Recently, the G-20 meeting took place in Seoul, South Korea. The participants stated goals prior to the event were to “ensure global economic recovery and strengthening the global financial system”. I am offering no commentary here, as to the outcome.
The main economic council for ‘wealthy’ nations was expanded from the G-8 to the G-20in September 2009. This major shift in G’s is significant and confirms that emerging markets can no longer be ignored, as the current composition of the G’s serves as an accurate ‘mirror’ of where economic power currently resides.
Importantly: economic power is no longer measured in terms of output– consumption is equally valued.
When I ran a relative strength analysis of the G-20 participants emerging market members sat atop the grid as follows: Turkey, Indonesia, Mexico, and India, while the lower ranked participants come from developed markets - Germany, Italy, France, and the European Monetary Union (the EU is a member organization).
As the G-8 has evolved into the G-20 we too must evolve our portfolios to mirror this shift in economic power.
Tuesday, November 30, 2010
Tuesday, November 2, 2010
Putting your head in the sand is not a portfolio strategy
Many investors are frustrated at the perceived lack of results from the quick fixes enacted to stimulate the US economy, and thus remain wary of investing in equities. Money flows are still showing net reductions in equity funds and inflows to bond funds, with the ten year treasury yielding approximately 2.7%!?!
I believe this is wrong; there are a lot of opportunities ahead and the theme is ‘global’: global growth, global demand, global business opportunities and global investment opportunities.
Let’s examine the facts. Post WW II there were 600 million consumers between Europe, Japan & the US coming-on-line. Today, there are 2.5 – 3 billion (yes, billion) consumers coming on-line in the emerging economies. And while developed economies like (western) Europe, Japan & the US may lag, developing economies such as (eastern) Europe, Latin America, Asia and even parts of the Middle East are experiencing expanding economies. First-hand experiences travelling the world taught me that people with increasing affluence want to consume; the progression I observed is as follows: American cigarettes (Marlboro) and alcohol (Budweiser & Johnnie Walker; red & black), boom boxes, TVs and refrigerators, a more powerful motor bike and then an automobile. Already, automobile manufacturers including GM and Mercedes are having their Chinese design studios contribute greatly to the designs of new automobiles, thus enhancing global (and domestic) sales. Today, Mercedes sells more top-of-the-line cars in China than in the US. Bottom line, there is a lot of pent-up demand because of the desire to live the ‘good-life’ enjoyed in the West.
The growing affluence of the masses living in what is best described as ‘emerging markets’ and their consumption habits are where I believe the best potential for investing will reside for some time to come. US companies positioned to capitalize on this growth in demand will be the domestic beneficiaries, as will well managed companies domiciled in other parts of the world. So stop worrying about weak domestic economic growth and start focusing on the opportunities that abound around the globe and the companies which will benefit.
I believe this is wrong; there are a lot of opportunities ahead and the theme is ‘global’: global growth, global demand, global business opportunities and global investment opportunities.
Let’s examine the facts. Post WW II there were 600 million consumers between Europe, Japan & the US coming-on-line. Today, there are 2.5 – 3 billion (yes, billion) consumers coming on-line in the emerging economies. And while developed economies like (western) Europe, Japan & the US may lag, developing economies such as (eastern) Europe, Latin America, Asia and even parts of the Middle East are experiencing expanding economies. First-hand experiences travelling the world taught me that people with increasing affluence want to consume; the progression I observed is as follows: American cigarettes (Marlboro) and alcohol (Budweiser & Johnnie Walker; red & black), boom boxes, TVs and refrigerators, a more powerful motor bike and then an automobile. Already, automobile manufacturers including GM and Mercedes are having their Chinese design studios contribute greatly to the designs of new automobiles, thus enhancing global (and domestic) sales. Today, Mercedes sells more top-of-the-line cars in China than in the US. Bottom line, there is a lot of pent-up demand because of the desire to live the ‘good-life’ enjoyed in the West.
The growing affluence of the masses living in what is best described as ‘emerging markets’ and their consumption habits are where I believe the best potential for investing will reside for some time to come. US companies positioned to capitalize on this growth in demand will be the domestic beneficiaries, as will well managed companies domiciled in other parts of the world. So stop worrying about weak domestic economic growth and start focusing on the opportunities that abound around the globe and the companies which will benefit.
Tuesday, October 5, 2010
There's more to investing than the S&P 500!
