On My Radar - Pensions and Interest Rates; It's Not Your Father's Bond Market

December 16, 2016
By Steve Blumenthal

“Earnings don’t move the overall market; it’s the Federal Reserve Board… focus on the central banks and focus on the movement of liquidity… most people in the market are looking for earnings and conventional measures. It’s liquidity that moves markets.”
– Stan Druckenmiller

“As I look out over the coming years, I am convinced that we’ll see the blowing up of the biggest bubbles in history, including those of government debt and government promises, and not just in the U.S. but all over the world, leading to an eventual global crisis of biblical proportions – although it isn’t clear what the immediate cause of the crisis will be. Right now I am looking at Italy with intense focus.”
– John Mauldin

“Bull-markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.”
– Sir John Templeton

I’ve fielded a large number of investor questions recently around tax cuts and earnings. The idea is that tax cuts, for both corporations and individuals, will significantly improve corporate earnings and thus propel the market higher.

I attempt to answer that question inside today’s piece. The Stan Druckenmiller quote, one of the world’s greatest performing hedge fund managers, tips my hand but do read on. We’ll also look at what happens to equities in a rising rate environment and a fun chart you may like to share with your clients about an investor’s “emotional cycle.” If bull markets die in “euphoria,” I argue we are just not quite there yet.

But before you dive into the heart of this week’s On My Radar, a risk we’ve been talking about for some time, underfunded pensions, just took a big step forward.

The California Public Employees Retirement System, better known as CalPERS, this week stated that a 7.5% annual return is no longer realistic. Finally, amen, right on. And as my kids would say when they were young, “duh.”

What is CalPERS? It is an agency in the California executive branch that manages the pension and health benefits for more than 1.8 million California public employees, retirees, and their families. At $300 billion, it is the largest pension fund in the U.S.

You probably have a close friend that will always tell it to you straight. She or he will look you in the eye and tell it like it is. Sometimes we like the advice, sometimes it is really “tough love” and it hits us hard. But trust matters, honesty matters and we know that the toughest advice is often the best thing for us. Dig deep, reflect, stand up straight and step forward on a better path.

Let’s cheer this week’s “tough love” announcement from CalPERS, as reported in the WSJ, America’s Largest Pension Fund: A 7.5% Annual Return Is No Longer Realistic. Over coffee with Susan this morning, I explained (hopefully in plain English) what this means. I’ll try to write this in a way that you may share with your clients. This is big… really big.

Top officers of the largest U.S. pension fund want to lower their investment targets, a move that would trigger more pain for cash-strapped cities across California and set an increasingly cautious tone for those who manage retirement assets around the country.

Think about this: Promises were made to school teachers, fire fighters, police and other state employees. Work for a certain number of years and receive a monthly pension check for the rest of your life. Pension managers are considered experts at managing money and the largest plans, like CalPERS, attract the greatest talent. They strive to achieve a certain return over long periods of time. The lives of current retirees and future retirees are counting on the promises that have been made to them.

Money comes into the pension fund each month from current workers and money goes out of the fund to pay current retirees. The smart guys in charge have to crunch the numbers and generate returns so that the right amount of money is available to take care of today’s retirees and grow the pool of money in a way that takes care of tomorrow’s retirees. The state pays into the plan as well just as your employer or you, if you’re self-employed, might pay into a defined benefit plan or 401k (some percentage form of match). If you have a defined benefit plan, your plan must be fully funded in a way that makes sure the obligations can be met.

Kind of standard stuff except when the plan falls way behind the actuarial numbers calculated to fulfill the obligation. To meet those calculated numbers, an estimated return number is plugged into the spreadsheets and over many years that number was around 8%. But 8% hasn’t worked over the last 16 years and with bonds yielding just 2%, as I’ve written about frequently, there is no way to hit those return bogies over the coming seven to 10 years.

See here and here for forward probable returns or I’ll cut to the chase and tell you it’s 3% to 4% for stocks and 2% for bonds (we’ll call it now 2.50% after the recent rate spikes). Best case 4% not 7%, not 7.50%, not 8% as many plans are calculating today.

The problem is the “pig in the python.” Those damn baby boomers (to which at age 55 I am on the younger side of that generation). But we are many and the front end of the wave is hitting retirement age. The math is going the wrong way. Low returns, more retirees. CalPERS finds itself just 68% funded versus where they need to be to meet the contractual promises they’ve made. And 68%, while not good at all, is better than many.

