over the last five years, net of fees, the strategy has slightly outperformed the S&P 500, which has been no easy task for any in our business, who still pick stocks and actively manage portfolios for clients.  We have also handily outperformed our current Benchmark, the Powershares Wilderhill Clean Energy ETF (PBW) which is admittedly not as representative of the current strategy as it once was.   We don’t have official numbers yet for quarter end but internally, these are the figures from 12/31/2012 through the close of last week (9/22).  We only review our strategy numbers weekly.  As a reminder for the 1 billionth time, past performance is no guarantee of future returns and please feel free to review our composite performance disclosure pages on our website.

12/31/2012 – 9/22/217 (Expansion date of New Power to end of last week)

Annualized returns net of all fees for this period – nearly 5 years.

New Power                  +12.93%

S&P 500                       +12.64%

PBW                            +5.30%

So is this a good time to put new money into New Power?  Let me answer that question with my cheesy pinstriped institutional money guy suit on. If you are a long-term investor, meaning you intend to keep money in this strategy for at least 5-7 years, then yes, anytime is a good time. If, on the other hand, you are considering New Power now as part of your unsaid GRQ (Get Rich Quick) financial plan, I wouldn’t recommend it.  Many of the stocks in the strategy are up well over 100% and we are far closer to taking profits than anything.  In fact, we’ve already started doing so with recent sales of Amazon, Expedia and cutting our Tesla and First Solar positions in half.   We are in the mode of capturing gains as we’re seeing some new higher levels of volatility among high-flying tech stocks in the last couple weeks.  We are also “powering” down to new positions with better values, higher current free cash flow, and better looking fundamentals. If you are already an investor, it’s been a good ride on the speculative stocks with potentially more to come but you should also temper your short-term expectations.

All said we’re very pleased with results since making the design change back in 2012 and looking forward to the next generation of investments surrounding the Internet of Things.  New Power is our momentum strategy representing the aggressive stock portion of any investor’s balanced portfolio, which should include Tactical Equity, Blended Asset, and Income strategies.

Next Up – Worldwide Sectors Results one year after it’s “Extreme Makeover”

Have a great weekend and thank you again for your trust and confidence in our firm.

Cheers

Sam Jones

As the last and final great opportunity, we’re going to give it some extra juice and make it a two for one. Who doesn’t like a BOGO? Actually, you’re spending nothing beyond your own time in reading this blog so BOGO isn’t really right, is it? On with the show.

The “Opportunity “ to Buy Low

 

First, we need to clarify one thing. The US stock market is in a bull mode as it has been since 2009. There have been periodic signs and warnings that the trend higher is weakening but all of these situations, have resolved to the upside including the most recent round of weakness in August of this year. “Buy the dips” mentality is still healthy reflecting the healthy economy and nearly perfect Goldilocks environment of not too hot and not too cold in terms of growth rates. There are currently no signs of imminent recession here or globally. So at the moment, all is well, we are nearly fully invested and making nice returns. But eventually, the economic system and financial markets break down as they have since the beginning of time. On average, bear markets drive the major market indices lower by -33{1de7caaf0b891e8de3ff5bef940389bb3ad66cfa642e6e11bdb96925e6e15654} over an average time period of almost two years. Subjectively, we think this event is closer than many are expecting so it’s time to start making plans. That’s what this is all about; making a plan for the inevitable.

 

Understanding Where We Are Today – S&P at 2500

 

Let’s back into this opportunity with an observation of where the US stock and bond markets are today in terms of their valuations, risk structure, and upside/downside potential. I’ll state this as clearly as I can. I find almost nothing attractive about the US stock or US bond markets from a value perspective at these levels. Our 2017 upside target of 2460 on the S&P 500 has already been met. Perhaps we undershot the opportunity this year, but the year is not over yet. Yes, there are pockets of opportunity in oversold assets that we continue to watch but don’t seem to want to get up and run. I also see the great moves of the last several years from the likes of Facebook, Netflix, Amazon, Microsoft, Google, etc. These are all great companies, some would even call them consumer staples now. Will they continue higher? Unequivocally yes, with our 10-year goggles in place. But at some point in the shorter term, you’ll need to put up with standard 30-50{1de7caaf0b891e8de3ff5bef940389bb3ad66cfa642e6e11bdb96925e6e15654} declines in any of these names. I also see the broad US market indices, just this week, making all-time highs.

 

Sam, all time new highs in the major stock indices? How is this not attractive?

 

Forgive me, I don’t like to buy expensive things and this market is very expensive by almost any standard. I see valuations that are now statistically the third highest in the last century which tells me that prices are rising faster than earnings. The first was at the dot.com peak of 1999 ushering in a 14 year period of investor suffering. The second was the very market peak in the late 20’s, just before the Great Depression. And now, we are making history again. Here’s the classic chart of the Case/Shiller P/E ratio by month.

     The Price to Earnings ratio is just one measure of valuation but the others (price to book, price to cash flow, dividend yield, etc) all tell the same story. Now markets don’t fall because they are overvalued. They fall for other reasons most of which surround lack of liquidity, credit crisis or economic recessions. These are not current risks to the market. But valuations matter very much in terms of the magnitude of downside potential when the turn happens. As I said earlier, average bear market losses are about -33{1de7caaf0b891e8de3ff5bef940389bb3ad66cfa642e6e11bdb96925e6e15654} so I’m going to make a conservative forecast and assume that the next bear market is going to yield a larger loss than 33{1de7caaf0b891e8de3ff5bef940389bb3ad66cfa642e6e11bdb96925e6e15654} given the current lofty state of valuations. That’s unattractive.

 

Unfortunately, US Treasury Bonds are also unattractive and will be an unproductive asset class for many many years. In February of 2015, I made a similar statement. Since then, the total return on the 10 year US Treasury bond to date is up… 2.2{1de7caaf0b891e8de3ff5bef940389bb3ad66cfa642e6e11bdb96925e6e15654} or 0.83{1de7caaf0b891e8de3ff5bef940389bb3ad66cfa642e6e11bdb96925e6e15654}/annualized. The total return on the longer-dated 20 year Treasury bond is a negative -2.08{1de7caaf0b891e8de3ff5bef940389bb3ad66cfa642e6e11bdb96925e6e15654}. This is dead money at best and probably the source of some rather serious wealth destruction looking forward. Not attractive, check.

 

Where is the Opportunity?

 

I believe in the benefits of investing in stocks in terms of wealth accumulation. I wouldn’t be doing this for the last 24 years if I didn’t firmly know that truth. I also believe firmly that success is a function of timing and deliberate Net Exposure to the markets at different times. Our industry likes to call this Asset Allocation. I call it common sense. If stocks are in a bear market, don’t own stocks. When stocks are rising in a bull market, own stocks (as we do today). Sounds easy, doesn’t it?

 

Our third mega opportunity for investors is the opportunity to buy stocks at much lower levels than they are today when the upside potential is real, long lasting and can yield incredible life changing wealth. But for us to capture this opportunity we need to do a few things first. We need to secure and maintain our emotional and financial capital through the next bear market.life changing wealth. But for us to capture this opportunity we need to do a few things first. We need to secure and maintain our emotional and financial capital through the next bear market.long lasting and can yield incredible life changing wealth. But for us to capture this opportunity we need to do a few things first. We need to secure and maintain our emotional and financial capital through the next bear market.

 

What is Emotional Capital?

 

It is something that is earned when we don’t lose a great deal of our wealth to things like bear markets. When we have the discipline to recognize an overvalued market and execute a well-defined risk management system that gets us out of harms way when the time comes, we build emotional capital. We stay in the driver’s seat with our money and we give ourselves the emotional strength to buy near the lows when everyone else is giving up. As soon as you have lost more than your emotional comfort will allow, you have lost your emotional capital and there are no second chances. Of course, your financial capital is also lost. For most, we’re really talking about understanding your risk capacity, not to be confused with your attitude toward risk taking. The most common error I see among investors, especially younger investors, is a self-diagnosed risk loving attitude without the necessary risk capacity (total assets, incomes, savings rates, controlled spending habits and ability to withstand a significant loss) to support the attitude. When prices fall, attitudes change. Emotions quickly shift into survival mode with honest statements like “I can’t afford these types of losses” ending in frustration with a “sell all” type decision at or near the lows. Frankly, this is why “Buy and Hold” as a strategy isn’t practical for many investors over time, as attitudes toward risk very often do not match up with actual risk capacity.

 

Picking Up Nickels

 

Back to today’s market. Jared Dillon of “The 10^th Man” newsletter said it well a few weeks ago. If you’re reaching for returns now, it’s like picking up nickels in the street in front of a steamroller. Funny but I think about that statement a lot these days. The markets can go higher and probably will, but how much risk are you taking to get those last nickels?

 

I will advise any and all investors. If you do not have a plan to keep your emotional and financial capital intact when the markets turn lower, you need to make one right now. If you do not have a system or any criteria or experience with such things, find someone who does and pay them to do it for you. Make a commitment to do it before you are raking leaves.

 

When prices are back to normal and valuations for both US stocks and bonds become attractive again or even discounted significantly again, you can gleefully take advantage of this opportunity.

 

BOGO

 

As we’ve spoken of many times in the last year, we believe that international investing, outside of the US, is far more attractive and probably will be for quite a few years. This is especially the case with China, India and other developing countries. Price trends relative to the US are very strong for the first time in the last eight years. Currency differences are supportive, valuations are far more attractive outside of the US and political risk is much lower. But most importantly, we now have solid price patterns that reflect the mega shift in the percent of World GDP from developed countries to developing countries. This has been going on largely since the 50’s but the trends are now accelerating. The US is not the global superpower that it used to be.

 

Here’s the past

and here’s the projected future

 

Practically, we want to be conscious of a few things with our International Investment theme. First, currency trends do matter and a strongly rising US dollar will make for tough sledding with dollar-denominated foreign securities. So far, the US dollar is not rising so that’s good. Second, we can’t assume that international securities will rise in the event of a global financial crisis. They got crushed along with the US market in the last cycle. It seems reasonable that they might lose less than their US counterparts in the next round, but I wouldn’t bank on that. Finally, there is a distinct lack of transparency with foreign investments, specifically individual stocks, creating some extra risks for investors. Stock pickers beware. We are leaning on foreign indices and ETFs for our exposure rather than trying to own the right international stocks. With that said, we feel that investors need to get comfortable owning a much larger percentage of their portfolios in foreign funds than we have historically seen in the past.

 

 

 

This ends our three-part series on great investment opportunities in the future. They are all in various stages of development but should offer investors some guidance on where to look – or when to look.

 

Cheers

Sam Jones

Investment Opportunity #2

 

Getting back to our three part series surrounding great investment opportunities, you’ll notice a theme developing. The theme is about identifying potentially large reversals of current trends.

Counter to the greater fool theory employed by so many investors (ehemm, Bitcoin), we look for sectors, asset classes, countries or other segments of the market that are out of favor, overlooked and unloved. In these cases, we’re banking on major reversals where the dogs become the darlings over periods of years, not days or weeks. I hate to sound like Buffett but he does have a proven track record. Here’s the next one.