The media regularly quotes the S&P 500 (SPX) Capitalization Weighted Index. This index has seen two of the biggest hits in its history during the last decade, and is down 23.44% for the decade, but there are many areas of the market which are up for the decade. Take those same 500 stocks, equal weight them and they are up 47.53%. What about Small Cap stocks? The iShares S&P SmallCap 600 Index (IJR) is up 76% since December 31, 1999. Similarly, the Vanguard Emerging Markets ETF (VWO) is up 112.62% and the GreenHaven Continuous Commodity Index (GCC) is up 102.29%.
I have been providing this type of guidance; implementing a proactive and disciplined investment plan for clients since 1983.
I have been providing this type of guidance; implementing a proactive and disciplined investment plan for clients since 1983.
Tuesday, August 31, 2010
US or international?
The natural tendency for investors in the US is to overweight US holdings. However, at times - like now, international equities are favored over the US because the asset class as a whole is performing well relative to US asset classes, as a whole.
Two popular and widely used ETFs are EFA (Europe, Far East & Asia) and EEM (Emerging Markets). The two largest holdings represented in the EFA are Japan and the United Kingdom, with a 22% and 21% weighting respectively. By contrast, the EEM's two largest country weightings are China and Brazil at 18% and 16% respectively. The relative strength relationship between EFA and EEM continues to favor EEM, telling me that emerging markets continue to outperform developed markets. However, by taking this analysis one step further, FRN (Frontier Markets) is exhibiting better strength than EEM. FRN’s largest country weighting is Chile at 31%.
It is this type of analysis which helps me to determine where to invest your funds. As I peel back the layers of the proverbial onion; international over US, emerging over developed, frontier over emerging…I am able to peer deeper into the international space and I can provide further analysis into where actual strengths may reside.
The trials and tribulations of the developed markets have been front & center in the news lately, suggesting a more defensive posture with respect to the developed and US equity markets at this time. On the other hand, we continue to see positive developments in the International equity space and superior strength still present in the Frontier and Emerging Markets.
Two popular and widely used ETFs are EFA (Europe, Far East & Asia) and EEM (Emerging Markets). The two largest holdings represented in the EFA are Japan and the United Kingdom, with a 22% and 21% weighting respectively. By contrast, the EEM's two largest country weightings are China and Brazil at 18% and 16% respectively. The relative strength relationship between EFA and EEM continues to favor EEM, telling me that emerging markets continue to outperform developed markets. However, by taking this analysis one step further, FRN (Frontier Markets) is exhibiting better strength than EEM. FRN’s largest country weighting is Chile at 31%.
It is this type of analysis which helps me to determine where to invest your funds. As I peel back the layers of the proverbial onion; international over US, emerging over developed, frontier over emerging…I am able to peer deeper into the international space and I can provide further analysis into where actual strengths may reside.
The trials and tribulations of the developed markets have been front & center in the news lately, suggesting a more defensive posture with respect to the developed and US equity markets at this time. On the other hand, we continue to see positive developments in the International equity space and superior strength still present in the Frontier and Emerging Markets.
Monday, August 16, 2010
Take a step back and look at the facts
After a day like Wednesday (8/11/10), which left many investors feeling a little rattled as the market exhaled, it is important to take a step back and look at the facts.
The financial headlines: "Global Fears Strike Stocks", "Market Woes", Stocks Tumble", etc. make an investor doubt their positions and convictions, for fear the sky is falling. But it's important to keep all rallies and declines in perspective.
Over the course of the past month the Dow Jones Industrial Average (DJIA) has gained roughly 1000 points, but with the Dow losing 265 points on Wednesday that rally came to an abrupt stop. To gain perspective on this decline I evaluated the longer term (100 point box) chart of the Dow. After attaining a high of 10,700 earlier this month, the Dow has pulled back to 10,400. Thus far, the pullback is a normal, and healthy, pullback within the confines of an overall positive trend for the DJIA.
There is no way to tell what the future holds however, by evaluating the underlying supply and demand relationship of tthe market we can gain some insight that might not otherwise exist, and is sorely lacking in the media reports.
The financial headlines: "Global Fears Strike Stocks", "Market Woes", Stocks Tumble", etc. make an investor doubt their positions and convictions, for fear the sky is falling. But it's important to keep all rallies and declines in perspective.
Over the course of the past month the Dow Jones Industrial Average (DJIA) has gained roughly 1000 points, but with the Dow losing 265 points on Wednesday that rally came to an abrupt stop. To gain perspective on this decline I evaluated the longer term (100 point box) chart of the Dow. After attaining a high of 10,700 earlier this month, the Dow has pulled back to 10,400. Thus far, the pullback is a normal, and healthy, pullback within the confines of an overall positive trend for the DJIA.
There is no way to tell what the future holds however, by evaluating the underlying supply and demand relationship of tthe market we can gain some insight that might not otherwise exist, and is sorely lacking in the media reports.
