Breadcrumbs

January, 2016: “But……Isn’t cheaper oil good for the economy?”

As of this writing on the evening of January 20th, the equity markets are experiencing their worst monthly loss since February, 2009. Many worldwide equity and commodity markets are already in what is defined as a bear market; being down more than 20% from their highs. In U.S. equity markets, the average stock in the S&P 500 is down 22% from its high, although the index itself is not yet in bear market territory. Oil is down 25% since the start of the year and down 60% since June of 2014. Many investors are asking two things. Why has this happened so fast, like flipping a switch on the first day of trading in 2016 when equity prices started falling? Secondly, why are declining oil prices dragging down the entire world’s equity markets? Although markets are too complex to ever point to one reason for a major sell off, one of the factors that is contributing without a doubt does map back to substantially lower oil prices. While it is true that lower oil prices will put more money in the pockets of U.S. consumers and companies that may help other areas of the U.S. economy; initial indications, such as the lack of a rise in retail sales, indicate that most are choosing to save this extra money or it is being eaten up by increasing healthcare costs and other services.

Let’s take a look at some of the reasons falling oil prices are a very bad thing for financial markets.

    • Although much of the oil drop is due to oversupply from increasing supply in the U.S., et al and now Iran’s oil coming back online, it is becoming apparent that the drop is also due to falling demand. This would be a clear indication of slowing growth in the world economy; especially China.

 

    • S&P earnings for the 4th quarter of 2015 are expected to come in at -5.7% year over year. If energy companies were not included, earnings would be -.1%. (FactSet) The materials sector is also expected to report negative earnings, due to the drop in prices of all commodities.

 

    • The drop in oil contributes to a stronger dollar, which in turn hurts all U.S. companies that do business internationally. The stronger dollar makes our products more expensive if they buy them in their local currency and when sales are made in their local currency, that local currency can’t buy as many dollars when it is converted back to U.S. dollars.

 

    • Many oil companies in the U.S. are highly leveraged and will be defaulting on debt that they can no longer service at these lower oil prices. This will hurt the earnings of banks that take these losses. Many of these loans are also in the “junk debt market”. As those bonds sell off due to increasing default risk, that selloff in the price of these bonds will bleed over into a selloff in equities, which is already happening.

 

    • The U.S. and other countries are already experiencing large numbers of layoffs in the oil, commodity and materials industries. In addition, companies that provide materials and equipment for these industries are being hurt. Companies like Caterpillar are also letting employees go, as the need for their heavy equipment has fallen off sharply. This will contribute to a weaker U.S. and world consumer, economy and could possibly contribute to further weakness in other areas.

 

Lastly, in the shorter term and ongoing, the biggest reason that dropping oil prices are causing the large selloff in equities is due to the impact of sovereign wealth funds. Sovereign wealth funds are invested assets owned by worldwide governments. In oil exporting countries, these assets are tied to decades of oil profits that have been put to work in the world equity markets, real estate, the expansion of oil producing projects, etc. The world’s sovereign wealth funds together have assets of $7.2 trillion, according to the Sovereign Wealth Fund Institute, which studies them. That is twice their size in 2007, and more than is managed by all of the world’s hedge funds and private-equity funds combined, according to J.P. Morgan Asset Management.

Equally as troubling, “Energy-exporting countries pulled money out of world (equity) markets last year for the first time in almost two decades, halting the "recycling" of oil windfalls,” BNP Paribas has said. The trend would continue as energy prices stayed under pressure, the bank predicted last year. Although China is not oil dependent for its revenues to run the country, a slowdown in China will contribute to their need to liquidate assets from their SWF. According to the Wall Street Journal, Norway, who has the largest SWF in the world due to their oil exports, communicated in December that they would be selling equities after the first of the year.

They along with other oil dependent countries have seen oil fall another 25% year to date and this would seem to explain why the first day of trading for 2016 was the start of weakness right out of the gate. It also supports the idea that oil prices continuing to fall is definitely bad for the equity markets and rightfully so. Equities are the first choice of these funds to sell because they are more liquid than real estate and their additional oil investments are beaten down just as oil is. According to Claire Milhench, an energy correspondent out of London, “In July, Saudi Arabia resorted to issuing a bond for the first time since 2007. The International Monetary Fund has warned of the Saudi deficit - estimated at around 20 percent of GDP this year.” This debt was issued to keep from dipping into their SWF to pay for the many entitlement programs that keep their people from rising up against the wealthy and suppressive monarchy.

Again, it can’t be emphasized enough that oil has fallen substantially from when these actions had to be taken. The longer oil continues to fall or even stays at lows not seen since 2003, oil dependent countries will have no choice but to sell assets from their SWF’s to cover government programs and responsibilities. This in turn will contribute to slowing world growth and cause other countries not oil dependent to do the same. One can easily see how this could become a vicious cycle.

The good news is that your investments at PCM were very conservatively invested going into the New Year, 2016 and we hope to continue on a path that will allow us to be recognized for top performance for 1st quarter, 2016 on our client’s behalf and benefit.

