Tag Archives: stocks

The Market Peak Is In

Summary In April I wrote an article that predicted the conditions necessary for a market peak to have occurred. In August these conditions were met. I detail some investment options to consider if a peak has in fact been made. In this article, I will be explaining why I believe the market has peaked or will peak soon, which means this bull run is over. In an article I wrote in April titled ” Constructing A Market Peak Blueprint ” I detailed three metrics that when combined have predicted the end of the previous two market tops in 2000 and 2007. The metrics I looked at were the monthly S&P 500 (NYSEARCA: SPY ) Shiller PE ratio, high-yield bond spreads and interest rates. In the final paragraph, I noted, “While none of these metrics currently are near a point at which all three will align to predict a top, it is still something that investors can watch for in the future. Well, the future I talked about in my article is now! I never like being the bearer of bad news, however since I wrote my article, all three metrics have aligned to the specifications I laid out in my article. That is why I am predicting the market peak is in. Market Peak Conditions The conditions needed to be met to declare a market peak are the following conditions listed below. I collected Shiller PE data from Multipl.com , High-Yield Spread data from the St.Louis Federal Reserve and historical interest rate data from Yahoo Finance . [Note all data is monthly] As the data in the tables below show that in August, all of these conditions were met. Shiller PE of greater than 25 Shiller PE declines 4 Months in a row High Yield Spreads Increase 4 Months in a row 10-year Interest Rate decreases 3 Months in a row Shiller PE   High Yield Spreads   10-Year Interest Rate May 26.87   May 4.51   May 2.10 June 26.62   June 4.66   June 2.34 July 26.55   July 5.11   July 2.21 August 26.54   August 5.66   August 2.20 Previous Peaks There have been three previous times in the last fifteen years where these conditions have all aligned and those were in November & December 2000 and August 2007. This can be seen graphically in the following two monthly charts, which show the point at which the conditions were triggered. (click to enlarge) (click to enlarge) [Charts from ThinkorSwim Platform] What can investors do? -Don’t Panic! The number one thing is not to panic if the market peak is in. I am in no way saying to go out and panic selling. However, as I detail below, there are some investment actions investors can make to lessen the pain if a market peak has already occurred and a major correction follows. Investment Option #1: Get Defensive With ETFs, investors have a number of choices that are quality ETFs that own defensive equities. The PowerShares S&P 500 Low Volatility Portfolio ETF (NYSEARCA: SPLV ) is attractive because it holds stocks with the lowest volatility in the S&P 500. The Guggenheim Defensive Equity ETF (NYSEARCA: DEF ) is attractive because it holds fundamentally strong, dividend paying companies that have a history of outperforming according to its Fact Sheet . “DEF uses a rules-based quantitative approach, the index selects stocks based on fundamental characteristics such as a strong balance sheet, dividend payments, conservative accounting practices, and a recent history of out-performance during weak market days.” The Barclays ETN+ VEQTOR S&P 500 Linked ETN (NYSEARCA: VQT ) or the PowerShares S&P 500 Downside Hedged Portfolio ETF (NYSEARCA: PHDG ), which both dynamically allocate between stocks, VIX futures & cash. The following chart from the VQT prospectus shows that in late 2008, the allocation to volatility was increased which is shown by the steep increase in the index value. [Chart from VQT Prospectus] Investment Option #2: Add a short position to hedge downside risk The two main options for shorting the overall market are the ProShares Short S&P 500 ETF (NYSEARCA: SH ), which is the DAILY inverse of the S&P 500. The second option is the AdvisorShares Ranger Equity Bear ETF (NYSEARCA: HDGE ), which is an actively managed short ETF. Investment Option #3: Consider Adding Precious Metals During the large decline in the market two weeks ago, gold (NYSEARCA: GLD ) & silver (NYSEARCA: SLV ) performed quite well because of investors seeking safety. For those looking for investment choices in the precious metals space there is obviously the GLD or SLV or there is the broad ETFS Physical Precious Metal Basket Trust ETF (NYSEARCA: GLTR ), which holds physical gold, silver, platinum & palladium. Investment Option #4: Employ a barbell approach Investors can employ a barbell approach where they own short-term fixed income to preserve capital and generate some income and high quality growth stocks. The PIMCO Enhanced Short Maturity Strategy ETF (NYSEARCA: MINT ) is an actively managed ultra-short term bond ETF designed to generate above money market returns and is a good capital preservation tool. In addition, if you still want capital preservation but are looking for a higher yield, a quality choice is the Vanguard Short-Term Corporate Bond Index ETF (NASDAQ: VCSH ), which invests in short-term investment grade corporate bonds and currently yields just less than 1.90%. For the other end of the barbell, investors can look for high growth companies that have growth and have minimal debt. For example, earlier this year I wrote an article , where I determined it was the number one stock in the world was Visa (NYSE: V ). I determined Visa was the number one stock because they have $4.7 billion in cash, no-debt, they pay a dividend, is expected to grow earnings 17.74% over the long-term, is buying back shares and in 2016 they start their new deal replacing AMEX (NYSE: AXP ) at Costco (NASDAQ: COST ). Other quality stocks like Gilead Sciences (NASDAQ: GILD ), which have strong balance sheets and clear growth drivers, should be considered when using the barbell approach. Closing Thoughts If a market peak is in fact in, investors need to be mindful and give extra scrutiny to investments for their potential performance during a down market. If a market peak has occurred, as I highly suspect that it has, individual stock selection and/or tactical allocation to ETFs is something that will become extremely important. This kind of environment is where great investors shine. I do not know who said the following quote but it applies to this situation and it goes something like “Anyone can be a good investor in a bull market, however, what separates good investors from great investors is bear market performance.” Disclaimer: See here . Disclosure: I am/we are long SPLV, GILD. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Templeton Global Income Is On Sale

