Breadcrumbs

October, 2016: “Lions and Tigers and Bears….Oh My”

The markets remain fairly stable despite numerous statistics indicating the market is at record level valuations. These indicators are sending warning signs at a time of geopolitical uncertainty and a close presidential election. In addition, according to John Butters, VP, and Sr. Earnings Analyst at Factset, for Q3 2016, the estimated earnings decline for the S&P 500 is -2.1%. If the index reports a decline in earnings for Q3, it will mark the first time the index has recorded six consecutive quarters of year-over year declines in earnings since FactSet began tracking the data in Q3 2008.

As earnings have deteriorated over the last 6 quarters, the market has continued in a trading range close to alltime highs. The NYSE Composite, an index that tracks all stocks that trade on the NYSE, is right around the same level that it was over 2 years ago. This deterioration of earnings coupled with a market that has traded in what appears to be an extended topping pattern has brought us here. Of the several research firms that we follow, they all point to a few of their favorite and most reliable valuation models. What they all have in common is that their most trusted measures are showing that we are in the midst of one of the most highly valued markets in history with some metrics showing that we are more overvalued than 2000 and 2007. For October, our models remained balanced with exposure to both equities and bonds. As has been the case the last few times the market has started to roll over, we expect our allocations to transition quickly to positions that would be defensive or possibly even make positive returns in a falling market

PCM Strategies: 08.2016 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: Investment grade corporates, high yield and U. S. Treasuries of varying maturities from 7-20 years.

2. PCM Absolute Bond Index SM: International corporate and international treasury bonds

3. PCM Absolute U.S. Sector Index SM : Consumer discretionary, technology and healthcare

4. PCM U.S. Industries Total Return IndexSM: Medical devices, internet, technology and food and beverage

5. PCM Absolute Equity Income IndexSM : Preferred and dividend paying equities, and international developed real estate

6. PCM Emerging Market Total Return Equity IndexSM: Emerging Asia and India    

7. PCM Total Return Portfolio IndexSM and PCM Stable Growth Plus+ Portfolio IndexSM: International corporate and treasury bonds, emerging market equities, healthcare, technology, and consumer discretionary equities in the U.S. are all themes in these portfolios.    

8. PCM Global Tactical IndexSM: U.S. technology, and equities in New Zealand, South Korea and South Africa    

9. Global Macro IndexSM: High yield bonds, broad based U.S. equites, emerging market equities and bonds and 20+ year U.S. Treasuries      

10. PCM Alpha 1 IndexSM: Emerging market equities  

11. PCM Absolute Commodities IndexSM: Sugar and cash equivalent

And now…our award ceremony….PCM was again been recognized as a "Top Gun" for our performance. This time for the 2nd quarter of 2016 by Informa Investment Solutions. The PCM Absolute Commodity model ranked #1 out of over 200 other products and money managers in the "ETF Global Balanced Universe" category and also #1 in the "Overall Global/International Balanced Universe"

 PERFORMANCE RECOGNITION: 2nd Quarter, 2016

Informa Investment Solutions’ (PSN) Ranks PCM "Top Gun" Products

  •  PCM Absolute Commodity - (Top 5/#1) ETF Global Balanced Universe (out of over 200 products)
  •  PCM Absolute Commodity - (Top 10/#1) Overall Global/Intl Balanced Universe

 

PERFORMANCE RECOGNITION: 1st Quarter, 2016

Informa Investment Solutions’ (PSN) Ranks PCM “Top Gun” Products

  •  PCM Absolute U.S. Sectors - (Top 5/#1) ETF US Equity Universe (out of 112 products)
  •  PCM Absolute Bonds - (Top 5/#1) ETF Global Fixed Income Universe (out of 25 products)
  •  PCM Absolute Equity Income - (Top 5/#4) ETF Global Balanced Universe (out of 204 products)
  •  PCM Absolute Equity Income - (Top 10) Overall Global/Intl Balanced Universe

 

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)

 

***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.

 

 

August, 2016: “The Negative Earnings Streak Continues, but no one told the Market”

The markets continue to push higher, as the second quarter earnings wind down with yet another year over year decline in earnings.

