Thursday , May 25 2017
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Michael Lebowitz

Michael Lebowitz

Co-Founder 720 Global. Strategic Expertise: Macro-Econ, Asset Alloc, Valuation, Risk Mgt.

Articles by Michael Lebowitz

Clouds on the Horizon : Range Chart Update

1 day ago

On March 10, 2017, 720Global introduced the Trump Range Chart. Developed to see several different markets on one page, this unique chart provides a composite perspective of many instruments at once.  Given the large post-election market gyrations across many asset classes, our concern was, and still remains, that those moves are transitory, reflective of extreme and possibly unwarranted optimism regarding the ability of the new administration to pass bold economic initiatives. For a broad discussion of the harsh economic landscape Trump faces, our cause for doubt, please read The Lowest Common Denominator: Debt.
Unbridled Enthusiasm
On May 17, 2017, the S&P 500 fell 1.82% on rumors that President Trump had tried to persuade former FBI Director James Comey to influence the FBI

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The Virtuous Cycle – Video

8 days ago

At the beginning of this year, I wrote an article entitled the “Death Of The Virtuous Cycle,” wherein discussed the reasons why, despite many promises, there has been no sustainable economic recovery. The United States, and the developed world for that matter, have made repetitive attempts over the last 16 years to return economic growth to the pace of years long past. These nations are stuck in a cycle in which hopes for economic “escape velocity” get crushed by economic recession and asset price collapse. Following each failure is an increasingly anemic pattern of economic growth accompanied by rising mountains of debt, which ultimately lead to another failure. The perpetual excuse from the central bankers is that not enough was done to foster “lift-off”. In their view, lower interest

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The Deck is Stacked : Putting Risk and Reward into Perspective

15 days ago

“The individual investor should act consistently as an investor and not as a speculator.“ – Ben Graham.
We are frequently told that valuation analysis is irrelevant because fundamentals do not signal turning points in markets. Scoffers of valuation analysis are correct, as there is no fundamental statistic or for that matter, technical or sentiment indicator that can provide certainty as to when a market trend will change direction.
Despite being humbled by recent market gains and the difficulties associated with timing the market to call a precise top, we remain resolute about the merits of a conservative investment posture at this time. At some point, current equity market valuations will succumb to financial gravity and the upward trend of the last eight years will reverse. When that

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Volatility: A Misleading Measure of Risk

21 days ago

“History has not dealt kindly with the aftermath of protracted periods of low risk premiums” – Alan Greenspan
The ability to see beyond the observable and the probable is the most important and under-appreciated characteristic of successful investors. For example, visualize a single domino standing upright. With this limited perspective, one can establish what the domino is doing in the present and form expectations around what might happen if the domino falls. However, by expanding one’s viewpoint, you may discover the domino is just one in a long line of dominoes standing equidistant from each other. The potential chain of events caused by the first domino falling now offers a vastly different outcome. Many investors myopically focus on the trends of the day and fail to notice the line of dominoes, or what is technically known as multiple-order effects.
Since the Great Financial Crisis of 2008, maintaining animal spirits has been a primary goal of the world’s central banks. The crisis proved a brutal reminder that, in this new era of significant leverage, a loss of investor confidence can result in violent reactions that ripple throughout the financial markets and the global economy. By employing extraordinary policies and optimistic narratives, the central banks have persuaded the public to believe that all is well.

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Playing the Game to Win

29 days ago

What Rick Barry and the Atlanta Falcons can teach us about risk management
“Something about the crowd transforms the way you think” – Malcolm Gladwell – Revisionist History
With 4:45 remaining in Super Bowl LI, Matt Ryan, the Atlanta Falcons quarterback, threw a pass to Julio Jones who made an amazing catch. The play did not stand out because of the way the ball was thrown or the  agility that  Jones employed to make the catch, but due to the fact that the catch easily put the Falcons in field goal range very late in the game. That reception should have been the play of the game, but it was not. Instead, Tom Brady walked off the field with the MVP trophy and the Patriots celebrated yet another Super Bowl victory.
NBA basketball hall of famer Rick Barry shot close to 90% from the free throw line. What made him memorable was not just his free throw percentage or his hard fought play, but the way he shot the ball underhanded, “granny-style”, when taking free throws. Every basketball player, coach and fan clearly understands that the goal of a basketball game is to score the most points and win. Rick Barry, however, was one of the very few that understood it does not matter how you win but most importantly if you win.

