Stock Market

Markets in Minutes March 4 2018

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Markets in Minutes: March 4, 2018

S&P 500    10 Year Treasury    Gold    World Ex-US    US Dollar    Commodities   US Economy   Stock Market Valuation

Markets in Minutes is intended to give our client partners and subscribers a quick and easy understanding of current market conditions. This update covers December 1 – December 30, 2017

Investor Learning: Given recent volatility I thought rather than sharing a quote I’d share what drives bull markets. It’s simple if you take time to break it down. Bull markets are driven by:
1. Low to moderate inflation
2. Low to moderate interest rates
3. Rising earnings
4. Economic expansion
Inflation and interest rates are both slowly rising but are low overall. Earnings are growing. Economies both here and abroad are growing. Under these conditions, bull markets continue. That makes periods of volatility buying opportunities for smart investors.

 

Economy: Consumer prices rose 0.3% ex-energy in January. This inflation rate is still below the Fed mandate which will help keep interest rate rises gradual, which is supportive to expansion.

Industrial production rose by 1.7% and is solidly in expansion mode. The Non-Manufacturing Index saw a strong rebound from December’s numbers and is also in expansion mode. The official unemployment rate for February won’t be released until March 9, but anecdotal accounts suggests employment held steady at 4.1%. Wages ticked up 0.1% in the period, with wage inflation still below target. The US continues to be a sort of Goldilocks situation: moderate inflation, rising employment, low interest rates, rising GDP and corporate earnings.

 

Markets

S&P 500: (-3.7%), 0.0% for 2018. The S&P enjoyed its first correction in about 2 years in February, and volatility remains relatively high. Earnings season is wrapping up, and in many sectors of the S&P, stronger than expected. Both the primary and intermediate up-trends are intact.

Bonds: Yields on the 10 year Treasury rose +3.6% in February, +16.2% for 2018. Bond risk remains elevated, and rising yields even during a stock correction reinforces the idea that bonds may be nearing the end of a decades long bull run. Long duration bonds (more than 5 years) should be examined carefully to make sure they are in your portfolio for a specific reason.

Gold: (-1.7%) for the period, +0.3% for the year. Gold followed the expected behavior for February, falling from January’s high and finding support in the $12.50/$12.60 area, with some gymnastics in between. It will be interesting to see if it can continue to hold above $12.60 once we work through the stock correction. As before, a fall below $12.50 on volume could see Gold fall back into the 2017 range ($11.65 – $12.60). I use IAU as a proxy for Gold and the above is based on the ETF.

World Ex-US: (-5.2%), (-0.9%) YTD 2018. February was not a great month for the rest of the world, but it held up better than I expected vs. American markets. Interest rates are low elsewhere and economies are growing globally, which is supportive of positive market outcomes. However, nothing has changed about my view of US markets vs. the world. I was wrong in 2016/2017. We’ll see where 2018 takes us. I continue to view risk in markets outside the US as higher than perceived.

US Dollar: +1.8%, +2% for 2018. The dollar hit a new 2 year low in February but has managed a mild rally towards $90 against a basket of currencies. I think the Buck will have a tough time rising about $92. I would not be surprised to see it move between $86 and $92 over the next several months. This would be a positive for earnings.

Commodities: Oil (-5%) for month, +2.4% for the year. Global growth expectations continue to support oil in the face of growing American supply (US added 30 rotary rigs in February, active rig count up +15% since last February). I expect increased American production to drive barrel prices into the $50’s by the 2nd half of the year if not sooner.

Copper futures lost -2.3% for the month, falling aggressively mid-month before recovering. Copper still looks appears to be in a consolidation phase that seems unlikely to resolve itself in either direction until the fate of the President’s infrastructure initiative becomes clear. If the project gets off the ground, it is likely to push copper to multi-year highs, if not it may fall back to mid-2017 levels.

 

Earnings: Earnings season is wrapping and it’s been stronger than many anticipated. We’ll know by the next Markets-in-Minutes if we got the record quarterly earnings I expected.

Market Valuation: February helped bleed off some of the market’s excess valuations, with the broad market falling a bit over 11% from January’s high to the February 9th low. It recovered fairly quickly before seeing some sellers in the market again this past week. The market is now in an area where it is fully valued, but not overly so. If interest rates and inflation remain muted, earnings growth still looks solid enough to offset a gradual pace of rising rates. That makes it likely this correction will look like a reasonable entry point come year end.

Recession Probability Indicator: The most recent reading on the RPI is 17, up from last’s months reading of 12. The RPI is still indicating we are not currently in recession and the investment environment is stable. CLICK HERE to learn more about the RPI.

S&P Technical Picture: The S&P found support in the zone highlighted in the last edition of Markets in Minutes and institutional buyers appeared to step into the market at both the areas expected.  The rally off the $2500/$2600 zone keeps both the intermediate and primary up-trends intact.   The intermediate term and primary trends are identified by the red arrows below, Fair Value by the thick blue line. Any of these points can present reasonable entry points for index investing from a technical, if not a purely fundamental, standpoint.

SPY Chart (S&P 500 Proxy)

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Invest Smarter. Live Better. Expect a Difference.

Dak Hartsock
Market Strategist
ACI Wealth Advisors, LLC
Process Portfolios, LLC

Markets in Minutes December 2017

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Markets in Minutes: January 6, 2017

S&P 500    10 Year Treasury    Gold    World Ex-US    US Dollar    Commodities   US Economy   Stock Market Valuation

Markets in Minutes is intended to give our client partners and subscribers a quick and easy understanding of current market conditions. This update covers December 1 – December 30, 2017

Investor Learning: “A contrarian approach is just as foolish as a follow-the-crowd strategy. What’s required is thinking rather than polling. Unfortunately, Bertrand Russell’s observation about life in general applies with unusual force in the financial world: “Most men would rather die than think. And many do.” — Warren Buffett

“Effective money managers do not go with the flow. They are loners, by and large. They’re not joiners; they’re skeptics, cynics even. Whatever label you want to put on them, the trait they all share is that they don’t automatically trust that what the majority of people – especially the experts – are doing is necessarily correct or wise. If anything, they move in the opposite direction of the majority, or they at least seek out their own course. ” Scott Fearon – Crown Capital Management (hedge fund manager, author “Dead Companies Walking.”)

 

S&P 500: +0.7% since November 30, +19.4% for 2017 (+ dividends). The S&P 500 drifted higher for much of December, finishing a very strong year in the index on the back of low interest rates, solid earnings growth, tax cuts and a strengthening economy. In the near term, the S&P still appears to have gotten a bit ahead of itself – as with last month, the market is still more overbought than we’ve seen in more than a decade. This is often a precursor to a period of correction or consolidation, particularly after a strong run. Both the primary and intermediate uptrends are intact.

Bonds: The 10-year treasury yield rose 1.7% for the 2nd month in a row. In between it fell to 2.32%. The 10-Year is up 2.1% Year-to-Date. I sound like a broken record, but yields are currently low enough that long duration bonds (more than 5 years) should be examined to make sure they are in your portfolio for a specific reason. It is still a good time to compare corporate bonds with highly rated municipal bonds in both the taxable and exempt spaces.

Gold: +2.1% for the period, +12.3% for the year. Gold finished strong after an initial sell-off to start December, falling as low as -3% before starting a rally. It’s now moved into short term overbought as it attempts to break above $12.60. Volume will need to rise to confirm any breakout – a move above $12.60 that isn’t supported by rising volume is likely to fall back into the range. This may be a reasonable point to reduce bets on continued strength in gold, barring a large scale (negative) geopolitical event. For those interested, I use IAU as a proxy for Gold and the above is based on the ETF.

World Ex-US: Again, +0.8% for the month, +23.4% for 2017. A very strong year for stock markets outside the US. With valuations in the US still high, there are arguments to be made that markets outside the US will continue to outperform. I continue to view Europe and the rest of the developed world as less stable and less growth oriented than the US. I also believe emerging markets will only try to emerge as long as the US is stable and growing. When the US starts having problems, the reactions in these markets may not be worth the satisfaction in seeing higher returns today. I may be wrong about this. I’m bullish on the US, and don’t like risks in emerging economies or the social/structural risks I see in Europe. We are now entering the 2nd year where I’ve held this view. I may get some more egg on my face in 2018.

US Dollar: The Buck moved up at the start of the month and managed to get above $94 before breaking down again in late December. At this point the dollar looks likely to test the September 2017 low at $91.33 in the near term. For the year, the dollar has finished up at -10%. Dollar weakness supports of the earnings of the big US based multi-nationals by providing a currency tailwind. Price stability in the low $90s or a fall into the mid-high $80s will help Q1 earnings and broader exports.

Commodities: +4.7% for month, +11.5% for the year. Oil closed out the year with continued strength and managed to close above $60 a barrel on supply issues in the Middle East (Libya) and anticipated higher demand globally on the strength of global growth. We haven’t seen oil above $60 since 2015. Dollar weakness is also contributing to oil’s strength. My range expectations for oil in 2017 held ($40 – $60/$65). Moving into 2018, I continue to think we will see higher average oil prices vs. 2017, but I don’t see oil as holding above $60/$65 (subject to change). With prices this high, US producers are taking out the stops to get oil to market. At some point, this should offset any temporary supply constraints out of the Middle East.