If returns are weaker than the return assumptions suggested, then there is simply less money in the kitty available to meet the retirement payments. Eventually, something has to give and we are getting closer to that tipping point.

Investing in a Rising Interest Rate Environment

What tends to happen to equities in a rising rate environment? With the Fed raising interest rates again this week, this is a question on many investor minds. My standard answer is the “two steps and a stumble” rule, which means that when the Fed raises the federal funds rate the first time, there is little impact on the equity markets but when they raise rates twice, that’s when the stumble begins.

Think about what Stan Druckenmiller said above, “Earnings don’t move the overall market; it’s the Federal Reserve Board… focus on the central banks and focus on the movement of liquidity…”

John Mauldin highlighted a section from a recent On My Radar post about valuations. You can find his piece titled, The Trump Rally Will Morph.

If you are not reading John’s weekly Thoughts from the Frontline, I highly recommend you do. It’s been a must-read of mine since I met him in 2000. He’s become a great friend… He’s really good!

I’m going to borrow from John and share a section as it ties in nicely to what is on my mind today – the Fed and rising interest rates. The section is titled, Something’s Gotta Give:

So far, we have seen compelling evidence from several sources and methodologies that US stocks are overvalued. Yet just in the last month we saw investors react to the US election by bidding the benchmarks up to new all-time highs. This implies they expect even higher prices next year. Can it happen?

Louis Gave of Gavekal took on that question in a lengthy and masterful presentation last week titled “Something’s Gotta Give” (article is behind paywall). He had more questions than answers.

The prime question, says Louis, is whether the US economy is a “coiled spring” ready to bounce higher based on the new political environment. We know changes are coming. Are they the kinds of changes that will help the economy, and therefore corporate earnings, grow enough to justify sharply increased stock prices in an already overvalued stock market?

Louis doesn’t have a firm answer, but I think it’s fair to say he is dubious. I’ll share with you just two of his 63 slides. The first one concerns government spending. Part of the present rally comes from expectations that Trump and the Republican Congress will launch an infrastructure stimulus program and also raise defense spending. That’s not a sure thing. Even if it were, Louis points out that higher government spending historically correlates with lower P/E ratios.

Some people will dispute this. You can argue that the higher spending is a response to the lower growth that caused the low P/E ratio. But if you believe that government is by nature less efficient than the private sector, then higher government spending will mean more capital misallocation, which is not good for stock valuations. A second justification for the current rally is that new policies and perhaps delayed Federal Reserve tightening will mean higher inflation. People say this will be positive for stocks. With this chart Louis again says, “Not so fast”:

The vertical shaded areas are periods of rising inflation. Other than 1979–81, we see stocks falling in those periods, not rising. Louis says this is because inflation misallocates resources. Companies have to hold more inventory, spend more on payroll and benefits, and otherwise take their eyes off more important goals.

Of course, the Trump administration will do more than just raise spending. Trump intends to reduce taxes, roll back excessive regulation, and otherwise make the US more business-friendly. He will go about it differently than other Republicans would. His intervention in the Carrier outsourcing indicates that this is not going to be a conventional GOP White House. We’ll see how well his approach works, and whether other changes can outweigh the drag caused by higher spending and inflation.

Investing in a Rising-Interest-Rate World. My friends at Welton Investment put out very thoughtful and useful papers, and I always make a point to read them. They are chock-full of useful charts and historical insights. In the latest one they offer some cautions to the recent euphoria of the Trump Rally (see more later). It turns out that equity returns are not all that durable in rising-interest-rate environments. Of course, one could argue that a 25-basispoint increase from already low rates every six months or so does not really correspond to any historical interest-rate increase cycle, but that’s a topic for another letter. Here is a chart that shows average returns during the last six rising-interest-rate environments:

Source: Mauldin Economics

OK, that will get you thinking. I see stagnation (low growth and rising inflation) in our future.

Gundlach – The Tipping Point for Stocks and Bonds

Jeffery Gundlach’s live December 13, 2016 webcast titled, Drain The Swamp (slide deck here).

