Monthly Archives: February 2015

Scarcity and Stocks: How to Follow (Or Avoid) A Late ’90s “New Economy” Playbook

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For the better part of 15 months, I have pounded the table for longer-term U.S. treasuries. Most financial pundits thought that I was nuts in December of 2013; they debated my scarcity premise throughout 2014 and they dismiss my relative value argument here in 2015. About the only concession? The talking heads have often acknowledged that if the “poop” hits the propeller, the proverbial flight to quality would involve super-sized demand for the perceived safety of U.S. sovereign debt.

Nevertheless, there has been more conversation about people missing out on the opportunity to short oil or buy a 2% stock dip than investors neglecting opportunities in federal government IOUs. From my vantage point, however, the prospects for increasing long bond exposure have not been quite as appealing since the iShares 20+ U.S. Treasury ETF’s (TLT) 50-day trendline crossed above its 200-day one year ago.

tlt 50 200

When professionals erroneously slam the possibility of adding treasuries to a mix, they typically focus on ultra-low yields alone. Yes, the yields are deplorable. Heck the 10-year barely competes with the dividend of the S&P 500 SPDR Trust (SPY). And yes, bonds are extremely overvalued from a simplistic perspective of the payment of interest.

What they fail to recognize, of course, is that roughly half of our nation’s public debt is owned by foreign central banks and foreigners; 20% is owned by our very own Federal Reserve. Pensions, mutual funds, banks and insurance companies own most of the remaining securities. Now, think about it. Foreign central banks earn more on dollar-denominated AA/AAA treasuries than they earn on lower yielding, lower-rated assets in depreciating currencies; the relative value means there is little reason to sell. The Fed has no intention of dumping treasuries on the market for fear of killing favorable borrowing costs. In the same vein, pensions as well as bond mutual funds have rules about their allocation, while banks would rather earn 3% from a risk-free 30-year treasury than 3.5% from Joe and Josephine Shmo’s mortgage.

It follows that the demand for U.S. treasuries across the globe is extraordinary, yet the supply is undeniably limited. This is scarcity. What’s more, when you add in other factors – relative value against scarce developed world bonds, need for perceived safety, economic deceleration – the “Fed is raising overnight lending rates” counter is entirely myopic.

Perhaps ironically, some stock advocates are using scarcity to explain why stocks are poised to continue their remarkable run without a hitch. In brief, believers posit the following: Retiring/semi-retiring baby boomers are set to live well into their eighties and nineties, meaning that the demand for stocks held over 30 years will be higher than anyone could have imagined. On the other hand, the percentage of available share in the S&P 500 have dwindled considerably due to remarkable share buyback activity by component corporations. In fact, they argue, the laws of supply and demand pretty much trump traditional measures of valuation and, for that matter, human psychology in panics.

One such stock advocate is an “almost famous” commentator who I respect (even when I do not agree with him). Joshua Brown of the Reformed Broker wrote about scarcity of stocks on 2/25:

“They’re living way longer than their parents did and way longer than they’d originally expected to. 25 percent of them will make it into their nineties. What do they need more than anything? It sounds crazy, but they need stocks. Bonds aren’t going to cut it for a thirty year retirement…

“And stocks are scarce… Buybacks have shrunk the quantity of S&P 500 company shares…”

There are quite of few problems with the scarcity argument as a sole driver for market-based securities. Remember, scarcity in treasuries trumps the severely overvalued mantra because there’s more to the story, including relative value with comparable treasuries clear across the developed world, safe harboring for those who need some assurance of capital preservation and a well-delineated slowdown in global economic activity. However, scarcity in stocks is unlikely to trump ridiculous overvaluation in equities ad infinitum. I suppose one can also explain that European and Asian injections of liquidity will also find their way into scarce stocks, though I suspect the high probability of recessionary pressures weighing on the U.S. in the near-to-intermediate term will make participants rush for the exits.

Josh Brown may well remember the 2000-2002 dot-com disaster as a fresh-faced University of Maryland graduate circa 1999. He may even recall how the “New Economy” had been expected to change the rules of investing altogether; that is, traditional measures of valuation no longer applied. Not only was Dow 40,000 and Dow 100,000 right around the corner, but trailing P/Es of 30, 45 or 60 simply reflected the realities of a new economic ideal. (Or so people erroneously thought.)

Here in 2015, Josh waxes philosophic about a scarcity paradigm:

“There aren’t ten Disneys, there’s just one. There aren’t two Apples, there’s one.”

