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Market Climateand Weather Forecast
Presented by Herb Geissler, Managing Director of The St.Clair Group
Rational Investing/VectorVest Special Interest Group of Pittsburgh AAII
May, 2013
"It is not the strongest of the species that survives, nor the most intelligent,
but the ones most adaptable to change." Charles Darwin
Basic Traits of Successful Investors
1. They look at objective indicators. Removing the emotions from the investing process, they focus on data instead of reacting to events;
2. They are Disciplined: The data drives decision making with pre-established rules. External factors do not influence them;
3. They have Flexibility: The best investors are open-minded to new ideas, or revisiting previous thoughts;
4. They are Risk adverse: Not always obvious to investors, it is a crucial part of successful investing.
Investors always will make mistakes, and many of them.The only difference between winners and losers
is that winners have small losses and losers have large losses
Observations by Ned Davis
Secular Bear Market RequiresDifferent Strategies Than During
Bull
Avoiding losses is more important than going after big gainsKuznets’ Infrastructure cycle averages 17.6 years for each bull or bear phase
Government Spending Now Approaching European
Levels
Medicare andWar on Poverty
Guns and Butter
Redistribution
Of Wealth
And Misdirected from Infrastructure Needed for Long-
Term Growth
Total Public Construction Spending vs GDP
Spending on roads, bridges, sea/air ports, sewage and water supply, public housing, etc
Congress Spends Excessivelyon Vote-Getting Consumption
Sequestration on March 1 would trim 10% from
31%,halving one year’s
growth
Federal spending exceeded revenues by $100 Billion every month for past 3
years
Federal ReserveFinancing Spending
ExcessesFederal Reserve QE is creating $85 Billion of IOUs every month
$40 Billion finances Federal excess spending $45 Billion funds housing & mortgage banks This $1 Trillion in annual QE adds 7-points to
GDP of $15 Trillion (vs 2-3% net growth) FRS liabilities tripled from $0.874 Tln in ’08 to
$2.9 Tin in early 2013The 7 Governors and 12 Bank Presidents are all political appointees from White House and Congress
Fed’s Game Planand Likely Timing
Cease reinvesting some or all payments of principal on the securities holdings; (mid 2014)
Raise the target federal funds rate; (mid 2015) Sell remaining agency CMO securities over a period
of three to five years; and (mid 2015, 16, 17, 18, 19) Once sales begin, normalize the size of the balance
sheet over two to three years (mid 2015, 16, 17)
Actions stated in June 2011 FOMC Meeting.
Timing from August 2012 FRS Staff Discussion Paper
Real Driver of Bull Market Has Been
Fed Stimulus Liquidity
Make hay while the sun shines, but watch out when Fed dampens QE
May 2013May 2013 Long-Term Long-Term
Strategic ConclusionsStrategic Conclusions
1. Deleveraging heavy borrowings for excessive spending increases unemployment and will cause recessionary conditions globally during next several years.
2. Now, at middle of Kuznets’ cycle, upside is limited; as long as QE persists, cautious selections and disciplined timing (in and out) can be profitable. Even bonds & gold are risky now.
3. Return of capital is more important than return on capital. Defensive strategies and disciplined timing to lock-in gains is essential in this roller coaster market.
So, what should we do over the next months and quarters?
Positive and rising PMI’s supported rising market
Market rises when ISM is above 50, except right after 9/11/2001
Consumer Spending is supporting retail,
wholesale, healthcare and services sectors
Rising stock market despite weakening PMIs
suggests summer correction
S&P500
May 2013May 2013 Intermediate-Term Intermediate-Term
Strategic ConclusionsStrategic ConclusionsUS employment is stabilizing and consumer spending is holding up Liquidity from Fed still flowing strongly; low interest rates boosts stocksU.S manufacturing sector is becoming healthier, but starting to falter
Europe’s sovereign debt and spending problems prolongs their recessionsEmerging Markets losing strength; even China in PMI contraction.
Bullish US stock market is vaporizing, suggesting a bad summer.
Fiscal uncertainties necessitate great selectivity in both strategies and vehicles and, most importantly, the rules and discipline to exit when market swoons
Weather Forecastfor More Active Investors
When the facts change, I change my position.What do you do, sir?
- John Maynard Keynes
High Quality Dividend Stocks Are Favored During Weak Bull
PeriodsUnderscoring Weakness of Today’s Bullish Levels
May 2013May 2013 Short-Term Short-Term
Strategic ConclusionsStrategic Conclusions1. Hot market is now rolling over towards a Summer correction
Topping out and roll-over patterns reveal current risks Tight stops, caution, and cash accumulation is prudent for stockpiling
ammunition
2. Liquidity from QE and bond sell-off provides some cushioning Correction could be a mild 10-15%, but Washington is erratic Use simple spreadsheets or charts to signal when to get out and when to re-buy
3. Preferred havens are cash and/or strong dividend equities REITs, Production MLPs, Utilities, Food Makers are attractive havens
4. But Hirsch may be right• Stocks may drop 20% into Thanksgiving, move sideways til Easter, then
plunge another 20-25% into a 4Q/14 bottom• Use charts and spreadsheets for logical, disciplined actions
Remember: we are still in the Kuznets Bear Phase; use the discipline of indicators to
pinpoint trigger points
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