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October, 2014 PCM Quant Coalescence

PCM Indexes remained in a conservative stance for the October 1st reallocation and added outright inverse equity positions as well. PCM Absolute U.S. Sectors went to cash equivalents and the defensive healthcare and consumer staples, while PCM U.S. Industries is heavily in cash equivalents with the only equity exposure being consumer staples.

After gaining significant ground year to date and hitting an all time high in August, the Emerging Market Equity Index pulled back in September. It is now allocated to long equities in the Middle East (of those nations more aligned with the West), and spread off against an inverse exposure to emerging markets in general. The strong sell off in emerging markets seen in September are a product of the strengthening dollar and the unwinding of the associated "carry trade". The unwind is motivated by the fear of investors who are invested in a local currency. As they see the dollar strengthen, there can be a rush to sell the assets in the local currency to buy back their U.S. dollars, which they know they will eventually have to do if they want their money back. If they wait too long and the U.S. dollar continues to rise, they may not be able to buy back nearly as many dollars as they had when they invested in the emerging market, hence creating a loss in the investment.

The strengthening dollar is also a reason for the weakness in oil and gold that we have seen recently. As the dollar gets stronger, it takes less dollars to buy these commodities in the world market, where the dollar is the reserve currency and everything is priced based on the strength or weakness of the dollar. PCM Total Return and Stable Growth Plus are now both in line with these trends, as they have long positions in the U.S. dollar and an inverse position in gold, as well as a heavy allocation to cash equivalent (amongst other conservative positioning). (Please note that performance numbers on the website for indexes do not include dividends and are appropriately calculated sequentially.)

The PCM Global Tactical Index is also inverse gold, as well as long U S. preferred stocks and consumer staples, cash equivalent and inverse equity exposure to Europe and Asia. The Alpha One Index remained in the cash equivalent; short term U.S. Treasuries, where it has been since mid September. PCM Absolute Metals Index remained inverse gold with the remaining 50% allocation in cash equivalent, while PCM Commodities Index is still long livestock and now also in cocoa.

The PCM US Bond Index remained heavily in cash equivalent with the remaining exposure spread off between the 20 year U.S. Treasuries and inverse high yield corporates. The PCM Absolute Bond Index remained in 100% cash equivalents.

****Newly announced performance awards: PCM Index Strategy composites have again been recognized for performance by Informa Investment Solutions; this time for the 2nd quarter of 2014, as well as 1-year trailing performance and 3-year trailing performance. The PCM Absolute Bond strategy and the PCM Absolute Commodity strategy both won a "Top Gun" award for performance in their respective category for the 1-year trailing performance period, with the PCM Absolute Bond also winning the "Top Gun" award for 3-year trailing performance. The PCM Alpha 1 strategy 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 and PCM Alpha 1 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 "indexes" 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.

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