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Life Stage Asset Allocation Reference Timeline

Monday, August 13th, 2018
  • Consensus Life Stage appropriate asset allocation
  • Historical Life Stage asset allocation returns
  • Forecasted Life Stage asset allocation returns

During this long Bull market, some portfolios have been more aggressive than might be expected over the long-term. Now, we are approaching or may be in the 9th inning or the 11th hour, and are exposed to some extraordinary event risks. It may be appropriate to review what the consensus Life Stage allocation is according to major money management institutions.

By Life Stage, we mean, not age, but how many years before you convert from adding assets to your portfolio to withdrawing assets – the Withdrawal Stage of Life.

While people can enter the Withdrawal Stage at any age, the standard reference model is at age 65 with an estimated 30 years to live (for the portfolio to last). Based on that assumption, institutions have designed what they believe are the most sensible and prudent allocations leading up to and following the commencement of the Withdrawal Stage.

This is the model simplified to 4 asset categories that is near the average of the recommendations of 12 leading institutions (excluding the cash level, which tends to be around 2%-4% in later stages):

You may wonder how those allocation levels have performed historically.

This table shows recommended allocations at 5-year intervals before and after entering the Withdrawal Stage, and how they performed over various cumulative periods through July 2018, and over individual calendar years through 2017, plus forecasts by Vanguard and BlackRock.

The data is for indexes, except for international Dollar hedged government bonds which is based on the Vanguard fund with that objective from 2014-2017, and the VALIC foreign government bonds fund (Dollar hedged opportunistically) from 2008-2013.


Even though the stock market may continue on longer than expected, we think those near or in the Withdrawal Stage should give careful consideration to these “rule of thumb” allocation levels; judge strategic aggressiveness relative to them; and if more aggressive, shift tactically toward them.

We’d like to be more safe than sorry over the next couple of years. As we have discussed before, we are using ultra-short-term, investment grade, floating rate US bonds in lieu of other bonds during this Fed rate hiking cycle; probably until early 2019 (maybe longer for the international bonds portion).

[directly related securities:  VTI, VXUS, BND, BNDX, FLOT, FLRN]

Compare 10-Year Projections Using Historical and Forecasted Returns

Thursday, May 17th, 2018

Institutions generally agree that total returns over the next 10 years will be lower than the long-term historical level:

  • 5.42% mean for US large-cap stocks vs 11.92% from January 1987 – April 2018
  • 3.19% mean for Aggregate US bonds vs 6.07% from January 1987 – April 2018.

Forecasted returns used here are averages of forecasts by BlackRock, State Street Global Advisors, JP Morgan, Bank of NewYork/Mellon, Callan Associates (pension consultants) and Research Affiliates.

Considering mean return history or forecasts is not adequate for setting portfolio expectations, because future results have a wide spread of possibilities around the mean due to the impact of volatility (often made worse by investors selling in panic at bottoms and re-entering late in Bulls).

This table shows simulated probabilities for a $1,000,000 bonds or stocks portfolio at the 10th, 25th, 50th, 75th and 90th percentile probabilities (covering 80% of likely outcomes, but still leaving 10% more extreme possibilities at either end of the spectrum undefined).

(click images to view full size)

This table shows four common allocations: 40/60 (conservative balance), 50/50 (allocation Vanguard uses in their target date funds for investors age 65 just beginning retirement), 60/40 (traditional balanced fund allocation) and 70/30 (aggressive balanced allocation).

If the institutions are correct in their assumptions, you should expect lower returns, and lower cumulative values for your portfolio over the next 10 years. The differences in cumulative portfolios per million Dollars of starting capital between simulations based on historical data and forecasted data are in the hundreds of thousands of Dollars.

For example, per $1,000,000 for a 50/50 portfolio allocation at the 50th percentile simulation probability, you should expect an inflation adjusted (real) portfolio value at the end of the next 10 years to be about $624,000 smaller (about 35% less) based on forecasted returns and volatility rather than based on historical returns and volatility. Maximum drawdowns are expected to be similar.

This table shows the actual total returns of US large-cap stocks, US aggregate bonds and nine allocation levels between them over a variety of periods all ending at 12/31/2017.

This table based on daily prices shows the rolling period price returns (not total returns) ending on all market days since the beginning of 1928. All the data is for actual results — no theory or hypotheticals here. There were many very good and very bad rolling period returns.

