Brexit Referendum

In a little over a week British voters will decide whether or not to stay in the European Union.  There is a lot of media attention around the event and investors are wondering what it will mean for Europe and stocks.

Market fear levels are already high.  The fear here may not be so much Britain’s potential exit.  If they do vote to leave an adjustment period could be bumpy but it’s not likely to be disastrous.  An exit vote would trigger a two-year period where negotiations would take place allowing markets to adjust.  The European Union policy makers real fear may be the potential for other countries to consider an exit.

BrexitAlthough history is limited in the area of independence votes, back in 2014 the Scottish independence vote failed to win enough support.  Voters generally prefer the status quo which may provide the stay camp a slight edge when ballots are finally cast.

In terms of the economic impact, Britain has strong trade relationships outside of Europe.  Their geographical proximity to the region suggest they will be able to maintain their trade agreements within the region.  Since Britain is not part of the Eurozone (they are part of the European Union) they do not use the Euro currency.  Britain pays around $10B a year for their membership in the European Union.

Whatever the outcome it will likely have less impact outside of the region. European stocks have already experienced more volatility than U.S. stocks and have under-performed U.S. markets since the 2009 recovery.

Once the outcome is known it will fall by the wayside which could end up boosting stocks.  The vote takes place on June 23rd.

Don’t Let An Old 401k Languish

Old 401kAfter a 25+ year career it is not uncommon for an individual to have worked at several different employers and each employer may represent an old retirement account.  Many times I have helped a client consolidate old retirement accounts (401k, 403b, 457, and others) into an IRA or Roth.  The process is often referred to as a “rollover”.

There are a lot of factors to take into consideration when making the decisions to rollover an old retirement account.  Factors like the control, expenses and investment options.

There are tax considerations as well.

If you are interested in learning more about your rollover options let me know and I will pass along a report on “Consolidating Old Employer Retirement Accounts”.  It provides more detail on the decision.  I’m also available to discuss the subject so give me a call at 877-874-1133 or email me at INFO at

Stocks Rally Despite Bearish Mood

U.S. stocks continue to move higher despite an overwhelmingly bearish attitude.  Investors sentiment, considered a contrarian market indicator, has not recovered from the brief but steep corrections experienced in late 2015 and early 2016.  Don’t be surprised if the bearish attitude reverses bringing more buyers back into stocks.  It doesn’t have to happen but it could and if it does stocks could stage a strong rally.

In terms of the strength of the current rally, it gets a little better each day.  One of the market gauges I used with my Adaptive Growth strategies is firmly in bullish territory and the spread between bullish and bearish positioning continues to improve.  The action of some individual stocks has also been encouraging.

Another indicator I reference for the Adaptive Growth strategy remains in a sell mode which is why I consider the market to still be in a transition.  Because we remain in a transition I am prepared to make defensive moves in the Adaptive Growth strategies quickly if conditions start to deteriorate.

I think many investors are unprepared for the possibility the market could stage a strong rally the balance of 2016.  One thing that I have learned over the years as a professional investor is the market has a tendency to do the opposite of what many market pundit’s broadcast.

That is one of the beauties of using a combination of my Adaptive Growth strategies and Market Growth strategies.  In a highly leveraged economy like we have today investors can expect deep contractions as imbalances correct.  This is where an Adaptive Growth strategy designed to avoid sustained declines like those of 2008 can be very helpful.  On the other hand, having part of your investment dollars exposed to longer-term growth and dividend investments along with the right bond investments for some level of protection help participate in the recovery regardless of how uncomfortable investing might feel at that time.

There is no perfect investment strategy for all markets.  My approach is to keep it simple.  I use a simple timing approach, straight forward investments and combine an Adaptive Growth and Market Growth approach which should position investors for a wide variety of market outcomes.

What A June Rate Hike May Mean for Stocks, Bonds & Real Estate

In order to assess the potential impact of an interest rate hike on asset markets it may help to understand the possible motivation behind the Fed’s decision.  While they point to an improving economy, outside of their employment mandate there is little reason to raise rates.  The Fed has also been clear about their desire to normalize interest rates and this is likely the reason policy makers will raise interest rates at the next available opportunity.  The Fed is trying to get rates up to a point where when the economy falls into a recession they will have the ability to lower rates.  Its important to understand that under the typical interest rate cycle the Fed is usually raising rates as the economy is about to overheat and create inflationary pressures.  That is not what the Fed is trying to do in this cycle.