Copper futures gained +7.3% for the month, +31.4% for the year. Copper is widely considered to be an indicator of economic health due to the significant role it plays in industrial manufacturing. Continued expansion in the United States and the likelihood Trump’s infrastructure agenda is likely to make it on the legislative schedule this year are near term positives.

 

Economy: Consumer prices rose 0.4% in November mostly as gas prices rose because of strength in oil. Prices excluding food and energy grew about 1.7% in the last 12 months. This inflation rate is still below/near the Fed mandate and should help keep rate raises gradual. Industrial production rose by 1.5% for December over the previous month and CEO’s commentary support the story of a strengthening economy. The 4th quarter numbers aren’t in yet, but I continue to expect record quarterly earnings. We’ll see. The Non-Manufacturing Index fell further from October’s 2 year high, but is still solidly in expansion. The official unemployment rate held steady at 4.1% in December, with CEO’s and suppliers complaining about the difficulty of finding qualified people. Even so, wage inflation is still below target at 2.5%. The US continues to be a mostly sweet spot: moderate inflation, rising employment, low interest rates, rising GDP and corporate earnings.

 

Earnings: Earnings season starts in a couple weeks and we’ll know by late February where we are. As I’ve said, I’m expecting record earnings for Q4 2017. We’ll see.

 

Market Valuation: Valuations have fallen as a result of the tax cut. If Q4 earnings come in strong, that may also help. From my perspective, the market is overvalued somewhere between 10%-15%, with the weight of evidence nearer 15% than 10%. In the absence of recession, this suggests that 2017 returns may have borrowed some from 2018 returns, and higher valuations moving into the start of the year support this idea. Interest rates are still low, but the Fed expects 3 raises this year. I’m fairly confident we’ll see at least 2 of those — unlike previous years, the Fed seems able to carry through with their planned raises in 2018 – -they will use the tax cuts to shield the economy from a slow-down due to higher rates. If rates rise too quickly, valuation in the market will become more problematic.

 

Recession Probability Indicator: The most recent reading on the RPI is 12, indicating we are not currently in recession and the investment environment is stable. CLICK HERE to learn more about the RPI.

 

S&P Technical Picture: The S&P is more overbought on weekly basis than we’ve seen in decades. As in the past, this continues to suggest a near term top from a technical perspective. However, as I observed in early December, corporate tax cuts combined with other positive economic data seem likely to overwhelm short term technical situation. Things still seem like they might get a bit better (prices rise) before they get worse (prices fall). Overbought situations almost always result in either pullbacks or consolidations, but as of today market fundamentals seem to be fully in control.

That being said, 2017 had record low volatility. From a statistical standpoint, that seems unlikely to continue. It seems improbable that we’d go another 12 months without a measurable correction in the market.

Thanks to corporate tax cuts, Fair Value is in the $240.00 area for S&P proxy SPY, but I would not look for the index to fall that far should a correction ensue. Barring some truly nasty surprise, pullbacks of more than 5% are probably solid opportunities for long term investors, even in the face of geopolitical events. The intermediate term and primary trends are identified by the red arrows below, Fair Value by the thick blue line. Any of these points can present reasonable entry points for index investing from a technical, if not a purely fundamental, standpoint.

SPY Chart (S&P 500 Proxy)

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Invest Smarter, Live Better. Expect a Difference.

Dak Hartsock
Market Strategist
ACI Wealth Advisors, LLC
Process Portfolios, LLC

Valuations, Stock Returns & Interest Rates

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Valuations, Stock Returns & Interest Rates. June 10, 2017

Before I begin, I thought I’d include a longish quote from The Oracle, to lend perspective –

“Let’s start by defining ‘investing.’ The definition is simple but often forgotten: Investing is laying out money now to get more money back in the future – more money in real terms after taking inflation into account.

Now, to get some historical perspective, let’s look back at the 34 years – to observe what happened in the stock market. Take, to begin with, the first 17 years of the period, from the end of 1964 through 1981. Here’s what took place in that interval:

  • DOW JONES INDUSTRIAL AVERAGE Dec. 31, 1964: 874.12, Dec. 31, 1981: 875.00.

Now I’m known as a long-term investor and a patient guy, but that is not my idea of a big move.

To understand why that happened, we need first to look at one of the two important variables that affect investment results: interest rates. These act on financial valuations the way gravity acts on matter: The higher the rate, the greater the downward pull. That’s because the rates of return that investors need from any kind of investment are directly tied to the risk-free rate that they can earn from government securities. So, if the government rate rises, the prices of all other investments must adjust downward, to a level that brings their expected rates in line.

The increase in equity values since 1981 beats anything you can find in history.” – Warren Buffett in 1999

It sure seems there is a lot of investing wisdom in that quote, right?

Inflation/Interest rates generally headed higher between 1964 and 1981 before Paul Volker, Chairman of the Federal Reserve, started to drop the hammer on inflation in October 1979 and doubled the Fed Funds rate over the next 4 months.  In the 2 years following, inflation rates fell from over 14% to under 5%, and the Fed Funds rate fell from 19% to under 9%, setting up the greatest and most enduring bull run in history.

For clarity, Blue is the effective Fed Funds rate, red is inflation, green is the stock market in the form of the Wilshire 5000.  The impact of lowered interest rates is pretty clear.

Nice to know, but what can that do for me today?

Here’s a more recent Buffett quote – “Measured against interest rates, stocks are actually on the cheap side compared to historic valuations.  But the risk always is interest rates go up, and that brings stocks down.”

How? You might be asking. We’ll get to that in a minute.  But first, was Buffett just blowing smoke?  After all, words are one thing, action another.

Buffett spent around $18 billion on Apple stock in the last year and a half.  That’s a reasonable bet on where he sees interest rates going, at least in the next few years.

I happen to agree.  As I’ve said several times, my view is lower rates for longer.  For interest rates to approach historical averages (Y Charts says that’s 6.1% on the 10-year Treasury) the economy must strengthen.  A lot.

In my view, GDP growth would basically need to double.  I just don’t see any way that can happen in the near term.  So, lower for longer.  My best guess right now is 5 years (or more) below a 3.5% Federal Funds rate, and about the same before we see a 10-year Treasury above 5%.

So, are stocks overvalued?  Some of them, yes.  Some not.  But interest rates are just above historical lows, and that’s supportive of the stock market.

Exactly how do lower interest rates have such an impact on stock valuations?

There are many formulas and concepts available to understand the value of a stock and the impact of interest rates, but as we are looking at things through the lens of Buffett’s tremendous investing brain, let’s use one of the concepts near and dear to his heart – the quick and dirty intrinsic value formula of his chief mentor, Ben Graham.

V = EPS x (8.5 +2g) x 4.4 /  Y

V = Intrinsic Value

EPS = the company’s most recent 12 month earnings per share

8.5 = the appropriate PE ratio of a company that expects 0 growth

g  = the long term (five years) growth estimate

4.4 = the average of high grade corporate bonds in his era (3.6% in our era)

Y = the current yield on 20-year AAA corporate bonds (we’re going to use 10 year Treasuries at 2.2%)

 

Let’s have a look at Apple with current interest rates in play, speculating they will endure for at least a few years more.

Apple EPS = $8.57

Apple consensus 5-year earnings growth (“g”) = 10.12%

3.6% average yield high grade corporate bonds

2.2% 10-year Treasury yield

V = 8.57 x (8.5 + 2(10.12)) x 3.6 / 2.2

= $403.04 projected intrinsic value.

 

The notion here is that at some point, ideally in about 5 years, Apple’s price will reflect its intrinsic value.  There is no doubt in my mind this number was part of Buffett’s process in deciding to buy Apple.  However, it was assuredly NOT the only part.

Even Graham said that this simplified formula shouldn’t be used as the only criteria to decide to invest/not invest, but it is an informative tool to show what can happen to stocks when interest rates rise (or fall).

Now, let’s have a look at see what impact rising interest rates might have on Apple’s intrinsic value.  Let’s use the 6.1% historical 10-year rate from Y Charts.  Let’s pretend investment grade corporate bonds are yielding 1.4% more than Treasuries, just as today.

Apple EPS = $8.57

Apple consensus 5-year earnings growth (“g”) = 10.12%

7.5% average yield high grade corporate bonds

6.1% 10-year Treasury yield

V = 8.57 x (8.5 +2(10.12)) x 7.5 / 6.1

= $302.83 projected intrinsic value, a value reduction of 25%!

 

It’s clear interest rates can have a tremendous impact on stock value.

It’s also clear why Buffett was comfortable spending $18 billion on Apple stock at around $100 per share.

Lastly, it’s an unambiguous statement about his expectations for interest rates, at least for the next several years.

Will he be right?  I certainly hope so.  I’ve been on the same page as Buffett a couple times (Precision Cast Parts and Apple) and it would be great if we were both right here, too.

In sum, with interest rates very low on a relative basis, growing earnings, and no recession currently on the horizon the market can be expected to move higher over the intermediate term (2 – 5 years) – which probably means investors will get more money back in the future in return for dollars invested today.

