I was recently interviewed by GuruFocus and the article was published on their popular website several weeks back. Our Market Update is shown after GuruFocus’ 15 questions below:
1). How did you get started investing? What is your background?
I had an extremely busy and successful professional practice for 25 years, specializing in spinal care and in functional medicine. I had always been interested in investing and in the mid-1980s I created one of the first relative strength analysis programs and it is still used in several popular investment newsletters. I continued to slowly study the financial world after that and eventually came to realize that almost nobody in the investment world knows what they are talking about, although they all believe that they do. In my study, I felt that it was my responsibility to attempt to kill all of the popular investment ideas out there, other’s ideas as well as my own and they were not difficult to destroy. The level of belief in non-working ideas and systems out there is staggering. There is very little that actually tests out as adding to alpha rather than to ego.
My personal financial situation is such that it allows me to invest my own money without being dependent on income from MarketCycle Wealth Management. This allows me to always have a mindset of concentrating on what is best for my clients: the best risk adjusted returns. I know that my job is to take the equity line from lower left to upper right. It’s that simple. In order to do this, we hold diversified, global, bullish trending assets for long periods and we constantly monitor for economic-recessions so that we can sidestep these rarer portfolio crushing periods.
I have established two websites:
- MarketCycle Wealth Management, with free monthly blog (set up for retail investors and clients)
- MarketCycle Wealth REPORT, which is continually updated (set up for professionals)
2). Describe your investing strategy.
We utilize the following:
- Trend following (we always want to hold assets that are moving in one general direction over a long period of time)
- Inter-market analysis (how one asset’s performance will effect another’s)
- Global-macro (how macro-economics will effect performance)
- Relative strength analysis (we always want to hold the strongest hand, strongest sectors, strongest countries & regions, etc.)
- Diversification (including income generating assets)
- Analysis of Federal Reserve activity
- Interest rate analysis
- Inflation analysis
- Currency relative strength analysis
- Risk analysis (based on price & volume breadth, interest rate spreads, leading sector breakdown and much more)
- Calculated U.S. recession chances 3 months out
- Where is the bubble or anti-bubble (which is just as important) and where is the craziness?
- Chart pattern recognition (is something a continuation or a reversal pattern?)
- How an asset’s volatility effects the amount of money committed to the asset and does the asset truly diversify the portfolio
- Where we currently are in the typical business market cycle, how it might be different this time, and how this effects asset selection
3). What drew you to that specific strategy?
The above are the things that we weren’t able to kill through our continual and relentless testing.
4). What other investors influenced you?
Various trend followers such as John Henry, Bill Dunn, Jerry Parker and Richard Donchian, but I have generally altered the original trend following concepts to apply to today’s changed world, changed assets, changed inflation levels and to longer-term investing periods.
5). How has your investing changed over the years?
I am more patient and I never panic. It took me forever to learn my lessons but I now feel that I have a clear perspective and that I know exactly what to do each morning before the day begins. I never make trading/investing decisions while the market is open. I take one day at a time with an overall perspective about what is happening in the big picture, how everything is trending rather than how a recent news item is causing temporary volatility. Also, as I’ve killed my own and other’s ideas, my “system” has become simpler and cleaner and clearer… and much more so over the past two years and even the past two months and literally during the past two days. The learning is exponential and continual.
6). Name some of the things that you do that other investors do not.
I’d have to say that it would be the combining of the 15 elements listed above and the elimination of those things that are popularly believed and held dear by so many but that do not actually test out to be true.
7). Where do you get your investing ideas?
They almost always come to me at 3:00 in the morning. I have a note pad by my bed and write it down and then begin testing it for the next few weeks. It is almost always “killable” and not usable but sometimes it is fairly brilliant (as the subconscious mind sometimes is). I get very few usable ideas from reports or publications or financial websites or magazines. Frankly, I’ve done this long enough now that only a few articles each day pull my interest enough to warrant reading.
8). Do you use any stock selectors?
I feel that, because of computers, there is very little information that is not instantly disseminated and therefore the micro level is too efficient to warrant individual stock selection, so I leave that to others and choose ETFs that use techniques that will beat the market (in a bull market) by decent amounts. Almost no stock selector beats the market consistently while a technique, such as “dividend stocks or low-volatility stocks that are not hurt by rising rates” or a “longer-term relative strength analysis system that slowly rotates into the strongest stock sectors” will beat the market under the correct conditions.