Tuesday, June 15, 2010
Ranking The World Cup Teams and the Market
The S&P 500 (SPX) and the Dow Jones Industrial Average (DJIA) each fell below their February correction lows during the most recent correction as did many of the broader based international equity indices. However, such as is often the case, a further look underneath the surface shows some pretty interesting developments. First, there are a number of indices that have remained above their February correction lows. Secondly, those indices that remain above their February lows are also those areas that have been exhibiting superior relative strength characteristics for some time now. They include: US Small Cap, US Mid Cap, US Equal Weighted S&P, and Growth. In other words, these indices are showing a positive divergence versus the rest of the broad equity market.
How do I know this? I will provide an example using national soccer teams:
The World Cup, one of the world's most watched sporting events, started this past weekend, 32 national soccer teams will compete in South Africa; like the Olympics, the World Cup rotates around the world every four years.
If you see the Brazilian team play, you'll notice a game of quick dance-like moves, efficient passing, and flare. However, if you see the Italian team, they play with staunch defense, but will suddenly and aggressively implement a counter-attacking strategy that often catches their opponents flat-footed. Although the two styles of play differ immensely, Brazil and Italy have won over half of the World Cups played. These two very different approaches have been tremendously successful, proving there is indeed more than one ‘right answer’ to the question of how to win a world cup. In soccer like in my business, employing a sound strategy and employing it well, leads to success over time. There is no one single investment approach that is right for the temperament of all investors, but a great many that can be ‘right’ if applied correctly. Relative Strength-based risk management using the Point and Figure methodology is my ‘style of play,’ and it works for me.
One reason I rely on relative strength is the simple fact that it gives me the objective capability to rank different assets and instruments. It does not matter if it's a stock or an ETF, I can compare it against another, and then rank them from strongest to weakest. This same concept of using rankings can be found almost everywhere in sports, including soccer. The Fédération Internationale de Football Association (FIFA) puts together the FIFA/Coca-Cola World Rankings to objectively rank the national teams from strongest to weakest - with the expectation that those at the top will most likely continue to perform better than the teams at the bottom. Does this sound familiar? The ranking tools I employ operate similarly, comparing different assets against each other and then ranking them from strongest to weakest, the assets at the top of the matrix have developed trends of outperformance, and history has demonstrated that these trends tend to sustain themselves for extended durations of time, so I look to these leaders to remain leaders until proven otherwise.
Currently, Brazil, Spain, Portugal, Netherlands, and Italy are the five strongest teams out of 202 entering the tournament. Simply put, the teams at the top have been performing better relative to the other teams. So, by having the strongest performance over the last few years, the teams at the top, have exemplary relative strength characteristics – just like what I want to own in your portfolio. The teams at the bottom of the ranking exhibit the lowest RS readings. In anticipation of the World Cup, we should expect to find Brazil and Spain making a strong push toward the finals.
In summary, by using relative strength I am able to rank the different ‘parts’ of the market. So as we go through the current market correction, we continue to hold the strongest sectors and shed those sectors dropping in rank while keeping an eye toward the future market leaders so we can add them to the portfolio when the time is right.
Securities and Investment Advisory services offered through NBC Securities, Inc., Member FINRA and SIPC. Investment products 1) are not FDIC insured, 2) not guaranteed by any bank and 3) may lose value including a possible loss of principal invested. NBC Securities does not provide legal or tax advice. Recipients should consult with their own legal or tax professional prior to making any decision with a legal or tax consequence.This is not an offer to sell or buy any securities products, nor should it be construed as investment advice or investment recommendations.
How do I know this? I will provide an example using national soccer teams:
The World Cup, one of the world's most watched sporting events, started this past weekend, 32 national soccer teams will compete in South Africa; like the Olympics, the World Cup rotates around the world every four years.
If you see the Brazilian team play, you'll notice a game of quick dance-like moves, efficient passing, and flare. However, if you see the Italian team, they play with staunch defense, but will suddenly and aggressively implement a counter-attacking strategy that often catches their opponents flat-footed. Although the two styles of play differ immensely, Brazil and Italy have won over half of the World Cups played. These two very different approaches have been tremendously successful, proving there is indeed more than one ‘right answer’ to the question of how to win a world cup. In soccer like in my business, employing a sound strategy and employing it well, leads to success over time. There is no one single investment approach that is right for the temperament of all investors, but a great many that can be ‘right’ if applied correctly. Relative Strength-based risk management using the Point and Figure methodology is my ‘style of play,’ and it works for me.
