Archive for the 'Investing' Category

Quoted in “Fiscal Cliff: Fact or Fiction?”

The article “Fiscal Cliff: Fact or Fiction?” appeared at discussing the coming Fiscal Cliff facing the U S economy.  I  provided the author with background information and is quoted in the article addressing investor strategy.

Sell in May Looks Pretty Good So Far

My last post on April 26, “Why I’m Worried,” I went through several fundamental and technical indicators that showed the first quarters rally was likely to have ended. From an investment perspective our client accounts were moved to low beta stocks and ETF’s. I sold JNK. And last week added another defensive layer by adding SH, Powershares Inverse S&P 500 ETF to our income portfolios. Here’s a wrap up of why I am growing more bearish.

  • Corporate Earnings. First quarter earnings came in very strong relative to expectations. That should have been a good sign, but it failed to move the market upwards.
  • Citibank Economic Surprise Index (Figure1.) The stock market is based on expectations more than reality. As the chart in Figure 1. indicates actual economic data has been coming in below expectations. The index has flattened recently, but this could be from lowered expectations, as estimates have been missing for the past 3 months. Look for a trend reversal as one signal that the market may have bottomed.

Figure 1. Citibank Economic Expectations Index.

  • St. Louis Fed Financial Conditions Index and Chicago Fed Manufacturing Index.  Last time I looked the CFNAI-3MA (3 month moving average) was weekly trending up and the STLFSI was trending down, but still at troubling levels. These indices have continued to weaken as seen in Figure 2. My comment a month ago was that financial conditions were not at levels to support strong economic activity. As seen below financial stress has turned back up (bad) in the latest reading. Expect CFNAI to continue to trend lower with its next release.

Figure 2. STLFSI and CFNAI-3MA.

  • Yield Curve Figures 4. And 5. The yield curve has been a fairly decent economic indicator. Reliable enough that the Federal Reserve has a formula that predicts GDP growth based on the spread between 10 yr and 3 month Treasuries. Figure 4 shows that the yield curve has been flattening as long term rates are declining. The current yield curve is the black line; the fading lines show recent history.  Figure 5 shows that at current rates the Fed is anticipating real GDP growth of around 0.7%. Not impressive, but still positive. Continue watching the long end of the yield curve. As rates come down the expectation for GDP growth will be lowered too.

Figure 3. Yield Curve.

Figure 4 Future GDP Growth as Predicted by the Yield Curve.

  • Europe.  This is a topic worthy of a book. Actually I’m sure, dozens of books over the next decade or so. But the real issue, is what affect will, whatever happens, have on the U.S.? For a clue, take a look at the recent performance of our “too big to fail” banks; JPMorgan (JPM), Citi Group (C), and Bank of America (BAC).  Simply put, these stocks have tanked since mid March.   Yes interest rates have come down which will hurt earnings, but not enough to see 40% drops in price. Investors are definitely seeing problems ahead. While my understanding is that they are not directly exposed to European sovereign debt, they are exposed through the CDS market – as re-insurers of sovereign debt.

Figure 5. BAC, C and JPM

  • Continuing Divergence Between SPLV and SBHB. The Stand and Poors High Beta (SPHB) and Low Volatility (SPLV) Indices shows a continuing flight away from the higher beta “risk on” stocks in the S&P 500. Since the stock market high in early April the low volatility index has continued to hold its own, while the S&P 500 (SPY) and the High Beta Index have continued to decline.

Figure 6. SPY vs SPHB vs SPLV

  • JNK Below 30 day Moving Average. A month ago I sold JNK (Spider High Yield Bond Index ETF), shortly after it broke down through its 30 day moving average. Since then JNK has continued to tumble. What makes this interesting is that if expectations are that U.S. corporations can weather a Euro storm, JNK would not be dropping off as it has the last 30 days or so. Clearly, the markets are indicating that there is a serious worry that whatever happens in Europe, will have a negative impact on both our economy and corporate earnings.

Figure 7. JNK and 30 Day Moving Average


No indicator is 100% certain in predicting either the economy or the stock market. As an investment advisor I’m entrusted with clients’ business and personal wealth. It is incumbent upon me to adjust our holdings as the market indicates either softening or recovery. It is about probabilities, not certainties.

What we’re seeing now, across a fairly broad spectrum of indicators, is that investors are worried. There are more sellers than buyers of risk assets. Period. The questions are, “Is this a time to be a contrarian?” My personal opinion is that if Greece exits the Euro there is a strong likelihood of another 40% drop or more in our markets. The next question then is not “whether” this will happen, it is “what are the consequences if it does?” Are you and your clients willing to live through another sell off? If not, the only prudent response is to take risk off the table and take a wait and see approach.

