Wednesday, July 31, 2013

In the "Things Are Getting Better" Department

*Per ADP, US adds 200,000 more jobs in July, more than estimates of 180,000.

*First Read of 2nd quarter GDP shows a reading of economic growth at an annualized rate of 1.7%.  {Note though that GDP has a history of being revised down over the past several years in its later reports.  Indeed in the same report 1st quarter GDP was revised down to 1.1% from 1.8%.}  Economists had been looking for growth in the 1% range.

*Per Dr. Ed's Blog, forward Wall Street estimates of S&P 500 earnings are now $118.26 while end of year 2014 are $123 per share.  Those numbers seem to high to me but a 15 multiple on that $123 estimate implies an S&P 500 with the potential to trade around 1850 by the end of next year.  We'll see about that!

*Long ETFs related to the S&P 500 in client and personal accounts.

Tuesday, July 30, 2013

Three Investment Mistakes


From Vanguard.com.  {Excerpt with my highlights}.
People don’t often share their investment mistakes. .....Yet, investment errors are fairly common. They’re not all catastrophic, and many can be easily remedied. Nonetheless, there are lots of them. In fact, the top-of-mind list is longer than one blog post will allow. So, let’s consider this the first in a series dedicated to common portfolio pitfalls.....



The perils of benign neglect



I know you don’t mean to ignore your portfolio, but life happens. I understand. And I don’t judge..... Fast-forward a decade or more, and suddenly you realize you’re holding a bunch of “stuff” that no longer reflects your financial goals. It happens to the best of us, but you’re relying on that collection of stuff to get you comfortably through retirement!
If you have the time and discipline, sort through your various holdings with the goal of creating a portfolio that reflects your current investment risk tolerance and time horizon. These two factors can be a starting point for setting proper asset allocation. .... If you need a lot of help, consider hiring an advisor. You’ll pay for the professional assistance, but it might be worth it to get your portfolio back on track.

The danger of the single security



If any one security (or sector) represents a relatively large portion of your portfolio, you’re susceptible to concentration risk. In simple terms, your portfolio’s performance may rely too heavily on the market movements of that single stock or sector. To varying degrees, this can introduce more volatility than necessary to your portfolio.
The wisdom of holding a broadly diversified portfolio is fairly well documented.¹ Despite this, we consistently observe that even savvy investors don’t always construct their portfolios based on research findings. Instead, investment decisions are sometimes driven by emotion and complicated by the ties that bind us to the things and people we love.....

The downside of keeping money under your mattress



...{T}here are actually two kinds of market timers: The kind that I just described and what I’ll call the “unintentional” market timer. This investor isn’t interested in complex tactical asset allocation strategies —they’re interested in protecting their nest egg. And maybe they’re a little bit guilty of the benign neglect I described earlier, unwittingly holding a more aggressive portfolio than their situation warrants. In truth, these investors are more conservative than their heavy equity allocations would imply.
Extended periods of high market volatility and uncertainty can send these investors running for the exits, seeking refuge in cash rather than suffering the market’s gyrations. If this sounds like you, you’re not alone. No one likes to admit that they missed the market rebound that inevitably follows a big downturn, but plenty of investors did. In fact, some are still waiting for the “right time” to get back into the market. But, stuffing cash in your mattress (or in your low-interest savings account) introduces shortfall risk to your portfolio. If your holdings are too conservative for your time horizon, you run the risk of losing pace with inflation and outliving your assets.
To combat this risk, you’ll need to reinvest in the equity market at the level and pace that’s right for you, consistent with your goals and time horizon. Our research indicates that it’s generally best to bite the bullet and get back to your desired allocation quickly.⁴ This “lump sum” investing approach allows your portfolio to begin working for you at the proper asset allocation as soon as possible. But if jumping back into the market has you feeling just as skittish as when you jumped out, then take your time. A traditional dollar-cost averaging approach, in which you rebalance back into equities in smaller increments each month or quarter, may make you more comfortable. Regardless of your approach, the goal is simply to get back to your desired asset allocation…the sooner, the better.


Monday, July 29, 2013

Seventeen Investment Rules

Random Roger publishes his seventeen investment rules.  I like folks who make the world of investing real to the rest of us so I'm publishing this excerpt with my highlights.  