Following in bullet point format are highlights:

Gundlach predicts trouble for the equity, corporate and junk-bond markets if the yield on the 10-year Treasury bond goes above 3% in 2017.
Even the housing market would suffer. That rate increase would translate to a 30% increase in mortgage payments for homeowners from the July levels, according to Gundlach.
This would hurt real estate sales, he said, since there is “no way” the median income would rise by nearly 30%.
Corporate bonds, as measured by the ETF LQD, have done poorly since the market bottom on July 8, returning -5.4%, but the junk-bond ETF JNK “massively” outperformed, returning 3.6% since that date.
But he said if the 10-year bond, which closed at 2.46% on the day he spoke, goes above 3%, then junk bonds would “fall into a black hole of illiquidity.”
Investment-grade corporate bonds are already “as overvalued as it gets,” he said, and are threatened by excessive leverage in the corporate sectors.
A push above 3% would cause investors to rethink their equity holdings and shift allocations to bonds.
Financial services – specifically banks – would suffer because their dividend yields would be significantly less than 3%.
Gundlach said that “3% is a really big number on the 10-year. It won’t happen soon, but it may happen in 2017.”

On the Trump win:

Gundlach said that the election results could be summarized in this chart:

Over the last 30 years, the share of wealth for the bottom 90%, by income level, has gone from 35% to 22%, while the share for the top 0.1% went from 5% to the same 22%.
The bottom 90% have as much wealth as the top 0.1%.

Gundlach compared the economy that Trump will inherit to what Reagan faced when he took office in 1982:

In both cases, GDP growth was slow, but Reagan faced much higher inflation and bond yields.
Stock market P/E ratios were in single digits for Reagan, but Trump will take office with a multiple of approximately 20.
Debt-to-GDP was a mere 31% in 1982, versus the 105%.
He added, “People have fallen asleep on this topic since 2011,” when government shutdowns were a common topic of conversation.
Trump’s policies threaten to push debt levels higher, as he will need to fund his infrastructure initiatives and plans for increased defense spending.
“There is a lot of debt in the economy and it will be hard to get a debt-based boom,” Gundlach said.
Manufacturing jobs are down 27% since NAFTA was signed in 1993, Gundlach said, and he doubts that Trump can bring back those jobs.
“A lot of those jobs have been lost to robots,” he said, or will be lost to innovations such as driverless cars.
Trump has said he will attack the trade deficit, but Gundlach was skeptical he would make much progress toward that goal, since China is our biggest trading partner and it is unlikely we can increase exports enough to offset Chinese imports.
Gundlach said that Trump’s plan to decrease the corporate tax rate may have a limited impact on the deficit, since those taxes are only 11% of federal revenues; the bulk of federal tax revenue comes from individuals, he said.
Trump has talked about building a stronger defense, but that too may not have a big effect on GDP growth. Defense spending has been incredibly stable since 1970 on an inflation-adjusted basis, Gundlach said, but only about 3% of GDP, plus or minus 1.5%, has been allocated to defense.
Net interest is an incredibly small part of federal spending, Gundlach said, and hasn’t grown in the past 15 years on an absolute basis.
But Gundlach has predicted that 10-year rates would go to 6% in the next four to five years, about the time of the next presidential election, and he said that level of rates “would be a problem.”
See infrastructure spending.
More aggressive spending is “what Trump campaigned on,” Gundlach said. “That will lead to another leg up on debt, which is not friendly for bonds.”
The market has warmed up to that idea. Gundlach said that 10-year rates have risen from 1.72% to 2.53% since Trump’s victory. (It hit a 2.62% yield yesterday.)
Gundlach predicted an equity sell-off around inauguration day. But he added that he doesn’t expect a recession, although one often occurs in the first year of a new president’s term.

The global markets and Fed policy

Conditions in Europe reflect instability and the risk of a fracture in the European Union (EU).
Gundlach cited polls showing that European citizens gave a mixed review on whether they have a favorable view of the EU, although in some countries, such as France, the view is very unfavorable.
With elections coming in 2017, Gundlach said he would closely monitor developments in France.
Sovereign debt yields in Europe are up 60 basis points since July, he said, and spreads have widened from 1.5 to 1.9%.
Spreads in Italy are a clear indicator of the likelihood of it leaving the EU, he said, but he did not predict if or when that would happen.
Italian bond yields are lower than those in the U.S. and Gundlach said he can’t imagine why anyone would own Italian bonds.
Bond yields are rising globally, he said, and noted that yields in Japan are now positive.
He is not sure past is prologue, but Gundlach said that in prior rate cycles the Fed has tightened until “something broke,” and then there was a “massive reversal.”
The question is what level of the Fed funds rate will cause something to break. People are used to very low rates, he said.
Don’t think that if rates rise there will be a positive stock market based on an expectation of economic growth, Gundlach warned.