As we communicated last month, PCM was again recognized as a “Top Gun” for our performance during the 3rd quarter of 2015 by Informa Investment Solutions. Four of our models were in the top 10 performers out of hundreds of products and money managers.

 PERFORMANCE RECOGNITION: 3rd Quarter, 2015 Informa Investment Solutions’ (PSN) Ranks PCM “Top Gun” Products

PCM Protective Equity - (Top 10/#5) All Cap Universe (543 products in the All Cap universe)

PCM Diamond - (Top 10) US Balanced Universe (314 products in the US Balanced universe)

PCM Global Macro - (Top 10/#2) Global/Intl Balanced Universe

PCM Global Tactical - (Top 10/#8) Global/Intl Balanced Universe (297 products in the Global/Intl balanced universe)

The January allocations theme is “risk off” with a very heavy bias towards cash equivalents. The slight allocations to equities stayed conservative as well, with utilities and consumer staples a common theme. Belgium and New Zealand equities showed up in the international allocations and the currency allocations stayed with the U.S. Dollar and the Japanese Yen. Both of these currencies do well in “risk off” scenarios and this month has been no exception.

 

PCM Strategies: 01.2016 Allocations*

*(Please note that performance numbers on the website for indexes do not include dividends and are appropriately calculated sequentially.)

1. PCM US Bond Total Return Index SM: Inverse high yield bonds and cash equivalent.

2. PCM Absolute Bond Index SM: 1-3 month U.S. Treasury bills.

3. PCM Absolute U.S. Sector Index SM : Utilities, consumer staples and cash equivalent

4. PCM U.S. Industries Total Return IndexSM: , : Utilities, consumer staples, REIT’s and aerospace

5. PCM Absolute Equity Income IndexSM : Dividend paying equities, utilities and REIT’s

6. PCM Emerging Market Total Return Equity IndexSM: 100% cash equivalent.

7. PCM Total Return Portfolio IndexSM and PCM Stable Growth Plus+ Portfolio IndexSM: Cash equivalents are heavy in the allocation of portfolios, which are seeing a SMall fraction of the downward move thatequities and commodities seen so far for 2016.

8. PCM Global Tactical IndexSM: For the second half of January are now in utilities, the Japanese Yen, 20 year U.S. Treasuries and cash equivalent after starting 2016 with exposure to New Zealand, Belgium, consumer staples, Utilities and cash equivalent.

9. Global Macro IndexSM: Heavy cash equivalent and the U.S. dollar

10. PCM Alpha 1 IndexSM: Cash equivalent first 2 weeks of year and now in 7-10 year U.S. Treasuries.

11. PCM Absolute Commodities IndexSM: Cash equivalent all month.

 

***We have enhanced our website AGAIN at https://www.pcminvestment.com. You can now see performance of our indexes (previous day and month to date) on our streaming ticker. We include performance for both our indexes and our composites, as applicable. You will be asked to enter your email address to get into the website. There will be no password required, so you won’t have to worry about forgetting it. This is partly due to helping us stay in compliance with requirements in our industry that we know who has reviewed our website content. Please use the website link above to see all of our indexes and composites.

In addition to the above mentioned “Top Gun” performance awards from Informa Investment Solutions, PCM composites have been previously recognized for performance by Informa Investment Solutions; the PCM Absolute Bond CompositeSM for the three year performance ending the 4th quarter of 2014, as well as previous awards for 1-year trailing performance and 3-year trailing performance. As of 2nd quarter 2014, the PCM Absolute Bond CompositeSM and the PCM Absolute Commodities CompositeSM both won a “Top Gun” award for performance in their respective category for the 1-year trailing performance period, with the PCM Absolute Bond CompositeSM also winning the “Top Gun” award for 3-year trailing performance. The PCM Alpha 1 CompositeSM was awarded the “Top Gun” performance award for the 1st quarter of 2014. We are very pleased to see these particular multi directional strategies being recognized, as the PCM Absolute Bond StrategySM and PCM Alpha 1 StrategySM are particularly timely for where we are in the current market cycle.

To view Morningstar Fact sheets of all of our index models, please visit our website at www.pcminvestment.com under the “PCM multi-directional Strategies” tab.

By: Melissa Wieder, CFP®, Director Institutional Services
Collaborative insight provided by CIO Michael Chapman.

 

About "PCM Quant Coalescence"

Welcome to Provident's "Quant Coalescence" communication. We suspect that many of you are no different than us. That is to say that when our quantitative models rebalance every 2 weeks for some indexes or once a month for other indexes, you sometimes find yourselves asking "What is behind a rotation into that ETF?" This communication is our opportunity to "unite for a common end" with our clients and partners; keeping you updated on our thoughts and perspectives. As you know, our indexes are based on an absolute approach: we strive to make money in up markets or down markets, while trying to greatly minimize loss in any market environment. Our indexes are also quantitative, reflective of our systematic, unbiased and technical approach. Since our indexes are unbiased, the quantitative models would obviously at times rotate into positions that cause us to scratch our heads. Nevertheless, being so close to the analysis as it unfolds, allows us to quickly begin to validate the fundamental reasons behind the quantitative "following of the money." At other times, the trades are not validated right away; the story unfolds as the days pass. We have been very excited about many of these "validations" and "ah ha" moments. We had another "ah ha" moment when we decided that these insights would also be interesting to those who have entrusted us with their financial peace of mind. Our goal is to be short and to the point, specific to what is happening in our indexes rather than a lengthy macroeconomic perspective.

