The European Central Bank president, Mario Draghi, signaled on Thursday that more stimulus is coming and the world markets loved it. China lowered rates 25 bps to 4.35%. The benchmark deposit rate was lowered by 25 bps to 1.5%.
By Steve Blumenthal, CEO, CMG Capital Management Group Inc.
Rising yields are good for some stocks and bad for others. Dividend payers, REITs and Utilities have been among the recent worst performers.
Alternately, banks and life insurance stocks have been rising since January and strong again last week. Bond yields began rising in early February. The 10-year Treasury yield has gone from 1.67% (YTD low on February 2) to 2.48% last Friday.
4/22/2015 Trade Signals: In summary, both Big Mo (Momentum) and the 13/34-Week EMA suggest that the market remains in a cyclical bull market (up trending) state. I believe trend is most important: therefore, buy the dips (on extreme pessimism) as long as the 13/34-Week Blue EMA line is above the Red EMA line and own equities (but hedged as valuations are high, the market bull is aged; thus, overall equity market risk is high). For charts and explanation see Trade Signals – “Risk On” Trade Remains in Place.
From an investment management perspective, I’ve followed, managed and written about trend following and investor sentiment for many years. I find that reviewing various sentiment, trend and other historically valuable rules based indicators each week helps me to stay balanced and disciplined in allocating to the various risk sets that are included within a broadly diversified total portfolio solution.
Steve Blumenthal, CEO of CMG Capital Management Group, writes in Forbes about”the year that interest rates will finally rise.” An excerpt:
“Employment figures continue to surpass analyst estimates and the trend over the last six months has been strong. Last Friday’s upside surprise sent interest rates higher. It is expected that the Fed moves off its zero bound peg by September.
“Liftoff is likely just the beginning of the journey. That popular song rings louder in my head, All About That Fed. The problem with rising rates is that bonds lose money, especially when your starting place is ultra-low yields.
“Confusion deepens the more you turn on CNBC. One expert shouts rates are going higher. The next argues they’re headed lower. Both make a good case.”
See the full story: Rate Hike Ahead, Bond Model Says Sell
By Steve Blumenthal, CEO, CMG Capital Management Group
I highlighted three valuation measures earlier this month Click Here: one based on reported earnings through 12-31-2014, one based on operating revenue, and Warren Buffett’s favorite valuation indicator Stock Market Capitalization as a Percentage of Gross Domestic Income. The market is expensively priced. The problem is that when valuations are high, the probable forward returns are low. This doesn’t mean the U.S. equity market can’t go higher from here; but it does mean that risk is much higher.
By Steve Blumenthal, CEO, CMG Capital Management Group
The Zweig Bond model as well as our tactical fixed income relative strength strategies remain bullish on bonds. Global deflation remains the dominant theme. Because yields are so low, risk is high. I favor tactical over traditional bond buy-and-hold.
Given the historically low yield on bonds, I believe it is important to understand what happens to bonds when interest rates rise. Bonds simply do not provide the same yield benefit to portfolios and the risk that rates normalize (move higher) is real. The next chart shows the risk and return benefit.
By Steve Blumenthal, CEO and portfolio manager, CMG Capital Management Group
I wrote often throughout 2014 about the danger signals flashing from an excessive run up in debt and derivatives. We have a repeat of the scenario we suffered in 2008, only much worse (Watch Junks Bonds For Early Warnings Of New Financial Crisis). The budget recently passed by Congress put taxpayers on the hook for a 2008-like derivatives failure. The potential losses could exceed the previous financial meltdown as other world market conditions exacerbate a bad situation.
As a risk manager, I need to acknowledge and plan to mitigate these big, macro risks. At the same time, as a tactical manager, I acknowledge that right now the weight of evidence points to a continued positive trend for this mega bull market.
In a world of excessive debt and unprecedented Central Bank intervention, where is a global investor to go? For now, the best place remains in U.S. equities.
Global debt continues to be the #1 concern going into 2015. A sovereign debt crisis looms on the horizon yet for now the creativity of global central bankers has kicked that can down the road. It is desperation time in Japan and the Eurozone is not far behind. A number of factors favor the U.S. dollar and U.S. equities through mid-2015.
Read the rest of Steve Blumenthal’s 2015 investment preview in Forbes Looking Ahead To The Year That Interest Rates Will Finally Rise
CMG Capital Management Group CEO Steve Blumenthal is quoted in the Investor’s Business Daily story Russia ETFs Reel From Crumbling Ruble, Rate Hikes. Excerpt fom the story:
“Raising rates is an attempt to attract foreign investors to buy Russian bonds at 17%,” thereby shoring up the ruble,” said Steve Blumenthal, CEO of CMG Capital Management.
Top-Heavy In Energy
The fortunes of Russia ETFs are closely tied to oil and gas; energy stocks make up 40% of RSX’s portfolio. The highly concentrated RSX’s top 10 holdings include Novatek, Lukoil (OTCPK:LUKOY) and Gazprom (OTCPK:OGZPY).
Trend following process moved us from HY
to very short-term bond exposure last week
For more than 22 years I’ve been trading the intermediate-term trends in the high yield market. I wake up each day, grab a coffee and sit in my favorite chair. With laptop online, the first thing I do is look at the prior day’s high yield bond mutual funds’ closing prices – it’s a pretty long list. Do anything for that long a period of time and you gain a feel for trend. Of course, my wife looks over and says, “Looking at charts again.” It has remained so interesting to me. I know – I need to get a life.
Anyway, I’ve been warning on the coming default wave in high yield and I can say with some confidence that high yield is usually one of the first asset classes to warn of recession. Though, of course, past performance means zilcho in this business.
By Steve Blumenthal, CIO, CMG Capital Management Group
Technical trend evidence remains positive. Investor sentiment evidence continues to support a short-term recovery uptrend. The market remains expensively priced, the cyclical bull is aged – risk is high.