 

Commodities and Hard Assets

 

This opportunity is developing but may not really bloom until later in 2018/19. Commodities of all sorts have been in decline, lagging or under rather sustained selling pressure since the middle of 2008. In my lengthening years of experience, I have found that major asset class rotations occur on 12-year windows. Don’t ask me why but there is a lot of evidence supporting these mega cycles. For instance, the S&P 500 registered a new 12 year low in price in March of 2009 after two devastating bear markets. That was the bottom. The US dollar found a major low point in 1990 and rose rather dramatically until 2001 (11.5 years), and then fell until the year 2013 (12 years). Treasury bonds have bucked the 12-year cycle and moved higher since the beginning of time but I suspect the Federal Reserve standing on the interest rate scales since the year 2000 might have something to do with artificial returns. So back to commodities, given the most recent top in 2008, we might be looking out closer to 2020 before we would really see a burst higher in commodities, but it could really come at any time.

 

The case for commodities is a tough one right now with very little “juice” to push it higher. Inflation is almost non-existent even as we remain at full employment, after four rate hikes from the Fed and after nearly 8 years of economic expansion in the US. That’s pretty amazing. The culprit is productivity or lack thereof. Productivity has been falling per employee for several years so employers aren’t really in the mood to increase wages just because someone is warming up their seat daily. No wage pressure, no inflation, simple math. Typically inflation would be an issue under these circumstances and we would most certainly see an associated healthy rise in commodities by now. Not so, at least not yet. In fact, the markets are really oriented more toward a mild recession than anything at this point. The bond market is certainly telling that story loud and clear as is the trend of the US dollar, which is making new multi-year, lows this week. Did you notice that the Fed isn’t talking about rate hikes anymore, especially now that Stanley “the hawk” Fischer is out? I think they sense that any more pressure on borrowing costs and our fragile (read stuck at 2{1de7caaf0b891e8de3ff5bef940389bb3ad66cfa642e6e11bdb96925e6e15654} GDP economy) would buckle. Furthermore, oil and gas are huge components of the commodities complex and this is one area of the market that is structurally evolving. We’re going to see some mega mergers before this is over, like when Exxon bought Mobil in the last energy crunch. We’re going to see some high profile failures and the sector will begin to look like airlines do today; a few players controlling everything. We also need to see the five-year supply glut in oil shrink by a few million barrels. Without energy moving higher, aggregate commodity funds are going to have a tough time moving higher.

 

Thankfully commodities come in many flavors and there are plenty of sub categories in this space to invest in. Right now, we’re starting to see some real buy side activity in copper, gold, silver and several other industrial and precious metals. Here’s a quick snapshot of an ETF that we own offered by State Street SPDRs, symbol XME – SPDR Metals and Mining. You can see a very large and dramatic exhaustive sell spike in early 2016, followed by an equally large and sustained rally off those lows. This most recent low corresponds to the same levels of 2008, which serves as long term support.

      Technically, this presents a near picture perfect price pattern to accumulate shares on pullbacks.

 

There are other commodities ETFs or investments that fall into this category but aren’t necessarily aggregate commodities funds, remembering that we still want to avoid oil! These include Palladium, Platinum, Copper, Aluminum, and Timber. They are all bubbling now after sitting quiet and cold for years. Please do not run out and buy any of these tomorrow. We are looking for a mega move in commodities, lasting years, which might have some early leadership among the industrial metals. But the macro environment is not supportive of a big, aggregate move yet. We need to be patient but expectant.

 

Gold is most recently joining the party but I’m always leery of suggesting gold in any market. It serves no purpose beyond a hedge and a fear trade. Then again, it’s doing its job well at the moment. Again, you can see the same pattern of the exhaustive low in early 2016 followed by a very robust rally, pullback to the trend line and now another push higher. This appears to be a new uptrend and a tidy pullback for buyers to step into. In full disclosure, we do not own the GDX ETF, but other ETFs and mutual funds with similar holdings.

 

     Investors should also recognize that a bottom in commodities is often associated with a top in Treasury bonds from a timing perspective. One could argue that bonds topped in 2015 and I can make a case that commodities put in a long term low in the same year. Perhaps it’s game on! But again, without a supporting expansion in our global economic growth rates, especially as the US seems to be angling toward recession, the environment doesn’t seem quite right yet. Honestly, normal intramarket analysis is being seriously distorted by central bank intervention, forcing negative bond yields and all the stuff that mom told you not to do. It’s hard to say if the “normal” relationships still work.

 

So this is our second great investment opportunity in development. It will happen and present some very profitable gains for investors who are awake, knowledgeable and willing to act. If that’s not you, call our office 303-837-1187

 

Cheers

Sam Jones

I was well into my second piece on great investment opportunities when a lot of stuff just happened. Let’s interrupt our series of the Three Best Investment Opportunities to touch base on what’s happening in the news and how the markets are reacting now.

 

Hurricane Harvey

 

NPR has been doing a great job covering the humanitarian side of this disaster but the images of downtown Houston under water are a bit Orwellian. Our thoughts go out to everyone in that part of the country and wish you as much comfort and peace as possible. Oddly enough, I was sitting in a movie with my boys this weekend and watched a preview of Al Gore’s sequel to “An Inconvenient Truth”. Whether or not you believe in Climate Change, you must know that footage and imagery of disasters along our coasts associated with powerful weather systems (Sandy, Andrew, Katrina, Harvey, etc, etc) are coming to Al Gore much easier these days. I don’t need to watch the movie, I can just watch the news today! 70% plus of our country believes that Climate Change is real and needs to be addressed. And yet, Trump and company deny it all while simultaneously writing billion-dollar checks in Federal Disaster Relief. Ironic isn’t it? I do wonder how much evidence we need before taking serious action to mitigate the human impact on our global ecosystem (aka climate change). Perhaps Houston looking like Atlantis? Will that be enough? If you’re warm and dry watching the carnage from your TV, probably not. If you’re in a shelter, soaking wet, I’ll bet you are a believer. Sorry for the soapbox. I’ll get down now.

 

The markets are responding as they always do to hurricanes. They push up the price of Home Depot and Lowes banking on the next great wave of home remodeling in Texas. Building materials, industrial metals, wood and other hard asset type securities are also getting a bid for the same reason. On the macro side of things, there will be cause for a delay of game in the theme of a rising economy. The Fed will do nothing to rates for the rest of 2017 but they had already decided that this summer, before Harvey was even on the radar. With zero inflation or wage growth despite plentiful jobs, and an economy that is barely growing more than 2%, they can’t push too hard on the brakes …and they know it. Earnings for the majority of US companies will be largely unaffected by Harvey unless they are already a disaster, or in the disaster business.

 

North Korea

 

North Korea, specifically Kim Jong-Un, is now a global thorn and the world is about to pull out the tweezers. I can’t say how or when it will happen but we can probably anticipate some form of destabilizing act in the near future. If I were a resident, I would leave that country… today. Most of their population probably has very little to do with the actions of their unstable leadership. But they will pay the price as the world cuts them off in all ways. This situation is not good and the markets are appropriately worried. When the markets are worried, big money comes off the table regardless of logic or reason. These situations usually set up some nice discounts to buy, but only after we actually see prices fall rather dramatically either over time or all at once. We have seen neither so far. As I said before, there is way too much firepower in the hands of crazy on both sides for my liking. I think the markets agree.

 

Gold, Bonds, and Stocks Telling The Same Story

 

Last week we saw the markets continue a subtle orientation toward defense. Now, it’s pretty obvious. Yesterday, Gold broke UP out of a very long term base. We took entry level positions in gold and gold miners in the last four trading sessions. The US dollar has now broken long term support and is in a confirmed downtrend, now down -10% YTD. Why is the US dollar falling? Well for several reasons. The first is a vote of no confidence that the US economy is going to re-inflate or grow until something meaningful happens. There was no change in the Healthcare system as promised so we’ll continue to see 16-20% of our GDP go unnecessarily to rising healthcare costs. There is also the promise of a showdown in Congress over the debt ceiling, which is all just entertainment because they will raise the debt ceiling in the end (always and forever). The government might shut down for a while in the process, but the markets have never reacted to that other than going higher. Finally, as economic reports come in, it is becoming more obvious that Europe is actually growing with momentum, while the US is not. The Fed is paying attention and will not raise rates in this environment. Generally, we’re in a bit of a pre-recessionary holding pattern, which is also why Treasury bonds are also breaking out to a new high in the short term. Meanwhile, stocks continue to correct from the August 8^th high and the market is in a tug-of-war between buyers and sellers.

 

 

 

 

 

I doctored up a quick technical look at the S&P 500 and made some notes. A strong move back above 2455 on a closing basis would be good. Given that our model is still slightly negative across a lot of different variables (seasonality, sentiment, momentum, weak breadth, expanding 52 week new lows, high yield sell signal, etc), we still think there is more trouble ahead, especially in early October. All said, these are all reasons why the US dollar is under pressure but it also serves to illustrate the current situation across the different asset classes.

 

So those are all the major developments this week, not a lot of actual motion but a lot of commotion as we’ve come to expect this time of year. Rest assured that we’re making adjustments as necessary.

 

I’m sure everyone is looking forward to getting through this.

 

Best of luck to all

Sam Jones

Three Big Investment Opportunities – Part I

 

As promised, this update will be the first of a three-part series that brings to light three longer term, pending, Investment opportunities. Please, do yourself a favor and don’t run out and act on any of this information today. Wait, watch and let this serve as a guide as to where we might look to generate returns looking forward.

 

Growth Market Reverts to a Value Market

 

Let’s start by defining what we mean by growth versus value because these adjectives cover a lot of territory. First, we’re talking about equities only in this conversation. That might be an individual stock, a stock sector ETF, a stock mutual fund, or even a stock index. So we’re talking stock here. Second, you need to understand that any discussion about value versus growth is relative in nature and not absolute. For instance, if we only look at one set of metrics, say the Price to Earnings ratio, of a given security, we might say, hey that is low relative to the other names in the sector, or compared to the market as a whole. We might conclude that the stock is therefore cheap or trading at a discount. In this example, we might also fall into the classic value investors’ trap. A low stock valuation might lead us to believe that we can buy safely and expect great positive returns ahead. Quite often, however, we find that our low valuation stock just continues to get cheaper and cheaper, sometimes falling off exchanges and moving into bankruptcy. So you have to remember that valuation, however you define it, does not mandate a specific future outcome for that stock. Remember, the market is quite efficient as a pricing mechanism. Value investors should always ask the question, “why is this so cheap?” before buying. The same is true in the opposite for the growth sector with valuation metrics seemingly high and yet the price of the security just continues to rise and rise to new all-time highs day after day. Many of the FANG stocks fit into this category. Now with that tutorial on relativity out of the way, let’s talk about reversion to the mean.