 

Disclaimer:

The views and strategies described herein are for illustrative purposes only and may not be suitable for all investors. The information is not based on any particularized financial situation, or need, and is not intended to be, and should not be construed as investment advice or a recommendation for any specific PCM or other strategy, product or service. Investors should consult their financial advisor prior to making an investment decision. There is no guarantee that these investment strategies will work under all market conditions and each investor should evaluate their ability to invest long-term, especially during periods of downturn in the market. This material contains the current opinions of the author(s) but not necessarily those of PCM and such opinions are subject to change without notice. This material is distributed for informational purposes only. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this article may be reproduced in any form, or referred to in any other publication, without express written permission. Provident Capital Management, Inc., PCM and Absolute Return Index are trademarks or registered trademarks of Provident Capital Management, Inc., in the United States.©2013, PCM.

For further disclaimers and disclosures, see our website for index disclosures and composite disclosures.

December, 2015: “It’s beginning to look a lot like…….”

Christmas? Time for the first rate hike in 9 years? The last leg of this bull market? Time for some performance awards? All of the latter? We now know the Fed hiked a quarter point. We also know that PCM has (again) been recognized as a “Top Gun” for our performance during the 3rd quarter of 2015 by Informa Investment Solutions. Four of our models were in the top 10 performers out of hundreds of products and money managers.

PERFORMANCE RECOGNITION: 3rd Quarter, 2015
Informa Investment Solutions
(PSN) Ranks PCM “Top Gun” Products

  • PCM Protective Equity- (Top 10/#5)  All Cap Universe (543 products in the All Cap universe)

  • PCM Diamond- (Top 10) US Balanced Universe (314 products in the US Balanced universe)
  • PCM Global Macro- (Top 10/#2)  Global/Intl Balanced Universe

  • PCM Global Tactical- (Top 10/#8) Global/Intl Balanced Universe (297 products in the Global/Intl balanced universe)

    I don't think anywhere in the US is looking a lot like Christmas this year, with even Buffalo, New York setting a record for no snow this late in the season. As far as the Fed, the speculation will soon enough turn to “What next? When? How many?” And is this bull market on its last leg? The following are some interesting statistics to consider:

  • Corporate debt is over 50% higher than it was at the beginning of the financial crisis in 2008. As interest rates rise, the corporate buybacks of stock that have been a major driver of this bull market will begin to dry up. The debt that has been taken on will become more expensive to service, profit margins will contract and credit defaults will increase. This will further increase the yield that investors expect and so the vicious cycle begins. (Remember that the first signs of trouble in 2008 were in the credit markets)

  • This bull market is the third longest in history. By the spring of next year, it will be the second longest in history and we are already at almost twice the average time of bull markets historically.

  • Margin debt as a percentage of nominal GDP hit an all-time high earlier this year and appears to have peaked. The last two times margin debt peaked were right before the 2000 and 2007 bear markets.

  • Even though the S&P 500 and Nasdaq have been at times on the positive side in 2015, the majority of equities in the S&P 500 are down for the year. This is possible due to a handful of very large cap stocks being up substantially. In other words, there is very broad based weakness in equities, despite where the broad based indexes are trading.

  • The trailing P/E of the S&P 500 is 23. One year ago it was under 19. The average over the last 140 years has been 16.6. The S&P 500 is close to unchanged from this time last year. The reason the P/E has gone up is therefore not because the market has gone higher, but because earnings have been negative year over year for the last 2 quarters. This is the first time this has happened since the financial crisis ended in 2009. Falling earnings, rising interest rates and valuations at almost 40% higher than the historical average make for a tough uphill climb for equities.


    The December allocations theme is equities with a bias towards dividend payers, technology, financials, emerging market bonds, and inverse high yield bonds, which is very similar to what we saw in November. Most of the models and portfolios also have a fair portion in cash equivalents.

    PCM Strategies: 11.01.2015 Allocations*

    *(Please note that performance numbers on the website for indexes do not include dividends and are appropriately calculated sequentially.)
  • PCM US Bond Total Return Indexsm:  Inverse high yield bonds and cash equivalent.

  • PCM Absolute Bond Index sm:  1-3 month U.S. Treasury bills.

  • PCM Absolute U.S. Sector Index sm    : Technology, financials and industrials.

  • PCM U.S. Industries Total Return Indexsm: Technology, insurance, industrials and media.

  • PCM Absolute Equity Income Indexsm:  Dividend paying equities and cash equivalent

  • PCM Emerging Market Total Return Equity Indexsm: Emerging Asia and cash equivalent.