1)......Your family and your health are at least two things that are more important than your money  and you may have more.



2) Every so often the capital markets will go down a lot and scare the hell out of a lot of people as if it's never happened before. Knowing/remembering this ahead of the next one should make them easier to endure. In 2008 people thought the financial world was literally ending. Anyone not lucky enough to have reduced exposure early on but gutsy enough to not to have panic sold should now be back to even. No growth for five years is not a great result but it is not ruinous for someone who is able live within their means.


3) And while we are at it, live within your means. Better yet live below your means. A $4000 lifestyle is much easier to replace in the face of some sort of personal shock than a $10,000 lifestyle......

4) Your investment strategy will not always work the way you hope. No single strategy can possibly be the best for all markets; that includes yours and mine...... 

5) What your investment strategy should do is provide a combined reasonable chance for allowing you to have enough when you need it while allowing you to sleep most of the time (or all of the time if possible). 

6) Youshould exercise  vigorously, regularly and most of it shouldn't be enjoyable.....

7) When a particular segment of the market has a panic or a crash or some other nightmare your holdings in that particular segment are going to participate in that panic or crash or some other nightmare. Everything that has gotten hit hard in the last few weeks has been hit hard before and will get hit hard again at some point in the future. That they will get hit again in the future means they are not going to zero now.

8) Get a dog and then get a dog for your dog. The benefits are immeasurable. {My comment this is so true.  I miss my dog every day!  I don't know about having two though}

9) Don't forget what large declines feel like. For years I have contended that people somehow forget what it feels like to endure a large market decline, they react like it has never happened before which results in panicked action......

10) Don't drink soda. You don't have to be a diet nazi to eat fish once or twice a week, eat fruit everyday. eat a salad everyday and avoid soda.

11) You don't need 20% in gold, other commodities, REITs, MLPs, absolute return, private equity or any other specialized segment of the market. All of the above can be valid parts of the market to include in a diversified portfolio but too often people end up finding out they had way too much exposure at the wrong time. 

12) Volunteer somewhere....... 

13) This time is not different. The details causing something to happen in markets might be different but the emotions of fear and greed are still driving prices just like they always have.

14) Don't wish away the week to get to the weekend, you end up wishing away your entire life that way. If you dislike your job so much that you do wish away they week then you need to find something else to do. This is not a call to go in on Monday and scream "I quit" but instead start working on a plan to make a change even if it takes months or years. You will eventually get to where you want to be and even just the process of getting there can relieve whatever negative feelings you take from the job you are trying to change.

15) True bear markets start slowly over a period of months, they do not start with crashes. Both the tech wreck and the Great Recession started this way.

16) Life is about the journey not the destination. ...

17) You have more control over your spending and saving than you do returns in the market. If over the next ten years global equities compound at just 2%, you will not compound at 10%....

Whoever this guy is I already love him!  I've added him to my must read list every day!  Link:  Random Roger: 20 Rules for Investing and Life.

Thursday, July 25, 2013

an tSionna: Mortgages

Much has been made recently about the rapid rise in mortgage rates and whether that will choke off the nascent rally in home prices.  Since the first mortgage I ever took out on a place was around 8%, I don't think it's that much of a concern whether rates have moved from 4 to 4.25% or so.  Chart of the Day.com shows the longer term trend of Mortgage rates.  This link here will give you their commentary on the chart.  




Does Your Financial Advisor Have Your Back?

Guardian.com Article on American Investment Advisors.  {Excerpt with my highlights.}


Whose side is your financial adviser on, anyway?


