Sleazy Banks Paid Big Settlements (Quietly)

Barclays – $2 Billion

Goldman Sachs – $5.1 Billion

JP Morgan – $13 Billion

Bank of America – $16.65 Billion

That’s how much these banks paid out in fines and penalties for  misrepresenting the quality of the Mortgage-backed securities they sold leading up to the huge financial crisis that climaxed in 2008-2009.

I wonder how much money they actually made from those sales?

Stocks Look Weaker Today

As of this writing, the S&P500 is down more than 1% on a Monday after lots of political news over the weekend.

My last blog post articulated our current asset allocation percentages as of last Thursday. No changes today. Right now, our overall portfolio is flat on the day because of the other positions in our portfolios.

While the Nasdaq Managed to hit new highs recently, the other major stock indexes have not. Breadth in stocks is weak (ie. more stocks are going down than are going up), even though the popular big name stocks (Facebook, Amazon, Netflix, Google) have supported the major indexes.

Market tops have usually taken a long time to form … only becoming clear in retrospect. That is why many people say you can’t time the markets by getting out when you think the market is “high” or “over valued”. I don’t disagree with that belief, but I do believe that when stock market volatility begins to increase after a  long run up, your asset allocation to stocks should decrease according to the rise in volatility of stocks relative to the other asset classes.

Traditional asset allocation models are based on a couple of assumptions that we all know are not true:

  1. The monthly fluctuation (volatility) in stock returns follows a Normal Distribution statistically; and
  2. The future correlation of an asset class to other assets will correspond to the long-term historical correlation of that asset class to other assets (i.e. When stocks go down, bond values will go up).

Most of the time, these assumptions are very useful for the purposes of modeling market behavior. However, during periods of market crisis. The “rules” go out the window because human beings are making decisions based on something besides cold, hard logic and mathematical probabilities. When fear and greed take over, models fail… unless you have a methodology that reduces risk when markets are more risky.

That’s what we do.


We are at a Pivotal Point with Stocks

Well, as we close the day Friday, February 23, 2018, stocks are back up to the levels where we did our reallocation of assets a month ago. So, our portfolios are doing OK.

If they held on, investors and funds that are very heavy in US stocks have partially recovered also. You can almost draw a horizontal line across the highs of SPY for this week and the previous two weeks, with lots of scary dips along the way.

It will be very interesting to see what transpires next week. Like a stretched rubber band or guitar string, when it is plucked, there is a big fluctuation which then gradually subsides, and I would not be surprised to the smaller ups and downs for a few more weeks before the market decides to resume the uptrend or follow through to the downside.

Our clients have had a much smoother ride because we were diversified, and we reallocated based on the behavior of the asset classes as it changed, rather than trying to guess what would happen next.

A much better approach, in my view.

Have a great weekend.

Wow! The Pullback Has arrived!

Well, the fear Friday and today is as great as the greed has been during December and January. Stocks are getting killed today. Gold and Bonds are up, which is a very helpful thing for our portfolios.

As of the end of last week, our methodology called for an increase in gold (the intermediate trend is up again) and a reduction in stocks. Accordingly, this morning before the huge selloff, we sold a lot of stocks and bought gold and bonds.

I also made the decision to replace US Long Term Treasuries (TLT etf) with US Inflation-Protected Securities (TIP). Since TIP is much less volatile than TLT, our methodology calls for a larger TIP position than we had in TLT, thus reducing the stock positions even more. Thankfully, this move has proven very timely.

As I sat down to write this blog post, the Dow and the S&P 500 had given up all of their gains for 2018. Wow.

It was uncomfortable watching stocks go straight up when we were widely diversified in other asset classes. Now, it feels pretty good.

Have a great week.


Happy 2018! Wasn’t January nice?

Of course, January was nice, but gave back a lot of ground in the last couple of days. February is starting off poorly, but we were long over due for a pullback in stocks.

Sadly, today, it seems like everything is being sold.

Our balanced portfolios are performing well so far this year. Of special note is the fact that gold and long-term US Treasuries have entered a medium term downtrend. That change is reflected in our allocations since just after the 1st of January.

As we’ve stated before, our methodology dynamically adjusts asset allocations based on their volatility relative to the rest of the portfolio. This means that the most volatile asset classes, based on how they are CURRENTLY behaving, get the smallest percentage of the portfolio.

Also, I’ve enhanced my model by incorporating individual stock selection for the US large and small cap portions of the portfolio.

Questions? Give me a call at 615-414-1942.