- New Newsletter Format
- Market & Portfolio Positioning Review
- The “Art Of The Deal” & How To Lose A Trade War
- New: Financial Planning Corner
- Sector & Market Analysis
- 401k Plan Manager
New Newsletter Format
We have recently been running lots of surveys on our newsletter, particularly with those who “unsubscribed” to our email list. Over the years, the newsletter has transformed several times due to your inputs.
We are always trying to improve the quality of our content to keep you informed on what is happening with your money, our portfolios, and the world between us.
It is with this understanding we are implementing a few new “tweaks” to our newsletter.
- A couple of weeks ago we introduced a new Financial Planning Corner to assist with some of the questions faced by individuals approaching, or in, retirement.
- The “market review” at the beginning of the newsletter will remain but will be expanded to include what we are doing, if anything, with our client portfolios.
- The “macro view” is now being written as a separate piece and will be a prominent link in the newsletter. This will shorten the length of the newsletter but still provide access to our macro-viewpoints on the economy and markets.
- Lastly, the 401k Plan Manager has been condensed to make it more useable in a “quick format” structure. We have also launched a full “live” version which compares your portfolio to our recommended model at RIAPRO.NET.
We hope you will find these changes useful and we continue to look forward to your recommendations, criticisms, and comments so we can continue to improve our newsletter for your benefit.
After all, it is YOUR money we want to make sure you keep it.
Lance Roberts, RIA Advisors
Catch Up On What You Missed Last Week
Market & Portfolio Positioning Review
“The ‘Trade War” Is Dead…Long Live The ‘Trade War.'”
On Friday, “Phase One” of the “Trade Deal” was agreed to, with the Trump Administration originally stating that “Phase Two” would not begin until after the 2020 election.
Then reality set in.
Since 2018, President Trump has come to understand that if the market declines, a “tweet” about a “trade deal coming” would spark a market rally. Without a “trade deal” to negotiate, there is no catalyst to support asset prices heading into the election. This is why on Friday, Trump immediately declared that “Phase Two” of the trade deal would begin immediately.
Long live the “trade war.”
In our “Macro View” piece below we go into much more detail about the “trade deal” and what to expect next. However, from an investment view, the agreement is clearly about two things:
- Boosting exports of Agricultural Products; and,
- Devaluing the Dollar.
With the Fed giving up on their mandate to maintain price stability, (they recently stated they will let inflation “run hot,”), the path was cleared for the Trump Administration to devalue the U.S. dollar (which is inflationary) without worries the Fed will start hiking rates.
This is one of the reasons we have started laying commodity exposure into our portfolios with the recent positions in precious metals and energy. We recently published a thesis “Collecting Tolls On The Energy Express” for our RIAPRO subscribers. (You can download the full report with a FREE 30-Day Trial.)
“This model forecasts the price of MLPI based on changes to the price of XLE and the yield of U.S. Ten-year Treasury Notes. The model below has an R-squared of .76, meaning 76% of the price change of MLPI is attributable to the price changes of energy stocks and Treasury yields. Currently the model shows that MLPI is 20% undervalued (gray bars). The last two times MLPI was undervalued by over 20%, its price rose 49% (2016) and 15% (2018) in the following three months.”
The Demise Of The Dollar
As shown in the chart below, the dollar has broken below both its rising trendline from its previous lows and the 200-dma.
(We cover the dollar and positioning each week for our RIAPRO subscribers because the dollar impacts exports which makes up about 40% of corporate profits.)
Currently, the breakdown is very early in it potential progress. As we saw in June, that breakdown was short-lived before it reversed as foreign dollars continue to poor into USD denominated assets for both safety and higher returns than elsewhere in the world.
We previously discussed this important point in “The Great Cash Hoard Of 2019.”
“As it relates to foreign positioning, it is worth noting that EURODOLLAR positioning has been surging over the last 2-years. This surge corresponds with the surge in dollar-denominated money market assets.
What are Euro-dollars? The term Eurodollar refers to U.S. dollar-denominated deposits at foreign banks, or at the overseas branches, of American banks. Net-long Eurodollar positioning is at an all-time record as foreign banks are cramming money into dollar-denominated assets to get away from negative interest rates abroad.”
Importantly, when positioning in the Eurodollar becomes extremely NET-LONG, as it is currently, the reversal of that positioning has been associated with short- to intermediate corrections in the markets, including outright bear markets.