What to Look For

The US economic calendar heats up quite a bit on Thursday, May 31 and
Friday, June 1:

Thursday: ADP Employment, Jobless Claims and GDP (first revision to Q1)
Friday: Government Employment Situation, Personal Income & Outlays, ISM Mfg, Construction Spending

If these reports are terrific, then we may spring higher. Unfortunately, if the economic reports show weakness, and then coupled with the debt problems in Europe, the markets could resume their spring sell off and extend into summer.

Watch the economic indicators listed above for a turn around. If corporate earnings and GDP can continue to grow in the face of European turmoil we could be setting up for the end of this 12 year old secular bear market. It is just looking more likely that we will have to go lower first, before we see a return to a long term secular bull market.


What’s Wrong, What We’re Doing About It, and When Will it All End? Part I

I’ve been suffering some serious writer’s block lately. Just can’t seem to come up with the right words to express the current condition we find our condition to be in.

Now usually in the movies, when the main character is a writer suffering from the blank page syndrome, something dramatic happens. Either he goes off to the woods to find inspiration and instead finds a gang of crazy zombies trying to break into his house and kill him. Or, typically after a bottle of bourbon, he makes a deal with the devil – inspiration for his soul. Or even worse (that is if you’re the movie watcher looking for a good action flick on a Saturday night) he finds the “love interest,” and the whole thing just turns into another weepy chick flick.

But as luck would have it, I didn’t need to recluse myself to the woods, or make a deal with the devil. Instead I had the good old European Community to snap me out of my doldrums. You see this past weekend, the G-8 world leaders met, and emerged with what had to be, one of the single most bizarre statements ever made in political/economic history. Since this incident received minimal coverage, let me set the stage and explain.

So picture the G-8 leaders (the leaders of 8 of the largest 12 world economies – they still won’t let the non-white guys in, or Russia which are basically white guys that don’t count), sitting around a table agonizing over unemployment across the EU, lack of economic growth, trillions in deficits, the Greeks are dumpster diving for food, the Spanish are turning back the clock 200 years as young men are flocking to be sheep herders – one of the few jobs available in their new “austerity” economy. Then in the midst of gloom, up pops Eddie Haskell aka French President Hollande, and he says. “Hey Beav, let’s just change our policies to “growth” and our economies will grow again!” The Beaver, played by ECB Chief Mario Drahgi, replies, “That’s a great idea Eddie, why didn’t we do that before!” Then in unison, the rest of the G-8 leaders have their V-8 moment, slap their foreheads with the palm of their hands and, in unison, exclaim, “Yes, we’ll just grow our economies!” They proudly emerge from the conference and announce to the press that they will implement a balanced approach to austerity by adding in growth measures for their economies. The world applauds, and global stock markets rally…for a day.

The immediate reaction to this “Eddie Haskell” moment, was relief. (For both of you readers that are too young to appreciate the Leave it to Beaver references, you can go to to see what you missed). The ECB would just give growth a chance, before giving Greece, Italy, and Spain the boot. But seriously, if growth was just a matter of politicians sitting around and agreeing to implement growth strategies, what the heck have we been doing for the past decade(s)?!? You mean we needn’t go through business cycles? Booms and busts? All we have to do, to have consistent sustainable growth, is to say “Make it so”?

The reality is that growth strategy is synonymous with government spending in politician speak. The entire European Union has been implementing “growth strategies” since the formation of the EU. If deficit spending truly resulted in sustainable economic growth then Greece would have the fastest growing economy on the planet, followed by big brother and big sis, Spain and Italy. They have cumulatively spent their way into deficits that are 200% or so of their GDP, saddled their banks with bad debt, and killed off their private sectors in return for the Euro, and more cheap borrowing. You simply do not keep feeding a drunk alcohol to cure alcoholism.

The reality is, the entire G-8 has financed a global boom with massive government borrowing. The end result is that private sector growth has been stunted as capital has been siphoned off to the public sector. Now, when the accounting numbers no longer add up, debt needs to be repaid, there is just not a large and vibrant enough private sector (translation: not enough jobs and the jobs we have don’t pay enough), to generate enough tax revenue to maintain our bloated public sectors AND maintain payments on our accumulated debt. The only difference between us and Europe is that they are further down the road then we are. When the dust settles in Europe, it will be our turn. Pay attention. This is a rare opportunity to watch your future unfold before your eyes.