So what can we expect if the Fed raise rates in June?  Last summer when rate hike talk surfaced the stock market responded poorly and experienced a swift and deep correction.  By December stocks had staged a recovery and the Fed raised rates a quarter point.  Markets proceeded to sell off aggressively as we entered 2016 only to recover by mid-April.

Will we see the same reaction from the stock market this time?  Maybe not.  Stocks have held up recently despite a mixed Q1 earnings season.  Wednesdays initial stock market reaction to the Fed minutes was based on the surprise a rate hike was firmly on the table for June.  At the time the futures market was projecting around a 5% chance of a June hike.  It’s only around a 35% as of today.  However, markets closed even on the day of the Fed release after being down earlier.  On the following day they recovered a good portion of their moderate declines.  As the stock market approaches the close of the week stocks are staging a rally.  So far stocks appear to have taken a potential rate hike in stride.  (I will post this note before the market close so take note of how they end the session for clues on how they may respond going forward.)

The bond market, on the other hand, could start to come under pressure.  Bond investors have experienced a 35-year bull market and a move back to historical rates would cause fairly significant price declines for bonds with longer maturities.  The bond market has moved to new highs since the December rate hike so the first hike had zero impact on the broader bond market.  Bonds reacted poorly on the date of the Fed minutes release but stabilized the last couple of days.  However, if the bond market sense more rate hikes are coming later this year you can expect downward pricing pressure to materialize.  Depending on how high rates move the good news is investors will finally be able to receive a higher yield on their fixed income investments.  But don’t count on it, we could easily see negative rates here in the U.S. before we see a 30-year Treasury bond yielding 5%.

The big risk for the Fed with a rate hike is the impact on the real estate activity.  Whether you are talking about new construction, remodeling, refinancing and resale activity in both commercial and residential segments, activity is up.  There is talk of a bubble in some markets and some ultra-high-end markets are seeing a slowdown, but generally speaking real estate activity appears to be good.

Part of the strength in real estate can be attributed to low interest rates and available credit markets.  Rates have been higher at various stages of the current recovery so there is probably room for some hikes before rates start to deter the real estate market.  We don’t know at what level interest rates will start to deter real estate borrowing and that is the tightrope the Fed must walk.

As I have said for many months, I believe healthy real estate activity is key to keeping this economy going.  I don’t think a rate hike in June is going to derail things here in the U.S. and I expect one in June unless something significant changes between now and then.  So far it looks like the stock market is going to take the hike in stride.  The bond market, on the other hand, could come under pricing pressure especially if it feels additional hikes are coming.  Real estate activity, I believe is the most critical component and one the Fed will not want to disrupt.

To Raise Or Not To Raise, That Is The Question

The on again of again posture of The Federal Reserve is apparently back “on” again regarding an interest rate hike in June.  At least that is what they are signaling this week.  Apparently they are seeing enough strength in the U.S. economy to feel confident another small increase from already very low rates should not derail the economy; they are probably right.  Another reason they may be focused on normalizing rates is so they have the ability to lower rates during the next recession.  The one thing they cannot risk is a slowdown in real estate activity.  If higher rates cause a slowdown in construction, remodeling, refi and resale activity, one of the few areas of strength at present, that could be problematic for the broader economy.  Rates are probably low enough that another rate hike or two is not going to crush real estate but if it turns out the reason they are raising is to normalize rates versus respond to economic growth they may create a problem as the perception of a less accommodative environment causes a slowdown in real estate activity.  At present the futures market does not believe a rate hike is going to happen in June but that does not mean that it won’t.  There is plenty of time between now and the next meeting for data to impact the decision.