There is a pendulum factor to the financial markets. By that I mean, that nothing rises forever or falls forever. There are times when it seems like just that after a trend remains in place for years and years. They used to say that about technology after nearly 20 years of unbridled price appreciation in the 80’s and 90’s. But then the dot.com bubble burst and it was all taken away. They used to say that real estate never falls because it has use value or rental value or other silly justifications. The real estate collapse from 2006 to 2011 caused more wealth destruction in our country than any stock market event in history. Nothing is forever when it comes to asset pricing (or credit pricing for that matter). Write that somewhere near your computer screen with that big fat permanent marker. Huge trend reversals happen every so often and they can be sources of great wealth accumulation or destruction depending on how you are positioned and whether or not you have been patiently watching and waiting for the turn. The big turns don’t happen that often but when they do, the really smart guys recognize the change and load up with the new trend. Practically every major market sector in the US has experienced at least two to three significant multi-year reversals since the year 2000. A reversal of a major trend that has been extended way beyond a normal level, either up or down, is considered to be a reversion or, as they say, a reversion to the mean. The mean is the average of course and that implies that our asset category is reverting from an extreme to a more average or normal condition. And very often, with financial asset pricing, we’ll see not only a reversion to average but a full-blown pendulum swing to the opposite extreme before the trend begins to slow down.

The final important variable to understand is that value can show up in any industry, country, sector, style or size investment category. Yes, there are specific defensive areas of the market that are considered value sectors like consumer staples, healthcare or utilities but even these can trade as if they were growth sectors as times. Conversely, we could make a case that Apple is more of a value play (almost a consumer staple now) within the growth-oriented technology sector. Value is generally found in names and sectors that are more consistent, or among those areas that pay out some sort of dividend or equity income. They are home to investors who don’t like drama with their money and their life savings, thus the name. Value represents not only a state of valuation but also of things that we tend to need rather than want. When times are good, we spend our money and our investment dollars on wants. When times are not so good, we all tend to spend more of our money on things that we need, like investments that “need” to not drop in price.

Back to the script. Today we are in a growth market environment. Investors are chasing growth at all costs, literally. $1000 stocks are not that notable anymore. Earnings kind of matter but not really as long as the price continues to go higher. As I write, the S&P 500 Growth Index ETF (IVW) is up nearly 14{1de7caaf0b891e8de3ff5bef940389bb3ad66cfa642e6e11bdb96925e6e15654} YTD while the S&P 500 Value index ETF equivalent is up a little over 2{1de7caaf0b891e8de3ff5bef940389bb3ad66cfa642e6e11bdb96925e6e15654} YTD. The same type of gap is happening across the globe, not just in the US and it has been a relatively strong trend since the early days of the new bull market in 2009. Here are a couple relative strength charts showing this incredible divergence between the past performance of growth versus value.

 

     Obviously, we don’t have to be Buffett to recognize that this relative performance is stretched to the same place it was back in the year 2000. Back then, technology was driving the growth sectors more than anything and valuations were just ridiculous. Today, the growth sector is not so richly valued as it was in 2000 but today we also see a value sector that is more deeply discounted leaving us with the same gap in relative performance in the aggregate. Maybe, the gap will continue to widen in the years to come. We don’t think so. We think we are very close to one of those decade-long trend changes that could easily see a reversion to the mean where value outperforms growth. At this point, we can’t justify the trend change because we never know why until after the fact. But, we can say that the probabilities of a significant change in leadership for financial markets across the globe are rising dramatically with each day now. This is the first pending investment opportunity that seems both timely and significant looking forward. Growth investors should be looking overseas, as there is simply nothing attractive in the growth sectors domestically in our view. But value investing among US-based companies might become quite attractive in the months to come.

 

Stay tuned for the next two investment opportunities on our radar in the next couple updates.

 

Happy eclipse day!

 

Sam Jones

President All Season Financial Advisors

 

Sean Powers

Chief Investment Officer

I am purposely writing more these days on topics surrounding return expectations because this is that critical time when investors make a lot of mistakes. Beyond managing your wealth, much of our job as your advisor is to talk you through risks and opportunities to help empower your own decision making regarding personal financial decisions. This update is very enlightening and a must-read for all investors if we respect the past as our teacher.

 

20-Year Stock Market Returns

 

A big thanks to Steve Blumenthal, of CMG Capital Management Group, for bringing this chart to my attention last week. Take a look at the 20-year returns for the S&P 500 over time. Really look at the lower chart in terms of highs and lows.

 

 

 

I’ll call out a few highlights. First, we see that investing in stock is a good place for your money. We have seen 20-year rolling returns as high as 13%. These are the periods marked that ended in the early 1960’s and then again in late 1999. Good times for sure, I was there. Everyone with big stock portfolios was rich. But there are other long periods where the rolling 20-year return approaches zero, or even slightly below. Today, we are in a bull market that began way back in 2009 with some very strong returns and a market that is trading way up at new all-time highs. But here’s the key that every passive index investor needs to acknowledge: Even after eight years of a bull market with nearly 200% gains off of the lows, the 20-year rolling return for the S&P 500 is still only 4.69%! Remember, we didn’t see a new high in the S&P 500 until well into 2013 dating back to the previous all time high in the year 2000. Thirteen of the last seventeen years were just making up for losses and working toward breakeven. The last four years have been legitimate new gains and real returns leading us to our 4.69% rolling 20-year return. The Nasdaq Composite is even worse. A new all time new high was recorded on July 13^thof 2016 from the previous peak in March of 2000. 16 years of making up for losses in other words.

 

What’s the point?

 

Today, we don’t really know if the trend of 20-year rolling returns has turned up or is just finishing its long-term move toward the zero line. We all have a guess but none of us knows the answer. When I first saw this chart, I was immediately curious about how we stacked up over the last 20 years. Our history with the All Season strategy is now almost 20 years old, if you can believe that, putting us in a very small group of advisors with a long-term real return history net of all fees.

 

(Please see our composite performance disclosure for more performance details)

 

The All Season Strategy, our only strategy with a long enough performance history, has made… 5.69% average annual returns net of all fees compared to the S&P 500’s 4.69% shown above since inception in 1997 (20 years). I was happy to see some outperformance in the aggregate but more importantly; our clients didn’t need to suffer through two bear market loss periods of nearly 50% either. Here’s a picture worth many of my words. The All Season strategy is shown in Red and the S&P 500 is shown in Green:

 

 

 

Now Back to Setting Expectations

 

Last week our exposure model moved into negative territory for the first time since July of 2016. We have a model reading of -4 out of a scale of +/- 19. Our Net Exposure mandate says that we need to work toward a target cash position of 20% in our equity models. We’re on our way having sold several positions last week that hit stops. Typically, we see a bounce of some sort that fails after 2-3 days, followed by more selling. I would not be surprised to see a 7-10% correction in the next couple months but this is still too early in the cycle for us to see the start of a nasty bear market. That time should be closer to the middle of 2018 if all things continue as they are. In fact, we are still expecting higher all-time highs by year-end and into the first quarter of 2018.

 

Looking out further with those 20-year goggles firmly in place, we should be open to the idea that returns might need to hit that historic low point of zero before we can really angle strongly back up toward the low teens (looking at 20-year returns – top chart). Practically, that means that sometime in the next three years, we’re going to see a significant bear market in stocks, something that brings prices back by 35-40% if the math works out. But here’s the good news: The buying opportunity that develops out of the bear market will be another one of those generational moments for investors who hope to make double digits average annual returns on that rolling 20-year window. We’re planning on being in that group, just as we were in the 90’s. Obviously, the key between now and then is to keep your capital intact and avoid the next bear. We are laser focused on that agenda now and will give up some upside return voluntarily as our risk management system kicks in.

 

Side Note on North Korea – Most of what is happening in stocks today around the globe has been in the works for many months, well before all the noise from Trump and Kim. Huge egos with big guns battling over media attention are, however, a bad combo.

 

More updates coming as conditions warrant.

 

Our best to everyone,

Sam Jones

There Are No Shortcuts

 

 

I read a quote in National Geographic this morning and it got me thinking. This is not an alert type update but rather a timely reminder for all of our clients.

 

“We can’t save the people who want to take maximum shortcuts”

 

Matt Gerdes

Founder of Squirrel Wingsuits

 

The backstory is the fact that the makers of Squirrel Wingsuits are discovering that too many of their customers are flinging themselves off of cliffs without any training, relying on “the suit” to make them stars in their own home movies. Of the 37 base jumping related deaths last year, 24 were wearing wingsuits.

 

 

Thankfully, there are new companies loading up some much-needed curriculum for progressing from skydiving to wingsuit flying. What does this have to do with personal finance and investing? Glad you asked.

There Are No Shortcuts to Wealth Accumulation

 

At this point in my career, I think I’ve almost seen it all. Investors come to the table wanting what they can’t have. Specifically, they want all the return the best stock market has to offer, but none of the risk. Of course, the prudent part of our brain says that’s not possible but there are times when we seem to forget after long streaks of gain without pain.

 

Times like now.

 

In the month of July, the markets rose marginally higher with some of the lowest recorded levels of daily and weekly volatility (according to the VIX). Volatility is a nice word for down days or losses. So we just experienced a historic month of gains without pain.

 

Subsequently, our tiny and reactive lizard brains tell us that investing is just a game of gains. How much did I make? How much did you make? How much did the market make? Questions and discussion of downside risk or potential losses are so… out of date. I read another story today about how the current era of investing is really just a game of the Tortoise and the Hare. Both are moving forward but it’s really about who is moving quickly, and who is moving slowly. Investors are now beginning to make those bad decisions again like chasing returns, building oversized positions in “safe” things like Facebook, Amazon, Netflix and Google (FANG) or shifting to 100% stock index funds. The effort is based on some sense that we might accumulate our wealth faster, get rich more quickly, reach retirement a few years early if we just cut that corner.

 

What could go wrong?

 

I’ll say this again for the one millionth time. There are no shortcuts in investing as a means of building personal wealth. When it seems just so easy to make money in the markets and we feel that tug to take a chance, cut that corner a bit, load up on this or that stock, we need to avoid temptation. This is the message of the day, as we approach the ninth year of this bull market with a market that is just simply too quiet and rewarding to investors.

 

Risk Management Hurts – At The Top

 

In our shop, we talk a lot about risk management, which does not promise all the return and none of the risk by the way. We promote the slow and steady consistency of investing with a constant eye to net exposure, selection and position size. Adjustments are made regularly in an attempt to keep investment assets in the right place, factoring in both risk and return prospects. While many are looking for that shortcut to wealth accumulation, piling on more and more into overbought and wildly overvalued securities, we’re quietly looking to take profits in many of our positions. In the process, we aren’t going to make big numbers in the final months and quarters of an aging bull market as we prepare for the downside. We are going to keep pace, make a decent and respectable return, but you won’t get really excited about any of it. In fact, this is about that time when you question the logic of needing risk management (or a risk manager like us). We’ve been here before, twice actually. Once in 2000 and again in 2007 just before the next bear market really started. Know that your slow and steady patience will be rewarded when the markets do finally buckle, correct and ultimately embark on the next cyclical bear market as we’ll be actively taking steps to limit losses and keep your profits and your capital intact.

