Author Archives: Scalper1

GMOM: Momentum Swings From Bonds Back To Stocks

Summary GMOM shifted from stocks to bonds in late August, but was too late to protect itself from the summer market plunge. GMOM missed the October snap-back relay in stocks, but has recently repositioned itself to be overweight in equities. The recent whipsaws has not been kind to GMOM, but it may regain its lustre in strongly trending markets. The Cambria Global Momentum ETF (NYSEARCA: GMOM ) is an actively managed ETF that seeks to exploit the momentum factor across different asset classes. Essentially, GMOM invests in the top 33% of a target universe of 50 ETFs based on measures of trailing momentum and trend. Assets include domestic and foreign stocks, bonds, real estate, commodities and currencies. The fund rebalances monthly into ETFs with strong momentum and are in an uptrend over the medium term of approximately 12 months with systematic rules for entry and exit. Seeking Alpha author Left Banker has penned an excellent pair of articles describing the construction of this ETF, and thus these details will not be rehashed here. Instead, this article seeks to highlight the fact that GMOM has just recently switched from a bond-heavy portfolio back into stocks. Locating the previous switch to bonds In his last feature article on GMOM in Feb. 2nd, 2015, Left Banker found that GMOM was broadly diversified across numerous asset classes, with about 46% in equity, 31% in bonds, 18% in real estate (including mREITs) and 6% in commodities. Fast-forward to Nov. 3rd, 2015, and the situation is drastically different. Nearly 94% of the portfolio was in bonds , with the remaining 6% or so in REITs. GMOM holdings on Nov. 3rd, 2015 iShares 7-10 Year Treasury Bond ETF (NYSEARCA: IEF ) 17.56% iShares 3-7 Year Treasury Bond ETF (NYSEARCA: IEI ) 17.12% Vanguard Short-Term Bond ETF (NYSEARCA: BSV ) 17.08% iShares 1-3 Year Treasury Bond ETF (NYSEARCA: SHY ) 12.11% Vanguard Total Bond Market ETF (NYSEARCA: BND ) 10.93% Vanguard Total International Bond ETF (NASDAQ: BNDX ) 6.44% iShares Residential Real Estate Capped ETF (NYSEARCA: REZ ) 6.22% Vanguard Short-Term Corporate Bond ETF (NASDAQ: VCSH ) 6.01% iShares MBS ETF (NYSEARCA: MBB ) 6.00% Total 99.47% As GMOM does not publish its historical holdings, I do not know the exact time that it made the switch from bonds to stocks. However, given the significant underperformance of both U.S. (the SPDR S&P 500 Trust ETF (NYSEARCA: SPY )) and international stocks (the iShares MSCI ACWI ex-U.S. Index ETF (NASDAQ: ACWX )) stocks compared to their respective bond counterparts, the Vanguard Total Bond Market ETF [BND] and the Vanguard Total International Bond ETF [BNDX] over the summer, I infer that change to the better-performing bond ETFs was made sometime during those months. To narrow down the precise timing of the switch further, I compared the total performance of GMOM with SPY and BND over the past three months. We can see that the stock market plunge in late August was acutely felt by GMOM, suggesting that GMOM was still heavily invested in equities at that time. However, GMOM did not track the market fluctuations experienced by SPY in the month of September, nor the snap-back rally in stocks in October. This suggests that the switch from equities to bonds took place sometime at the start of September. We can see from the graph above that while moving to a bond-heavy portfolio protected GMOM from the market gyrations experienced by SPY in September, it also caused GMOM to miss out on the fantastic rally in stocks the following month. This illustrates a general observation: momentum strategies tend to underperform in whipsaw situations. A similar set of circumstances was chronicled for the AlphaClone Alternative Alpha ETF (NYSEARCA: ALFA ), which uses the 200-day MA in order to time its hedges (which is a type of momentum strategy), in my recent article entitled ” ALFA Underwhelms As Hedge Fund Darlings Crater Plus An Untimely Hedge .” From bonds back to stocks Checking the holdings of GMOM a few days later, I discovered that a massive shift had taken place in the constituents of this ETF. The portfolio had shifted from 94% bonds to only 29%. REITs increased from 6% to 17%. Stocks increased from a measly 0% to 53% (70% if you include REITs as stocks). GMOM holdings on Nov. 6th, 2015 iShares Global Tech ETF (NYSEARCA: IXN ) 10.61% iShares Global Consumer Discretionary ETF (NYSEARCA: RXI ) 10.60% Vanguard REIT ETF (NYSEARCA: VNQ ) 10.60% Cambria Shareholder Yield ETF (NYSEARCA: SYLD ) 10.59% iShares Global Consumer Staples ETF (NYSEARCA: KXI ) 10.59% Vanguard Total Stock Market ETF (NYSEARCA: VTI ) 10.57% PowerShares Emerging Markets Sovereign Debt Portfolio ETF (NYSEARCA: PCY ) 10.56% Vanguard Total International Bond ETF BNDX 6.43% iShares Residential Real Estate Capped ETF REZ 6.17% Vanguard Short-Term Corporate Bond ETF VCSH 6.02% iShares MBS ETF MBB 6.00% Total 98.73% The recent change in the portfolio is also shown graphically below. Obviously, the recent move back into equities is a direct consequence of the ferocious rally in the stock market over the past month and a half. With stocks knocking again on the door of all-time highs, one has to ask the question, is this really the best time to be overweight equities? If you answered “yes” to that question, then you are likely a momentum investor, and GMOM might be an ideal fund for you. If you answered “no,” you would do well to sell GMOM now that it has shifted again back into stocks (and you should also ask yourself why you were invested in this fund in the first place?). Summary The recent whipsaws in the stocks, and to a lesser extend bond, market has not been kind to a momentum fund such as GMOM. Indeed, while having performed comparably with U.S. and international stocks and bonds in the first six months or so of its lifetime since inception, it now trails all four major asset classes by a wide margin. If this whipsaw behavior were to continue, GMOM will likely continue to underperform. On the hand, strong trending markets (both bull and bear) in various asset classes should allow GMOM to focus on what it does best: exploiting the momentum premium. GMOM Total Return Price data by YCharts For more information about other momentum ETFs, see my previous articles ” Comparing 4 Tactical/Momentum ETFs ” and ” An Update On 4 Tactical/Momentum ETFs “.