Bottom line – a simplified look at historical mean returns all ending on a recent day, and not understanding how volatility creates a wide spectrum of possible outcomes and occasional Maximum Drawdowns is not a safe way to look at what may occur in the future. Your allocation decision is critical – more critical than your choice of specific securities – in determining the likely range of return outcomes and the severity of likely Maximum Drawdowns.

Presuming you make reasonable choices of securities and have a diversified portfolio, those decisions will have far less impact on your overall outcomes than your Own / Loan / Reserve allocation decision.

And, whatever your Own / Loan / Reserve allocation decision, the predominate institutional opinion is that returns are likely to be lower over the next 10 years than the last 10, 20 or 30 years.

As you can see in the simulation tables, the lowest projected returns are also paired with the largest Maximum Drawdowns. Minimizing Maximum Drawdown exposure is almost synonymous with maximizing return. Selecting a static allocation is implicitly selecting a likely Maximum Drawdown exposure.

There are two ways to minimize Maximum Drawdowns, not involving derivative products or shorting:

  • Select a more conservative allocation
    • Requires lower overall return expectations
    • Rebalancing maintains risk level, but does not increase return
  • Shift between more aggressive and more conservative allocations as risk levels change
    • Requires a rational signal system for increasing and decreasing risk exposure
      • Trend following approaches are superior to trend prediction approaches
    • Shifting will experience false positives that drag on performance during Bulls
    • Generates tax costs in taxable accounts that reduce return benefit
    • Shifting as risk levels change can avoid the largest part of Maximum Drawdowns
    • Missing the largest part of Maximum Drawdowns can increase returns
    • Requires active oversight and time commitment.

Think about these historical and projected returns, and how you are most comfortable with managing risk levels.






Maximum Drawdown and Allocation Approaches

Sunday, May 6th, 2018
  • Simple Buy & Hold, Strategic Fixed Risk Level Allocation, Strategic Flexible Risk Level Allocation, Dynamic Tactical Risk Level Allocation.
  • 4.5 to 10.5 years time to recover to breakeven associated with 6 example Bears.
  • Our view of suitable allocation within Flexible Strategy.

There are many types of risk when investing. Here are 10 of them:

Credit risk
Interest rate risk
Inflation (real return) risk
Currency risk
Tax risk
Active management risk
Valuation and forecasting error risk
Volatility risk
Maximum drawdown risk
Portfolio longevity in retirement risk

Each of these deserves attention in portfolio construction. In this letter, we examine Maximum Drawdown Risk, which is probably the greatest risk portfolios face over the next couple of years.

Maximum Drawdowns occur infrequently but massively, and it typically takes years to breakeven with the pre-crash portfolio value. In the battle of philosophies between Buy & Hold and Tactical Trend Following, the long recovery time after a Maximum Drawdown is the trend follower’s main argument. We are in the Tactical Trend Following camp for long-term trend reversals. We prefer to take cover in falling markets, by tilting away from equities toward bonds or cash.

Since 1936, US large-cap Bear markets have taken mostly 4 to 6 years from the pre-crash peak to the bottom and back to a breakeven level. Total return recovery from the 2000 Bear took 6.15 years, and from the 2007 Bear it took 4.5 years. Of course, a portfolio diversified with debt assets, experienced a less extensive drawdown and a total return recovery over a shorter period.

This table shows how long it would take for total return breakeven after various levels of portfolio decline, assuming various post-drawdown rates of return:

(click images to enlarge)

Many of us, don’t have the luxury of waiting 4 to 6 years to breakeven with pre-crash levels, particularly if we are making regular withdrawals from our portfolios to support lifestyle.

A young person with only a small portion of future accumulations achieved, engaging in regular periodic investments, can not only ignore most Bear markets, but actually enjoy buying more shares each month at a lower price during a Bear – maybe even increasing the rate of investment during a Bear.

However, for someone, regardless of age, who has completed the process of adding new money to the portfolio, and is relying on the portfolio for sustenance, the Bear presents a threat not an opportunity. Of course, if that person has such a large asset base that withdrawals are less than the investment income (interest and dividends), for that person the Bear is more an annoyance than a threat and may present some attractive asset substitution opportunities.

But for most of you, and for me, the Bear is more of a threat than an opportunity if we lean into it and take it in the face full force.