  • PCM Total Return Portfolio Index:sm and PCM Stable Growth Plus+ Portfolio Indexsm: Technology, financials, and industrials are also a common theme, both Indexes also hold the U.S. dollar and gold inverse.

  • PCM Global Tactical Indexsm: Equities in New Zealand, inverse gold, consumer staples, and cash equivalent.

  • Global Macro Indexsm: Exposure to the U.S. dollar, broad based U.S. equities, emerging market bonds and cash equivalent.

  • PCM Alpha 1 Indexsm: Cash equivalent

  • PCM Absolute Commodities Indexsm: Cocoa and cash equivalent.


    ***We have enhanced our website AGAIN at https://www.pcminvestment.com. You can now see performance of our indexes (previous day and month to date) on our streaming ticker. We include performance for both our indexes and our composites, as applicable. You will be asked to enter your email address to get into the website. There will be no password required, so you won't have to worry about forgetting it. This is partly due to helping us stay in compliance with requirements in our industry that we know who has reviewed our website content. Please use the website link above to see all of our indexes and composites.

    In addition to the above mentioned "Top Gun" performance awards from Informa Investment Solutions, PCM composites have been previously recognized for performance by Informa Investment Solutions; the PCM Absolute Bond Compositesm for the three year performance ending the 4th quarter of 2014, as well as previous awards for 1-year trailing performance and 3-year trailing performance. As of 2nd quarter 2014, the  PCM Absolute Bond Compositesm and the PCM Absolute Commodities Compositesm both won a "Top Gun" award for performance in their respective category for the 1-year trailing performance period, with the PCM Absolute Bond Compositesm also winning the "Top Gun" award for 3-year trailing performance. The PCM Alpha 1 Compositesm was awarded the T"op Gun" performance award for the 1st quarter of 2014. We are very pleased to see these particular multi directional strategies being recognized, as the PCM Absolute Bond Strategysm and PCM Alpha 1 Strategysm are particularly timely for where we are in the current market cycle.

    To view Morningstar Fact sheets of all of our index models, please visit our website at www.pcminvestment.com under the PCM multi-directional Strategies tab.

    By: Melissa Wieder, CFP®, Director Institutional Services
    Collaborative insight provided by CIO Michael Chapman.

    About PCM Quant Coalescence

    Welcome to Provident's Quant Coalescence" communication. We suspect that many of you are no different than us. That is to say that when our quantitative models rebalance every 2 weeks for some indexes or once a month for other indexes, you sometimes find yourselves asking "What is behind a rotation into that ETF?" This communication is our opportunity to unite for a common end with our clients and partners; keeping you updated on our thoughts and perspectives. As you know, our indexes are based on an absolute approach: we strive to make money in up markets or down markets, while trying to greatly minimize loss in any market environment.
    Our indexes are also quantitative, reflective of our systematic, unbiased and technical approach. Since our indexes are unbiased, the quantitative models would obviously at times rotate into positions that cause us to scratch our heads. Nevertheless, being so close to the analysis as it unfolds, allows us to quickly begin to validate the fundamental reasons behind the quantitative "following of the money." At other times, the trades are not validated right away; the story unfolds as the days pass. We have been very excited about many of these "validations" and "ah ha" moments. We had another "ah ha" moment when we decided that these insights would also be interesting to those who have entrusted us with their financial peace of mind. Our goal is to be short and to the point, specific to what is happening in our indexes rather than a lengthy macroeconomic perspective.

    Disclaimer:

    The views and strategies described herein are for illustrative purposes only and may not be suitable for all investors. The information is not based on any particularized financial situation, or need, and is not intended to be, and should not be construed as investment advice or a recommendation for any specific PCM or other strategy, product or service. Investors should consult their financial advisor prior to making an investment decision. There is no guarantee that these investment strategies will work under all market conditions and each investor should evaluate their ability to invest long-term, especially during periods of downturn in the market. This material contains the current opinions of the author(s) but not necessarily those of PCM and such opinions are subject to change without notice. This material is distributed for informational purposes only. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.  No part of this article may be reproduced in any form, or referred to in any other publication, without express written permission.  Provident Capital Management, Inc., PCM and Absolute Return Index are trademarks or registered trademarks of Provident Capital Management, Inc., in the United States.©2013, PCM.

     
     
    For further disclaimers and disclosures, see our website for index disclosures and composite disclosures.


     

October, 2015: Fed Surprises, Dollar Weakens, Commodities Rise

October, 2015 PCM Quant Coalescence

Before we begin, I want to provide a quick reminder that we have enhanced our website at https://www.pcminvestment.com. One of the main enhancements is that we now include performance for both our indexes and our composites, as applicable. Also new; you will be asked to enter your email address to get into the website. There will be no password required, so you won't have to worry about forgetting it. This is partly due to helping us stay in compliance with requirements in our industry that we know who has reviewed our website content. Also, links in this newsletter to individual indexes have been removed. Please use the website link above to see all of our indexes and composites. Now let's move on to the October quant analysis...

