Michael Lee Hudson – Zermatt Holdings

Retail Sales Prove Resilient

Michael Lee Hudson — Mon, 20 Sep 2021 05:18:31 +0000

Last Week’s Market Headlines:

Blowout Retail Sales in August equals + 0.7% increase versus -0.8% expected decline…Consumer is Still Spending Money
The S&P 500 Finished Lower for the Second Consecutive Week
Latest University of Michigan Consumer Sentiment Survey Shows Little Change Since August Release…Not a lot of Confidence in the Current State of the Economy
Delta Variant Continues to Dominate the Headlines, Partly Due to Muddled Booster Rollout
Inflation Issues and Supply Chain Concerns Persist

Last Week’s Market Performance:

U.S. stocks ended the week mostly lower as investors weighed the positive retail sales report with concerns over global supply chains, inflation, and Covid-19.
The Dow Jones Industrial Average ticked down -0.1% to 34,585, while the technology-heavy NASDAQ Composite fell a half percent to 15,044.
By market cap, the large cap S&P 500 gave up -0.6%, the mid cap S&P 400 fell -0.3%, and the Russell 2000 rose +0.4%.

A Huge, Surprise Increase in Retail Spending Occurred in August

The Covid effect reared its ugly head two weeks ago in the release of the University of Michigan Survey of Consumers.
People surveyed said they would change their behavior to adjust to the concerns created by the Delta variant. This reaction to the variant is leading the way for several economic forecast changes.(See last week’s Market Insights.)

However, saying you will change your behavior, answering a survey question, and changing it are two different things.
As I suggested last week, look around your town. What do your eyes see – shut down, slow down, or full steam ahead? Economists are downgrading their forecasts, but my eyes are telling me something different is going on.

The bad consumer spending data in the heart of summer did not align with the current “eye” test. I assumed we would have to wait and see until possibly the release of the September retail spending numbers for a reversal of the downward trajectory.
We did not need to wait that long.

August retail spending numbers were blowout numbers. Retail spending for August increased +0.7% versus an expected decline of -0.8%.
The American consumer is more resilient than given credit. We love our stuff!

Everything from the grocery store to the big box stores saw big increases in traffic in August. One of the few weak spots was car sales, as automakers continue to grapple with the computer chip shortage.

Another boost to sales, unfortunately, came from and will continue to come from the effects of Hurricane Ida.

As we all know too well living in southeastern NC, hurricanes of that magnitude send everyone to the store to stock up before the storm hits, and back to the store for the clean up and rebuild. Since Hurricane Ida left her mark through a wide swath of the east, the potential for expanding retail sales exists for the October release of the consumer spending data as well.

Please note, the consumer spending report due out in October includes both services as well as retail sales figures.

What about the Delta Variant and the Effect on the Consumer

No one is denying that the Delta variant is having an effect on behavior.

The return of mask mandates and capacity restrictions have decreased some aspects of consumer spending. As we discussed last week, travel is down and some events have been canceled.

What the retail sales number proves is, if you take something away, we will spend the money somewhere else.

The spending change appears to be away from consumer services to goods. Can’t get the experience? Then buy a product.

Look for early holiday shopping to keep the goods moving. The supply chain issues are real. The worry is that if you wait to do your Christmas shopping until the start of the shopping season, many sought after items will be gone due to the decling number available.

The disruption in normal holiday shopping patterns will change the reporting, creating the need for a deeper dive into the numbers to determine true consumer spending compared to previous holiday seasons.

If the goods are not available, will we travel more for the holidays? Travel was restricted during the holidays last year. Should we consider that in our planning to spend?

What is Boosting Retail Sales?

Retail sales are a glimpse into the general wealth of the American consumer.

Working Americans have experienced rising wages across the board, and they have increased their savings as many Americans are putting their current stimulus checks into savings with their earlier stimulus checks.

Working Americans are in good shape heading into the holiday season. Increasing wages combined with high savings gives consumers the ability to spend money comfortably with no fear of how will they pay for this.

The Federal Reserve continues to say the inflation experience is temporary. Some reduction in prices before the shopping season starts would be appreciated but does not appear likely.

This is a situation we will pay close attention to.

Don’t be surprised by better than expected holiday spending as long as enough goods are available.

The 50-Day Moving Average Gives Stocks a Boost

For those of you who closely follow the stock market, you may be wondering why Wednesday was an up day in the otherwise selling trend over the last couple of weeks.

A technical marker was approached that gave the bulls (buyers) a little more confidence to put some cash to work.