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Passive Negligence II

April 19, 2017

Almost a year ago, we stumbled upon a topic that is currently generating much discussion in the financial media. In Mm Mm Good, published August 2016, we highlighted the Campbell Soup Company (CPB) and the utility sector to show how yield-starved investors were chasing dividend stocks to dangerously high valuations. The following quote from the article highlights the risk inherent in CPB’s valuation:
“This concept of a no-growth company with soaring valuations is alarming. The price of CPB would have to drop 30% to return to its post-recession average P/E. If that were to occur, it would take 16 years’ worth of dividend payments to recoup the price loss, assuming dividends remain stable”.
When writing that article, we assumed that a hunger for yield was the primary driver of excessive valuations in those relatively safer sectors. We did acknowledge, however, that there were other factors. Unbeknownst to us at the time, the shift from active to passive investing was one such factor playing a growing role in creating valuation divergences.
We followed up the article in November of 2016 with Passive Negligence. This sequel, of sorts, discussed valuation divergences and economic inefficiencies occurring as a result of the growing popularity in passive investing and the related decline in value/active management strategies.

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The Forgotten Path to Prosperity

April 5, 2017

This article, and those that will follow in this series, describes in simple but compelling form several objective truths about the dynamics of scarcity and prosperity and the role they play in human decision-making within the context of an economy. The simple elegance of the economic system we describe seems to have been long forgotten, buried under an accumulation of overly sophisticated explanations, theories and complex models.
The Forgotten Path to Prosperity
“The record of history is absolutely crystal clear. There is no alternative way so far discovered of improving the lot of the ordinary people that can hold a candle to the productive activities that are unleashed by a free enterprise system.”  – Milton Friedman
Whether one thinks of a market as barter, a grocery store, internet commerce or the New York Stock Exchange, the concepts behind each of them are identical.  In all of these marketplaces, people have resources which they are willing to give up in order to gain something else they deem as more valuable.
If I own a coop full of chickens that produces two dozen eggs every week, then I am not likely to pay for eggs in the grocery store.  More likely, a grocer may be willing to buy my eggs for re-sale to his customers.  If my portfolio is over-weighted with technology stocks, then I am less likely to seek new technology stocks to own.

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Echo Chamber

March 22, 2017

Since the U.S. economic recovery from the 2008 financial crisis, institutional economists began each subsequent year outlining their well-paid view of how things will transpire over the course of the coming 12-months. Like a broken record, they have continually over-estimated expectations for growth, inflation, consumer spending and capital expenditures. Their optimistic biases were based on the eventual success of the Federal Reserve’s (Fed) plan to restart the economy by encouraging the assumption of more debt by consumers and corporations alike.
But in 2017, something important changed. For the first time since the financial crisis, there will be a new administration in power directing public policy, and the new regime could not be more different from the one that just departed. This is important because of the ubiquitous influence of politics.
The anxiety and uncertainties of those first few years following the worst recession since the Great Depression gradually gave way to an uncomfortable stability.  The anxieties of losing jobs and homes subsided but yielded to the frustration of always remaining a step or two behind prosperity.  While job prospects slowly improved, wages did not. Business did not boom as is normally the case within a few quarters of a recovery, and the cost of education and health care stole what little ground most Americans thought they were making.

