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On My Radar: GVC – The Great Virus Crisis

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March 20, 2020
By Steve Blumenthal

“I am proposing that we do not think outside of the box.
We must get rid of the box.”

– John Mauldin

This week’s piece was hard for me to write. How does an optimist keep their spirits up? I’m OD’ing on the news and with coffee in hand early this morning, I told my wife, Susan, “I just can’t write about the coronavirus.”

She said, “If I hear the words ‘unprecedented,’ ‘extraordinary,’ or ‘uncharted’ one more time, I’m going to explode.” And yet…

Millennial Tweet – Boomer Response

California just announced that there are 1,000 cases in the state today, and they expect 25.5 million within eight weeks. If this is true, it will exceed even Italy’s rate of infection. Californians are ordered to stay at home to help mitigate the spread and impact of the virus. Note that the state has limited resources to address the kind of numbers predicted by their estimate and asked the federal government for $1 billion in aid. Add the word “shocking” to Susan’s list. The Great Virus Crisis indeed.

On My Radar is a weekly letter focused on global macroeconomic investments. We cover greed and fear, opportunity and risk management. This week, let’s take a hard look at the implications of the coronavirus and set a few targets in terms of coming opportunity. I wrote the following earlier this week:

U.S. markets have never fallen this far this fast from an all-time high. Through yesterday, March 17, 2020, the S&P 500 Index is down 25.82% YTD, down 19.14% MTD and has annualized just 2.06% over the last three years. The S&P MidCap 400 Index is down 35.09% YTD and -6.74% per year the last three years. The S&P SmallCap 600 Index is down 41.16% YTD and -7.99% per year the last three years. Today, Wednesday, March 18, the market is down an additional 9%.

Risk happens fast but never before this fast. We are a long way from the market highs less than a month ago. (See On My Radar: This is EUPHORIA, Wait for PESSIMISM, published Feb. 21, 2020). Pessimism is arriving quickly. I have no idea whether we will see -60%. Much depends on the U.S. government’s fiscal response to the crisis. We don’t yet know size, structure or timing. What I do like is that valuations and forward return opportunities are looking much better. The best buys come in pessimism. I believe it’s near. See Wednesday’s full Trade Signals post here and more color below in the TS section. I explain in greater depth more of my thinking.

Check out the following back-of-the-napkin picture. We have quickly moved from extremely overvalued (the red “We WERE Here” arrow) to the fairly valued (the orange, “We are NOW Here” arrow) and my best guess is we will likely see extreme undervalued (the green, “We’d be better off Here” arrow).

When the light turns green, we’ll have reached extreme pessimism. Subsequent 10-year returns will be highest. Risk will be at its lowest, as most of it will have already occurred. Green means go. Today we sit at orange.

In a rare mid-week Thoughts from the Frontline post, my good friend and business partner, John Mauldin, published a must-read piece called, “Coronavirus Is Not an Emergency. It’s a War.” Frankly, it was an about-face from some of the conversations he and I have had personally, and emotionally I’m still having a hard time taking it in. I’m a cup-half-full kind of guy, yet there’s no denying the economic punch to the face.

Below you’ll find John’s full post. Note: you may want to keep sharp objects at least six feet away when you sit down to read.

Note too that there are certainly reasons to remain optimistic. Yesterday, the New York Post reported, “A drug developed over half a century ago to treat malaria is showing signs that it may also help cure COVID-19 — especially when combined with an antibiotic, a promising new study reveals.” Of course, larger studies are in the works. And there are other potential vaccines in development. The point is the medical fight is on. We are going to win the battle. I believe this will pass as quickly as it arrived. That will be a welcome relief.