That doesn’t mean the market is going up tomorrow – I’m about as good at predicting where the market will be 6 months or a year from now as Buffett, which means marginal to no good (barring recession).  But current conditions still favor stocks over bonds.  That is likely to continue until conditions change.

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To Smarter Investing,

Dak

Market Strategist

ACI Wealth Advisors, LLC.

Process Portfolios, LLC. 

This is an illustration and is not a recommendation to buy Apple.  Price paid has an impact on expected returns, and the Graham Formula is just one of many ways to evaluate a stock investment.  ACI uses nearly 2 dozen investment/financial models and several modes of research to identify and evaluate stocks for the Durable Opportunities Portfolio.    Disclosure: ACI owns Apple in the Durable Opportunities Portfolio.

Getting More Income (and More Safety) from the Market

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How to Get More Income (and More Safety) from the Markets. May 14, 2017

Investors take advantage of 3 major ways to generate income from the market; dividends from bonds or stocks, pure stock dividend strategies, or preferred stock plays where the yield is higher than a normal stock dividend strategy but maintains the possibility of capital growth.

But there is another way to pull income from the markets – a time tested strategy utilized by market billionaires, pension funds and sophisticated investors but unknown to most investors. This investment has massively outperformed the S&P 500 over nearly 30 years while taking about 30% less risk than typical market investment.

It’s known as option writing. ACI has an option writing portfolio known as Market Income Portfolio. I will use the real-life results from Market Income over the most recent 6 months to demonstrate the effectiveness of the method of investment.

In the last 6 months (November 2016 – April 2017) Market Income Portfolio has generated an +8.16% net income stream on the average monthly value on the portfolio.

You read that right. +8.16%. In 6 months.

This is how it breaks down:
Dividends: +0.75%
Capital Gains on Stock: +3.44%
Options Premium: +4.65%
Total % Income Return: +8.84%
Fees: (0.68%)
Total Net Income Return: +8.16%

These gains help offset any sector or stock specific unrealized losses due to market movements. Thanks to the income above, Market Income portfolio returned +3.46% for the period despite significant unrealized losses in 2 of the sectors it is currently invested in – Retail and Financials (down -10.1% and 5.5% respectively.) Together these sectors account for about 31% of the portfolio.

What should be really interesting to investors is that both sectors continue to produce better than dividend income for the portfolio despite being well below the purchase point.

Contrast this to a typical stock portfolio’s ability to generate income and offset market downdrafts.

ACI’s Market Income Portfolio is modeled off the BXM (Buy/Write) Index. BXM has been trackable since 1989. It’s worth noting, Market Income has outperformed the BXM Index each year since it was broken out into a separate portfolio.

I’ve compared the BXM Index (green) with the S&P 500 (blue) from January 1989 to December 2016 in the chart below. As you can see, over time the extra income created by this style of investment makes a huge difference, not only in long term return, but in terms of offsetting losses when the market get choppy or sells off aggressively.

Investment managers look at a lot of data to determine how to invest, and one of the main things investment managers keep an eye on is risk. This strategy typically takes about 30% less risk than normal stock investments.

So, steadier returns, better downside management, and less risk than just investing in index and sector funds.

If you are above 40, that probably sounds like a pretty good deal.

Here are so more articles on the subject if you’d like to understand more;

Become a Stock Market Landlord

Here’s How to Get Better Investment Returns

What is a Covered Call?

How does Options Writing (selling) Work?

Want to see how ACI Market Income Portfolio has done over the last 10 years? CLICK HERE.

Have questions? Get in touch using the form at the right, the contact button, or simply call the office.

To Smarter Investing,

Dak Hartsock
Market Strategist
ACI Wealth Advisors, LLC.
Process Portfolios, LLC.

Transparency, Communication, Risk Management
Expect a Difference.

*Net income stream does not account for taxes that may be due on taxable accounts. Please see additional disclosures on www.aciwealth.com at page bottom or www.dakhartsock.com at page bottom.

Markets in Minutes April 30, 2017

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Markets in Minutes April 30, 2017

S&P 500   10 Year Treasury   Gold   World Ex-US   US Dollar   Commodities

Markets in Minutes is intended to give our client partners and subscribers a quick and easy understanding of current market conditions. This update covers April 17 – April 28, 2017.

Investor Learning: “We would rather underperform in a huge bull market than get clobbered in a really bad bear market” — Seth Klarman, Founder Baupost Group, 17% average annual return over 3 decades.

—-

Economy: The only new number of import since the last report is GDP, which came in slightly below expectations but still in growth mode. The economy continues to tick onwards and upwards, albeit slowly and below potential.

Earnings: Earnings so far have been mostly positive. The exception is a dozen or so beleaguered retail companies such as Bebe and Sears who are singularly ill-equipped to compete in the digital age. Amazon, among others, is eating their lunch (and dinner, snack, breakfast and dessert by the looks). So far my expectation of seeing earnings growth vs. same period last year holding true. This is a big positive for markets – bull markets don’t usually die from valuation issues, they die from earnings issues.

—-

Market Updates:

S&P 500: +2.3%since April 17, +5.5% year-to-date. The S&P has managed to hold most of the year’s gains to date as positive economic data and earnings, along with the prospect of corporate tax cuts, continue to support the market in the face of rising global and domestic political uncertainties. The primary up trend remains intact, with the intermediate uptrend still intact.

Bonds: The 10 year treasury yield closed up +1.8% for the period, reducing bond principal incrementally. Yields fell to as low as 2.18% ahead of Trump’s tax proposals, but rallied as the equity market applauded (at least initially) the proposals. I’m beginning to sound like a broken record, but keep an eye on yields when we finally see an equity correction, or if geopolitical uncertainty causes a flight to bonds (Open conflict with North Korea, a potential La Pen victory in the upcoming French elections in May). If yields drop to 2% or below, passive investments in bonds (especially those with durations more than 5 years) should be re-evaluated. As an aside, if yields fall into the 2% range, that’s a good time to think about locking in a great rate on a 30 year mortgage if you missed that opportunity last time.

Gold: Down -1.5% since the last report. From a technical perspective gold is showing some signs of strength given the geopolitical uncertainty around North Korea and now France. As before, however, buying interest is still not displaying exceptional strength and until that changes the durability of the rally should be questioned. Gold remains in a countertrend rally unless it sustains a move above $1260. If gold falls below $1180, it seems likely to keep falling for a while.

World Ex-US: Up 2.5% for the period, +9.7%year-to-date and continuing to show speculative strength. This may be a be a good year for world stocks. However, I don’t see this as sustainable. Therefore, my view on European/Asian/Emerging market stocks remains negative, perhaps incorrectly. Time will tell.

US Dollar: Fell 1.3% for the period to close at $99.04. From a technical standpoint, the USD looks to test last period’s low of $98.75. A falling dollar is good for earnings.

Commodities: Oil fell 7.9% despite incremental dollar weakness for the period but remains within the projected range. Rising supply is outstripping rising demand. As long as oil can hold above $40 per barrel on average, American producers will continue to pump oil, putting a cap on oil prices. This should hold oil in my projected range of $45 – $60/$65 a barrel for the intermediate term. Copper futures rose 1.6% for the period, maintaining a moderately tight range which is likely to hold until we get clarity on Trump’s infrastructure spending plan.

—-

Market Valuation: Valuations are high. But as above, valuation doesn’t end bull markets. Interest rates continue to hold in a range of historic lows, earnings appear to be gaining strength, and the possibility of tax cuts before year end seems a strong focus of the administration. These are all supportive of the market, and therefore it’s not likely that high valuations will drive a meaningful (or enduring) sell off. IF the tax cuts do not materialize, the market is not likely to appreciate it as a 10% reduction in the corporate tax rate is already priced in.

Recession Probability Indicator: The most recent reading on the RPI is 17 and indicates we are not currently in recession. The investment environment is currently stable.

S&P Technical Picture: The S&P setup continues to be suggestive of a near term top, but we’ve seen nearly two months in a relatively tight range of price movement. This “time” correction or “consolidation” period could allow earnings to push the market higher. Fair Value is approximately $1800 – $1875. The weight of data still suggests that pullbacks more than 5% are likely buying opportunities, even in the face of geopolitical risk, provided earnings strength continues. The intermediate term and primary trends are identified by the red arrows below. These can be reasonable entry points for index investing from a technical, if not fundamental, standpoint.

SPY Chart (S&P 500 Proxy)

Please share with one friend that can benefit from this information. Share buttons below for your convenience.

To Smarter Investing,

Dak Hartsock
Market Strategist
ACI Wealth Advisors, LLC
Process Portfolios, LLC

Markets in Minutes April 15, 2017

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Markets in Minutes April 15, 2017

S&P 500   10 Year Treasury   Gold   World Ex-US   US Dollar   Commodities

Markets in Minutes is intended to give our client partners and subscribers a quick and easy understanding of current market conditions. This update covers March 20 – April 14, 2017.

Investor Learning: “Good long-term performance results from beating the market in bad times. Caution should not be seasonal.” — Christopher Browne, co-founder, Tweedy Browne Value Fund.