On Inflation

Inflation is rising, he said, but it is not driven by food or energy prices. Instead shelter and other “sticky” things are pushing inflation higher. If food and energy prices spike, Gundlach said inflation could be over 3%.

The overarching question

The big uncertainty for investors is the long-term trend in interest rates. Is the 35-year bull market in bonds over or will the current spike in rates be a temporary phenomenon?
Gundlach did not give a precise answer to that question. A lot depends on if and when the 10-year yield reaches 3%.
But he was clear about the reasons behind the general trend in rates.
- Global yields are on the rise because markets have realized a belief that “negative-interest rates are with us forever” has lost out to a recognition that they don’t work, he said.
- In regards to negative rates, he said, “You can’t keep doing the thing that doesn’t work.
- We’re moving on to fiscal stimulus.”

“Free Money” – Do Larger Federal Budget Deficits Stimulate Spending? Depends on Where the Funding Comes From, By Paul Kasriel

I’ve hit you with a lot of information today. Print out this section and come back to it from time to time. I think this is what we are likely to see in our near future. Free money (print and spend) except this time the money is going to go into the economy and not get parked at the banks. And we are going to see Trump tax cuts. Nothing is certain but I see both as highly probable.

If you missed this Outside the Box from John Mauldin, I share it with you next. But first take a second to reheat that coffee or go for a second cup.

John introduces Paul’s piece:

In the true spirit of stepping outside the box, today’s OTB is a counterintuitive argument against the concept that fiscal deficits and/or infrastructure spending constitute effective economic stimulus. It comes from Paul Kasriel, who was one of my favorite reads when he was at Northern Trust, and I am glad he continues to write in “retirement.” He always has a way of looking at things from different angles than everybody else does.

Paul is a self-confessed reformed Keynesian. He likens his own longtime tendency to revert to Keynesian macro analysis to the damnable difficulty of fixing a faulty golf grip: “If you start out playing golf with an incorrect grip, you will have a tendency to revert to it on the golf course even after hours of practicing at the driving range with a correct grip.” But as he struggled with his unfortunate tendency over the years, Paul was forever reminded of a question a fellow student asked him when Paul delivered his very first homily on the wonders of Keynesianism to an undergraduate political science class: “Where does the government get the funds to pay for the increased spending or tax cuts?”

As Paul himself notes, the post-election US stock market rally has been due in part to the expectation that the Trump administration will enact simulative fiscal policies, which in turn will jumpstart growth. Paul begs to differ. He tells us that after some years out in the real world, he realized that tracing through where government gets the funds to finance tax cuts and increased spending is the most important issue in assessing the potential effects of simulative fiscal policy. And, to cut to the chase, his conclusion was and remains that “Tax-rate cuts and increased government spending do not have a significant positive cyclical effect on economic growth and employment unless the government receives the funding for such out of “thin air.” (emphasis mine)

“Thin air.” You know, that stuff they bottle at the Federal Reserve, slap a fancy label on, and sell by the boatload. Or that emerges – POOF! – from banks as they create credit.

Paul engages us in a thought experiment to make his case, and I think I’ll just step aside and let him lead the thinking. He got me thinking, that’s for sure.

John Mauldin, Editor, Outside the Box

The letter got me thinking and I found myself nodding my head in agreement. Tax cuts and free money. We may likely get them both.

Click on Do Larger Federal Budget Deficits Stimulate Spending? Depends on Where the Funding Comes From, by Paul Kasriel

It’s worth the read.

Trade Signals – Summary of this Week’s Trade Signals by Asset Category (posted 12-14-2016)

S&P 500 Index — 2,271 (12-14-16)

Equity Markets: The overall trend remains bullish as measured by the CMG NDR Large Cap Momentum Index (a trend-based indicator), the 13/34-Week Moving Average Trend and Volume Demand (more buyers than sellers). Don’t Fight the Fed or the Tape (Trend) is neutral.

Investor Sentiment: Investor sentiment is an indicator designed to highlight short-term swings in investor psychology. Current readings show excessive optimism. The objective is to identify trading extremes that may be used for trading or hedging purposes. Current readings suggest it is a time to hedge. More is explained when you click through to the charts below.

