July, 2015: Risk of Greek Exit from the Euro Increases Dramatically
Welcome back after a Happy and Safe Independence Day. 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. Now let's move on to the July quant analysis!
Greece continues in the spotlight, as yesterday's resounding referendum vote of "No" by the Greek voters added to the speculation that Greece could actually exit the Euro. The "No" vote was a "No" to more austerity measures. Many Greeks feel that the situation can't get any worse if they do exit, so why not push for debt write downs if they are going to stay? This resolve may fade in the coming days, as personal bills go unpaid and food and medicine become more scarce. Many analysts believe that Puerto Rico defaulting on their debt should be a bigger concern, however the markets don't seem to be focused on that. The situation in China is also going somewhat unnoticed in comparison to the coverage that Greece is receiving and in light of the extreme volatility Chinese investors are experiencing. After rising 150% in the last year as of mid-June, 2015, the Shanghai Index has dropped approximately 30% in the last 3 weeks. Perhaps more interesting than the substantial swings are the measures being taken to stabilize the markets. The Chinese central bank is doing everything from buying equities, to backing brokerage firms' margin lending with additional capital, to requiring that mutual funds and pensions only buy stocks (yes that is correct; no selling) for the remainder of the year. These are all unproven and highly unusual attempts to keep their equity markets from going into a panic selloff and as is always the case: Time will tell. Our July quant analysis picked up on this uncertainty as allocations to cash equivalent and inverse equity ETF's were both strong themes.
Both PCM US Bond Total Return Index sm and PCM Absolute Bond Index sm remain allocated to inverse 20 year U.S. Treasuries and cash equivalents.
PCM Absolute U.S. Sector Index sm is now inverse U.S. equities, while remaining long consumer discretionary equities. PCM U.S. Industries Total Return Indexsm is heavily weighted in cash equivalents with some exposure to food and beverage. The PCM Absolute Equity Income Indexsm remained in a heavy cash equivalent position with the remainder in an inverse real estate position. .
The July reallocation of the PCM Emerging Market Total Return Equity Indexsm remained in a heavy cash equivalent position.
Inverse U.S. Treasuries and inverse U.S. 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 and exposure to commodities. (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 heavily in cash equivalents with some exposure to long equities in the way of consumer discretionary. The Euro and inverse gold are also represented for an interesting spread on the U.S. dollar. The Global Macro Indexsm is inverse 20 year U.S. Treasuries and also has a heavy cash equivalent exposure. It too has what could be considered a dollar spread trade by being short emerging market equities and long the Euro.
The PCM Alpha 1 Indexsm is long commodities. The PCM Absolute Metals Indexsm has exposure to inverse gold and to cash equivalent, while the PCM Absolute Commodities Indexsm moved into livestock while remaining in cocoa.
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
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.