According to John Butters, VP, and Sr. Earnings Analyst at Factset and as of August 19th, 2016:

  •  With 95% of the companies in the S&P 500 reporting earnings to date for Q2 2016, 71% have reported earnings above the mean estimate and 54% have reported sales above the mean estimate.
  •  For Q2 2016, the blended earnings decline for the S&P 500 is -3.2%. The second quarter marks the first time the index has recorded five consecutive quarters of year-over-year declines in earnings since Q3 2008 through Q3 2009.
  • On June 30, the estimated earnings decline for Q2 2016 was -5.5%. Seven sectors have higher growth rates today (compared to June 30) due to upside earnings surprises, led by the Information Technology and Consumer Discretionary sectors.
  • For Q3 2016, 72 S&P 500 companies have issued negative EPS guidance and 30 S&P 500 companies have issued positive EPS guidance.
  • The forward 12-month P/E ratio for the S&P 500 is 17.1. This P/E ratio is based on Thursday’s (August 18th) closing price (2187.02) and forward 12-month EPS estimate ($128.46).

Our models did pick up on the continued strength and remain invested in both US and emerging market equities through the end of August. PCM also has been awarded more performance awards from Informa Investment Solutions, this time for the PCM Commodity composite, which earned the “Top Gun” #1 best performance in its category out of over 200 other strategies for the second quarter of 2016. Please see more specific details about all of our performance awards below.

 

PCM Strategies: 08.2016 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: Investment grade corporates, high yield and U. S. Treasuries of varying maturities from 7-20 years.

2. PCM Absolute Bond Index SM: International corporate and international treasury bonds

3. PCM Absolute U.S. Sector Index SM : Consumer discretionary, technology and healthcare

4. PCM U.S. Industries Total Return IndexSM: Medical devices, internet, technology and food and beverage

5. PCM Absolute Equity Income IndexSM : Preferred and dividend paying equities, and international developed real estate

6. PCM Emerging Market Total Return Equity IndexSM: Emerging Asia and India    

7. PCM Total Return Portfolio IndexSM and PCM Stable Growth Plus+ Portfolio IndexSM: International corporate and treasury bonds, emerging market equities, healthcare, technology, and consumer discretionary equities in the U.S. are all themes in these portfolios.    

8. PCM Global Tactical IndexSM: U.S. technology, and equities in New Zealand, South Korea and South Africa    

9. Global Macro IndexSM: High yield bonds, broad based U.S. equites, emerging market equities and bonds and 20+ year U.S. Treasuries      

10. PCM Alpha 1 IndexSM: Emerging market equities  

11. PCM Absolute Commodities IndexSM: Sugar and cash equivalent

And now…our award ceremony….PCM was again been recognized as a "Top Gun" for our performance. This time for the 2nd quarter of 2016 by Informa Investment Solutions. The PCM Absolute Commodity model ranked #1 out of over 200 other products and money managers in the "ETF Global Balanced Universe" category and also #1 in the "Overall Global/International Balanced Universe"

 PERFORMANCE RECOGNITION: 2nd Quarter, 2016

Informa Investment Solutions’ (PSN) Ranks PCM "Top Gun" Products

  •  PCM Absolute Commodity - (Top 5/#1) ETF Global Balanced Universe (out of over 200 products)
  •  PCM Absolute Commodity - (Top 10/#1) Overall Global/Intl Balanced Universe

 

PERFORMANCE RECOGNITION: 1st Quarter, 2016

Informa Investment Solutions’ (PSN) Ranks PCM “Top Gun” Products

  •  PCM Absolute U.S. Sectors - (Top 5/#1) ETF US Equity Universe (out of 112 products)
  •  PCM Absolute Bonds - (Top 5/#1) ETF Global Fixed Income Universe (out of 25 products)
  •  PCM Absolute Equity Income - (Top 5/#4) ETF Global Balanced Universe (out of 204 products)
  •  PCM Absolute Equity Income - (Top 10) Overall Global/Intl Balanced Universe

 

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)

 

***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.

 

May' 2016: “Some cattle, pork bellies and corn for thought?”

According to statistics and research credited to Factset’s John Butters, "as of May 6th, 2016, 1st quarter earnings are coming in at -7.1% year over year with 87% of companies in the S&P 500 having reported. This marks the first time the index has seen four consecutive quarters of year-over-year declines in earnings since Q4 2008 through Q3 2009. For Q2 2016, 55 companies have issued negative EPS guidance and 24 companies have issued positive EPS guidance. The forward 12-month P/E ratio is 16.5. This P/E ratio is based on Thursday’s closing price (2050.63) and forward 12-month EPS estimate ($124.64)".