Grab that coffee and find your favorite chair. I’ve been promising you my notes from an excellent presentation I attended featuring Carl Petty, Director of Leadership and Organizational Effectiveness at WisdomTree Investments, at the WallachBeth Winter Symposium. Carl was a Navy fighter pilot. When he left the Navy, he dedicated his life to honoring the loss of his friends. As he put it, those lost were “often smarter, wiser, and more honorable than [me]. With each loss, I determined to become a better person, trying to make up to the world for the loss of such great people.” Carl’s special. Hope you enjoy my notes from his presentation.

Coffee in hand? Sharp objects out of reach? Read on…

If a friend forwarded this email to you and you’d like to be on the weekly list, you can sign up to receive my free On My Radar letter here.

Included in this week’s On My Radar:

Thoughts from the Frontline: Coronavirus is Not an Emergency. It’s a War.

SB here: As you read the next section, I want to say that I don’t necessarily agree with the drastic social distancing measures that are taking hold. But this is serious and I may very well be wrong.

Yes, we have a responsibility to slow the pace of infection to help save the lives of those most at risk. But frankly, I’m not sure that nuking the economy is the right answer.

However, I can tell you that is what’s happening, and most of my team agrees with John—that social distancing is imperative, regardless of the costs. Still, I am worried that the economic shock will kick-start the next default crisis (more on that in a future post).

Maybe a silver lining here is that the right fiscal policy, or the political mode necessary to enable it, will come forward much sooner than I’ve been predicting. I’m not just talking about the capital needed to help businesses and workers; I’m talking about phase two: the efforts required to tackle (monetize) the debt.

This from John:

This is a short midweek note, something I haven’t done for years. But as we all know, these are very special and difficult times.

Below, I’ll give you two links. They describe the nature of the new coronavirus pandemic and its potential consequences. I have run this past the best medical professionals I know, and they agree.

I was critical of the Federal Reserve for its emergency moves last Sunday. I now assume they had the same information that I’m giving you today. They weren’t panicking, they were trying to get ahead of the situation, going where we know we need to go and doing it now. Good on them. I apologize for my criticism.

Without radical action (some of which is already happening, some places, but not enough), this pandemic could cost many lives and potentially launch an economic depression. I am not exaggerating when I say this. I really mean it.

That doesn’t have to happen. We can solve this. That is what we as Americans or British or Italian or Chinese do. That is what we as humans do. We come together in a crisis.

But it will mean that we have to treat this situation not as an emergency, but as a battle that could turn into a war. World War C. It will be costly and require extraordinary measures, even if we act quickly. This weekend, I will explain why we should forget about balancing the budget, not unlike we did in World War II. I will say things I never thought John Mauldin would ever think or say, let alone write.

In the meantime, I urge you to read the following links and understand the urgent need for extraordinary actions in terms of social distancing. It will come at a terrible cost for much of the country, but if we do it now, we can get through this crisis quickly.

Consider how South Korea, Singapore, and Hong Kong have fared. Swift, comprehensive actions work. And as in a war, we must bear this financial and lifestyle burden together, understanding it will have consequences. The longer we delay, the higher the costs will be.

It is not that I think my ideas are any better than others being proposed, but I will offer some philosophical underpinnings and ideas that can guide us. And I will argue that proposals I have read so far, which may change by this weekend, are inadequate to deal with the nature of the crisis. They merely seem radical in terms of what we have done in the past of those alive. It is not radical if we are to avoid a World War II type of situation.

I am proposing that we do not think outside of the box. We must get rid of the box.

The data below clearly indicates we must take action. That action is going to cost a great deal of people and businesses a great deal of money, time, and blood. The sooner we take action, the lower the cost will be.

This first link talks about the consequences of delaying serious social distancing and quarantine policies, even for one more day. I believe the math and science are overwhelming. And that means you, gentle reader, must take action today for your own family. If you are in a position of power, you must take action for your community or your business. Focus on the actions that will make a difference today and be ready to adapt further as we see how the battle is unfolding.