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Villanova vs. Kansas : Outcome vs. Process Strategies

March 15, 2017

Villanova versus Kansas
 Outcome versus Process Strategies
It is that time of year when the markets play second fiddle to debates about which twelve seed could be this year’s Cinderella in the NCAA basketball tournament. For college basketball fans, this particular time of year has been dubbed March Madness. The widespread popularity of the NCAA tournament is not just about the games, the schools, and the players, but just as importantly, it is about the brackets. Brackets refer to the office pools based upon correctly predicting the 67 tournament games. Having the most points in a pool garners office bragging rights and, in many cases, your colleague’s cash.
Interestingly the art, science, and guessing involved in filling out a tournament bracket provides insight into how investors select assets and structure portfolios. Before explaining, answer the following question:
When filling out a tournament bracket do you:
A) Start by picking the expected national champion and then go back and fill out the individual games and rounds to meet that expectation?
B) Analyze each opening round matchup, picking winners and advance round by round until you reach the championship game?
If you chose answer A, you fill out your pool based on a fixed notion for which team is the best in the country.

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The Trump Range Chart

March 14, 2017

On the night of the U.S. Presidential election, many investment assets went from a state of sheer panic at the prospect of Donald Trump winning the election, to manic euphoria as the glorious narrative of Reagan-esque economic revival was born with Trump’s victory. Euphoric markets are not generally built on durable substance, and they eventually reconcile with reality as investors come to their senses.
In today’s case, the enthusiasm of pro-growth fiscal initiatives are destined to collide with decades worth of ill-advised economic policies and political obstacles. As such, we created the Trump Range Chart to track the performance of various key indexes and tradeable instruments since Election Day. This tool serves as a gauge of market sentiment and the market’s faith in Donald Trump’s ability to effect real economic change.
We suspect that when economic proposals meet political and economic reality, some markets will begin to diverge from their post-election trends. As is typically the case, it is likely that this will occur in some markets before others. Markets showing early signs of divergence may provide tradable signals. We plan on releasing this data regularly to help our clients track these changes. Based on feedback, we may produce new range charts to include different markets, various time frames, and economic data.

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Second To None – A Look At Valuations Vs. Fundamentals

March 1, 2017

“Today’s equity market valuations have only been eclipsed by those of 1929, and 1999.”
Given the continuing equity market rally and multiple expansion, the quote above from prior articles, had to be modified slightly but meaningfully. As of today, the S&P 500 Cyclically Adjusted Price to Earnings ratio (CAPE) is on par with 1929. It has only been surpassed in the late 1990’s tech boom.
A simple comparison of P/E or other valuation metrics from one period to another is not necessarily reasonable as discussed in Great Expectations. That approach is too one-dimensional.   This article elaborates on that concept and is used to compare current valuations and those of 1999 to their respective fundamental factors.  The approach highlights that, even though current valuation measures are not as extreme as in 1999, today’s economic underpinnings are not as robust as they were then. Such perspective allows for a unique quantification, a comparison of valuations and economic activity, to show that today’s P/E ratio might be more overvalued than those observed in 1999.
Secular GDP Trends
Equity valuations are a mathematical reflection of a claim on the future cash flows of a corporation. When one evaluates a stock, earnings potential is compared to the price at which the stock is offered. In most cases, investors are willing to pay a multiple of a company’s future earnings stream.

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The Sure Thing

February 22, 2017

The New England Patriots pulled off a stunning come-from-behind victory in Super Bowl LI, and one that was truly unprecedented in American football. Throughout modern NFL history, playoff teams that had a 19 point lead or greater in the fourth quarter, as the Atlanta Falcons did, were 93-0. A Patriots comeback was deemed virtually impossible by the odds-makers. There is an important lesson here worth considering. The Patriots improbable victory follows a variety of other unlikely, but surprising high-profile events in the past several months, some of which will have far greater impact on our lives than we may realize.
The British referendum to leave the Euro

Last summer, the odds of Brexit gaining a majority vote briefly dipped below 5% in the days preceding the vote. In a premonition to the upcoming U.S. election, The Sun newspaper in London mistakenly announced that the head of the Brexit campaign, Nigel Lafarge, conceded to the “Remain” vote.
Leicester City’s improbable Premier League Championship
Leicester City entered the 2016 Premier League season as a 5,000 to 1 underdog to win the league championship. Fortunately for Leicester City, the existence of long odds bear no direct influence on outcomes as they went on to win the Premier League Championship.