9). Name some of the traits that a company must have for you to invest in.
See above answer, but some low priced stocks may be low priced for a reason and most high priced stocks absolutely will eventually revert (drop) to the mean.
10 & 11). What kind of checklist do you use when investing? What kind of research do you do?
Please review #2 above.
12). What kind of bargains are you finding in this market?
- Emerging market high yield debt and emerging market sovereign debt, both hedged into the United States Dollar
- Commodity producers and cyclical industrial commodities
- Oddly enough, both gold and the United States Dollar
- Variable-rate preferred U.S. shares. & TIPS (Treasury-Inflation-Protected-Securities)
I currently see a building bubble in Japanese stock shares (because of the incredible level of sovereign Japanese Central Bank stock purchases) but I would not short. Eventually this blows up, probably during the next U.S. recession.
13). How do you feel about the market today? Do you see it as overvalued?
All relative strength is in the United States and it will remain with the U.S. over the longer term. Emerging markets will get an intermediate-term pop but it won’t last too long before going into a new multi-year decline.
We are currently in the late-stage of the most recent market cycle. Longer term, we are in a period that is not too different than in the 1950s. Based on historical precedent, I see possible annual 15% S&P-500 returns over each of the next couple(?) of years and then a likely recession and resultant market drop of around 33%. My system is set up to identify and then to profit rapidly during recessions, turning normal investing on its head.
I believe that after the next recession, the U.S. stock market really takes off.
Readers will laugh but at some point just before the next big Secular bear begins we may be looking back from Dow 80,000. Then I will worry about “overvalued” on a very long-term basis.
14). What is the best new investing book?
Applied Financial Macroeconomics & Investing Strategy, by Robert T. McGee. He gives away some major secrets but I doubt that the average (even professional) reader will notice. The novice reader won’t have the background to be able to understand it. Very few people have even read this important book.
15). Any advice to a new investor?
Yes: Don’t believe everything that you think. Try to kill everything that you believe (in all areas of your life) and see what survives. Seek out a pro for at least some of your investment money because it will take a “new investor” perhaps a decade of study and multiple major (and expensive) money mistakes before they realize that they know nothing at all and that they are likely still at square one. Many new investors fall prey to curve-fitted investing techniques with outlandish claims (like day trading VIX futures, which works until it totally blows up) or trading based on what month of the year it is or buying lottery-style small-cap growth stocks. It is a minefield out there… so tread carefully.
Market Update is below…
MARKET UPDATE (charts show as of before the market open on Monday, October 24, 2016)
U.S. stocks shown over the longer term with a possible eventual final target somewhere near #5 on this chart. The small rectangular box shows the unusual and prolonged two year(+) sideways period that investors have had to endure:
Below, U.S. stocks shown over the past two years. They have now finally broken out to the upside which is bullish for stocks over the next year plus. Support (the red/green line) has now been tested twice and it held both times. Even if support does not continue to hold here, and I believe that it might not in the temporary near-term, we are still in a zig-zagging bull market longer-term and the prolonged sideways period is likely over and investors need to be patiently pre-invested in late-stage assets:
U.S. Stocks
U.S. bond yields have retested their bottom and bond prices, which move the inverse of rates, have reached over-bought conditions and appear ready to weaken going forward. Investor emphasis should now be on floating-rate bond proxies and emerging market bonds, especially emerging market high-yield bonds (and paying around 7%).
Growth & momentum stocks continue to beat out value stocks. When growth stocks lead, then bull markets tend to be very strong (as can be seen off of the 2009 bottom).
Inflation is still rising in the United States:
The Gold & Silver Index (representing both gold and industrial metals) has bottomed and is still heading higher and this means that we have entered the late-stage of the current bull market that started in 2009:
Oil is likely heading towards $75-ish before the next recession:
And finally, the United States Dollar, after moving sideways for two years (along with stocks) now appears ready to strengthen again. Normally this would cause commodities to weaken since they are priced in USDs, however, increasing inflationary levels will continue to give commodities and gold a boost. I expect gold and the United States Dollar to now move in tandem and in the same general trend direction (UP) and this is somewhat unusual.
SUMMARY: “We are still in a bull market.”
Article by Stephen Aust, MarketCycle Wealth Management
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