Fixed Income: We’ve done a great job at avoiding the large declines that have hit the bond market. The Zweig Bond Model (ZBM) moved to a sell signal on October 12, 2016 and remains in a sell today. The sell-off in high grade bonds has increased. The yield on the 10-year Treasury has moved from 1.37% in July 2016 to 2.42% today (having peaked at 2.51% recently). The CMG Managed High Yield Bond Program remains in a buy signal. The trends in HY funds and ETFs is bullish.

CMG Opportunistic All Asset Strategy. Here is what we are currently seeing:

Across equity asset classes, the strongest relative strength is in Small Caps, Financials (Regional Banks), Mid-Caps and Technology.
The portfolio is 92% positioned in equities and 8% in “MINT” (a short-term bond fund ETF). It can move to 100% fixed income or 100% equities.
See the allocation pie chart below. You can follow the daily, weekly, monthly and annual performance of the CMG Tactical All Asset Index here.

Posted each Wednesday, Trade Signals looks at several of my favorite stock, investor sentiment and bond market indicators. It is my weekly risk management dashboard, designed to keep me better in sync with the major technical trends. I hope you find the information helpful in your work.

Click here for the most recent Trade Signals blog.

Concluding Thought and Personal Note

“Where you want to be is always in control, never wishing, always trading, and always, first and foremost protecting your butt.”

“I believe the very best money is made at the market turns.

Everyone says you get killed trying to pick tops and bottoms and you make all your money by playing the trend in the middle.

Well, for twelve years, I have been missing the meat in the middle but I have made a lot of money at tops and bottoms.”

“At the end of the day, the most important thing is how good are you at risk control.”

“The whole trick in investing is: “How do I keep from losing everything?”

— Paul Tudor Jones

Euphoria? I just don’t think we are there yet. Take a close look at the next chart. I think we are somewhere between “optimism” and “thrill”… but that is just a best guess.

Keep Sir John’s sage advice front of mind, “Bull-markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.”

I like Mauldin’s “diversify to trading strategies idea.” However, I openly disclose that I am biased as I’ve been a trend-following momentum investor since the early 1990s.

Why always such a focus on risk? It is my belief that the most important investment lesson is to understand how math compounds over time. To this end, I wrote a piece titled, The Merciless Math of Loss. I hope you find it helpful and share it with your kids.

Valuations are high and forward returns low. We find ourselves in the debt bubble of all bubbles — here there and everywhere. It chokes growth. I believe Ray Dalio has it right, we are in a secular debt deleveraging cycle. They happen maybe once in a generation.

BTW, Google “How The Economic Machine Works” by Dalio. Share that one with your kids as well.

It is going to be interesting to watch how this plays out. Risk remains high. Stocks likely have further to run, however, it is prudent to hedge that equity exposure (and/or use Paul Tudor Jones 200-day moving average rule to “control-losses”, tactically trade bond exposure (due to the ultra-low rates and risk of loss) and diversify to a handful of trading strategies.

I fly to Denver tomorrow evening and praying I get a four-wheel drive rental. The car rental company says it’s a 90% probability. My head of research and I will land and drive immediately to Vail for a day of skiing before a few meetings on Monday, December 19. Snow is in the forecast and I am really excited to ski. Hopefully, many feet of snow. If you’ve ever powder skied, it’s like floating on a cloud. Wish we could bottle up that feeling and sell it to the world.

I’ll be in Colorado on January 8-11 attending an industry event with a handful of peers. OK, it is a sponsored event from one of our business partners – back to Vail. I know… but why not live. The Inside ETFs 2017 Conference in Hollywood, Florida is up next on January 22-25. I will be presenting on gold (which is in a confirmed downtrend – I’ll share a few ideas on how to trade gold). If you are planning on attending, please let me know. I’d love to grab a coffee or better yet a good beer with you.

Yesterday was my father’s birthday. He’d be 81 today. Prostate cancer took him nearly six years ago. I miss him and sure wish he was here. Happy birthday, Pop! I’ll be taking a ski run or two with you in mind on Sunday – let it snow!

Wishing you and those you love most a wonderful weekend!

If you find the On My Radar weekly research letter helpful, please tell a friend … also note the social media links below. I often share articles and charts via Twitter that I feel may be worth your time. You can follow me @SBlumenthalCMG.

