CMG AdvisorCentral

Tactical investing news, views and resources for financial advisors

Best Ideas from the Morningstar ETF Conference

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ms-etf-conferenceOn September 8, I had the privilege of participating on a panel regarding portfolio construction (“Beyond the 60/40 Portfolio”) at the Morningstar ETF Conference in Chicago.  Not surprisingly, there were a lot of terrific discussions, and I took tons of detailed notes.  One of my favorite sessions was the “Best Ideas” panel, which featured Mark Yusko of Morgan Creek Capital Management, John West of Research Affiliates, and Rich Bernstein of RBA.  Morningstar’s Jeff Ptak did a great job moderating the panel.

As promised, I shared some of my notes from the Best Ideas panel in Friday’s On My Radar.  More to come from the conference later this week.  Stay tuned!

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Elliott Management’s Paul Singer Warns of “Dangerous Time” in Global Financial Markets

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In the August 19, 2016, issue of On My Radar, Steve Blumenthal cited a CNBC article discussing Elliott Management’s quarterly investor letter by Paul Singer, which predicted a forthcoming market “breakdown.”  Singer contends that the global bond market is “broken.”

Today, at CNBC’s Delivering Alpha conference, Singer criticized central bankers and specifically the Federal Reserve saying, “What they have done is created a tremendous increase in hidden risk, risk that investors don’t exactly know or have faced about their holdings.  I think it’s a very dangerous time in the global economy and global financial markets.”

In these volatile, unpredictable times, advisors need to know that someone has their back.  We’ve got your back.  CMG is here to serve our clients, exceed their expectations and help build the strongest all-weather portfolios possible.  Contact us today.

Current High Valuations Suggest Low 10-Year Returns for Stocks

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Both professional and individual investors must recognize the relationship between risk and reward (i.e., returns).  Indeed, as fiduciaries, investment advisers are duty-bound to protect their clients’ interests and elevate them above their own.  We’ve been writing for some time that current market valuations are very high and, when the market is at these excessive levels, returns are typically reduced.

On August 31, the S&P 500 median price-to-earnings (P/E) ratio was 23.7.  (Think of “median P/E” (which is based on actual, reported earnings and current share price) as the middle P/E (250 stocks have a lower P/E and 250 have a higher P/E).)

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I’ve shared the chart above previously.  It shows that returns are highest when the market is most favorably priced (low median P/Es) and lowest when the market is least favorable priced (high median P/Es).  We are in Quintile 5 today.  The next chart shows that not only were returns lowest when P/Es are high, like they are today, the risk is actually the highest.

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In fact, some investment managers, are further lowering forward return expectations for equities.  GMO recently revised its real return forecast for large-cap equities to -3.2% from -1.9.

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For charts, analysis, and commentary, see the rest of the story in On My Radar: Why? Because We Need the Eggs

The current opinions and forecasts expressed herein are solely those of Steve Blumenthal and are subject to change.  They do not represent the opinions of CMG.  CMGs trading strategies are quantitative and may hold a position that at any given time does not reflect Steve’s forecasts.  Steve’s opinions and forecasts may not actually come to pass. Information on this site should not be used as a recommendation to buy or sell any investment product or strategy.

Why I Don’t Follow Consensus Earnings Estimates

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I bet that you, like me, get a number of client calls that reference a Wall Street report touting forward P/Es.  The client watched an analyst on TV saying P/Es are cheap based on next year’s earnings estimates.  The analyst compared that forward estimate based P/E, which is 17.20 as of August 31, 2016, to 23.7 (median P/E) or 26 (Shiller P/E) and says the market is not so richly priced.

Not only is that poor analysis, if you look at forward P/E and compare it to other periods in time, you’ll see that the current level is as high as it was in 2007 and higher than any other period since the 1960s with the exception of the late 1990s and early 2000s.

With that said, here is the main reason I don’t rely on Wall Street “consensus” earnings estimates.  The next chart shows year by year where Wall Street’s estimates began and where they finished up.  For example, look at the 2016 estimates (orange line).  Back in March 2015, the consensus earnings estimate for 2016 was approximately $137.50 in operating earnings per share for the S&P 500.  The most recent estimate, as of August 24, 2016, is $110.84 per share.