Does your financial adviser have a legal duty to give advice that's in your best interests? The chances are that you think the answer to this question is "yes."  Chances are, you're wrong.
Not everyone who gives you financial advice has a duty to actually help you. The technical term for the true helpers is 'fiduciaries.' That means it's their legal duty to always put their client's best interests ahead of their own.
Two sets of regulators – the Labor Department and the Securities and Exchange Commission – have been examining what kinds of financial consultants should count as fiduciaries. Is your stockbroker a fiduciary? Is your financial adviser?........
Chalk it up to Washington's reliable ability to confuse the best interests of the financial services industry with that of the 315m-plus Americans who need protection in everything from college savings strategies to retirement planning.
The problem, as it always is, is money. The financial services industry wants to protect the fees it receives from selling financial products to people who sometimes have no good reason to be buying them. A fiduciary should be able to tell you that you don't need to buy something – but the financial services industry wants to make room for people who can sell you things with very little thought for what they might do to your finances.
There are some financial helpers who are fiduciaries already. That includes certified financial planners and Registered Investment Advisors – usually known as RIAs. Their job description includes warning you away from any financial cliffs. Unfortunately, these people are a small part of the financial advice world – they make up less than 20% of the universe.
When most of us go looking for help with our investments, whether we go to the bank or the friendly professional we first heard about via a commercial on CNBC, we encounter people who call themselves financial advisers. That's a fancy word for a salesman.  These salesmen are not fiduciaries, but they do need to adhere to something called the suitability standard........
....It gets better. The financial services industry has been arguing that they should not be subject to the fiduciary standard as it is currently written; they believe that if they are forced to act in the best interests of their clients, they will not be able to give advice while making a profit.
....No matter how many well-meant personal finance articles are published, most consumers have no sense of what is in their financial best interests. Not only are those unsophisticated investors likely to fall victim to a persuasive technique, they are unlikely to ever figure out they received less-than-ideal advice – until, that is, real damage is done.
Think about it for a moment. We don't ask patients to wonder if their doctors are recommending one sort of treatment over another because they have a financial stake in it. In fact, if a doctor recommended a second-tier treatment because she had a financial stake in it and it turned out badly for the patient, it's unlikely a jury hearing a malpractice case would be sympathetic to the defense that the treatment was suitable enough.
But when it comes to financial advice, well, good luck to you. We somehow expect everyone to be an instant expert at exotic financial instruments.....
How much Congressional enthusiasm is there for this? Well, a bill was recently introduced into Congress that would force the Department of Labor to wait until the SEC announces its changes to the fiduciary standard. That would effectively stop the process for quite some time into the future. The proposed legislation's name? The delightfully Orwellian "Retail Investor Protection Act."
Only in Washington would protecting the consumer really mean protecting the financial services industry.
My Comment:  Lumen Capital Management, LLC is a Registered Investment Advisor with the State of Illinois.  Our only compensation is via our management fees that we charge quarterly to clients.  We make no money from commissions, soft dollar arrangements or from the sale of any investment or product.  Like the family attorney of old, our time and advice are our stock in trade.

Tuesday, July 23, 2013

Current Bull Market


From Business Insider via LPL Financial.

Authors notes:  "While it has been impossible to kill so far this year despite all the shots fired at it, this is no mindless and shambling rally. Stocks have deliberately moved past these events that did not stop the still beating heart of economic growth in the United States."

The author also notes that stocks have risen despite:


  • In four of the past five months, investors have been net sellers of U.S. stock funds. This has been the case in four of the past five weeks, as well, according to the Investment Company Institute.
  • The American Association of Individual Investors Sentiment Survey measures the percentage of individual investors who are bullish, bearish, and neutral on the stock market.  The percent that are bullish on the stock market this year has averaged 38, below the 10-year average of 41—a period that included the long and deep bear market that accompanied the 2008-09 Great Recession.
  • Insiders, or top executives of companies, have been net sellers of shares. While the pace of insider selling often slows during the “blackout” periods around the earnings season, recent data show that the number of shares of S&P 500 companies insiders have sold relative to those that they have bought has soared.



  • *Long ETFs related to the S&P 500 in client and personal accounts.

    Monday, July 22, 2013

    Market Corrections

    Dr. Ed Yardeni published this post on corrections sometime ago.  I think it give some perspective to what happens when markets inevitably have a pullback.  {Excerpt with my highlights.}



    "Corrections are typically defined as declines of 10% or more. Bear markets are defined as declines of 20% or more. There have been three corrections in the S&P 500 so far during the current bull market, in 2010 (-16.0% lasting 69 days), in 2011 (-19.4% lasting 154 days), and in 2012 (-9.9% lasting 59 days). That means that since the start of the bull market, there have been four relief rallies that more than offset the corrections along the way, with the S&P 500 still up a whopping 144%. Last year’s correction troughed on June 1. There have been a few downdrafts since then, but no corrections. 


