Category Archives: Investing Money

Short Selling Drops to Lowest Level Since Lehman

roulette wheelMy Comments: Last Tuesday, I referenced an article with a compelling reason to think the current stock market move upward would soon go the other way. The author asserted the collapse was already under way. Here is an equally compelling article that suggests it’s not going to collapse, instead is going to continue going up.  (at least for a while!)

All this is to tell you no one has a clue. After the fact, everyone on the right side of history can claim they were right. But that’s like a broken watch which is right twice every 24 hours.

In my opinion, as a fincial advisor, the solution is to employ the skills of talented money managers, people with a laser like focus on one particular component of the overall market. Then make sure they have the ability to be in the market positively or negatively, or in cash. That way you really don’t care what happens, since your chances of increasing the size of your account are higher regardless of the history.

By Miles Johnson, Hedge Fund Correspondent / July 8, 2014
Hedge funds still unwilling to bet against the rally

Hedge funds have sharply scaled back their bearish bets that the value of stocks is about to fall, with the proportion of shares earmarked for short selling at its lowest level since before the financial crisis despite warnings of renewed market exuberance.

The percentage of stocks that have been borrowed by short sellers – who try to profit from a company’s share price falling – has dropped to the lowest level in the US, UK and the rest of Europe since the years before the collapse of Lehman Brothers, according to data compiled for the Financial Times by Markit.

The fall in short selling comes as Wall Street and markets in Europe trade at near record and multiyear highs, indicating that while some high profile hedge fund managers have warned of excessive market euphoria the industry is still unwilling to bet against the rally.

The amount of so-called short interest in the benchmark US S&P 500 index is hovering around 2 per cent of total shares in the index, close to the lowest level since Markit began collecting the data in 2006. In the European Stoxx 600 index, the level is similar at just over 2 per cent, while short interest in the UK FTSE All-Share index stands at less than 1 per cent.

This compares with sharply elevated levels in the years preceding the credit crisis, with the data showing short interest in the US in 2007 hitting a high of 5.5 per cent. The Markit data does not take into account all changes in stock indices over the period.

Buoyed in part by injections of cheap money from central banks, including the Federal Reserve’s asset-purchase programme, leading stock markets have continued to rise this year after enjoying strong gains in 2013, forcing some hedge funds to cut their short bets to avoid being squeezed.

As the FTSE All-World and S&P 500 have set records, volatility has faded away, with one measure, the Vix index or “Wall Street fear gauge” dropping to a near seven-year low.

“Historically, periods of low volatility usually lead to further periods of volatility, they are not precursors to a crisis.” – Antonin Jullier, global head of equity trading strategy, Citi

This has prompted a string of recent warnings from a number of leading hedge fund managers such as Baupost’s Seth Klarman, CQS’s Michael Hintze and David Einhorn of Greenlight Capital about the distortions being caused by ultra-low interest rates and bubbles in some asset classes.

Closely-followed short sellers such as Mr Einhorn have argued that US technology shares have reached “bubble” valuations, but have bemoaned the difficulty of making bets against them given the level of hype surrounding the sector.

“It is dangerous to short stocks that have disconnected from traditional valuation methods,” Mr Einhorn told his clients earlier this year. “After all, twice a silly price is not twice as silly; it’s still just silly”.

However, despite a jittery period for some technology stocks in the first half, investors have been undeterred by the warnings, with some analysts arguing that shares are still cheap compared with other assets.

“Historically, periods of low volatility usually lead to further periods of volatility, they are not precursors to a crisis,” said Antonin Jullier, global head of equity trading strategy at Citi.

Mr Jullier said that some hedge funds had become discouraged from short selling as a result of being repeatedly wrongfooted by rising markets.

“Hedge funds have underperformed in the first half and this means their appetite for risk has fallen over the year,” he said.

Rising stock markets have coincided with sharp price increases for other asset classes, ranging from Jeff Koons’s sculptures to junk bonds and London house prices, prompting concerns among some investors that markets have lapsed back into complacency.

Buckle Up! The New Bear Market Has Begun!

1-5-2000-to-6_30-2014My Comments: The writer has a powerful message to send. He was right about this back in 2008 but that doesn’t mean he’s right this time. I have clients and prospective clients asking when the next downturn is going to begin. And yet there are many articles that suggest it’s still a long way off.

This week I received my copy of Investment Advisor. In it five famous advisors share their preferred asset allocation of the month. The most conservative of them has 30% in stocks, 50% in bonds with 20% in cash. The previous month he had 30% in stocks, 40% in bonds and 30% in cash. Clearly, he doesn’t think interest rates are going up soon. The other four had about 65% of their holdings in the stock market.

Another example is an investment manager whose results in 2013 were a plus 17.51%. Rather than moving away from the stocks, he is now fully invested in the stock market to the tune of 120%. (To understand how that works, you need to call or email me.)

