Wednesday , August 15 2018
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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

Whatever it Takes

7 days ago

“At the end fiat money returns to its inner value—zero.”  – Voltaire
 “Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.” – Mario Draghi July 26, 2012
On July 26, 2012, European Central Bank (ECB) President Mario Draghi essentially guaranteed the ECB would not allow the markets to cripple the Euro region. This shot across the bow finally remedied the instability caused by the sovereign debt crisis. The markets quickly reversed the damaging trends and uncertainty that had plagued the Euro-zone for months.
Draghi’s statement essentially boiled down to a promise that the ECB would print unlimited amounts of money to stop the “harmful” will of investors.
Fiat currency, be it dollars, euros, yen, or any other major currency

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Are The Market Generals Leading Us To War?

14 days ago

Market Wizards, a best-selling investment book written by Jack Schwager, is a must-read for investors looking to improve their performance. Each chapter of the book provides a biography and an interview of a highly successful trader/investor. Originally published in 1989, the book is full of valuable lessons from some of the best in the business, including Paul Tudor Jones, Jim Rogers, Marty Schwartz, and Ed Seykota.
Of timely interest is a quote from William O’Neil:
“Another way to determine the direction of the general market is to focus on how the leading stocks are performing. If the stocks that have been leading the bull market start to break down, that is a major sign the market has topped.”
The “leading” stocks that O’Neil mentions are commonly referred to as the “Generals.”
On

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QE4 – When, Not If – RIA Pro

15 days ago

Many market prognosticators attribute the rise in interest rates to a consensus outlook for expanded economic growth and increasing inflationary pressures. In our article, Deficits Do Matter, we took this view to task by providing market-based evidence to show that those factors only account for about a third of the increase in interest rates.  Our perspective is that the rapidly growing forecasted supply of Treasury debt coupled with limited demand from the two largest holders of Treasury securities are currently the main drivers of higher yields.
In this article we take that analysis a step further and ask a question that few seem to be considering; what if there is a recession in the coming year or two? In answering that question, from the perspective of the federal deficit and related

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Everyone Hears The Fed…But Few Listen

19 days ago

Announcing RIA Pro
After several long months of research, development and input from our loyal readers and subscribers, we are pleased to announce RIA Pro, a new subscription service by Real Investment Advice and 720Global. 
As gratitude for your patience we are providing all Real Investment Advice readers access to this RIA Pro article which discusses the growing misconception that Chairman Powell’s Fed is as investor friendly as Yellen and Bernanke were.
Currently the site is up for a limited number of BETA test users. If all goes well, as we suspect, it will be released to everyone shortly.
RIA Pro will have exclusive articles covering important aspects of the market such as this one, as well our model portfolios, daily commentary, videos, market data, charts, analysis, and A LOT more.

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Everyone Hears The Fed…But Few Listen – RIA Pro

20 days ago

Everyone Hears the Fed but Few Listen
“See no evil, hear no evil, speak no evil”
Currently, investors appear to be covering their eyes, ears, and mouths and ignoring the Federal Reserve’s (Fed) determination to increase interest rates. This divergence of outlooks between investors and the Fed is a stark departure from the financial crisis and the years following when the Fed and the market were on the same page regarding monetary policy.
Often such a discrepancy between the Fed and investors results in sharp changes in asset prices and heightened volatility. In this article, we analyze the current situation to predict whether the market’s dovish expectations will be proven right, or if their unwillingness to heed the Fed’s warnings will cost them dearly.
Trump vs. Powell
As we were

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The ABC’s of QE and QT – RIA Pro

20 days ago

Search the internet for “QE and money printing”, and you will see countless articles explaining why Quantitative Easing (QE) is or is not money printing.
Here are a few articles that we found:
“The Fed’s Magic Money-Printing Machine”
“Bernanke Admits to Congress: We are printing money, just not literally”
“America’s reckless money-printing could put the world back into crisis”
“Why Quantitative Easing isn’t printing money”
Is QE money printing or is it something else that appears to be money printing?
Some will say that the question is irrelevant, as QE ended a few years ago. We disagree, and it has nothing to do with proving our opinion on the matter right or wrong. It is extremely important to understand what QE is and is not as the reversal of QE, known as Quantitative Tightening (QT),