 

Economy Still Getting Weaker

 

In our Quarterly Statement Insert, we suggested that the second half of 2018 might easily see a recession in the US. What? Yes, and there is plenty of evidence. Bespoke has a matrix of economic indicators and they aggregate those that improve versus those that get worse each month. Here’s the chart for data ending in June. As you can see, the US economy peaked in February of this year according to the net number of indicators score (at 10) and is heading swiftly toward negative territory. A negative number would mean that a majority of indicators are getting worse. But it’s not until we see readings of -5 to -10 that we might expect a formal US recession to become recognized. So we have some time and of course, this data set could bounce higher as it has many times in the last eight years. But now that the Fed is raising rates and the economy is at full capacity and full employment, we should be especially watchful (read critically).

 

 

source – Bespoke Investment Group

 

From a market perspective, if the economy continues to show more evidence of weakness, we would look for a more serious top around October, at least in the US market. Currently, our Net Exposure model is stubbornly sitting at +1 on a scale of +/-20. That’s about as neutral as it gets even as prices are working hard to make more new highs. Our playbook says that all is not as it seems. A slip into a negative reading would dictate a move to our first level of target cash (~20%) and we might be close to that event.

 

Three-Part Series On Major Investment Opportunities – Coming Soon

 

In an effort to close on a happy note, we are working on the details of a three-part series, which will highlight several significant investment opportunities in the next 12-24 months. These have been developing for many years. Each requires an active hand in shifting assets to new leadership, which we are perfectly willing and able to accomplish. Timing will be everything as always. These will be our investment themes and focus looking forward so clients should pay special attention.

 

Have a great week

Sam Jones

As a reminder to all, the Red Sky Report is delivered on an as-needed basis. Effectively, when there is something noteworthy to report, you’ll hear all about it with several pieces covering the action in short order. When trends are persistent and we’ve already discussed much of it, we won’t jam up your already bloated inbox. Ok?I can see you nodding your head. For this update, as a reminder, I’ll simply touch base on current trends that have been firmly in place since early to mid-2016. Despite our collective expectations for one outcome or another, nothing has changed. This is where your money should be invested factoring in both risk and reward properties.

 

 

Markets in an Uptrend

 

We are still in a bull market and last week the US market confirmed another all-time new high. Nothing new. Pullbacks to the shortest of trend following type moving averages, like the 50-day moving average, have seen opportunities for buyers to step up and either add new positions or add to existing positions from cash. Someday, this buy-the-dip pattern will give way and the trend will not hold, leading to a deeper correction or perhaps a new bear market. However, seasonally, this is the tough phase of the year as mid-July through mid-September can be some of the most challenging. We’re purposely carrying some higher cash now to create a smoother ride through this time, considering the pending showdowns in Congress, earning season directly ahead, worrisome valuations, and a less accommodative Federal Reserve. It’s the right thing to do knowing that we’re leaving some potential return on the table.

 

Internationals

 

The strength in internationals is one of the most persistent and rewarding trends in today’s global market place. It’s an exciting and dramatic change in the leadership of world markets, which has grossly favored US Index investing for the better part of 20 years. Today, the US market is rising, yes, but not like the rest of the world. The combination of our country’s stagnant growth rate (can’t seem to get above 2% annually), current aggregate market valuations (one of the highest in the world), tightening monetary policy (now three rate hikes in) and the great many concerns surrounding Trump, makes the US relatively unattractive for investments. Conversely, almost the exact opposite set of variables can be found in much of overseas financial markets with varying degrees of strength, all of which are outperforming the US. Today, the equity portion of our strategies are largely invested outside the US and only lightly invested in the US. We intend to add to our internationals as we see opportunities and entry points to do so.30-40% internationals in one’s portfolio now is reasonable and I believe that is the first time in my 25-year career that I have ever said that.

 

Take a look at the chart below from Bespoke, specifically the YTD numbers for internationals.WOW!

 

Playing the Interest Sensitive Space

 

     Going into 2017, there was a very strong investor preference for bond proxy type investments. These are the funds that pay dividends or interest but aren’t quite bonds. Preferred securities, convertible securities, dividend ETFs, high yield corporate bonds, etc. Generally, all have lagged the non-interest bearing stock indices and the relative strength continues to decline. Conceptually, bond proxies tend to struggle in a rising interest rate environment and make no mistake, this is a rising interest rate environment. While our guiding High Yield bond signal has not yet tripped to a formal sell, the asset class and everything in the High-Income space is now unattractive from a credit spread perspective. If Treasury bonds want to go for another run higher (price) and yields fall toward zero or even negative rates like Japan, then one could make the argument that High Yield might have more room to run. But then again, if Treasury bond yields are going negative, our focus will be on capital preservation more than anything. At this point, we’re going light on bond proxies and planning to take profits on all in the near future.

 

Note – Earlier this month, we again reduced our “Equity Income” sleeve in the All Season Strategy by 5% (down to 10% of total) and added the same percentage to our “World Stock Index” Sleeve bringing it up to 40% of total. These types of tactical allocation changes are reviewed and executed quarterly.

 

Real Estate is a hold for us now and a nice diversifier to most portfolios. Strangely enough, real estate and REITS hold up relatively well in a rising rate environment, much more than most understand. Today, they are lagging stocks a bit but still in a nice stable uptrend, offering investors regular entry points, dating back to Feb of 2016. Jared Dillon who writes a brilliant regular column called “The 10^th Man” did an excellent update last week on a developing opportunity in Retail Malls, even Retail REITs.What?I know, sounds crazy but he makes a pretty compelling argument that retail stocks and associated REITS are now battered and hammered to the place where the value guys with icy veins, like Buffett, will start accumulating. Maybe retail is dying as an industry relative to on-line sales but it will never really disappear according to Jared. We’re doing our homework now. Remember when Buffet was so crazy to buy Goldman Sachs at the bottom of the financial crisis. Remember when he bought Burlington Northern and everyone said he had lost it. How about those IBM and Wells Fargo bets. Now they are all HUGE winners. Value investing is insanely tough emotionally, dangerous in terms of finding a bottom and very lucrative if done right.

 

Sectors, Styles and Size

 

Nothing much has changed here with one exception. Value is trying to re-establish itself as the leadership group above Growth. We can’t say that it’s really happened yet but we are seeing a lot of selling and new volatility in technology while there is some obvious accumulation in things like financials, transportation, materials and industrials. Small caps continue to underwhelm but look constructive. Beyond that, there isn’t really an edge anywhere.

 

That’s about all there is to report of interest but again, not much new. These are trends that have been in place for almost a year. Our quarterly statements were delivered last week and they included a complete second-half market forecast. We would encourage you to read these quarterly updates where we take a longer-term view of the market and economic conditions in order to guide your expectations. Note, market internals are now hinting at a potential US recession by mid-July 2018. As always, we are here for you to discuss your personal situation or help with any decisions you are considering. It’s critically important to understand the current and future economic environment when making any significant financial decisions (housing, moving money around, business prospects). Please consult with our team of wealth managers first!

 

That’s if for now – enjoy the summertime!

 

Sam Jones

Wow, what a change one week can make. Conditions are changing very quickly now and this is a good time for an update on the markets and real estate considering the Housing Starts numbers reported this week. Time to wake up.

 

Net Exposure Analysis Says Raise Some Cash

 

For those who have been following our discussions regarding our investment process, you know that our first, and most important, screen is governed by our Net Exposure analysis. In simple terms, that means we take in a bunch of different variables, put them into the sausage maker and generate a weight of evidence driven recommendations for our net exposure to the markets. As of this week, the analysis suggests we start to raise our cash position. The main three ingredients to our net exposure model are sentiment (confidence, bullish and bearish surveys), fundamentals (valuations and economics) and technicals (internal indicators and price action). Regular readers know that on March 1^st, 2017, the markets hit an internal high of sorts. We talked about March 1^st seeing the largest inflow on record into the S&P 500 ETF (SPY). On Monday of this week, the S&P 500 made big headlines by pushing out to a very marginal new high, crossing the 2400 level by a total of 2 points. Strangely, something also happened or didn’t happen, on that marginal break out day. Not one of the 10 S&P 500 internal sectors made a new high. Normally, we would see 4-5 S&P 500 sectors confirm the move. In this case, not one. Honestly, I can’t tell you how the S&P 500 made a new high.

 

Other compounding evidence suggesting caution has been in play since late February including a decline in the ratio of stocks making all-time highs, weaker volume and more recently a strong drive toward optimism in the sentiment indicators. Jason Goepfert of Sentiment Trader.com is the master and he posted this list yesterday.

 

You don’t really need to understand each of the indicators above as much as recognize that all of them are piled up on the “optimistic” side of the balance sheet. When optimism hits extremes, relative to pessimism, there aren’t many places prices can go, but down.

 

Fundamentally, the economy is in reasonably good shape still with no signs of recession on the horizon but much of the current earnings have been priced into the financial markets. In fact, earnings have come in very strong this quarter, beating expectations by a decent margin and yet prices have gone exactly nowhere since March 1st. That’s a bit telling, adding to our weight of evidence. Furthermore, we know that valuations are still very, very high as they have been for over two years.

 

But here’s the most important point. The trend of the current equity and bond markets is all that really matters. We can look at all of this evidence and it can pile high suggesting the markets are going to do one thing or another. The evidence can paint a picture of a high risk or high opportunity environment for investors. Today the picture is of a higher risk environment. But in the end, we have to wait for the most important thing to happen and that is an actual break down in the price of action of the markets. This often happens last.

 

As I write, the S&P 500 just closed down -1.82{1de7caaf0b891e8de3ff5bef940389bb3ad66cfa642e6e11bdb96925e6e15654} indicating that the March 1^st high is still the high of the year. Given the increase in the number of warnings coming over the last couple weeks and months, we have to give this new selling pressure some respect and begin to raise cash. Today, we did so in most portfolios by selling our weaker holdings or those that are pegged for upgrades while holding our leading investments for now. As conditions warrant, we’ll continue to make adjustments.

Now let’s talk about Real Estate

Housing Starts and Inventories Still Low

 

So here’s the conundrum that has Wall Street guessing as to what is going on in housing in the US. We’ve all heard the stories of bidding wars again in certain states. We’ve all heard that there are simply no homes to buy, that inventories are still at historically low levels and that prices will just continue higher. With that in mind, one would expect and anticipate builders to be going full tilt right now, working 24/7 just to keep up with demand. And yet, housing starts, which measure the number of new homes in the permitting phase, are not where they should be and just registered their second monthly decline! I’ll quote Bespoke and show their chart delivered today.

 

“Despite an eight-year recovery in the sector, current levels of starts are only now just at levels that were typical closer to the depths of prior recessions than at the peak of an expansion.”

