At a recent investment conference, one of the panelists was an investment officer for the China Investment Corporation (CIC) – the Chinese sovereign wealth fund. She was particularly critical of the performance of their hedge fund managers. The CIC and others have been exiting their hedge fund investments. A common theme of late.
“The secret to my success is I buy when everyone else is selling and I sell when everyone else is buying,” said the great Sir John Templeton to me in 1985. He added, “If you can do that, you’ll be amongst the best in the business.” The contrarian in me just couldn’t help but to think back to that sage advice. It seems to me like we may be arriving at one of those points in time, Sir John. Just saying.
The chart below tracks the delinquency rate on commercial and industrial loans from all commercial banks on a percent change from the prior year (blue line). It then compares that change to Bank of America/Merrill Lynch US High Yield spread (red line). The spread is simply the current yield minus the comparable yield for a safe investment, like U.S. Treasurys, that has a similar maturity. If the average maturity is five years on the ML HY Index, then the spread is that yield less the five-year Treasury yield.
I like to think of this weekly process as a risk management dashboard. Of note this week is the extreme level of investor optimism. Generally, such readings are short-term bearish for equities and suggest a pause or correction within what is a bullish trend environment (see 13/34-Week EMA chart below) for equities.
As one of “the more influential ETF strategists in the money management industry” CMG Capital Management Group CEO Steve Blumenthal was invited to write a column for ETF.com about bond investing. Steve writes: