Transcript Market Climate and Weather Forecast

Market Climate
and Weather Forecast
"It is not the strongest of the species that survives,
nor the most intelligent,
but the ones most adaptable to change."
Charles Darwin
Presented by Herb Geissler, Managing Director of The St.Clair Group
Rational Investing/VectorVest Special Interest Group of Pittsburgh AAII
May, 2013
Basic Traits of
Successful Investors

1. They look at objective indicators. Removing the emotions from the
investing process, they focus on data instead of reacting to events;
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2. They are Disciplined: The data drives decision making with preestablished rules. External factors do not influence them;

3. They have Flexibility: The best investors are open-minded to new
ideas, or revisiting previous thoughts;
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4. They are Risk adverse: Not always obvious to investors, it is a crucial
part of successful investing.
Investors always will make mistakes, and many of them.
The only difference between winners and losers
is that winners have small losses and losers have large losses
Observations by Ned Davis
Secular Bear Market Requires
Different Strategies Than During Bull
Kuznets’ Infrastructure cycle averages 17.6 years for each bull or bear phase
Avoiding losses is more important than going after big gains
PE Likely To Halve
Before Bear Ends
8
8
Ominous Triple Top Also
Implies Halving of Market Value
1590
Government Spending Now
Approaching European Levels
Guns and
Butter
Redistribution
Of Wealth
Medicare and
War on Poverty
Industry Bore Initial Brunt
of Social Welfare Programs
Workers Endure The Most Pain
Spending Problem is Severe
And Misdirected from Infrastructure
Needed for Long-Term Growth
Total Public Construction Spending vs GDP
Spending on roads, bridges, sea/air ports, sewage and water supply, public housing, etc
Congress Spends Excessively
on Vote-Getting Consumption
Sequestration on March 1
would trim 10% from 31%,
halving one year’s growth
Federal spending exceeded
revenues by $100 Billion every
month for past 3 years
Federal Reserve
Financing Spending Excesses
Federal Reserve QE is creating $85 Billion of IOUs
every month
 $40 Billion finances Federal excess spending
 $45 Billion funds housing & mortgage banks
 This $1 Trillion in annual QE adds 7-points to
GDP of $15 Trillion (vs 2-3% net growth)
 FRS liabilities tripled from $0.874 Tln in ’08 to
$2.9 Tin in early 2013
The 7 Governors and 12 Bank Presidents are all
political appointees from White House and Congress
Central Banks in China and Europe
Are More Bloated than U.S.
Fed’s Game Plan
and Likely Timing
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Cease reinvesting some or all payments of principal
on the securities holdings; (mid 2014)
Raise the target federal funds rate; (mid 2015)
Sell remaining agency CMO securities over a period
of three to five years; and (mid 2015, 16, 17, 18, 19)
Once sales begin, normalize the size of the balance
sheet over two to three years (mid 2015, 16, 17)
Actions stated in June 2011 FOMC Meeting.
Timing from August 2012 FRS Staff Discussion Paper
Real Driver of Bull Market Has Been
Fed Stimulus Liquidity
Make hay while the sun shines, but watch out when Fed dampens QE
Hirsch Foresees
Six More Years of Pain
Jeff Hirsch’s Little Book of Stock Market Cycles
May 2013
Long-Term
Strategic Conclusions
1.
2.
3.
Deleveraging heavy borrowings for excessive spending
increases unemployment and will cause recessionary
conditions globally during next several years.
Now, at middle of Kuznets’ cycle, upside is limited; as long as
QE persists, cautious selections and disciplined timing (in
and out) can be profitable. Even bonds & gold are risky now.
Return of capital is more important than return on capital.
Defensive strategies and disciplined timing to lock-in gains is
essential in this roller coaster market.
So, what should we do over
the next months and quarters?
For Intermediate Term investing:
Stock Prices Track GDP
Four Key Indicators
Show Pace of U.S. Recovery
WLI Tracks GDP and
Evidences Last Year’s Recovery
Pres. Election
Positive and rising PMI’s
supported rising market
Market rises when ISM is above 50, except right after 9/11/2001
Consumer Spending
is supporting retail,
wholesale, healthcare
and services sectors
S&P500
Rising stock market
despite weakening
PMIs suggests summer
correction
May 2013
Intermediate-Term
Strategic Conclusions
US
employment is stabilizing and consumer spending is holding up
Liquidity from Fed still flowing strongly; low interest rates boosts stocks
U.S manufacturing sector is becoming healthier, but starting to falter
Europe’s
sovereign debt and spending problems prolongs their recessions
Emerging Markets losing strength; even China in PMI contraction.
Bullish US stock market is vaporizing, suggesting a bad summer.
Fiscal uncertainties necessitate great selectivity in
both strategies and vehicles and, most importantly,
the rules and discipline to exit when market swoons
12-Month Moving Average
Helps Avoid Major Losses
11% above
Bear-Zone
Weather Forecast
for More Active Investors
When the facts change, I change my position.
What do you do, sir?
- John Maynard Keynes
IVY Invests Very Defensively
Bull’s End Is Confirmed When
Summation Index Crosses its MA20
or its MACD drops below zero-line
... And When 1/3 of S&P Stocks
Stay Below Their MA50
Traders Still Showing No Fear,
which could be dangerous
50/50/0 Rules Show Rollover Top,
But Not Yet Confirming Exit
Investors Were Fleeing Bonds,
But Are Now Seeking Shelter
And Gold Has Lost
its Defensive Luster
High Quality Dividend Stocks Are
Favored During Weak Bull Periods
Underscoring Weakness of Today’s Bullish Levels
May 2013
Short-Term
Strategic Conclusions
1.
Hot market is now rolling over towards a Summer correction
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2.
Liquidity from QE and bond sell-off provides some cushioning
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3.
Correction could be a mild 10-15%, but Washington is erratic
Use simple spreadsheets or charts to signal when to get out and when to re-buy
Preferred havens are cash and/or strong dividend equities

4.
Topping out and roll-over patterns reveal current risks
Tight stops, caution, and cash accumulation is prudent for stockpiling ammunition
REITs, Production MLPs, Utilities, Food Makers are attractive havens
But Hirsch may be right
•
•
Stocks may drop 20% into Thanksgiving, move sideways til Easter, then
plunge another 20-25% into a 4Q/14 bottom
Use charts and spreadsheets for logical, disciplined actions
Remember: we are still in the Kuznets Bear Phase;
use
the discipline of indicators to pinpoint trigger points
Any Questions?