Posts Tagged 'economy'

Opening Remarks for 2015

TOW

I recently had a conversation with a client about the strategy for his account in 2015. He indicated that since the market is at an all time high, he expects the market to crash by the end of summer as the Fed raises interest rates. And he would like to adjust his holdings accordingly.

Many of you are probably nodding your head in agreement with this sentiment.

However, please let me remind everyone, that if it was that simple and obvious to predict the economy, let alone the market with that much accuracy there would be many more rich people walking around than there are today! The only thing that is certain, is that what seems “certain” rarely is!

Case in point is a part of an email I received from Fuller Treacy Money, their comment of the day. For those who want the short version it is this: the article sites two economists from Harvard. They are very well known and respected economists. They have nearly opposite opinions.

The point I hope is obvious, if such esteemed economists with the same background, see the world so differently, how can any of us, without the resources and time to study these things as professionals do, be so sure that our opinions will be the ones that in fact pan out in the year ahead?

We just don’t know what the future holds and the best investment strategy is to listen to what the market tells us as we go along, use tried and true investment strategies, and always be aware…and have a strategy…for when things do change!

Below is the piece from Fuller Treacy.

A standing-room only crowd packed a hotel ballroom on Jan. 3 to hear…Professors Lawrence Summers of Harvard University and Robert Gordon of Northwestern University in Evanston, Illinois, defend their views.

“Just because we have 5 percent growth doesn’t mean we are out of the woods,” Summers, a former Treasury secretary and senior White House official, told the American Economic Association meeting in Boston, alluding to the U.S. economy’s pace of expansion in the third quarter.

He rattled off a variety of reasons for caution. Among them: the risk of financial bubbles, the difficulties the Federal Reserve may face in raising interest rates back to more normal levels, and continued excess capacity in Japan and Europe.

Summers also compared the euro area’s situation today with that of Japan in the late 1990s, before it slipped into a deflationary funk, and warned that the U.S. could be in for an extended period of a “dismal growth rate below 1-1/2 percent.”

Fellow Harvard professor Greg Mankiw took issue with that gloomy prognosis as far as the U.S. is concerned. In particular, he highlighted the improving labor market, where unemployment is at a six-year low and wages have begun to rise.

“We are returning to normalcy,” said Mankiw, who is also chairman of the economics department at Harvard in Cambridge, Massachusetts and a former chief White House economist.

“What…Me Worry?”

wheres-the-beef

Thought I’d show my age by recalling two iconic figures from the past; Clara Peller’s “Where’s the beef?” Wendy’s ads and Alfred E Neuman’s catch phrase from the cold war days “What, Me Worry?” But they both sum up our current political standoff better and more succinctly than I am able to. But I will spend some time explaining.

First, I apologize for being late to address our current state of affairs. From the calls and emails we’ve received I know that many of you are concerned, as you should be, by current events. However, I am not a believer in saying or writing something just for the sake of talking or writing. It’s taken a bit of time to digest the insanity and determine the best approach. Of course hindsight will be the determinant of the “best” approach, but I think we are taking a rational and prudent approach.

The background. As we are all aware Congressional Republicans and the President are locked into a game of chicken. The impending collision officially comes at after October 22 – when the U.S. government must borrow more money than is currently appropriated to pay our bills. With Congress refusing to up the limit it raises the specter of the government: 1. Shutting down various departments en masse, and 2. Not being able to pay interest on our debt – thus officially defaulting.

Queue here Mr. Neuman, “What…me worry?” Seriously, we will not default on paying the interest on government debt. Period. The consequences are severe. The Chinese, American banks, credit unions, entire European Countries and their banks technically could go bankrupt if the U. S. defaults. Now I could go into details here as to how that works, but that would be a long post and detailed post. Please drop me an email, (bill@401advisor.com) or give me a call (937.434.1790) if you want to discuss details. Seriously. I really do enjoy those conversations!

Now to the real reason we won’t breach the debt limit…Ms. Peller. Representing senior citizens throughout the country, asking “Where’s the beef?” (aka social security check) come November 1. Remember amongst the insanity, our government leaders are elected. And if Ms. Peller and her legions of AARP following social security recipients miss one check, you can be assured that those responsible will never see government office again post their next election. Our Congressmen are well aware of this. The Chinese we can deal with, but don’t mess with a Ms. Peller’s social security check!