Coronavirus: Why You Must Act Now

Let me call out my own home state. As of this morning, Dallas has basically shut everything down. Fort Worth, on the other hand, is letting bars and restaurants open with six foot distancing. Fort Worth is putting Dallas and everyone else in the region at risk. Maybe in hindsight, we will find out that Fort Worth was right. However, given the data, can we risk it? Governor Abbott, I know you read my letter. Take charge and kick some Texas ass.

This second link describes a study by the Imperial College in Britain. A link to more detailed data is in the article. Basically, without drastic action now, it is possible a million Americans will die, and potentially even more. Again, the actions we take today can drastically impact what we can and cannot do a few weeks from now. It is very sobering.

Sobering Prediction

Bluntly, this is going to cost more than a few trillion dollars. It will have unpleasant financial consequences for a very long time. So did World War II. But acting quickly will cut that cost in terms of life and spending. The consequence of not dealing with it financially, let alone medically, will be a depression and an unacceptable loss of life and economic support for millions of people.

Longtime readers know I am the “Muddle Through” economist. But this is not a Muddle Through scenario.

Again, I urge you to read the links, think about your own personal situation, and this weekend we’ll talk about what we must do as a nation.

It is time for our own Greatest Generation to step up. Only this time, it needs to be all of us.

For those of you who are Tolkien and Lord of the Rings fans, it is time to light the signal fires and muster the Rohirrim. I can never watch that 30-second scene with a dry eye.

It is time for us to light our own signal fires and muster our own courage. God knows we will need to support the front lines who go into harm’s way to keep the country running.

I’ll be back this weekend, and look forward to your feedback as always.

Your ready to get through this together analyst,

John Mauldin
Co-Founder, Mauldin Economics

Coronavirus and Small Business

Mauldin Economics has an excellent subscription service called Over My Shoulder. As the name of the service indicates, as John Mauldin reads through literally reams of top-level investment and economic research as part of his regular work each week, he keeps a close eye out for those special gems that deserve your immediate attention. When he finds one, he forwards them to you, along with a quick pointer or two as to the importance and personal relevance of the research. I’m a long-time subscriber. You’ll find subscription information below in case you’re interested, along with a few disclaimers.

We know many businesses are closing amid the virus outbreak. Homebase, a company that provides time-tracking software to 100,000 small businesses nationwide, has real-time data showing the impact. Their users aren’t a random group, but the sample is big enough to give us some clues. It’s even uglier than we thought.

Key Points:

  • On Monday of this week, hourly employees nationwide worked 21% fewer hours than the equivalent weekday in January.
  • By Tuesday it had dropped further, with a 32% reduction in hours worked.
  • This coincides with the many school, daycare, and voluntary business closures that began early this week.
  • Homebase data from Seattle businesses showed the impact last week. Now others around the country are catching up.
  • San Francisco, Boston, Pittsburgh, New York, and San Jose all show work-hours down more than 50%.
  • Businesses were rapidly closing across the US even ahead of local orders.
  • Homebase estimates the lost wages due to closures could easily reach $35 billion over the next month if current trends continue.

Bottom Line: The Homebase data is weighted toward owner-operated restaurants, retail, and service businesses, so it doesn’t reflect the entire economy. It is nevertheless brutal, and probably means that last week’s jump in initial jobless claims is only the beginning.

Please click here to learn more about Over My Shoulder.

Disclaimer: I am not compensated in any way by Mauldin Economics if you subscribe. John and his partners benefit, of course. John is chief economist and a co-portfolio manager here at CMG. CMG is an investment advisory business. We provide a full-service institutional platform for independent advisors and provide multi-family office services for high-net-worth investors. Mauldin Economics is an entirely separate business run by him and his partners Olivier Garret and Edward D’Agostino. Good guys, but there exists an important and appropriate compliance wall between our businesses. Mauldin Economics is a newsletter-publishing business. If you are a do-it-yourself investor, you may want to consider some of their subscription services. Jared Dillion is fun to read.