The last time The Fed raise rates back in December stocks corrected briefly.  That was the second correction.  Stocks also sold off last summer when The Fed started discussing the idea.  Late winter and into the spring stocks staged a strong rally with the S&P 500 touching on all-time highs.  Stocks have pulled back during Q1 earnings season, which is coming to a close, where results have been mixed but not a disaster.  With two recent corrections and a generally improving economy it is remarkable stocks have held up which is reason to believe there won’t be another steep correction.

If the U.S. economy has more strength than is currently realized, small rate hikes at current low levels should have little impact on economic activity.  Therefore, we would expect a recovery in earnings to materialize which should lead to higher stock prices.

The other factor that makes this particular round of market analysis more difficult than the environment that led up to the 2008 bear market is there is no obvious market threat the way the subprime market was a potential problem back then.  Sure, there are lots of possible culprits but no one central market risk that could send stocks into a bear market at least here in the U.S.  There are some who suggest the next market collapse will be sparked in Japan, China or a coffee shop in Venezuela.  It is true, most of the rest of the world is a mess.

It is interesting that Walmart reported earning this morning and the stock was up 8.6% as I wrote this note.  If the price holds it will be their best one-day gain since 2008.

NOBODY knows what is NEXT

NOBODY knows Jack or Jill about what is next for markets or the economy, I don’t care what people say or how convicted they are in their belief. Investors that make big investments on their best guess (or forecast, projection, thesis, etc.) are having a very tough go of it in this market.  Very popular mutual funds and hedge funds have suffered big losses in the last year and many have closed.  When central bank intervention dominates asset markets traditional methods like fundamental and technical analysis do not work well.  Eventually market forces correct imbalances and policy makers hope they can correct some of those imbalances before they self-correct.  All we really know is what we can observe right NOW.  Even history can’t be relied upon to guide decisions because, while this time may not be any different, the timing may be very different.  Meaning, markets can stay disconnected from reality for much longer than anyone expects.  Then again, they could self-correction tomorrow.  Or, they could move in very unexpected direction.  For example, not many people are suggesting Treasury yields will rise the balance of 2016 but it could happen especially if the Fed does end up raising rates throughout the balance of the year.

One way to address all the market uncertainty is to deploy several different investment strategies with various levels of risk aimed at navigating different outcomes over the long-term.  That is the approach I have developed at Dightman Capital.  It is really quite straight forward and uses basic index oriented asset classes in unique combination.  One set of strategies maintains exposure to asset class but combines the investments in very unique ways.  Another strategy uses a timing mechanism designed to avoid sustained market declines.  The outcome when these strategies are combined may represent an overall lower correlation to the stock market, lower downside volatility and a higher overall risk-adjusted return.

Consider international stock markets that are either flat or down since 2008.  Despite massive policy intervention designed to lift markets, international stocks remain a challenging investment.  What worked in the U.S. (QE, ZIRP) clearly did not work in many other countries.  Of course, some countries also implemented austerity measures and Japan is in a completely different league overall.  Here is the thing, despite EEMEFA2008being “cheap” at times it has been difficult to generate gains from international markets during the last 8 years!  There have been periods where international markets outperformed U.S. markets and it is likely that dynamic will one day return but it is impossible to know WHEN.  Some exposure to international market for long-term growth investors probably makes since but one thing to keep in mind.  The benchmarks we use to measure long-term stock market performance here in the U.S. is generally based on the S&P 500, which is a U.S. based stock index.

(EFA – International Developed Stock Markets, EEM – International Emerging Stock Markets)

In terms of the U.S. stock market, it has pulled back the last several weeks after a strong recovery rally that kicked off in February.  Many commentators have predicted a total collapse of the market any day and while that could certainly happen, so far U.S. stocks have held up.  One thing investors can do to potentially avoid sustained bear market declines is to deploy a simple timing based system.  I used one very successfully in 2008.

For example, downside volatility in the U.S. stock market the last 9 months has put my Adaptive Growth timing system in a transition mode.  Meaning, it triggered a reduction in risk last summer when markets started to fall.  You can see in the graph where the black line crosses below the blue line.  While the strategy is nearly fully invested now as a result of the black line moving above the blue line, some cash has been held back in case stocks do not fully escape the current correction.  The Adaptive Growth strategy is suggesting stocks remain in a transition mode and until they clearly move out of this status the strategy will remain a little defensive.