Summary Templeton Global Income trades at a -15.72% discount to NAV following last week’s market panic. This discount is historically large and most likely a limited time offer. Mr. Market seems to be rating the investment skill of Michael Hasenstab below average. I disagree. Background Templeton Global Income Fund (NYSE: GIM ) is a closed-end fund. Its investment objective in Templeton’s own words : The Fund seeks high, current income, with a secondary goal of capital appreciation. Under normal market conditions, the Fund invests at least 80% of its net assets in income-producing securities, including debt securities of U.S. and foreign issuers, including emerging markets. Discount To NAV Following last week’s market tantrum, GIM currently trades at a substantial -15.72% discount to net asset value. This discount is large historically speaking (albeit the rolling average discount has been increasing the past five years). Source: CEFconnect.com If we assume the following… NAV is fairly calculated (I do in GIM’s case). GIM’s investment mandate is sufficiently flexible (it is). … then the discount would appear to be Mr. Market’s judgment on the quality of GIM’s management skill. If management skill is well below average, the discount is warranted. If management skill is average or above, the discount represents a buying opportunity (and a margin of safety should our judgment of management skill prove incorrect). I believe management skill is above average. Michael Hasenstab Michael Hasenstab is the key man behind Templeton Global Income. (More specifically, he is the Chief Investment Officer, Global Bonds for Franklin Advisers, Inc, which manages the fund.) His long-term record speaks for itself… Source: Trustnet.com I’m a fan of the guy. He takes chances, which is to say he “actively” manages the portfolio. (Illustrating this point, GIM’s R-Squared is 0.17 vs. its benchmark over the past three years.) Unfortunately, this seems to be a novel approach in an industry where too many fund managers claim to be “active” (to justify higher fees) but in practice hug their benchmark, prioritizing career risk over the actual risks facing their investors. Sometimes Hasenstab’s chances pan out ( Ireland ). Other times they don’t ( Ukraine ). Over the last decade plus, he’s won more than he’s lost and produced solid risk-adjusted returns. I think the combination of his temperament and relatively young age makes it a decent bet GIM’s performance will remain solid. Here are his thoughts on the recent market volatility. For the record, I am far more bearish on China’s prospects than he appears to be from the video. I was short the Direxion Daily FTSE China Bull 3X ETF (NYSEARCA: YINN ) until last week and plan to short it again should government intervention artificially push it back up. That said, I have no qualms with GIM’s latest reported exposures (which do not include China)… (click to enlarge) Other Thoughts On The Merits Behind An Investment In GIM I believe the bulk of a decision to invest in GIM boils down to one’s appraisal of the manager’s skill (above average in my opinion) and the margin of safety should that appraisal be wrong (the CEF’s current -15.72% discount to NAV). Here are three more quick thoughts on the merits behind an investment in GIM though… Fees are reasonable at 0.73%. I believe it is well positioned risk-wise for the current market environment given its low duration (0.6438 years) and closed-end fund structure, which prevents forced selling from redemptions during a market panic. GIM is highly focused on emerging market bonds and currencies. I believe these are currently reasonably priced exposures relative to other asset classes. GMO’s “7‐Year Asset Class Real Return Forecasts” agrees… (click to enlarge) Conclusion The Templeton Global Income closed-end fund is trading at a huge discount following last week’s market panic. Mr. Market is suggesting Michael Hasenstab is a below average investor. I disagree. Long GIM. Disclosure: I am/we are long GIM. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