After a very volatile August and September, Janet Yellen and the Federal Reserve decided not to raise rates on September 17th. Initially the market sold off until the minutes of the meeting were released at the end of September. After the minutes revealed a rate hike could be delayed until well into 2016, we also had employment numbers come out showing dismal job growth that hugely missed expectations. This further confirmed that the Fed would have to wait to raise rates as bad news became good news. Since then, the market has had its best monthly performance in over 4 years and is in the top 1% of "turnarounds" since 1986. The Fed's decision to hold off on a rate hike also lead to a weakening of the US dollar, which has been very strong the past few quarters and been blamed for hurting the earnings of large, multi-national companies. The anticipation of a delayed rate hike, improved earnings on a weaker dollar, improved earnings for energy and materials companies on higher commodity prices and one of the biggest "short squeezes" in history, contributed to the parabolic rebound in the markets. The rise in commodity prices is a strong theme for our current allocation, as commodities, commodity exporting countries and commodity currencies all came into play.

Before we break down the October allocations, let's also take a look at some statistics on 3rd quarter earnings to date.

Earnings growth for Q3, 2015 is now estimated to come in at -4.6% according to estimates at FactSheet. The real picture would be much worse if not for historical levels of stock buybacks and further "financial engineering" associated with earnings reporting. According to Barclay's, profit margins have slipped 60 bps in the last 12 months to 8.5%. Historically high profit margins, achieved with technology enhancements and reduced workforces since 2009, have been a major driver in the growth in earnings over the last several years. This all comes at the same time that revenues and earnings will be down year over year for the last two quarters, which hasn't happened since 2009. Looking forward at both estimates and leading indicators, the Baltic Dry Index, which is an indicator of the demand for shipping containers in international trade, is at its lowest seasonal level since 1986. Goldman Sachs has lowered their earnings estimates for the S&P 500 for both 2015 and 2016 to $109 and $120 respectively, with the expectation that earnings multiples will fall as well. As an extreme example of what this could mean, if price to earnings multiples fell to low double digits in 2016, the S&P 500 could be trading at around 1200 ($120 in earnings times a multiple of 10). This is down 40% from our current levels. Although that sounds nearly impossible to think about, earnings multiples have historically gone much lower than 10 and earnings could be revised down from these lower estimates. This latter noted to put into perspective why we remain committed to our multi directional, non-correlated, quantitative approach that can be opportunistic in both rising and falling markets. Let's move on with the October allocation with the weaker dollar theme.

The October allocation leaned towards cash equivalents, government bonds, precious metals, commodities, commodity exporting countries and commodity exporting currencies. The PCM US Bond Total Return Index sm is allocated to investment grade corporate bonds and U.S. Treasuries along the entire yield curve from 3 years to 20 years. The PCM Absolute Bond Index sm is allocated to 20 year U.S. Treasury bonds and international government bonds.

PCM Absolute U.S. Sector Index sm is spread between inverse U.S. equities and long utility stocks with the remainder allocated to cash equivalent. PCM U.S. Industries Total Return Indexsm is in cash equivalents, with the only exposure to U.S. Industries for this trading period being utilities. The PCM Absolute Equity Income Indexsm remained in a cash equivalent position with the remainder also in utility stocks. The PCM Currency Indexsm followed the commodity theme by going into the Canadian dollar, which benefits from oil exports that have gone up in price with the weaker U.S. dollar.
The October reallocation of the PCM Emerging Market Total Return Equity Indexsm is on the sidelines in cash equivalents. Long U.S. Treasuries, U.S. utilities and precious metals are also represented in the PCM Total Return Portfolio Indexsm and PCM Stable Growth Plus+ Portfolio Indexsm. Both Indexes also hold the Canadian dollar. (Please note that performance numbers on the website for indexes do not include dividends and are appropriately calculated sequentially.)



The PCM Global Tactical Indexsm is consistent with the weak dollar trend with gold, utilities, U.S. Treasuries, the Canadian dollar and New Zealand, which is another commodity exporting country. The Global Macro Indexsm, which has been invested since the first day of October, is heavily in cash equivalent with additional exposure to U.S. Treasuries.

The PCM Alpha 1 Indexsm is exposed to precious metals. The PCM Absolute Metals Indexsm is in silver and palladium, while the PCM Absolute Commodities Indexsm is in gold and silver, continuing the precious metals theme.

PCM Index Strategy composites have been recognized for performance by Informa Investment Solutions; most recently for the PCM Absolute Bond Compositesm for the three year performance ending the 4th quarter of 2014, as well as previous awards for 1-year trailing performance and 3-year trailing performance. As of 2nd quarter 2014, the PCM Absolute Bond Compositesm and the PCM Absolute Commodities Compositesm both won a "Top Gun" award for performance in their respective category for the 1-year trailing performance period, with the PCM Absolute Bond Compositesm also winning the "Top Gun" award for 3-year trailing performance. The PCM Alpha 1 Compositesm was awarded the "Top Gun" performance award for the 1st quarter of 2014. We are very pleased to see these particular multi directional strategies being recognized, as the PCM Absolute Bond Strategysm and PCM Alpha 1 Strategysm are particularly timely for where we are in the current market cycle.
To view Morningstar Fact sheets of all of our index models, please visit our website at www.pcminvestment.com under the "PCM Strategies" tab.