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Fed Up – A Look Behind the Curtain

February 15, 2017

Danielle DiMartino Booth, a former Dallas Federal Reserve official, released a new book this week entitled Fed Up. The book, a first-person account of the inner-workings of the Federal Reserve (Fed), provides readers with unique insight into the operations, leadership, and mentality of what is unquestionably the world’s most powerful financial force.  What it reveals about the Fed is neither flattering nor confidence-inspiring. By pulling back the curtain to reveal the Fed’s modern-day machinations, DiMartino Booth provides an assessment of the highest levels of economic thinking and how it is afflicting our economy.
Throughout the book, it is clear her purpose is equal parts entertainment and education with a dash of sermon to underline the gravity of the situation.  Fed Up is compelling, well-written and its objectives are clear; expose the hubris at the Fed which results in poor decision-making and generate much-needed debate to bring about change in how the Fed functions. As you read this review, and hopefully the book as well, we remind you the Fed is sworn to serve the American public and should be held accountable to this obligation.
We thank Danielle for giving us the privilege of reading an advance copy of her book so that we can provide this timely review to you.

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Fed Up – A Look Behind the Curtain

February 15, 2017

Danielle DiMartino Booth, a former Dallas Federal Reserve official, released a new book this week entitled Fed Up. The book, a first-person account of the inner-workings of the Federal Reserve (Fed), provides readers with unique insight into the operations, leadership, and mentality of what is unquestionably the world’s most powerful financial force.  What it reveals about the Fed is neither flattering nor confidence-inspiring. By pulling back the curtain to reveal the Fed’s modern-day machinations, DiMartino Booth provides an assessment of the highest levels of economic thinking and how it is afflicting our economy.
Throughout the book, it is clear her purpose is equal parts entertainment and education with a dash of sermon to underline the gravity of the situation.  Fed Up is compelling, well-written and its objectives are clear; expose the hubris at the Fed which results in poor decision-making and generate much-needed debate to bring about change in how the Fed functions. As you read this review, and hopefully the book as well, we remind you the Fed is sworn to serve the American public and should be held accountable to this obligation.
We thank Danielle for giving us the privilege of reading an advance copy of her book so that we can provide this timely review to you.

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The Lowest Common Denominator

February 8, 2017

The Lowest Common Denominator: Debt
At a recent investment conference, hedge fund billionaire Stanley Druckenmiller predicted that interest rates would continue rising. Specifically, he suggested that, consistent with the prospects for economic growth, the 10-year U.S. Treasury yield could reach 6.00% over the next couple of years. Druckenmiller’s track record lends credence to his economic perspectives.  While we would very much like to share his optimism, we find it difficult given the record levels of public and private debt.
Druckenmiller’s comments appear to be based largely on enthusiasm for the new administration’s proposals for increased infrastructure and military spending along with tax cuts and deregulation. This is consistent with the outlook of most investors today.  Although proposals of this nature have stimulated economic growth in the past, today’s economic environment is dramatically different from prior periods. Investors and the market as a whole are failing to consider the importance of the confluence of the highest debt levels (outright and as a % of GDP) and the lowest interest rates (real and nominal) in the nation’s history.  Because of the magnitude and extreme nature of these two factors, the economic sensitivity to interest rates is greater and more asymmetric now than it has ever been.