$SPXTrig2The Adaptive Growth strategy also incorporates another signal that has recently signaled a defensive move.  This is a longer-term trigger and suggests more declines may be ahead.  However, since the Adaptive Growth strategy is in a transition period I don’t have to take immediate action because I am already under invested and prepared to take further defensive action if conditions deteriorate.  If markets continue to rally I am already participating and ready to add more growth investments.  If a more conservative move is signaled here too I ready to take action.  This is not a purely mechanical system.  As I have described there is an element of interpretation involved but overall it is a pretty simple and straight forward system and I have been using it for years.

In terms of economic data driving corporate earnings, we continue to take two steps forward and one step back.  Most of the economic data suggests a mildly improving environment accompanied by an occasional disappointment.  The construction industry appears to be one of the primary contributors to current economic growth.  Both new construction along with remodeling appear to be helping companies like Home Depot  (HD) and material suppliers like Vulcan Materials Co. (VMC) perform well in this market.HD_VMC

The chart of Vulcan and Home Depot show their prices rising steadily the last three years and near all time highs.  As both companies move into new high territory, along with many other stocks, there is reason to believe stocks could rally into the summer.  At least that is what is happening NOW.

In terms of new innovation, General Electric (GE) is busy reinventing itself and its latest announcement could be a game changer.  After trimming its financial unit and selling the home appliance division the company aims to leverage its massive industrial knowledge based by becoming an Industrial Internet Powerhouse, a new direction with potential promise.  Investor’s Business Daily details more here.  General Electric is not currently included in my favorite dividend stock investments but that may change if the new initiatives improve the company’s rank relative to other dividend paying stocks.  The real takeaway is this, despite all the challenges faced 124-year old companies like G.E., companies are finding ways to position their businesses for future growth opportunities.

Stocks had a great start to the week.  My favorite growth investment closed up 1.25% Monday.  This performance is so ironic.  Just this past Friday I was contemplating a short position for the Adaptive Growth strategy based on the ongoing deterioration of my second trigger measurement.  Just when you think it is about to get a lot worse it gets better which is typical in this market.  I have found this particular market environment requires a little more patience then usual.  Everything could change in the near future and I admit there are a lot of reasons to suggest markets are going to go through another correction.  However, markets have a tendency to do their own thing so a summer rally is not out of the question either.

NOBODY knows what tomorrow will bring and with stakes potentially higher than usual, based on risks that may have been introduced to the market by Central Bank intervention, using multiple strategies I believe is an effective approach for navigating the current uncertainty while positing for potential opportunities.

Have a great week!

Are Negative Interest Rates Coming To The U.S.?

You may have heard the central banks in Japan and several countries in Europe have implemented negative interest rates.  They are hoping the banks that deposit funds with the central bank will be incented to loan the money out versus receive less when they make a withdrawal.

Central Banks with Negative Interest Rates

There have been some reports negative rates have made their way into consumer products in Europe, specifically mortgages.  At least one bank in Spain, Bankinter, with mortgage rates tied to Swiss Libor which is now approaching minus 1%, sold mortgages that it could not charge interest on so it reduced principle for some of its customers.  For the most part, negative interest rates are a policy tool between central banks and those banks the deposit funds with them.

Here in the U.S. rates are still positive but barely.  The Federal Reserve started the process of raising rates at the end of 2015 but they have been on hold since.  Economic data, while not deteriorating, is not improving either.  The U.S. economy appears to be stuck in a slow growth mode.

Eventually this could turn into a big problem because a lot of debt has been accumulated trying to stimulate the U.S. economy.  This is why policy makers are so desperate to see economic activity pickup.

It would be quite a turn of events if the U.S. switched form raising rates to negative rates after holding ultra-low rates for such an extended period of time.  It could happen and if the 10-year Treasury yield falls below 1.5% we may see it happen.  However, helicopter money may become the policy tool of choice going forward.  I’ll have some more to say about that in the future.

