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Why Investors Should Not Party Like It’s 1999

In 1999, it was the dot-com revolution that caused investors to ignore the exorbitant valuations and pitiful breadth. In 2015, it is the remarkably low cost of capital as provided by central banks worldwide that is causing investors to dismiss ridiculous valuations and dismal market internals. Stocks are super expensive today, much like they were in 1999. Yet are the stock market internals (breadth) genuinely as weak as they were back in 1999? No, they are not. The take home? Employ a tactical asset allocation strategy and stick with it. Tens of thousands of investors read my commentary at popular financial portals. Some have been reading my articles for more than a decade. Others might have clicked on a social media “follow” link in the last month or the last last year. Ironically, few realize that I originally developed a front-n-center persona on national talk radio in the late 1990s. The medium was unique in the way that listeners felt like they had a connection with me (a.k.a. “the G-Man”) and I felt connected to them. In fact, I felt a responsibility to help people understand investment mania as well as how to protect one’s self from devastating loss. Scores of folks in 50 some-odd cities may have listened for entertainment and perspective. On the other hand, many of those individuals did not take my words to heart. For instance, in 1999, I compared the stocks on the New York Stock Exchange (NYSE) with those that traded on the NASDAQ. The NYSE Composite had been flattening out over the final year-and-a-half of the 1990s whereas the NASDAQ Composite appeared to be charting a near-vertical course northward. Not only that, the records for the NASDAQ had been occurring on sky-high valuations and declining NASDAQ market internals (breadth). The bleak combination warranted caution. I did not tell investors over the radio airwaves to sell every equity holding. After all, the NASDAQ’s uptrend remained intact due to a handful of market-cap leaders still shouldering the work-load. Instead, I suggested tactical asset allocation shifts to prepare for the inevitable bearish turn somewhere down the pathway. Lighten up on the more aggressive holdings that had already experienced the greatest gains. Shift a bit to value. Raise cash equivalents for future buying opportunities. And pick up a bit more of investment grade bonds. The generalized recommendation to reduce the risk of loss was a winner in practice. Many who had lost 50%, 60%, 70% of their net worth pleaded for specialized asset management. Indeed, the 2000-2002 tech wreck is the reason that I was able to start my own Registered Investment Adviser that focused on the growth and protection of retirement portfolios. Flash forward to present day euphoria. The collective sentiment of the go-for-growth crowd is that central banks will never allow recessionary pressures to build; relatively low rates and/or the possibility of additional measures to create money electronically will be there to prop up equities should the economy or market confidence stumble. In 1999, it was the dot-com revolution that caused investors to ignore the exorbitant valuations and pitiful breadth. In 2015, it is the remarkably low cost of capital as provided by central banks worldwide that is causing investors to dismiss ridiculous valuations and dismal market internals. Are valuations really that ridiculous right now? Undoubtedly. And it does not matter if you prefer cyclically-adjusted price ratios (e.g., PE10), current price ratios (e.g., price-to-sales), the Buffett Indicator (market-cap-to-GDP) or a dividend yield-earnings yield combo. One can only decide that, like 1999, valuations no longer matter in a “New Economy,” or that 10-year returns for buy-n-hold will be woeful. In contrast, one could raise cash and less risky assets in his/her portfolio to buy at lower prices than currently exist. “Okay, Gary,” you concur. Stocks are super expensive today, much like they were in 1999. Yet are the stock market internals (breadth) genuinely as weak as they were back in 1999? No, they are not. That said, stock market breadth is noticeably shaky and growing shakier by the moment. Take a look at the ability of today’s NASDAQ to keep powering forward in price, albeit at a slightly slower pace, even as declining issues have started to overwhelm advancing issues. The similarity to the late 1990s is discernible. The take home? Employ a tactical asset allocation strategy and stick with it. By adjusting your portfolio’s mix when more caution is warranted, you will improve your risk-adjusted returns over time. For instance, when sky-high valuations couple with weak market internals, a 65% growth/35% income investor might downshift to 50% large-cap equity/30% investment-grade income/20% cash. Another person might be more risk averse, and decide that 40% large-cap equity/25% investment-grade income/35% cash places him/her in a better position to weather a future storm. Naturally, there is a flip side here. When low-to-fairly valued prices couple with improving market internals, a