Market Updates:
S&P 500: -1.9% since March 17, +3.2% year-to-date. The S&P has managed to hold most of the year’s gains to date as positive economic data and earnings, along with the prospect of corporate tax cuts, continue to support the market in the face of rising global and domestic political uncertainties. The primary up trend remains intact, with the intermediate uptrend still intact.

Bonds: The 10 year treasury yield closed down -1.2%% for the period, pushing bond principal up incrementally. The rate raise in March sparked a mild rally in bonds, probably supported by rising geopolitical tensions. If yields drop further due to a potential equity correction or in response to a geopolitical event, passive investments in bonds (especially those with durations more than 5 years) should be re-evaluated. As an aside, municipal bond yields are now approximately level with corporate bond yields in some classes. If you have significant corporate bond positions it might be a good time to compare with municipals.

Gold: Up +4.9% for the period, and still experiencing what appears to be a counter trend rally with a tailwind from a falling dollar this week and increasing geopolitical risks. Buying strengthened on nuclear rhetoric out of North Korea and may have positioned gold for a run to resistance at $1260. Buying interest is still not displaying exceptional strength and until that changes the durability of the rally should be questioned. Gold remains in a countertrend rally below unless it sustains a move above $1260, but a sudden rise in geopolitical uncertainties could cause an equally rapid spike in price.

World Ex-US: Down -0.5% for the period, +7.0% year-to-date and continuing to show speculative strength. My view on European/Asian/Emerging market stocks remains negative, perhaps incorrectly. Time will tell.

US Dollar: USD rose slightly for the period (+0.3%) but has shown a fair amount of volatility with moves in both directions. From a technical standpoint, the USD made a lower low at $98.86 but rallied off support, setting up a potential range between $98.75 and $102.25. Reminder – falling dollar is good for earnings.

Commodities: Oil rose about 7.4% since the last report but still within the range identified in the December 19, 2016 edition of MIM. Outages in North Sea production early in the month and increased military activity in the Middle East combined with a recent dollar weakness to support the move. As before, my view is that American producers will continue to produce supply above $40 a barrel, keeping oil within a projected range of $45 – $60/$65 a barrel for the intermediate term regardless of OPEC agreements on constraining production. Copper futures fell by 4.5% as uncertainty about the speed of the Trump infrastructure agenda surfaced in the markets, but continue to hold most of the post-election gains.

Economy: Consumer prices weakened somewhat unexpectedly in the period, mostly on the back of falling gas prices. This is a positive for consumer spending. Industrial production was unchanged since the last reporting period, while job gains slowed slightly but drove the unemployment rate down to 4.5%. Demand for qualified workers is rising, helping push salaries higher, also supporting consumer spending.

Earnings: We are on the cusp of 1st quarter earnings reporting, and should see growth vs. the same quarter in 2016. Expect earnings to fall from last quarter – the 1st quarter has been slower for years following a 4th quarter spending hangover in consumers.

Market Valuation: Valuations are still stretched, but with interest rates still in a range of historic lows, rising earnings, and the possibility of tax cuts before year end its unlikely valuations will drive a meaningful (or enduring) sell off. The market remains in a price zone that requires measurable earnings acceleration and tax cuts to sustain prices.

Recession Probability Indicator: The most recent reading on the RPI is 17 and indicates we are not currently in recession and the investment environment is stable.

S&P Technical Picture: The S&P has worked off the previous overbought condition by virtue of time passing. Conditions still support the idea of a near term top, but the underlying uptrend is not currently at risk. Fair Value is approximately $1800 – $1850, but I would not look for the index to fall that far should a correction ensue. Barring a nasty fiscal/policy surprise, the weight of data suggests that pullbacks more than 5% are likely buying opportunities, even in the face of geopolitical events. The intermediate term and primary trends are identified by the red arrows below. These can be reasonable entry points for index investing from a technical, if not fundamental, standpoint.
SPY Chart (S&P 500 Proxy)

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Dak Hartsock
Market Strategist
ACI Wealth Advisors, LLC
Process Portfolios, LLC

Here’s How to Get Better Investment Returns

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Here’s How to Get Better Investment Returns  April 02, 2017

“Greedy, short-term orientated investors may lose sight of a sound mathematical reason for avoiding loss; the effects of compounding on even moderate returns over years are compelling, if not downright mind boggling.” Seth Klarman (17% annualized returns over more than 30 years)

Today I thought I’d take a break from Markets-in-Minutes and talk a little about loss management. There’s an old phrase that a bull market makes everyone a genius. And to some extent it’s true. It seems almost hard to lose money in a bull market, which is why so many investors get hurt so badly when the bear drives the bull out.

As a professional manager, I’ve been fired a couple times for not keeping up with the market in a given year. Investors that chase the market, and there are many of them, are failing to confront the mathematical reality of investing – it’s more important to protect capital than it is to maximize returns.

Here is a simple illustration.

The chart below tracks 2 investors in the S&P 500 since January 2000.

The red line is the result of an investor buying the S&P 500 and doing nothing but hold it through December 2016. In between were 2 gut wrenching recessionary bear markets, and years and years spent waiting for the account to make it back to break even. “Red” believes if you want ride the rallies you gotta endure the valleys. It’s a neat phrase he heard from his financial advisor.

The green line is an investor that buys the S&P 500, but whenever there is a recession this investor takes the simple precaution of reducing risk by 50%. When the recession goes away, the investor simply takes the cash set aside and buys back into the market. He’s isn’t worried about the gains – his eye is on the losses.

This investor misses the top and the bottom, but his initial investment isn’t any different than Red’s, nor are his initial gains. But in investing, as in football, it’s defense that wins championships.
Let’s compare the two:

RED
Dotcom Crash Loss (initial investment to valley): -41.5%
Time to get back to initial investment: 5 years.
Time account stayed positive between recovery and next crash: 14 months.
Great Recession Loss (initial investment to valley): -47.3%
Time to get back to initial Jan 2000 investment 5 years.
Total gain after 1st 12 years (Aug 2012): 0.9%
Total gain for 16 years (Dec 2016): +60.6%

GREEN
Dotcom Crash Loss (initial investment to valley): -23.8%
Time to get back to initial investment: 23 months
Time account stayed positive prior to next crash: 5 years
Great Recession Loss (initial investment to valley): -6.4%
Time to get back to initial Jan 2000 investment: 5 months
Total gain for 1st 12 years (Aug 2012): 44%
Total gain for 1st 16 years (Dec 2016): +229.2%
 
Wow, right?

What happens if you play defense every month instead of just when a recession hits?

Below is the BXM Index (Green) vs. the S&P 500 Index (Blue) since 1989. The BXM is always partially hedged, meaning that it trades part of the potential upside gain each month to get some downside protection.

From 1989 to 2016 the BXM Index returned +1058.7% vs. the S&P 500 Index at 731.9%, and held gains far better during crashes.

Again, clearly its defense that wins championships.

What if you combined a BXM derived strategy with a recession risk reduction strategy?

If you are a current ACI investor, you are in luck. This is exactly what ACI’s Market Income portfolio does.

If you are not a current ACI investor and would like to learn more about how a solid defense might help you do better with your investments, you are also in luck. Just send an email to updates@aciwealth.com that includes your first and last name, the city and state you live in, and “subscribe” in the subject line. Include your questions.

We’ll add you to the weekly updates newsletter, reserve 2 slots for you our online educational event “Winning on Wall Street in the New NOT Normal,” and answer whatever questions you have.

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To Smarter Investing,

Dak Hartsock
Market Strategist
ACI Wealth Advisors, LLC.
Process Portfolios, LLC.

And now for our bonus disclosures. Everyone thank the lawyers in DC. Neither the S&P 500 Index nor the BXM Index can be invested in directly. Past performance does not guarantee future results. The illustration assumes that the portfolio moved to 50% cash when the US moved into recession in 2000 and 2008. This assumption is based on hindsight and assumes that the investment manager both reduced investment as a result of the US entering recession and that the data used to determine the state of the US economy accurately signaled that the US had entered recession. The indicator used to determine the signal in the illustration is the Recession Probability Indicator developed by Stock Market Strategist Dak Hartsock. For additional information on the Recession Probability Indicator please visit: http://www.dakhartsock.com/monthly-features/recession-probability-indicator/
While the RPI has proved to be very accurate in the past, there is no guarantee it will prove to be correct in identifying recession in the future. There are inherent limitations in hypothetical or model results as the securities are not actually purchased or sold. They may not reflect the impact, if any, of material market conditions which could have has an impact on the manager’s decision making if the hypothetical portfolios were real. Historical performance does not take into account either transaction or management fees and is shown for illustrative purposes only – no illustrations contained in this article should be interpreted as an indication of performance of any ACI portfolio.The Chicago Board of Exchange S&P 500 Buy/Write Index or “BXM” has historically displayed less volatility than the S&P 500 and Market Income. There are no guarantees it will continue to do so in the future.

March 20 2017 Markets-in-Minutes

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Markets in Minutes  March 20, 2017

Markets in Minutes is intended to give our client partners and subscribers a quick and easy understanding of current market conditions.  This update covers March 1 – 17, 2017. 

In this update:  S&P 500, Bonds, Gold, World Stock Market, US Dollar, Commodities, the Economy, Recession Probability Indicator, & S&P 500 chart. 