The current price of the S&P 500 almost reached its 50-day moving average price, the average price of the last 50 days. We prefer when today’s price is moving away from the 50-day average, showing that the market is on an upward trend. On Wednesday, the current price approached the 50-day moving average price – a downward trend.

The trend line held as buyers came back into the market after the recent decline found the S&P 500 down around -2.5%. For most of the summer a pullback of 2% to 3% has been followed by the next rally. Seems like many investors on Wednesday were hoping this pattern would continue.

Unfortunately, selling continued to finish out the week. The two-week decline for the S&P 500 was its worst stretch since February.

Our Short Term indicator has turned negative so some cash will need to be raised in your portfolios. Based on the futures this morning, selling will continue to start the week.

We will continue to Apply our Risk Management Discipline to your Portfolio.

It is also important to remember there is a difference between volatility and losses. Remember one of our seven investing rules is “Volatility is the cost of building wealth over time.”

Thank you for your trust and confidence in our services.

If you have questions or just want to discuss the current state of the market and your portfolio in greater detail – do not hesitate to call or use your monthly progress update email to get on our schedule.

You can schedule a face-to-face meeting in the office, a web conference, or a phone call, whichever you prefer! If you prefer a home visit, please call or email the office with your request and we will do our best to accommodate you as soon as we can. We are always available.

Have a great week!

(sources: all index return data from Yahoo Finance; Reuters, Barron’s, Wall St Journal, Bloomberg.com, ft.com, guggenheimpartners.com, zerohedge.com, ritholtz.com, markit.com, financialpost.com, Eurostat, Statistics Canada, Yahoo! Finance, www.stocksandnews.com, www.chaikinanalytics.com Chaikin Analytics, www.marketwatch.com, www.BBC.com, www.361capital.com, www.pensionpartners.com, www.cnbc.com, www.FactSet.com, W E Sherman & Co, LLC)

Zermatt Wealth Partners is an investment adviser registered under the Investment Advisers Act of 1940. Registration as an investment adviser does not imply any level of skill or training. The information presented in the material is general in nature and is not designed to address your investment objectives, financial situation or particular needs. Prior to making any investment decision, you should assess, or seek advice from a professional regarding whether any particular transaction is relevant or appropriate to your individual circumstances. This material is not intended to replace the advice of a qualified tax advisor, attorney, or accountant. Consultation with the appropriate professional should be done before any financial commitments regarding the issues related to the situation are made.

The opinions expressed herein are those of Zermatt Wealth Partners and may not actually come to pass. This information is current as of the date of this material and is subject to change at any time, based on market and other conditions. Although taken from reliable sources, Zermatt Wealth Partners cannot guarantee the accuracy of the information received from third parties.

An index is a portfolio of specific securities, the performance of which is often used as a benchmark in judging the relative performance to certain asset classes. Index performance used throughout is intended to illustrate historical market trends and performance. Indexes are managed and do not incur investment management fees. An investor is unable to invest in an index. Their performance does not reflect the expenses associated with the management of an actual portfolio. No strategy assures success or protects against loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk. All investing involves risk including loss of principal. Investing in stock includes numerous specific risks including: the fluctuation of dividend, loss of principal, and potential liquidity of the investment in a falling market. Past performance is no guarantee of future results.

Ignore the Headlines: Buy the Dips

Michael Lee Hudson — Fri, 16 Jul 2021 06:03:10 +0000

One of the first rules of successful investing is to pick a management style that makes sense to you, and then to stay with it, even when other styles are outperforming. This either sounds easy or stupid; Easy, because if you feel you have done your homework, why would you run contrary to your conclusion? Stupid, because if your investment strategy is under-performing when your goal is to make money, then you likely need to change, or worse you need to re-evaluate your strategy. The statements sound easy enough to adhere to, but in real time, these statements will likely cause you to chase the market. You will be the investment equivalent of a dog chasing its tail. The results will be similar and you will look just as ridiculous.

#1 Rule of Investing: “…pick a management style that makes sense to you, and then stay with it, even when other styles are outperforming.”

There are many investment disciplines to choose from: Standard Asset Allocation (often over simplified and implemented incorrectly), Tactical Asset Allocation, Core and Satellite Portfolios, Direct Indexing, and Advanced Indexing and Momentum Investing just to name a few. All models have their strengths and weaknesses. These strengths and weaknesses are immaterial to the point of this article but I do understand that further elaboration may be of interest to many of you. Stayed tuned to future posts!

Most investors bail on their model at its weakest point and shift to another model that’s exhibiting strength. This is better known as “sell low and buy high” and it’s never a good idea!