What could cause such a reversal? A pick up of economic growth, a reversal of negative rates, a realization of over-valuation in domestic markets which starts the decline in asset prices, or the devaluation of the US Dollar.
A reversal of positioning would spark a virtual spiral, with assets flowing out, which lowers asset prices, leading to more asset outflows. While the bulls are certainly hoping the “cash hoard” will flow into U.S. equities, the reality may be quite different.
Watch the dollar closely.
Santa To Visit Broad & Wall
As we head into the last two weeks of the year, and the decade, it is time for Santa to visit “Broad & Wall.” While I expect the markets to try to rally into year end there are a couple of caveats which could derail that optimism.
Currently, “bullish sentiment” and “optimism” is once again extremely lopsided. Currently, investor cash is at extremely low levels, with investors fully allocated to equity risk. This is a sharp reversal from this summer when “everyone” thought a “recession” was near.
Lastly, the markets are back to extremely extended and overbought conditions in the short-term which suggests the majority of the current advance has been made and a correction is needed before a further advance can be made.
With the market currently overbought and more than 7% above the 200-dma, corrections usually come before the next advance ensues.. Such suggests being a little prudent in adding exposure too aggressively and look for weakness to opportunistically position portfolios.
On a monthly basis we see much the same deviation from long-term (3-year) moving averages. Historically, when extensions from the long-term moving average are this extreme, corrections have tended to occur. In most instances that reversion entailed a correction back to the long-term mean.
Rules For A Santa Rally
Currently, our portfolio allocations remain primarily long-biased although we are carrying a slight overweight position in cash, we have also recently added positions to take advantage of a potentially weaker dollar, and a steeper yield curve. We also recently took profits in our Healthcare sector which has gotten grossly extended.
These processes follow our basic rules of portfolio management which you can apply to your portfolio as well to reduce overall volatility risk.
- Tighten up stop-loss levels to current support levels for each position.
- Hedge portfolios against major market declines.
- Take profits in positions that have been big winners
- Sell laggards and losers
- Raise cash and rebalance portfolios to target weightings.
Notice, nothing in there says “sell everything and go to cash.”
Remember, our job as investors is actually pretty simple – protect our investment capital from short-term destruction so we can play the long-term investment game. Here are our thoughts on this.
- Capital preservation
- A rate of return sufficient to keep pace with the rate of inflation.
- Expectations based on realistic objectives. (The market does not compound at 8%, 6% or 4%)
- Higher rates of return require an exponential increase in the underlying risk profile. This tends to not work out well.
- You can replace lost capital – but you can’t replace lost time. Time is a precious commodity that you cannot afford to waste.
- Portfolios are time-frame specific. If you have a 5-years to retirement but build a portfolio with a 20-year time horizon (taking on more risk) the results will likely be disastrous.
With forward returns likely to be lower and more volatile than what was witnessed over the last decade, the need for a more conservative approach is rising. Controlling risk, reducing emotional investment mistakes and limiting the destruction of investment capital will likely be the real formula for investment success in the coming decade.
The Macro View
If you need help or have questions, we are always glad to help. Just email me.
See you next week.
“NEW” – Financial Planning Corner
by Danny Ratliff, CFP®, ChFC®
How well do you know diversification? Not your typical asset class diversification that every advisor talks about. BUT, beyond the typical industry norm of having Large cap, Mid cap, Small cap, international stocks and bonds as diversification. The type that many advisors don’t speak of, but I feel there is a growing army of advisors ready to conquer. These advisors are ready and willing to equip you with more information, better information to help you make the best decisions beyond just diversification of your investments, but to giving your investments freedom.
Freedom! We all like freedom, well most of us do. It’s kind of a funny thing to think about freeing your money; but let me explain. Assets are only worth what they are on paper until they are taxed.
If you could have funds in 3 different accounts: a partially taxable account, a tax free account and a fully taxable account where would you want these funds?
Allow me to put these in order:
- Tax Free
- Partially Taxable
- Fully Taxable
WHAAAA???? You guys ever seen the minions? I’d put a picture here, but you know that little copyright thing. Look it up and you’ll understand, but this is how I imagine many reactions.
CPA’s as well. (Unfortunately, most people judge them on how much they can save us today versus a forward looking or advisory view.)