Leadership – Carl Petty

Carl Petty spoke at the WallachBeth Winter Symposium in Park City, Utah a few weeks ago. Carl is a Harvard Business School graduate and is Director of Leadership and Organizational Effectiveness at WisdomTree Investments.

His life’s mission:

I strive to bring people of very different mindsets together to help them appreciate how much they have in common and to respect or even celebrate that which makes them different. I would love to do this on a grand scale as a diplomat, helping to resolve conflict throughout the world. Whether this ends up as my path or I walk another, less visible one, I will be happy so long as I can do some of the good left undone by those who sacrificed their lives so that we may live ours to their fullest.

How can you not love that?

From a management perspective, I’m not sure there is better training in the world than what is learned in the military.

Following are my notes from Carl’s presentation (“Leading for Impact”) along with select slides.

  • Most leaders don’t need really need help with strategy as much as they do getting their strategy out of their own people.
  • Instead of hiring some external yahoo to tell them about their own business, the answers usually lie within their own business.

Carl took us back to hunter-gatherer and how tribes band together based on largely universal norms –

  1. Fairness – everyone eats, evenly divided by the leader
  2. Indirect reciprocity – share with those who have none
  3. Fight despotism – vigilance and coalitions against intimidation and power-mongering

a. Which is strongly enforced through gossip… or worse

There are two types of motivation that drive people to action:

  1. Extrinsic Motivation – things external to us that move us to action. We act out of our desire to get (or avoid) something in return.
  2. Intrinsic Motivation – things internal to us that move us to action. We act out of love of doing it, because it’s meaningful, interesting, challenging or helps us grow.

When can the stick and carrot approach be effective for Extrinsic Motivation? Several things have to be true:

  • When the task is clear and no room nor desire for innovation
  • Meeting expectations is fine – people striving to go above and beyond not valued
  • Don’t need collaboration; everyone stays in their lane
  • We can observe to verify task has been completed and have the power to apply rewards or penalties

If all of the above are satisfied, use the stick and carrot approach.

Our brain perceives conflict as a threat and drives us toward reflexive reactions:

Fear works because of how our brains are wired and leaders should be aware of this.

  • Fear-based management is generally not the best approach. The brain and its bodyguard is the amygdala section within the brain. It looks out for threats.
  • When we stimulate the amygdala, our body gets ready. Adrenalin surges throughout the body pushing sugar and oxygen to the muscles, the digestive tract shuts down and focuses on “fight or flight.”
  • The biggest problem when the amygdala gets fired up, it shuts down the rest of the brain. The responses from this, from a management perspective, is not constructive.
  • When people are in fear, they generally do stupid things. The goal of great management and great leadership is to get your team in the game the way we need them.

Here are the top amygdala triggers in the workplace:

  • Condescension and lack of respect
  • Being treated unfairly
  • Being unappreciated
  • Being held to unrealistic outcomes or deadlines
  • Feeling that you’re not being heard or listened to

They are early warning indicators that you are not being valued by the tribe. The goal is to have a fear-free environment — not saying a stress-free environment. Focus on creating a culture that has a fear-free environment.

One of the principle doctrines in the United States Marine Corps handbook is “to induce maximum fear into your advisories.” Why? Because you are trying to get their amygdala heightened so that their brains shrink to the size of a pea. Because dumb people are a lot easier to take out than smart thinking people.

Why in the world would we want this for our own people? Carl encourages leaders to suck fear out of their systems.

As a leader, reducing fear is usually a winning move. Some things to be aware of:

  • For everyone, losing fear of status is a very strong emotion.
    • He’s not saying that sometimes you need to light a fire that gets someone moving… just have to be very careful and use it selectively. They may underappreciate the importance of a directive and you may need to make it extra clear.
  • Some fear can help get people out of complacency, but… be careful.
    • Once people have genuine fear, their focus narrows to the source of fear, driving greater risk aversion.
  • As a leader, think of fear as an inhibitor of your people’s initiative, innovation and creativity, and as static in the system that keeps your messages from getting through.

Intrinsically motivated people move beyond compliance and commitment, with very different results:

Intrinsically motivated people move beyond Compliance and Commitment, with very different results:

Intrinsic Motivation is internally sourced, but can be activated by others using four “levers:”

Fire up your teams play, purpose, mastery and autonomy… Give training, coaching and ability and power to run.

What insights might leaders have from better understanding “Human Technology?”

  • Tribal hunter-gatherers at heart who expect a leader who is egalitarian, resolves conflicts and includes others in decisions. Having a say is important even if you as the boss have the final say – inclusion and being truly heard is important.
  • The amygdala is vigilant for threats to status and safety in the tribe. (Keep the amygdala in its cave.)
  • Do not perform at their best when driven by sticks and carrots.
  • Crave Play, Purpose, Mastery & Autonomy.
  • People are wired to follow those who serve and facilitate their success.

Carl concluded that in his 20 years in the military, he never heard the words, “That’s an order.”

The most effective leaders see themselves as servants!

How do leaders serve by still being leaders?

  1. Serve by ensuring clarity and purpose of direction
  2. Serve by providing needs and helping people
  3. Serve by setting the example
  4. Serve by fostering trust and commitment
  5. Serve by ensuring growth
  6. Serve by making the tough decisions

That concludes my notes on Carl’s leadership presentation. I hope you enjoyed it as much as I did. Stay tuned: I’ll be doing a podcast with Carl in the near future.

My wife Susan gave her son (my stepson), Tyler, a book entitled, Leaders Eat Last. It’s about “Why Some Teams Pull Together and Others Don’t,” leaders are not simply those with authority. They are selfless figures willing to relinquish their best interest for the betterment of those they lead.  Amen – we are going to need a lot of selfless leadership in the next few days. Let’s lift!

Trade Signals – Thoughts on the Market, Targets, Risk Management and Recession

March 18, 2020

S&P 500 Index — 2,398

Notable this week:

“It’s not the 15% to 20% declines that cause the most trouble,
it is the -40% to -60% that take so long to recover from.”

– Steve Blumenthal

U.S. markets have never fallen this far this fast from an all-time high. Through yesterday, March 17, 2020, the S&P 500 Index is down 25.82% YTD, down 19.14% MTD and has annualized just 2.06% over the last three years. The S&P MidCap 400 Index is down 35.09% YTD and -6.74% per year the last three years. The S&P SmallCap 600 Index is down 41.16% YTD and -7.99% per year the last three years. Today, Wednesday, March 18, the market is down an additional 9%. Risk happens fast but never before this fast. We are a long way from the market highs less than a month ago. (See On My Radar: This is EUPHORIA, Wait for PESSIMISM (published Feb. 21, 2020)). Pessimism is arriving quickly. I have no idea if we see -60%. Much depends on the U.S. government’s fiscal response to the crisis. We don’t yet know size, structure or timing. What I do like is that valuations and forward return opportunities are looking much better. The best buys come in pessimism. I believe it’s near.

Following are some additional thoughts on the markets, targets, risk management. I believe we are currently in recession in the United States. My concern is the risk of depression.

The economy is facing a number of shocks:

  • Consumer demand, which drives two-thirds of the U.S. economy, is temporarily shut down. Unless you are a toilet paper manufacturer, of course.
  • Small businesses represent 50% of U.S. GDP. Many businesses are facing an economic crisis never contemplated. While perhaps temporary, behaviors will be effected. A material impact on growth.
  • Global supply chains are affected.
  • The impact on wealth will likely change spending behavior. Move savings, less spending. Less growth.
  • The energy industry is deeply in debt and dependent on higher oil prices. Crude oil prices below $30 per barrel put many companies at risk of default. The Russia Saudi oil price/supply war is far reaching.
  • While Treasury yields have fallen, corporate yields have risen significantly. Given the record high levels of corporate debt, large-scale default risk is rising.