By: Melissa Wieder, CFP®, Director Institutional Services

Collaborative insight provided by CIO Michael Chapman

November, 2015: "Fool Us Once......"

Our October newsletter was titled, Fed Surprises by Holding Off on Rate Increase, Dollar Weakens, Commodities Rise.

The sentiment that the Fed will hold off until well into 2016 to raise rates lasted for about a month and now with the surprisingly strong November jobs report released last week, Fed Fund futures are once again indicating that Janet Yellen, et al are more likely than not to raise rates before the end of 2015.

Since the middle of August, the Fed has failed miserably at trying to keep the markets stable with transparency and telegraphing their intentions of the timing of a rate hike. Since then, the equity markets have been down 10%, back up 5.3%, back down 5.8%, back up 12% and as of today back down almost 4% from the recent highs. One week the market is sure that the Fed is moving and the next week the market is certain they will wait and so on. In the words of Yogi Berra, who I see just passed away in September, “It’s like déjà vu all over again”. The Fed's "transparent guidance" attempt is about as helpful as another "Berra-iSM", "When you come to a fork in the road, take it". In Janet's defense, it is not uncommon for markets to experience these types of swings after an extended bull market like we have had. With P/E’s again getting very rich and negative overall earnings being reported last quarter for the first time since 2009, the market is very nervous about not only the first rate hike, but what the Fed will do after the first hike.

We have said for quite some time that with equities close to all-time highs and bonds in a 30 plus year Bull Run, how can portfolios be truly diversified with a traditional 60% equities/40% bonds mix? It will be difficult for bonds to make up for the losses in equities when the market does have a pullback. I read an article this week titled, “60/40 Portfolios are Hopelessly Broken” by Jeff Benjamin. In it he states that Yale University’s endowment currently has only a 6% allocation to stocks and a 5% allocation to bonds. The rest is invested amongst strategies like ours that are highly non-correlated to stocks or bonds and/or have the ability to make positive returns in falling markets. It is nice to see validation of our philosophy from one of the most successfully managed endowments in the world.

Many of our models were positioned to make positive returns in the 10% correction that we saw in August and performed much better than their benchmarks for the 3rd quarter. The models also did a good job of rotating out of the inverse positions and avoiding a “whipsaw” as the markets rebounded in October.

The November allocations theme is equities with a bias towards dividend payers, commodity exporting countries, technology, materials and emerging market bonds. Many of these are a result of “following the money” after the Fed surprised by not raising rates in late September. As mentioned above, the rate hike is now back on the table for December.

The PCM US Bond Total Return IndexSM is allocated to investment grade corporates cash equivalent. PCM Absolute Bond IndexSM is allocated to 1-3 month U.S. Treasury bills and emerging market bonds.

PCM Strategies: 11.01.2015 Allocations*

*(Please note that performance numbers on the website for indexes do not include dividends and are appropriately calculated sequentially.)

  1. PCM US Bond Total Return Index SM :Investment grade corporates cash equivalent.
  2. PCM Absolute Bond Index SM : 1-3 month U.S. Treasury bills and emerging market bonds.
  3. PCM Absolute U.S. Sector Index SM : Technology, materials and consumer discretionary.
  4. PCM U.S. Industries Total Return Index SM : Added technology and REITs, and remained in consumer staples and the insurance industry.
  5. PCM Absolute Equity Income Index SM: REITs and dividend paying equities.
  6. PCM Emerging Market Total Return Equity Index SM : BRIC’s, emerging Asia and cash equivalent.
  7. PCM Total Return Portfolio Index SM and PCM Stable Growth Plus+ Portfolio Index SM : Technology, materials and dividend payers is also a common theme, both Indexes also hold the Japanese yen and emerging market bonds.
  8. PCM Global Tactical Index SM : Equities in New Zealand, technology, consumer discretionary, and dividend payers in the U.S. and broad based U.S. equities.
  9. Global Macro Index SM : Exposure to the U.S. dollar, broad based U.S. equities, emerging market bonds and cash equivalent.
  10. PCM Alpha 1 Index SM : Dividend payers.
  11. PCM Absolute Commodities Index SM : Gold and sugar.