PS – I’ve left out the charts since they do not add much to the message other than the one at the top.

Craig Brockle / May. 8, 2014

• This article reveals the convincing evidence that a new bear market has already started.
• Those who failed to sell near all-time highs in 2000 and 2007 have a chance to do it here in 2014.
• Learn the two proven, reliable assets that go up when everything else is going down.

Did you or a loved one lose money in the 2008 Financial Crisis? How about the real estate bubble bursting two years earlier? And if we go back to the turn of the millennium, there was the Dot-com Crash. Remember that one?

This article is intended to help as many people as possible avoid another devastating loss. I will explain where we appear to be in the current economic cycle, what appears to be coming next and how you can protect and grow your money like the top 1% of successful investors.

I’ve done my best to make this article understandable by everyone who reads it, whether you have previous investment knowledge or not. Investment terms, when first introduced have a link to their definition to help aid comprehension. If you see something you don’t understand, a Google search of the word + definition can help.

Before we go any further, observe what the above-mentioned financial events look like on a graph. First, we’ll look at the 2006 real estate bubble. Shown below is the past 20 years of home price data based on 10 US cities.

Up until 2006, the consensus was that real estate only goes up in value and that one’s home was a great investment. By 2009, this belief was proven to be utterly false as foreclosures and short sales became widespread.

There is a great deal of evidence that suggests the real estate market is again poised for a significant drop, but explaining that would be an article of its own. Perhaps after reading this article, you’ll agree that the next financial bear market has indeed begun. If so, you will likely conclude that owning real estate through this period will be hazardous.

Now let’s look at the overall US stock market over the past 20 years as represented by the S&P 500 index in the chart below. This shows the S&P 500 from 1994-2014. (at the top is the S&P from 2000-2014)

If a picture is worth a thousand words, I believe the above chart could be worth 30-60% of your current investment portfolio. That is if you fail to recognize the pattern that’s developed and act accordingly, you could stand to lose that much money.

It’s been over five years since the last bear market bottomed and many investors have forgotten what it was like. The following short clip from CBS 60-Minutes titled “The 401k Fallout” will remind you what average investors were experiencing at the time. Those who cannot learn from history are doomed to repeat it.

Now, let me give at least one reason why you might want to listen to me. After all, there are so many conflicting opinions and obviously not everyone can be right. I’m the first to admit that the market has a mind of its own, which no one, including myself can accurately predict at all times. That said, I went on the record in late 2007 with this YouTube video warning viewers to prepare for the upcoming market crash. That video was released the exact month the S&P 500 index peaked, after which it dropped 57%.

After the real estate bubble collapsed in 2006, it became obvious to my contrarian colleagues and me that it would have a spillover effect into the rest of the financial world. There were other telltale warning signs at that time that I’ll explain below as these signs are giving the same message today.

By October 2007, the S&P 500 index (500 largest US companies) was the focus of attention as it set a new all-time high that month. Meanwhile, the Russell 2000 index (2,000 of the smallest publicly-traded US companies) had already been in a bear market for three months, after peaking in July of that year. This is a sign of stock market exhaustion where only a smaller group of stocks continue to push higher while the overall pack falls off. You could picture this as a huge pack of companies climbing a wall. By the end of it, the overwhelming majority were already in their descent while only the biggest companies inched higher.

Today we’re seeing the exact same thing as the Russell 2000 has again been showing obvious signs of weakness, even though the S&P 500 has been revisiting its all-time highs. The Russell 2000 Index Peaked at 1,213 on March 4, 2014.

Another warning sign that a new bear market has begun is courtesy of the volatility index (VIX). In finance, volatility is a measure of the variation of stock prices over time.

Volatility, investor emotions and stock prices are all very closely related. In periods when volatility is low and investors are feeling complacent or even euphoric, we experience high stock prices. Conversely, when stock prices collapse and fear becomes widespread, we see volatility spike much higher.

Volatility measures can be a very early warning signal. For instance, in the last financial crisis, volatility began to rise seven months before the bear market in the Russell 2000 began and 10 months before the S&P 500 started its decline.

Taking a look at volatility in the current cycle, we see that it reached its lowest point on March 14, 2013. Since then volatility has been in an uptrend, setting a consistent pattern of higher lows. This time around, it has taken the Russell 2000 almost 12 months to peak, hitting its high on March 4th of this year. I suspect the S&P 500 will make at least one last push higher, at least above 1900. This would also help fool more people into believing that there’s nothing to worry about when they should actually be most concerned.

Other warning signals are currently blaring today as they did in 2007. These include stocks being extremely overpriced, selling by the most experienced investors and heavy buying by the least informed, the general public. Let’s look at each of these factors briefly.