Those are the reasons that generic advice to someone starting out is to put all assets in stocks, to maximize regular monthly savings, and damn the torpedoes in a Bear market. And, those are the reasons as we achieve more and more of our ultimate accumulation (Financial Capital), and the present value of our future earnings from work (Human Capital) declines, and the number of years we have before beginning to withdraw assets decreases (Time Horizon), that we need to diversify our risk (specifically the correlation of return of the assets we own), to mitigate the damage that a stocks Bear market can have on the ability of our portfolio to support our lifestyle now or in the future (to avoid the Risk of Ruin – outliving our assets – to protect Portfolio Longevity).

Unfortunately, diversification is a bit like insurance. It has a cost, at least it seems that way almost all the time, except in the instance that you need it. You lament the premium you pay for your auto, home or medical insurance, until you have a major claim event. Then you are so glad you had the insurance. Same thing with portfolio risk diversification (diversified asset return correlation), which is predominantly accomplished with high quality debt assets (particularly Treasuries). High quality debt assets do not generate returns over short periods as high as equities do, but they do not experience Maximum Drawdowns as severe as stocks – thus moderating overall portfolio Maximum Drawdown. This picture tells the story:

From the early 1990’s (close to 30 years) the S&P 500 generated a cumulative return over 950%, while the Aggregate Bond market generated a cumulative return of only 265% — and a balanced portfolio of 60% S&P 500 and 40% Aggregate bonds generated a cumulative total return of 630%.

Who would want 265% when they could have 950%? My grandchildren certainly should look to the 950%. But most of you can’t safely deal with Maximum Drawdowns that are likely over 30 years.

Here is how the aggregate bond index helped in the last two Bears (beginning in 2000 and 2007):

The 2000 Bear and the 2007 Bear were back-to-back in a sense, because the October 2007 pre-crash peak was only one year after the S&P 500 reached total return breakeven in October 2006 after the 2000 crash.

This chart shows how the S&P 500 (VFINX) and Intermediate-Term Treasuries (VFITX) worked together in 70/30, 50/50 and 30/70 allocations to moderate the severity of Maximum Drawdown in both Bears through their breakeven points:

Treasuries, unlike corporate bonds have zero credit risk (but like corporate bonds have interest rate risk). In times of panic, no form of debt beats a Treasury, although holding them between Bears is uninspiring. Gold may be helpful in a panic, but its performance is less certain. In times of significantly rising interest rates using ultra-short investment grade variable rate corporate debt, ultra-short Treasuries or money market funds may be best as portfolio risk moderators.

How Do Different Approaches Deal with Maximum Drawdown?

A very simplified view might be that there are 4 general approaches in portfolio risk management (excluding methods involving leverage, shorting, or hedging with futures or options) – let’s give them these names:

  • Simple Buy & Hold
  • Strategic Fixed Risk Level Allocation
  • Strategic Flexible Risk Level Allocation
  • Dynamic Tactical Risk Level Allocation.

Simple Buy & Hold means you own a fixed basket of securities, hopefully cognizant of the risk profile, with the intention of doing nothing thereafter for a long-time. You do not rebalance.

On the positive side, this minimizes taxes, transactions costs, and time commitment.

On the negative side, this basically ensures that the risk profile of the portfolio will move up and down by significant amounts over time – becoming much riskier as stocks outperform debt, and much less risky after stocks crash (and significant portfolio value has gone away).

This method is probably talked about favorably more than it is actually practiced – with many proponents during long Bull markets, but fewer who do not bail out during a crash.

For someone with many investing years ahead, with low assets relative to future additions to savings, making regular periodic investments, Buy & Hold is probably fine. However, for someone without many investing years ahead, with high assets relative to future additions to savings, and certainly those in the withdrawal stage of their investing lives; Buy & Hold of stocks is probably not a good approach, because of it’s exposure to Maximum Drawdown which could take several years to recover. For those in the withdrawal stage taking fixed amounts of money from a declining asset value accelerates the rate of asset depletion, which could be ruinous (your money dies before you do).

Strategic Fixed Risk Level Allocation means you own a selection of assets in a fixed ratio to each other (example: 50% stocks and 50% bonds) with an expected level of risk and return, with the intention to rebalance the mix from time-to-time, or when the ratio of assets held shifts materially, to restore the portfolio to the original allocation to maintain approximately constant risk and return expectations. The assets you choose have diverse return correlations (they don’t all go up or down at the same time in response to the same issues or to the same degree).

