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Market Climate and Weather Forecast

Market Climate and Weather Forecast. "It is not the strongest of the species that survives, nor the most intelligent, but the ones most adaptable to change." Charles Darwin. Presented by Herb Geissler, Managing Director of The St.Clair Group

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Market Climate and Weather Forecast

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  1. Market Climateand Weather Forecast "It is not the strongest of the species that survives, nor the most intelligent, but the ones most adaptable to change." Charles Darwin Presented by Herb Geissler, Managing Director of The St.Clair Group Rational Investing/VectorVest Special Interest Group of Pittsburgh AAII AAII May, 2012

  2. Two Time Frames Secular Overview to determine best broad investing strategies over years Cyclical Climate over next year or so for specific strategies to get good gains

  3. Simple Buy & Hold Not Likely to Be Productivefor the next dozen years 15-20 year Consolidating Bear Market Ten-fold, 15-20 year Big Bull Market Kuznets’ Infrastructure cycle averages 17.6 years for each bull or bear phase

  4. Demographics Dictate Destiny About 2/3 through to trough-bottom in 2015

  5. Corporate Profits Generally Track Growth in GDP Although Exogenous Events can “put a thumb on the scale” Credit Crunch Oil Crisis Asian Crisis

  6. And the Stock Market also Tracks Growth in GDP

  7. Consumptive Spending leaves little over for future users or for economic growth Gross Domestic Product consists of: • Private Consumption Demand, plus • Gross Fixed Investment Spending, plus • Government Consumptive Spending (all levels) • Plus/minus exports and imports

  8. US Government SpendingSqueezes Private Sector Growth and Consumer Spending S&P 500

  9. Financed WithOther People’s Money

  10. Chrushing Consumers, while neglecting growth priorities

  11. Economy in Troublewith Housing in the “Pits”

  12. Economic Growth Driven by “Permanent” Investments Latest Readings 4Q/11 +2.8% 3Q/11 +15.7%

  13. GDP Stagnates During Next Several Years

  14. Huge Surge in Unemployed 13 million Unemployed

  15. Massive Structural Unemployment 9% jobless rate actually closer to 20% Low-cost countries displaced US workers Technology is obsoleting many jobs USPS cut 110,000 jobs in past 4 years and must cut 220,000 more from 572,000 in next 5 years Austerity requires doing more with less Education systems are geared to yesterday Siemans’ US 70,000 employees plus 3,000 open Spiral: less income means less demand

  16. Secular Challengesduring this coming decade Increasing structural unemployment Declining GDP means less output and fewer jobs Massive global debt requires austerity and write-offs Global politicians unwilling to resolve problems, kicking can down road Lacking confidence in political leaders, both industry and consumers retrench

  17. To Correct Economic Malaise and Structural Unemployment Pay-down U.S. debt to sustainable level through austerity first and then economic growth Slicing is less painful than slivering over several years Create 15 million “new” jobs (10% more than today) Not just service jobs in retailing, distribution and finance Need jobs producing technology products that provide more goods and services from less resources to enhance standard of living

  18. Secular Strategic Game Plan for Investing in this Decade Replace Buy&Hold of index or stocks with disciplined tactical allocation (select the few best asset-class ETFs or stocks) and Use Dynamic Asset Allocation (market timing) to switch from yesterday’s heroes to strongest horses IVY tactical and dynamic allocation strategies require just a few minutes every month for above-average returns and below-average drawdown (spreadsheet discs available)

  19. Cyclical Climate Examine forces that shape economic growth over the next year or two Identify a few indicators that measure where we are and where we’re headed Determine investing strategies and tactics to match these conditions

  20. Cyclical ClimateNew Political Agendas and Administrations globallythrough 2013 Still in churning phase of Kuznets cycle Europe is sick with sovereign debt, US healing slowly from debt crisis and is improving manufacturing efficiencies with fewer workers emerging markets coping with demand shrinkage from their major markets in developed countries Then why has US stock market been so strong?

  21. Recent Market Surges WereFueled by Fed Stimulus Liquidity

  22. ISMs (PMIs) Confirm Direction of Stock Market Market rises when ISM is above 50, except right after 9/11/2001 NAPM = 54.8 NMBA = 53.5 in April ‘12 9/11

  23. For 40 years, ECRI’s WLI Called every major SP500 Drop The leading economic indicator (LEI), published by Economic Cycle Research Institute, is a weighted average of ten different economic and financial indicators. Above 50 is expansion, below 50 is contraction Growth in WLI since January ’12 is now weakening and WLI (absolute) is barely above 50 and remains below par

  24. Consumer ConfidenceStruggling to Reach Prior Lows Consumer confidence still close to the worst during Normal periods

  25. Small Business Confidenceis below normal and weakening

  26. Presidential CycleFavors 2011 and 2012 2011 Only unprofitable year in over 60 years DJIA Gains during Presidential Cycle This Cycle likely to be much below normal

  27. Rhetoric Causes Trading Ranges 2013 Bull Rally Hinges on Severity of Austerity

  28. SPY violated the 50/50/0 Markers in April,but may find support at past highs Would you be long now? RSI less than 50 Price is below MA50 MACD sloping down and is under zero DMIs are net-negative

  29. 2012 Intermediate-Term Strategic ConclusionsWalk softly and carry a big stick • Active institutional bottom-fishing and Operation Twist in November 2011 produced strong relief rally to end-March, 2012, as cash hoards were put to work • Liquidity from Fed is over, Europe is in sovereign debt crisis, emerging markets slowing down: all likely to cause US stocks to sag into seasonal low by July 4th, ‘12 • U.S manufacturing sector becoming healthier from “creative destruction” and better technologies. But investing methods require greater selectivity in strategies and vehicles during such uncertain times • Political uncertainties and posturing delays problem-solving into next administration. Stocks bobble (crab-like) through 2012 into a political relief rally in Fall 2012 • Next administration “forced” to drastically cut spending, paring Government from 20% of GDP closer to historical 15%, increasing job-losses. Big Slice will be received better than frequent small slivers. European socialism/populism will worsen problems • Thus 2013 likely to be a “blood bath” year for the US economy and the stock market. Using Contras and Defensives could be critical to getting any positive returns.