Don’t chase the market! “You will be the investment equivalent of a dog chasing its tail. The results will be similar and you will look just as ridiculous.”

Throughout my career in finance, I have, at one time or another, used all the above listed strategies, and even tried to merge a few of them together! The results have been all over the map. I will spare you the walk down investing-memory-lane for now. That’s fodder for another post…

The main goal of most of our clients is twofold:

Growth, when possible, and
Avoiding Large Losses

The goal itself provides the answer to the question of which money management strategy to employ. The two parts are in direct conflict, which means to achieve the desired result, the portfolio will need to adapt to market cycles. Adaptation is a nice word for change! NOT constant change, or even trading-just-to-trade change, but instead adjusting at a macro-level to the areas of the investing world that are gaining, while diminishing the areas of under-performance.

Momentum is the strategy used to identify such trends. Momentum investing carries with it a sell-discipline. A tenant of the strategy is before an investment is added to the portfolio, before any transaction is initiated, one determines the buy price and sell price. The selling price is adjusted over time based on the individual performance of the investment.

Momentum Investing can broadly be defined by a strategy that holds the winners and sells the losers. Momentum can be as simple as looking at the trailing 12-month price movements of different asset classes, sectors, or individual securities, holding the investments that are higher and selling the ones that are lower. Comparing the movement of any variable against its past, or comparing any variable to another variable, is using some form of momentum.

Momentum Investing is not done in singularity but can comprise of endless combinations of variables. Like most investment strategies, there is a discipline within the discipline. Sorry folks, I know there are a lot of people who would like you to believe that investing is quite simple, but all you have to do is Google some questions from a college finance class, or from an MBA program, or from the ChFC, CFP, or CFA exams to know that one needs some education, formal or informal, before starting their investing career. My Grandfather gave me a great piece of advice when I was little. He said, “you hire the people to do things you do not know how to do or that you do not have time to do.”

The biggest question we are getting in the office currently from people who want to invest now is, “How do you know what to invest in when the market has gotten ahead of itself?” This question has surfaced several times since the last major market drop in the summer of 2011 which was just shy of the dreaded negative 20% (defining for some an official market correction). The problem with that question has been the same for years; Who said the market is ahead of itself? We have had slow growth with little to no inflation, low volatility along with a Fed that only moved from accommodating to do no harm.

I know it is difficult to reconcile positive momentum with the turmoil in Washington, but the markets and politics are rarely on the same page. The political headlines through the last several administrations have been negative and Congress continues to enjoy an extremely low approval rating. As more and more company’s stock prices reach new 52-week highs, I take it as a sign, that unless something big happens in the political world, the day to day Washington bickering is irrelevant, from an investment standpoint anyway. One measure used to see the effect of new company highs is the advance/decline line. The advance/decline line is the difference in the number of stocks advancing vs the number of stocks declining in price in any stock index. The advance/decline line moves up when more stocks are advancing in price and down when more stocks are declining in price. These two pieces of evidence, Washington turmoil and stock prices reaching new 52 week highs, cannot exist together if high correlations existed between politics and the stock market. Since most of the negative news lately is purely political, I say “Ignore the news and buy the dips.” I trust the movement higher in the advance/decline line more than I trust Washington politics.

“… unless something big happens in the political world, the day-to-day Washington bickering is irrelevant, from an investment standpoint anyway.”

(sources: all index return data from Yahoo Finance; Reuters, Barron’s, Wall St Journal, Bloomberg.com, ft.com, guggenheimpartners.com, zerohedge.com, ritholtz.com, markit.com, financialpost.com, Eurostat, Statistics Canada, Yahoo! Finance, www.stocksandnews.com, www.chaikinanalytics.com Chaikin Analytics, www.marketwatch.com, www.BBC.com, www.361capital.com, www.pensionpartners.com, www.cnbc.com, www.FactSet.com, W E Sherman & Co, LLC)

Hayden Royal is an investment adviser registered under the Investment Advisers Act of 1940. Registration as an investment adviser does not imply any level of skill or training. The information presented in the material is general in nature and is not designed to address your investment objectives, financial situation or particular needs. Prior to making any investment decision, you should assess, or seek advice from a professional regarding whether any particular transaction is relevant or appropriate to your individual circumstances. This material is not intended to replace the advice of a qualified tax advisor, attorney, or accountant. Consultation with the appropriate professional should be done before any financial commitments regarding the issues related to the situation are made.