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Great Expectations

February 1, 2017

“Never ever lose sight of long term relationships” – Paul Krake – View from the Peak
Throughout 2016 we highlighted that various measures of equity valuations are at historically high levels and present an unfavorable risk/reward profile.
Comparing valuation metrics to their respective longer term averages is a good way to gauge richness or cheapness, but it does not necessarily paint a complete valuation picture. For instance, Amazon’s stock trades at an astronomical price to earnings ratio (P/E) of 172 or about seven times that of the S&P 500. Despite the seemingly high ratio, one cannot single-handedly declare that Amazon is expensive. If Amazon’s sales continue to grow at a torrid pace, a ratio of 172 may not be out of line.
The objective of this article is to form a complete valuation picture of the S&P 500. Although the work behind valuations and rich/cheap analysis is never complete, this exercise will help you understand the earnings growth priced into current valuation levels. It also provides a framework to evaluate the upside and downside of various combinations of earnings projections and price multiples. From there, you can make your own judgment about whether current valuations make sense.
The graph below plots the Cyclically Adjusted Price to Earnings ratio (CAPE) since 1883, its average and plus/minus one standard deviation levels from the average.

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Extrapolate at Your Own Risk

January 18, 2017

As we dig through S&P 500 price forecasts for the year 2017, we discover that a majority of “Wall Street’s top strategists”, are calling for a year-end S&P 500 price in the 2,300-2,450 range. None of the forecasters expect a down year, but that’s an article for another day. Not surprisingly, a year-end index price in the aforementioned forecasted range would put growth in line with that experienced since 2012. While the strategists will claim they have extensive multi-factor models that help them arrive at their estimate, it is quite likely many of them rely on extrapolating prior price performance into the future based on the dangerous assumption that the future will be like the past.
Such a forecasting strategy may seem logical, and has worked well for the last four years, but it fails to acknowledge that earnings growth, which have repeatedly been grossly over-estimated, have been relatively flat over the same period. Since 2012, the S&P 500 has risen almost 70% while earnings are up a mere 2%. The graph below plots the S&P 500, earnings per share and their respective trend lines.

Data Courtesy: Bloomberg and Standard & Poor’s
When price increases are not accompanied by earnings increases, it indicates that multiple expansion has occurred. In other words, the ratio of price-to-earnings (P/E) is expanding almost entirely because of its numerator- price increases.

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Hoover’s Folly

January 11, 2017

In 1930, Herbert Hoover signed the Smoot-Hawley Tariff Act into law. As the world entered the early phases of the Great Depression, the measure was intended to protect American jobs and farmers. Ignoring warnings from global trade partners, the new law placed tariffs on goods imported into the U.S. which resulted in retaliatory tariffs on U.S. goods exported to other countries. By 1934, U.S. imports and exports were reduced by more than 50% and many Great Depression scholars have blamed the tariffs for playing a substantial role in amplifying the scope and duration of the Great Depression. The United States paid a steep price for trying to protect its workforce through short-sighted political expedience.
On January 3, 2017 Ford Motor Company backed away from plans to build a $1.6 billion assembly plant in Mexico and instead opted to add 700 jobs at a Michigan plant. This abrupt reversal followed sharp criticism from Donald Trump. Ford joins Carrier in reneging on plans to move production to Mexico and will possibly be followed by other large corporations rumored to be reconsidering outsourcing. Although retaining manufacturing and jobs in the U.S. is a favorable development, it seems unlikely that these companies are changing their plans over concerns for American workers or due to stern remarks from President-elect Trump.

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December 21, 2016

Janet Yellen
At the December 14, 2016 FOMC press conference, Federal Reserve Chairwoman Janet Yellen responded to a reporter’s question about equity valuations and the possibility that equities are in a bubble by stating the following: “I believe it’s fair to say that they (valuations) remain within normal ranges”. She further justified her statement, by comparing equity valuations to historically low interest rates.
On May 5, 2015, Janet Yellen stated the following: “I would highlight that equity-market valuations at this point generally are quite high,” Ms. Yellen said. “Not so high when you compare returns on equity to returns on safe assets like bonds, which are also very low, but there are potential dangers there.”
In both instances, she hedged her comments on equity valuations by comparing them with the interest rate environment. In May of 2015, Yellen said equity-market valuations “are quite high” and today she claims they are “within normal ranges”? The data shown in the table below clearly argues otherwise.

Interestingly, not only are equity valuations currently higher than in May of 2015 but so too are interest rates.