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Take a look at each year.  Note how it started high and how much it declined by the time the actual numbers were reported.  Keep in mind we won’t know 2016 numbers until Q1 2017.  And we won’t have 2017 numbers until Q1 2018.  My simple point is… how can we rely on forward P/E based on Wall Street’s earnings estimates?  I can’t.

Click here to find out what actually happened with consensus estimates.

The slow, long expansion

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A client asked me how economic growth post the great financial crisis compares to other prior periods.  I did some digging and found this from Ned Davis Research, “Currently in its eighth year of growth, this expansion is the fourth longest of the postwar period.  Early next year it will be number three.  The longest expansion was ten years, which ended in March 2001 and encompassed the technology boom.”

Here is a look at the data from 1947 to present:

Anatomy of Post War Economic Expansions 03/1947 - 07/2016

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Everyone Is In The Dark

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CMG Capital Management Group Market AnalysisWhen it comes to research, I favor managers with skin in the game.  Paul Singer is one of those managers.  His firm, Elliott Management, manages $28 billion in assets, making it one of the world’s largest hedge funds.  Years ago, in my hedge fund days, we had an investment in his fund.  He is smart, experienced and seasoned.

Singer warns that the bond market is “broken” and that when the central bank actions of recent years no longer ward off a market downturn, the subsequent loss of confidence could be severe.  Singer states, “Trading in this market is particularly difficult….  Everyone is in the dark.”  He continues, “Experience doesn’t count for much, and extreme confidence may be fatal.”

My mantra has been to own equities but with some downside hedge in place.  Almost one-half of the Western world’s outstanding sovereign debt—$12.6 trillion worth—traded at negative yields last week, according to the Financial Times.  With economics, “no government can play god.”  We’ll find out soon enough.

For charts, analysis, and commentary see the rest of the story in On My Radar: “In the Realm of Economics, No Government Can Play God.| By Steve Blumenthal |

The current opinions and forecasts expressed herein are solely those of Steve Blumenthal and are subject to change.  They do not represent the opinions of CMG.  CMGs trading strategies are quantitative and may hold a position that at any given time does not reflect Steve’s forecasts.  Steve’s opinions and forecasts may not actually come to pass. Information on this site should not be used as a recommendation to buy or sell any investment product or strategy.

What Would Janet Do?

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Janet YellenLet’s take a look today at just how attractive U.S. interest rates are relative to most of the world.  To wit, the title of this week’s On My Radar piece, “The Best Looking Dude at the Dance.”  Who in their right mind could have imagined that 1.50% would be attractive?  We’ll look at the comparisons today and consider the implications.  Lower for longer?  Dr. A. Gary Shilling says yes.  I’m getting concerned that too many are now in that camp (yours truly among them).

The bond market seems to have forgotten last Friday’s strong employment report.  The worry about “What Would Janet Do” (raise interest rates) has subsided.  The yield on the 10-year Treasury jumped from 1.49% to 1.58% back down to 1.50%.  What is this telling us? One thing that’s apparent to me is that the global capital flow advantage goes to the U.S.

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The Reality of Forward Returns

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Today, let’s take a look at the most recent market valuations and what they are telling us about forward returns over the next ten years.  But keep in the back of your mind that you can get pretty close on seven and ten-year return probabilities but it is a coin flip on what the equity returns will be over next number of months.

We do know that the insatiable demand for stocks with above average yield is causing valuations to diverge materially from historical norms.  This may continue.  In a recent State Street poll, investors were asked what their returns expectations are for the next five years and beyond for real estate, commodities, equities and bonds.

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The Quest For Yield

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CMG Capital Management Group Market AnalysisAt 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.

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Use Caution Chasing Yield

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CMG Capital Management Group Market AnalysisWe have four interns this year. At the start of their internships, we required that they read “How the Economic Machine Works” by Ray Dalio.  The paper discusses how central bankers have certain levers they can pull, such as raising and lowering interest rates and other tools to speed up or slow down the economy.

I told them that I’m thrilled our fixed income strategies are doing well yet the unprecedented central bank experiments have so distorted price discovery that I just don’t know if I should scream or shout.  I’m concerned that the Fed has boxed itself into a Keynesian corner.

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