Understandably so, you’ve been taught, we’ve all been taught that we need to sock away every dollar we can into a pretax account because inevitably we will all be in a lower tax bracket when we retire.
What if we aren’t?
What if the government spends to much money? What if they just want to redistribute? What if we see higher taxes?
What if after your work benefits, retirement contributions and health care premiums you’re in the same tax bracket in retirement as you were in your working years.
How far will your money go?
Scared yet? Yeah, #metoo. Let’s start a movement. #makethesefundsmineagain catchy if I don’t say so myself.
In the new year we’ll be discussing how to keep more money from the dreaded tax collector and more in your pocket. We’ll also discuss what types of accounts fall into the categories of tax free, partially taxable and fully taxable. Today I hope I caught enough of your attention to start at the very least thinking about not only diversification of assets, but of accounts.
You’ll be hearing more about more specific strategies to diversify soon, but don’t hesitate to give me any suggestions or questions.
Market & Sector Analysis
Data Analysis Of The Market & Sectors For Traders
S&P 500 Tear Sheet
ETF Model Relative Performance Analysis
Sector & Market Analysis:
Be sure and catch our updates on Major Markets (Monday) and Major Sectors (Tuesday) with updated buy/stop/sell levels
Improving – Energy (XLE)
The improvement in Energy has stalled for now as as the rotation to “value” gave way back to momentum for the “QE Chase.” Energy needs to break above the downtrend to become an attractive candidate for portfolios. We recently added 1/2 position in AMLP to portfolios and are looking to add XLE on a break above the 200-dma.
Current Positions: 1/2 AMLP
Outperforming – Technology (XLK), Healthcare (XLV), Industrials (XLI), Financials (XLF)
Financials have been running hard on Fed rate cuts and more QE. The sector is extremely overbought and extended and due for a correction. Take profits and be patient to add exposure.
Industrials, which perform better when the Fed is active with QE, broke out to new highs recently, but has since stalled and started to consolidate at a high level. Given the sector is extremely overbought, we will look to add but will wait for this correction to play out first.
Technology and Healthcare have been the leaders as of late. Healthcare made a sharp recovery from weakening to leading relative to the overall market, and the sector is now grossly overbought and extended. As recommended we took profits in XLV reducing it from overweight to portfolio weight. Like everything else, XLK is extremely overbought so wait for a correction to add exposure.
Current Positions: 1/2 weight XLI, Full weight XLK, XLV
No sectors in the weakening category.
Current Position: N/A
Lagging – Real Estate (XLRE), Staples (XLP), Discretionary (XLY), Communications (XLC), Materials (XLB), and Utilities (XLU)
Despite Staples remaining in the “lagging” category this past week, the sector continues to ratchet new highs. Momentum reamins strong, but the sector is GROSSLY extended and overbought. Take profits.
Discretionary remains a real laggard and has been unable to break out to new highs. As noted last week, the weakness suggest that retail sales would likely not be as strong as expected which was indeed the case in the latest retail sales report. Watch XLY, a failure at support will likely suggest a larger corrective process.
Communications broke out to new highs, but is still lagging the overall market. Given the sector is very overbought, be patient for a better entry point.
XLRE and XLU came under pressure last week on the jump in interest rates. However, with both these sectiors now oversold, look for an entry point to add to portfolios.
Current Position: Target weight XLC, XLY, XLP, XLRE, 1/2 weight XLB
Market By Market
Small-Cap (SLY) and Mid Cap (MDY) – Small- and Mid-caps broke out of the previous ranges as the rotation to risk continues. This past week, we added small-cap fund to our portfolios and we will look to pair that fund with a small-cap ETF. We will update you accordingly.
Current Position: KGGIX, Looking To Add SLYV, MDYV
Emerging, International (EEM) & Total International Markets (EFA)
Emerging and International Markets, rallied recently on news of a “trade deal” and finally clearly broke above important resistance.
We are going to add positions in both emerging market and international value positions in the next few days provided the breakouts can hold. Watch our portfolio and position update reports at RIA PRO.
Current Position: Looking To Add EFV and DYVE
Dividends (VYM), Market (IVV), and Equal Weight (RSP) – These positions are our long-term “core” positions for the portfolio given that over the long-term markets do rise with economic growth and inflation. Currently, the short-term bullish trend is positive, and our core positions are providing the “base” around which we overweight/underweight our allocations based on our outlook.
Be aware that all of our core positions are EXTREMELY overbought. A short-term correction or consolidation is likely before a further advance can be made.
Current Position: RSP, VYM, IVV
Gold (GLD) – Gold is holding support at the $140 level and about to register a buy signal. GDX has also held support and turned higher with a triggered buy signal. We have taken our holdings back to full-weights after taking profits earlier this year.
Current Position: GDX (Gold Miners), IAU (Gold)
Bonds (TLT) –
Bonds rallied back to the 50-dma but failed on Friday as the realization that the “trade deal” is likely not as much of a trade deal as hoped. Stay long current positions for now, and look for an opportunity to add to holdings.
Current Positions: DBLTX, SHY, IEF
Sector / Market Recommendations
The table below shows thoughts on specific actions related to the current market environment.
(These are not recommendations or solicitations to take any action. This is for informational purposes only related to market extremes and contrarian positioning within portfolios. Use at your own risk and peril.)
This past week, the market into the “trade deal,” which was not really a “deal at all,” but pushed asset prices above breakout or resistance levels in several key areas.
One of the aspects, noted in the main body above, is the weakening of the dollar relative to other currencies. This is good for gold and commodities and supports our portfolio changes this week.
Over the last couple of weeks , we have discussed looking for the opportunity to add exposure to small and mid-caps, international and emerging markets, as well as industrials, materials, and energy.
As noted previously, we have been “picking through the ruble” of the energy sector looking for a couple of tradeable ideas in the sector as well. We have identified an interesting yield play that we are looking for the right entry point for. You can read the research note here.
This past week we added the first half of our position in AMLP. We will look to add XLE if it can foster a breakout above the 200-dma.
We also added back into our Gold Miners and Gold positions taking them back to full weight, along with the first step in our addition of a small-cap value fund.
The addition of the small-cap value fund is a long-term structure we will build into over the next several quarters. The rotation to value has not truly started yet, but when it does, it will be a big winner for the portfolio. In the short-term it will likely drag on performance, so please be aware this is a long-term macro theme we are building into.
- New clients: We are holding off onboarding new client assets until we see some corrective action or consolidation in the market.
- Equity Model: We bought 1/2 position of AMLP, added to GDX and IAU.
- ETF Model: Reduced XLV to target weight, Bought 2% KGGIX
Note for new clients:
It is important to understand that when we add to our equity allocations, ALL purchases are initially “trades” that can, and will, be closed out quickly if they fail to work as anticipated. This is why we “step” into positions initially. Once a “trade” begins to work as anticipated, it is then brought to the appropriate portfolio weight and becomes a long-term investment. We will unwind these actions either by reducing, selling, or hedging if the market environment changes for the worse.
THE REAL 401k PLAN MANAGER
A Conservative Strategy For Long-Term Investors
The 401k plan allocation plan below follows the K.I.S.S. principle. By keeping the allocation extremely simplified it allows for better control of the allocation and a closer tracking to the benchmark objective over time. (If you want to make it more complicated you can, however, statistics show that simply adding more funds does not increase performance to any great degree.)
If you need help after reading the alert; do not hesitate to contact me.
See below for an example of a comparative model.
Model performance is based on a two-asset model of stocks and bonds relative to the weighting changes made each week in the newsletter. This is strictly for informational and educational purposes only and should not be relied upon for any reason. Past performance is not a guarantee of future results. Use at your own risk and peril.
401k Plan Manager Live Model
As an RIA PRO subscriber (You get your first 30-days free) you have access to our live 401k p
The code will give you access to the entire site during the 401k-BETA testing process, so not only will you get to help us work out the bugs on the 401k plan manager, you can submit your comments about the rest of the site as well.
We are building models specific to company plans. So, if you would like to see your company plan included specifically, send me the following:
- Name of the company
- Plan Sponsor
- A print out of your plan choices. (Fund Symbol and Fund Name)
If you would like to offer our service to your employees at a deeply discounted corporate rate, please contact me.
Lance Roberts is a Chief Portfolio Strategist/Economist for RIA Advisors. He is also the host of “The Lance Roberts Podcast” and Chief Editor of the “Real Investment Advice” website and author of “Real Investment Daily” blog and “Real Investment Report“. Follow Lance on Facebook, Twitter, Linked-In and YouTube
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