May 31, 2013
By Steve Blumenthal
Paul Volker – Volcker Weighs In on Limits of Fed’s Easy Money Policies
On Wednesday Former Federal Reserve Chairman Paul Volcker waded into the debate over when to reduce today’s ultra-easy U.S. monetary policies, contending that the benefits of bond buying are “limited and diminishing”; warning that central banks are too often late in removing stimulus.
Volcker, who led the U.S. central bank’s aggressive battle against inflation in the 1970s, said the decision to adjust policy will come down to good judgment, leadership and “institutional backbone” in the face of political pressure.
“Here and elsewhere, the temptation has been strong to wait and see before acting to remove stimulus and then moving toward restraint,” Volcker told the Economic Club of New York.
“Too often the result is to be too late, to fail to appreciate growing imbalances and inflationary pressures before they are well ingrained,” he said.
Two very nice gentleman square off on the direction of stocks. Famed Professor Siegel is bullish while famed investor Jimmy Rogers a bear. (My comments follow in blue)
- SB: My two cents: What a challenge investors face! Who to believe? Both have a convincing view. How do you allocate? Targeted concentrated bets or Enhanced MPT? Sometimes the markets simply feel like a casino. Making money is intoxicating. Personally, I think it is a mistake to put one’s chips “all in” on black or red but this is what many investors do. Forgotten is the disciplined investment game plan. Switch me in, move my bonds, look how much the market is up (QE will keep it moving higher they reason). Right!
The best time to buy is after the decline and not after the gain but that is not how our minds seem to work. I get it – it’s tough – but don’t DO IT. After 30 years I’ve made some good trades and some bad trades, having been equally sure each time. Sometimes I was lucky and sometimes I was smart.
My point is that it is so easy to find a reason to justify buying more stocks today but I suggest it is an emotional bias tied to projecting recent returns forward. Maybe Siegel is right, maybe Rogers is right, or frankly, maybe they both might be right. The question is one of timing.
If we can shift our focus to understanding the awesome power of compound interest then one begins to see that protecting against significant loss enables compound interest to work its magic over time. It is for this reason that I believe an enhanced MPT portfolio construction approach is the better path, for by its nature, takes the “get rich” bet out of the equation. It is the difference between being an investor and being a gambler. Maybe “get rich” is a path that can work but few walk out of the casino with large winnings. Most lose. Risk is elevated.
Risk management can be implemented relatively inexpensively and there are other important return streams that can make money in both up and down trending environments. Add them to your mix as they can help smooth the ride. “Stocks for the Long Run”? Yes – if your client can stay the course. Be especially careful when Wall Street is telling you to go “all in”. I believe Enhanced MPT is a better path.
Countering Professor Siegel’s bullish outlook on stocks is this chart from John Hussman projecting just 3.2% per year from equities over the next ten years. “Just saying…”
Quoting Hussman, “We presently estimate the likely return of the S&P 500 over the coming decade to be about 3.2% annually. There are all sorts of models that Wall Street wishes investors embrace. Embrace the ones that show a long-term, demonstrated relationship with actual subsequent market returns, both historically and even over the period since 2000. See Investment, Speculation, Valuation and Tinker Bell to review the estimation methods here.”
Finally, following are several charts I find helpful at identifying cyclical bull and bear market periods
13/34 – This chart shows the 13-week (blue line) vs. the 34-week (red line) Effective Moving Average. Note the current Cyclical Bull Market period (far right). Watch for the blue line to drop below the red line to signal change in trend.
S&P 500 Index – Cyclical Correction Target 1480 (risk management focused discussion)
This chart points to logical correction targets. Stock traders frequently look to the “Fibonacci retracement” when predicting future share prices. I have always been amazed over the years at the accuracy of the Fibonacci sequence. The red box shows a 38.2% retracement and the blue box shows a 50% retracement. Note how the move to 1482 corresponds to the current 200 day moving average (blue line) as well as the September 2012 price high of 1474.51 and the February 2013 price low of 1480. This to me suggests logical price support. I anticipate a summer sell-off to 1480. We’ll see. 1480 may also be a probable point to remove option hedges if investor sentiment is also at a level of extreme pessimism (which would be bullish for equities). The next logical point of support is a 50% retracement or 1420. While there is chart support at 1597.35 and just below 1550, I believe 1480 is more probable. Of course, there can be no guarantees.
NDR’s Big Mo
I showed the next chart in Wednesday’s “Trade Signals – Big Mo Can Make You Dough.” Simply, it is a chart that is On My Radar as it has done a good job at identifying the major market trends. Note the “B” buy and “S” sell signals.
Explanation: The NDR Big Mo Multi-Cap Tape Composite Model was created to give a composite reading on the technical health of the broad equity market. The model, plotted in the lower clip of the chart, aggregates the signals of over 100 component indicators and generates a reading between 0% and 100%, reflecting the percentage of the component indicators which are currently giving bullish signals for the S&P 500 Index. The chart’s top clip plots the S&P 500’s weekly closes. The model uses trend and momentum indicators based on a broad array of our NDR Multi-Cap cap-weighted sub-industry group price indices. Trend indicators are based on the direction of a sub-industry’s moving average, while the momentum indicators are based on the rate of change of the sub-industry’s price index. By including many indicators together in the composite model, we find the “weight of the evidence” regarding the market’s trend and momentum rather than relying on only one or a few indicators. The specific signal-generation calculations for the model’s indicators were determined based on historical testing. The boxes in the chart’s upper clip show two perspectives on how the S&P 500’s returns have historically been associated with the model’s signals. One box shows the market’s returns based on going long when the model is above the upper bracket and going short when the model is below the lower bracket. The other box shows the results when switching to commercial paper instead of going short.
For now, both the 13/34 EMA and the NDR Big Mo Composite Model support a bullish market view. However, with investor sentiment continuing to be excessively optimistic (see Wednesday’s Trade Signals), I continue to favor a relatively inexpensive collared option strategy that hedges the stock exposure within a portfolio.
Siegel or Rogers? Who wins in the short term? Don’t know and, frankly, don’t really care as long as I’m risk protecting exposure from time to time and have a deeply diversified 33/33/34 portfolio game plan in place.
I did enjoy how gracious Professor Siegel and Mr. Rogers were with each other. That was nice to see.
Have a great weekend!
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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