tactical asset allocation strategy would call for more risk. It would be time for the moderate investor described above to rebalance back to his preferred level of 65% growth/35% income. Moreover, the growth would likely include smaller-caps as well as higher-yielding income on the other side of the ledger. I recognize that not everyone wishes to engage a tactical asset allocation strategy. Fair enough. Still, those who paid attention when I addressed valuation and breadth concerns to a national audience in 1999 did not meet with disaster in 2000-2002; those who read my articles and recession warnings in 2008 did not experience the level of devastation that many experienced in the 2008-2009 financial collapse. Similarly, to the extent that you may experience apprehension about setting your portfolio on cruise control – to the extent that you wonder about the sense of holding onto the most aggressive securities in your accounts forever and ever – consider your alternatives. Perhaps hold onto assets like the iShares S&P 100 ETF (NYSEARCA: OEF ) , the Health Care Select Sect SPDR ETF (NYSEARCA: XLV ) and the iShares MSCI USA Minimum Volatility ETF (NYSEARCA: USMV ) ; perhaps let funds like the iShares Russell 2000 ETF (NYSEARCA: IWM ) go until the time that we have more attractive valuations and improving market internals (breadth). Disclosure: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc, and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert web site. ETF Expert content is created independently of any advertising relationships.

The Hardest Thing To Do In Investing

Summary The investment world is chocked full of pitfalls, missed opportunities, and unforeseen risks that make the game difficult under the best of circumstances. In my world, the hardest thing that I have to do on a regular basis is buying dips in the market. The best buying opportunities are usually the ones that feel the worst. The investment world is chocked full of pitfalls, missed opportunities, and unforeseen risks that make the game difficult under the best of circumstances. Many of us worry about high fees, perfect timing, macro headline risks, and security selection with a fervor that can only be described as obsessive. At this stage of the game many investors have now converted to the ETF model and know they are getting the lowest fees possible with heavy diversification. With any luck they have also weeded out their friend’s “stock tips” after a few bad trades. Yet, the endless worries over the Fed hiking interest rates, Greece defaulting, China’s bubble collapsing, and a variety of other cataclysmic headlines make it difficult to control our emotions. The endless cycles of fear and greed are powerful motivators that try to lure us into selling low or buying high with predictable outcomes. In my world, the hardest thing that I have to do on a regular basis is buying dips in the market. It’s uncomfortable every time that I have to do it and I literally have to swallow the lump in my stomach and force myself to push the button. Why? The best buying opportunities are usually the ones that feel the worst. Let’s face it, when the market is down 3, 5, or even 10%, it’s usually because something bad is happening in the world. A country with a stock market you barely knew existed is going bankrupt, a server glitch in some backroom closet is rearing its ugly head, or an unexpected black swan event has sent shockwaves of panic across the globe. If you’re like me, your initial reaction is probably to sell everything and stock up on canned goods and ammunition. But the reality is that drastic moves of this nature will likely cause more harm than good and it’s usually not the end of the world despite the media hype. Keeping a level head and balanced perspective of the market will serve you much better than immediately trying to clear the decks. Instead of taking a sledge hammer to your portfolio, I prefer to make subtle changes to reduce the overall risk profile or deploy cash in areas of the market that look attractive during a pullback. Reduce Risk Consider transitioning away from your 3x biotech ETF to a more conservative equity holding in order to ride out the storm. As an example, I recently sold an underperforming sector position and purchased the iShares MSCI USA Minimum Volatility ETF (NYSEARCA: USMV ) for my Strategic Income clients. This move allowed me to reposition my equity exposure into an index suited for the current market environment without drastically altering the overall portfolio mix. Evaluate your bond sleeve for any signs of undo stress. Credit sensitive holdings such as high yield bonds, emerging market bonds, and convertible bonds should be put under a microscope to determine if they are indeed adding value. You may even want to consider transitioning a portion of those holdings to a more diversified bond fund with a mix of quality and credit securities. I’m still a believer in the efficacy of active management in fixed-income, which makes the PIMCO Total Return ETF (NYSEARCA: BOND ) and SPDR DoubleLine Total Return Tactical ETF (NYSEARCA: TOTL ) two of my top options. More than