We’ve entered the recession you and I have been watching for. Stock market declines average approximately -35%. The last two recessions gave us -50% each. This one could be the same or more. Debt is the significant issue, particularly in the sovereign debt markets (e.g., Europe, Asia) and in the corporate debt markets (BBB-rated bonds and HY junk bonds). In recessions, lending dries up, leaving companies unable to issue more debt. Warren Buffett said, “It’s only when the tide goes out that you learn who’s been swimming naked.” Governments and corporations have been papering over their problems. Governments, corporations and households have been living on debt. We’ve reached a point in the long-term debt cycle where the system needs to clear.  That means defaults and reorganizations for many companies. Today, a popular muni bond ETF (“MUB”) was down over 5%. The risk is municipality tax revenues go way down.

You can imagine how leverage can help to grow and expand the economy and how deleveraging causes the opposite. We find ourselves at the end of a long-term debt super cycle. We will need to figure out how to reduce the debt. It will be in the form of government bailouts, needed infrastructure spending, direct lending to citizens and defaults. It will take congressional leadership and new legislation. I believe legislative leadership will rally around the current crisis. Nancy and Donald together with pens in hand? Call me crazy but it could happen. We just don’t know the ultimate size of the fiscal rescue programs, the structure, the ease of access, or the timing. We are in recession. At risk is depression. I believe we avoid depression.

On Sunday evening, the Fed fired its biggest bazooka yet. After putting another $1.5 trillion into the repurchase (“repo”) market, it launched $700 billion in new quantitative easing (“QE”). Call it “QE5.”  In one week, the Fed has essentially matched all of what they did from 2007 to 2009. The repo market remains in distress. It is and remains the “canary in the coal mine.” More on the repo market mess in a future post.

Yesterday, the Fed announced it is launching a short-term commercial debt facility to help companies with short-term funding needs.  Normally, the Fed’s emergency stimulus goes directly to the banking system and the banks have been redepositing that extra cash back on the books at the Fed.  Free earnings on gifted money.  A pretty good gig.  But the money did not get out into the system.  The direct lending to the commercial paper market (i.e., to corporations) is a move that puts the money directly into businesses and businesses into the economy (workers, etc.). This is good news. Let’s hope they don’t use it to buy back more stock. At immediate risk is a debt market collapse, companies laying off employees and economic challenges that won’t be easy to repair. The coronavirus pandemic is real and we will fight it. The economic hit is bigger than 9/11 and 2008. Fiscal policy will expand.

U.S. Treasury Secretary Steve Mnuchin met with senators to persuade them to pass a $1 trillion stimulus package that would send cash to Americans within two weeks, and backstop airlines and other companies. Our economy produced $22 trillion last year.  I expect we will see $5 trillion in government gifts. The Fed will print, and legislators will find ways to get that money directly to the people (likely after they’ve taken care of a few best friends). Further, I wouldn’t be surprised to see the Federal Reserve Act amended to allow for the direct purchase of U.S. equities. (Following Japan’s play book.) Support the “wealth effect” and our pocketbooks. I know you are thinking… “Steve, you’re losing it.”  You might be right. Let’s keep watch.

Because of these many moving parts, required legislation, amending of laws… No one knows how this will play out.  I’m sharing my best guess.  With all this said, I do think there are some clues we can follow.  In this direction, valuations can help.  Let’s next take a look as I believe they can help us shape our portfolio exposures.  Valuations tell us a great deal about coming returns and things are looking up in terms of where we now sit in the long-term return cycle.

