August 16, 2013
By Steve Blumenthal
Bright Future
“Dad, though this card is small, it was the only message that I could find that even came close to how I’ve felt about this summer. Thank you – for this entire summer. Thank you for encouraging me to do something I didn’t think I was able to do and for believing in me when I didn’t. I have learned so much, met incredible people and became part of a system that is so much bigger than myself…”
Today, Brianna finished a ten week internship in New York City working for Locus Analytics. Locus is a group of smart individuals led by a brilliant entrepreneur, Rory Riggs, working on something that might just win a Nobel Prize in finance.
The future is bright for all of us; yet there will be financial bumps along the way, so it is important to build your portfolio(s) with a focus on risk management and proper diversification.
I share several thoughts on the current state of the economy and a simple idea as to how you can make your client’s portfolios stronger.
Weakening Economy
The world broke in 2008 and the economic recovery that began in the second quarter of 2009 has produced a less than hoped for 2.2% annual growth rate in real GDP.
With 69% of the 2.2% GDP driven by consumer spending, we need consumers to spend but can they? Real wages are declining, the unemployment picture is worse than the manipulated numbers reflect, and individual savings are low leaving little in the tank to fuel spending. The remaining 31% that comes from exports, government spending, housing and capital spending face continued headwinds. Our big customers are at or near recession (EU, UK, Japan and a sharp slowdown in China).
Nearly $4 trillion in newly created Fed currency units has done little to move the growth needle and zero interest rate policy is further hurting significantly underfunded pension plans and retirees (cutting their income). Unfortunately, it is also forcing many investors into riskier assets at just the wrong time.
Looking at the economic data coming in this past July, here are some highlights:
- On GDP – if you didn’t get a chance to list to Jeremy Grantham’s Charlie Rose interview shared in last week’s On My Radar – click here and listen to Jeremy’s position on GDP. He sees less than 1.5% annual for years to come.
- Employment is not as good as the headline number reflects.
- Earnings – the red line in the next chart is the Bureau of Labor Statistics “BLS” current calculation of the Consumer Price Index and the blue line is the BLS CPI calculation used in 1990. Official real earnings today still have not recovered their inflation-adjusted levels of the early-1970s, and, at best, have been flat for the last decade.
Whether you pick the red or blue line, there is little to no growth in real wages. This suppresses consumer’s ability to spend.
Source: www.shadowstats.com
The US Government continues to spend far more than it is taking in tax receipts. Over 100% of the recent deficits have been financed by newly created currency from the Fed, who in turn uses that money to buy newly issued government bonds – the debt ceiling showdown is approaching. Too much debt inhibits one’s ability to spend.
- Yet interest rates in the US, UK, EU and Japan are at record lows
- Federal Reserve Assets from purchases reached $3.6 trillion. Note how QE has fueled the market advance since 2009.
**Charts source: www.agaryshilling.com, July 2013. If you are not reading Gary Shilling, you should be!
Unmanageable debt, unmanageable entitlements, underfunded pensions… we’ve got issues.
Here’s is an idea for you to share with your clients.
While core equity risk management is vital, I have combined two of our tactical strategies with the S&P 500 Index to show how they may enhance returns while also reducing the risk.
The following chart shows the return streams of the S&P 500 (red line), the CMG Tactical Rotation Strategy (green line), the CMG Opportunistic All Asset Strategy (light blue line) and the combination of all three (dark blue line). The idea is to get a sense of how three diverse investments combine together.
If you look to the bottom of the chart under the Performance section, you’ll see data reflecting return and risk (as measured by standard deviation). Note that the total return for the S&P 500 Index was 2.94% since 2000, which includes the 40% move in the last two years. The recent 2008-09 -50.95% decline and a near -50% drop in 2000-2002 are the culprits.
Compare the data by looking at return relative to risk, take a look at the max drawdown and you’ll find the up capture and down capture ratio information interesting. I like the idea of three diverse risks combined together in a way that strengthens my overall potential for success. It is about engineering return relative to risk. This is what Enhanced MPT is all about. See important disclosure information below.
Conclusion
I walked through the city with Brianna and my two boys and as I looked around I couldn’t help but observe that we are a highly educated and beautifully diverse society. Despite our challenges, we have the world’s most developed capital market structure and an innate entrepreneurial drive embedded in our DNA.
Brianna concluded her letter by saying, “everyday when I’d walk to work, I’d look around and remind myself how lucky I am and how grateful I am for this experience.”
Bumps and imbalances remain but create we will. Until then, be smart and find solutions (they exist) that help you both gain and preserve your assets.
If you have any questions or comments, please feel free to email info@cmgwealth.com or simply reply to this email. Wishing you the very best.
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
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.
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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).