likely, a falling stock market will trigger a flight to quality that helps counterbalance the risk of your remaining equity holdings. When all else fails, raise a modest amount of cash to put back to work in the market once the dust clears. That may include selling some of your most volatile positions and putting the money on the sidelines for a short period of time. However, be wary of holding too much cash for too long and letting opportunities pass you by – see the next section below for details. Deploy Cash The first step in your game plan to deploy cash is to develop a watch list of positions that you want to purchase. This should include evaluating holdings based on relative strength, costs, volatility, and in the context of holes in your existing asset allocation. Take note of leadership sectors and those that are more defensive-oriented. If you are positioning for a comeback, you want to put your money to work in areas that you feel will offer the best opportunity to outperform on the upside. Identify points both below and above the current price where it would make sense to start a new position. You may not get all the way to an intended low point in the market, so it’s important to have a game plan if stocks begin to head higher as well. Discipline is important here as you don’t want to get left behind during the next rally phase. Start small and deploy capital in incremental steps. Avoid trying to call a bottom with a significant portion of your money. You may want to average into a new position with two or three trades rather than going all in at once. This will allow you greater flexibility to control your cost basis and not over commit to a certain outcome. Transaction-free ETFs make this very easy and cost-effective to accomplish. In addition, most of the major online brokerage companies have a suite of them at your disposal. The Bottom Line Despite all the innovation in the last 100 years of the stock market, controlling emotions and buying into fear is one of the hardest things to do with your hard earned capital. While it may seem counterintuitive, lightening up on your exposure on long rallies and adding on dips will serve as a solid map to achieve successful results.

Greece, Puerto Rico Or China? Debt-Fueled Excesses At The Heart Of Them All

Investors erroneously focus on which human interest story, or combination of issues, is/are of greatest importance. However, the root cause of every high-profile concern is debt-fueled excess. It follows that a responsible media should refrain from concocting unknowable storms and, instead, hone in on the risks associated with ultra-low borrowing costs and/or exceptionally easy credit terms around the world. Lately, I have been fielding a host of “which is worse” questions. Is it the possibility of Greece exiting the euro-zone or is it the potential for Puerto Rico to default on its debt? Is it the 25%-plus bearish retrenchment of China’s Shanghai SSE Composite or is it the likelihood of eventual rate hikes by the U.S. Federal Reserve? In truth, investors erroneously focus on which human interest story, or combination of issues, is/are of greatest importance. However, the root cause of every high-profile concern is debt-fueled excess . It follows that a responsible media should refrain from concocting unknowable storms and, instead, hone in on the risks associated with ultra-low borrowing costs and/or exceptionally easy credit terms around the world. For the purpose of understanding, let’s discuss the debt concerns of Greece, Puerto Rico and China, beginning with the Greek tragedy. Since the origin of the euro-zone, less productive and less economically successful countries had been able to borrow-n-spend at the same favorable rates as the most productive and most successful countries. That’s like giving a $50,000 line of credit to individuals with very different abilities to handle debt – like offering a card to a $200,000 per year earner with a 760 credit score as well as providing a card to a $50,000 per year earner with a 520 credit score. Sooner or later, one of the individuals will not be able to keep up. And in this case, Greece cannot keep up with Germany, Austria or Finland. (Neither can Portugal, Spain or Italy.) Easy borrowing and reckless spending has left Greece with few viable alternatives. Now let’s shift gears to Puerto Rico. Whereas the working-aged population employment rate/labor participation rate in the United States is 62.7%, this number is a mere 40% in Puerto Rico. Over the last decade, corporate tax breaks disappeared for a number of U.S. corporations operating in Puerto Rico, forcing the companies to leave and to take many of those jobs with them. Residents also left over the last decade due to limited job prospects and exorbitant local taxes as high as 33%. Less jobs, less people, high taxation… none of that stopped the Puerto Rican government from borrowing way beyond its means and running enormous deficits. Ironically, U.S. states are not allowed to use debt to increase budget deficits. Puerto Rico did. Eventually, the territory will be bailed out by congressional/While House decree or be