August 19, 2016
By Steve Blumenthal
“In the realm of economics, no government can play god.”
— José Niño, Analyst, Acton Circle of Chile
I came across today’s intro quote this week while sitting in my beach chair facing the Atlantic Ocean. The title seems apropos to the world we find ourselves living in today.
In a free market, prices function as signals to both consumers and producers of how much of a product or service must be demanded or supplied, respectively. The Mises Institute blog post, my source for the quote, concluded:
The laws of economics are universal; they apply to developed countries just as much as developing countries. When price controls are implemented, shortages and black market activity are to be expected. No government, no matter how well-intentioned or powerful it claims to be, can violate these principles without consequences.
In the realm of economics, no government can play god.
I’m on vacation this week and thinking about the economy and the markets. Ugh. I know I shouldn’t be. An addiction I can’t seem to shake. However, the South Jersey sand is soft and white, the ocean water is warm and we are having a wonderful time. I’m up early with coffee in hand and with a gentle reminder from my wonderful wife Susan to keep today’s piece short.
I hope that you are taking some time off and enjoying the last few weeks of summer. Slow down and recharge. It helps us in the creation process and you and I, my friend, have so many more great things to create.
More and more I find myself surfing on my iPhone. No large computer to lug around. The digital world is at our finger tips — instantly. Pretty cool when you stop and think about it. While surfing on my phone, a CNBC article mentioning Elliott Management’s second quarter client letter caught my eye.
When it comes to research, I favor managers with skin in the game. Paul Singer is one of those managers. His firm, Elliott Management, manages $28 billion in assets, making it one of the world’s largest hedge funds. Years ago, in my hedge fund days, we had an investment in his fund. He is smart, experienced and seasoned.
Singer warns that the bond market is “broken” and that when the central bank actions of recent years no longer ward off a market downturn, the subsequent loss of confidence could be severe. Singer states, “Trading in this market is particularly difficult…. Everyone is in the dark.” He continues, “Experience doesn’t count for much, and extreme confidence may be fatal.”
My mantra has been to own equities but with some downside hedge in place. Almost one-half of the Western world’s outstanding sovereign debt—$12.6 trillion worth—traded at negative yields last week, according to the Financial Times. With economics, “no government can play god.” We’ll find out soon enough.
Below I link to the CNBC Singer/Elliott Management article, as well as the most recent Trade Signals post. Both are quick reads. For now, the trend is up and risk appetite appears to be strong. My two cents: Stay diversified and hedge that equity exposure.
Included in this week’s On My Radar:
- Paul Singer – The Market is Broken, CNBC
- Trade Signals – Don’t Fight the Tape or the Fed Moves to Neutral Signal, Investor Sentiment Remains Too Optimistic, HY and Zweig Remain in Buy Signals
Paul Singer – The Market is Broken, CNBC
Click here for the link to the CNBC Paul Singer/Elliott Management article.
Trade Signals – Don’t Fight the Tape or the Fed Moves to Neutral Signal, Investor Sentiment Remains Too Optimistic, HY and Zweig Remain in Buy Signals
A quick summary of what we are seeing by investment category (equity markets, fixed income and liquid alternatives):
Equity Markets: Investor sentiment remains extremely optimistic (short-term bearish for equities), Don’t Fight the Tape or the Fed moved from a +1 to 0 (now neutral on Equities). The 13/34-Week EMA trend indicator remains bullish. The CMG NDR Large Cap Momentum Index is nearing a buy signal. Neutral to positive on equities.
Fixed Income: HY remains in a buy signal and the Zweig Bond model remains in a buy (favoring long-duration high quality bond exposure over short-duration). It has been a surprisingly strong run for HY. Both are “Trend Following” strategies.
Liquid Alternatives: The CMG Opportunistic All Asset ETF Strategy is taking on more risk. Recently, we increased allocations to technology and biotech. On Tuesday, we sold out of short duration bonds (“MINT”) into Vanguard Total World Stock ETF (“VT”). The risk on theme remains.
Due to high valuations and the aged nature of the cyclical bull market, for the moderate growth investor I favor a reduced portfolio exposure to equities (hedged). 30% equities, 30% fixed income (tactically managed), 40% to liquid alternatives (e.g., tactical all asset, managed futures, global macro via mutual funds and gold).
Click here for the most recent Trade Signals blog post.
Personal Note
“In the realm of economics, no government can play god.” Indeed. The problem is that they think they can. To that end, Howard Marks of Oaktree Capital Management penned an article this week entitled “Political Reality.” Howard is another hedge fund great. You can find his commentary here. Long piece, but insightful.
I’ll be speaking on portfolio construction using ETFs at the Morningstar ETF Conference on September 7-9 in Chicago. Please let me know if you will be attending. Denver follows on September 13-15 where I’ll be attending a one-day S&P Indexing Conference. It looks like a quick one-day trip to Charlotte, NC during the third week of September.
If you find the On My Radar weekly research letter helpful, please tell a friend … I believe the most important lesson to learn about investing is how money compounds over time. Markets move through states of undervaluation and overvaluation. Recessions are a healthy and important part of the economic cycle. At times, risk management matters more than other times. Now is one of those times.
Hedge that equity exposure and include a handful of strategies that seek growth along with capital preservation (e.g., tactical all asset, managed futures, global macro, etc.). A higher investment return environment remains ahead. Prepare yourself to buy when everyone else will be selling. Let’s get to that opportunity in good shape and mentally prepared to act.
♦ If you are not signed up to receive my weekly On My Radar e-newsletter, you can subscribe here. ♦
Wishing you and your family the very best!
With kind regards,
Steve
Stephen B. Blumenthal
Chairman & CEO
CMG Capital Management Group, Inc.
Stephen Blumenthal founded CMG Capital Management Group in 1992 and serves today as its Chairman and CEO. 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.
Trade Signals History:
Trade Signals started after a colleague asked me if I could share my thoughts (Trade Signals) with him. A number of years ago, I found that putting pen to paper has really helped me in my investment management process and I hope that this research is of value to you in your investment process.
Following are several links to learn more about the use of options:
For hedging, I favor a collared option approach (writing out-of-the-money covered calls and buying out-of-the-money put options) as a relatively inexpensive way to risk protect your long-term focused equity portfolio exposure. Also, consider buying deep out-of-the-money put options for risk protection.
Please note the comments at the bottom of Trade Signals discussing a collared option strategy to hedge equity exposure using investor sentiment extremes is a guide to entry and exit. Go to www.CBOE.com to learn more. Hire an experienced advisor to help you. Never write naked option positions. We do not offer options strategies at CMG.
Several other links:
http://www.theoptionsguide.com/the-collar-strategy.aspx
IMPORTANT DISCLOSURE INFORMATION
Past performance is no guarantee of 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, together “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. 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 FundTM, CMG Global Equity FundTM, CMG Tactical Bond FundTM, CMG Global Macro Strategy FundTM and the CMG Long/Short FundTM 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 FundTM, CMG Global Equity FundTM, CMG Tactical Bond FundTM, CMG Global Macro Strategy FundTM and the CMG Long/Short FundTM 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.
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.