Investor Learning:  “Your ultimate success or failure [in investing] will depend on your ability to ignore the worries of the world long enough to allow your investments to become successful.” – Peter Lynch. 

 

Market Updates:

 S&P 500:  +0.2% for the period, +5.3% year-to-date.  The S&P made an incremental new high on the 1st on the back of the largest overbought condition for the year so far, but the only thing that has changed since the last update is the Fed Funds target rate has increased by 0.25%.  The market continues to be supported by the promise of tax cuts & deregulation and an improved earnings picture.  As I’ve said, the market appears to have priced in a corporate tax rate of 25% or perhaps even 20%.  Look for volatility if the promised tax cut is meaningfully smaller, doesn’t materialize or is overly delayed.   The markets are showing signs of a near term top again as we saw in mid-December.  This suggests another period of consolidation such as December 9 until February 13, or we will finally see a pullback.  I’m leaning near term pullback.  A correction of 5% or more is a buying opportunity under current conditions.  The primary up trend is remains in control above $182 on the SPY, $1820 on the S&P.

Bonds:  The 10 year treasury yield closed up 2.9% at 2.53% from the prior period, pushing bond principal down incrementally.  The 10 year hit a high of 2.62% before pulling back.  With the economy likely to tolerate the Fed’s planned 2 additional 2017 rate hikes, passive investments in bonds (especially those with durations in excess of 5 years) should be carefully considered.  If yields drop because of an equity correction, it may benefit investors to have a hard think about longer duration bonds.

Gold:  Down -1.83% for the period after hitting a low of $1153 on 3/10, but +6.7% year-to-date.  The most recent action suggests gold may be trying to find a near term range trade as it held above its January low.   Regardless, it will stay positioned within a larger counter trend rally structure unless it can sustain a move above $1260.  Buying interest still doesn’t show commitment.  This may become a problem for gold bulls at or above $1195 if it makes it that far.  As before, recent dollar weakness is providing some support for gold and other commodities. 

World Ex-US:  +2.64% for the period and 7.6% run year-to-date.  World Ex-US stocks offer the distinction of good historical value at current valuations with the caveat that there are more unknowns in investing outside the US and also several knowns that are probably negative.  Rising rates in the US are not great for the rest of the world, particularly emerging markets.  My view, which may or may not be accurate, is that the US markets, despite uncomfortable valuations in some areas, will continue to benefit from capital flight from less stable markets over time.  My negative view on European/Asian/Emerging market stocks is unchanged despite gains year-to-date.  Time will tell if this is the correct perspective.  

US Dollar: USD began to fall March 10, but is flat for the period.  A stable dollar is better than a rising dollar, and a falling dollar even better at least where earnings are concerned.  Interestingly, the dollar has fallen about -2% from its March 9 high in the wake of a less than aggressive Fed plan to raise rates.  From the market’s perspective, it would be nice to see the dollar continue to show some weakness, but given other factors the higher likelihood is the dollar holding most 2016 gains and perhaps even moving higher at some point.   

Commodities:  Oil fell -8.8% for the period despite a -2% fall in the dollar, but still within the expected range I’ve talked about in the past.  The reality is that oil producers outside the US are not going to be able to consistently hold down supply with agreements.  There will be cheaters, and when prices are high enough to show profit (about $40) American producers are going to pump.  This is a benefit to US consumers and companies that use petroleum products in their supply chain. Copper futures rebounded from the March 9 low to finish the period down slightly, but barring a shock of some kind seem likely to hold most of the post-election gains.    

 

Economy:  Recent Fed data continues to support the notion of a slowly expanding economy, with Real Retail and Food Services Spending pulling back slightly in February as the holiday credit card hangover does what it does, but still moving upwards.  The March US Manufacturing report (ISM) also showed its sixth consecutive month of gains.   

Market Valuation:  Valuations are stretched, but with interest rates still in a range of historic lows, rising earnings, and the possibility of tax cuts before year end its unlikely valuations will drive a scary (or enduring) sell off.  However, the market is moving into a price zone that requires measurable earnings acceleration and tax cuts to sustain prices.   

Recession Probability Indicator:  The most recent reading on the RPI is 12 and indicates we are not currently in recession and the investment environment is stable.

 

S&P Technical Picture:  The S&P remains overbought on the weekly timeframe (red arrow), which hasn’t occurred since June of 2014.  Historically, this is suggestive of a near term top, but does not put the underlying uptrend (green line) at risk.   Fair Value is approximately $1800 – $1850, if tax cuts materialize the number is $1900 – $1950 but I would not look for the index to fall that far should a correction ensue.  Barring a nasty political or policy surprise, the weight of data suggests that pullbacks of more than 5% are likely buying opportunities.   

SPY Chart (S&P 500 Proxy)

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To Smarter Investing,

Dak Hartsock

Market Strategist

ACI Wealth Advisors, LLC

Process Portfolios, LLC

January 8 2017 Markets In Minutes

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Markets in Minutes  January 8, 2017

Markets in Minutes are short video updates that survey the 6 major asset classes US investors typically invest in. Each update features 3 asset classes to help investors understand what is happening in each market.

 

In this update:
S&P 500           0:57
10 Year Bond   3:44
Oil                      5:01
Copper              6:01

Times denote when in the video coverage of each asset begins.

The next update should have better resolution.

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To Smarter Investing,

Dak Hartsock
Market Strategist
ACI Wealth Advisors, LLC.
Process Portfolios, LLC.

Disclosures were accidentally cut off when the video was edited, so I had to post them below. Enjoy.

Disclosures

This article and the web site upon which it is posted reflects the opinion of Dak Hartsock and is not intended to offer personalized investment advice. Information regarding investment products, strategies, and services is provided solely for educational and informational purposes. Other information provided on the site, including updates on the Recession Probability Indicator (“RPI”) are presented for educational purposes and are not recommendations to buy or sell securities or solicitation for investment services.

Dak Hartsock does not provide personalized investment advice over the internet, nor should any information or materials presented here be construed as personalized investment or financial advice to any viewer. Mr. Hartsock is not a tax advisor and investors should obtain independent tax advice regarding investments. Neither Dak Hartsock, ACI Wealth Advisors, nor any affiliated persons or companies accept any liability in connection with your use of the information and materials provided on this site.

Dak Hartsock is a Series 65 licensed and registered Independent Advisor Representative with ACI Wealth Advisors, LLC (“ACI”). ACI is a Registered Investment Advisor (“RIA”), registered in the State of Florida and the State of California. ACI provides asset management and related services for clients in states where it is registered, or where it is exempt from registration through statute, exception, or exclusion from registration requirements. ACI is in no way responsible for the content of DakHartsock.com nor does ACI accept any responsibility for materials, articles, or links found on this site. A copy of ACI’s Form ADV Part 2 is available upon request.

Market data, articles, blogs and other content on this web site are based on generally-available information and are believed to be reliable. Dak Hartsock does not guarantee the accuracy of the information contained in this web site, nor is Mr. Hartsock under any obligation to update any information on the site. Information presented may not be current. Any information presented on this site should not be construed as investment advice or a solicitation to buy and sell securities under any circumstances.  Please see additional disclosures below.

Trump Wins – What’s Next for the Market?

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    Trump Wins – What’s Next for the Market? From the 11/13/2016 Client Letter

    Wow. What an interesting week for the markets.

    A quick recap, and then a brief summary of how I see events impacting markets over the next quarters:

    Early Wednesday morning, market futures began selling off as a Trump victory began to look possible. As those odds increased, the futures markets began to sell off in earnest. At one point Dow futures were down more than 800 points. Other exchanges such as the NASDAQ saw circuit breakers triggered to slow the downward cascade. Overseas markets, which had gone negative as the electoral votes piled up in Trump’s column, also sold off more deeply.

    For those that don’t know, when this happens the market usually opens where the after-hours trade left off. So it was looking like the markets were going to experience a very bad day.

    Then something changed. Futures began to make up lost ground, overseas markets began to rise. Often, following a large directional move, the markets will retrace part of that move prior to reversing again to continue in the same direction as before. In this case, down.

    But that’s not what happened Wednesday morning.

    Markets opened slightly down from Tuesday’s regular session and then proceeded to rally the rest of the day. The Dow’s move from down over 800 points after hours to rally nearly 6% from the futures low and reach an all-time high the day after the election results may be as unprecedented as Trump’s come from behind victory in election.

    Many of Trump’s campaign promises were slim on details and big on promise, as is often the case with politicians seeking election. But Trump had more unknowns than most and the markets dislike uncertainty.

    This uncertainty helped drive the futures selloff. But what changed in the early hours of Wednesday morning?

    Markets globally began to rally when it became clear that in addition to the Presidency, Republicans would also take the House and the Senate. Instead of a gridlocked DC with Democrats holding the Senate or Congress, real change suddenly became possible.

    It didn’t mean that everything would change, but that some items of Trump’s agenda were suddenly probable, and without a term long fight with the opposition.

    As a family member of mine expressed it, the Republican sweep is perceived as The Free Market Revived.

    What exactly does this mean, and how might it impact markets in the near term?

