August 19, 2016
By Steve Blumenthal
“In the realm of economics, no government can play god.”
— José Niño, Analyst, Acton Circle of Chile
I came across today’s intro quote this week while sitting in my beach chair facing the Atlantic Ocean. The title seems apropos to the world we find ourselves living in today.
In a free market, prices function as signals to both consumers and producers of how much of a product or service must be demanded or supplied, respectively. The Mises Institute blog post, my source for the quote, concluded:
The laws of economics are universal; they apply to developed countries just as much as developing countries. When price controls are implemented, shortages and black market activity are to be expected. No government, no matter how well-intentioned or powerful it claims to be, can violate these principles without consequences.
In the realm of economics, no government can play god.
I’m on vacation this week and thinking about the economy and the markets. Ugh. I know I shouldn’t be. An addiction I can’t seem to shake. However, the South Jersey sand is soft and white, the ocean water is warm and we are having a wonderful time. I’m up early with coffee in hand and with a gentle reminder from my wonderful wife Susan to keep today’s piece short.
I hope that you are taking some time off and enjoying the last few weeks of summer. Slow down and recharge. It helps us in the creation process and you and I, my friend, have so many more great things to create.
More and more I find myself surfing on my iPhone. No large computer to lug around. The digital world is at our finger tips — instantly. Pretty cool when you stop and think about it. While surfing on my phone, a CNBC article mentioning Elliott Management’s second quarter client letter caught my eye.
When it comes to research, I favor managers with skin in the game. Paul Singer is one of those managers. His firm, Elliott Management, manages $28 billion in assets, making it one of the world’s largest hedge funds. Years ago, in my hedge fund days, we had an investment in his fund. He is smart, experienced and seasoned.
Singer warns that the bond market is “broken” and that when the central bank actions of recent years no longer ward off a market downturn, the subsequent loss of confidence could be severe. Singer states, “Trading in this market is particularly difficult…. Everyone is in the dark.” He continues, “Experience doesn’t count for much, and extreme confidence may be fatal.”
My mantra has been to own equities but with some downside hedge in place. Almost one-half of the Western world’s outstanding sovereign debt—$12.6 trillion worth—traded at negative yields last week, according to the Financial Times. With economics, “no government can play god.” We’ll find out soon enough.
Below I link to the CNBC Singer/Elliott Management article, as well as the most recent Trade Signals post. Both are quick reads. For now, the trend is up and risk appetite appears to be strong. My two cents: Stay diversified and hedge that equity exposure.
Included in this week’s On My Radar:
- Paul Singer – The Market is Broken, CNBC
- Trade Signals – Don’t Fight the Tape or the Fed Moves to Neutral Signal, Investor Sentiment Remains Too Optimistic, HY and Zweig Remain in Buy Signals
Paul Singer – The Market is Broken, CNBC
Click here for the link to the CNBC Paul Singer/Elliott Management article.
Trade Signals – Don’t Fight the Tape or the Fed Moves to Neutral Signal, Investor Sentiment Remains Too Optimistic, HY and Zweig Remain in Buy Signals
A quick summary of what we are seeing by investment category (equity markets, fixed income and liquid alternatives):
Equity Markets: Investor sentiment remains extremely optimistic (short-term bearish for equities), Don’t Fight the Tape or the Fed moved from a +1 to 0 (now neutral on Equities). The 13/34-Week EMA trend indicator remains bullish. The CMG NDR Large Cap Momentum Index is nearing a buy signal. Neutral to positive on equities.
Fixed Income: HY remains in a buy signal and the Zweig Bond model remains in a buy (favoring long-duration high quality bond exposure over short-duration). It has been a surprisingly strong run for HY. Both are “Trend Following” strategies.
Liquid Alternatives: The CMG Opportunistic All Asset ETF Strategy is taking on more risk. Recently, we increased allocations to technology and biotech. On Tuesday, we sold out of short duration bonds (“MINT”) into Vanguard Total World Stock ETF (“VT”). The risk on theme remains.
Due to high valuations and the aged nature of the cyclical bull market, for the moderate growth investor I favor a reduced portfolio exposure to equities (hedged). 30% equities, 30% fixed income (tactically managed), 40% to liquid alternatives (e.g., tactical all asset, managed futures, global macro via mutual funds and gold).
Click here for the most recent Trade Signals blog post.
“In the realm of economics, no government can play god.” Indeed. The problem is that they think they can. To that end, Howard Marks of Oaktree Capital Management penned an article this week entitled “Political Reality.” Howard is another hedge fund great. You can find his commentary here. Long piece, but insightful.
I’ll be speaking on portfolio construction using ETFs at the Morningstar ETF Conference on September 7-9 in Chicago. Please let me know if you will be attending. Denver follows on September 13-15 where I’ll be attending a one-day S&P Indexing Conference. It looks like a quick one-day trip to Charlotte, NC during the third week of September.
If you find the On My Radar weekly research letter helpful, please tell a friend … I believe the most important lesson to learn about investing is how money compounds over time. Markets move through states of undervaluation and overvaluation. Recessions are a healthy and important part of the economic cycle. At times, risk management matters more than other times. Now is one of those times.
Hedge that equity exposure and include a handful of strategies that seek growth along with capital preservation (e.g., tactical all asset, managed futures, global macro, etc.). A higher investment return environment remains ahead. Prepare yourself to buy when everyone else will be selling. Let’s get to that opportunity in good shape and mentally prepared to act.
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Wishing you and your family the very best!
With kind regards,
Stephen B. Blumenthal
Chairman & CEO
CMG Capital Management Group, Inc.
Stephen Blumenthal founded CMG Capital Management Group in 1992 and serves today as its Chairman and CEO. Steve authors a free weekly e-letter entitled, On My Radar. Steve shares his views on macroeconomic research, valuations, portfolio construction, asset allocation and risk management.
The objective of the letter is to provide our investment advisors clients and professional investment managers with unique and relevant information that can be incorporated into their investment process to enhance performance and client communication.
Click here to receive his free weekly e-letter.
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A Note on Investment Process:
From an investment management perspective, I’ve followed, managed and written about trend following and investor sentiment for many years. I find that reviewing various sentiment, trend and other historically valuable rules-based indicators each week helps me to stay balanced and disciplined in allocating to the various risk sets that are included within a broadly diversified total portfolio solution.
My objective is to position in line with the equity and fixed income market’s primary trends. I believe risk management is paramount in a long-term investment process. When to hedge, when to become more aggressive, etc.
Trade Signals History:
Trade Signals started after a colleague asked me if I could share my thoughts (Trade Signals) with him. A number of years ago, I found that putting pen to paper has really helped me in my investment management process and I hope that this research is of value to you in your investment process.
Following are several links to learn more about the use of options:
For hedging, I favor a collared option approach (writing out-of-the-money covered calls and buying out-of-the-money put options) as a relatively inexpensive way to risk protect your long-term focused equity portfolio exposure. Also, consider buying deep out-of-the-money put options for risk protection.
Please note the comments at the bottom of Trade Signals discussing a collared option strategy to hedge equity exposure using investor sentiment extremes is a guide to entry and exit. Go to www.CBOE.com to learn more. Hire an experienced advisor to help you. Never write naked option positions. We do not offer options strategies at CMG.
Several other links:
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