As our commentary mentioned in March, if you extrapolate the downwardly (now realized) 1st quarter 2016 S&P 500 earnings estimate over the entire year of 2016; you get P/E ratios that are extremely elevated to the historical norm.


Even at the current 16.5 forward 12 month P/E mentioned by Factset calculations above, the forward P/E of the S&P 500 is above the 5, 10 and 15 year averages: 13.6, 14.1 and 16 respectively. All things being equal, the market has to either go down, earnings have to improve dramatically for the remainder of the year or the market has to be comfortable trading at very high forward multiples.


***Side note, the earnings on the S&P 500 quoted above are based on the sum of the earnings of all 500 companies in the S&P 500, both negative and positive. This is a method of valuing the overall equity market by looking at all 500 companies in the S&P 500 as ONE company. In other words, how much is an investor paying for the estimated (forward) or trailing (actual) earnings of "the market".


This all leads us to the possible "why" of the current allocations for PCM's quant strategies for May, 2016. As is always the case, we look for fundamental reasons as to why our quantitative analysis results in certain themes rising to the top. For the May 1st, 2016 reallocation; commodities, materials, metals and commodity exporting countries/currencies are all strong themes. Could it be that with asset bubbles everywhere…created by central bank intervention… coupled with the selloff in commodities and metals over the last several quarters….that this asset class is one of the few attractive and fairly valued? Just some cattle, pork bellies and corn for thought!

Before we break down the weightings of the individual strategies, below is a table of our gross composite performance for our models for 1st quarter 2016. We look forward to winning several performance awards and were very pleased with the quarterly outcome, especially in light of the historical selloff combined with a historical comeback; all in one quarter. An excerpt from our 1st of 2016 quarterly client letter sums it up:

“So there it was; a record for the worst open to the equity markets in history for January. Six weeks into 2016 on Feb. 11, all of the major U.S. stock indexes were down more than 10% for the year. A bear market looked all but certain. That day the Dow Jones Industrial Average closed nearly 15% off its May 2015 record high. The benchmark Standard & Poor’s 500 was down 14.2% and the NASDAQ composite was down 18.2%.

Then we had the record “comeback” rally. According to CNBC, the Dow Jones Industrial Average saw its biggest quarterly comeback since 1933. Most of the U.S. indexes finished the quarter unchanged or slightly up. Let’s digest that. For the U.S. equity markets to finish the quarter basically flat, the markets set a record on the downside and on the upside in just one quarter! Now THAT is volatility….and we LIKE it! 

What does this all mean to you and your investments? Let’s start with a barometer of what the average investor experienced during the 1st Qtr. 2016. The NASDAQ composite was down 2.8% and the IBD mutual fund index, which is an index of 19 very large growth mutual funds, closed down 3.14%. “
And the PCM results? See below:

 Img May 

And now…back to our regularly scheduled newsletter and our May, 2016 allocations theme. Gold, materials, energy, commodities, commodity exporting countries and commodity exporting currencies all rose to the top of the quant rankings. As mentioned to start the May newsletter, this could be a product of these asset classes being one of the few areas that have sold off in the last year and hence a value play. This may also be explained by the new Central Bank and worldwide phenomenon known as “NIRP” that we explained in March, which could make all hard assets more attractive. As a reminder, NIRP is an acronym for the unchartered waters of Negative Interest Rate Policy. This uncertainty of what all of this could mean with no precedent makes gold and other hard assets potentially more attractive. We also see continued allocations to dividend paying equities and global bonds. Global bonds have continued to be attractive, as they have gone up in price as negative interest rates have been announced.

PCM Strategies: 05.2016 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:  High yield and investment grade corporates and inflation protected U. S. Treasuries (TIPS)  
  2. PCM Absolute Bond Index sm:  High yield U.S. and international corporate bonds
  3. PCM Absolute U.S. Sector Index sm: Materials, industrials and energy  
  4. PCM U.S. Industries Total Return Indexsm: Materials, industrials, aerospace and telecom  
  5. PCM Absolute Equity Income Indexsm :  Preferred equities, international real estate and cash equivalent
  6. PCM Emerging Market Total Return Equity Indexsm: Emerging Europe, Latin America and the Middle East
  7. PCM Total Return Portfolio Indexsm  and  PCM Stable Growth Plus+ Portfolio Indexsm: International bonds, gold, materials, energy, and preferred equities are all themes in these portfolios.
  8. PCM Global Tactical Indexsm: Canadian equities and Canadian dollar, gold, materials and high yield corporate bonds
  9. Global Macro Indexsm: Gold, broad based commodities, International inflation protected Treasuries, emerging market bonds and high yield U.S. corporate bonds    
  10. PCM Alpha 1 Indexsm: Broad Based commodities
  11. PCM Absolute Commodities Indexsm: Silver and cocoa

