MCS has not changed our outlook- the broad U.S. stock markets are in a topping process and will make a series of lower lows as time goes on. A short history lesson of recent meltdowns may be in order: In 2007 to 2009 from the high in Oct of 2007 to the low in March of 2009- the market dropped from 1565 to approx. 666 with many bounces along the way. The steep selloff occurred in just a little more than two months early in 2009. The tech meltdown in 00-02 happened in just about the same fashion. The market bounced to and fro continuously during that time, similar to what is occurring today. Don’t be fooled by these movements, buy and hold investors should use bounces to sell out of long positions. Typically, few investors sell, as they are elated during the highs and fearful when a new low is touched.
The U.S. market has been gyrating for months- since the high in May of 2015 and that high may be in place for a long time. Daily market movements can make investors confused, up one day and down the next- keep the trend in mind and understand that markets such as this rarely result in profits for investors. Manager returns this year are evidence of this phenomenon. Your bloggers have been writing for many years about the markets, the investment industry and about the need for firms to focus on two services not just one. Those services are appreciation of assets and protection of assets. Another example of stretching for the appreciation piece while ignoring the protection piece was reported in the media this week from a firm called: Aequitas. The SEC charged the firm with defrauding investors and all divisions of the firm have been closed. It appears the firm was a just another Ponzi scheme- putting investor funds in products they would never purchase themselves. In a quest for yield, investors flooded the firm with $1.67B in assets hoping for the high yield return of 8-10% on short term notes, and high returns on a student loan portfolio purchased from the for profit college, Corinthian. Just another sad example of investor loss.
We feel confident our readers understand the financial industry is one huge product generator. Some of those products carry enormous risk. Every day new products are released- but at the end of the day the products are not as important as how you use the products to profit in your own investment portfolio. The five main asset classes are still in place as they have been for centuries: Cash, Bonds, Stocks, Commodities and Real Estate, and there are many derivatives of these different asset classes. Exchange Traded Funds are just one of these derivatives, and are somewhat similar to mutual funds. It is always up to the manager or investor to purchase and sell whichever products are deemed appropriate in the ultimate hopes of generating profits. Our firm concentrates on the timing of these purchases and sells, using the ETF universe instead of individual stocks or bonds, mutual funds or private funds for obvious reasons including: daily liquidity, cost effectiveness, the ability to access asset classes, the structure of ETF’s and execution. Our firm also writes options to bring in income for portfolios, and options on indexes have the same daily liquidity, low cost, product access and execution. 2016 has already proved fruitful in reaping option income or profits. Portfolios that receive options- the Hedge Fund and Tactical Growth have both puts and calls on the S&P500. The volatility that is limiting other portfolios is generating profits. This same volatility is expected to continue and should allow an investment in ETF’s in the near term. While the S&P tops, many other assets are ripe for a bounce- long or short including Gold and Oil.
In Central Bank news- the ECB cut interest rates and increased their QE program this week. They also added the ability to purchase corporate bonds- which has increased the anxiety about the situation at Deutsche Bank; including a possible default similar to Lehman or Bear Stearns. Bloomberg stated there a $1.3T bond problem in the Deutsche Bank’s books which could trigger contagion. When Governments are purchasing Corporate Bank debt, one can be confident there is a big problem “under the hood.” This event can be viewed as a sign of desperation from the ECB. The Bank of Japan and our Federal Reserve meet next week and their announcements will be closely watched.
As the Q2 earnings season ramps up, Investors may be surprised to know that just 6% of the companies in the S&P500 contribute to 50% of the earnings per share in the S&P500. 6% of the 500 companies equates to just 28 companies; with the largest contributions coming from just 10 companies: Apple, JPMorgan, Berkshire Hathaway, Wells Fargo, Gilead Sciences, Verizon, Citigroup, Google, Exxon and Bank of America. Half of these ten companies are financial companies; and earnings may be compromised with the financial index XLF down from recent highs, problems in Europe and the fact that banks are not expected to add to their profits in a low interest rate environment.
The next earnings season, combined with the Fed meeting, the short term topping of oil, and the global economic slowdown all contribute to the negative forecast for markets. Our advice is to focus on the longer term- not the day to day moves and you won’t get dizzy. Enjoy the beautiful weekend in D.C.-maybe Spring has arrived early.