 

We have enhanced our website at https://www.pcminvestment.com. One of the main enhancements is that we now include performance for both our indexes and our composites, as applicable. Also new; you will be asked to enter your email address to get into the website. There will be no password required, so you won’t have to worry about forgetting it. This is partly due to helping us stay in compliance with requirements in our industry that we know who has reviewed our website content. Also, links in this newsletter to individual indexes have been removed temporarily. Please use the website link above to see all of our indexes and composites. PCM Index Strategy composites have been recognized for performance by Informa Investment Solutions; most recently for the PCM Absolute Bond Composite SM for the three year performance ending the 4th quarter of 2014, as well as previous awards for 1-year trailing performance and 3-year trailing performance. As of 2 nd quarter 2014, the PCM Absolute Bond Composite SM and the PCM Absolute Commodities Composite SM both won a “Top Gun” award for performance in their respective category for the 1-year trailing performance period, with the PCM Absolute Bond Composite SM also winning the “Top Gun” award for 3-year trailing performance. The PCM Alpha 1 Composite SM was awarded the “Top Gun” performance award for the 1st quarter of 2014. We are very pleased to see these particular multi directional strategies being recognized, as the PCM Absolute Bond Strategy SMand PCM Alpha 1 Strategy SM are particularly timely for where we are in the current market cycle. To view Morningstar Fact sheets of all of our index models, please visit our website at​ww.pcminvestment.com under the​​“PCM mult- directional Strategies” tab. 

 

By: Melissa Wieder, CFP®, Director Institutional Services

Collaborative insight provided by CIO Michael Chapman


Disclosure:

The views and strategies described herein are for illustrative purposes only and may not be suitable for all investors. The information is not based on any particularized financial situation, or need, and is not intended to be, and should not be construed as investment advice or a recommendation for any specific PCM or other strategy, product or service. Investors should consult their financial advisor prior to making an investment decision. There is no guarantee that these investment strategies will work under all market conditions and each investor should evaluate their ability to invest long-term, especially during periods of downturn in the market. This material contains the current opinions of the author(s) but not necessarily those of PCM and such opinions are subject to change without notice. This material is distributed for informational purposes only. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this article may be reproduced in any form, or referred to in any other publication, without express written permission. Provident Capital Management, Inc, PCM and Absolute Return Index are trademarks or registered trademarks of Provident Capital Management, Inc., in the United States.©2013, PCM.

About "PCM Quant Coalescence"

Welcome to Provident's "Quant Coalescence" communication. We suspect that many of you are no different than us. That is to say that when our quantitative models rebalance every 2 weeks for some indexes or once a month for other indexes, you sometimes find yourselves asking "What is behind a rotation into that ETF?" This communication is our opportunity to "unite for a common end" with our clients and partners; keeping you updated on our thoughts and perspectives. As you know, our indexes are based on an absolute approach: we strive to make money in up markets or down markets, while trying to greatly minimize loss in any market environment.

Our indexes are also quantitative, reflective of our systematic, unbiased and technical approach. Since our indexes are unbiased, the quantitative models would obviously at times rotate into positions that cause us to scratch our heads. Nevertheless, being so close to the analysis as it unfolds, allows us to quickly begin to validate the fundamental reasons behind the quantitative "following of the money." At other times, the trades are not validated right away; the story unfolds as the days pass. We have been very excited about many of these "validations" and "ah ha" moments. We had another "ah ha" moment when we decided that these insights would also be interesting to those who have entrusted us with their financial peace of mind. Our goal is to be short and to the point, specific to what is happening in our indexes rather than a lengthy macroeconomic perspective.

September, 2015: Fed Fund Futures indicate 75% Chance that Fed will Raise Rates this Week

Before we begin, I want to provide a quick reminder that we have enhanced our website at https://www.pcminvestment.com. One of the main enhancements is that we now include performance for both our indexes and our composites, as applicable. Also new; you will be asked to enter your email address to get into the website. There will be no password required, so you won’t have to worry about forgetting it. This is partly due to helping us stay in compliance with requirements in our industry that we know who has reviewed our website content. Also, links in this newsletter to individual indexes have been removed temporarily. Please use the website link above to see all of our indexes and composites.

Now let's move on to the September quant analysis!

Volatility continues to be the theme after the S&P 500 finished the month of August down 6.26%. Statistically, when the month of August is down more than 5%, there is an 80% chance that September will be down as well. Time will shortly tell which side of that statistic we are on. The 30 day Fed Funds futures are indicating a 75% chance that the Fed will raise rates by .25% later this week. This will be the first interest rate hike in nine years. In the meantime, Bob Doll, Nuveen Senior Portfolio Manager, cited the following seven reasons that he believes volatility will continue. The idea that there are seven easily identifiable reasons for the volatility would speak to the high likelihood that volatility is indeed here for a while. Here we go…

  • Many months of continued decline in earnings expectations
  • Credit spreads are widening (meaning investors are starting to expect more yield for taking on risk vs the risk free rate of return represented by short term U.S. Treasuries)
  • Further evidence of weakness in China
  • Commodity deflation
  • Uncertainty over Federal Reserve policy and when they will begin to raise rates for the first time in 9 years
  • Technical deterioration (the S&P 500 has broken below the 200 day moving average and stayed well below it for the first time since August 2011.)
  • Investor skittishness coupled with low summer trading volumes (volume should pick up now that we are past Labor Day and summer vacations are winding down on Wall Street)

The September allocations leaned towards cash equivalents and “opportunistic inverse”, the latter meaning the models picked up positions that will have positive returns if the asset class represented by the ETF goes down during the holding period. PCM US Bond Total Return Index SM is allocated to inverse high yield corporates, 3-7 year U.S. Treasuries and cash equivalent. PCM Absolute Bond Index SM is allocated to 1-3 month U.S. Treasury bills.

