CMG

Wealth through ingenuity

Linkedin

On My Radar: Integrity & Leadership

  • Share This:
Print Friendly, PDF & Email

December 13, 2013
By Steve Blumenthal

I was in Scottsdale, Arizona this week presenting at the IMN 18th Annual Global Indexing and ETFs Conference.  Goldman Sachs was the lead sponsor and all of the big industry players were there.  The content was particularly rich this year.  It was a two and a half days of brainstorming sessions with some of the industry’s smartest players.

The attendees were mainly large pension and endowment managers.  I learned a lot and share some of the highlights with you in today’s On My Radar.

In this week’s On My Radar, I share the following:

  • Thoughts from the IMN 18th Annual Global Indexing and ETFs Conference
  • Smart Beta – Advanced Indexing
  • Nelson Mandela – Integrity and Leadership
  • Trade Signals – Investors are the least bearish since 1987.  Concerning!

Thoughts from the IMN 18th Annual Global Indexing and ETFs Conference

Several points to note (in no particular order):

  • “If we can get 6 ½ percent returns on the S&P 500 Index, I’m going to do cartwheels”, Brett Hammond, Managing Director and Head of Index Applied Research at MSCI, Inc.
  • 49% of profits have come from the impact of interest rates savings.  That combined with cost cutting has lead to earnings growth.  This according to Merrill Lynch research.  Newedge’s Lawrence McDonald, Head of Equity and Policy Strategist added, “Cost cutting is completely done”.
  • Also see last week’s On My Radar discussion on the mean reverting tendencies of profit margins (here).
  • 10,000 people are turning 65 years old everyday for the next 15 years.
  • 70% of the 16 leading professional money managers polled believe the 10-year Treasury will yield 3.20% to 3.50% by the end of 2014 (currently 2.80%).  Not one analyst said the yield will be below 2.90% and not one said it will be above 4.10%.
  • The entire street is of one view.  When everyone is leaning on the same side of the boat the boat will rock.
  • The amount of shorts on the NYSE has collapsed.  It is lower than it was in 2007.  WOW!
  • SB view: I expect a meaningful correction in 2014.  More on this in next weeks 2014 Outlook.
  • From Goldman’s Charles Himmelberg, Managing Director (worked for the Federal Reserve, Columbia University, University of Chicago, World Bank and a consultant to the Chicago Fed).
    1. Inflation is an issue in the next few years but not immediately.  The market will be forward in behavior and hang to the numbers.  For now there is excess capacity in the system and there is no wage pressure due to real higher unemployment.  Therefore, the Fed can push their agenda seeing inflation remain lower for now.  The problem is that we can’t get enough growth and drive inflation to the Fed’s target.  Labor is 70% of the input to US GDP.  Still a lot of slack.  Still in a deep unemployment hole.  More recently, labor participation has taken a surprising drop.  It looks like this is a business cycle issue and the hole is deep.  There is zero evidence of wage inflation.
    2. Interest rates are near a 200 year low.  Goldman believes the 10-year should rise to 3.25% in 2014.
    3. The growth rate of people who buy stuff (globally) is in decline and at a fast pace.  Businesses factor this into their planning and are thus slow to hire.  We remain in a global debt deleveraging cycle.  Overall, he sees less consumption.  The slow growth period is here to stay.  Low rates are adding to the issue; thus, lower income for retired savers.
  • Some notes from the Pension CIO Roundtable: Challenges of Portfolio Construction in a Post QE World session.  I found Lee Partridge from Salient to be simply brilliant and noted several of his comments:
    1. On demographics – we have an aging retiring population with not enough workers to cover retiree consumption needs.
    2. Youth unemployment is at an all time high
    3. Interest rates have been low and tax rates and regulation are on the rise – all are headwinds to peak earnings.
    4. His advice: reduce core market exposure and add to alternatives.  You can now invest directly and cheaply.
    5. Pursue skill-like returns.  Find talent.
  • A few notes from the Alternative Sources of Income panel:
    1. The State of Texas Pension has an 8% actuarial assumption, according to Tom Cammack, CFA, CPA, Senior Investment Manager from the Texas Retirement System.  Texas is adding approximately 3% to energy and natural resources (seeking 10-15% income-type returns), has 13% in Treasury securities (mostly short-term), seeking to reduce medium- and long-term treasury exposure, likes global infrastructure via private equity, and said they are adding to equities, including global equities, but didn’t share current weightings.  He added that they remain significantly underfunded. Texas is also invested in MLPs, TIPs, corporate bonds and REITs.
    2. SB: I was hoping to get greater clarity on current mix to back into the 8% assumption but like all good managers, Tom smartly guarded his allocations…his competition was in the room.
    3. There seems to be a clear shift towards alternative sources of income such as MLP’s, higher dividend stocks, tactical fixed income and option writing strategies such as covered calls.

My note book is full and I’m loaded with power point presentations.  There is some pretty good material that I’ll share next week.  The big debate this week was around the term “smart beta”.  Let’s touch on that next before concluding.

Smart Beta – Intelligent Indexing

The growth of smart beta ETFs may just be getting started as institutional investors plan to boost their usage of these ETFs. Increased use of intelligently indexed ETFs at the institutional level jives with plans by pension funds, endowments and other institutions to increase their overall use of ETFs.

It is not a stretch to say that 2013 has been the year of “intelligent indexing” or “smart beta” strategies gaining prominence in the exchange traded funds industry. These are ETFs that may add 200 bps or more over the cap weighted indices.  That may prove important for the many underfunded pension plans in the years to come.