Here are a few thoughts:

I shared this chart with you last week.  At the time of this writing, the S&P 500 Index has corrected back to its long-term fair value level. Median price-to-earnings (P/E) puts the 52-year fair value at S&P 500 Index level at 2,333 (second chart immediately below).  The S&P 500 Index closed today (March 18, 2020) at 2,398.  The intra-day low was 2,280.  Just below the long-term growth trend line.  What’s important here is that from “fair value,” I believe a 10% return over the coming ten years is highly probable. If we get to 1,600, the coming 10-year annualized returns will be in the mid-teens (see the green “We’d be better off Here” arrow).

With that said, these are unusual times. Valuations tell of nothing in terms of timing.  The hit to employment and to the economy will be significant.  I could argue that it will take some time for rescue legislation to pass and the obvious hit to earnings will send P/Es (I believe temporarily) lower.  Meaning Median Fair Value, which is 2,333.83 as of the end of last month, may move lower.  Today, we tested this first important major support level hitting an intraday low of 2,280.  The next level of meaningful support is 1,600.  That is equivalent to the “We’d be better off here” green arrow in the cycle chart above.  That would be a point to get very aggressive with your equity exposure. If you have been managing your portfolio risk (more defense than offense), the days ahead present considerable investment opportunity to put your offense back on the field.  If you don’t have a good financial coach, now is a good time to find one.  It’s hardest to do the things that will help you most when all about you everyone is panicking.  It’s about game plan and executing on your plan.  I know this sounds inappropriate, but I’m really getting excited about coming opportunity.  I hope you are as well.

Risk Management

Risk management is two-fold. First, some form of downside protection process on each investment.  I like diversifying to several as none are perfect. The shorter-term signals are good but tend to whipsaw frequently, the intermediate and long-term signals help to keep you in the major up-trends.  More recently, the short-term signals have been best and, as you can see in the Trade Signals Dashboard below, the longer-term oriented signals have or are near signaling risk-off. Second, the mix of assets and strategies you combine together to make up your total portfolio. I favor an adaptive approach: more defense than offense when markets are most overvalued and a switch to more offense than defense when markets are undervalued (the green “We’d be better off HERE” arrow in the above cycle chart). I believe we are nearing that point in the cycle. That’s good news and let’s be prepared to act.  It will come in EXTREME PESSIMISM.  Stay tuned.

Volume Demand (buyers) vs. Volume Supply (sellers) moved to a Sell Signal, which is bearish for equities.  The 13-week over 34-week moving average moved to a sell signal this week. The CMG Ned Davis Research US Large Cap Long/Flat model is nearing a sell signal, as are the 200-day moving average S&P 500 and NASDAQ trade signals. The Zweig Bond Model moved to a sell signal this week. A bearish signal for high quality bonds, bond funds and bond ETFs. The CMG Managed High Yield Bond Program triggered a sell signal several weeks ago, just a percent from the high yield bond market top. Gold remains in a buy signal. Investor pessimism is extremely bearish, which is short-term bullish for equities. Market support will likely come from the Fed. We see little appetite for a fiscal response getting through Congress at this time.

If you are a CMG client, following is a quick update on strategy positioning:

CMG Managed High Yield Bond Program – Traded to short-term Treasury bill (cash) exposure a few weeks ago.  
CMG Large Cap Long/Flat Strategy – Remains invested in S&P 500 Index exposure via a low-fee ETF (signal is nearing a sell signal). The intermediate and long-term trend signals are beginning to turn down. The record three-week drop doesn’t get picked up right away in the moving average math.  Just as you can see in the 200-day moving average charts below.  I have confidence in the risk management process and continue to recommend diversifying to several different risk management processes. None are perfect, most are very good.  Combined together, portfolio risk is reduced and increased in what I believe is a process-driven, intelligent way.
CMG Beta Rotation Strategy – 100% allocated to a Treasury bill ETF (“BIL”). Incorporates a stop-loss risk rule that is tied to a moving average rule that looks at short-term, medium-term and long-term trends.
CMG Mauldin Smart Core Strategy – A combination of trading strategies. The strategy is performing as we anticipated and we are pleased. About 20% equity exposure, 2% inverse S&P 500 Index exposure, 56% short-term Treasurys via ETFs, 5% intermediate-term Treasurys via ETFs, 6% long-term Treasurys via ETFs, 6% gold and 5% cash. The bond and gold positions have performed particularly well. The four strategies can move between various asset classes.
CMG High and Growing Dividend ETFs – 100% allocated to BIL. The strategy allocates to a carefully selected handful of ETFs that meet our standards. Five moving average signals are used that range from short-term, medium-term to long-term. When the price of any ETF is below four of the five moving averages, the ETF is positioned to a Treasury bill ETF. Stop-loss triggers have been reached on several of the ETFs.
CMG Tactical All Asset Strategy – 20% equities, 10% long Treasury bonds, 10% gold and 60% short-term Treasury bills via ETFs.