Why is my adrenaline flowing? Why am I worked up? Here is a quick story: A couple weekends ago I was asked to speak at a conference in Atlanta. It was hosted by one of the largest clearing firms in the US. One of the other speakers was a chief equity analyst for a very big domestic investment company that we all know and love. In addressing the European situation, he said “We see about a 5% chance that the Euro will break up”. I challenged that assessment, asking for his data that would suggest the anyone has enough money to actually get all of Europe solvent again. His reply, and I paraphrase was, “ We really don’t have any data, we just believe that a breakup of the Euro would be so catastrophic, that it just won’t happen.” Really. As he spoke visions of Wall Street bankers flashed through my head, circa 2007, and I wondered how many had said those exact same words referring to mortgages and the mortgage backed securities market?

Here is the bottom line. Risk is not about the odds of something happening. It is about the consequences if it does. The question you should be asking yourself is not whether the Euro fails or not. The question is, what happens to my investments, my retirement, my kid’s education, my sanity, if we go through another market crash as seen in 2000-2002, and 2007-2009. And if you are not willing to accept the consequences of another 50% loss or so to the equity portion of your portfolio, you need to take steps now. Either get out, lighten up on risk, or plan an exit strategy. If Greece exits, the global financial markets will be in trouble. If Europe holds it together, we will be knocking on the door of the next secular bull market – you’ll have 15 – 20 years to make some serious money. Being on the sidelines for the first 3 – 6 months or so, would really not be a big deal.

Up next: The indicators we’re watching and how we’ve prepared our portfolio’s.

Why I’m Worried

Over the last week I have done a major revamp of our managed portfolios. In our ETF Seasonal Growth Strategy I’ve rotated into low beta and low volatility ETF’s. In our Dividend Income strategies I’ve replaced several higher beta holdings with lower beta, lower P/E, and unfortunately lower yielding stocks and ETF’s. Our models also signaled a sell of JNK, the SPDR High Yield Bond Index ETF, which increased our cash position by 20%. Here’s what I’m looking at:

  1. Seasonality. Any fundamental investor, and probably most technical investors seem to minimize the history of “Sell in May, and buy in November” as a legit trading strategy despite historical evidence showing significant risk reduction by following the strategy. While results are not consistent, what the data does show is that most of histories large drops have come between May and November. I don’t like big drops, so I’m cautious, and nervous.
  2. The Chicago Federal Reserve’s National Activity Index (CFNAI) has had a large downturn since February. While the St. Louis Financial Stress Index (STLFSI) continues to show an improving trend (downward sloping line means less stress), the level is still well above levels that have historically started recessions. Apparently from the graph below, STLFSI is just not improving fast enough to keep the CFNAI above a zero reading

Year to date the Standard and Poors High Beta ETF (SPHB) has outperformed the Standard and Poors Low Volatility ETF (SPLV) and the index itself (SPY) which is what you would expect in a rising/bull market. See Figure 2 below: Blue line – SPHB, yellow line – SPLV, and the red and green candle sticks – SPY.

Chart 2. Year to Date: SPY, SPLV, and SPHB


However, if you look at the same chart below, but change the time frame to the past month you can clearly see the market has rotated to lower volatility (risk off) stocks vs. higher beta (risk on) stocks as represented by the SPLV and SPHB ETF’s.

Chart 3 One Month: SPY, SPLV, and SPHB


But the big worry comes down to Spain. Chart 4 shows the past two years of SPY and I’ve highlighted the highly volatile breaks in between a couple of nice runs. Pretty much each period of high volatility has come about from concerns over Greece and the Greek debt crisis. While out of the headlines, Greece has not been solved. Only the can has been kicked down the road. Last December the EU implemented LTRO, Long Term Refinancing Operation. Which basically has given European Banks free money. The thinking was that this would kick the can into 2012. Wrong. We are barely past a quarter into the year, and Spain’s financial difficulties have started to hit the news. Particularly troubling because here in the U. S. corporate earnings have beaten estimates thus far. The expectation, (hope) was that with good earnings, reasonable valuations, and continued ZIRP, earnings would kick off another leg of the bull market. Instead the market has been shrugging off the good news (earnings) and moving on the bad news (Spain).

By summer Greece should be back in the news, and Italy and Portugal should be attracting their fair share of attention as well.