On the positive side, this keeps you in the same approximate risk/return exposure that you chose as suitable for you when the market value of your various assets fluctuates up and down. In effect, you sell high and buy low, which is a good thing, because rebalancing back to a fixed allocation level forces a trimming of outperforming assets and augmentation of underperforming assets (typically means trimming the more volatile assets and augmentation of the less volatile assets).

On the negative side, except in tax-free or tax-deferred accounts, trimming outperformers creates a tax cost. There are transaction costs to rebalancing, but those are very low these days and if the size of the taxable gain in the transaction is, let’s say, over $500, then the transaction is probably worth the transaction cost, but not necessarily the tax cost. There is a modest time commitment required to pay attention to the changes in allocation percentages. The lowest time commitment is to rebalance based on the calendar (such as quarterly or yearly). The highest time commitment is to rebalance based on allocations getting out of line with the plan, because that requires weekly or monthly monitoring. Overall, its not much of a time commitment either way, but more than Buy & Hold.

The allocation that is suitable for you changes as you approach retirement – Allocation Glidepath.

Strategic Flexible Risk Allocation, like the Fixed Risk approach to allocation, owns a selection of asset categories chosen for correlation diversification and held in a ratio to each other expected to produce the desired risk and return. And, like the Fixed Risk approach, you rebalance. However, instead of an unchanging allocation, you set Target allocation levels for each asset category, but also Minimum and Maximum allocation levels for each category, allowing you to modulate your risk and return expectations based on objective or subjective criteria as markets unfold or are expected to unfold (example: stocks Target 50%, Minimum 45%, Maximum 55%; and bonds Target 50%, Minimum 45%, Maximum 55%).

On the positive side, you are set up to use rebalancing to keep your expected risk and return at the level you determined was suitable for you, while also allowing you to modulate your allocation within pre-set limits based on changes in your expectations of return or volatility for some or all of your asset categories to maintain your risk exposure; or to modulate your risk exposure. Frankly, it satisfies the common human drive to act, while preventing misjudgment or emotional behavior from possibly creating a big portfolio performance problem.

On the negative side, it has the same negatives as the Fixed Risk approach and introduces the possibility that the reasoning behind deviation from the Targets is faulty. Use of the Minimum and Maximum allocations may produce a lower total return, or higher volatility, or larger Maximum Drawdown than the Fixed Approach. As they say, “it depends”. I find this approach is more appealing to more people than the Fixed Approach. Most people who are not Buy & Hold advocates prefer the idea of some continuing active choices about allocation.

Dynamic Tactical Risk Level Allocation is essentially the opposite of Buy & Hold. It means hold assets while they are doing well and don’t hold them when they are not doing well; and when risk assets are not doing well, hold the money that would otherwise go to them in safe liquid assets such as T-Bills, money market funds or ultra-short-term bond funds.

In practice this could be a full Long / Flat approach (example: 100% S&P 500 and 0% T-Bills, or 0% S&P 500 and 100% T-Bills). Alternatively, it could involve a stepwise movement between 100% and 0% between the asset categories.

The approach could be based on long-term trends (probably the better choice) or short-term trends (probably the less attractive choice) to day-trading (probably the worst choice, unless you are a very special person with very special skills with nerves of steel).

OPINION: If it is your intention to use a Tactical approach, it is probably best in most cases to use it only as a sleeve of your portfolio in combination with Strategic Fixed Risk Level Allocation, where the Strategic portion of your portfolio is an anchor to windward, just in case the Dynamic Tactical Allocations works out less well than planned.

I do believe the evidence shows that a Dynamic Tactical approach (probably more commonly called Trend Following) will underperform the Strategic approach during Bull markets (which could be many years), and if done well, outperform in Bear markets, and thereby outperform in the long-term.

It is not surprising that during the current Correction, we have received numerous calls about whether and when the Bull will end, and whether and how much we should be practicing intermediate-term Trend Following versus long-term Strategic Allocation.

First, if you set out with Strategic Allocation as the plan in the beginning of this Bull market, and now are prepared to cut and run, you never had a Strategic plan in the first place. What you had was a Tactical Allocation plan in hibernation.

A combination of a Strategic Flexible Allocation with a Tactical Allocation sleeve will suit more investors than not.

I believe getting out of the way of a train wreck — as long as an investor is properly prepared to get back on the rails when the wreck is cleared off the tracks. By this I do not mean day-trading or bouncing in and out of risk assets based on headlines, or forecasts, or exiting risk assets within the noise level of volatility (which means at least not within Corrections).

