January 10, 2014
By Steve Blumenthal
In this week’s On My Radar, I share the following:
- Asset Class Returns – An Interesting Look at Annual Returns (best to worst)
- With All Due Respect – An advisor’s response to last week’s On My Radar
- Time to Pick a Ladder – by Blaine Robbins
- Trade Signals – Investor Sentiment Remains Extremely Optimistic
Asset Class Returns – An Interesting Look at Annual Returns (best to worst)
Several points to note from JP Morgan’s chart (in no particular order):
- The Russell 2000 Index was the top performer in 2013 gaining 38.8%. The S&P 500 gained 32.4%.
- As one might expect, the grey Asset Allocation category consistently hugged the middle of the chart. It is made up of 25% S&P 500, 10% Russell 2000, 15% MSCI EAFE, 5% MSCI EM, 25% Barclays Aggregate Bond, 5% 1-3 month Treasuries, 5% Credit Suisse Tremont Equity Market Neutral Index, 5% DJ UBS Commodity Index and 5% NAREIT Equity REIT Index (balanced annually). This is a fair enough representation of a more broadly diversified investment portfolio.
- In a nod toward a strategic asset allocation investment plan – ask your client if he or she can pick the 2014 top performer. Few will pick commodities. What about EM or REITs?
- REITs, after holding the top position for three straight years, returned just 2.9% in 2013. There was considerable optimism on REITs heading into 2013. Yesterday’s returns make us humans feel comfortable – usually at the wrong time.
- On the flip side, commodities have held the bottom spot for three straight years. Investors are selling out. A smart move? I doubt it.
- Investors tend to compare everything they own against the S&P 500 Index, especially in strong years. It is a classic mistake. After 30 years in the business and with full awareness of the performance history of the very best managers, I can confidently tell you that no one can consistently select the top performing asset classes.
- Invest or speculate? “Both investment approaches are ok,” I recently told a client, “but you can’t have it both ways. Comparing your broadly diversified investment portfolio to the top performing asset classes is a common human tendency. It usually leads to buying and selling at exactly the wrong time.” There are very few successful speculators. Pick your path and stick with it.
With All Due Respect – An advisor’s response to last week’s On My Radar
Below is a recent response to my On My Radar from January 3 regarding my bearish market outlook and supporting viewpoint from Ned Davis Research. The first paragraph is the advisor’s response and following is my response to the advisor.
Advisor:
“Respectfully – you have wanted this market to go the other way for years now – and we are in the greatest bull market of any administration of the last 50 years and you and the short pundits still want the correction to occur and now Ned Davis chimes in with a 20% correction article. The valuations are as they have been – still 10-12% below historical PEs, so given the continued accommodative monetary policy, low interest rates (still) and high earnings, can we really have a 20% sell off? Sure, but we can still have a 20% rally if we put together a couple of 3% quarters. What is the basis for the Barron’s article to even be published? The analysis is based on what? Not fundamentals, but their own Venice, Florida hocus-pocus with the conclusion of the article being, yes, a 20% correction, then an uptick, with the end result being a higher market than where we are today. What is the point of it? Because it’s Ned Davis?”
My Reply:
I really do appreciate your reply to me. It helps me to sit back and see how my writing is coming across. My overall message is that there are times to put inexpensive risk protection in place and times not to. This is a small cost relative to risk. I really believe that money is made through the power of compounding over time.
Ned Davis Research (NDR) is a solid shop. They are almost always contrarian and, honestly, I try to stick to a philosophy of buying when everyone else is selling – that may be why I have been such a NDR fan for many years.
Some history on my market calls: I shouted caution in mid-1998 and got my butt kicked in for a year and a half before the market peaked – though I did make money over that time trading my high yield strategy. I stayed with the trend until it moved lower in early 2000. We missed the decline and gained about 30% from 2000 to 2001. A $100,000 in CMG’s HY strategy went to approximately $130,000, while $100,000 in the S&P went to $50,000 and $100,000 in the NASDAQ went to $25,000. Most people shifted in the late 1990s to technology funds. An investor needed nearly a 300% increase to catch up to where our HY clients were at the end of 2002. Back then, I wrote about a client who left us in December 1999 so she could, as she called it, “invest in safe stocks” with a Merrill Lynch broker. Unfortunately, she bought the top.
I was a bull again and went long in Q3 2002. This was another unpopular market call and again I took some heat from readers. I went bearish again in 2007 – I talked about subprime, CDOs, Freddie and Fannie’s failures as well as the insane leverage in the system. I was against the crowd and once again took a lot of heat. I was about one and a half years early but it is important to note that I rode the trend higher until we exited HY – minimizing the meltdown.