The opinions expressed herein are those of Hayden Royal and may not actually come to pass. This information is current as of the date of this material and is subject to change at any time, based on market and other conditions. Although taken from reliable sources, Hayden Royal cannot guarantee the accuracy of the information received from third parties.

The Trouble with Diversification – 4 Investment Assumptions Sure to Go Wrong

Michael Lee Hudson — Fri, 16 Jul 2021 05:42:56 +0000

Does Diversification limit your downside risk (chance of loss)

The meaning’s behind overused words or phrases changes with time. The term “diversification” is one in the category. You will get different answers depending on the person you ask. The most common response we hear when asked for a general description of “what does diversification mean?” The most common answer is “Don’t put all your eggs in one basket.” This response is an oversimplification, to say the least.

“Diversification” is the heart of Modern Portfolio Theory, a 1950’s Economic Nobel Prize-winning model.

The goal of this blog is to speak our truth. A long drawn out explanation of Modern Portfolio Theory is a sure way to have you click on something else immediately. If you want to find out more, Google search “Harry Markowitz” or “Modern Portfolio Theory” and your reading options will be endless.

The issue we have with your Google search results are the failures to explain that modern portfolio theory was an academic study to illustrate the variance in expected returns. It was never intended to be the “end all” of portfolio management.

The point of modern portfolio theory was an explanation for the volatility of investment returns that we experience most of the time.

Many of the most well-known economists from the early 1900s to 1950 believed that this was a useful tool in explaining average markets. However, they knew full well that bull and bear markets could cause trouble for Modern Portfolio Theory in its real-world application. After the 2008 & 2009 market crash, the term tail risk was spoken, at nausea around the broader financial world.

Don’t let “tail risk” throw you from what the real discussion is. Tail risk refers to the rates of return that are outside of the model, both positive and negative. Returns on either end of the spectrum, strong positive results or weak negative results, will not be accounted for in modern portfolio theory study.

We will concentrate on bear markets and the potential for loss or Negative Tail Risk. No one complains about positive tail risk. In over 20 years of serving clients, making someone too much money has never been a reason used for my termination papers!

What Is Diversification?

Let us first give you some additional working knowledge beyond “not putting all your eggs in one basket.” Nothing too intense, I promise.

Diversification is not so much a strategy for higher returns as it is a strategy to control risk. Unfortunately for its users, it’s not a very good risk strategy. The great recession of 2008 and 2009 bears that out.

The critical factor in determining risk within Modern Portfolio Theory is the correlation between different investments. (Bear with me. You will need some basic knowledge of correlation if you have not encountered the term before.) Correlation is a calculation which measures the tendency of investments to act similarly. The correlation formula produces results between -1, an opposite relationship exists, to 1, a direct relationship exists.

There are four essential outcomes:

The investments go up at the same time. (1)
The investments go down at the same time. (1)
The investments move in the opposite direction from one another. (-1)
The investments do not have a relationship, and therefore their movements are independent of each other. (0)

Next, you will need some basic guidelines with the results. A correlation of 0.90 or higher provides very little regarding diversifying away risk. The investments are the same. A calculation producing a result of 0.30 or less is considered attractive pairings for risk diversification within a portfolio. One last one, a result of 0.0, shows No correlation between the investments.

We will not use this information in explaining the widely understood but rarely discussed problems with the assumptions in modern portfolio theory. It is merely a reference point should you do some digging of your own.

We are concentrating on the application of correlation, not the calculation itself. From the math, one can produce an underlying portfolio that includes a mix of US stocks, International stocks, Bonds, Real Estate and Cash with defined percentages in each category – more commonly referred to as your “Investment Pie Chart.” Some investment companies even embed the chart in your monthly statements.

I know some of you are thinking we left out Alternative Investments, Commodities and Leverage Options. Including “other investment options” will not change the fundamental flaws with portfolios built on diversification strategies.

Model Portfolio Assumptions Sure to Go Wrong

1. People are rational risk-averse investors – The simple goal of investing is to generate more wealth. The underlying assumption is all people correctly evaluate risk using the same information to arrive at the same “rational” decisions.

There is a whole new academic study in the world of economics called Behavior Psychology. The work in this area has been awarded the Nobel Prize two times since the turn of this century. The prize was one for disproving that people are rational when making money decisions. We, humans, are emotional about our money, not rational!

2. Diversification is unaffected by the irrational behavior of a few – This may be true in an “up” market, but it is NOT even close in a “down” market.