PCM was recognized as a “Top Gun” for our performance during the volatile 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) 

 

***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.

 

 

June, 2016: “Brexit goes mainstream and more performance awards for PCM”

Those of us that work in the financial markets have been talking and pondering about the outcome of the June 23rd “Brexit” vote for several months now. As you probably all know, this is the referendum vote that allowed citizens in the U.K. to decide if they wanted to remain in the European Union or reclaim their independence. It has been big news in financial services, as it was feared that it could greatly impact world economies, bond and equity markets. The story has now become a much bigger and mainstream story because even though the polls showed a close vote, everyone believed that Britain would not vote to leave the EU.

Well, they did vote to leave and as we all saw last Friday and Monday, the markets don’t like surprises. The markets had their biggest opening gap from the previous days close in years with the DJIA down as much as 600 points. The market has since regained some of those losses, but history tells us that surprises like this will see the markets sell off at least 10% in the coming months after this initial “dead cat bounce”. The news has also grown in importance and coverage, as there are now fears that other EU countries will vote to do the same. Now that the sun rose the day after the vote, it may not seem so scary. At the same time, many voters in the U.K. apparently now have “buyers’ remorse” over their vote to leave; wondering if the coming economic turmoil will be worth it. . The majority of voters in Scotland and Ireland wanted to stay in the EU. This could motivate them to have another vote on their independence from the U.K. in an effort to stay in the EU. In the coming months, important votes are already on the calendar in Spain, Italy and our presidential election here in the U.S.; France and Germany follow next year. All of these countries including the U.S. have seen a huge surge in populist’s movements, driven by similar frustrations with the economy, job prospects, regulations and immigration.

Compounding the turmoil and uncertainty that this unexpected outcome has brought about, earnings season for second quarter 2016 begins in July. It is expected that S&P 500 earnings will be down year over year again, and this will be the fifth quarter in a row. This will be the longest stretch of negative quarterly year over year earnings since the span of the 2008-2009 financial crisis. To make matters worse, the “Brexit” has strengthened the U.S. dollar, which will hurt already struggling earnings in the U.S. It has also increased the chances of recession in Europe.

Before we break down the weightings of the individual strategies, below is a table of our gross composite performance for our models for 1st quarter 2016. Since the last monthly newsletter, we have been notified that we did indeed win several “Top Gun” performance awards. The awards recognized our quarterly performance in the PCM Absolute Bond, PCM Absolute U.S. Sectors and 2 performance awards for PCM Absolute Equity Income; being recognized in an ETF category and an equity category. We were very pleased with the quarterly outcome for first quarter, especially in light of the historical selloff combined with a historical comeback; all in one quarter. An excerpt from our 1st quarter 2016 client letter sums it up:

“So there it was; a record for the worst open to the equity markets in history for January. Six weeks into 2016 on Feb. 11, all of the major U.S. stock indexes were down more than 10% for the year. A bear market looked all but certain. That day the Dow Jones Industrial Average closed nearly 15% off its May 2015 record high. The benchmark Standard & Poor’s 500 was down 14.2% and the NASDAQ composite was down 18.2%. Then we had the record “comeback” rally. According to CNBC, the Dow Jones Industrial Average saw its biggest quarterly comeback since 1933. Most of the U.S. indexes finished the quarter unchanged or slightly up. Let’s digest that. For the U.S. equity markets to finish the quarter basically flat, the markets set a record on the downside and on the upside in just one quarter! Now THAT is volatility….and we LIKE it!

What does this all mean to you and your investments? Let’s start with a barometer of what the average investor experienced during the 1st Qtr. 2016. The NASDAQ composite was down 2.8% and the IBD mutual fund index, which is an index of 19 very large growth mutual funds, closed down 3.14%.“

And the PCM results that garnered these performance awards? See below:

Most of our models continue to experience stable and positive performance in the second quarter ending June 30. (Equity models would be exceptions, as they were long equities going into the surprise Brexit vote.) For the week ending June 24th, the S&P 500 is flat (including dividends) year to date, the NASDAQ composite is down 6% and the IBD mutual fund index is down over 4%.