Adam Hamilton, a contrarian colleague of mine, recently published an excellent article. In it he points out that as of this year, stocks are more overpriced than they were prior the 2008 financial crisis. In case you’re unfamiliar, the value of a stock is determined by comparing a company’s current stock price to how much profit it earns. This is referred to as a price to earnings ratio. For instance if a stock is currently priced at $10 and has earned a profit of $1 over the past year, the stock would be said to have a price to earnings ratio of 10.

Over the past 125 years, the average price to earnings ratio has been 14 for the largest 500 companies in the United States. Prior to the 2008 financial crisis, these same stocks reached peak price to earnings ratios of 23.1. As of the end of March of this year, the average price to earnings ratio for these same 500 stocks was 25.7. This indicates that even if corporate profits were to remain constant, that stock prices would need to drop 45% just to reach their historical average of 14.

Furthermore, we’ve recently seen a significant increase in insider selling of stocks combined with heaving buying by the general public. Insiders include directors and senior officers of publicly traded companies, as well as anyone that owns more than 10% of a company’s voting shares. Insiders are among the most knowledgeable and successful investors as they have such strong understanding of what’s really going on in their company and industry. When insiders are selling, it’s usually wise to take notice. Insiders are among the top 1% of successful investors and act more on logic rather than emotion.

Lastly, we have the average investor. We could refer to them as the other 99%, based on their sheer numbers. These are the least informed investors and have the worst track record. This group tends to react emotionally rather than rationally at major turning points in the market. This is evidenced by the fact that the heaviest selling of stocks by the general public occurred in the first few weeks of 2009. This was right before the last bear market transitioned into one of the strongest bull markets in history.

Recently there hasn’t just been strong buying by the general public, but they have been borrowing more money to buy stocks than they ever have. As always, knowledgeable insiders, commercial traders and contrarian investors are unloading their positions near the current all-time highs to an unsuspecting public that really should know better by now-especially after what happened in 2000 and 2007. Here we are in 2014, another seven years later and it is again time to prepare for another bear market.

While no one, including me, likes to live through difficult economic times, at least we all have a choice as to how we are affected. There are truckloads of lemons coming our way, so I think we’d best get started making lemonade. And while we’re at it, help as many other people as possible do the same.

In crisis, we find both danger and opportunity. Reportedly, there were more millionaires created during the Great Depression than any other time in American history. And that’s back when a million dollars was worth many times what it is today. A million dollars in the Great Depression would be worth over $35 million today.

So, what is one to do? How can you avoid becoming road kill and instead conquer the crash? Fortunately there are proven, reliable ways to protect and grow your money in a bear market. Below are the two best assets I know for doing so.

The first chart shows the US Treasury fund (TLT) rise as the US stock market fell. The period shown is the 2008 financial crisis. When investors panic, they sell everything they can and put their money in something they consider reliable. This is called a “flight to safety” and US Treasury bonds are considered one of the safest assets during times of trouble.

Based on the information in this article, I hope you too realize that a new bear market has begun. Volatility bottoming last year was the first warning signal. More recently we’ve seen the Russell 2000 run out of steam, corporate insiders selling and the general public buying in droves. On top of this, stocks are more overvalued today than they were at the peak in 2007.

My goal in writing this article is to help you and as many other people as possible avoid another devastating financial loss. My 2007 YouTube warning reached over one hundred thousand viewers. This time I’m hoping that millions of people are able to get this message in time. I appreciate you following me here on Seeking Alpha, leaving your comments and sharing this article with others.

Bear markets are not to be feared. In fact, they can be very profitable for those who are well prepared. Buckle up. This is going to be one heck of a ride!

Source: http://seekingalpha.com/article/2202043-buckle-up-the-new-bear-market-has-begun?ifp=0

US Cable Barons And Their Power Over Us

Internet 1My Comments: Professionally, I live in the world of finance and investments. Regulation is pervasive, most likely increasing, since there is a pervasive threat of abuse by the big players. I think it would help all of us to have a level playing field, including individuals, corporate America, and society as a whole.

I cannot run my business today without the internet. My predecessors couldn’t run their businesses without newspapers and telephones. Over the years, no one had a problem keeping those industries from being dominated by a few companies who just might become monopolies.

So why is Congress apparently willing to let Comcast become a virtual monopoly without restriction?

By Edward Luce | April 13, 2014 | The Financial Times

No one in Washington seems to have the will to stop industry moguls from tightening their grip on the internet.

Imagine if one company controlled 40 per cent of America’s roads and raised tolls far in excess of inflation. Suppose the roads were potholed. Imagine too that its former chief lobbyist headed the highway sector’s federal regulator. American drivers would not be happy. US internet users ought to be feeling equally worried.