One reason I rely on relative strength is the simple fact that it gives me the objective capability to rank different assets and instruments. It does not matter if it's a stock or an ETF, I can compare it against another, and then rank them from strongest to weakest. This same concept of using rankings can be found almost everywhere in sports, including soccer. The Fédération Internationale de Football Association (FIFA) puts together the FIFA/Coca-Cola World Rankings to objectively rank the national teams from strongest to weakest - with the expectation that those at the top will most likely continue to perform better than the teams at the bottom. Does this sound familiar? The ranking tools I employ operate similarly, comparing different assets against each other and then ranking them from strongest to weakest, the assets at the top of the matrix have developed trends of outperformance, and history has demonstrated that these trends tend to sustain themselves for extended durations of time, so I look to these leaders to remain leaders until proven otherwise.
Currently, Brazil, Spain, Portugal, Netherlands, and Italy are the five strongest teams out of 202 entering the tournament. Simply put, the teams at the top have been performing better relative to the other teams. So, by having the strongest performance over the last few years, the teams at the top, have exemplary relative strength characteristics – just like what I want to own in your portfolio. The teams at the bottom of the ranking exhibit the lowest RS readings. In anticipation of the World Cup, we should expect to find Brazil and Spain making a strong push toward the finals.
In summary, by using relative strength I am able to rank the different ‘parts’ of the market. So as we go through the current market correction, we continue to hold the strongest sectors and shed those sectors dropping in rank while keeping an eye toward the future market leaders so we can add them to the portfolio when the time is right.
Securities and Investment Advisory services offered through NBC Securities, Inc., Member FINRA and SIPC. Investment products 1) are not FDIC insured, 2) not guaranteed by any bank and 3) may lose value including a possible loss of principal invested. NBC Securities does not provide legal or tax advice. Recipients should consult with their own legal or tax professional prior to making any decision with a legal or tax consequence.This is not an offer to sell or buy any securities products, nor should it be construed as investment advice or investment recommendations.
Thursday, June 3, 2010
Looking Under the 'Hood' of the Market
Since peaking about a month ago, the S&P 500 (SPX) has given back about 12%; however, as I continue to look ‘under the hood’ of the market, there have been some interesting developments from a relative strength (RS) perspective.
Today, there are 13 out of the 40 US economic sectors that have a higher RS reading than on April 23rd. By the way, 38 out of the 40 economic sectors produced positive returns last year (2009) and certainly, some sectors did better than others, but simply being in the market produced attractive returns. However, as we are now five months into 2010 it is becoming more and more apparent that having a tactical sector rotation strategy is going to be extremely important going forward. So far, there are 22 out of the 40 sectors which have produced positive returns this year. In other words, without a disciplined strategy you had roughly a 50 / 50 chance at picking a winning sector this year.
The correction for the vast majority of strong relative strength names has been just that - a correction, many investments are still in positive trends with strong technical attributes.
While volatility can wreck havoc on an investor's psyche, it is also the reason why equity returns are higher than returns on more stable assets like CD's.
Securities and Investment Advisory services offered through NBC Securities, Inc., Member FINRA and SIPC. Investment products 1) are not FDIC insured, 2) not guaranteed by any bank and 3) may lose value including a possible loss of principal invested. NBC Securities does not provide legal or tax advice. Recipients should consult with their own legal or tax professional prior to making any decision with a legal or tax consequence.This is not an offer to sell or buy any securities products, nor should it be construed as investment advice or investment recommendations.
Today, there are 13 out of the 40 US economic sectors that have a higher RS reading than on April 23rd. By the way, 38 out of the 40 economic sectors produced positive returns last year (2009) and certainly, some sectors did better than others, but simply being in the market produced attractive returns. However, as we are now five months into 2010 it is becoming more and more apparent that having a tactical sector rotation strategy is going to be extremely important going forward. So far, there are 22 out of the 40 sectors which have produced positive returns this year. In other words, without a disciplined strategy you had roughly a 50 / 50 chance at picking a winning sector this year.
The correction for the vast majority of strong relative strength names has been just that - a correction, many investments are still in positive trends with strong technical attributes.
While volatility can wreck havoc on an investor's psyche, it is also the reason why equity returns are higher than returns on more stable assets like CD's.
Securities and Investment Advisory services offered through NBC Securities, Inc., Member FINRA and SIPC. Investment products 1) are not FDIC insured, 2) not guaranteed by any bank and 3) may lose value including a possible loss of principal invested. NBC Securities does not provide legal or tax advice. Recipients should consult with their own legal or tax professional prior to making any decision with a legal or tax consequence.This is not an offer to sell or buy any securities products, nor should it be construed as investment advice or investment recommendations.
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