May 16, 2014
By Steve Blumenthal
“Become a master observer. Have the willingness to look at things that nobody else has bothered to look at.
Identify points of meaning. We learn when we observe.”
Peyton Manning
Famed quarterback Peyton Manning presented this morning at the Envestnet 2014 Advisor Summit in Chicago. Who doesn’t love Peyton Manning? He didn’t disappoint.
It has been a stimulating three days in Chicago. Envestnet has grown to be one of the great disrupters in the financial business. Their platform provides advisors with broad access to more than 12,000 products, hundreds of SMA managers, portfolio construction support, due diligence and an elite network of strategists. Their technology provides the ability to combine diverse strategies along with individual security positions, all in one account. No small feat. I was there to learn more as we are one of the strategists on their platform. I listened, learned and walked away with excitement for your business and CMG’s. I also left extremely impressed with who they are as people.
Peyton talked about his intensive study of film. How he looks to “identify points of meaning.” I reflected on this and the recent stream of better than expected economic data prints and wondered if we could we be nearing a “So Good, It’s Bad” moment. The market showed some behavioral signs of just that this week.
In late October 2008, I wrote a piece titled “So Bad It Is Good”. Included were charts showing just how rare the buying opportunity was. The problem was that few stood in a healthy enough financial position to capitalize on the opportunity. Fear drove most to panic out. They were hit by the avalanche of selling.
It is the other side of that coin that I believe we are closer to today. Call it a “So Good, It’s Bad” environment. So good means the Fed succeeded in creating inflation – So good means the punch bowl of liquidity (QE) is taken away – So good unfortunately means that interest rates move higher – So good means bad news for bonds, richly priced stocks and trouble for the overleveraged derivative trader looking to stretch for extra bases.
Yet, for now, the cyclical trend remains positive for both stocks and bonds. “Don’t fight the tape or the Fed” remains an important theme. The Fed is data dependent and as Zachary Karabell, head of global strategies at Envestnet and author of “The Leading Indicators: A Short History of the Numbers that Rule Our World,” pointed out in his presentation, one should question the data.
Included in this week’s On My Radar:
- NDR – More Good Economic News
- Widely Used Economic Data are Outdated
- David Tepper –Touts Caution on Equities
- Trade Signals – Sentiment, Trend and Bonds
NDR – More Good Economic News
Second quarter economic growth is looking strong. The Jobless Claims number came in under 300,000 (the best result in seven years) and below the estimate of any economist surveyed by Bloomberg. ISM came in strong and April employment surprised to the upside. The Empire State Manufacturing Report (a barometer of manufacturing business conditions in the New York region) came in far above estimates and, as noted by the Federal Reserve Bank of NY, showed “significant improvement”.
With the Fed watching inflation and employment, the following two charts are beginning to give me concern.
A look at inflation:
Note the yellow box and the negative DJIA Gain/Annum when in the “High Inflationary Pressures” zone.
On employment:
The Employment Trends Index is picking up indicating a strong Q2 GDP.
Widely Used Economic Data Are Outdated
Numbers, like the GDP and inflation, actually mean little in a rapidly changing world, says Zachary Karabell. Just a little concerning since the world is hooked on data and, more importantly, so is Fed policy.
http://www.thinkadvisor.com/2014/05/14/envestnets-karabell-widely-used-economic-data-are
David Tepper –Touts Caution on Equities
I read a lot of hedge fund research as I like to see what some of the brightest investment minds (with very real money on the line) are thinking. I found it interesting this week that a bullish David Tepper has turned more cautious. Forbes reported:
“With the S&P 500 near all-time highs a healthy dose of skepticism is certainly warranted, and a well-regarded hedge fund manager provided the latest helping this week.
Speaking at Skybridge Capital’s SALT Conference in Las Vegas Wednesday afternoon, Appaloosa Management founder David Tepper offered words of caution to those in attendance:
“Don’t be too fricking long right now,” he said, referring to bullish positions. “There’s times to make money and there’s times not to lose money.” via Hedge-Fund Manager David Tepper, Concerned About Market – WSJ.com.