    First off, lower taxes. America has one of the highest corporate tax rates in the world. Lowering corporate taxes makes America more competitive as a home market for both our corporations and multi-nationals located in higher tax rate jurisdictions. Think of the tax inversions we’ve seen in the last couple years, when large US companies make an acquisition to get their corporate taxation domiciled in Ireland or elsewhere. It’s reasonable to expect multi-nationals elsewhere to start attempting American tax inversion if Trump gets his 15% corporate tax rate. More jobs.

    Lowering the corporate tax rate also leaves more $ in private sector hands, which is traditionally much more efficient with capital than government. This could translate to more jobs, bigger dividends, continued stock buybacks, and accelerated M & A activity driven by tax savings.

    He also aims to simplify individual taxes and lower rates across the board. In the near term, tax cuts are more effective than stimulus spending. Tax cuts hit the economy quickly.

    He’s proposed a tax holiday for US corporations. Depending on what study you read, there are between $1.2 trillion and $2.8 trillion dollars being held by US companies overseas. At a 20% tax holiday or less, most if not all of those dollars will come home. Trump is proposing 10%. That is a potential steroid for US corporations.

    Regulations will be rolled back. Many have been overly burdensome for several industries. This removes a major obstacle US companies of all sizes have been forced to deal with over the last decade. They can now look forward to an easing of regulations rather than more unknown regulations coming down the pipe. This allows management teams to become more effective in strategic planning and capital expenditures. These are probable positives for jobs and earnings.

    Banking in particular will almost certainly see wide spread reduction in regulations. Dodd-Frank will be heavily streamlined if not gutted entirely. These are positives for bank earnings.

    If Trump’s promises are to be believed, he will try to break up the big banks. I see this as an additional significant positive if it happens. It could pave the way for increased earnings sector wide while reducing systemic risk.

    Interest rates are likely to rise. Also good for banks.

    The energy industry is facing renewal, with administrative policies that favor American producers over global producers. This will begin to impact energy sector earnings within a few quarters, subject to what kind of protections actually come through and whether OPEC can get agreement at cutting production.

    The Affordable Care Act will also be streamlined or perhaps completely restructured. Given the precipitous rise in cost to patients, providers, insurers, and tax payers that has occurred as a result of the program, it’s hard to think whatever changes come will not be financial positives in some significant way. This will take longer than the other initiatives, but reforming the ACA is on the agenda.

    These are factors the market began to price in when it became clear Republicans were going to sweep the election.

    It’s interesting to note these are the sort of structural fiscal reforms the US Central Bank has been calling on elected officials to implement for years in order to reduce the economy’s dependence on monetary policies (which are increasingly ineffective.)

    Despite the sweep, many if not most of Trump’s ideas will be obstructed by opponents on both sides of aisle – he is an outsider and will likely remain so. But it’s clear the market is cheering lower taxes, lower regulation, and the probability of a renewed American energy sector.

    How long will the honeymoon last? That’s impossible to say definitively, but the above gives the market something to think about, particularly if earnings continue to strengthen. There are no guarantees, but lower taxes + lower regulation + rising earnings + no recession should translate into positives for equity market prices in the near term.

    There are downsides to many Trump proposals, including deficits risks and trade wars, and bonds seem likely to suffer, but for now the markets like what they think they see. Barring a change in recession status or a major disruptive event here or abroad, markets seem primed to hold their ground and perhaps even advance moving into year end and the first half of next year.

    As always, reach out with your questions. Please share this information with one friend that can benefit from it. Share buttons below.

    To smarter investing,

    Dak Hartsock
    Market Strategist
    ACI Wealth Advisors, LLC.
    Process Portfolios, LLC.

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    Investment Management

    For ACI, investment management begins with understanding and actively managing risk for our clients and partners.  We do this through smarter investments built on low cost, highly liquid and diversified investments rather than expensive financial products.

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    Market Income

    This portfolio invests in a basket of highly liquid Index or Sector securities and sells off atypical returns in exchange for a premium on a rolling basis. That’s a fancy way of saying we take the bird in hand and let someone else have the two in the bush.  We buy sectors that are undervalued relative to the rest of the market or vs. their historical value ranges which reduces downside risk vs. the broad market.  Typically out-performs in bear markets, neutral markets and mild bull markets.   while under-performs strong bull markets.

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    Invests in diversified components of the financial markets and broad economy by targeting sectors which demonstrate the greatest potential for a consistent range of multi-year returns, while offering a risk adjusted investment profile equal to or lower than the broad markets.  Our research tells us which sectors demonstrate the greatest potential for consistent multi-year returns while offering greater risk efficiency than the broad markets.  We invest on an “Outcome Oriented” basis – meaning we have a good idea what the returns over time will be at a given purchase price.

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    This portfolio is derived from the ground breaking work in ‘risk parity’ by Ray Dalio, arguably one of the top 10 money managers in history and founder of Bridgewater Associates.  The Full Cycle portfolio is built on the allocation models Ray designed to provide the highest potential risk adjusted returns possible through all phases of the economic cycle.  Bridgewater’s “All Weather” fund was designed for pension funds and other large institutional investors that needed to earn stable returns with stable risk, and has been closed to new investors for years.  At the time the fund closed, the All Weather Portfolio had a minimum required investment of $100 million.

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    This is a risk management overlay which helps build and protect accounts by collecting small premiums against held positions on an opportunistic basis during correcting markets.  EQB seeks to collect an extra 2% – 5% per year against the cost of underlying investments.  While primarily targeted at increasing account equity, EQB gives an extra layer of protection to capital during periods of higher volatility.

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    ACI Investment Team

     

    Dak Hartsock; Investment manager with over 15 years of experience with securities & securities options. Dak has worked full time in the financial markets since 2007. He has more than a decade of operating experience as a business owner & developer, with substantially all personal net worth invested in ACI. He is a graduate of the University of Virginia.

    Robert Hartsock; MBA. Bob has over 30 years of senior management experience in diverse markets, products and businesses. He brings an exceptional record that includes management roles in two Fortune 500 companies and leadership of 7,500+ employees. Bob’s career features a specialization in identifying and fixing management and operational problems for multiple companies including leading over a dozen acquisitions, private placements and a public offering. He is uniquely positioned to provide ACI with highly relevant C-Level management perspective. Bob provides operational & macro perspective on investments ACI undertakes for client portfolios. Bob holds degrees from University of Illinois and University of Washington.

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    This web site reflects the opinions of Dak Hartsock and is not intended to offer personalized investment advice. Information regarding investment products, strategies, and services is provided solely for educational and informational purposes. Other information provided on the site, including updates on the Recession Probability Indicator (“RPI”) are presented for educational purposes and are not recommendations to buy or sell securities or solicitation for investment services.

    Dak Hartsock does not provide personalized investment advice over the internet, nor should any information or materials presented here be construed as personalized investment or financial advice to any viewer. Mr. Hartsock is not a tax advisor and investors should obtain independent tax advice regarding investments. Neither Dak Hartsock, ACI Wealth Advisors, nor any affiliated persons or companies accept any liability in connection with your use of the information and materials provided on this site.

    Dak Hartsock is a Series 65 licensed and registered Independent Advisor Representative with ACI Wealth Advisors, LLC (“ACI”). ACI is a Registered Investment Advisor (“RIA”), registered in the State of Florida and the State of California. ACI provides asset management and related services for clients in states where it is registered, or where it is exempt from registration through statute, exception, or exclusion from registration requirements. ACI is in no way responsible for the content of DakHartsock.com nor does ACI accept any responsibility for materials, articles, or links found on this site. A copy of ACI’s Form ADV Part 2 is available upon request.

    Market data, articles, blogs and other content on this web site are based on generally-available information and are believed to be reliable. Dak Hartsock does not guarantee the accuracy of the information contained in this web site, nor is Mr. Hartsock under any obligation to update any information on the site. Information presented may not be current. Any information presented on this site should not be construed as investment advice or a solicitation to buy and sell securities under any circumstances.

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    Disclosures Regarding Investment Performance Reporting in compliance with Rule 206(4)-1(a)(5).

    Visit http://www.dakhartsock.com/process-portfolios-historical-performance/ for historical performance of ACI’s Process Portfolios.