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Banks in Drag : The Russell 2000 Exposed

December 14, 2016

In “Passive Negligence”, we highlighted how investors, on the margin, have been shifting from an active investment style to a more passive approach by favoring index and sector ETFs and mutual funds over individual holdings. We raised a concern that, in this mad dash towards the latest fad, many investors are falling prey to complacency by failing to properly analyze the underlying companies in which they are ultimately investing.
Since Donald Trump won the election, the Russell 2000 (R2K) has been the darling of the market, increasing approximately 15%. There are many narratives that support investing in small cap stocks, as represented by the R2K, and some even have credence. That said, investors should look beyond these narratives and analyze the index’s current valuation and its underlying holdings to better judge if the R2K is a good investment.
This article was written in conjunction with J. Brett Freeze, CFA from Global Technical Analysis.
The Russell 2000
Passive investors looking to diversify their equity holdings frequently hold a number of ETFs and mutual funds that blindly follow an index or sector. Many investment professionals employ a similar approach called “closet indexing”. In other words, they own a portfolio of different equity indices and some specific sectors as a decoy to their clients.

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Mind Games

December 7, 2016

In “Bubbles and Elevators”, we discussed how human beings do seemingly ridiculous things to fulfill their instinctive need to mimic what others are doing, right or wrong, logical or illogical. The greatest investors, those that make money when markets are rising and avoid the pain when bear markets occur, are a limited bunch. It is not luck that makes them special, nor is it necessarily their ability to find fundamental and/or technical set ups that provide great opportunities. Ultimately, these investors possess the ability to understand and overcome the inherent behavioral traits that handicap most investors. To use a trite phrase- the great ones are truly able to think outside of the box.
Behavioral Traits
Confirmation bias, group think, and cognitive dissonance dominate our logic and the way we interpret the world around us. It is our hope that, through a better understanding of each of these behaviors, we may encourage you to consider views that are outside of the box.
Confirmation Bias – This bias, a form of cognitive bias, is a condition of the human mind that occurs when we seek or interpret information in a manner that tends to confirm our existing beliefs or hypothesis. Those exhibiting this bias pay little attention to opinions and data that may offer alternative possibilities.

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A Narrative for Every Season

November 30, 2016

“All is for the best in the best of all possible worlds” – Voltaire (Candide/The Optimist)
Consider the media headlines and stories published before and after the presidential election.
Before the election:
“The conventional wisdom is that, right off the bat, the stock market would fall precipitously. Simon Johnson, the Massachusetts Institute of Technology economist, posited that Mr. Trump’s presidency would “likely cause the stock market to crash and plunge the world into recession.” He predicted that Mr. Trump’s “anti-trade policies would cause a sharp slowdown, much like the British are experiencing” after their vote to exit the European Union.”  – The New York Times – “What Happens to the Markets if Donald Trump Wins?” by Andrew Ross Sorkin
“The stock market doesn’t like the idea of a Trump Presidency”- PBS Newshour
“Economists: A Trump win would tank the market” – Politico
“Stock Markets will freak out if Trump wins, but you probably shouldn’t”- Boston Globe
Wall Street welcomes Trump with a bang” –CNN Money
Stock Market Slingshots Higher After Trump Victory Sparked Overnight Plunge” Forbes
Dow Surges to Fresh All-Time High on Trump-Fueled Momentum” –Fox Business
Following Donald Trump’s surprise victory and the violent market reactions, many investors are left scratching their heads.