♦ If you are not signed up to receive my weekly On My Radar e-newsletter, you can subscribe here. ♦

With kind regards,
Steve

Stephen B. Blumenthal
Executive Chairman & CIO
CMG Capital Management Group, Inc.

Stephen Blumenthal founded CMG Capital Management Group in 1992 and serves today as its Executive Chairman and CIO. Steve authors a free weekly e-letter entitled, “On My Radar.” Steve shares his views on macroeconomic research, valuations, portfolio construction, asset allocation and risk management.

The objective of the letter is to provide our investment advisors clients and professional investment managers with unique and relevant information that can be incorporated into their investment process to enhance performance and client communication.

Click here to receive his free weekly e-letter.

Social Media Links:

CMG is committed to setting a high standard for ETF strategists. And we’re passionate about educating advisors and investors about tactical investing. We launched CMG AdvisorCentral a year ago to share our knowledge of tactical investing and managing a successful advisory practice.

You can sign up for weekly updates to AdvisorCentral here. If you’re looking for the CMG white paper, “Understanding Tactical Investment Strategies,” you can find that here.

AdvisorCentral is being updated with new educational resources we look forward to sharing with you. You can always connect with CMG on Twitter at @askcmg and follow our LinkedIn Showcase page devoted to tactical investing.

A Note on Investment Process:

From an investment management perspective, I’ve followed, managed and written about trend following and investor sentiment for many years. I find that reviewing various sentiment, trend and other historically valuable rules-based indicators each week helps me to stay balanced and disciplined in allocating to the various risk sets that are included within a broadly diversified total portfolio solution.

My objective is to position in line with the equity and fixed income market’s primary trends. I believe risk management is paramount in a long-term investment process. When to hedge, when to become more aggressive, etc.

IMPORTANT DISCLOSURE INFORMATION

Investing involves risk. Past performance does not guarantee or indicate future results. Different types of investments involve varying degrees of risk. Therefore, it should not be assumed that future performance of any specific investment or investment strategy (including the investments and/or investment strategies recommended and/or undertaken by CMG Capital Management Group, Inc. or any of its related entities (collectively “CMG”) will be profitable, equal any historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. No portion of the content should be construed as an offer or solicitation for the purchase or sale of any security. References to specific securities, investment programs or funds are for illustrative purposes only and are not intended to be, and should not be interpreted as recommendations to purchase or sell such securities.

Certain portions of the content may contain a discussion of, and/or provide access to, opinions and/or recommendations of CMG (and those of other investment and non-investment professionals) as of a specific prior date. Due to various factors, including changing market conditions, such discussion may no longer be reflective of current recommendations or opinions. Derivatives and options strategies are not suitable for every investor, may involve a high degree of risk, and may be appropriate investments only for sophisticated investors who are capable of understanding and assuming the risks involved. Moreover, you should not assume that any discussion or information contained herein serves as the receipt of, or as a substitute for, personalized investment advice from CMG or the professional advisors of your choosing. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisors of his/her choosing. CMG is neither a law firm nor a certified public accounting firm and no portion of the newsletter content should be construed as legal or accounting advice.

This presentation does not discuss, directly or indirectly, the amount of the profits or losses, realized or unrealized, by any CMG client from any specific funds or securities. Please note: In the event that CMG references performance results for an actual CMG portfolio, the results are reported net of advisory fees and inclusive of dividends. The performance referenced is that as determined and/or provided directly by the referenced funds and/or publishers, have not been independently verified, and do not reflect the performance of any specific CMG client. CMG clients may have experienced materially different performance based upon various factors during the corresponding time periods.

The CMG Tactical Fixed Income Index and CMG Tactical All Asset Index are rules-based indexes that reﬂect the theoretical performance an investor would have obtained had it invested in the manner shown and do not represent actual returns, as investors cannot invest directly in the Indexes. The CMG Tactical Fixed Income Index and CMG Tactical All Asset Index returns represented do not reﬂect the actual trading of any client account. No representation is being made that any client will or is likely to achieve results similar to those presented herein. The CMG Tactical Fixed Income Index performance results are presented net of a 2.50% maximum annual fee deducted from the account balance quarterly, in arrears.

Any ﬁnancial product based on the CMG Tactical Fixed Income Index, CMG Tactical All Asset Index or any index derived therefrom that is oﬀered by CMG Capital Management Group, Inc. is not sponsored, endorsed, sold or promoted by Solactive AG and Solactive AG makes no representation regarding the advisability of investing in the product.