  30. Depends on Who You Are? Strategy Preferences For Intermediate Term Investors • Passive Investor is defined by absence of disciplined rules to sell-off losers • “Snooze and lose” has destroyed many nest eggs • Active investors vary in degree of activity • Timing to avoid big losses = dynamic asset allocation = MA12 • Periodic rebalance ETFs = tactical asset allocation = IVY • Monthly weed and refresh of stocks = position trading • Daily or weekly trading = swing trading • Modestly active investors need better tools to trigger sound entry and exits that stay out of harm’s way

  31. Limiting Losses Keeps More of Your Gains Since 1885, the DJIA spent • 32% of time in bear markets, going down • 44% of time getting back to break-even • 24% of time in net bull territory • Data from Ned Davis Research Disciplined timing takes you out of harm’s way, when the bear market begins or in progress. • Keep more of your gains • Recover losses more quickly • Make more money, more of the time • IVY spreadsheet discs are still available at $30

  32. Three Simple Strategiesfor Moderately Active Investors to stay on the RIGHT side of the market • Exit stocks whenever Index drops below its 12 month moving average • Diversify risk by holding 5 non-correlated ETFs only when each above its 10 month MA • Find single best-class to boost return, with moderate drawdown, by holding the “top performing” ETF of the 5, refresh monthly

  33. During past 60 years,Timing with 12 Month Moving Average Earned 35% More than Buy&Hold

  34. For Dynamic Asset Allocation during Cyclical Periods,12 Month Moving Average Pinpoints Reversals and Minimizes Draw-downs During 10 difficult years, would have averaged 6.6% annual gain with 11.5% max draw-down vs 1.2% gain and 52.6% mdd with Buy & Hold Explained more fully in Dynamic Allocation book

  35. Spreadsheet, posted monthly,Keeps you Out of Trouble

  36. For tactical investorsTwo Easy Monthly Refresh Strategies • Ivy Portfolio • 5 asset class ETFs provide diversification • Simple timing avoids big draw-downs • Few minutes each month is easy to take • Rotation Variation • Calculate weighted average return of • each of the 5 ETFs • Invest only in the top 1 or 2 ETFs

  37. 5 asset class ETFsprovide diversification VTI = Vanguard Total US Market, VEU = Vanguard All World ex US, IEF = Intermediate Treasury Bonds, VNQ = Vanguard Real Estate Trust Index, DBC = DeutscheBank Commodities Index

  38. Simple 10 Month Moving Average avoids big draw-downs

  39. Diversification into 5 Asset Classes Avoids Big Draw-downs But Timing Helps Keep The Gains 4750 2900 Hold the 5 ETFS CAGR 2.75% 9.5%pa

  40. IVY Basic Produces Good Results with Little Effort Refresh monthly (can rebalance annually to 20% in each ETF). Since 1973, beat S&P 500 and only one losing year (half-of-one percent) 11.3% for IVY vs 9.8% for buy-and-hold Max drawdown pared from 36% to 9.5%

  41. IVY Spreadsheets, posted monthly,Tells You Which ETFs to Hold IVY BASIC, as shown, keeps you out of trouble and beats buy-and-hold returns IVY TOP, best single ETF, produced 17.3% compound annual return over past five years

  42. Buying the Best IVYBoosts Return and Draw-down Faber calculated the 3, 6, 12 month gain for each ETF, monthly, and then calculated the Average Return • Boosts return to 17.6% vs 11.3% timed Ivy, but increases volatility and max drawdown • Buying top two drops return to 16.4%, but improves volatility and Max DrawDown (and comfort level) • Drawdown may be sharply reduced by going to cash whenever choices are below their 10 month MAs

  43. HEG Variation had High Gains and Lower Draw-down • Faber’s method boosts return to 17.6% vs 11.3% timed IVY, but increased one-time max drawdown to 34% • HEG variation, IVY TOP, doubled in value from January 2007 to end 2011 (17.4% annual gains with a max DD of 12.5% during Credit Crash in 2008), while buy&hold US stock ETF lost 20% thru September and 47.8% drawdown in 2008 • Linked spreadsheet requires no additional time to post ETF values and isolate top performing ETF

  44. Linked Spreadsheet Tells You Which Best ETF to Hold

  45. Recap of Key Points • Economy and stock market will be distressed and risky for several years • Major losses can be avoided by moving out of stocks whenever below MA12 • IVY BASIC stays in diversified ETFs only when each is bullish; can be 100% cash • IVY TOP skims the cream for more gain

  46. Any Questions ? CDs with the 3 spreadsheets and 3 tutorials are available for $30 here or by mail. Send check and return address to: Herb Geissler 1792 Taper Drive Upper St. Clair, PA 15241

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