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Another Payoff Pitch

November 23, 2016

In July of 2015 we penned an article entitled “Finding Value in the Ninth Inning of the Great Bond Rally”. At the time, bond yields surged higher in response to an all-too-familiar growth and inflation scare. In that article, we noted that while the bond market rally of over 30 years was aging, the fundamentals were still supportive of lower yields.  Accordingly, we made specific investment recommendations for those in agreement with our forecast that yields were close to peaking and would soon head lower again. In January of 2016, following a 75 basis point reversal lower in the ten-year Treasury yield, we wrote a follow up article, “Payoff Pitch”, in which we suggested taking profits on the original recommendations. Anyone following our advice posted double digit returns over the six-month period.
The recent surge in interest rates is creating a similar opportunity. Since July, ten-year Treasury yields have risen over 60 basis points, comparable to the increase that led us to make our 2015 recommendation. Investors again appear overly-concerned that the 30-year bond bull market has finally run its course and interest rates will continue rising. This fear is creating opportunity with a reasonable risk/reward backdrop in the fixed income sector.

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The Inconvenient Truth Behind Donald Trump’s Victory

November 11, 2016

Following the BREXIT vote in late June and passionate support for the Bernie Sanders campaign, the Presidential election of Donald Trump provided yet another sign that the American people, as well as many around the world, are increasingly demanding a new economic path. This piece is not written to opine on the election or the merits of Donald Trump. The intent is to highlight, through the use of a few charts, that the nation’s economic policy for the last 30 years has failed greatly and hollowed out the middle class. The consequences have been accumulating for years but have been camouflaged by ever increasing, but unsuccessful attempts to reignite economic growth.
The graphs below provide evidence that despite the narratives of the Federal Reserve, media pundits and most policy wonks, the economy is failing most Americans. While there are many ways to show the deterioration of the U.S. economy and the consequences endured by its citizens, we selected charts we deem to be the most telling.
We hope that no matter who you voted for, you study these graphs to better understand the impetus behind Trump’s victory. More importantly, we hope this helps everyone better grasp why economic policy must change before the consequences become dire.
As a supplement to these charts, we highly recommend reading or re-reading our important article “The Death of the Virtuous Cycle”.

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Special Presentation: Employment Trends In America

November 9, 2016

Just recently, the Bureau of Labor Statistics (BLS) released the employment data for October 2016. Economists rely heavily on this data to help gauge the health of the economy. Investors believe the data provides valuable insight into the likelihood that the Federal Reserve adjusts monetary policy in the near future.
Due to its importance, we have put together a series of charts to serve as a gauge of current employment conditions. Notice that many, but not all, of the post 2008/09 employment trends have stopped improving. While they are not necessarily reversing, consolidations in these trends have led to reversals and in many instances, recessions in the past.
Employment Trends In The U.S.

2016/11/09Michael Lebowitz, CFAInvestment Analyst and Portfolio Manager for Clarity Financial, LLC. specializing in macroeconomic research, valuations, asset allocation, and risk management. RIA Contributing Editor and Research Director. Co-founder of 720 Global Research. Follow Michael on Twitter or go to for more research and analysis.

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Passive Negligence

November 2, 2016

The stock market is an essential cornerstone of capitalism, not a game of roulette. Well-functioning and free capital markets properly regulate the cost of capital, which is a vital input allowing companies to analyze the cost and benefit of investing and the economy to run efficiently.
The Federal Reserve (Fed), in historic efforts to increase debt and further stimulate consumption, has taken extraordinary actions to lower interest rates to levels never seen before. Low interest rates encourage consumers to borrow and spend. They also encourage investors to speculate instead of investing in more productive endeavors. From the Fed’s perspective, speculative behavior drives financial asset prices higher and generates a so-called “wealth effect”. The hope is that, as investors grow wealthier, they consume more goods and services. Additionally, the increased value of assets can be used as collateral for new debt, allowing for further growth in debt and consumption.
One of the consequences of a “managed” economy, such as the one the Fed has created, is that the normal functions of a capitalistic society erode. Capital is misallocated in a behavioral response to policy, and asset price inflation emerges in a divergence from economic fundamentals.   One of the manifestations of this reaction by investors is the recent rise in popularity of passive equity investing.