Jason Hsu had an outstanding presentation on the topic of intelligent indexing.  Rob Arnott and Jason wrote a paper eight years ago on a fundamental-based indexing approach and today there is a whole suite of indices that are not dependent on cap weightings.  Rob, by the way, was awarded the William F. Sharpe Indexing Lifetime Achievement Award.  Congratulations my friend.

Further, Hsu tested and replicated those indices that are now in the market and found that they seem to work.  He went a step further and tested the exact opposite of the given indices and found that those returns also out-performed cap weighted.  In geek terms, that is a good thing.  Cap weighted is the only strategy in the study that you couldn’t invert the weighting and get similar results.  Expect a big flow from cap weighted indexing to intelligent indexing.  Get in front of this one – it’s big.

Click here for more.

Nelson Mandela – Integrity and Leadership

Nelson Mandela, former president of South Africa and Nobel Peace Prize winner, has died. During his long life, Mandela inspired countless individuals. Here is a collection of quotes that personify his spirit:

  • “Difficulties break some men but make others. No axe is sharp enough to cut the soul of a sinner who keeps on trying, one armed with the hope that he will rise even in the end.”
  • “It always seems impossible until it’s done.”
  • “If I had my time over I would do the same again. So would any man who dares call himself a man.”
  • “I like friends who have independent minds because they tend to make you see problems from all angles.”
  • “Real leaders must be ready to sacrifice all for the freedom of their people.”
  • “A fundamental concern for others in our individual and community lives would go a long way in making the world the better place we so passionately dreamt of.”
  • “Everyone can rise above their circumstances and achieve success if they are dedicated to and passionate about what they do.”
  • “Education is the most powerful weapon which you can use to change the world.”
  • “I learned that courage was not the absence of fear, but the triumph over it. The brave man is not he who does not feel afraid, but he who conquers that fear.”
  • “For to be free is not merely to cast off one’s chains, but to live in a way that respects and enhances the freedom of others.”
  • “Resentment is like drinking poison and then hoping it will kill your enemies.”
  • “Lead from the back — and let others believe they are in front.”
  • “Do not judge me by my successes, judge me by how many times I fell down and got back up again.”
  • “I hate race discrimination most intensely and in all its manifestations. I have fought it all during my life; I fight it now, and will do so until the end of my days.”
  • “A good head and a good heart are always a formidable combination.”

Source: http://www.usatoday.com/story/news/nation-now/2013/12/05/nelson-mandela-quotes/3775255/

Trade Signals – Correction Targets

Click here for a link to Wednesday’s Trade Signals.

Tonight Susan and I are hosting our annual CMG holiday party at our home.  The house is ready (no thanks to me) and thankfully my “to do” list remains small.  Mostly, I’m in charge of the wine and the snow shoveling.  I get off far too easy – all thanks to Susan, of course.

Linda will light up the room with her always happy presence and I intend to own the billiards and ping pong tables.  It’s all about the “w” tonight.   Well, actually it is far more about gratitude and on that score I am a very lucky man.  But I’m still going for the “w”.

There are a number of paths towards leadership and as the year is concluding I find myself often reflecting on what I can do better.  Did I really listen?  Was I present? Did I lift another and did I see the gift that might be hidden in disguise for me?

A few years ago I asked my friend, Jim Ruff, to coach me in the business.  He is the retired president of Oppenheimer Funds and grew that business from $5 billion to over $200 billion.  He simply told me, “you don’t know what you don’t know”.  After three years under Jim’s wing I look back and say holy smokes, boy was he right.

What I think I admired most about Mandela was the truly genuine and honest way he treated people.  Even to those who wished him ill will.  Talk about lifting ones spirits.  What a gift he was to our human race.

Teach, give, listen and learn.  As any great coach or leader will tell us, we really are all better as a collective whole.  Hope your holiday party with your team is a great celebration.  I’m heading out to party with mine.

Wishing you an outstanding weekend!

With kind regards,

Steve

Stephen B. Blumenthal
Founder & CEO
CMG Capital Management Group, Inc.
Philadelphia – King of Prussia, PA
steve@cmgwealth.com
610-989-9090 Phone
610-989-9092 Fax

IMPORTANT DISCLOSURE INFORMATION

Please remember that past performance may not be indicative 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.

CMG SR Tactical Bond FundTM , CMG Global Equity FundTM and CMG Tactical Equity Strategy FundTM:  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 SR Tactical Bond FundTM, CMG Global Equity FundTM and CMG Tactical Equity Strategy FundTM is contained in each Fund’s prospectus, which can be obtained by calling 1-866-CMG-9456. Please read the prospectus carefully before investing. The CMG SR Tactical Bond FundTM, CMG Global Equity FundTM and CMG Tactical Equity Strategy 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 mange 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. (i.e. S&P 500 Total Return or Dow Jones Wilshire U.S. 5000 Total Market Index) is also disclosed. For example, the S&P 500 Composite Total Return Index (the “S&P”) is a market capitalization-weighted index of 500 widely held stocks often used as a proxy for the stock market.  Standard & Poor’s chooses the member companies for the S&P 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 (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 is not an index into which an investor can directly invest. The historical S&P 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 professionals.

Written Disclosure Statement. CMG is an SEC registered investment adviser principally located in King of Prussia, PA. 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 (http://www.cmgwealth.com/disclosures/advs).