permitted to seek some from of bankruptcy protection (after a law or two is passed). Now we come to China. And yes, I will stipulate that the recent turbulence in Chinese stocks as well as China’s underachieving economy as more critical to the performance of risk assets around the globe than Greece or Puerto Rico. This is China – the world’s 2nd largest economy behind only the United States. Of course China matters more than tiny countries or territories. So when loose rules surrounding margin debt helped fuel the miraculous rise in China’s Shanghai SSE Composite, and when the People’s Bank of China (PBOC) recently cut interest rates to ease lenders’ capital settings, and when the Securities Association of China announced that the country’s big brokerages had agreed to put up 120 billion yuan ($26 billion) to prop up Chinese blue-chip equities, one might have hoped for the party to go on. That’s not the case, though. Once again, investors need to take note of why China is struggling at all. Rate cuts mean easier money and excessive margin debt implies debt-fueled excess. As if that weren’t enough, the country’s total government, corporate and household debt load as of mid-2014 is roughly equal to 282 percent of the country’s total annual economic output. China’s debts are growing at a pace that is unsustainable. Debt-fueled excess explained the financial crisis in 2008 for the U.S. Is it any surprise, then, that Greece, Puerto Rico and China have been dealing with similar concerns related to easy credit? (Note: I am not saying that China is a lost cause the way Greece and Puerto Rico are, but simply, noticing the similarity in the genesis of debt-fueled excesses.) What does it all mean for risk assets stateside? Perhaps ironically, there is boundless love for the Federal Reserve in the United States. Nobody seems to believe that the Fed has ever made or will ever make a policy mistake. Yet the Fed erred in its rate policy leading up to the 2000 dot-com collapse; it faltered in keeping rates too low for too long leading up to the 2008 financial crisis, and then failing to recognize the severity of the coming recession in not cutting rates quickly enough. Will Greece, Puerto Rico and even China push the Fed toward keeping zero percent rates in place for all of 2015? Will seven years of zero-percent, ultra-easy rate policy be a good thing, then? And if so, when does it become a bad thing? As I have pointed out in previous columns, sky-high stock valuations and a lusterless domestic economy may not matter in the near-term. Yet they may begin to matter alongside battered faith in the central banks of Europe and/or China; they may begin to matter if waning confidence spreads to the Fed. One of the best ways to determine whether confidence is waning or holding firm is to check in on the market internals (a.k.a. breadth indicators ). Here are three considerations: The Advancing-Declining Volume Line (AD Volume Line) measures the buying and selling pressure behind a market advance or market decline. It goes up when advancing volume is positive; it falls when it is negative. In other words, if there is significant volume behind declining stocks, you have selling pressure and reason for caution. The pressure today is powerful enough for the volume behind decliners to push the AD Volume Line for the S&P 500 below its 200-day moving average for the first time since 2012. We can also look at the Advance/Decline (A/D) Line for the S&P 500. Although there has not been a definitive breakdown in the number of advancers participating in the bull market relative to decliners, the drop-off since mid-May is worthy of continued vigilance. Finally, investors should be mindful of the High-Low Index, This breadth indicator is based on new 52-week highs and new 52-week lows. In essence, when the High-Low Index is above 50, the stock index may be thought to be in an uptrend; when the index is below 50 – when new lows outnumber new highs – the trend may be considered bearish. The S&P 500 Hi-Lo at 56.67 is still positive today, though it sits at its lowest level in 2015. Income assets have been trimmed at the longest-end of the yield curve as well as the middle of the asset risk spectrum. We have concentrated our income in funds like the i Shares 3-7 Year Treasury Bond ETF (NYSEARCA: IEI ) and the BulletShares 2016 High Yield Corporate Bond ETF (NYSEARCA: BSJG ). Most notably, we have raised our cash component of the income picture. Growth assets have been trimmed in the foreign holdings arena. Several had hit stop-limit loss orders , leaving the combined cash from growth-n-income trimmings at roughly 15%-20%. Growth at 50%-55% of most portfolios is primarily comprised of funds that we have held onto for years, including funds like the Health Care Select Sect SPDR ETF (NYSEARCA: XLV ) , the iShares MSCI USA Minimum Volatility ETF (NYSEARCA: USMV ) and the Vanguard Mid-Cap Value ETF (NYSEARCA: VOE ). Disclosure: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc, and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert web site. ETF Expert content is created independently of any advertising relationships.