Some time in the next year, Comcast’s proposed $45.2bn takeover of Time Warner Cable is likely to be waved through by antitrust regulators. The chances are it will also get a green light from the Federal Communications Commission (headed by Tom Wheeler, Comcast’s former chief lobbyist).

The deal will give Comcast TWC control of 40 per cent of US broadband and almost a third of its cable television market.

Such concentration ought to trigger concern among the vast majority of Americans who use the internet at home and in their work lives. Yet the backlash is largely confined to a few maverick senators and policy wonks in Washington. When the national highway system was built in the 1950s, it provided the arteries of the US economy. The internet is America’s neural system – as well as its eyes and ears. Yet it is monopolised by an ever-shrinking handful of private interests.

Where does it go from here? The probability is that Comcast and the rest of the industry will further consolidate its grip on the US internet because there is no one in Washington with the will to stop it. The FCC is dominated by senior former cable industry officials. And there is barely a US elected official – from President Barack Obama down – who has not benefited from Comcast’s extensive campaign financing. As with the railway barons of the late 19th century, he who pays the piper picks the tune.

The company is brilliantly effective. Last week, David Cohen, Comcast’s genial but razor-sharp executive vice-president, batted off a US Senate hearing with the ease of a longstanding Washington insider. A half smile played over his face throughout the three-hour session. One or two senators, notably Al Franken, the Democrat from Minnesota, offered skeptical cross-examination about the proposed merger. But, for the most part, Mr. Cohen received softballs. Lindsey Graham, the Republican from South Carolina, complained that his satellite TV service was unreliable when the weather was bad. Like many of his colleagues, Mr. Graham either had little idea of what was at stake, or did not care. With interrogations like this, who needs pillow talk?

Comcast is aided by the complexity of the US cable industry. Confusion is its ally. The real game is to control the internet. But a lot of the focus has been on the merger’s impact on cable TV competition, which is largely a red herring. The TV market is in long-term decline – online video streaming is the viewing of the future.

Yet Comcast has won plaudits for saying it would divest 3m television subscribers to head off antitrust concerns. Whether that will be enough to stop it from charging monopoly prices for its TV programmes is of secondary importance. The internet is the prize.

The public’s indifference to the rise of the internet barons is also assisted by lack of knowledge. Americans are rightly proud of the fact that the US invented the internet. Few know that it was developed largely with public money by the Pentagon – or that Google’s algorithmic search engine began with a grant from the National Science Foundation. It is a classic case of the public sector taking the risk while private operators reap the gains. Few Americans have experienced the fast internet services in places such as Stockholm and Seoul, where prices are a fraction of those in the US. When South Koreans visit the US, they joke about taking an “internet holiday”.

US average speeds are as little as a tenth as fast as those in Tokyo and Singapore. Among developed economies, only Mexico and Chile are slower. Even Greeks get faster downloads.

So can anything stop the cable guy? Possibly. US history is full of optimistic examples. Among the dominant platforms of their time, only railways compare to today’s internet. The Vanderbilts and the Stanfords had the regulators in their pockets. Yet their outsize influence generated a backlash that eventually loosened their grip.

For the most part, electricity, roads and the telephone were treated as utilities and either publicly owned, or regulated in the public interest. The internet should be no exception. Much like the progressive movement that tamed the railroad barons, opposition to the US internet monopolists is starting to percolate up from the states and the cities. It is mayors, not presidents, who react to potholed roads.

Last week, Ed Murray, the mayor of Seattle, declared war on Comcast even though it donated to his election campaign last year. Drawing on the outrage among Seattle’s consumers, Mr. Murray seems happy to bite the hand that fed him. “If we find that building our own municipal broadband is the best way forward for our citizens then I will lead the way,” he said.

Others, such as the town of Chattanooga, Tennessee, which is distributing high-speed internet via electricity lines, are also doing it for themselves. Forget Washington. This is where change comes from. “We need to find a path forward as quickly as possible before we [the US] fall even further behind – our economy depends on it,” said Mr. Murray. As indeed does America’s democracy.

The Rise of Tactical Asset Allocation

retirement_roadMy Comments: Yesterday I talked about investment risk, and how we, both clients and advisors alike, should understand it. Today, I’m reposting an article that describes, for me, a way to help clients achieve their perceived objectives, and keep the risk element under control.

As before, risk is not to be avoided, but to be managed. It’s only with risk can we hope to realize our financial goals, which for most people is a bigger pile of money than you started with, one that will translate to peace of mind and a greater ability to enjoy life.

It’s somewhat technical, so if that turns you off, then either struggle with it or call me for an explanation. Or both.

