By Steve Blumenthal
September 12, 2014
“All About That Bass
Because you know
I’m all about that bass
‘Bout that bass, no treble
I’m all about that bass
‘Bout that bass, no treble”
It’s about a 35 minute drive to school each morning and, frankly, it is some of the best quiet time I have with my boys. Trapped with dad is what I think they are thinking but sometimes we break into one of those great conversations that bond us closer together. No such luck today, I’m afraid to report. Matthew took hold of the iPhone, linked into Spotify and on came a popular song by Meghan Trainor titled, All About That Bass. My mind drifted to “It’s All About that Fed, ‘Bout that Fed, No Trouble”.
‘Bout that Fed: Famed portfolio manager Jeffrey Gundlach was on CNBC earlier this week. I highlight some of his thinking and provide a link to the interview below. The short of it is he sees low rates for some time, yet believes they will get out of control in about five years. He may be right or may be wrong (see ‘Why Bonds Are A Buy And Everybody Had It Wrong‘) but put Jeffrey in the “guy to listen to” category. The simple takeaway is to have a plan in place to manage the risk within your portfolio as that risk has grown quite large.
As a quick aside, I include a video link to The Tonight Show’s host, Jimmy Fallon, taking the All About That Bass song to a new place with guest, Meghan Trainor. Together, with the show’s band, The Roots, they play the song using pre-school musical instruments. It’s fantastic!
I share the following in this week’s On My Radar:
- Gundlach on the Fed and Interest Rates
- High Yield Turning Lower
- All About that Fed, ‘Bout that Fed
- Trade Signals – Cyclical Bullish Trend for Stocks Remains – 09-10-2014
Gundlach on the Fed and Interest Rates
Jeffrey Gundlach, founder of DoubleLine Capital, discusses the hidden, leftover problems of QE2 and the recession that might be needed to fix today’s no interest rate market. I note the following from the CNBC interview:
- Interest rates going out of control five years from now are a very plausible scenario.
- The best logic for raising rates to 2% is that it will give us the ability to stimulate the economy on its next leg down.
- The problem is the bond market is giving the message that if you are going to raise interest rates, the economy will weaken.
- We never really financed the 2012/13 budget deficit. The Fed bought it. Those bonds are going to mature in 2019/20. That is exactly the time that entitlement programs (Social Security, Medicare, Medicaid) hockey stick higher. Someone is going to have to buy those bonds when they mature. Japan? China? Maybe the Fed again?
- Until then, we are looking at a very low rate environment. It is possible the Fed raises rates to give them room to move lower again in the future but this will likely lead to fear of deflation.
Source: CNBC
Here is the Video [ 2:07 ]
High Yield Turning Lower
I explain how to risk manage high yield bond exposure in a post I did for Forbes (HERE). Think in terms of stop loss risk management. Move to short-term treasury bills using an ETF like “BILL” when the price drops below the 21-week EMA (the red line in the chart). Move back into a HY ETF of your choice when the price moves back above the 21-week EMA. Note the recent turn lower (upper right in the chart). Source: CMG Research and StockCharts.com
We are in the process of putting our CMG Managed HY Bond ETF Strategy on the Envestnet platform. There we serve as an ETF Strategist/model provider. Our process is more nimble than the above 21-week EMA trend chart and has more than 20 years of real performance. For individual investors, the strategy may be available through your independent investment advisor.
Note the 2008 and 2009 sell signal (red arrow) and buy signal (green arrow). You would have exited at a higher price and a yield of approximately 8.5% and re-entered with wealth largely preserved at a lower price and a yield of more than 18%.
I think that one of the largest waves of high yield defaults is coming soon. The HY market is now over $2 trillion in size. It took from the mid-1970s to 2010 to reach $1 trillion. In the last four years alone, it has grown by another $1 trillion. Think about how the chase for yield has been well embraced by companies looking for easy funding.
Martin Fridson is estimating $1.6 trillion in defaults from 2015 to 2020. My two cents is it is better to have a disciplined strategy in place to deal with the risk and, importantly, position you for opportunity.
Maybe the HY market is telling us something today. There was certainly reason to have continued optimism in June 2008 when the stop-loss process advised to move to BILL. A head fake this time? Don’t know.
All About that Fed, ‘Bout that Fed
What we do know is that the market does not do well when the Fed is raising interest rates. I showed this chart a few weeks ago. Note the “Subsequent % Decline in Market” (red arrow).
This historical data is certainly something for us to keep on our radar.
Trade Signals – Buffett’s Favorite Valuation Indicator – 09-10-2014
As for market valuations, Warren Buffett, has been quoted as saying his favorite valuation indicator is Stock Market Capitalization as a Percentage of Nominal GDP. Without going all geek on you, I jump to the conclusion that by this measure the market is “Very Overvalued” and more overvalued than it was in 2007 (yellow oval in the chart included – click on the link below).
Yet, despite this “Very Overvalued” equity market, the bigger picture points to a continuation of the bull market as suggested by both the Big Mo “buy” signal and 13/34-Week EMA Trend indicator. “Don’t Fight the Fed” remains an important theme and the fact that globally “cash is trash” may continue to mean that equities are the asset class of choice.
Click here for the link to the charts and the balance of Wednesday’s Trade Signals post.
Conclusion
NDR’s Chief Global Investment Strategist, Tim Hayes, summed it up pretty well in a current piece, “Not since the precarious days of 2007 has the market gone so long without corrections of 5%, 10% and 20%. Is the streak about to end? Geopolitical speculation is running rampant (think Middle East, Ukraine, Scotland, etc.) and September through October has a bad reputation. A dozen of the DJIA’s 20 biggest one-day drops have occurred from mid-September through October, most recently in 2008. It’s understandable that investors would be worried and nervous.”
For now, the weight of evidence continues to support the cyclical bull market equity trend. Keep in mind that risk is high. The exit from the Fed’s QE and zero-bound-interest-rate policies will be both tricky and possibly treacherous. The QE exit is at hand (October). The risk has been and remains: Exit too fast and they deflate the real economy. Exit too slow creates a bubble bigger than 2008. We know too well what happened to the financial system then.”
It’s All About that Fed, ‘Bout that Fed. No worries?
The link to the Fallon video follows. As I watched it, all I could think of was how happy he is doing his job and shouldn’t we all strive for that joy in our day? My wish for you is just that along with continued great success!
https://m.youtube.com/watch?v=lc9MzCcmNCU
Have a wonderful, fun-filled weekend!
With warm 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
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