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The Fallacy of Macroeconomics – RIA Pro

20 days ago

“The hubris in economics came not from a moral failing among economists, but from a false conviction: the belief that theirs was a science. It neither is nor can be one, and has always operated more like a church. You just have to look at its history to realize that.” –Collaborative Fund
The Federal Reserve (Fed) has over 750 Ph.D. economists on staff, many of whom sport degrees from the finest universities in the world. Given such a population of experts, why does the Fed have such a poor track record forecasting economic activity? Consider the graphs below, which provide recent evidence of the Fed’s futile forecasting efforts, if you find the preceding question slightly condescending or offensive. Please note it is not just the Fed, but poor economic forecasting pervades most economists

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It’s Not To Early To Be Late

20 days ago

The golden rule of investing is buy low and sell high. While great advice, it is extremely difficult to accomplish with precision. Because of the perceived impossibility of timing peaks and troughs, many investment professionals prefer a buy and hold approach. They claim that, over time, stocks produce respectable average returns, so why attempt to pick peaks and troughs. We firmly disagree as taking a passive approach and riding the ups and downs in the market guarantees that investors will spend large periods of time recovering losses and not compounding wealth. Because of these losses, buy and hold portfolio returns usually fall far short of average market returns. For more on this reality, see the graph and article linked in the postscript below the article summary.
Prudent investment

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Booming Profits

21 days ago

“Better to be paralyzed from the neck down than the neck up.” – Charles Krauthammer
It is easy to be upbeat about the stock market. Currently, as second quarter earnings are being released, the S&P 500 is expected to post a second consecutive quarter of earnings growth in excess of 20%. The first two quarters of 2018 will show the strongest two consecutive quarters of growth since 2010, when earnings were recovering from the fallout of the financial crisis. The recent strength in corporate profits is attributable, in large part, to the federal tax overhaul late last year, but there are other factors contributing as well. The U.S. economy is showing strength, employment data remains strong and consumer spending is upbeat.
Although recent economic output has been encouraging, the Federal

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The Mendoza Line: Is The Fed’s New “Yield Curve” Professional Grade?

July 11, 2018

In professional baseball, there is a performance standard called the Mendoza Line, a term coined in 1979 and named after Mario Mendoza, a player that struggled to hit consistently throughout his career. The standard or threshold is a batting average of .200. If a player, other than a pitcher, is batting less than .200, they are not considered to be of professional grade.
Investors’ also have a Mendoza Line of sorts. This one, the yield curve, serves as an indicator of future recessions. Since at least 1975, an inverted yield curve, which occurs when the 2yr U.S. Treasury note (UST 2) has a higher yield than the 10yr U.S. Treasury Note (UST 10), has preceded recessions. Currently, the 2s/10s yield curve spread has been flattening at a rapid pace and, at only 0.33% from inversion, raises

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The Uncivil Civil War: Economic and Market Implications of Political Transformation

July 9, 2018

Come senators, congressmenPlease heed the callDon’t stand in the doorwayDon’t block up the hallFor he that gets hurtWill be he who has stalledThere’s a battle outsideAnd it is ragin’.It’ll soon shake your windowsAnd rattle your wallsFor the times they are a-changin’
The Times They Are A-Changin’ – Bob Dylan
America’s populace is politically divided in a way that has not been seen in decades. The growing rift is rapidly changing the landscape in Washington D.C. and has major implications for the nation. Amazingly, as voters from different parties espouse views that are worlds apart, they share a strikingly similar message.
This article considers the juxtaposition of colliding worldviews and the unified message that voters across the political spectrum are sending. While many investors are

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Monthly Fixed Income Report – June 2018