Posted by Michael Kitces on Wednesday, June 20th, 2012

The foundation of investment education for Certified Financial Planner (CFP) certificants is modern portfolio theory, which gives us tools to craft portfolios that effectively balance risk and return and reach the efficient frontier. Yet in his original paper, Markowitz himself acknowledged that the modern portfolio theory tool was simply designed to determine how to allocate a portfolio, given the expected returns, volatilities, and correlations of the available investments.

Determining what those inputs should be, however, was left up to the person using the model. As a result, the risk of using modern portfolio theory – like any model – is that if poor inputs go into the model, poor results come out. Yet what happens when the inputs to modern portfolio theory are determined more proactively in response to an ever-changing investment environment? The asset allocation of the portfolio tactically shifts in response to varying inputs!

The evolution of the industry for much of the past 60 years since Markowitz’ seminal paper has been to assume that markets are at least “relatively” efficient and will follow their long-term trends, and as a result have used historical averages of return (mean), volatility (standard deviation), and correlation as inputs to determination an appropriate asset allocation. Yet the striking reality is that this methodology was never intended by the designer of the system itself; indeed, even in his original paper, Markowitz provided his own suggestions about how to apply his model, as follows:

“To use [modern portfolio theory] in the selection of securities we must have procedures for finding reasonable [estimates of expected return and volatility]. These procedures, I believe, should combined statistical techniques and the judgment of practical men. My feeling is that the statistical computations should be used to arrive at a tentative set of [mean and volatility]. Judgment should then be used in increasing or decreasing some of these [mean and volatility inputs] on the basis of factors or nuances not taken into account by the formal computations…
…One suggestion as to tentative [mean and volatility] is to use the observed [mean and volatility] for some period of the past. I believe that better methods, which take into account more information, can be found.”
– Harry Markowitz, “Portfolio Selection”, The Journal of Finance, March 1952.

Thus, for most of the past 6 decades, we have ignored Markowitz’ own advice about how to apply his model to portfolio design and the selection of investments; while Markowitz recommended against using observed means and volatility of the past as inputs, planners have persisted nonetheless in using long-term historical averages as inputs and assumptions for portfolio design. Through the rise of financial planning in the 1980s and 1990s, though, it didn’t much matter; the extended 18-year period with virtually no material adverse risk event – except for the “blip” of the crash of 1987 that recovered within a year – suggested that long-term returns worked just fine, as they led to a stocks-for-the-long-run portfolio that succeeded unimpeded for almost two decades. Until it didn’t.

As discussed in the 2006 Journal of Financial Planning paper “Understanding Secular Bear Markets: Concerns and Strategies for Financial Planners” by Solow and Kitces, the year 2000 marked the onset of a so-called Secular Bear Market – a one or two decade time period where equities deliver significantly below average (and often, also more volatile) returns. The article predicted that the sustained environment of low returns would lead planners and their clients to question the traditional approach of designing portfolios based on a single, static long-term historical average input (which leads to a buy-and-hold portfolio), and instead would turn to different strategies, including more concentrated stock picking, sector rotation, alternative investments, and tactical asset allocation. In other words, stated more simply: planners would find that relying solely on long-term historical averages without applying any further judgment regarding the outlook for investments, as Markowitz himself warned 60 years ago, would become increasingly problematic.

The Growing Trend of Tactical
Although not widely discussed across the profession, the FPA’s latest Trends in Investing study reveals that the rise of tactical asset allocation has quietly but steadily been underway, and in fact now constitutes the majority investing style. Although not all financial planners necessarily characterize themselves in this manner, the study revealed that a shocking 61% of planners stated that they “did recently (within the past 3 months) or are currently re-evaluating the asset allocation strategy [they] typically recommend/implement” which is essentially what it takes to be deemed “tactical” in some manner.

When further asked what factors are being re-evaluated to alter the asset allocation strategy, a whopping 84% of respondents indicated they are continually re-evaluating a variety of factors: 69% indicated following changes in the economic in general, 58% indicated they watch for changes in inflation, and another 58% monitor for changes in specific investments in the portfolio. Notably, only 14% indicated that they expected to make changes based on what historically would have been the most popular reasons to change an investment, such as changes in cost, lead manager, or other administrative aspects of the investment.

Although not directly surveyed in the FPA study, another rising factor being used to alter investment allocations appears to be market valuation, on the backs of recent studies showing the value and effectiveness of the approach, such as “Improving Risk-Adjusted Returns Using Market-Valuation-Based Tactical Asset Allocation Strategies” by Solow, Kitces, and Locatelli in the December 2011 issue of the Journal of Financial Planning, and more recently “Withdrawal Rates, Savings ratings, and Valuation-Based Asset Allocation” by Pfau in the April 2012 issue, along with “Dynamic Asset Allocation and Safe Withdrawal Rates” published in The Kitces Report in April of 2009.