    During bull markets, corrections aren't necessarily frequent occurrences. Indeed, there was only one correction during the previous bull market, but only if the start date is pegged at October 9, 2002 rather than March 11, 2003. Between the bear market of 1987 and 2000-2003, there were just two corrections. Between the bear markets of 1980-1982 and 1987, there was only one."






    Thursday, July 18, 2013

    an tSionna {The Current Market Rally}

    From Chart of the Day.com.  Current rally as measured by the Dow Jones Industrial Average.  I suspect they use the Dow because there is not as much historical data on the S&P 500.

    "......As today's chart illustrates, the Dow has begun a major rally 13 times over the past 112 years which equates to an average of one rally every 8.6 years. It is also interesting to note that the duration and magnitude of each rally correlated fairly well with the linear regression line (gray upward sloping line). As it stands right now, the current Dow rally that began in March 2009 (blue dot labeled you are here) would be classified as well below average in both duration and magnitude. However, when compared to the most recent post-major bear market rally (i.e. the rally that began in 2002), the current rally is significantly greater in magnitude and accomplished this feat in less time."


    *Long ETFs related to the S&P 500 in client and personal accounts.  Long ETFs related to the Dow Jones Industrial Average in certain client accounts.

    Wednesday, July 17, 2013

    Forward PE Averages.


    From Dr. Ed Yardeni's Blog:


    "The S&P 500 remains among the world’s best-performing stock indexes this year. On Friday {June 12, 2013}, the forward P/E of the S&P 500 rose to 14.3, almost matching the year’s high on May 21. It was 16.5 for the S&P 400 MidCaps, also just under the previous recent high. It was 17.7 for the S&P 600 SmallCaps. The current bull market’s highs for all three were recorded during 2009 or 2010: S&P 500 at 15.1 on October 14, 2009; S&P 400 at 17.3 on April 23, 2010; and S&P 600 at 18.9 on September 18, 2009. 


    The market’s reaction to Bernanke’s comment suggests that the Irrational Exuberance scenario is back in play. I still assign it a 30% probability. However, it is certainly looking more credible again now that the S&P 500, S&P 400, and S&P 600 are all at record highs. Valuation multiples remain rational, and record highs in forward earnings suggest that the fundamentals continue to support those valuations. 

    We may be in for another four years of this bull market if it doesn’t melt up over the rest of the year."

    My Comment:  I've said in the past that I think that by the time we get to the end of this decade that we'll be surprised by how well stocks have done.  I think there is an extremely high probability that stocks could average on a total return basis 6-8% between now and December 31st 2019.  Remember total return includes dividends.  I don't think we'll be going up in a straight line and there's probably a down year or two in there somewhere.  But from my perch I think that kind of return is doable given where interest rates are and given what we are currently seeing in the economy.  Dr. Yardeni seems to agree with me at least over the next four years.

    Long ETFs related to the S&P 500 and Midcap indices in client and personal accounts.  Long ETFs related to small cap stocks in certain client accounts.

    Tuesday, July 16, 2013

    Department: What If Things Are Getting Better

    In our sometimes profiling of economic events in the "Things Are Getting Better" Department, today we get home builder confidence.  That rate rose to its highest level since January 2006.  It did so in spite of rising interest rates and most importantly this confidence was witnessed across all regions of the country.  

    Undoubtedly there will be those that try to spin this in some sort of negative fashion....land prices higher, the rush to buy before mortgage rates soar etc.  But let's not overlook the fact that construction is a huge jobs creation industry and let's also not overlook the simple notion that we haven't even been building homes at a replacement level for the population until this year.  

    Smidiríní

    It's been awhile since we've done one of these posts!

    I've grown a bit more positive on foreign markets.  If you want to see a different and more negative perspective on this go read via Business Insider.com Byron Wien's most recent commentary regarded his last trip to Asia. 

    Why the Long Bias?{Josh Brown-the Reformed Broker.com} "Optimism as a Default Setting is the only way to successfully fund a retirement over the long stretch. Unless you believe that you have the god-like ability to dance into and out of the markets with good timing on a consistent basis. I know you can't and I don't even know you.