 

 

The chart above illustrates the quote. Even after a longer than normal economic recovery in the US, housing starts are still languishing behind other recovery periods in the last several decades. After factoring in increases in population since the mid-1950s, Bespoke argues that housing starts should be almost 60{1de7caaf0b891e8de3ff5bef940389bb3ad66cfa642e6e11bdb96925e6e15654} higher than reported today. The half-full perspective would say, give it time and home building will increase dramatically in the years to come and catch up to where they should be effective. Arguably, the trend is directionally up, so that perspective may play out. But for this update, I’m going to offer another explanation for why housing starts are lagging and could, in fact, be closer to a cyclical peak despite the very low inventory numbers.

 

Unaffordable Housing

 

Millennials are finally looking to buy their first homes. We said it would happen eventually but we didn’t expect them to delay those purchases by almost a decade. Unfortunately, like all buyers today, they are facing some very lofty prices in nearly every market of the country across all price ranges. Again, consensus opinion says, prices are high because there is no inventory so buyers must bid up prices to get the house, right? I don’t think it’s that simple. Consider these variables that are now aggregating together at one moment in space and time.

 

Land Costs are at an All-Time High

 

This is true for any available piece of buildable dirt. Builders need to buy an old home and scrape it to build a new one in more dense areas. Not cheap! To build a new home, your very first cost of land acquisition is at an all-time high.

 

Borrowing costs are rising Steadily

 

Believe it or not, interest rates bottomed in…. July of 2012, as did mortgage rates. We are now approaching five years of rising borrowing costs. Interest rates on a 10-year bond, which serve as the basis for mortgage costs, are up 62{1de7caaf0b891e8de3ff5bef940389bb3ad66cfa642e6e11bdb96925e6e15654} since July of 2012. Mortgages are not up quite as much but are darn close. It doesn’t feel terrible yet because today’s rates are still historically low but remember that 3{1de7caaf0b891e8de3ff5bef940389bb3ad66cfa642e6e11bdb96925e6e15654} is 50{1de7caaf0b891e8de3ff5bef940389bb3ad66cfa642e6e11bdb96925e6e15654} higher than 2{1de7caaf0b891e8de3ff5bef940389bb3ad66cfa642e6e11bdb96925e6e15654}. Buyers are facing rising monthly costs associated with a mortgage for a home that is at a historically high price.

 

Rising Costs of Building Materials

 

There is a lot of variability in the cost of materials to build a home as much depends on the quality of the home construction and the desired price point. But many materials, like concrete, copper, wiring, connectors, wood and steel are necessary to all. If you do some Google searches for building material costs, you’ll see that most bottomed in price in February of 2016 and have moved strongly higher by 20-25{1de7caaf0b891e8de3ff5bef940389bb3ad66cfa642e6e11bdb96925e6e15654} since then. I wouldn’t call it runaway inflation yet but these are some stiff price increases in just 15 months. Higher building material costs are passed on to the eventual buyer of course. But the key point here is that it costs a hell of a lot more to build a home today than it did just a few years.

 

Skilled and Affordable Construction Labor is Hard To Find

 

There are three variables coming together here. The first is that after the 2008 wipeout, many construction crews and workers had to find other work and many did not return to the industry. The second is that Trump’s adverse immigration policy is beginning to take root with fewer low-cost workers available from places like Mexico. The third is that the US economy is now at full employment (4.5{1de7caaf0b891e8de3ff5bef940389bb3ad66cfa642e6e11bdb96925e6e15654} unemployment). Everyone is already working in other industries and many are probably happy not to be out in the hot sun with a nail gun strapped to their belt. Homebuilders could raise wages as many project, but these costs would have to be pushed out to the final buyer on top of higher land costs and rising cost of materials.

 

Builders Don’t Make Money On Low-Cost Homes

 

If you sit in the builder’s seat for a minute and consider the situation, you might understand why a builder doesn’t want to build low price homes. Simply put, they make no money. Margins are razor thin when considering all of the rising costs associated with building a home (above) and the ultimate market or price points for “low price homes”. It is too expensive to build a low price home in a nutshell! So the builder hopes that they can stay in the higher end markets but those are pretty saturated now and the number of buyers in this space has really plateaued. This whole theme of swimming up stream to build a home for the super rich (only) is becoming pronounced in the custom home world. Last weekend, I heard a story of an architect who WOULD NOT work on any project less than $25 Million. Of course, I was in Aspen for the weekend, but still.

 

Back to the point and the alternate explanation for what’s happening. It goes like this;

 

Inventories of affordable homes are low, but rising building costs and higher borrowing costs are conspiring against the reality of any additional build-up in inventory. We may be approaching that gridlock moment where buyers can’t afford the current market and those who can afford it have already bought or given up on the prospects of moving. I want to point out that this is another sign of developing stagflation in our economy, like the 70’s and early 80’s. Stagnant growth and inflation is the makeup of the word, Stagflation.

 

The more important point to this entire discussion is the potential impact on the economy. Real estate is an enormous contributor to US growth rates, employment, consumption and aggregate GDP. We saw our first “Great Recession” in 2008 associated with a collapse of real estate (caused by, in my opinion) for instance. Today, the situation is quite different in that prices of real estate could stay high due to lack of inventory, but the number of transactions could take a serious nosedive based on lack of affordability. If I had to choose, I would choose this situation over the one in 2008, as real estate prices will likely stay steady keeping household wealth intact. But the negative impact on the economy as real estate activity begins to slow and eventually stop, could be meaningful. Take heart that these are slow moving trends indeed and at this point, there are virtually zero signs of recessions in the current system. I would suggest, however, that we all open our minds to a different outcome than the one projected by consensus opinion regarding real estate trends and subsequent growth in the US economy.

 

All in, this is a good time to stay focused and pay attention to what’s happening. I see a lot of complacency out there regarding the markets and real estate.

 

Until next time

 

Sam Jones

Having recently completed our latest round of client reviews with households from many different walks of life, I found myself hearing and answering the same comments and set of questions. These are relevant and timely questions in light of market conditions and performance over the last 18-20 months. All of our clients should spend some time with this important update.

 

Comment – “I Haven’t Made Much Money in the Last Two Years”

 

For most portfolios, in aggregate, that situation is real and largely accurate. Of course, everyone’s situation is different depending on whether or not you are adding or withdrawing money and your strategic allocation among our strategies. But for the most part, returns have been flat, even slightly down for many of our client households for almost two years. That feels like a long time and certainly, it begs a few questions like, are we doing something wrong or why am I paying management fees if I’m not making money. Said another way, there seems to be an expectation that paying a money manager means that you will make money all the time. Last week, we talked about the value of risk management and the realities of market drawdowns, changing asset class performance, etc. For this update, we’ll add to that discussion by setting expectations (or reminders for most) for upside returns in difficult markets.

 

You must recognize that there are long periods of time when stocks simply fail to move higher. We have been in one of those flat spots. For most broad domestic and global stock indices, it began on July 3^rd, 2014 (678 calendar days ago). Yes that is about two years ago. The S&P 500 and the Dow Jones Industrial average are up a total of 3.6% since July of 2014 but neither are broad market indices. The Dow is made up of only 30 stocks right? The bulk of global stocks and stock indices are actually down 7-8% since July 3^rd of 2014. Here’s a chart showing the NYSE index (red), the Dow Jones Global stock index (green) and the Russell 2000 small cap index (yellow).

 

 

 

I have marked the date of July 3^rd, 2014 for reference as the beginning of our current global stock market “Flat spot”. Also, you should know that losses through yesterday include a very strong and healthy advance off the lows in February, 2016 when several benchmark stock indices formally experienced bear market losses of 20% or more. Is there more downside to come? Or was that the end of the garden variety bear market we’ve been talking about since 2014? At this point we don’t know honestly, but we will have an answer by summer time.

 

Now to the question of why we have not made money for as long.

 

Should we be expected to make money, earn returns, in this type of negative investing environment as risk-focused money managers?

 

The answer is no – although that outcome is still possible and has happened in the past (2000-2003 for instance). Our job as risk managers is to assess market conditions daily following more than 20 different technical and fundamental pieces of data to determine our Net Exposure for our various strategies. In difficult and unproductive markets like these, we will naturally adjust our net market exposure to carry more cash, lean on defensive holdings and play solid defense.

 

Plainly stated, for long stretches of time over the last couple years, we have not tried to make returns as much as worked to protect your hard earned investment capital.

 

When conditions improve, we’ll be there to take advantage of healthy return opportunities. But for now and for the last seven quarters, opportunities have been thin and risk has been high.

 

I’ll give you a close up example with an illustration using our flagship All Season strategy (red) compared to our benchmark, the Dow Jones Global Stock Index (green) to show you the value of what we’re doing.

 

The beginning of 2016 was the worst start of any year in stock market history. Yes that’s a fact, we made history this year but not in a good way. Stocks opened the year, falling nearly straight down 10% and made a final dramatic low on February 11^th, down 12%. Going into 2016, our net exposure screen had already moved us into defensive mode with nearly 50% cash and non-correlated holdings. The All Season strategy at it’s very worst on February 11^th was down a total of -4.38% including a full quarter of management fees netted out. Subsequently, we got back in the driver’s seat as our systems quickly switched back to adding net exposure (buying) and we’ve enjoyed a nice ride higher since.

 

 

This is what we do. We adjust our holdings according to market conditions finding that balance of downside risk control as well as upside opportunity. Over time, this disciplined process yields solid results with real wealth accumulation. Here’s the long range picture of our All Season strategy (net of any and all fees) versus the same Dow Jones Global Stock index benchmark with the clear performance advantage going back to December of 1997. By the way, you won’t find many in our industry with a verified performance track record going back that far. We are a proud few.

 

Investing requires a high degree of patience. Two years of no returns, even slight losses, is not a problem as these periods of time also tend to reset value and create new highly profitable return opportunities. I think we’re almost there but that’s another discussion.

 

 

Question – Should I Shift My Accounts Into the Income strategies?

 

The situation is this. Our Income models are making all time new highs now as one would expect while stocks are under pressure. We have two such strategies. One is designed for retirement accounts, the other is designed to be more tax efficient for taxable investors, called Freeway High Income. Freeway has been doing especially well of late given it’s very large exposure to high yield municipal bonds which are appreciating at a healthy clip of 9% annualized on a total return basis. Both income models were relatively unproductive in 2015 but have shot higher since the start of 2016 and remain fully invested in combinations of corporate bonds, investment grade and junk grade, preferred securities, emerging market debt, municipal bonds, TIPS and Build America Bonds. All are in strong uptrends. Pictured below is our Freeway High Income Strategy since global stocks went flat in July of 2014.

 

 

Back to the question – Should you move your accounts into this Income strategy?

 

We don’t like to make strategy changes within a portfolio unless there has been a significant life change related to finances, like death, divorce, inheritance, business sale or retirement to name a few. We understand the interest in moving accounts into strategies that are making all time new highs but in effect this is return chasing and generally a bad practice from a strategic allocation perspective. Instead we lean on our client profiles to help keep your money balanced appropriately through your various stages of life.