Notwithstanding the magnitude of this emerging trend towards more active management, it doesn’t necessarily mean financial planners are becoming market-timing day traders. The average number of tactical asset allocation changes that planners made over the past 12 months was fewer than 2 adjustments, and approximately 95% of all tactical asset allocators made no more than 6-7 allocation changes over the span of an entire year, many of which may have been fairly modest trades relative to the size of the portfolio. In other words, planners appear to be recognizing that the outlook for investments doesn’t change dramatically overnight; however, it does change over time, and can merit a series of ongoing changes and adjustments to recognize that.

Tactical Asset Allocation: An Extension of MPT

At a more basic level, though, the trend towards tactical asset allocation is simply an acknowledgement of the fact that it feels somewhat “odd” to craft portfolios using long-term historical averages that are clearly not reflective of the current environment, whether it’s using a long-term bond return of 5% when investors today are lucky to get 2% on a 10-year government bond, or using a long-term historical equity risk premium of 7% despite the ongoing stream of research for the past decade suggesting that the equity risk premium of the future may be lower.

Consistent with the idea that financial planners are recognizing tactical asset allocation as an extension of modern portfolio theory and not an alternative to it, a mere 26% of financial planners answered in the Trends in Investing survey that they believe modern portfolio theory failed in 2008. For the rest, the answer was “no”, modern portfolio theory is still intact, or at least “I don’t know” – perhaps an acknowledgement that while MPT may still work, many of us lack the training in new and better ways to apply it. Nonetheless, that hasn’t stopped the majority of planners adopting a process of making ongoing changes to their asset allocation based on the economic outlook and other similar factors.

Unfortunately, though, perhaps the greatest challenge for planners implementing tactical asset allocation is that we simply aren’t trained to do so in our standard educational process. Some financial planning practices are responding to the challenge by investing in training, staff, and/or research to support a more tactical process. Others are responding by outsourcing to firms that can help; the Trends in Investing survey showed nearly 38% of advisors intend to outsource more investment management over the next 12 months, and 42% are already outsourcing more now than they were 3 years ago.

Regardless of how it is implemented, though, the trend towards tactical itself appears to have grown from a broad dissatisfaction amongst planners and their clients that the “lost decade” of equity returns has left many clients lagging their retirement goals. Even if diversified portfolios have eked out a positive return, it is still far behind the projections put forth when clients made their plans in the 1990s, forcing them to adjust by saving more, spending less, or working longer, to make up for the historical returns that never manifested. And as long as the secular bear market continues, the strategy will continue to be appealing. Ultimately, though, the sustainability of the tactical asset allocation trend will depend on it delivering effective results for clients.

So what do you think? Would you characterize yourself as a tactical trader? Is tactical asset allocation a short-term phenomenon, or here to stay? Is tactical asset allocation simply modern portfolio theory done right, or does it represent an entirely new investing approach?

Should Your Investments Include Europe?

global econ 3My Comments: Europe has been in the news a lot recently. President Obama is/was over there, it’s the 70th anniversay of D-Day, the Ukraine is a basket case waiting to get resolved, and so on. And all this time, people have investments and between dealing with the heat of summer and the need to take a vacation, somewhere, in a lonely section of their brain, circuits are opening and closing as questions about their money surface from time to time.

For those of us who find ourselves in these kinds of weeds on a daily basis, it becomes part of the background noise that leads us to make decisions on behalf of our clients, decisions that we hope will make life easier, for us and for them.

This comes from a thought leader that I think is pretty good. It’s worth your time to read. But don’t let yourself get too deep as it might interrupt your vacation.

posted by Jeffrey Dow Jones June 5,2014 in Cognitive Concord

The big story this week is the European Central Bank. Early this morning, Mario Draghi did something historic. He cut the deposit rate to negative 0.10%.

This makes them the first central bank in the world to use a negative deposit rate. It sounds pretty dramatic, right? Negative interest rates mean you pay somebody else to hold your money. Who on earth would do that?!

As it turns out, that’s exactly the point. When it costs money to hold funds on deposit, it creates a disincentive to do so. That disincentive to hold cash theoretically creates more capital movement, hopefully, consumption and investment. It’s supposed to be stimulative.

At the macro level, a negative rate makes people dislike the Euro. And a strong Euro has been one of the bigger problems over there for some time now. Strong currencies make a country’s exports relatively more expensive, and that translates into lower GDP. Supposedly a weaker Euro might stimulate a bit more economic growth.

Europe is in a really weird spot. They have a single currency and they have a central bank, but they don’t have a political union nor do they have any kind of unifying fiscal union. It’s just a bunch of really different countries that all share a currency. It’s the biggest experiment in monetary history.

Look, they’ve gotta do something. Inflation has been trending lower and lower and lower and is now officially in the Danger Zone.