Portfolio Strategy
Despite my confidence that we see a pre-November 1 solution, I will never risk client assets based on my personal outlook. I will always try and have a Plan B in place. In this case we have raised our cash positions to about 20% of our portfolios. While I don’t see permanent portfolio damage due to the wrangling, we could certainly see a temporary drop. Cash is available to limit volatility and to be in position for an opportunity buy, if I see such an opportunity. The Plan B, is that the 20% in cash can be deployed quickly to buy a “short” ETF – simply a stock that goes up when the market goes down. A 20% position won’t eliminate a loss, but it will soften the blow. That would be a quick adjustment. We will just have to see what happens to determine where we go to from there. As you should be aware, if things get that dicey, I am perfectly willing to move all portfolios to 100% cash if we have a storm that we need to ride out.

My bigger concern, which I will address next week, is the short term trend in corporate earnings – which hasn’t been good. As we get into the heart of reporting for third quarter earnings we absolutely have to start seeing some optimism from businesses regarding the outlook for future growth and profits. The stock market simply cannot continue its upward trend without earnings growth. That is a very real and more certain trend that will have longer term repercussions for the market.

Is The Market Topping?

The following article originally appeared at MarketWatch on Friday 3/8/2013. Despite nervousness over new market highs, this rally appears to be in the early stages, not the end.

With the market hitting new highs (DOW) or closing in (S&P 500), the topic du jour for the past couple of weeks, has been whether or not the rally can continue.

In my last post, I noted that JNK, the SPDR High Yield bond index ETF, was dropping while the S&P 500 was continuing up. Since JNK and SPY have a high correlation (they tend to move in the same direction) something was due to give. Either SPY was due a selloff, or the correction in JNK was done and it would soon follow SPY up. As shown in the chart below from freestockcharts.com, Spy (the red and green candle chart) has moved on to new highs since the downturn started in JNK, shown by the vertical white line. Spy did pause a bit to digest the sequester non-event, but it didn’t even drop to its support level, shown by the longer up sloping white line. And in fact JNK did resume a modest uptrend.

chart1

The point being, SPY shrugged off two negative influences, a drop in high yield bond demand (lower price for JNK) and totally shrugged off the sequester.

This leads me to my next market indicator to watch.

The market seems to go through four distinct cycles:
1. Up on bad news
2. Up on good news
3. Down on good news
4. Down on bad news

It seems to me the market is still in phase #1, up on bad news, and hoping to get to #2, meaning news becomes consistently good. Not that all current news is bad by any means. In fact we’ve had some pretty good economic news lately. But when you include political events, news has been a mixed bag. And when confronted with bad news, the market is shrugging it off. Slow earnings growth? No problem, it will get better. Sequestration? No problem, it’s just politics. Italian election? No problem, the ECU will rein them in… And on really good news, good ISM report, the market is having really good days.

One easy way to follow the economic news is to use MarketWatch’s economic calendar.

chart2

On a daily basis you can track economic reports and see the market’s reaction. I like to look at the data at the end of the week for a bigger picture of the data and market trend. This leaves the more subjective political news. My observation is that the market is shrugging off nearly everything political. Perhaps the first crack in our current rally will be when the market actually reacts negatively to what would seem to be negative political news.

For now, my strategy is to stay bullish. While I personally can give a pretty ugly laundry list of reasons the market could (or should) go down, for now I’ll assume the market is smarter than I am, and not fight the trend.

Investment Outlook – September 2012

Our portfolios have lagged the overall market since mid-June when the recent market rally started. The portfolios have continued to hold our “low beta” selection of dividend paying stocks and ETF’s.

The rationale to remain in “coast” mode is that it is my opinion the rally has been primarily fueled by Mario Draghi’s comment that the ECB stood ready to take “any action necessary” to preserve the Euro and by extension the EU, including Greece. The problem is that the ECB does not have the authority to follow through on such statements. Simply put, the ECB is prohibited from “printing” the money they would need to implement a U.S. style round of quantitative easing (QE). It is pretty well accepted, that absent such action, there is just not enough economic backing to backstop the financial bleeding in Europe.