The reach for yield continues, anything paying a dividend or even a small amount of interest has continued to be attractive, as negative interest rates appear to be here to stay for a while.

 

PCM Strategies: 05.2016 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:  High yield and investment grade corporates and inflation protected U. S. Treasuries (TIPS)  
  2. PCM Absolute Bond Index sm:  High yield U.S. and international corporate bonds
  3. PCM Absolute U.S. Sector Index sm: Materials, industrials and energy  
  4. PCM U.S. Industries Total Return Indexsm: Materials, industrials, aerospace and telecom  
  5. PCM Absolute Equity Income Indexsm :  Preferred equities, international real estate and cash equivalent
  6. PCM Emerging Market Total Return Equity Indexsm: Emerging Europe, Latin America and the Middle East
  7. PCM Total Return Portfolio Indexsm  and  PCM Stable Growth Plus+ Portfolio Indexsm: International bonds, gold, materials, energy, and preferred equities are all themes in these portfolios.
  8. PCM Global Tactical Indexsm: Canadian equities and Canadian dollar, gold, materials and high yield corporate bonds
  9. Global Macro Indexsm: Gold, broad based commodities, International inflation protected Treasuries, emerging market bonds and high yield U.S. corporate bonds    
  10. PCM Alpha 1 Indexsm: Broad Based commodities
  11. PCM Absolute Commodities Indexsm: Silver and cocoa

PCM was recognized as a “Top Gun” for our performance during the volatile 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) 

 

***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.

 

 

March' 2016: “Spring has sprung….earnings expectations, not so much”

We will soon "Cruz" into earnings season for 1st quarter 2016 and so far the downward revisions are "Trumping" the upward revisions, as Bulls may need to prepare to "Feel the Bern". "Hillaryious", right? Okay, maybe not so much. Obviously, I am watching too much political commentary, but be honest….so are you. In reference to earnings, the following statistics are credited to Factset’s John Butters in his March 24th, 2016 "Earnings Insight".

  • For Q1 2016, the estimated earnings decline is -8.7%. If the index reports a decline in earnings for Q1, it will mark the first time the index has seen four consecutive quarters of year-over-year declines in earnings since Q4 2008 through Q3 2009.
  • As of December 31, 2015 the estimated earnings growth rate for Q1 2016 was 0.3%. All ten sectors have lower growth rates today (compared to December 31) due to downward revisions to earnings estimates, led by the Energy sector.
  • For Q1 2016, 93 companies have issued negative EPS guidance and 26 companies have issued positive EPS guidance.
  • The forward 12-month P/E ratio is 16.5. This P/E ratio is updated based on Tuesday’s closing price (2055) and forward 12-month EPS estimate ($124.30).
  • On a per-share basis, estimated earnings for the S&P 500 for the first quarter have fallen by 9.3% since December 31 (to $26.42 from $29.13).

 

This is where it gets interesting. If you extrapolate the downwardly revised 1st quarter 2016 S&P 500 earnings estimate over the entire year of 2016, you get ($26.42 x 4)= $105.68. If you use the current P/E of 16.5 to calculate the forward value of the S&P 500, the result would be a level on the S&P 500 of 1743. That is over 15% lower than the current level of 2055. On the flip side, if the market remains around its current levels, we would have to adjust our P/E ratio to 19.45 (2055/$105.68).

These valuations are always a moving target though, because both the P/E (16.5 in this case) and the actual earnings on the S&P 500 ($26.42 estimate in our example) fluctuate. To make it more confusing, future expectations of BOTH of these numbers fluctuate continuously. In addition, one has to choose to follow the valuation based on one year forward expectations of earnings OR one year trailing actual earnings numbers. GAAP earnings or GAAP excluding unusual items, anyone? Oh yeah…and don’t forget to consider if you want to look at the median or the mean when trying to determine if the current S&P 500 valuation is above or below what has been seen historically.

So, is the market cheap and a good buy or expensive and a screaming sell? Even at 16.5 (let alone our 19.45 calculation), the forward P/E of the S&P 500 is above the 5, 10 and 15 year averages: 13.6, 14.1 and 16 respectively. All things being equal, the market has to either go down, earnings have to improve dramatically for the remainder of the year or the market has to be comfortable trading at very high forward multiples.