It’s been a long time since we’ve talked about this. But that chart is one of the most important charts in the world right now. The Eurozone is the world’s largest economic entity. And the world’s largest economic entity has been pretty sick for a while. They’re doing everything they can to keep this next chart from dipping back into negative territory:

Will Europe be OK? Will GDP hold? Let’s ask the market:

That’s Europe, folks.

It’s up over 50% in the last two years.

Let me ask you a question: is this a market that is concerned about recession?

Is this a market worried about deflation?

Clearly, equity investors over there think everything will be just fine. Markets are forward looking things and what they see right now is no recession, no deflation, no problem. They could certainly be wrong about that, but when markets do get it wrong, they tend to react rather quickly when evidence starts emerging that they are. This is the equity benchmark that investors really ought to be paying attention to right now. I think a(nother) European recession is the single biggest risk for investors right now, or at least the one with the biggest possible global impact relative to its probability.

I’ve been bullish on European stocks since last summer. Alpine Advisor Pro subscribers will remember our macro move away from the U.S. and into more favorably-valued Europe.

CONTINUE-READING

There Isn’t Going To Be A Crash Anytime Soon

080519_USEconomy1My Comments: Last week I posted an article that suggested you be very cautious with your investments going forward. This article says “never mind”, all is well, keep going.

Unfortunately, from my perspective, both are completely rational, plausible, and probably accurate. Which means that I have no earthly idea how this is going to play out. One thing I do agree  with this author about is there is not going to be a giant market drop anytime soon. Those things come along about once every 65-75 years which means most of us will be dead before the next one.

In the meantime, find someone to help you maintain a healthy balance, with the ability to adjust quickly to changing fortunes, leaving you at the end of the day with more money than you started with. Go here to see my best soluttion: http://goo.gl/Z5iICf

Jun. 8, 2014 1:01 AM ET

Summary
• The SPY is not rising out of control and there is a lot of data to prove it.
• As of May 2014, the Domestic Market Capitalization of the main U.S. Exchanges was $24.9 trillion, not that drastically higher than the 2007 and 2008 time period.
• For ETFs like SPY, there will continue to be allocations away from other smaller capitalization companies to companies indexed by the SPY ETF.

Introduction
For the last few months, the amount of articles published about the “impending market meltdown” has gotten a bit excessive after considering the contributors’ conclusions and how they reached them (using some sort of data set with no actual triangulation of ideas). So here is my shot at this topical obsession.
Just a general note, my position on the markets is that market levels are just not that out of the ordinary. I strongly believe that market levels are warranted and I have the data to back it up. This article will mainly cover the objectivity of a sound SPY investment and how investors should not be too worried about ridiculously volatile changes in the market (there will not be another giant market drop anytime soon).

Instrument of Choice: SPDR S&P 500 (SPY)
The SPY seeks to provide investment results that, before expenses, generally correspond to the price and yield performance of the S&P 500 Index. The Trust holds the portfolio and cash and is not actively managed. To maintain the correspondence between the composition and weightings of portfolio securities and component stocks of the S&P 500 Index, the Trustee adjusts the portfolio from time to time to conform to periodic changes in the identity and/or relative weightings of Index Securities.

Below is a summary of indices, comparing the S&P 500 index to the rest of the major indices. It’s fairly easy to point out that SPY is not narrow enough to be classified as a “narrow” indicator and not broad enough to be a “broad” indicator (I consider the Russell 2000 a broad index), so this will need to be kept in mind throughout the remainder of the article. Overall, the SPY has captured a significant portion of the 2013 to 2014 price rises and that may be a direct link to market confidence; however, this is a premature conclusion and will need more than just loaded statements to defend my position on the market (that a market crash is not coming anytime soon and current levels are not that out of the ordinary).


CONTINUE-READING

How Will The Federal Reserve Raise Interest Rates?

house and pigMy Comments: There is little argument that sooner or later the Fed will start to push interest rates up. And when they do, there is going to be confusion about how fast and how far they push. This in turn will cause some volatility and timing issues on Wall Street.

But all this is part and parcel of being a democracy in a capitalistic world. It’s how you manage the movements that separates the survivors from those who will die. If you have money with me, you’ve heard me talk about this ad nauseum. But that’s what I do, so if you have more questions, you know how to find me.

(Unrelated to any of this is our recognition that 70 years ago today, many brave men landed ( and died ) in France to evict the Nazis. My father landed on Dday plus 3, with the British forces. He was in charge of the recovery of all German field equipment; tanks, guns, etc for analysis by the British Army.)

John M. Mason / May. 30, 2014

Summary
• The Federal Reserve continues to taper its security purchases.
• Within the Fed further discussions are taking place with respect to how interest rates might be raised in the future.
• The Fed has already been experimenting with the use of reverse repurchase agreements as a tool to smooth the transition to a “more normal” functioning of the banking system.