PCM Absolute U.S. Sector Index SM is inverse U.S. equities and also allocated to cash equivalent. PCM U.S. Industries Total Return IndexSM is in cash equivalents, with the only exposure to U.S. Industries for this trading period being the insurance industry.

The September reallocation of the PCM Emerging Market Total Return Equity IndexSM is inverse emerging markets with the remainder in cash equivalent.
Long U.S. Treasuries and inverse U.S. and Asian equities are also represented in the PCM Total Return Portfolio IndexSM and PCM Stable Growth Plus+ Portfolio IndexSM. Both Indexes also hold the British pound. (Please note that performance numbers on the website for indexes do not include dividends and are appropriately calculated sequentially.)

The PCM Global Tactical IndexSM is in cash equivalents, inverse Europe and Asia, and long the Euro and Japanese Yen currencies. The currency allocations are picking up on dollar weakness, as China is selling U.S. Treasuries in its attempt to prop up its own currency. China is trying to balance the benefits of allowing their currency to weaken, which helps its exports with the risk that the fear of a weakening Chinese Yuan could cause capital to flee in advance of that risk. The Global Macro IndexSM has cash equivalent exposure and is long the Euro. It is also inverse U.S., Asian, European and emerging market equities.

The PCM Alpha 1 IndexSM is inverse Asian and European equities. The PCM Absolute Metals IndexSM is all in cash equivalent, while the PCM Absolute Commodities IndexSM remained in livestock and added gold.

PCM Index Strategy composites have been recognized for performance by Informa Investment Solutions; most recently for the PCM Absolute Bond CompositeSM for the three year performance ending the 4th quarter of 2014, as well as previous awards for 1-year trailing performance and 3-year trailing performance. As of 2nd quarter 2014, the PCM Absolute Bond CompositeSM and the PCM Absolute Commodities CompositeSM both won a “Top Gun” award for performance in their respective category for the 1-year trailing performance period, with the PCM Absolute Bond CompositeSM also winning the “Top Gun” award for 3-year trailing performance. The PCM Alpha 1 CompositeSM was awarded the “Top Gun” performance award for the 1st quarter of 2014. We are very pleased to see these particular multi directional strategies being recognized, as the PCM Absolute Bond StrategySM and PCM Alpha 1 StrategySM are particularly timely for where we are in the current market cycle.

To view fact sheets of all of our index models, please visit our website at www.pcminvestment.com under the “PCM Multi Directional Strategies” tab.

 

By: Melissa Wieder, CFP®, Director Institutional Services

Collaborative insight provided by CIO Michael Chapman

 

Disclosure:

The views and strategies described herein are for illustrative purposes only and may not be suitable for all investors. The information is not based on any particularized financial situation, or need, and is not intended to be, and should not be construed as investment advice or a recommendation for any specific PCM or other strategy, product or service. Investors should consult their financial advisor prior to making an investment decision. There is no guarantee that these investment strategies will work under all market conditions and each investor should evaluate their ability to invest long-term, especially during periods of downturn in the market. This material contains the current opinions of the author(s) but not necessarily those of PCM and such opinions are subject to change without notice. This material is distributed for informational purposes only. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this article may be reproduced in any form, or referred to in any other publication, without express written permission. Provident Capital Management, Inc, PCM and Absolute Return Index are trademarks or registered trademarks of Provident Capital Management, Inc., in the United States.©2013, PCM.

About "PCM Quant Coalescence"

Welcome to Provident's bi monthly "Quant Coalescence" communication. We suspect that many of you are no different than us. That is to say that when our quantitative models rebalance every 2 weeks for some indexes or once a month for other indexes, you sometimes find yourselves asking "What is behind a rotation into that ETF?" This communication is our opportunity to "unite for a common end" with our clients and partners; keeping you updated on our thoughts and perspectives. As you know, our indexes are based on an absolute approach: we strive to make money in up markets or down markets, while trying to greatly minimize loss in any market environment.
Our indexes are also quantitative, reflective of our systematic, unbiased and technical approach. Since our indexes are unbiased, the quantitative models would obviously at times rotate into positions that cause us to scratch our heads. Nevertheless, being so close to the analysis as it unfolds, allows us to quickly begin to validate the fundamental reasons behind the quantitative "following of the money." At other times, the trades are not validated right away; the story unfolds as the days pass. We have been very excited about many of these "validations" and "ah ha" moments. We had another "ah ha" moment when we decided that these insights would also be interesting to those who have entrusted us with their financial peace of mind. Our goal is to be short and to the point, specific to what is happening in our indexes rather than a lengthy macroeconomic perspective.

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