As an example of the above mentioned moving targets, in October of 2014 Goldman Sachs estimated that S&P 500 earnings for 2015 would come in at $122. In July, 2015 this estimate was revised down to $114. In September, 2015 it was revised to $109 and in January, 2016 the 2015 full year number was revised to $106. This certainly begs the question, "How reliable is the current $124.30 estimate for 2016 earnings on the S&P 500?" If we extrapolate our above estimate for 1st quarter 2016, it looks like another year of an overshoot of about 20%.

***Side note, the earnings on the S&P 500 quoted above are based on the sum of the earnings of all 500 companies in the S&P 500, both negative and positive. This is a method of valuing the overall equity market by looking at all 500 companies in the S&P 500 as ONE company. In other words, how much is an investor paying for the estimated (forward) or trailing (actual) earnings of "the market".

The graph below is another indicator that shows the headwinds that equities are facing. It shows changes in corporate debt since 1996, represented by the blue line. The green line graphs changes in corporate earnings over the same time period. As one can see, earnings have gone negative year over year for the first time since 2009, while corporate debt is growing at the highest it has in 20 years. The trend is also similar to the years before the Great Financial Crisis, when companies continued to accelerate their debt as earnings were dropping. This problem is amplified by two factors. Number one; the Federal Reserve has begun raising interest rates, which will increase the burden of this debt AND make it harder for the debt to be refinanced when the time comes (if it can be refinanced at all, as will likely be the issue with many energy companies). Second, this debt has not been taken on to invest in projects that have a positive Return on Investment to increase future earnings. This debt was largely brought on to increase earnings in the absence of increasing revenues via stock buybacks. As Paul Harvey used to say, "Now you know the rest of the story." In reality, we don’t know exactly how this will unfold. What we do know is that this is all happening at a time when earnings estimates are being downgraded and the cost to service this debt may be going up.

  Blackrock

 

What is my point? The point is that it is very difficult to determine if the market is fairly valued at any time. There are so many actual final numbers that will be estimated and subsequently revised, such as sector and overall earnings and macroeconomic indicators of the health of the world economy. In addition to that, one has to consider investor psychology, risk appetite and the current financial needs of institutions and sovereign governments. This is why as portfolio managers, we prefer to use multi directional, quantitative models. The benefit is that we have the opportunity to make positive returns in any market conditions AND we don’t rely on predicting investor sentiment or predicting hits or misses in estimates. Our models follow the money by looking at data points that have historically shown where “the crowd” is going and where "the crowd" is exiting.

The March allocations theme has been interesting, as we see gold continue to do well in both up and down markets. This is most likely explained by the new Central Bank and worldwide phenomenon known as "NIRP" that we explained last month. As a reminder, NIRP is an acronym for the unchartered waters of Negative Interest Rate Policy. This uncertainty of what all of this could mean with no precedent makes gold attractive. We also see continued allocations to dividend paying equities, utilities, consumer staples and global bonds. Global bonds have also been a good place to be in March, as they have gone up in price as negative interest rates have been announced. New Zealand equities in our international allocations have seen an increase of over 13% month to date. The currency allocations continued with the U.S. Dollar and the Japanese Yen.

 

PCM Strategies: 03.2016 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: U. S. Treasuries of multiple maturities.

  2. PCM Absolute Bond Index sm: Emerging Market bonds and International treasuries.

  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, inverse Dow Jones, cash equivalent.

  5. PCM Absolute Equity Income Indexsm : Dividend paying equities, utilities and cash equivalent.

  6. PCM Emerging Market Total Return Equity Indexsm: Cash equivalent and equities in the Middle East.

  7. PCM Total Return Portfolio Indexsm and PCM Stable Growth Plus+ Portfolio Indexsm: International bonds, gold, and dividend paying equities are all major themes in these portfolios.

  8. PCM Global Tactical Indexsm: Japanese Yen, 20 year U.S. Treasuries, gold, cash equivalent and International Treasuries.

  9. Global Macro Indexsm: Gold, U.S. and International Treasuries and inverse Europe and far East.

  10. PCM Alpha 1 Indexsm: 7-10 year U.S. Treasuries.

  11. PCM Absolute Commodities Indexsm: Gold and Livestock.

PCM was recognized as a "Top Gun" for our performance during the volatile 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)

***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.

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