Going full Tactical may sound interesting now, but I doubt that most investors would have a taste for it as a continuing practice. For example, even the best long-term trend indicators generate some false positives. That means by following a tactical system, there will be times that it is wrong. You get “whipsawed”, meaning you exit, the indicator proves wrong and reverses, then you get back in. You may have capital gains taxes because of the exit, and you may get back in at a higher price than your exit. That upsets people, but that is part of tactical methods no matter how good they are.

Example Historical Drawdowns:

A tactical practitioner must accept those costs in exchange for the large payoffs that occur generally many years apart in Bears such as these:

  • Non-US Developed MSCI large-cap + mid-cap stocks
    Down 45% over 1.6 years from 3/1973 – 9/1974
    5.3 years to price breakeven in 7/1998
  • Non-US Developed MSCI large-cap + mid-cap stocks
    Down 58% over 1.3 years from 10/2007 – 2/2009
    10.5 years later (now) not yet reached price breakeven (still down 14%)
  • Emerging markets MSCI large-cap stocks
    down 58% over 3.9 years from 9/1994 – 8/1998
    10.7 years to price breakeven in 10/07
  • USA MSCI large-cap + mid-cap stocks
    Down 48% over 1.8 years from 11/1972 – 9/1974
    7.2 years to price breakeven
  • S&P 500
    down 51% over 2.5 years from 3/2000 intra-day high to 10/2002 intra-day low
    6.1 years to price breakeven in 10/2006
  • S&P 500 Down 57% over 1.4 years from 10/2007 intra-day high to 3/2009 intra-day low
    4.5 years to price breakeven in 4/2012.

I am not willing for my personal portfolio to endure Bears like that, then wait years to breakevenI do believe there is no utility (for other than the early stage investors making regular periodic investments, who may benefit by a stock market crash) to intentionally take the full force of the storm.

Stock market declines of 40% and 50% occur from time-to-time. Once a Bear has clearly arrived for a risk asset, exiting that asset after the Bear has quantitatively revealed itself, is reasonable in my opinion; then re-entering that asset is appropriate when the Bear is dead, and the Bull quantitatively reveals itself.

That is easier said than done, but it is doable to various levels of imperfection. However, an imperfect avoidance of a 50% decline, and an imperfect re-entry, can be better than the full ride down, with a 4 to 6 year or longer wait to breakeven with the pre-Bear portfolio value.

Recommendation (except for early stage investors)

Be allocated in a balanced way in a Strategic Fixed or Flexible Risk Allocation portfolio that is age, wealth and time horizon appropriate (see generic glide-path as a post-script to this letter) and have a Dynamic Tactical Risk Allocation sleeve in that portfolio – a larger sleeve if you think that way and a smaller sleeve if your appetite for a dynamic approach is more limited

Here is my thought about the Strategic Flexible Risk Allocation approach for now:

Keep in mind that major allocation shifts based on expectation of trend reversals is more likely to disappoint than major allocation shifts in response to demonstrated trend reversals.

Expected trend reversal approaches have a much lower batting average than trend reversal recognition approaches. Trends tend to persist, so following a trend whether up or down tends to work. Trend reversals become clear when they break out of the volatility noise area. Trend reversal forecasts tend to be flawed (it is much easier to predict what will happen than when it will happen). Consider fundamentals but rely on trend measurements.

The alternative to a permanent allocation between equities and debt instruments, is a flexible one that shifts toward debt when equity indexes turn down, and that shifts toward equity when equity indexes turn up.

That shifting can be quite moderate, such as moving between a 65% and 75% equity allocation around a target level of 70% in a Strategic Flexible Risk Allocation program, to a more aggressive approach such as 60% to 80% around a 70% target – and all the way to long/flat investors who go from full target equities to 100% Treasury Bills, then back again, based on equity trend conditions.

You need to look deep inside to decide where you belong in the spectrum from Buy & Hold, to Fixed to Flexible Strategic Allocation to partial to full Dynamic Tactical Trend following. For most, some combination of the approaches (effectively in sleeves of the portfolio will be most suitable).

Think about expected returns, return variability, and the likely magnitude of portfolio value change for the allocation you choose during a Correction and a Bear (Maximum Drawdown).

Current Intermediate-Term Trend View for Key Risk Assets:

This is our current intermediate-trend view of major equity indexes, using the QVM Trend Indicator.

A 19 minute video explains this indicator – its rationale, method and results in backtest to 1900.