    Market Income Portfolio
    1. The performance of the broad market over the same time periods is included for both model and live portfolio to help investors understand market conditions present during the period examined by the model and during live investment.
    2. Listed Index models and graphs do NOT include transaction, fund or Advisor Management fees as the index model is not available for investment. Live portfolio results include all fees, including Advisor Management fees.
    3. Model results do NOT reflect reinvestment of dividends or other earnings. Actual results reflect limited reinvestment of dividends and other earnings, but do not reflect the impact of any applicable taxes which vary by investor and account type (deferred account vs. taxable, etc.).
    4. Investing involves risk, including risk of loss and/or principle. While the Index model has historically shown reasonable performance versus the S&P 500 on a risk adjusted basis, there is no guarantee that will continue into the future. Market Income is designed to provide reasonable returns for less risk than the broad market on a risk adjusted basis, and while the firm believes model portfolios are capable of continued outperformance on this basis, there is no guarantee they will do so. Comparisons with the S&P 500 are included to help the average investor understand how an investment in Market Income may differ from investment in an index fund such as an S&P 500 index fund.
    5. The model for Market Income is the Chicago Board of Exchange S&P 500 Buy/Write Index or “BXM.” BXM has historically displayed less volatility than the S&P 500 and Market Income. BXM cannot be directly invested in. Market Income does not exactly follow the BXM index model – the mechanics of closing and opening positions differ – BXM opens, closes or rolls positions on the same day every month regardless of the profit or loss in a position – Market Income generally, but not always, waits until after expiration before transacting. Market Income will also close or roll ahead of expiration if the position has a high percentage of profit present in order to capture that gain. Options are generally sold again within a week of the closure of the prior position, but not always, and often new position may be opened the same day the prior position is closed.
    Benchmark and index comparisons are made on a best available basis – meaning that both the index model and live performance are believed to be compared with market and the closest possible benchmark for simplicity of comparison. However, there is no guarantee future volatility will be either less than, equal to, or greater than the volatility experienced in the model or the S&P 500 although the firm invests with an eye on reduced volatility vs. the S&P 500.
    6. The model portfolio (BXM) utilizes the S&P 500 as its basis. Market Income differs from BXM in that the underlying securities are primarily selected on the basis of “relative” value. This simply means that sectors are compared with one another and Market Income generally invests in the sector or sector(s) trading at the greatest discount or the smallest premium relative to its historical average valuation. Other factors are also considered including sector earnings growth and expected return versus other available sector instruments. Advisor believes this gives Market Income a higher margin of safety than repeatedly investing in the S&P 500 on a rolling basis without regard to value or prevailing economic conditions, while preserving liquidity.
    7. The BXM model on which Market Income is based is a non-traded index. As such, results do not represent actual trading or investment and do not reflect any impact that material economic or market factors may have had on the advisors decision making if advisor had been managing live money during the period the model covers, including transaction, fund, or management fees.
    8. Market Income also differs from the BXM model in that Market Income seeks to reduce investment during recessionary economic periods while BXM stays invested regardless of economic or market conditions. Advisor believes this will better protect capital vs. BXM model but is materially different than staying invested in all market conditions. This action may cause Market Income to have reduced participation in markets that continue to move up despite Advisors reduction in investment.
    9. Advisor clients have experienced results that exceed the performance of the model to date. There is no guarantee Market Income will continue to outperform BXM in the future regardless of Advisor efforts to do so.

    Core Equity Portfolio
    1. The performance of the broad market over the same time periods is included for both model and live portfolio to help investors understand market conditions present during the period examined by the model and during live investment.
    2. Model is a historical back test and includes brokerage and fund fees but does NOT include Advisor Management fees which vary by account size, but in general reduce annual performance by approximately 1.5%. Live portfolio results include all fees, including Advisor Management fees.
    Historical back-test means the model portfolio has been tracked on a backwards looking basis prior to the beginning of live investments in order to establish historical risks and results for investment in this portfolio. Back testing has certain inherent limitations as detailed in item #7 below.
    3. Model results reflect regular investment of dividends or other earnings. Actual results reflect limited reinvestment of dividends and other earnings.
    4. Investing involves risk, including risk of loss and/or principle. While the back tested Core Equity model has historically shown desirable performance versus the S&P 500 on a risk adjusted basis, there is no guarantee that will continue into the future. Core Equity is designed to provide reasonable returns for the same or less risk than the broad market on a risk adjusted basis, and while the firm believes model portfolios are capable of continued outperformance on this basis, there is no guarantee they will do so. Comparisons with the S&P 500 are included to help the average investor understand how an investment in Core Equity may differ from investment in an index fund such as an S&P 500 index fund.
    5. The model for Core Equity is built of highly diversified, highly liquid sector and index securities, most frequently low cost ETFs. Core Equity live portfolios do not exactly follow the Core Equity model – variances in investor contributions, withdrawals, and risk tolerances result in measurable drift from the model. Over time, client accounts come closer in line with the Core Equity model.
    Core Equity live portfolios may differ from the Core Equity model in an additional material way; when valuations on certain sectors become overly stretched versus their historical average valuations, the Advisor may reduce exposure to those sectors in favor of a sector position which is priced in a more reasonable range in comparison to it’s typical historical valuation. Periodically, Core Equity may allocate a small but measurable percent of assets (up to 5%) in volatility linked instruments in an effort to better manage the portfolio.
    These factors may result in greater or less than model performance over time.
    Benchmark and index comparisons are made on a best available basis – meaning that both the index model and live performance are compared with market and other benchmarks the
    Advisors believe to be suitable for simplicity of comparison. However, there is no guarantee future volatility or performance will be either less than, equal to, or greater than the volatility or performance experienced in the model or the S&P 500 although the firm invests with an eye on reduced volatility vs. the S&P 500.
    6. Core Equity invests in diversified components of the financial markets and broad economy by targeting sectors or indices which demonstrate potential for a consistent range of multi-year returns, while seeking a risk adjusted investment profile equal to or lower than the broad markets. These sectors contain a range of equity stocks with an equally broad range of characteristics – some sectors are present in the Core Equity portfolio due to their historically defensive nature, some are present due to their historical growth characteristics, some are a blend of the spectrum between. The intent is to provide a balanced equity portfolio suitable for most investors as an S&P 500 index fund replacement but which seeks lower risk while experiencing, on average, a greater return than an S&P 500 index investment.
    7. The Core Equity model results do not represent actual trading or investment and do not reflect any impact that material economic or market factors may have had on the advisors decision making if advisor had been managing live money during the period the model covers, including transaction, fund, or management fees as detailed above in item #2.
    8. Core Equity live portfolios also differ from the Core Equity model in that Core Equity seeks to reduce investment during recessionary economic periods while the Core Equity historical model stays invested regardless of economic or market conditions. Advisor believes this will better protect capital vs. model but is materially different than staying invested in all market conditions. This action may cause Core Equity live portfolios to have reduced participation in markets that continue to move up despite Advisors reduction in investment.
    9. Advisor clients have experienced results that slightly lag the performance of the model to date. This lag is due to a number of factors, primarily the fact that different clients allocate different dollar amounts to Core Equity at different times. In general, the longer a client has been fully allocated to the Core Equity portfolio, the closer it is to model performance.
    The benchmark for Core Equity (The S&P 500) has historically displayed greater volatility (risk) than the Core Equity model or live Core Equity portfolios. This may or may not be the case in the future.

    Market Momentum Portfolio
    1. The performance of the broad market over the same time periods is included to help investors understand market conditions present during the period covered by live investment.
    2. Listed comparison Index graphs and statistics do NOT include transaction, fund or Advisor Management fees. Live portfolio results include all fees, including Advisor Management fees.
    3. Actual results reflect limited reinvestment of dividends and other earnings, but do not reflect the impact of any applicable taxes which vary by investor and account type (deferred account vs. taxable, etc.).
    4. Investing involves risk, including risk of loss and/or principle. While the closest benchmark for Market Momentum has historically shown reasonable performance versus the S&P 500 on a risk adjusted basis, there is no guarantee that Market Momentum that will continue such performance into the future. Market Momentum is designed to provide reasonable returns for less risk than the broad market on a risk adjusted basis, and while the firm believes the portfolio is capable of outperformance on this basis, there is no guarantee it will do so. Comparisons with the S&P 500 are included to help the average investor understand how an investment in Market Momentum may differ from investment in an index fund such as an S&P 500 index fund.
    5. The closest benchmark for Market Momentum is the Chicago Board of Exchange S&P 500 Buy/Write Index or “BXM.” BXM has historically displayed less volatility than the S&P 500 and Market Income. BXM cannot be directly invested in. Market Momentum differs in key ways from BXM – the mechanics of closing and opening positions differ – BXM opens, closes or rolls positions on the same day every month regardless of the profit or loss in a position – Market Momentum targets closing or rolling positions based on technical factors including trend support and resistance. Market Momemtum will also close or roll ahead of expiration if the position has a high percentage of profit present in order to capture that gain. Options are generally not sold again until the underlying investment has moved into an area of resistance but not always; new position may be opened the same day the prior position is closed.
    Benchmark comparisons are made on a best available basis – meaning that live performance is believed to be compared with the closest possible benchmark for simplicity of comparison. However, there is no guarantee future volatility will be either less than, equal to, or greater than the volatility experienced in the model or the S&P 500 although the firm invests with an eye on reduced volatility vs. the S&P 500. Market Momentum , like BXM, is an options writing strategy seeking to reduce investment volatility and improve risk adjusted returns for investors.
    6. The model portfolio (BXM) utilizes the S&P 500 as its basis. Market Momentum differs from BXM in that the underlying securities are primarily selected on the basis of “relative” value. This simply means that sectors are compared with one another and Market Momentum generally invests in the sector or sector(s) trading at the greatest discount or the smallest premium relative to its historical average valuation. Other factors are also considered including sector earnings growth and expected return versus other available sector instruments. Advisor believes this gives Market Momentum a higher margin of safety than repeatedly investing in the S&P 500 on a rolling basis without regard to value or prevailing economic conditions, while preserving liquidity.
    7. The BXM model on which Market Momentum is compared is a non-traded index. As such, results do not represent actual trading or investment and do not reflect any impact that material economic or market factors may have had on the advisors decision making if advisor had been managing live money during the period the model covers, including transaction, fund, or management fees.
    8. Market Momentum also differs from the BXM model in that Market Momentum seeks to reduce investment during corrective or recessionary economic periods while BXM stays invested regardless of economic or market conditions. Advisor believes this will better protect capital in comparison to BXM but such action is materially different than staying invested in all market conditions. This action may cause Market Momentum to have reduced participation in markets that continue to move up despite Advisors reduction in investment.
    9. Advisor clients have experienced results that exceed the performance of the benchmark to date. There is no guarantee Market Momentum will continue to outperform BXM in the future regardless of Advisor efforts to do so.