The coronavirus is a black swan-like shock to the economic system and the oil industry is facing a three-sided attack: falling prices, a move of institutional investors to divest from fossil fuel companies, and crushing debt loads. Debt is the major problem. The U.S. oil and gas industry has about $86 billion of rated debt due in the next four years, according to Moody’s. Nearly all of that debt is either junk rated, or rated just above junk. Fifty-seven percent of that is due in just the next two years. As oil prices fall and credit markets tighten, many companies won’t be able to refinance their debts or extend maturities.

No risk management process is perfect; thus, diversify to asset classes and diversify risk management processes. If you are a buy-and-hold investor, adding new funds below 2,000 on the S&P and re-balance your portfolio weights.  I don’t believe bond funds can help portfolios as they did in years past. Consider alternatives solutions like HY bond market trend following and risk-managed high and growing dividend stocks.

A much better investment opportunity is ahead. Let’s get to it in good health both physically and financially. Most importantly, support and hold the hands of those you love most. Stay healthy!

Not a recommendation for you to buy or sell any security.  For information purposes only.  Please talk with your advisor about needs, goals, time horizon and risk tolerances. 

Click here for this week’s Trade Signals.

Personal Note – Some Much Needed Humor

“Tell me, what is it you plan to do with your one wild and precious life?”

– Mary Oliver

Here’s a toast to keeping our sense of humor, a toast to grace, and a toast to joy. We have a family group text and daughter Brie has been sending our family some funny memes. Following is some much-needed humor. I enjoyed them and hope you do too.

We love sports in our family and of course they are all on hold. This was cute:

With all the conspiracy theories floating around out there, I liked this one best:

And this next one may very well turn out to be true:

And yes, there are more snacks at home than in the office:

Lastly, for all of us searching for toilet paper, maybe we are just looking in the wrong aisle:

The first day of spring is tomorrow, March 21, 2020. Much to do around the house and the weekend weather forecast is looking sunny. The email arrived this week: my golf club is closed indefinitely. Social distancing. But the maintenance team is at work, the course is in great shape, and we are allowed to play on our own. We’ll be putting golf bags on backs and walking together.

Susan keeps reminding me to work out. She’s right, and you should too. As much as I don’t want to admit it, my stress level is high. I’m going to need to work on Carl Petty’s Navy Seal breathing process: Breathe in deeply for four seconds, hold for four seconds, four seconds out, hold for four, repeat.

In case you missed it, I’m re-sharing an interview. Ed Lopez of VanEck interviewed me at the 2020 Inside ETFs Annual Conference in Hollywood, Florida. We talked about risk management, portfolio construction, and how an adaptive approach to portfolio allocations may be a better approach. I believe that’s true. A lot has happened in the month-and-a-half since then. Seems like ages ago. Click on the picture below for the full interview, and find the podcast here (put on your shoes and let’s walk together).

Hang in there. Thinking about you and your family. Ever forward!

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Warm 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.

Click here to receive his free weekly e-letter.

Follow Steve on Twitter @SBlumenthalCMG and LinkedIn.  

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