While stocks are in Correction, the Bull trend has not reversed, but enough cautionary signs exist that a more conservative tilt within equities, or shifting of equity allocation toward the lower end of your allocation policy range may be prudent.

This is a general response to questions many are asking. Lot’s to talk about and think about. The answer to the questions depends on many individually specific facts.

If this responds to a burning question, this commentary may be a good beginning for a personalized discussion.

If you are comfortable with the way you are situated now, including the event of a Bear market sometime within the 2018 – 2020 time frame, that’s great. However, let’s go over your allocation preferences one more time just to make sure as much as we can that what you have is what you need, want and can handle both financially and psychologically when the poop hits the fan.


There are three ways to minimize maximum drawdown that we should evaluate (not involving hedging with short stocks, futures or options):

  • A higher allocation to assets that respond positively to Bears to prepare for a future Bear (Treasuries, high quality medium and short-term corporate debt, and perhaps gold — with ultra-short variable rate debt in times of rapidly rising interest rates)
  • Tactical reduction of risk assets once a Bear is revealed
  • A combination approach.

If you are going to be strategic, recheck your Target Allocations, rebalance if needed, and stay calm.

If you are going to be tactical, do it the better way, not the worse way.


post-script (generic glide path):

Bitcoin Bubble Warning Follow-Up

Friday, December 22nd, 2017

We wrote to you on the December 12th warning to stay away from Bitcoin.

We posted that comment on our blog and received some outraged comments from Bitcoin “fanboys”. That is the price of skepticism expressed about any bubble.

We said we can’t be involved in Bitcoin as fiduciaries, and have been recommending to clients that they not become involved on their own.

As Bitcoin went from less than $500 to more than $18,700, our concern was increased, while some people felt we should not have missed the boat.

We are in good company with those who warn about involving in Bitcoin, including the CEO of  JP Morgan; the CEO of the largest hedge fund in the world; the CEO of the largest pure short-only hedge fund, the founder and former CEO of Vanguard; the former CIO of Harvard Endowment, the CEO of the largest money manager in the world, a Nobel Laureate in Economics, and Warren Buffet.

Bitcoin may bounce back to new highs, but it is simply not investable. It may be better than roulette as a fun thing to play, but is not an investable asset.

Maybe just dumb luck, but we did call at least an intermediate top on December 12th. We continue to believe it is not a good idea to own Bitcoin, and advise clients not to see the current decline as a buying opportunity.

Prices that go up vertically (an unsustainable pace) almost always turnaround and go down vertically until the speculative element is washed out.  That appears to be happening now with Bitcoin.

Futures may amplify that process, because now there is a way to be short, whereas before one could only be long.

Our warning post “Clients Ask, Should I Own Bitcoin?” can be found here.

Here is the chart of Bitcoin price on December 12th.

(click images to enlarge)

Here is the chart of Bitcoin today, December 22nd

2016 Year-End Review of ETF’s With Forward Standouts

Monday, January 2nd, 2017

This is a review of all ETF’s at year-end 2016 with a focus on liquidity, intermediate trend condition, and fundamental valuation, excluding commodity, currency and inverse ETF’s.

  • Out of 1605 ETFs, 132 have 2+ years of operations, are liquid, have fundamental data, and are in intermediate-term uptrends
  • Among equity ETFs, 31 have price-to-cash flow rations of 10 or less
  • Among country funds, Russia, Canada and Brazil stand out favorably
  • Among US dividend ETFs, 4 dividend ETFs stand out favorably
  • Among short-term investment grade US bond ETFs, 4 survive the filter
  • Among US junk bond ETFs, 4 survive the filter

Our database has 1605 ETF’s.

Of those, our QVM 4-factor trend indicator identifies 1271 ETF’s with sufficient history (28 months) to be measured. Given the large number of choices we have today with ETF’s, it seems reasonable to require a couple of years of operating history (see explanation of the QVVM 4-factor trend indicator here).

We’d like to look at equity ETF’s, bond ETF’s or hybrid equity bond ETF’s; leaving commodity, currency and inverse ETF’s aside for this review. ETF’s which lack a price-to-book ratio or bond duration virtually eliminates commodity, currency and inverse ETF’s.

Of the 1271 ETF’s, there are 879 for which MorningStar has either a price-to-book ratio, or a bond duration. For ETF’s lacking either of those metrics, we would prefer not to review them further. If MorningStar can’t identify one of those two attributes, there would not be enough information for us to draw a reasonable fundamental conclusion, upon further research.