 

How do we do that?

 

We have four client profiles established in our firm with prescribed portfolio allocations among our various strategies. These are based on your age, situation, goals, preferences and risk tolerance etc. All of our client profiles can be viewed on our company home page (Plant, Grow, Cultivate and Harvest profiles). You might take a look if you haven’t been exposed to this information as a client – or need a reminder.

 

WWW.ALLSEASONFUNDS.COM

 

There are two conditions now where we might justifiably increase your exposure to our Income strategies. The first is that you don’t have any exposure to Income strategies for whatever reason. Certainly in this case, we’d like you to consider that as all of our profiles have SOME income allocation. The second reason might be that you have a pile of cash sitting in the bank earning nothing and you want to make that money more productive. In this case, we believe there is a compelling reason to consider adding to, or opening, an account in our Freeway high Income strategy. The current annualized return of Freeway is 8.87% net of all fees. That’s better than zero.

 

Next week, I’ll try to answer a few more recent client questions as I may have exhausted you for today.

 

Cheers

 

Sam Jones

In the last update, we had many indications that the markets were angling toward the typical summer correction following the age-old pattern of “Sell in May, and go away”. Surprisingly, we saw a surge higher in prices last week that took our indicators off the brink and gave this hard-charging uptrend another breath of air. At the same time, the economy and markets are now giving us some early clues regarding a potential recession (in 2018). Finally, I’ll finish with some high-level thoughts on real estate versus other options in terms of long-term rates of return.

 

Net Exposure Increased Again – False Alarm

 

One could argue that we should just ignore technical signals during a bull market. After all, the most productive investment strategy during a bull market is to just stay 100% invested in a diversified group of securities and forget about it. That is all well and good in theory. Ben Carlson, of AWealthOfCommonSense.com, wrote this in his blog about why just sticking with a diversified portfolio over time is so difficult. He argues, as we do, that a diversified portfolio is hard to stick with given all the comparisons to a stock market that is running away to higher highs nearly every week. Of course, a diversified portfolio holds things other than stocks like bonds, commodities, real estate, etc.

 

Ben said it well;

 

 

•    —  U.S. stock market valuations are high and interest rates are low. This has been true for a number of years but that doesn’t make dealing with this scenario any easier.
•    —  There have never been more fund or product choices available to tempt advisors and investors alike from making portfolio additions or changes.
•    —  Many wealthy people make their money by placing concentrated bets in business. It can be difficult for advisors to change a client’s mindset from what it takes to build a fortune to what it takes to preserve a fortune.
•    —  Investors want what they can’t have. They mostly want strategies that work in every environment, fixate on short-term market moves, obsess over the performance of people doing better than they are and would rather focus on what’s working now versus what works over the long haul. Needless to say, this is at odds with reasonable investment advice that doesn’t work all the time.
•    —  Diversification is hard.

 

I’ll add one of my own. Diversification doesn’t matter, until it does. Meaning bear markets have a nasty way of surprising everyone and wiping out at least 60% of the previous bull market’s gains in relatively short order (Investech Research). Those who fail to stay diversified or have no risk management systems in place, like our Net Exposure model, will simply make money and then lose it, rinse and repeat. Are we close to such an event? Yes. What does close mean? It means that the probability of a bear market materializing at any time from these levels is significant. But, as we’ve seen since elections, prices can still move higher nonetheless. Tick tock.

 

Small Caps, Transportation, and Breadth in Gear

 

Some of the components of our Net Exposure model have been stubbornly sitting in negative territory but as of last week, most moved tentatively back into bullish mode. Small Caps and the Transportation sectors are often seen as a confirming group for market trends as a whole. Both have been sorely lagging the broad US stock market, until last week, when both saw a great deal of buying enthusiasm. If, and when, both break out to new highs, we can say that the bull market uptrend is still alive. The new strength is healthy and welcome but not yet enough to say, all is well. Also for several weeks, we have seen the FANG stocks literally carry the entire market on their backs while the rest of the index components traded below the peaks made in March. An index like the S&P 500 is capitalization weighted so it is quite easy for mega-cap tech companies to drive the index higher without much participation from any other components. An easy way to observe this is to watch a chart of the Equally Weighted S&P 500. Again, finally, last week we saw the equally weighted version of the S&P 500 also break out to new highs (green bar on the right side), thus confirming the move. This is a form of “market breadth” and the first sign of real confirmation we have seen since March 1^st. The odds of a summer correction or the beginning of a bear market are now statistically lower than they were a few short weeks’ ago.

 

 

 

Back to our Net Exposure model, these developments are good and have given us reason to get back to a fully invested position after only a few days of carrying a bit of cash. From a sentiment perspective, bullishness is also off the highs again, which gives us a little more confidence that prices can still go higher. Fundamentally, there are few new developments worth noting. Homebuilder starts continue to come in soft. Auto sales look like they have peaked now (except Ford trucks), and employment numbers were surprisingly weak last month. These are the additional signs of weakness in the economy that contradicts the story of unbridled consumer strength and business optimism. These are not acute or massive signs, but worthy of our attention in the aggregate. We’ll be watching the ratio of leading indicators to coincident indicators closely in the coming weeks. All is not as it seems regarding the story of a strongly growing economy and the recent strength in the bond market is echoing that statement. I have no doubt that the Fed will raise interest rates again this month as they tend to lag most trends in the economy by several months or quarters. But, with GDP sitting just above zero, they must be a bit nervous, behind closed doors and away from the public eye. I can almost imagine they have their meeting, and then finish with a winking agreement regarding their spin to the public. “We know what’s really going on, but what should we tell the public?” Ok, I’ll try not to be such a curmudgeon.

 

Real Estate and Other Options

 

I’m going to reference another piece from Ben Carlson, but from way back in April of 2014. It would worth your time to read this

 

http://awealthofcommonsense.com/2014/04/pointcounterpoint-real-estate-investment-option/

 

It would also be worth your time to subscribe to Ben’s free commentary. He’s bright and I like his stuff.

 

In this blog, you’ll see this chart. Spend a minute with it.

 

 

 

These are high-level numbers looking at calendar decades of returns. What you’ll notice is that housing prices generally track the returns of cash (or money market rates). For those who have taken a few macro econ classes, you know that cash or money market rates also tend to track inflation. Thus, this is an excellent time to repeat and remind ourselves of this long-standing fact; Real Estate prices tend to track inflation in terms of a rate of return +/- about 1%. Now take a look at the current Schiller Home Price Index: Year over Year % change

 

 

 

You’ll see a few things. The first is that when price appreciation, year over year moves above 10%, it becomes highly unstable, as it was back in the late 80’s and near 2005 and more recently in 2014. Now, remember, we’re looking at the rate of change on a rolling 12-month basis. These numbers are going to peak before actual prices peak because things tend to slow down before they change directions. Real estate is a slow-moving animal so lead times can be as much as two years. Now, look at the recent peak in the 12-month rate of change. By the eye, I’m going to say it happened around mid-2014. So, unless we see a dramatic increase in the Year over Year % change in real estate prices now, like right now, I’m going to expect to see an actual price peak in the near future. Finally, you might notice the current rate of change itself as mid 5%. I’m going to get myself in trouble with my realtor friends for saying this but when the real annualized rate of change (return) in the value of your home is less than the commission charged to sell it (6%), it seems we should all be a little critical of this transaction cost. I can say that after two decades of fee compression where the public thinks that any management fee is too much. Why are we not as critical about a 6% real estate commission on one of our largest centers of household wealth? If ever there was an industry ripe for automation, it is the real estate transaction business. I’m SHOCKED that the internet has not cut into this business yet… it will.

 

All good stuff to keep in mind as we make short and long term decisions about what to do with our hard earned money.

 

Until next time

 

Sam Jones

These days, we’re taking a lot of calls from prospective and existing clients about whether or not this is a good time to be adding to investment accounts. Most really want some sense of comfort that they are not going to be putting money in right as the bull market is ending. For this update, I’ll offer some sage advice on this subject both from a personal finance perspective as well as today’s market conditions.

 

Personal Finance 101

 

When should you add money to your investment accounts? If I were to ask Lauren and Alex, our current and future certified financial planners, I know what they would say. They would say, get on a regular plan for savings and investing that is not dependent on market conditions. In other words, avoid the temptation to add money after you read a big headline like “Nasdaq crosses above 6000 for the first time!” (4/25/2017). Similarly, we want to avoid those highly emotional moments, when markets are down hard and we feel compelled to sell, sell, sell as Jim Cramer loves to say. As our regular readers know, we do offer a solid system which identifies oversoldmarket conditions as reasonably good moments to add money to investment accounts via our “Calling All Cars” announcements to clients. In this way, we can help our clients answer that question and get money to work when prices are low or discounted. I wish more of our clients would act on this information, but unfortunately only a few ever do. It’s actually very hard to add money when the markets are down and headlines are warning of the end of days (always a great buying opportunity). So in the absence of a good system for identifying lows or following our timely Calling All Cars advice, the best system for adding to investment accounts is by doing so with some regularity, like quarterly or monthly, as a percentage of your annual income with clear retirement, education or estate goals in mind. If you are engaged with such a plan, good for you. You might enjoy the rest of this update, as the chances of higher prices ahead are still very good.

 

I’ve Seen Worse

 

In the last week of April, the negativity surrounding the future of stocks was palpable. Sentiment figures reflected a deep sense of doom around the 20^th of April as shown by the “Dumb Money” levels of SentimentTrader.com below. Dumb money is generally the smaller, less informed investor who follows headlines and believes everything they read. They are usually wrong on the future direction of the markets as most sentiment indicators tend to be dependably contrarian. As shown in Red, the CONFIDENCE level of Dumb money by April 20^th fell briefly below 50 as it tends to do at some of the better buy spots.

 

 

Meanwhile the Smart Money shown in Blue, rose above 50% giving the Dumb money indicator a little kiss. You can see the same series of events surrounding election time last November and in June of 2016 surround the Brexit vote. These “kiss” moments for sentiment have proved to be great buying opportunities. Our own system confirmed the short term buys on April 20^th and 24th and we used them to deploy the majority of available cash to new investments. The markets are largely out to all time new highs again now so these look like productive entry points.

 

Sentiment is just one of our indicator themes that form a dashboard for Net Exposure. We also look at volume, breadth, advance/ decline lines, leadership, relative strength, and fundamental valuations. As I said, in the headline, I’ve seen a lot worse looking market conditions in my time. While valuations are still not attractive, the trend of this bull market is still strong and healthy with few indications of pending recession or a deep correction. Highly valued markets are riskier than highly discounted markets but bull trends can run for a lot longer than most investors would perceptively expect. These conditions have been in place since the lows of the mini-bear market in February of 2016 and nothing has changed.

