CMG AdvisorCentral

Tactical investing news, views and resources for financial advisors

Animal Spirits and the “Fear Gauge”

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In Friday’s On My Radar, Steve Blumenthal wrote, “Last Monday, the VIX broke below 10 to close at 9.77, the lowest level in more than a decade.  There are only three other days the index has closed at lower levels, all of them in December 1993.  Investors are complacent to risk.  They shouldn’t be.”

Investment consulting firm 720Global also recently wrote about market volatility in The Unseen, “Volatility: A Misleading Measure of Risk.”

As investors, we are negligent if we follow the Fed’s lead into this complacent stupor. By prodding economic growth with unproductive debt and reigniting asset bubbles, the central banks have simply done more of what created the spasms of 2008 in the first place. Despite the markets calm façade and historically low perception of risk, the vast chasm that lies between perceived risk and reality is troublesome.

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Real Implications of Reduced Pension Fund Returns

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pension_cartoon1Last week, the investment staff of CalPERS — the $300 billion California pension fund — announced that they want to reduce its target of 7.5 percent annual returns.  According to Chief Investment Officer Ted Eliopoulos, achieving a 7.5 percent annual return is no longer realistic.  Holy cow!

The implications of this proposal, if adopted, are significant and “would trigger more pain for cash-strapped cities across California and set an increasingly cautious tone for those who manage retirement assets around the country.”

Can you imagine how many people are going to be affected?  Here’s the bottom line.  The pension system, across our great nation, is underfunded and in trouble.

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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).)

9.2.2

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.

9.2.3

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.

9.2.8

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.

9.2.9

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.

Trade Signals – Overvalued, Sentiment Remains in Bullish Extreme (S/T Bearish for Stocks), Cyclical Bull Uptrend

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With a nod towards broad portfolio diversification, following is a quick summary of what I am seeing this week — organized by investment category (equity markets, fixed income and liquid alternatives):

  • Equity Markets: The weekly Ned Davis Research (NDR) investor sentiment remains extremely optimistic (short-term bearish for equities). The daily sentiment indicator is now neutral from extreme optimism (neutral for equities).  At this time, there’s more buying demand vs. selling supply (a bullish signal), the market trend remains positive.  Don’t Fight the Tape or the Fed moved recently from a +1 to 0 (now neutral on equities).  The 13/34-Week EMA trend indicator remains bullish.  The CMG NDR Large Cap Momentum Index is nearing a buy signal.  Valuations, which we’ll look at again in this Friday’s On My Radar, remain extreme (overvalued), so while trend evidence suggests a neutral to positive view on equities, I continue to favor an underweight exposure to equities and hedge.
  • Fixed Income: HY remains in a buy signal or uptrend and the Zweig Bond Model remains in a buy (bullish on high quality fixed income). We see “JNK” and “PCY” exhibiting the strongest relative strength in fixed income (this from a universe of nine ETFs ranging from short-term and long-term Treasury bonds, corporate bonds, munis, high yield, emerging market, inflation and developed market bonds).  It’s been a good year for bonds.
  • Liquid Alternatives: Gold (“GLD”) is testing support at 125. The CMG Opportunistic All Asset ETF Strategy is currently allocated approximately 81% to equities and 19% to fixed income.  We allocated to “IYF,” a U.S. Financial ETF in the last week, trading out of “BND,” a bond ETF.  Emerging markets and technology continue to show strong price leadership.  Biotech has had a tough week.

For charts, analysis, and commentary see the rest of the story in Trade Signals – Overvalued, Sentiment Remains in Bullish Extreme (S/T Bearish for Stocks), Cyclical Bull Uptrend.

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.

Stocks and Bonds Have Little Juice Left

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CMG Capital Management Group Market AnalysisDo you remember back in the early 80s when interest rates peaked at 15.25% and most everyone felt rates were moving higher, certainly not lower?  The fact is, it was the single best time in history to get bullish on bonds.

Solomon Brothers’ head of research Henry Kaufman went from bond bear to bond bull and that call, unpopular as it was, later earned him “guru” status.  The thing is, at that time, most people thought he was nuts.

Recall too that inflation was in the mid-teens and both stocks and bonds had burned investors over the prior decade.  Fed Chairman Paul Volcker stood tall in his fight to rein in inflation.  Kaufman’s bullish call went on deaf ears.  Few seized the opportunity.

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Blumenthal’s Top 2016 ETF Picks For IBD

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Investor's Business Daily IBDCMG Capital Management Group CEO Steve Blumenthal picks 3 ETFs for 2016. Steve discusses NYSEARCA:IGV, NYSEARCA:OAPH, and NYSEARCA:DRR for the story 6 Best ETF Picks: Experts Favor U.S., Growth Stocks.

Says Steve:

“Central bank activity will remain the key theme for the markets in 2016. Higher U.S. interest rates vs. lower-to-negative rates in many parts of the world favor the dollar.

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Blumenthal in WSJ on Valuations And Forward Returns

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The Wall Street JournalCMG Capital Management Group CEO Steve Blumenthal analyzes stock valuations and projected forward returns of the U.S. equity market for a column in The Wall Street Journal. Excerpt:

“Valuation metrics can tell us a lot about probable forward returns,” says Mr. Blumenthal. The table helps drive home the point that buying stocks when they are reasonably priced relative to company earnings increases the odds of decent long-term returns. By contrast, historically when the P/E ratio was at a high level, the index didn’t perform well over the next 10 years, he says.

See the full story in The Wall Street Journal: Aha! How Stock Valuations Can Shape Long-Term Returns.

Bond And Stock Market Outlook

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By Steve Blumenthal, CEO, CMG Capital Management Group Inc.

CMG Capital Management Group logo

Wealth through ingenuity.

Bond yields rose again this week and are nearing an 8-month high.

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.

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