Of course, there was only one Eastman Kodak founded by George Eastman in 1888. My first camera as a nine-year old in 1976 was a Kodak, when the company owned 85% of camera sales in the U.S. as well as 90% of film sales. As late as 2001, Kodak held the No. 2 spot in U.S. digital camera sales. Unfortunately, digital pictures moved to the world of smartphones and tablets. (Thank you Apple!) How did it play out for Kodak buy-n-hold-n-hopers? Existing stockholders were wiped out by Kodak’s bankruptcy.

I suppose I could talk about General Motors, Lehman Brothers, K-Mart or Pacific Gas & Electric, but the reader should get the point. The stock of great companies can go down… quite a bit. Even Disney is quite capable of falling 57%. (See chart below.) The math of loss does not make a recovery from 57% losses quite so easy, nor does human psychology favor anyone’s willingness to watch their dollars disappear. That’s why investors need to insure against monstrous losses, particularly in an absence of tailwinds from six years of quantitative easing and six-plus years of zero-percent interest rates.

A bear at Disney

Yes, my clients still own overvalued stocks; we still own core holdings like Vanguard Dividend Appreciation (VIG), iShares S&P 100 (OEF) as well as Vanguard Mega Cap Growth (MGK). That said, if one of these assets falls below and stays below a 200-day moving average, I am likely to reduce exposure. I may employ stop-limit loss orders to sell some or all of satellite ETF assets like Pure Funds Cyber Security ETF (HACK) and SPDR Select Health Care (XLV). Finally, when a preponderance of volatility measures and contrarian indicators give me reason to anticipate benefit from multi-asset stock hedging, I invest in the FTSE Custom Mutli-Asset Stock Hedge Index. Multi-asset stock hedging gives investors a diversified means for pursuing profits above T-bills.


Disclosure Statement: Pacific Park Financial, Inc. is a Registered Investment Adviser with the SEC. Pacific Park Financial, Inc. and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising on this website. is created independently of any advertising relationship.

Saving Greece? What ETF Investors Should Really Be Focused On

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February has been a terrible month for the U.S. economy, but a wonderful month for U.S. stocks. Translation? Investors do not believe that the Federal Reserve will raise overnight lending rates during an economic slowdown.

Just how abysmal have the data been so far? Personal spending, construction spending, factory orders, international trade, business inventories, wholesale inventories, consumer sentiment, retail sales and housing starts are just a few of the data points that fell short of expectations. Heck, the Citi Economic Surprise Index recently demonstrated that data points have missed analyst forecasts by the most in more than two years.

Most blame the weakening U.S. situation on decelerating activity around the globe. Goldman Sachs has gone so far as to say that the global economy has entered a contraction phase, with six of its seven Global Leading Indicator (GLI) components worsening in February. The lone holdout? U.S. Initial Jobless Claims.

Indeed, a low level of unemployment filings coupled with a consistent string of 200,000-plus net new jobs are the positives on the domestic scene. Yet even here, the employment rate as defined by labor force participation is under 63% – percentages that are typically associated with the 1970s. If millions upon millions of working-aged individuals did not give up the search for employment or “retire” since 1/1/2009, back when 66% of working-aged people had jobs, headline unemployment in the U.S. would be above 10.0%. (Naturally, 5.7% unemployment sounds better for those who want to believe that circumstances are much rosier than they really are.)

Without question, the U.S. is not an island of self-sustaining expansion. As much as the media portray oil price declines as a windfall for stateside consumers, the slump across the entire commodity space (e.g., metals, agriculture, gas, etc.) communicates anemic demand. Equally troubling, none of the spectacular job gains have translated into significant wage growth in a way that price pressures might rise. (For what it is worth, Wal-Mart did raise its wages above Federally mandated minimums for all of its low-earning employees.) Worse yet, depreciating currencies against the U.S. dollar have adversely affected the trade balance such that the Fed acknowledged the dollar’s rapid rise as a “persistent source of restraint” on exports.

UUP 9 Months

The Fed is not the only group that has expressed concern about dollar strength. Corporations have blamed the dollar for missing earnings targets, as well as used the currency to guide future earnings projections lower. And analysts have dramatically scaled back profit-per-share outlooks for the S&P 500 from nearly 8%-10% in November to 0%-2% here in February. What do lower earnings projections mean? In essence, the Forward 12-month P/E was the last remaining valuation technique that supported the reasonableness of the current price people are paying for the S&P 500. Not anymore. Cyclical, trailing 12-month and forward 12-month price-to earnings (P/E), price-to-sales (P/S), price-to-book (P/B) and price-to-cash flow (P/CF) all suggest S&P 500 overvaluation.