This is a question that Robin Harding briefly examines in the Financial Times. The concern is growing… and will continue to grow in the coming months.

As reported in the article, the Fed “debated these tools at its April meeting and instructed the New York Fed to step up tests on a range of experimental facilities.”

The Federal Reserve is looking at “tools” to raise interest rates because the financial markets are not experiencing enough demand for funds relative to the supply of funds to warrant increases in interest rates.

Although the effective Federal Funds rate, the interest rate the Fed targets for executing monetary policy, has been as high as 20 basis points during the time the central bank has been exercising its efforts of Quantitative Easing, over the past year the effective Federal Funds rate has fluctuated around 10 basis points.

On May 28, 2013 the effective Federal Funds rate was 9 basis points and on May 28, 2014 the effective Federal Funds rate was 9 basis points. In between the rate got as high as 12 basis points and as low as 6 basis points, but it never got outside of this range.

There is essentially no demand pressure on the effective Federal Funds rate to rise. Usually at this time in the business cycle, almost five years and counting, the demand pressure in the market is causing money market interest rates to rise.

Not this time! And, why should interest rates rise? The commercial banking system has almost $2.7 trillion in excess reserves, on which reserves member banks are receiving a risk-free 25 basis points. Certainly better than making risky business loans or risky mortgage loans where the spread the banks earn are not a whole lot better than this 25 basis points. Plus, the banks don’t have to put up with the criticism of regulators about the loans that they are making.

So why should the commercial banks be lending?
The point of the Harding article seems to be that if short-term interest rates are going to rise in this extremely weak business recovery, it is going to have to be the Federal Reserve that causes the interest rates to rise.

Not a lot is going to happen, however, in the current environment as the Federal Reserve continues to “taper” its monthly purchases.

Over the last four-week period ending May 28, 2014, the Federal Reserve added a “net” $35.7 billion to its securities holdings. This is consistent with what it said it was going to be doing.

This increase is “small potatoes” compared with the “net” acquisitions over the past 52-week period, which was almost $950 billion.

One should note that this “net” amount of new securities added to the Fed’s portfolio was a little greater than the whole Fed balance sheet before the financial crises began.

But the Fed, over the past year, has been practicing its “exit” moves in the repo market. Harding reports that the most practical method of raising the effective Federal Funds rate is what it calls the “Overnight Fixed-Rate Reverse Repurchase facility”…or, ON RPP.

Well, as I have reported over the past four months, the Fed has been executing Reverse Repurchase Agreements. One must be careful with this title because the reverse repurchase agreements must be interpreted from the side of the government securities dealer and not from the side of the Federal Reserve.

The Federal Reserve is selling securities to a government securities dealer under an agreement to repurchase the securities at a given future date under a set price. By selling the securities the Federal Reserve “reduces” bank reserve balances.
The objective of these “reverse repos” is to reduce the bank reserves that are in the banking system and this could cause interest rates to rise.

At the close of business on May 28, the Federal Reserve had over $170.0 billion in reverse repurchase agreements on its balance sheet. On May 29, 2013, the Fed did not show any reverse repurchase agreements on its balance sheet. Over the past 13-week period the Fed added slightly more than $40.0 billion in reverse repos to its balance sheet so it is obvious that this exercise has been going on for a fairly lengthy time.

In terms of what is happening in the monetary statistics, the same old story applies that I have been reporting over the past four years. Demand deposits at commercial banks are continuing to rise at a fairly rapid rate — they are up almost 16.0 percent from last year but this increase in demand deposits is not coming from lending activity in the commercial banking system.

The major reason that demand deposits are increasing so rapidly is that individuals and businesses are still transferring funds for low-yielding short-term assets into demand deposits. As I have argued before, this is not a sign of strength in the economy, but an indication of the weakness that still exists. Of course, people and businesses are receiving next-to-nothing in interest rates on their “savings” but it is also true that because of the sorry economic state of so many economic units, these economic units want to keep their funds ready for spending, so they keep moving funds to “transactions” accounts.

Furthermore, the rate of increase in currency holdings continues to be historically high. Year-over-year, the rate of growth in currency in the hands of the public is almost 8.0 percent.

Small deposits at commercial banks and thrifts are down, year-over-year, at a 12.0 percent rate. The growth in retail money funds is basically non-existent for the past year and the growth in money in institutional money funds is down for the year.

So, “tapering” continues and officials at the Federal Reserve wonder how they are going to raise interest rates in the future when the time is right. And there still is the major question of what the Federal Reserve is going to do with the $2.7 trillion excess reserves in the banking system.

The answers to all these questions are crucial to the future of the United States economy. That is why it is important to keep a close watch on what the Federal Reserve is doing… and what its officials are thinking. Again, we are in completely new territory.