With Further Market Declines Likely, Keep The Long Run In Mind

This article originally appeared on the Independent Observer Blog . August was the worst month for U.S. markets in more than three years, so say the headlines. I suspect it was also the worst month in at least that long for many international markets as well. And, as today’s numbers show us, we aren’t done yet. As I write this, U.S. markets are down about 2.5 percent, and European markets closed down around 3 percent. There is actually not much more I can add to what I’ve already written. Current valuations remain relatively high , and there is certainly the potential for further declines if the market adjusts to more typical valuation levels. From a correction standpoint, the S&P 500 is still down less than 10 percent from the peak. In other words, for all the hype and worry, we are in a market decline that, by historical standards, is both small and normal. This is not to minimize the current situation, however. Substantial technical damage has been done to U.S. markets, which remain below both the 200-day and 400-day moving averages. This suggests to me that more weakness is very likely. Indeed, the odds of a more substantial decline are, in my opinion, rising as confidence continues to erode. Many decision rules that have tested well in the past are now pointing to more declines as well. With further market declines likely, what should you do? If you have longer-term money invested (i.e., you don’t need it for 10 years or more), try to stay put. And if you’re still contributing to your portfolio, remember that the decline actually represents an opportunity, since you can invest at lower prices and benefit from potential future growth. If you have shorter-term money invested (i.e., you need it in the next couple of years), or if you’re already drawing down your portfolio in retirement, work with your financial advisor to determine what effect a large decline would have on your financial well-being. Hopefully, your portfolio is structured in a way that any decline will have minimal impact over time. If not, you might want to consider making changes to ensure that is the case. Once your portfolio design meets your needs, though, unfortunately, there is little left to do but buckle up and endure the ride. Why this decline looks different I won’t say enjoy the ride, of course, but to make it less painful, consider that this decline is different: First, many previous and major, long-lasting declines – 2000 and 2008 being the most recent – came at the end of multiyear debt-fueled booms. We might get to that point eventually, but we’re not there now. Households have actually continued to pay off debt during the past few years, not add to it. Second, sustained declines typically took hold during periods of recession while, today, the U.S. economy continues to grow in a sustainable way. Third, the lack of corrections like this over the past few years has, arguably, been unhealthy. The current decline is actually a painful but necessary step to clear out market excesses and lay the groundwork for further advances. This prescription – prepare and keep the long run in mind – is neither easy nor satisfying. The only real thing it has going for it is that, over time, it generally works. That is what I try to focus on, and I suggest you do the same.