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Earnings Magic Exposed

October 26, 2016

Following the end of each fiscal quarter, SEC registered corporations release their financial statements. Typically, investors and the media place a lot of importance on these results. Consequently, stock prices tend to rise or fall based on how the financial results compare to a consensus of estimates made by Wall Street analysts.
Since the beginning of the current quarter (10/1/2016), 76% of the 113 S&P 500 companies that have released earnings results have exceeded expectations. Like so many quarters before, many investors and media pundits are supporting the naïve conclusion that earnings are better than expected. Unfortunately, few investors are paying attention to the measurement tool, expected earnings, to gauge its usefulness as a measure of earnings quality. In this article we uncover the crafty game that Wall Street and corporate investor relations departments’ play to put a positive spin on earnings releases and at the same time give the impression that stock prices are cheap based on forward looking earnings expectations.
Miraculous Results

The graph below shows that actual aggregate earnings growth for the S&P 500 has exceeded the corresponding consensus final expectation for earnings growth without fail since at least the second quarter of 2012.  Not once has a quarter’s earnings (green bar) been lower than the most recent earnings expectation (red bar).

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Perception Versus Reality

October 19, 2016

When asset valuations are extended well beyond historical norms, as they are today, some investment managers elect to take a more defensive and cautious posture than the consensus. In “Bubbles and Elevators”, we discussed how behavioral instincts to follow the herd dominate human nature, but fighting those instincts is necessary to limit exposure to, or avoid entirely, market situations that pose abnormally high risks. Rational judgment, not emotion, should guide investment decisions, and investment professionals need to effectively impart this rationale to clients. As if this task is not hard enough, it is frequently made more challenging when their client’s perspective on market returns is not supported by the facts. At such times, it is incumbent upon the manager to help clients understand reality.
Currently, with equity markets sustained near all-time highs, there is a common perception that the equity market is “running”. As a result, many investors harbor concern of getting left behind. The reality is that equity markets are not surging, or “running”, and have actually been consolidating for almost two years.

Human perception is based on an incredible amount of sensory information.

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The Flawed Logic of Inflation

October 12, 2016

“To me, a wise and humane policy is occasionally to let inflation rise even when inflation is running above target” – Janet Yellen Chairwoman Federal Reserve
“And, beyond that, would a rise in inflation to 3 percent or even 4 percent be a terrible thing? On the contrary, it would almost surely help the economy” – Paul Krugman Nobel Prize winning economist, Professor and Journalist New York Times
“Events since 2010 have led me to conclude those objections no longer apply. The Federal Reserve should give serious consideration to raising its inflation target?” Greg IP Author and Journalist Wall Street Journal
Why do the Federal Reserve and many economists want more inflation? Based on commonly held perspectives among economists and commentators in the financial media, one would think that inflation was something vital to the proper functioning of our economy. Long forgotten, though only a short time ago, inflation as seen in the 1970s and 1980s, was enemy #1 of the U.S. economy. In this article we discuss the motives and incentives driving the current passion for inflation.

The first step toward understanding why the Fed and most of the world’s leading economists desire inflation and abhor deflation begins with their economic perspective.

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The QE Premium

September 26, 2016

It has been eight years since the great financial crisis of 2008, and the Federal Reserve (Fed) is still maintaining an unprecedented level of accommodation in monetary policy. The Federal Funds rate has been pinned at or near zero since 2008. Recent discussions on raising the rate a mere quarter of a percent are met with a palpable level of angst and incredulity by economists and investors alike. Since the crisis, the Fed quadrupled their balance sheet using printed money to buy U.S. Treasury and mortgage securities. The economic results, supposedly the justification for these aggressive actions, have mostly been disappointing. That said, one can credit Fed policy actions for driving financial asset valuations to historic levels.
Over the last eight years investors have adopted a mindset that Fed intervention is good for asset prices, despite clear evidence that it has contributed little to the fundamental rationale for owning such assets.  Fixed income yields are at or near record lows and stock indices trade at valuations that have only been eclipsed twice in history, just prior to the great depression (1929) and at the height of the technology bubble (2000). High end real-estate and various collectibles trade at unparalleled levels. The eye-popping valuations on these less liquid assets further confirm how impactful Fed policy has been on asset prices.

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