As shown in the graph below, the spread between the returns of some of the best and worst performing stock indexes below is quite significant. A 290% spread from best to worst existed within the bull market running from 2003 through 2007. Since we do not know which investment will be the best or the worst, without the advantage of hindsight; investing some money in each is a sound investment theory to spread your risk around. Diversification at it’s best! Don’t put all your eggs in one basket.

In “down” markets more than an irrational few people head for the exits!

The graph below shows what happened to the same investments in the chart above when the 2008 and 2009 recession occurred. Our 290% spread dropped to a range of 15%. No matter which stock investment you picked, the result was the same – a significant loss! The same problem repeats itself in down markets. Ships sink when the tide goes out!

3. Investment costs and taxes are not relevant – I guess when Harry Markowitz was alive investments were free!

Ok, that statement was a touch passive aggressive. Here is why taxes and investment costs matter – They are not all equal. The higher the taxes and investment cost, the higher the hurdle you must jump for your investment to start making money. Even modern portfolio theorists know this. They try to hide it by using fancy terms to explain it, such as referencing the “upward bias on asset prices.”

If you underestimate the costs, you overestimate the returns, which goes straight to the heart of the theory – producing the best risk-adjusted returns. Higher costs don’t automatically signal lower returns but when does paying more for something help you save money? Are you willing to assume that the higher cost hurdle can be met, year in and year out, for better returns by the investment manager?

The hard part for today’s investor is determining what they are paying. Some costs are listed, and some charges are intentionally left out. Hopefully “real” investment cost transparency is part of the investment landscape in the not too distant future. If you want to know more read our post “9 Reasons to Avoid Mutual Funds – http://www.notiesfinance.com/9-reasons-to-avoid-mutual-funds/

4. No investor is large enough to influence prices – The claim here is that no one can manipulate prices without having some insider information, which if acted on, is illegal.

One of my favorite Warren Buffett stories is the sweetheart of a deal he received from Bank of America to help re-capitalize the bank after the Great Recession of 2008 & 2009. (If you want to know more information, you can Google it.) The gist of the story is that Warren was offered a reduced stock price with a guaranteed dividend to help Bank of America survive the crisis. In the end, Mr. Buffett made $12 Billion on the transaction. He is not the only billionaire getting investment deals that affect stock prices legally. Who says the wealthy do not get preferential treatment?

So Now What?

There is little denying the failures of Asset Allocation. However, we want to restore your confidence in arithmetic with an irrefutable math fact that has a profound effect on your investment returns: The good things help you less than the bad things hurt you!

We remind our clients of this simple math truth whenever possible with the following example –

The Story of Little Billy

Little Billy, our straight-A student, begins with his first grade of the year. Billy does his homework and studies for the first test and gets an A. He does the same things for test #2 and gets the same result, an A. Billy decides that this class is easy, so he stops paying attention, skips the homework assignments and does not study for the exam. The result was Billy’s first F of the year. Billy knows his parents are not going to be happy if he does not get an A on his report card. Little Billy gets back to working hard in school, and when the next test comes, he gets another A. Billy says to himself, thank goodness with three As and one F, I’m an A student again! Is he though? Depending on the actual test scores, Billy’s average now is either a C or B. Why? –

The good things help you less than the bad things hurt you!

It’s not irrational to get out of the market before you lose more than you can afford to lose. That’s common sense! Have you ever determined how much of your money you can afford to lose? It’s an amount everyone should generally understand!

Building Wealth or Staying Wealthy

Diversification combined with Dollar Cost Averaging is a good starting point for Beginning Investors but not the “end all” investment theory applicable to all people and situations.

Most people have a point where they are no longer Okay with portfolio losses. Don’t be shamed into staying invested. If told to “Stay the Course,” it is time for a new advisor.

Some perspective – Five to ten percent market corrections are common. Historically, you can expect one every year. Beyond 10%, you need to know how much you are willing to lose or can afford to lose before the next market drop occurs. This fact can help you save your wealth.

You have predetermined when you will act. If there is a breach of your acceptable loss percentage, you can enact your plan to preserve your wealth.

How about a text message? If one of our client’s account hits its loss amount, the client receives a text message stating that we need to talk so we can determine what actions they want to take. Think about what a difference this could have made in your response to the 2008 – 2009 recession.

No one knows when the next recession is coming, which makes “Stay the Course” even more dangerous. Unless you act now, when the next recession occurs, you will have already lost way more than your acceptable amount. (See Little Billy’s story again.)

Our Motto is: You never have to earn back what you don’t lose!

If you have your nest egg or you are building your nest egg; let us show you a better way to make money, keep money and grow it safely. Reach out to us; we would be glad to share some thoughts around proper risk management.