In spite of the seemingly obvious concerns investors should have about U.S. equities, bearish sentiment in the American Association of Individual Investors (AAII) is at a meager 17.88%. According to Bespoke Research, there have been only five weeks of the last 300 where bearish sentiment was lower.

Perhaps ironically, even as an institutional investor, I am not finding myself particularly bearish. On the contrary. I see opportunity to continue riding severely overvalued market-based securities higher; that is, there’s no reason to exit the central bank stimulus bubble when the world’s investors have so much faith in their policies. Overvaluation can beget irrational exuberance, and irrational exuberance can beget insane euphoria. It can go on for weeks, months or years. The only caveat? You have to realize the reality that asset prices have gone rogue, and that you will need an insurance plan for reducing risk when the inevitable blow-up transpires.

My approach is threefold. First, hold the stock assets that continue to trend higher. Each needs to remain above a a significant trendline like a 200-day moving average; a downside breach should not last more than a couple of days. Some of my favorites? Vanguard Dividend Growth (VIG), Vanguard Mega-Cap Growth (MGK), SPDR Select Health Care (XLV) and Vanguard Information Technology (VGT). Additionally, add exposure to assets where you see value, as I have with iShares Currency Hedged Germany (HEWG), or add exposure to where you’ve witnessed momentum, as I have with PureFunds CyberSecurity (HACK).

VGT 200 2 Years

Second, recognize that the appeal of long-term U.S. bonds will not dissipate in a weakening global economy. Fits and starts? Sure. Yet long-term U.S treasury proxies yield more than comparable sovereign debt abroad. Buying the bond dips can be as lucrative as buying stocks when they pull back. What’s more, funds like iShares 20+ Year Treasury (TLT) and Vanguard Long Term Bond (BLV) have made more money over the last 15 months than ETFs like the S&P 500 SPDR Trust (SPY) or Vanguard Total Stock Market (VTI). (Note: Readers know that I have been advocating exposure to longer-term maturities since December of 2013.)

Long-Term Bonds Versus Stocks

Third, there are a wide variety of things that could derail the respective rallies in stocks and bonds. Policy mistakes by one or more of the major central banks around the globe could cause an exodus. A monumental shift toward global acceleration in the worldwide economy would likely catch investors off guard. A decline in oil prices below the current line in the sand at $45 per barrel could cause hardship and/or civil unrest in export-dependent countries. A less-than-graceful exit from the eurozone by Greece (at some point in 2014) could affect the investing landscape. Even an unforeseen event(s) could take market-based securities for a ride where the price declines lead to bearish panic rather than bullish dip-buying opportunity.

Recessions as well as accompanying bear markets in equities are inevitable. It follows that one should be prepared to raise cash in their money market allocation to protect capital. I use stop-limit loss orders and trendline breaches to determine when a larger cash allocation is sensible. Yet I also use the FTSE Custom Multi-Asset Stock Hedge Index, sometimes called the “MASH Index,” to potentially earn more than T-bills in the early stages of a stock market bear. Component asset types include currencies (i.e., yen, franc, dollar), precious metals (i.e., gold), foreign sovereign debt (i.e., Japanese government bonds, German bunds) as well as U.S. bonds (i.e., inflation-protected, zero-coupon, long-term treasuries, munis). You can learn more about the MASH Index at


Disclosure Statement: Pacific Park Financial, Inc. is a Registered Investment Adviser with the SEC. Pacific Park Financial, Inc. and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising on this website. is created independently of any advertising relationship.

ETF Allocation When Stocks Are Stuck In A Moment

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The cyclically-adjusted price-to-earnings ratio (a.k.a CAPE, P/E10, Shiller’s P/E) evaluates the average inflation-adjusted earnings for the S&P 500 over the previous 10 years. The long-term CAPE average is 16.5. Today’s CAPE is north of 27. And despite numerous detractors on its predictive value, P/E10 led directly to a Nobel Prize for its creator, Robert Shiller.

With 140 years of market data, CAPE ratios above 27 have only occurred in the months around 1929, 1999 and 2007. Equally worthy of note, the Nobel economist’s work accurately identified the bursting of the dot-com bubble (1999-2000) as well as the collapse of the financial system (2007-2008).

Unfortunately for those who might like to argue why Shiller’s valuation methodology is irrelevant in 2015, U.S. stock prices are expensive whether you compare them to trailing 12 month earnings, forward 12 month earnings (being revised in light of the energy sector), book value and cash flow. Granted, one can suggest that zero percent rate policy makes Shiller’s P/E impotent; heck, those ridiculously low yields across the curve may make every traditional valuation metric worthless. Still, the more probable set of circumstances is that a bear market in equities is not too far off and that traditional valuation still has at least a single seat at the NYSE.