Panama Papers…Confirming What We Already Knew

If you haven’t heard, Panamanian law firm Mossack Fonseca, suffered a data breach of more than 11 million documents dating back four decades.  The firm is well known for establishing secret shell companies for offshore accounts used by world leaders and politicians.  So far 140 or so names have been referenced; we are not just talking about corrupt leaders from 3rd world countries.

It appears much of the work Mossack Fonseca conducts is perfectly legal.  That is not the problem.  It is the money that finds its way into these secret accounts that is troubling.  Wide spread fleecing of tax payers and ordinary citizens is so ridiculously obvious by politicians and their close contacts I don’t know how you could deny it.  I am not saying every politician’s fortune was ill gotten, but statistically how this group of individuals becomes so filthy rich with a salaried job and doing the “people’s work” doesn’t add up.


The potential fallout from this story could be huge as the world treads water in a sea of debt some of the people mentioned in these documents may have helped create.

Then again, we may be just one Kardashian distraction away from forgetting about the whole thing.

From an investment stand point, I have felt there are some companies that may do a better job of working with government officials than others and as a result may benefit more from policy decisions than their competition.  I view it as another form of competition in the area of formulation and execution of government engagement.  I believe I have identified such group of companies and they serve as a core investment in some of my strategies.  Let me know if you are interested in learning more about these companies.

Pro Forma & Reported Earnings Spread

The Wall Street Journal recently published an article suggesting earnings are far worse than reported based on a widening gap between Pro Forma and Reported (GAAP) earnings.  Pro Forma earnings exclude certain items like restructuring charges and stock based compensation and shows U.S. companies earning 0.4% more in 2015 then 2014 – the weakest growth since 2009.  When you look at earnings based on GAAP reporting EPS actually fell by 12.7%, the sharpest decline since 2008.

There is also concern about “one-time events” taking place every quarter.  One-time events allow a company to clean up their books by writing off bad investments, accounting for the cost of a layoff or other infrequent business expenses.  It sounds like bad things are happening in corporate America on a more frequent basis.

Investors continue to plug their nose in hopes this is a short-term development with sales and profits to recover later in the year.  It could happen, often during a earnings decline the market will anticipate the earnings recovery sending stocks higher.  This late in the credit cycle risks are higher earnings will contracting further before making a recovery.

Q1 earnings have been adjusted down by analysis, probably too low, which allows companies to “beat” their estimates sending the stock higher.  Just another reason for investors to be very selective and careful regarding their exposure to stock investments.

4.5.16 Q1 Earnings Growth

On Alert, Not Alarm

Apparently central banks and politicians have not done enough to help the global economy recover according to, Christine Lagarde, IMF Managing Director, in a speech at Frankfurt’s Goethe University where she called for stronger action by the world’s economies, suggesting downside risks were increasing.

“Let me be clear: we are on alert, not alarm. There has been a loss of growth momentum”.
Ms. Lagarde’s concern helps explain the shift by some central banks to negative interest rate policy (NIRP) and more recently talk of “helicopter money”.  (Seeking Alpha, April 5, 2016)

Remember the 2008 tax rebate checks? That is an example of helicopter money, money that bypasses the banks and lands directly in consumers’ pockets.  The path is set.  This is where we should expect to be headed.

Meanwhile, apparently the best case we have for a stronger recovery according to Bob Doll, Chief Equity Strategist at Nuveen Asset Management, are summed up with his positives outweigh the negatives summary (Financial Advisor April 5th, 2016):

• Dovish comments from Janet Yellen suggested a slow pace of interest rate increases and helped push stock prices higher.
• We expect relatively weak first quarter corporate earnings results, but believe conditions should improve later this year.
• Despite some near-term risks, we have a positive long-term view toward equities.

Sorry, but those are pretty lame and generic reasons to be bullish.  Yes, the Fed continues to be able to inflate the market with policy speak.  True, earnings may be in contraction so stocks could rally on an expected recovery during the second half of 2016 but what is the catalyst?  And who on Wall Street doesn’t have a positive LONG-TERM view of stocks?

Meanwhile U.S. Treasury Bonds rally which is why they can be a great tool for managing portfolio risk and provides a real assessment of what the market thinks about the current situation.