Tepper added that he was “nervous” for a variety of reasons, including tight monetary policy in China and from the European Central Bank and lackluster U.S. growth. He also said his current positioning would allow him to ramp back up to a more bullish posture if conditions change.
While Tepper said he wasn’t promoting bets against the market, his warning carries weight given his incredible track record. He ranked second on the latest Forbes list of highest-earning hedge fund managers, bringing home $3.5 billion in 2013, and famously bet big on bank stocks including Bank of America right around the 2009 bottom.
Tepper’s remarks were hanging over the market Thursday morning as stocks opened in the red. The Dow Jones industrial average was down 120 points, or 0.7%, at 16,494; the S&P 500 lost 15 points, 0.8%, to 1,874 after briefly touching the 1,900 mark earlier in the week; and the Nasdaq fell 38 points, 0.9%, to 4,063. The Russell 2000, which has flirted with a 10% correction, fell 0.9%.”
Trade Signals – Sentiment, Trend and Bonds
A look at the most recent investor sentiment and market trend charts. Sentiment is nearing extreme optimism again and both the equity market and fixed income cyclical trends, while aged, remains bullish.
Click here for a link to Wednesday’s Trade Signals.
Conclusion
Peyton talked about the importance of a great coach.
“Winners don’t hesitate to invest in a coach to help them continue to grow. Everyone can use a coach. Someone who has your best interest at heart, who has the capacity and willingness to point out what works and more importantly point out what doesn’t work.”
It sounded to me like he was defining a great advisor. I personally believe that deflation has the upper hand for now and I can point to some smart economists and fund managers who share that view. However, we could be wrong and who here wants to go all in long Treasury bonds? Maybe a Cyprus like confiscation (aka bailout) hits developed Europe and money flees to US stocks as it runs from European Banks. Go all in on that one? Can trillions of global money creation paper over our unmanageable debt issues without causing major market indigestion? I have my doubts.
I look back at two of several El-Erian quotes I presented in last weeks On My Radar:
- “To succeed, investors (Advisors) will need to construct global portfolios with more agile alpha and beta engines, more forward-looking differentiation, and more resilient sizing of positions.”
- “Equally important, they will also need to limit their vulnerability to severe downturns that threaten to suddenly erase hard-gained returns and, judging from the insights of behavioral finance, also increase the probability of subsequent portfolio mistakes.”
Both points are immediately doable.
My personal view is that the ending of QE will trigger a sizable market event. A 2008-like market disconnect. My best guess – mid to late 2015. Odds favor that time frame, tied to the beginning of Fed tightening (raising the Fed Funds rate from 0% to 0.75%), but who knows. Build portfolios that leave you in a position to profit. Build portfolios that can ease your clients’ anxiety along the path to achieving their goals.
Fortunately, you can limit vulnerability to periods of severe declines by including tactical, alternatives and tail risk hedging strategies in your portfolios. The liquid investment tools exist, as does the technology that enables you to tie it all together – in one investment account or across multiple investment accounts. There has been amazing technology innovation in just a few short years. Envestnet is one such technology solutions partner for you to consider. And they are a good one.
It was an eye opening week for me in Chicago and I am glad I made the trip. Unfortunately, I was unable to get to San Diego for my friend John Mauldin’s strategic investment conference. His lineup of thought leaders was impressive. I’ll review the presentation recordings and connect with John to get his post-conference thoughts. Perhaps we’ll line up a webinar to discuss/address any questions you may have. Stay tuned on that score.
My flight home was delayed (bad weather again) and Wi-Fi was spotty on US Air. It’s amazing how dependent we have become to Wi-Fi. Sorry for the delay in this week’s post.
I really hope it is a “So Good, It’s Great” weekend for you!
With warm regards,
Steve
Steve 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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