Of the 879, there are 753 with equity positions, because they have a price-to-book ratio. There are 145 with bond positions, because they have a bond duration attribute. There are 19 ETF’s that have both a price-to-book ratio and a bond duration suggesting they are hybrid funds.

That leaves us with a more than sufficient range of investments to consider.

After the question of some fundamental data being available, comes the question of trading liquidity. It’s very difficult to take position of “size” if the dollar volume of trading activity is low.

For large positions, such as $1 million, high trading volume is appropriate, and the list of suitable ETF’s small. For modest positions, such as $25,000, the list of suitable ETF’s is much larger.

For practical purposes, we think that an ETF should exhibit a per minute Dollar trading volume of at least $15,000 to be useful for modest positions. Therefore, we eliminated all ETF’s with 3-month average per minute trading volume less than $15,000.

Sometimes you will find an interesting sounding ETF, only to discover that it hardly trades at all. At the extreme in our filter today is ONG (Barclays pure beta energy ETN) which averaged $1 (that is one Dollar) trading volume per minute over the last three months. There are 175 ETF’s within the 753 that averaged less than $1,000 per minute trading volume in the last three months. The general proposition is that you probably don’t want to be investing in something that trades only several thousand Dollars per minute.

Using the $15,000 threshold, there are 324 ETF’s of the 879 that have price-to-book ratio or a bond duration.

We then ask which of these 324 ETF’s is in an intermediate-term uptrend. Using our QVM monthly 4-factor trend indicator, we find 205 are in uptrends. However, when we eliminate those that are not hitting on all our trend indicator dimensions only 132 remain.

100 of the ETF’s with an equity component have a trailing 12 month yield of 1% or more.

Of those 100, there are 31 with a price-to-cash flow ratio of 10 or less. Here they are ranked by price to cash flow.

To the extent that you seek a combination of positive intermediate price trend and attractive price-to-cash flow valuation, and at least some dividend income, these equity ETFs provide hunting ground.

(click images to enlarge)



Only eight bond funds survived the trend criterion filter. Here they are — you can see that they are floating-rate, short-term, or high-yield:



None of the hybrid equity/bond funds made it through the trend criterion filter.

If you are looking for country funds to diversify from a heavy US concentration, Russia (RSX), Canada (EWC) and Brazil (EWZ) are among the ETFs that survived the filter — each heavily depend on natural resource exports (not the least of which is oil).  Here is how they look on a monthly basis versus the S&P 500 (SPY) — they outperformed the S&P 500 over the past year.


These three countries also have attractive CAPE ratios (Shiller 10-year inflation adjusted P/E ratios relative to their own long-term history) — meaning they seem to have good long-term mean reversion potential.

Here is a spider web chart showing the position of the CAPE ratio of 28 country indexes to their own long-term history.   Values in the red areas have negative mean reversion potential.  Those in the green areas have positive mean reversion potential.  Values between the dashed black lines represent the middle quintile of positions (the likely fair value area).  You will also notice that the US is very expensive relative to other countries by this measure.



Looking toward above average dividend yield, these four ETFs made it through the filter – they outperformed the S&P 500 over the past year (SPHD, SDOG, DVY, FDL):


The sector weightings for dividend funds tend to be quite different than the broad market, as defined by the S&P 500, but the weightings vary greatly from dividend index to the other.  This table shows the sector weightings and weighting ratios to the S&P 500 for the 4 dividend ETF’ that made it through our filter:



Here are comparative performance charts for the short-term investment grade bond ETFs, and for the high yield bond ETFs – first the investment grade bond funds, then the junk bond funds

The short-term investments grade bonds were steady performers (except for BSJI which zoomed for reasons we have not explored) and turned in a respectable performance for low duration versus the Aggregate Bond index (FLOT, GSY, NEAR, BSJI):


The junk bonds outperformed the Aggregate Bond index and were pretty steady in their performance (HYS, SHYG, SJNK, HYG).



Overall the 39 funds in the tables above may provide some interesting ETF selections for the intermediate-term, or longer.