Chart 4. SPY, 2 Years


Bottom Line is summed up nicely in this headline from on Monday the 23rd:     INVESTOR ALERT Stocks slide as volatility leaps

 Volatility is not good for stocks. While there is still time for President Obama to work some election year magic, and keep the economic expansion going through the fall elections, the markets seem to be betting against him, for now.

But I would recommend being alert, and don’t forget, “Don’t fight the Fed.” If the Fed comes up with a new money producing stimulus, the market could bounce back quickly and it will be “Risk On!” again.

“Next Invest”

I’m a panelist for an online investing conference “Next Invest” hosted by Covestor. Other panelist include Ian Ayres: Professor, Yale University; Author, Lifecycle Investing  and David Whitmore: Senior Strategist, Trading Education, E*TRADE. I will be talking about the importance of investment strategy for long term investing success.

The online conference is March 20-21. Attendees can register to participate in this free event live or access content for a month following the conference at Next Invest.

2012 Outlook

This article originally appeared January 12, 2012 at I wanted to post it here as I will start taking a look at how my outlook for the year is panning out, and how I may be adjusting our client portfolios.

After a multi month hiatus, I hope to be back as a regular contributor here at The last half of last year got a little crazy, both at work and at home. Net, everything was good, just too many distractions to keep up with the blog. On the business front, I did add to my writing work. At MarketWatch I write regularly for their “Trading Deck” feature and write specifically on dividend investing and the strategies we incorporate at 401 Advisor, LLC. After 25 years in business, it is nice to be recognized as an “expert” in one of the areas of investing that I am very passionate about.

With that, I have procrastinated enough, it’s time to layout my outlook for 2012. While I’m probably obsessing way too much over this, as no one will really remember a thing in this blog by the end of the year, my current outlook is relevant to our current clients. Our current strategy’s allocations do depend quite a bit on the near term outlook for the markets and global economies. (We’re pretty much “fully” invested, but sleeping with one eye open!).

But first, I have to take a quick look back at January of 2011, and see how my predictions panned out. My “Outlook 2011” article can be found here.

Here are the bullet points:

1. Earnings are key and momentum is positive.
What Happened: Earnings growth stayed strong through the year, but did decelerate.

2. Fed and Federal stimulus would prop up the market.
What Happened: After the early drop, the markets were whipsawed, mainly on the news of the day from Europe. But money printing came to the rescue, this time by the ECB instead of the U.S. Fed, and the market came back to a breakeven point by year end.

3. GDP will come in at 2.5% and “Unemployment will stay above 8% for the next several years.”
What Happened: The Federal Reserve predicted GDP for 2011 would be between 3% and 3.5%. I predicted 2.5%. While actual GDP is not yet known for the 4th quarter, through the first three quarters GDP growth has averaged 2.2%. Latest unemployment came in at 8.5%.

4. Stock market would rally into second quarter, however things got “foggy” for the second half with all the international economic concerns. And investor would likely have to endure a fare amount of pain to realize nominal gains.
What Happened: The market did rise just over 10% by mid-May, however stock market investors had to endure a 20% drop, to finish the year with a virtual 0% return (based on the S&P 500).

So, over all a pretty good track record for last year. But that’s not the purpose of rehashing old news. The point is not to see what was right and what was wrong, but why, and how we can do better for this coming year. So here is my outlook for the year to come.

1. Let’s start with the earnings. Forget all the noise from the talking heads, the stock market will follow earnings. This could be my downfall for the year’s predictions, as earnings are still growing, but at a slower pace. Slowing earnings growth is a red flag and could doom a stock rally before it really gets going.

Prediction: Earnings will be “choppy” but overall positive for the first quarter. However, guidance will suggest optimism for the second quarter. Earnings growth will bottom in the first quarter and then accelerate, albeit modestly into the third quarter.

2. Official Fed Reserve stimulus will be minimal.

Prediction: While the administration will spend what they can prior to the election, very little of any kind of legislation will get through congress. However, the big wildcard is Europe. Greece is a mess, stores are running out of products, pharmacies can’t even get aspirin on their shelves. Greek unemployment will continue to skyrocket. The ECB will be guilted into action and we’ll see their printing presses going at full bore. The ECB stimulus will be enough to keep Europe’s problems from pushing the rest of the globe into a recession…for 2012.

3. GDP growth will accelerate through the first three quarters, back up to the 3% maybe even 3.5% range.

Prediction: After 3 years of subdued spending, pent up demand for cars, appliances, home improvements…consumer spending will surprise most pundits to the upside. Three years of recession, $4.5 trillion in Federal deficit spending, and $2 trillion of Federal Reserve stimulus is enough time and money for the economy to start coming around. All recessions eventually end.