The bull argument continues with the “bad news is good news” theme. With China’s economy softening, U. S. economic data “softening” at best, the economic stage is being set for a global simultaneous easing from China, the U.S. and Europe.

The best bull argument is that things are getting worse, so there has to be Fed intervention which would fuel a global rally. I am not willing to buy into that scenario. However, if we actually see such action come to fruition, we will change the look of our portfolio, jump on the bandwagon, and look for higher beta (more aggressive holdings) to capture gains if the rally truly emerges. With the risk to the markets extremely high if such hopes don’t materialize, I will wait for the Central Banks to literally “show me the money” before making a commitment with client’s hard earned investment dollars.

Below is a screen shot from covestor.com comparing my Dividend and Income Plus Portfolio (Dark Blue line labeled “Manager”)to the S&P 500 for the prior 90 days. While the underperformance is clear, so should be our lack of volatility. In fact the portfolio sports a beta of .63, or a volatility measure of 37% less than the S&P 500. And even with our 20% cash position, the portfolio is sporting a very healthy 4.5% dividend yield.

 

Combining the low volatility with the dividend yield, we are extremely happy with our overall performance, especially for the risk adverse income investor, such as a current or near retiree. Furthermore looking at the graph below, again from covestor.com, I zoom in our recent performance.

Since the recent market peak on August 17, the portfolio has outperformed the market by .7% over just two weeks.

Our ETF Seasonal Growth Model has had similar relative results.

Mario Draghi has “leaked” his plan for ECB bond buying and the reaction has been a big yawn. I expect September to be a volatile month and expect to close the recent gap in relative performance with the S&P 500. Primarily by maintaining value while the S&P 500 corrects.  I hope to be true to our motto, “It is not what you make, but what you keep that matters”.

Looking a little further out I do expect the post election rally. I have picked more aggressive investments to rotate into our portfolios if the rally does materialize. Until then patience is prudent.

Individual performances will vary depending on timing of investments, withdraws, specific holdings and allocations. Past performance does not indicate future results. All investing involves risk. Please consult with your financial advisor on suitability of any investments specifically mentioned prior to investing.

Just Saying – Debt Ceiling

This has been a brutal post Debt Ceiling Debate Agreement -week in the markets, eight consecutive down days resulting in a drop of 6.76% for the S&P 500. Then on Wednesday, with the market down nearly another 1%, the market turns and rallies into the black by about a ½% for the day on strong volume. Today we’re looking at another 2% sell off. So what happened on Thursday to cause a short term reversal? Could it be news that if the market had finished lower, it would have set a nine day losing streak, not seen since the days of Jimmy Carter?

I’m not usually one to jump on conspiracy theories, but here’s how I see it. On several occasions Federal Reserve Chairman Ben Bernanke has mentioned how important a rising stock market is to jump starting the economy. The last thing the Fed needs now is another stock market crash with the economy on life support after the GDP revisions from earlier this week. The last thing this President needs is any comparisons to former President Jimmy Carter’s administration as we head into an election year. Coincidently (or maybe not), we see a huge infusion of cash in the market.

What’s this mean to investors now? All I can say is what we at 401 Advisor, LLC are doing now – which is selectively selling positions in our portfolios to raise cash, and as of today we are buying SH – ProShares Short S&P 500 ETF. By the end of the day we should be about 10% short the S&P 500 and have another 15% or so in cash, depending on our overall strategy. Dividend portfolios have held up well so we will remain more fully invested, and collect our dividends, unless we see a stronger economic downturn than indicated now.

But I wouldn’t hit the panic button just yet. Gold’s rally is an indication that just about everyone now expects QE III. The market has rallied strongly on the heels of QE I and QE II. We’re only off 10% from our highs this year. 10% is just not a major move – yet. Be cautious.

Below is a graph of our results of our Dividend and Income Plus Portfolio at Covestor.com. Our portfolio is represented by the Green Line, the S&P 500 the Purple Line. This account mirrors client portfolios that we manage in our office. We are still positive for 1 month, 3 month and 12 month performance, and only down -.01% month to date. Just an indication that what you own matters in this environment. Conservative investors are still in control in this market.


bill@401advisor.com • 937.434.1790

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

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