ETF’s highlighted in this post:  RSX, EWC, EWZ, SPHD, SDOG, DVY, FDL, FLOT, GSY, BSJI, HYS, SHYG, SJUNK, HYG

Stocks With Strong Potential Earnings Boost From Trump Tax Plan

Friday, December 9th, 2016
  • Companies that have low effective tax rates due to current “tax loop holes” may find their effective tax rate rise (and profits decline), even if nominal corporate tax rates decline, because “tax loop holes” may be closed to pay for the tax rate change
  • Companies that have effective tax rates near the nominal rates, would likely see their effective tax rate fall (and profits rise), if nominal corporate tax rates decline
  • Searching for companies that may benefit from a tax rate decline, and are otherwise potentially attractive is a useful exercise
  • We found 22 stocks among all listed with favorable yield and valuation attributes that may provide interesting Trump tax plan return potential
  • We found 100 stocks in the S&P 500 with effective tax rates from 30% to 35% that would like benefit significantly from a corporate tax reduction
  • 34 of those 100 S&P 500 stocks are in current up trends.

Our search for stocks with favorable yield and valuation was of all listed US stocks, for those with these characteristics:

  • 7-year cumulative effective tax rate greater than 30% and less than 36%
  • 12-mo trailing dividend yield greater than 2%
  • PEG ratio less than 2
  • 12-mo trailing shareholder yield (dividend yield + buyback yield) is no less than dividend yield (no share issuance).

There are companies with tax rates  much higher than the nominal rates.  Those cases are too complicated for this simple search, and that is why we limited the effective tax range to less than 36%.   The 30% minimum is to find those with a substantial potential benefit from a corporate tax rate reduction.

These are the 22 companies that came through the filter criteria:

DE Deere & Company
HMC Honda Motor Co Ltd (ADR)
ETH Ethan Allen Interiors Inc.
PII Polaris Industries Inc.
HOG Harley-Davidson Inc
AFL AFLAC Incorporated
LM Legg Mason Inc
PDCO Patterson Companies, Inc.
IPG Interpublic Group of Companies
TEO Telecom Argentina SA (ADR)
AMX America Movil SAB de CV (ADR)
HRB H & R Block Inc
GATX GATX Corporation
IX ORIX Corporation (ADR)
AEO American Eagle Outfitters
M Macy’s Inc
PAG Penske Automotive Group, Inc.
BBY Best Buy Co Inc
MINI Mobile Mini Inc
NSC Norfolk Southern Corp.
CPPL Columbia Pipeline Partners LP

These are the metrics for each company, along with the Standard and Poor’s Capital IQ ratings for 12-months forward (“stars”) and fair value:

(click image to enlarge)





This table presents the trend condition of those 22 stocks, using the QVM 4 Factor monthly trend indicator.

A rating of 100 is for the leading end of the major trend line moving up.  A rating of zero is for the leading end of the major trend moving down. A rating of 50 is for the leading end of the major trend line in transition between trend directions.  At the bottom of this article, there is an explanation of how the QVM 4 Factor indicator works.



The median tax rate among S&P 500 stocks that have positive 7-year cumulative tax rates is 30%, and the average is 24%.

Our search among S&P 500 stocks simply eliminated those with 7-year cumulative effective tax rates below 30% and greater than 35%.  We found 100 such stocks shown in this table:


Thirty-four of those 100 stocks are currently in up trends as measured by the QVM 4 Factor monthly trend indicator, as follows



Companies currently with effective tax rates below the 20% rate that is often mentioned in Washington for the next Congress, may find their effective tax rate rising and profits declining, if the “tax loopholes” they have relied upon are repealed to pay for a new lower corporate tax rate.  Companies with rather full effective tax rates (such as those in between 30% and 35%) in our filter, would likely find their effective tax rate dropping and profits increasing under a new lower corporate tax rate.

Currently low effective tax rate companies with high valuation multiples would possibly see the double effect of declining profits and declining valuation multiples.

Currently high effective tax rate companies with high valuation multiples may see support for their multiples as their profits increase as their taxes decline.

If a company with a current 35% tax rate (with a 65% after-tax income rate) goes to a 20% tax rate (with an 80% after-tax income rate), that would be a 23% increase in profits.  That profits increase could offset a similar decline in valuation multiple, that might be triggered by a general multiple contraction in the broad market.

All-in-all that suggests to us that overweighting stocks of companies that would most strongly benefit by a corporate tax rate reduction, and a underweighting stocks whos effective tax rates might increase as a result changes in the tax law is a reasonable idea.

Within these two lists, there should be good hunting ground for strong Trump tax plan beneficiaries, that may be suitable for you.

Post Script: How the QVM 4 Factor Trend Indicator:

A quick summary is in the graphics below.  A more expanded discussion is at this link.