Buy Consolidated Edison For The 4.13% Dividend And Solid Fundamentals

The company was named a top 25 SAFE dividend stock in most recent “DividendRank” report. The dividend has been growing for the past 40 years. Solid fundamentals and a payout ratio of only 64% make the dividend look extremely safe going forward. Consolidate Edison (NYSE: ED ) also known as Con Ed, is one of the largest investor owned energy companies in the United States with nearly $13 billion in revenue and a market cap of $18 billion. The company offers a very nice 4.13% dividend that has been increasing for the last 40 years . The dividend was named a top 25 SAFE dividend by the prestigious “DividendRank” report . While the above may not be a good enough reason to invest the stock buy itself, when paired with the company’s rock solid fundamentals, an overall picture of safety and high yield emerges. The stock is currently trading at 15 times earnings, 1.4 times sales, and 1.4 times book value. These are very conservative numbers that show the stock is fairly valued and has limited downside even in the event of a severe market downturn (which would make the yield go through the roof). In addition to the reasonable price of the stock are the solid profit margin, return on equity, and even revenue growth to go along with it. The company is earning a profit margin of 8.67%, which is about average for the industry. The return on equity is 8.53%, which is a little below average , but still just fine with all of the other aspects of the company performing well. The most recent earnings report even showed quarterly YoY revenue increasing by 1.67%, which means the company is growing, albeit slowly. Furthermore, the payout ratio is only 64%, which is one of the reasons the dividend looks so safe. Most high yielding companies have much higher payout ratios . The great thing about a solid dividend stock like ED is its defensive nature during a bear market. While a rate hike is expected to hurt dividend stocks generally due to the fact that higher interest rates make bonds relatively more attractive, it will take years for rates to gradually return to normal, so the fear of one small hike by the Fed, which may not happen for many more months, is overblown. Furthermore, a utility company like ED is more stable than a typical run of the mill dividend stock, so if you’re worried about a market downturn, you really can’t get any safer than a leading utility company that pays a dividend over 4%. Finally, the stock recently dropped over 5% in one day when it just barely underperformed quarterly earnings expectations (they earned $1.45 a share when the market expected $1.48). I look at this as an opportunity to get some discounted shares rather than a sign that investors should be concerned. This is a good example of the market overreacting negatively to good results simply because they missed expectations slightly. I expect the stock to slowly recover over the next quarter while I collect the nice dividend in the interim.

Microsoft Appeases EU With German Data Centers

Microsoft’s (MSFT) move Wednesday to establish data storage centers in Germany is the latest fallout from the end of a longstanding data transfer agreement between the U.S. and European Union. Since the European Court of Justice last month scrapped the Safe Harbor Agreement, U.S. Internet companies have responded by bulking up data centers in the EU. The court ruled the agreement was illegal because privacy protections in the U.S. are too lax. The