    Fun fact - pick any day of any month of any year over the last 50 years - if you bought the stock market on that date, you had a 75% of being up one year later. That's the math of being in the game and being long-biased at all times."
    Why Hedge Fund Glory Days May Be Gone For Good.  {Bloombergbusinessweek.com}  "According to a report by Goldman Sachs released in May, hedge fund performance lagged the Standard & Poor’s 500-stock index by approximately 10 percentage points this year, although most fund managers still charged enormous fees in exchange for access to their brilliance. As of the end of June, hedge funds had gained just 1.4 percent for 2013 and have fallen behind the MSCI All Country World Index for five of the past seven years, according to data compiled by Bloomberg."


    Monday, July 15, 2013

    Letter To A Boston Boy.

    This is copy of an email that I sent to one of the Boston Boys the other day in response to a question he asked me regarding Point and Figure charting {that's the PnF in the letter} and Dow Theory.  Since I don't follow either, my response  ended up not being much about either of those things.  I thought however that what I told him was timely enough to post with a few changes here at the blog.  Here goes:

    "I don't really use PnF charts anymore because I believe that these stopped being useful after markets became decimalized.  I primarily use charts to look for information regarding money flows.  To do that I primarily take a look at:

    1.  Over bought/oversold markets.
    2.  Support and resistance levels.  {A possible subject for a future post.}

    Years of looking at charts has made me skeptical of the folks who see certain patterns in charts and can place a value on what stocks should do based on that pattern.  To me the world doesn't work like that.  Instead I think you can use charts to give you a reasonable set of probabilities that you can plan around.  To me here is a similarity between chart patterns and river or coastal maps. If you have a map of a river and that map says that around a certain bend there's usually a sand bar then you have a higher probability of that being the case.  That doesn't mean this time around that it will actually be there because when you deal with rivers things can change.  However, a higher probability of it being there than along another point in the river suggests that you proceed with caution when you get to that bend.  

    What I've found that works best over the years is to buy weakness and possibly be a seller into strength.  That seems to be the opposite of what most traders do but it's what's worked for me.  I generally try to look out on the time horizon 6-18 months.  That's not to say I'll never take advantage of something shorter term but for the most part that's the time period in which I operate.  

    Your PnF question referred to the Dow and Dow Theory.  I don't have an opinion on Dow Theory but I'll enclose a chart of the S&P 500 because it trades similarly to the Dow.


    By my work markets were oversold back in late June.  I invested certain client cash assets  back then.  Our investing was based on our different client strategies and subject to individual client investment perimeters.   For the most part we concentrated then on the S&P 500 and ETFs related to energy, technology and industrials.  
    That index as represented by the S&P 500 ETF SPY is now by my work over bought.  By my work it now has a higher probability at a minimum of being vulnerable to profit taking as it has worked it's way through last Springs resistance and has advanced a bit over 7% since the lows on 06/24/2013.  That doesn't mean SPY can't go higher, but to me it is a low probability buy for new money at this point.  {I'm adding a note here that readers  should also go back and read the base case scenario we've been using.}

    A little over a year ago {June 19th to be exact} I said that I thought stocks were cheap and they were undervalued by between 8-24%.  The day I wrote that the index closed the previous date at 1,334.78.  Part of the reason I thought stocks would do well was that they were very oversold then.  

    I don't point out the above because I'm trying to put out here some "puff piece" about how smart I was or am because I had no way of knowing that the markets would do this well.  What struck me back then was that you had both money flows and valuations working in your favor.  For investors with something longer than a day or few weeks investment horizon, stocks looked cheap and had in my opinion a higher probability of working higher.  They also had a lower risk entry point back then based on how oversold things were at that point.

    By the way as much as I felt that our markets were undervalued back then, I feel almost the same way about foreign markets right now.  