Part of my conclusion comes from talking to local businesses. Dayton Ohio hasn’t made any lists of “Economic Hotbeds” that I’ve seen. But several business people, in very economically sensitive businesses, that I’ve spoken to are doing very well. The biggest problem facing manufacturing is “finding people to show up to work every day, and being sober.”

4. The Stock Market.

Prediction: Through the first three quarters this will be the year of U.S. economic re-emergence. Earnings will be good, stock market valuations are reasonable, and (and this is the big factor), there will be just no other reasonable place for global investors to put their money, other than in the U.S. Certainly not Europe, China will see economic improvement but political turmoil, emerging markets will do ok, but global growth will be too tepid to see a boom in commodity prices that drive most emerging market economies. Expect a choppy market with a modest pre-election gain. We’ll finish the year with a 20% plus gain in the S&P 500.

5. Ok, it’s an election year, so just for fun here is my election wrap up.

The stock market and GDP growth look good through the first two quarters. President Obama’s approval ratings rise enough to quell any movement to add Hillary Clinton to the ticket. However, the U. S. dollar has risen throughout the year, killing exports and causing congressional rumblings about trade sanctions against China. Oil prices are spiking due to the turmoil in the Mideast and third quarter GDP estimates are getting chopped. Republicans campaign on images of Greek riots as “the U.S. future” if we don’t reign in spending. Ron Paul has enough delegates to influence the GDP platform. Voters are just starting to get comfortable with the recovery, and vote for Romney partially due to some “isolationist” type language added to the platform by the Ron Paul camp. Romney wins in a close election. Obama just can’t rally voters for the large turnout he needs for re-election. In hindsight he should have added Hillary. (If Mrs. Clinton does join the ticket, he wins in a landslide).

The one thing I am absolutely certain about, is that this will be another “crazy” year. Things aren’t settling down. We will have plenty of news to digest and argue about on a daily basis.

With that, it’s time to get back to work.

Why I Sold McDonald’s to buy Intel

How a predefined strategy makes investing decisions easier for an investor.

Radio Interview

I did an interview with Jay Cruz of Jay does a financial advice show and our interview covered some general year end financial planning advice and a little bit of an outlook for 2012.

The interview will be broadcast between 10:30 – 11:00 am and 10:30 – 11:00 pm today!

New Investment Column

I just wanted to pass along that I have been hired by The Wall Street Journal’s to write a weekly investment column for their website. Due to the success of our dividend investment strategy they have asked me to focus on dividend investing tips for their readers.

Investment Alert 11/17/2011

As we head into the holiday week I wanted to send out this quick note in an attempt to head off some post turkey indigestion.

All of our Seasonal Growth accounts, and 401(k)’s have been in cash, money markets, and/or bond funds for some time now. Today we are also selling our holdings in JNK and HYG. These are high yield bond index ETF’s that we hold to add dividends to our income portfolios. Simply put, credit spreads, the difference between interest rates for high quality and low quality bonds is widening. This shows that the bond market is much more worried about the economy than the stock market. But most times the stock market will follow these yield spread differences. In this case that would mean a lower stock market.

This means that even our conservative Dividend Value strategies have approximately 25% cash position. This is about as conservative as we get.

While no one should ever take broad based investment advice and assume it applies to their portfolio or strategy, it is my opinion that it is foolish to stay fully invested in the market. On Wednesday before Thanksgiving, the Debt Super Committee will announce how they will cut $41.5 trillion from government spending. There is no possible good outcome from this. Making the cuts means a drag on the near term economy. Not making the cuts means a drag on our future economy as we pay back the debt. Raising cash now, just gives us the opportunity to have one less thing to worry about when we should be enjoying the day with our families and loved ones.

Personally, I’m off to Annapolis MD for a weekend lacrosse tournament with my son, and then down to Kiawah Island SC where we will enjoy our Thanksgiving with my daughter. I’ll be back in the office on the 28th if you would like to call and discuss your investments. • 937.434.1790

Enter your email address to subscribe to this blog and receive notifications of new posts by email.

Join 504 other subscribers

Go to webpage:

Go to webpage:

Follow me on Twitter

on Amazon

Link to my weekly column.

Charles H. Dow Award Winner 2008. The papers honored with this award have represented the richness and depth of technical analysis.