 

Opportunities in Internationals

 

If you hadn’t noticed, our various strategies have built up an oversized weighting in global and international ETFs, stocks and global bonds. For those wondering where we might deploy new money, this continues to be one of those investment opportunities. Specifically for the first time in several years, we have full positions in emerging markets, emerging Asia, India and now Europe, which is suddenly catching up to the rest of the developed world. We believe this outperformance will continue as long as the US dollar remains stable at these levels. There is a significant gap between the 10-year performance of most of Europe and the US, which we expect will close over the next several years (see below from Bespoke Research). If Trump manages to get anything done in the vein of protectionism or Border Adjustment Taxes, you can assume that the US dollar will rise strongly again putting a wet towel on earnings. But so far, he has done almost nothing and global markets are benefitting.

 

 

Half Full/ Half Empty

 

Again, for those asking about adding new money to investments, we thought it might be appropriate to offer a little long-term perspective. On the 25^th of April, the Nasdaq broke through another 1000 level marker, specifically the 6000 level for the first time in history. The last level down at 5000 was broken on… wait for it… March 9^th, 2000. Bespoke provided this excellent chart showing the number of days between 1000-point thresholds on the Nasdaq. The most recent break above 6000 marks the end of an enormously long dry spell of 6,256 days. So the half full perspective for those wanting to add a new month to investments would argue that the Nasdaq is just now finding new highs after nearly 17 years of loss and recovery. As you can see in the late 90’s, after a similarly long dry spell, the Nasdaq went on to conquer several more 1000 point thresholds before the bull market ended in 2000. The half empty perspective would suggest that prices are again high enough that we should carry some significant worry about potential losses. I don’t have an answer for this one but I thought it was meaningful in this context.

 

Sell In May?

 

In the short term, it would be irresponsible for us to conclude without mentioning that we have reached the end of the best cycle of the year, which runs from November through April. Sell in May and Go Away does have an incredible track record. So let’s not get too excited about any of the good news and higher highs in the markets considering the time of year. We might find the best trade in the days to come is to take profits and look again in the fall. Some would appropriately say, Buyer Beware. We’ll just stick to our program of setting stops on current positions and enjoy the ride for as long as it lasts.

 

That’s it for now

 

Cheers

Sam Jones

Three Giant Headwinds For the US Economy

I could read and research all day every day and never really gain as much true understanding as when I just talk to people and hear their stories. Here in rural northern Colorado, I have a lot of conversations with hard-working Americans (aka blue-collar, middle-income types). I spoke at length with a guy who’s story crystalized three mega issues that continue to be a problem for the US in terms of our growth potential and competitive stance in the world.

Joe

Let’s call him Joe to protect his privacy. Joe is a 62-year-old civil engineer with two 20 something kids. He has lived in Routt County, Steamboat Springs since the 70’s “off and on”. In the 70’s Joe told me that the Savings and Loan bust along with the energy crisis forced him to move back to the city for work. Engineering jobs dried up with building and development work. It was a very tough time for the state of Colorado ( I remember it and I was only a 12 year old). Joe eventually had to move his family all the way back east for work but then his wife got a teaching job in Fort Collins and they moved back to CO, ultimately back to Steamboat Springs. I asked Joe if he was thinking about retiring now and he chuckled.

“No, I don’t have much saved so I’ll be working as long as they still need people like me. “ I interpreted that to mean as long as they need his 1970’s skill set as a civil engineer. I also heard the insinuation that his skill set might be going the way of the horse and buggy.

He’s got a job with the city, water conservation district (government job).

Joe also talked about how everything is so expensive now and he just can’t make enough. He cited healthcare costs “don’t know how I can keep paying this…”

Joe is looking forward to filing his tax “return” which struck me. Joe pays a little income tax but never has a tax bill at the end of the year. He files his taxes and expects a “return” every year like much of the country. Strange that people think of doing their taxes as filing a “return”.

So Joe’s situation and story is one that many could tell in our country and the very reason that Trump’s campaign to “Make America Great Again” found such fertile ground. We should all be compassionate and empathetic to those in this situation, which is not of their choice or preference. So let’s dive into the three themes, apparent in Joe’s life, that are mega problems for the US. Time will heal all but it might be a lot of time.

Theme #1 – Under-Skilled Labor Force

I spoke about this several weeks ago (The Busted American Dream) so this theme is not new to regular readers. Our country has done a poor job of educating and training our general population to be adaptive to the dynamic nature of workplace demands. We have been operating on the basis that if Joe is trained as a civil engineer, he’ll be fine, work a 9-5 job and make ends meet. Joe doesn’t feel that way. His job skills were probably outdated years ago but never adapted to that fact. He probably knew it but didn’t do anything about it. He had, and has, opportunities for an encore career but I suspect his motivation to reinvent himself, learn a new trade, start a new company, etc., at the age of 62 is pretty limited. Our system needs to teach and train our population not to be one thing or another but to be problem solvers, to be thinkers with the ability to do many things in our lifetimes. The pace of change in the world is outstripping our ability to adapt as a population and it’s creating a lot of strain, anxiety, and frustration. No political leader can make this strain go away without a massive welfare state. It can only be solved by starting at the bottom of the education chain and teaching our next generation how to create their own job, evolve within an industry and generate real value for the companies they work for. Clock punchers and button pushers doing routine and repeatable tasks are becoming obsolete very quickly as technology replaces them in today’s work environment. Coal miners, factory workers and most manufacturing jobs in the US fall into this camp. Again, no public policy initiative to bring them back will ever take root as this type of work is just too costly and inefficiently executed by labor. Up here in Coal country Colorado, the local mine and coal-fired power plants operators are very nervous about the shift to natural gas because they know that a power plant run on natural gas needs only 1/8 as many employees and zero coal miners.

Parents of young children – there is a magical intersection between problem solving and creativity. You should demand that your schools find it and teach it.

Theme #2 – Massive Debt and Inflation

Joe mentioned this and it’s very real. Inflation is in everything today. Food prices, healthcare costs, building materials, rents, housing, restaurants, etc. We all feel that reality and this is just the beginning, especially if protectionism, immigration reform and import taxes remain on the agenda. After nearly 30 years of falling costs and deflation, it seems highly likely that the tide is turning back toward actual inflation (reflation). This is fine if you own a lot of hard assets or even investment securities but not ok if you’re Joe. Joe doesn’t have a lot of stocks, Joe doesn’t own a lot of hard assets, and Joe probably doesn’t own the majority of his house. So for Joe, inflation is just a tax in his lifestyle. I was hopeful that the Healthcare proposals would somehow cut costs but it didn’t happen and this failure leaves Americans with a giant tax just to cover the most basic healthcare coverage need. Inflation and the rising costs of living are things that we can manage marginally by the choices we make but not all are discretionary. Along the same lines and certainly related, is the level of public debt in the US which is way, way, way off the charts. I’m afraid to even look, but it’s probably north of $28 Trillion this year, which is several times US annual GDP. The government will again raise the debt ceiling this month because they have never been able to afford their own current spending, ever. In 2008 and 2009, private debt, in the form of foreclosures and bankruptcies, was simply absorbed into public debt. Remember, “Too big to fail”? That is government speak for “we are going to turn your private bad debt in our collective public bad debt so that you don’t experience too much pain”. Well, the debt is still there and inflation, very high inflation, is one way that governments can get rid of it. At some point, the End Game for our debt will play out but I’m not clear exactly how yet. I can’t image the US defaulting on our Treasury bonds but I supposed that’s possible. I can’t image inflation in double digits but maybe. This theme is really on the macro side of things and probably off of the radar for most from a day-to-day standpoint. But it’s certainly one of those variables that create headwinds for growth and our competitive position in the world. It’s a bit like a carbon monoxide; you can’t smell it or taste it, but it can be very deadly.

Here’s a chart from Nerdwallet that sort of says it all capturing the rising costs of healthcare, credit card debt, and concerns about your financial condition.

 

 

Theme #3 – Undersaving Generation

 

The data surround total saving for retirement among the baby boomer generation are more than a little sobering. John Mauldin delivered an excellent and extensive piece on this topic this morning in his “Thoughts from the Frontline” newsletter. You can find it here

http://www.mauldineconomics.com/frontlinethoughts/?utm_source=newsletter&utm_medium=email&utm_campaign=frontline

We can’t know how this story ends, but like Joe, we are looking at a generation that hasn’t put enough away. They are going to be a very dependent generation leaning on children, government safety nets, social security, Medicare, Medicaid, etc. It’s really hard to say how this happened but the hard facts are undeniable. Many who assume they have pensions to cover them are now becoming doubtful that they will ever see those benefits. Sears is a classic case, recently in the news. Today their bountiful pension plan is underfunded by nearly $1.6B. Benefits are being cut, but more importantly, the PBGC (Pension Benefit Guarantee Corp) now has a lien on the future operating revenues of Sears to help fill the gap. Not only is the pension plan failing but it’s driving Sears faster and faster into complete bankruptcy. They won’t make it.

https://www.usatoday.com/story/money/2017/03/22/sears-retirees-worry-their-pensions-company-raises-doubts-its-future/99497610/

The promise to pay is only as good as a company is solvent. Many insolvent company pension plans have been turned into public debt through the PBGC – aka the government. Please re-read Theme #2!

So our baby boomer population, by and large, has massively undersaved and / or become dependent on government entitlement programs to cover just the basic living expenses. This generation is not going to have the money to spend like they did in their younger adult years and spending is the driver of the US economy. The third headwind to growth in the US is not something that can be easily solved either by policy or time.

 

Summary

 

These are depressing realities. I understand that, but awareness allows us to address them, make changes in our own behavior as we can and do our best to navigate through the environment ahead. That is part of our job as your financial advisor. The US may not be the economic powerhouse of the future. But there are a lot of opportunities within that macro picture and lots more opportunities outside of the US. We need to stay flexible and open to all with our personal finances.

 

Sorry for the bummer update so early in the week

Sam Jones

Fidelity Reduces Trading Fees

 

Fidelity (our primary custodian) has long offered a $2 per trade discount from $9.95 to $7.95 to client’s that have agreed to receive their statements and trade confirmations via e-delivery. However, beginning, March 6, 2017, this fee will be reduced even more, to just $4.95 per trade!

As a result, we highly recommend that anyone who is still receiving statements and trade confirmations via the US Postal Service (and still paying $9.95 per trade) to contact us so that we can assist you in signing up for e-delivery in order to receive the reduced trading fee.

All businesses should be aware of the “cost” of their primary function. All consumers should be wary of their spending on goods and services. As a fee-only (not fee-based) advisor we stand in a particularly interesting spot where we must balance the decision-making processes of buying and selling securities, the trading costs to our clients and management fees collected. We like to encourage savvy investing and are prepared to assist any clients who are interested in reviewing their trade confirmation and trade fee situation.

As always, we are inherently interested in Creating Wealth and Defending It, if we can lower your transaction cost through enrolling in online delivery of statements and trade confirmations, we perceive this as a win-win for all.

 

Enjoy your week.