    I'll temper that a bit because I don't consider myself an expert on how individual countries trade.  But I know these things via certain ETFs that I either follow or own:

    1.  Very out of favor asset class.  {Unloved by most investors today-bashed by the media}
    2.  More favorable valuations.
    3.  Most of the negatives are known.
    4.  High dividend ETFs {Can be paid to wait}.
    5.  Very oversold by my work and their charts look like these above.
    6.  Finally there's this.  US markets have so significantly outperformed overseas assets that it seems to me that either US markets have to go to sleep at some point or over seas will catch up to us.  Since one of my principle arguments is that things are continuing in the main to get better at home from an economic standpoint, then I think there is a higher probability that markets "over there" may play catch up to us.

    Again I don't know for sure what's going to happen and it could take awhile for me to find out if I'm right.  I wouldn't be surprised if these assets even head a bit lower first.  However,  I like what my probability schematics are telling me about these markets over a 6-18 month period.  In the meantime some of these ETF's dividend pay me to wait.  Also, If I'm wrong then I have some idea what I'll do as well.  I've had exposure to foreign markets since 2010 and  have recently accumulated on average a 5-10% exposure overseas and I'm willing to take that up to 15% of client portfolios depending on their investment mandates with me.  Will see.  Stay tuned."

    .....And now a post script.  When I look on my investment actions in the past few weeks, in retrospect and with respect to the definitions of our market indicators we probably should have changed our shortest and intermediate term indicators to NET MARKET POSITIVE since on balance we have been net purchasers of equity ETFs.  Of course this is not a trading model.  We don't sell these indicators as such and we are under no obligation to communicate any changes to readers but strive to do so in order to be as open as possible with this blog.  I will also emphasize that this should never be construed as a trading indicator as that is not how we use it.  If you use it in this manner you are on your own as that was never its intent.  Never-the-less if I had been thinking more clearly I would have seen that what we were doing probably constituted a change.  

    To be clear here is where we currently stand after the dust has settled.  On a longer term indicators are NET MARKET POSITIVE.  Short and intermediate term remains NET MARKET NEUTRAL.  However with respect to foreign based ETFs and given our investment activities we will change our shortest and intermediate term indicators to NET MARKET POSITIVE.  Hope that helps.  Sorry for any confusion this may cause.  I am growing unhappy with whether these current definitions accurately portray what I'm trying to convey so don't be surprised if I change these a bit in the coming months.

    *Long ETFs related to the S&P 500 in client and personal accounts.  Long DEM in client and personal accounts.  Postscript.  Forgot that I was long EEM via calls in a personal account of mine.  {Updated 2:30 PM:  7.15.2013}

    Charts courtesy of FINVEZ.com



    Thursday, July 11, 2013

    Fed To Markets....Never Mind!

    A quick break in.....Federal Reserve Chairman gave a speech in Boston after the markets closed yesterday in which he basically indicated in a much more direct manner that interest rates are going to stay low for a very long period.  He basically said that while the Fed uses unemployment as a gauge on the economy that probably is overstating the overall health of labor markets.  

    It is looking like the Fed didn't like the reaction to all that "taper" talk back a month or so as stocks lost something like 7% top to bottom.  In particular it probably wasn't happy with the rapid rise in mortgage rates.  Stocks are rallying today on this news.  Will have to sit back and think a bit on what this means now over the rest of the summer.

    Seasonality In Pictures.

    From All Star Charts.com and via some fellow named Alex Tarhini.


    "With seasonal studies, you always need to keep in mind the time frame of the data. Like every other market analysis, there are a number of ways to slice the pie. When looking at seasonality through average percent change, which I believe is the simplest form, the data can be annually, monthly, weekly, etc. In this case, we are looking at the Dow Jones Industrial Average on a monthly time frame. Another thing not to forget is the fact that seasonality studies need a start and end point. So when you see a monthly seasonal chart that shows June as a major outlier, it might be because the data only goes back until 2008, when the Dow lost 10% that month. It is usually best to look at data from multiple ranges of time so that you can get a better idea of what months are most important. Of course, this is all very simplistic and can (and should) be taken a few steps further (maybe in another post).
    With that said, here is a chart of average monthly returns for the $DJIA, using a number of different look-back periods (5,10,15,20,25, and 30 year)."

    "As you can see, July is not a terrible month. In fact, all of the average returns are positive. Still, it isn’t a standout bullish month either, as March, April, and December have higher returns."
    I'm not sure whether to attribute the comments to either Mr. Tarhini or to Mr. Parets who publishes All Star Charts.com.  I only know that none of the above is my work product so I have linked both.  