I wrote a piece in late 2008 about “buying when everyone else is selling”. Believe me I was unpopular then too for being bullish in the face of crisis (Lehman, Bear Sterns and the near collapse of the financial system as we know it). I not only wrote about it, I went long high yield in late 2008. I was really scared, but that was that feeling that convinced me to buy. Follow the system. The model said buy. I bought.
When we dove into the history of our Opportunistic All Asset Strategy prior to adding to our platform in early 2011, we analyzed all the trades going back to 2004. The relative strength-based strategy moved from stocks to bonds prior to the crisis and then back into stocks in December 2008 and became fully allocated to stock funds by April 2009. Certainly, there is no guarantee it will behave that well next time.
Right now, despite NDR’s 20% correction call or my call to buy puts to protect your long equity exposure tied to current extreme optimism, our Opportunistic All Asset Strategy is approximately 90% long equities. It’s a relative strength mathematical process that cares little about Ned Davis or Steve Blumenthal. Frankly, I like that. I see it as an important diverse investment in any portfolio. Also 100% long today is our Global Equity strategy. It has the ability to hedge but has not been hedged for some time. I like that the two have the ability to get defensive and mixes well with other positions in your portfolio. This doesn’t guarantee they get it perfectly right but portfolios are about a broad collection of diverse risks…we call it Enhanced Modern Portfolio Theory.
We have made our clients money over the years and I believe it is ultimately due to making sure the compounding effect is allowed to work. Of course no guarantees, but it definitely doesn’t work out well when one needs to overcome a 50% correction. Unfortunately, those periods happen and we’ll see another in the future. Looking at today’s environment, I see one that is highly manipulated. Global central bank activity is perhaps the grandest of all economic experiments. Maybe it ends well. I have my doubts.
You mentioned PEs in your comments so I thought I’d share my quick two cents: Forward PEs might look ok but I think most Wall Street analysts are very biased, making their estimates unreliable (they are in the business to sell stocks). The stats reflect their biased and over-optimistic calls over time. For this reason, I like actual reported PEs and they do not show the market to be cheap today. I’m not sure if I’m a year or so early in expecting a big correction. I do not have a crystal ball and hope I’m wrong on what I see coming. Our strategies are all long today. Hopefully they do well when the big wave ends. What if it is -50%? Can investors stay put? The historical evidence says no.
We know that investors behave irrationally and sabotage their portfolios. I want to be in a healthy position to be able to “buy when everyone else is selling”. It is not about getting the one or two great calls correct. That is a fool’s game. My belief is that if a strategic asset allocation plan is put in place and adhered to, the client is far more likely to experience the magic of compounding. This to me means broad portfolio diversification and some important risk management as it relates to long-term equity exposure (from time to time). This is an insurance cost that may just help the client stay the path and not panic out of the market; leaving him in a strong position to take advantage of others’ poor investment behavior.
A quick note on NDR: He was also bullish when everyone was bearish. He was bullish the last five years. I wouldn’t minimize his research. He just went bearish. His global allocation model has only slightly underweighted equities – I think by 10%. It is underweight bonds and overweight cash. His trading continues to lean modestly bullish.
Anyway – it’s a tough business we are in. I am grateful for the time you spent to give me your respectful and honest feedback and I’m sure you are not the only person feeling this way. To me it is about allowing compound interest to work its magic over time – it is not about getting some extra PR for making a big call. I’d rather make money.
Time to Pick a Ladder – by Blaine Robbins
I grabbed the below chart from Blaine’s Time to Pick a Ladder letter. I find his weekly posts to be a quick read, witty and fun. Click here for a link to his piece. There are several interesting charts to look at online: 1) Railroad shipments are on fire 2) REITs are highly correlated with equities right now and 3) investors continue to unload their bond holdings – chart below.
Source: RenMac via 361 Capital
Trade Signals – Investor Sentiment Remains Extremely Optimistic
Click here for a link to Wednesday’s Trade Signals.
I’m in Florida today for several business meetings and home on Sunday. The weather is in the low 80s. It is a nice escape from the cold. Let me know if you are attending the Index Universe ETF Conference at the end of this month. I’ll be there along with a few of my teammates. The conference is billed as “The World’s Largest ETF Conference”. We’ll be in the iShares ETF Strategist section. The conference is taking place January 26-29, 2014 at the Westin Diplomat in Hollywood, Florida. It would be great to grab a coffee with you.
Wishing you a great 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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