 

Alex Osmond

Tracking The Bear

I mentioned this concept in our recent Investment Forecast in the context of looking for signs of a market top, or more specifically, a rising risk structure inherent to owning stocks. Just like a hunter, we’re seeing more signs, more tracks as we get closer to the den.

 

Market Tops Are Very Deceptive

 

Before we get into the new evidence, I do want to say one thing that must govern any discussion of hunting for a market top. Markets can and will go much higher and for much longer than normal logic, prudence or your patience can typically tolerate. If you happen to have missed this entire bull market like so many have (a true statement), prices will rise until YOU finally capitulate and push in all of your chips. Then it will punish you for your lack of discipline. It is the nature of human risk aversion both in avoiding pain but also the pain of being left behind. Even when valuations are notably high as they are today, markets can and will again move even higher as multiples expand. Valuations today are the same as they were in 1996 and the same talk existed then as it does now. They said the markets cannot move higher considering valuations were so high. Well the S&P 500 went on to generate another 142% over the course of the next four years before we saw the final top in March of 2000. I started in this business in July of 1994 and I thought I was a genius ignoring the fundamental camp as valuations pushed higher into never (ever) land. I just didn’t know enough to do much more than read a chart pattern at that time and it worked out well. Dumb luck literally. So the message to retain is that calling a top is a sensational matter and great if you need someone to pay attention to you, but not really a high probability endeavor. I don’t need any attention. Our effort here is to point to the signs, the tracks and the evidence of investor excess as they develop. These are the hallmarks of the end of every bull market but the exact timing is always tough.

 

Additional New Tracks

 

In early February, we talked about cutting some exposure from our equity models as several of our markers had been hit in terms of extremes. Most notably the VIX hit a low of 10 and that fact has a long history of preceding a period of higher future volatility. Now understand again, that volatility comes in many forms including upside and downside volatility. So far, we have seen some upside volatility and that’s always the easy fun kind. Soon, we’ll see some downside volatility and that’s the nasty kind. Either way, when the probability of future volatility hits a high point as it did on January 29^th, the smart thing to do is to slightly reduce exposure and/or consider inherent volatility in your security selection. This is all that we have done in recent weeks but remain largely invested in all strategies, respecting the bull.

Today, I read a great post from Jared Dillon of the 10^th Man “When it’s time to leave the party”. It was very funny and a bit scary at the same time. Most of it surrounds the celebrity crowd like Jay-Z, Pitbull and yes the cheesiest of the financial televangelists, Tony Robbins getting in on the action. The last time I heard advice from celebrities, they were demanding to be paid in Euros! (oops).

 

 

Even CNBC did a little capitulating with this headline:

 

 

I’m still waiting for the big one, the mother of all signs of excess.

 

The cover of Kiplinger’s magazine asking – “Are You Rich Yet?”

 

When bullishness finally blows out as it has since last summer, we also tend to see money flow into the market, in mass. Did it happen? Did we find this track? You betcha.

2016 was actually the first year we saw net inflows into equities since the beginning of this bull market way back in 2009. Shocking. The number was huge as nearly one-half of $1Trillion of new money went into the stock market in 2016, much of it in the last couple months of the year. That’s great so far but it’s also more evidence that holdout investors are in fact capitulating and finally investing again.

Jason Goepfert of Sentiment Trader also posted another “track” today in his research surrounding a most notable event in the Dow. Nine consecutive closes at all time new highs is not something that happens all that often. Statistically, it’s happened six times since 1900. I know you want to know what has happened in the past after such events, so here they are as an average for the Dow Jones Industrials.

After 1 month +2.6%

After 2 months* +5.8%

After 3 months +4.0%

After 6 months +3.4%

After 12 months +0.90%

 

The sharp analyst would identify the end of the second month (April this year) as the month to cut and run which jives nicely with our stance that we should continue to see bullish strength and momentum through April.

Jason also made sure to mention that inside these average results following the event, we had not one but two market crashes, one very serious bear market called the Great Depression and one very long choppy period of no gains. All in, maybe not a great time to be plunking down a lot of cash in Jay-Z’s new Venture Capital fund (Just saying). In Jason’s words, “once it stopped, it stopped hard!”

Finally, those who watched our Investment Forecast for 2017, know that we set some boundaries on a reasonable expectation for upside market appreciation in the S&P 500 using an educated guess and some notable help from smart research shops.

Our upside target for the S&P 500 is 2430 (+9%) by year-end, but not necessarily the high of the year. Today the S&P 500 is trading at 2366 or about 3% shy of the target. So again, we could see prices rise beyond the target through April but we’ve already pulled forward a lot of 2017’s total year return in barely the first 60 days. The current annualized rate of the return for the S&P 500 based on the first 60 days of the year is…. 47%. Hmmmmm.

 

I’ll leave it right there.

 

Heed the tracks as we make our way up the hill to the den.

 

Have a great week

Sam Jones

Active vs Passive Managers in 2017

 

For those who reviewed our 2017 Investment Forecast Presentation, you may recall our sentiment that conditions are ripe for passive returns to revert back to the mean, while active management styles may outperform the market. We feel that 2017 will be a differentiator year in regard to active and passive investment strategies and will favor those advisors who employ active styles.

Our insight leads us to believe that 2017 will provide the opportunity for active managers to weather the aging bull market as well as bear markets that may arise. Factors leading us to this conclusion include the tumultuous first act of our new president, central bank meetings and announcements, proposed foreign and tax policy, indicators in the Chinese economy among other factors. We feel strongly that in 2017 the active vs passive balance will favor the former, but no need for you to take our word for it, these topics are covered in detail in the Forbes article which should be reviewed as the entrée to this appetizer.

Thank you for staying connected. We look forward to presenting more findings and insights as the vacancies in the presidential cabinet are filled and policy starts to solidify from rhetoric to action.

 

Best,

Alex Osmond

Cutting Exposure

 

In our home, we regularly have those conversations with our teenagers about good judgment. We frame it like this. “Ya know, the risk to reward tradeoff for that just isn’t very attractive. You have a lot more to lose than gain”. Somehow, our teens get that. We all do. As of 1/27, several of our indicators governing our Net Exposure system reached a point where … The risk to reward tradeoff is no longer attractive. As a result, sticking with our system, we are raising cash. You may notice several trades today and will see a few more in the coming days.

 

But The Markets Are At All Time Highs

 

As you know, on November 4^th of 2016, we issued the Calling All Cars directive to all clients suggesting that the markets had reached an oversold and attractive buying opportunity. Oddly enough, this happened just days before our presidential election with an unknown outcome and impact on stocks. Since then, the markets exploded higher by 8-12% through yesterday. Our own Tactical Equity and Blended Asset strategies tacked on a quick 6-9% and our income models added +2-3% even while bonds lost nearly -9%. This has been a great run for stocks but one that has largely pulled forward a lot of 2017’s calendar year returns based on hope and speculation. The uptrend in stocks is still healthy and good to be clear but it has also approached an extreme from our measures of overbought and overvalued. Take a look at this quick screen shot of the VIX (Volatility Index). This index measures… you guessed it…. Implied volatility taken from options pricing. When the number is low, it suggests that stock market prices are moving higher without much concern (options are cheap). When it rises, suddenly and dramatically, it reflects panic during steep sell-offs (options get expensive). In our shop, we have a little bell that rings when the VIX hits anything below 11. On 1/27, the VIX hit 10.58. Any reading below 11, in recent history has been one of the harbingers of corrections to come. After all, when everyone is overly confident and prices are bid way up, we tend to see corrections occur. The last time we saw the VIX under 11 was July 3^rd of 2014. 72 days later the S&P 500 was down -6.19%. As a matter of fact, the S&P 500 continued to struggle after that date for another 405 days until February of 2016 when the final lows were made. 405 days!

So today, prices are indeed tickling the all-time highs and we have yet to see a correction, but the VIX, and several other indicators like it, are telling us to expect HIGHER VOLATILITY in the days and weeks ahead. Today, we sold some of our index fund exposure and raised cash across all strategies (by 15-25%). Sell high, buy low right?

 

Selection Screen Changing

 

As we wrapped up 2016, the market was screaming for Trump stocks. These are the energy groups, stocks that benefit from infrastructure spending, economic growth, and domestic industrials. It was an easy and predictable trade as the shock of Trump in office became a speculative trade overnight. Now, in the new year, post-inauguration, some questions and doubt have entered the scene driving leadership back to other sectors and asset classes. One notable change has been the direction of the US dollar, which until the beginning of 2017, was in a strong uptrend. Now, the uptrend is stalling or worse. A rising US dollar indicates a strong and growing economy. Maybe the market is beginning to understand that Trump’s policies may not make America as Great as promised, at least not by the end of the first quarter (wink). The trend of the US dollar has a profound impact on sector and asset class performance.

Also changing from last year is a surge in large cap growth via the likes of the Nasdaq 100 index (QQQ). Small caps were the big winner in 2016, now they can’t seem to stop underperforming large caps. Likewise, while industrials, materials, and energy have been topping the charts for gains since the election, they are beginning to show signs of weakness, especially as earnings come home in full color. These groups should be doing well if Trump is going to get his way and they likely will to some degree. But for now, the hope factor may have gotten ahead of the fact factor.

Finally, with all the chatter about trade barriers, walls, trashing trade agreements and generally pissing off our global manufacturing partners, it seems that most international indexes are now beginning to show some notable relative strength to the US market. Some of this has to do with the fall in the US dollar of course. But, the 2017 YTD strength in internationals is pretty dramatic. Take a look at how leadership across the globe has changed YTD, Since the Fed Rate hike in December and Since Elections.

 

Bespoke Institutional Research

 

 

Not Leaving The Market

 

As of now, we have only an overbought market but not much more to worry about than that. The economy seems to be on fairly strong footing as it has been since last summer before elections. The Fed is playing nice with predictable commentary and actions and earnings are coming in right in line with expectations, even a bit stronger. The markets will follow earnings growth and thus we are not exiting the market altogether as much as cutting some exposure as the market comes back to earth a bit in terms of expectations, prices and the facts (the real ones). We are simply moving to the first tier of our cash allocations considering recent extremes in several indicators. Net exposure to the markets is the largest determinant of performance in any one investment portfolio and we make these timely adjustments for our clients based on our proprietary system as part of our core value proposition. If things get really ugly, we will become even more defensive but for now, we’re just putting one foot out the door.

From a timing perspective, March and April are notably the best months of the year for returns and we want to keep our hand in the game giving it the benefit of the doubt. However, worries about the Fed and a potential rate hike as soon as March will begin creeping into the narrative as well as additional information regarding disruptive policies from the Whitehouse. We are expecting higher volatility either way.

I look forward to seeing many of you at the upcoming Investment Forecast 2017 Solution Series at our office on February 15th which is now overbooked and completely full. We’ll talk a lot about market trends under the new president, the state of this aging bull market and where things are likely to go from here. The presentation will be sent out to current clients after the meeting.

 

Stay tuned

 

Sam Jones