    *Long ETFs related to the Dow Jones Industrial Average in certain client accounts.

    Wednesday, July 10, 2013

    an tSionna {07.13.13}



    The last time we posted this chart of the S&P 500 ETF SPY was in the teeth of the most recent sell off that began back in May.  In our base case scenario we outlined a view that the highest probability event was for a range bound market during the summer.  Nothing we've seen so far makes us want to change our base case scenario at this point.  Stocks have rallied into the teeth of this resistance and are now over bought via our shortest term indicators.  We did some repositioning when things were lower {again see our base case post} and may look to take the opportunity to make a few strategic sales now that stocks have moved closer to their all time highs.  We are not negative on the markets but are cognizant of reasons why markets could stall out around here to catch a breather.  Longer term we are positive on equities.

    Now look, it is entirely possible that the basic scenario that we've outlined for the next few months may not occur {although so far it has played to script}.   For all we know stocks may simply power through and just continue moving higher.   That has occurred in the past as recently as 2009.  There are reasons this could happen, particularly if earnings season comes through better than expected.  If stocks continue their relentless march higher then we'll be along for the ride as we believe we are well positioned in equity ETFs.  However, prudence dictates at least understanding where we are in the yearly cycle and where we are vis-a-vis our current base case scenario.

    A few final thoughts:

    1.  Our base case scenario won't change even if we make marginal new highs these next few weeks.  I don't have a "market weather gauge" that can tell me the exact point when markets will make their final highs during this bullish cycle.  It will be the overall pattern that I'm interested in and only time will tell what goes on with price movements.

    2.  If stocks are going to play to the "summer swoon" script then they will likely make their highs for this current rally cycle sometime between the beginning of this week and the end of July.  That's at least what has traditionally occurred.

    3.  Don't overlook the importance of recent new money flows into stocks.  The beginning of July marks the beginning of a new month, new quarter and new half year.  Also it is our opinion that the rotation out of bonds or bond funds into equities is only now getting started and that could put a floor under any market sell off.

    Chart courtesy of FINVIZ.com.

    *Long ETFs related to the S&P 500 in client and personal accounts.

    Tuesday, July 09, 2013

    Balance!


    Keeping Your Balance During Shaky Markets.  Source Alliance Bernstein.  {Excerpt with my highlights.}
    "While capital markets have had their ups and downs, it’s been at least 15 years since we’ve seen such a broad swathe of the global markets take a hit at the same time—risky and “risk-free” assets alike.  What’s most disconcerting for investors is that the part of their portfolio that likely has provided some stability historically—US Treasuries—appears to have been part of the volatility this time. Not many of today’s investors have had the experience of getting through a period of such instability, let alone using it to their advantage.
    The catalysts for this volatility include recent US Federal Reserve comments regarding tapering its bond-purchasing program, indications of slower growth ahead for China’s economy, euro-area indecisiveness, political turmoil from Brazil to Turkey and slowing growth in many emerging markets. A lot of these catalysts boil down to fears about the future rather than a focus on present positives. After all, Fed Chairman Ben Bernanke’s vision for gradually weaning us off easy monetary policy was based on the growing consistency of upbeat economic data......
    .......In more typical markets, diversification has kept investors on a steady course, with US Treasury bonds serving as ballast for portfolio stability. Even within the bond market, diversification has typically been a wise approach. That’s because there are two major risks in the bond market: interest-rate risk and credit risk. When the economy is shaky, the highest-quality securities, such as US Treasuries, generally tend to perform well. In times of economic growth and rising interest rates, high-yielding credits often shine. If an investor combines high-quality and high-income bonds in a balanced, barbell approach, their bond portfolio has the potential to weather most markets.
    The operative word, though, is “most.” That barbell approach hasn’t fared well in the past two months. Is it dead? Some investors may think so, but we don’t.
    Yield spreads and interest rates have historically moved in opposite directions, so when rates have risen, spreads have tightened and credit has outperformed. Right now, they’re moving together—meaning that government and credit prices are falling at the same time. This is a relatively rare occurrence.
    We compiled data (see display below) looking at time periods of 29 business days—the number of business days from the start of the current sell-off—from Monday, May 13 through Friday, June 21. The chart shows the many times between 1992 and today when there have been similar 29-day periods in which five-year US Treasury yields sold off by 60 basis points or more. In the majority of these periods, the yield spread between five-year US Treasuries and high-yield bonds declined or was flat. In a few instances, the spreads widened, but these were mostly in overlapping periods in August 2003 and May 2004. The only time that spreads widened significantly (the large diamond at the upper left of the chart) was during the May 13–June 21 sell-off of 90 basis points.
    Interestingly, when we look at five-year rate increases of over 80 basis points, spreads have never widened in the past 20 years. We think that the current relationship isn’t likely to last long, but we believe spreads are beginning to look very attractive at these levels. Of course, in the short run, investor behavior will influence whether this situation reverses sooner rather than later.
    Spreads Have Typically Narrowed When Rates Rise
    In any case, a credit barbell approach has fared rather well for the past 20 years, despite three other highly stressed macro-driven environments. The only time the barbell approach didn’t work was in 1994. The other major crisis periods were bad for this approach, as they were for almost every bond strategy, but that was primarily due to massive credit sell-offs.....