    Durable Opportunities Portfolio
    1. The performance of the broad market in the form of the Dow Jones Industrial Index over the same time periods is included for live portfolio comparison to help investors understand market conditions present during the period covered by live investment.
    2. The Index results do not include brokerage, transaction, or Advisor fees. Live portfolio results include all fees, including Advisor Management fees.
    3. Actual results reflect limited reinvestment of dividends and other earnings.
    4. Investing involves risk, including risk of loss and/or principle. Portfolios compromised of companies matching the profile of those selected for including in Durable Opportunities have historically displayed superior risk adjusted performance to the Index, but there is no guarantee that will continue into the future. Durable Opportunities is designed to provide investment in companies that firm believes meet a stringent set of criteria firm believes reduces the likelihood of permanent capital impairment while allowing investors to participate in investment in companies firm believes will stand the test of time and provide superior long term returns. While the firm believes the portfolio is capable of outperformance on this basis, there is no guarantee it will do so. Comparisons with the Dow Jones are included to help the average investor understand how an investment in Durable Opportunities may differ from investment in a concentrated index fund such as a Dow Jones Industrials index fund. Durable Opportunities is not restricted to investment in industrial companies or in companies with a specific level of capitalization, unlike the Dow Jones.
    5. Durable Opportunities is primarily a value driven strategy; when valuations in holdings become overly stretched versus their historical average valuations, the Advisor may reduce exposure to those holdings by either liquidation or hedging, and may re-allocate funds into a holding which is priced in a more reasonable range in comparison to it’s typical historical valuation. Periodically, Durable Opportunities may allocate a small but measurable percent of assets (up to 5%) in volatility linked instruments in an effort to better manage the portfolio.
    Benchmark comparisons are made on a best available basis – meaning that live performance is compared with the benchmarks the firm believe to be suitable for simplicity of comparison. However, there is no guarantee future volatility or performance will be either less than, equal to, or greater than the volatility or performance experienced in the Dow Jones Industrials although the firm invests with an eye on reduced volatility vs. the Dow Jones Industrials Index. 6. Durable Opportunties invests in companies firm believes to possess a Durable Competitive Advantage. Such companies are likely to be around for decades, easing the concern of principal return. DCA companies often suffer less in bear markets and usually lead recoveries. These companies allow ACI to build portfolios with minimum expected returns that may be in the mid-single digit range over any 3-5 year period which may provide long term stability partnered with long term growth in equity. There are no guarantees the strategy will be successful in this endeavor.
    6. The Durable Opportunities portfolios also differ from the benchmark comparison in that Durable Opportunities reduce investment by hedging or raising cash during recessionary economic periods while Dow Jones Industrial Index reflects 100% investment at all times regardless of economic or market conditions. Firm believes this will better protect capital vs. model but is materially different than staying invested in all market conditions. This action may cause the Durable Opportunities portfolio to experience reduced participation in markets that continue to move up despite Advisors reduction in investment.
    7. Advisor clients have experienced results that have lagged the performance of the benchmark to date. This lag is due to a number of factors, primarily the fact that the current high valuation investing environment has made it difficult to identify companies that fit the parameters of Durable Opportunities at a desirable valuation level. Different clients allocate different dollar amounts to Durable Opportunities at different times, which has also impacted the performance of the overall portfolio.

    Full Cycle Portfolio
    1. The performance of the broad market over the same time periods is included for both model and live portfolio to help investors understand market conditions present during the period examined by the model and during live investment.
    2. Model is a historical back test and includes brokerage and fund fees but does NOT include Advisor Management fees which vary by account size, but in general reduce annual performance by approximately 1.5%. Live portfolio results include all fees, including Advisor Management fees.
    Historical back-test means the model portfolio has been tracked on a backwards looking basis prior to the beginning of live investments in order to establish historical risks and results for investment in this portfolio. Back testing has certain inherent limitations as detailed in item #7 below.
    3. Model results reflect regular investment of dividends or other earnings. Actual results reflect limited reinvestment of dividends and other earnings.
    4. Investing involves risk, including risk of loss and/or principle. While the back tested Full Cycle Portfolio model has historically shown desirable performance versus the S&P 500 on a risk adjusted basis, there is no guarantee that will continue into the future. Full Cycle Portfolio is designed to provide reasonable returns for the same or less risk than the broad market on a risk adjusted basis in all phases of the economic cycle by holding risk weighted non-correlated assets, and while the firm believes model portfolios are capable of continued outperformance on this basis, there is no guarantee they will do so in the future. Comparisons with the S&P 500 are included to help the average investor understand how an investment in the Full Cycle Portfolio may differ from investment in an index fund such as an S&P 500 index fund.
    5. The model for the Full Cycle Portfolio is built of diversified, liquid sector and index securities, most frequently low cost ETFs and low cost funds. The live Full Cycle portfolio does not follow the Full Cycle model exactly – variances in investor contributions & withdrawals result in measurable drift from the model. Over time, client accounts come closer in line with the Full Cycle model.
    Full Cycle live portfolios may differ from the Full Cycle model in an additional material way; when valuations on certain sectors become overly stretched versus their historical average valuations, the Advisor may reduce exposure to those sectors in favor of a comparable position which is priced in a more reasonable range in comparison to it’s typical historical valuation.
    These factors may result in greater or less than model performance over time.
    Benchmark and index comparisons are made on a best available basis – meaning that both the index model and live performance are compared with market and other benchmarks the
    firm believes to be suitable for simplicity of comparison. However, there is no guarantee future volatility or performance will be either less than, equal to, or greater than the volatility or performance experienced in the model or the S&P 500 although the firm invests with an eye on reduced volatility vs. the S&P 500.
    6. Full Cycle invests in diversified components of the global financial markets and broad economy by balancing risks with non-correlating or reduced correlation assets in opposition to one another each of which is designed to prosper in some phase of the economic cycle and intended to offset reduced or poor performance in other portfolio holdings.
    7. The Full Cycle model results do not represent actual trading or investment and do not reflect any impact that material economic or market factors may have had on the advisors decision making if advisor had been managing live money during the period the model covers, including transaction, fund, or management fees as detailed above in item #2.
    8. Full Cycle live portfolios also differ from the Full Cycle model in that the live portfolio may be rebalanced more or less frequently depending on prevailing market conditions. While firm believes this difference positions portfolio for improved risk adjusted performance, it is not clear that this difference results in clear over or under performance versus the Full Cycle model.
    9. Advisor clients have experienced results that slightly outperform the performance of the model to date. This outperformance may or may not persist. In general, the longer a client has been fully allocated to the Full Cycle portfolio, the closer it is to model performance.

    Fixed Income Portfolio
    1. The performance of the broad bond markets over the same time periods is included to help investors understand market conditions present during the period covered by live investment.
    2. Listed comparison Index graphs and statistics do NOT include transaction, fund or Advisor Management fees. Live portfolio results include all fees, including Advisor Management fees.
    3. Actual results reflect limited reinvestment of dividends and other earnings, but do not reflect the impact of any applicable taxes which vary by investor and account type (deferred account vs. taxable, etc.).
    4. Investing involves risk, including risk of loss and/or principle. While the closest benchmark for Fixed Income has historically shown reduced volatility and reasonable performance versus many classes of fixed income investments, there is no guarantee that Fixed Income that will continue such performance into the future. Market Momentum is designed to provide reasonable returns for less risk than the broad market on a risk adjusted basis, and while the firm believes the portfolio is capable of outperformance on this basis, there is no guarantee it will do so. Comparisons with US Aggregate Bond Market and PIMCO Total Return are included to help the average investor understand how an investment in Fixed Income may differ from investment in an alternative index or fixed income fund.
    5. The closest benchmark for Fixed Income is the Pimco Total Return Fund. Fixed Income differs in key ways from BOND – including selection of underlying investments and reduced diversification. Benchmark comparisons are made on a best available basis – meaning that live performance is believed to be compared with the closest possible benchmark for simplicity of comparison. However, there is no guarantee future volatility and performance will be either less than, equal to, or greater than the volatility and performance experienced by the benchmark although the firm invests with an eye on out performance.
    6. The benchmark may include securities not contained in Fixed Income, and vice versa. Fixed Income currently holds significantly more cash than PIMCO Total Return Fund, a situation likely to continue in the near future. This action may cause Fixed Income to have reduced participation in markets that move up despite Advisors reduction in investment.
    7. Advisor clients have experienced results that lag the performance of the benchmarks to date. There is no guarantee Fixed Income will continue to outperform benchmarks in the future regardless of Advisor efforts to do so.

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