Mutual funds involve risk including possible loss of principal. An investor should consider the fund’s investment objective, risks, charges, and expenses carefully before investing. This and other information about the CMG Tactical All Asset Strategy Fund^TM, CMG Global Equity Fund^TM, CMG Tactical Bond Fund^TM, CMG Global Macro Strategy Fund^TM and the CMG Long/Short Fund^TM is contained in each fund’s prospectus, which can be obtained by calling 1-866-CMG-9456 (1-866-264-9456). Please read the prospectus carefully before investing. The CMG Tactical All Asset Strategy Fund^TM, CMG Global Equity Fund^TM, CMG Tactical Bond Fund^TM, CMG Global Macro Strategy Fund^TM and the CMG Long/Short Fund^TM are distributed by Northern Lights Distributors, LLC, Member FINRA.

NOT FDIC INSURED. MAY LOSE VALUE. NO BANK GUARANTEE.

Hypothetical Presentations: To the extent that any portion of the content reflects hypothetical results that were achieved by means of the retroactive application of a back-tested model, such results have inherent limitations, including: (1) the model results do not reflect the results of actual trading using client assets, but were achieved by means of the retroactive application of the referenced models, certain aspects of which may have been designed with the benefit of hindsight; (2) back-tested performance may not reflect the impact that any material market or economic factors might have had on the adviser’s use of the model if the model had been used during the period to actually manage client assets; and (3) CMG’s clients may have experienced investment results during the corresponding time periods that were materially different from those portrayed in the model. Please Also Note: Past performance may not be indicative of future results. Therefore, no current or prospective client should assume that future performance will be profitable, or equal to any corresponding historical index. (e.g., S&P 500^® Total Return or Dow Jones Wilshire U.S. 5000 Total Market Index) is also disclosed. For example, the S&P 500^® Total Return Index (the “S&P 500^®”) is a market capitalization-weighted index of 500 widely held stocks often used as a proxy for the stock market. S&P Dow Jones chooses the member companies for the S&P 500^® based on market size, liquidity, and industry group representation. Included are the common stocks of industrial, financial, utility, and transportation companies. The historical performance results of the S&P 500^® (and those of or all indices) and the model results do not reflect the deduction of transaction and custodial charges, nor the deduction of an investment management fee, the incurrence of which would have the effect of decreasing indicated historical performance results. For example, the deduction combined annual advisory and transaction fees of 1.00% over a 10-year period would decrease a 10% gross return to an 8.9% net return. The S&P 500^® is not an index into which an investor can directly invest. The historical S&P 500^® performance results (and those of all other indices) are provided exclusively for comparison purposes only, so as to provide general comparative information to assist an individual in determining whether the performance of a specific portfolio or model meets, or continues to meet, his/her investment objective(s). A corresponding description of the other comparative indices, are available from CMG upon request. It should not be assumed that any CMG holdings will correspond directly to any such comparative index. The model and indices performance results do not reflect the impact of taxes. CMG portfolios may be more or less volatile than the reflective indices and/or models.

Certain information contained herein has been obtained from third-party sources believed to be reliable, but we cannot guarantee its accuracy or completeness.

In the event that there has been a change in an individual’s investment objective or financial situation, he/she is encouraged to consult with his/her investment professional.

Written Disclosure Statement. CMG is an SEC-registered investment adviser located in King of Prussia, Pennsylvania. Stephen B. Blumenthal is CMG’s founder and CEO. Please note: The above views are those of CMG and its CEO, Stephen Blumenthal, and do not reflect those of any sub-advisor that CMG may engage to manage any CMG strategy. A copy of CMG’s current written disclosure statement discussing advisory services and fees is available upon request or via CMG’s internet web site at www.cmgwealth.com/disclosures.

On My Radar — Pensions and Interest Rates; It’s Not Your Father’s Bond Market

Investing in a Rising Interest Rate Environment

Gundlach – The Tipping Point for Stocks and Bonds

“Free Money” – Do Larger Federal Budget Deficits Stimulate Spending? Depends on Where the Funding Comes From, By Paul Kasriel

Trade Signals – Summary of this Week’s Trade Signals by Asset Category (posted 12-14-2016)

Concluding Thought and Personal Note

About Us

CMG Products

Connect with CMG

Disclosures

Our Affiliations