    .....Diversification of sectors, industries and securities is a must. Equally important is having the flexibility to alter sector allocations when warranted. Simply put, a barbell strategy should avoid sectors, industries and securities that are at higher risk of trouble, but remain alert and opportunistic to allocate into those sectors when prices are very depressed.
    We’ve seen numerous interest-rate and credit cycles over the past 20 years—and even several global and systemic credit crises. But strong credit selection going into a crisis and opportunistic allocation into more distressed sectors during a crisis gives the barbell approach the capability to potentially rebound strongly.
    Every new market gyration or crisis is different, but every one of them is also an echo of the past. We believe that the best response to any situation is having a strategy that lets you keep your balance."
    The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AllianceBernstein portfolio managers.  
    Paul DeNoon is Director of Emerging-Market Debt and Gershon Distenfeld is Director of High-Yield Debt, both at AllianceBernstein.

    Thursday, July 04, 2013

    Fourth of July.



    Happy 4th of July America!  Here's a large Huzzah for all the men and women who've served over the years in our armed services who have continued to make this day possible.  In particular on the 150th Anniversary of the Battle of Gettysburg we salute William H. Murray, Co. K. 19th Indiana Volunteer Regiment {Iron Brigade} who participated in and was wounded during that battle.  William Murray was my maternal great, great grandfather.  

    Wednesday, July 03, 2013

    Diversification


    We don't have the final total return numbers yet of different asset classes for June 30, 2013.  But we do know that US equity markets had a pretty good first six months of 2013 despite the contretemps that surrounded the past few weeks.  This is in sharp contrast to almost all other asset classes.  Fixed income's 2nd quarter was nothing to write home about as interest rates skyrocketed higher.  Gold and most commodities fell apart.  Foreign markets at best were flat and many ended up in bear market territory. 

    It can be tempting to think in this kind of market that perhaps one is better off just concentrating on what's working like say US equities.  Think again!  The BlackRock chart above shows the longer term outperformance of diversification {the purple line} versus what many have seen as a traditionally diversified portfolio of 60% Stocks represented as the S&P 500 and 40% bonds represented by the Barclay's Credit Index {light blue}. 

    BlackRock defines the assets that make up the purple line as follows: 12% S&P 500, 12% S&P MidCap 400, 12% S&P SmallCap 600, 12% MSCI EAFE, 12% MSCI Emerging Markets, 13.3% Barclays Credit Index, 13.3% Barclays US Treasury Index, 13.3% Barclays Capital High Yield Index.  

    I think when the dust settles only the top three of these asset classes will have had positive returns for the first six months of the year.  Short term then this kind of allocation may have hurt practitioners of diversification.  Longer term it has been a superior approach.  

    I'd also note that the other component of this kind of diversification approach is a process that also takes into account risk/reward perimeters.  The method above also leaves out cash which is a nice hedge in rocky environments. 


    *Long ETFs related to the S&P 500 certain, MidCap ETFs and foreign markets in client and personal accounts.  Long certain credit ETFs in some individual client accounts.