Indeed, if global interest rates continue to decline, strong corporations may do the same thing that they have been doing for the past six years; that is, they may issue low rate investment grade debt and use the funds to repurchase shares of corporate stock. That activity boosts the “E” in company earnings. I still believe this activity will keep equities from dropping off a cliff in the shorter-term. If nothing else, it is largely responsible for keeping the heralded index range-bound for the better part of the last 10 weeks.

$SPX 10 Weeks

Looked at another way, why would CEOs commit capital to major projects or human resources right now?  The strong dollar is killing exports, weaker foreign currencies are hurting profits, global deflation is hindering sales and volatile oil prices are increasing geopolitical risks. The “go-to” move of share buybacks may very well be the primary driver that keeps the S&P 500 from falling out of bed.

We should be cognizant, however, that stock buybacks for the S&P 500 are already approaching the record highs set in mid-2007. Is that a good thing? Or does it merely mask the declining sales and increasing debt of the companies that engage in the practice for too long?

On the other side of the coin is the reality that bear markets are inevitable. So I decided to conduct a little exercise. What if the S&P 500 fell an average bear market percentage drop from its 2093 perch? If you split the difference between the average bearish descent since 1926 (35%) and the median plunge since 1871 (38%), the S&P 500 would bottom out near 1330.

Let’s take that prospect a step further. The total return for the S&P 500 SPDR Trust (SPY) with dividends reinvested would come in around 17.5% for the first 14-plus years of the 21st century, representing an approximate compounded return of 1.2%. Of course, this would only occur if you had bought-n-held-hoped through all of the downturns — 2000-2002, 2007-2009, 2011, 2015.

It gets worse. A 17.5% total return (1.2% compounded) looks even meeker up against an investment grade bond fund like PIMCO Total Return (PTTDX). Assuming an absence of safe haven buying in the hypothetical bearish downturn and using just the performance numbers to date, the fund’s 160% since December 31, 1999 represents 7% annualized. That is for investment grade bonds, folks.

“But Gary,” you protest. “You’re speaking in hypothetical scenarios. The return for the S&P 500 SPDR Trust (SPY) so far is actually 4.5% at a total return of 85%.” Fair enough. My questions to protesters, then, are: (1) Do you believe that bear markets have been removed from the stock investing landscape and, (2) If you do believe in 30%-plus erosion of capital, what is your plan to minimize the damage?

The way that I see it, central banks cannot eliminate the inevitability of recessions or bear markets. Moreover, I believe that we are closer to the next “common sense” recession than we are to extraordinary acceleration of the U.S economy. It follows that one would be wise to prepare for the high likelihood of changes ahead.

In an investing environment that — by most measures — is becoming increasingly fearful, I emphasize ETF assets on the far left and far right of the risk spectrum. On the right, I maintain an allegiance to funds like iShares USA Minimum Volatility (USMV), Vanguard High Dividend Yield (VYM) and SPDR Sector Health Care (XLV). They have given me little reason to cut back. I have even added a modest amount of stock risk to European exporters that might benefit from euro weakness via iShares Currency Hedged Germany (HEWG).

On the left, I remain dedicated to risk averse assets as I have throughout the prior 14 months. Long duration treasuries have provided remarkable relative value in a world where inferior country debt offers less yield than U.S. debt. I continue to be long ETFs like Vanguard Extended Duration (EDV) and iShares 20+ Year Treasury (TLT). Taxable accounts have a variety of muni possibilities from iShares S&P National Muni (MUB) to Blackrock Muni Assets (MUA).

Perhaps most importantly, if a stock bear should be around the bend, I am able to use the FTSE Custom Multi-Asset Stock Hedge Index to my advantage. Not only did I join FTSE-Russell in creating the index that many are calling “MASH,” but I recognize the necessity of owning a diverse group of asset types to hedge against an extreme downturn in stocks. Long-dated treasuries, munis, gold, the Swiss Franc, the yen, the dollar, JGBs, German bunds, TIPS and zero coupons figure prominently in the index.

Nobody knows when a bear market will emerge. Yet failing to prepare for a catastrophic decline is the worst mistake an investor can make. If nothing else, investors should recognize that the collapse in commodities, never-before-seen lows in global yields and the rapid appreciation of the almighty buck are more indicative of “risk-off” money movement than “risk-on” excitement.


Disclosure Statement: Pacific Park Financial, Inc. is a Registered Investment Adviser with the SEC. Pacific Park Financial, Inc. and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising on this website. is created independently of any advertising relationship.