October 2017 Client Letter

Enjoy The Ride!
10/19/2017

Since the market bottom last November the S&P 500 has rallied from 2083 to 2560, a very healthy gain of 22.8% not including dividends. Despite these gains there are almost no signs of euphoria within the investing community which leads me to think this rally still has a long way to go.   Euphoria is a necessary evil that’s almost always seen at major market highs when investors refuse to believe the market will roll over.

Is there a valid case to be Bearish? Yes, but market momentum always takes precedence. Eventually the bears will be right but it may take a few more years and in the meantime so much opportunity will be lost. The bearish arguments have been around for years and completely dismissed as markets make new The bear case always sounds intelligent and well thought out but their losses and opportunities missed can be staggering.

This week marks the 17th time in the past 90 years that stocks made new all-time highs each day of the week. In only ONE instance did this ever mark the exact top of the stock market (1968). Higher highs occurred 94% of the time.

Once a trend has been established it tends to persist and run its full course.

Investing always has some form of anxiety for investors to contend with. If it’s not nervousness with the decline in your account value it’s the fear of the value rising too much and worrying you’ll give it all back. Is there a Goldilocks too hot – too cold – just right equivalence? Nope, but keep things simple as in try to sensibly grow your principal as much as possible in the good years and lose as little as possible in the bad. And, try not to mess it up in the meantime which is why: Temperament can more important than intellect.

In past years bonds offered a decent yield which allowed an investor to gain some income and diversify from stocks.   The problem in this era is that yields are very low and in order to gain a modest, even a high single digit return there must be some increase in bond prices and very little of that is happening now.

One of the best books ever written on investing was authored by Jesse Livermore “How to trade in stocks” published in 1940.   At his peak Livermore was worth an estimated $100 million in 1929 dollars after starting from scratch.   His approach was systematic and still effective today and I use many of the rules he originally created for himself.

One of Livermore’s lessons was: “Money is made by SITTING not trading” To paraphrase, when you know you’re in the right you stay invested until the rally fades.   You should remain in the stocks that are trending higher and take small losses along the way (never ride a losing stock down hoping it will turn).

The majority of “easy” money made in stocks is made during two unique phases of the economy/markets: The violent rally higher during the transition from recession to expansion and during long trending rallies in the mid cycle of the expansion like we’re experiencing right now. Smooth trending markets may happen just once or twice in a decade so it’s important to maximize the opportunity when it’s present.

While it’s part of our management philosophy to protect our clients during major down drafts, we do not sell prematurely or pretend that we can call a market top.   “Top Calling” the stock market is a way of gaining media exposure and attention. Top Calling has nothing to do with solid investment management since astute advisors know it can’t be done. The better option is to let the market take us out when the time is right with our built in exposure systems.

Charting the warning signs of the 1987 crash

It’s been 30 years since the 1987 crash so why not look at it closely for lessons?

The evolution of market tops is a gradual process whereby markets weaken as selling and distribution increase. Sometimes the flat sideways trend is nothing more than the “pause that refreshes” before another up-leg commences. However, sideways/choppy trends can also be the early stage of something more ominous.

In the summer of ‘87, the bond market was very weak with declining prices and higher yields which were becoming increasingly more attractive to stocks.   This was causing a migration from stocks which began to manifest itself in August. These were the grand old days when investors wouldn’t buy a municipal bond unless it had a tax free yield of 10% or more.

Stocks peaked in August then sold off by 8% in September then rallied 6% into October before crashing.   The decline in early October breached the 50-100-200 day moving averages which would have triggered a wave of sell signals for us. We always use the 200 day moving average as the ultimate cut off for owning stocks. I consider declines below the 200 day to be Bear Market country.

 

Summary: Enjoy the ride.

Brad Pappas
970-222-2592
Brad@greeninvestment.com

 

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision. All expressions of opinion are subject to change without notice in reaction to shifting market, economic or political conditions. Data contained herein from third party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed. Past performance is no guarantee of future results.

Performance update on the Vegan Growth Portfolio

I should get around to doing this more often as we are in the minority when it comes to investment advisors willing to post portfolios and returns.  I’ve advocated for years that retail investors don’t have to settle for the returns offered by indexers and robo-advisory firms.  Robo’s are cheap but you won’t receive what we offer in terms of returns and bear market protection.

The Vegan Growth Portfolio is a name we use to describe the concept of investing with Vegan perspective.  Its a diversified portfolio that usually has about 30 holdings when fully invested.   When our indicators tell us that when stock market risk in unacceptable due to the potential for recession we reduce our stock holding and focus on Treasury bonds or cash.

Collective2.com offers a unique opportunity to create a mirror portfolio of our client holdings in the Vegan Growth Portfolio.   In other words, the same day we buy or sell a stock for our clients we also buy or sell it in the VGP.  The price may differ by a small amount but the Vegan Growth Portfolio shown on Collective2.com is close approximation to our client accounts.

As you can see we are soon arriving to the important 5-year return milestone.  As of 2/24/2017 the compounded annualized rate of return is 17.3% which is net of all fees and expenses.  The gross (before fees) return is 18.8% per annum.

We respectfully ask when a potential client’s first question revolves around fee’s is which would you prefer:  Make 4%-6% net at a indexer or robo-advisor like Betterment or our returns which charge more?

VGP

This example assumes and account size of at least $100,000.  And, as we always have to say past performance is no guarantee of future performance.  VGP is only suitable for investors who appropriately seek growth.

No recession in sight

Music in the background:  The Black Keys  “Have Love Will Travel”.   I’ll pull no punches I love listening to the Black Keys especially at the gym.  But, for all their appeal has there been a band that has borrowed from more artists?   Bo Diddley should be collecting some of their royalties.

Frequently, we have to tell clients to ignore the noise of the media which will bombard the investor with combinations of fear or euphoria bordering on the manic.  Frequently those opinions are jaded with political or investment biases which make their statements virtually worthless.   Even more frustrating are the multi-handed economists who never appear to make a decisive stance “On one hand, then on the other hand etc.)

Its essential to tune out the noise and find sources of information that are purely data driven without biases and one very good source is Recessionalert.com (RA)

This morning RA released their Long Leading Index (USLLGI) and I’ll use their own words to describe the USLLGI:

“The USLLGI takes a far-reaching forward view of U.S economic growth by tracking 8 reliable indicators which have consistently peaked 12-18 months before the onset of NBER defined recessions since the early 1950?s. The growths of these indicators, together with their diffusion index, are combined into a 9-factor composite to give a generalized view of future overall U.S economic growth. When the USLLGI falls below 0 for 2 consecutive months you have a signal that recession will occur in 12-18 months.”

This is an economic timing method not a stock market timing system.   The lead times are long, for example in the 2007-2008 “Great Recession” the LLI tipped its hand in early 2006 by crossing over the 0 level.  In 2011 it made a near miss by approaching 0 but it never broke through.   At present its at a healthy reading of .1 which largely eliminates the chances of recession in 2014.   Its too early to say for 2015 but we’ll have an idea by the end of this year.

In the meantime, ignore the fear and noise.  The potential for a new secular bull market has some real potential.

Be careful out there

Brad Pappas