July 6, 2018

Monthly Fixed Income Update – June 2018
At the half-way point of 2018, there are a multitude of interesting stories to cover in the fixed income markets. Beginning with June’s performance, the headline remains the divergence in performance between investment grade (IG) and high yield (HY) credit. From a total return standpoint, junk bonds (HY) were the best performing sector for the first six months while IG was only kept out of the fixed income cellar by the poor performance of emerging markets (EM).
**Please note there was an error which has since been corrected in the May performance table. For reference, May’s corrected table is shown below June’s.
June’s Performance:

May’s Corrected Performance:

The primary culprit for IG underperformance versus HY is heavy supply from merger and

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Weekend Reading: #MAMI – Make America More Indebted

June 29, 2018

I have spilled a lot of digital ink over the last few years on the trajectory of debt, spending and the impact of fiscal irresponsibility. Most of it has fallen on “deaf ears” particularly in the rush to pass “tax reform” without underlying fiscal restraints. To wit:
“The recently approved budget was an anathema to any fiscally conservative policy. As the Committee for a Responsible Federal Budget stated:
‘Republicans in Congress laid out two visions in two budgets for our fiscal future, and today, they choose the path of gimmicks, debt, and absolutely zero fiscal restraint over the one of responsibility and balance.
Passing fiscally irresponsible budgets just for the sake of passing “tax cuts,” is, well, irresponsible. Once again, elected leaders have not listened to, or learned, what

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Weak Dollar Policy and Commodities

June 27, 2018

Many political pundits will tell you that President Trump won the election, in part, on the promise of a rebirth in the manufacturing sector. His initial strategy to reduce the trade deficit centers on negotiating new tariffs and renegotiating existing trade agreements. These volatile discussions with other nations, often accompanied by threats, will likely continue and the outcomes are far from certain. If the President is unable to satisfactorily adjust the trade terms with our partners, he could resort to a weak U.S. Dollar policy that has frequently been employed throughout modern history. As a current point of reference, the Chinese Yuan has weakened by about 5% over the last two months. This is likely an effort to reduce the effect of new tariffs.
The U.S. Dollar is the world’s

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Weekend Reading: The Next Big Bubble

June 22, 2018

If you’re a frequent reader, you’ve noticed that we often find fault with the one-sided manner in which the mainstream media reports on economic topics and the asset markets. Of chief concern to us, the cheerleading for the markets and the economy fails to provide readers with the other side of the story.
The fact is the economy and financial markets have been propelled higher since the financial crisis of 2008 by historically low interest rates, large fiscal deficits and a massive expansion of the Federal Reserve’s (Fed) balance sheet. We agree the monetary and fiscal policy prescriptions helped at the time, but we believe the ultimate consequences of these actions have yet to be felt.
We have written volumes on this topic. We thought it appropriate to share an article published by the

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Weekend Reading: Merger Mania

June 15, 2018

On May 24, 2018, Paul La Monica penned an article for CNN Money entitled Companies have spent a stunning $2 trillion on mergers so far this year.  The article notes that in 2018 merger activity has hit a feverish pitch fueled by “healthy balance sheets and strong share prices.” While somewhat true we think it is important to tell the whole story.
We have written numerous articles describing how cheap money and poorly designed executive compensation packages encourage corporate actions that may not be in the best interest of longer-term shareholders or the economy. The bottom line in the series of articles is that corporations, in particular shareholders and executives, are willing to forego longer term investment for future growth opportunities in exchange for the personal benefits of

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Monthly Fixed Income Report – May 2018

June 13, 2018

Despite a challenging start to the year and recent turmoil in some European bond markets, U.S. fixed income markets perked up in May with five of the seven primary fixed income sectors posting positive monthly returns. Investment grade municipals were the best performing sector returning 1.15% for the month followed by U.S. Treasuries, the aggregate index and securitized bonds. The table below, sorted by May’s performance, highlights returns over varying time frames as well as their current yields.

Data Courtesy Barclays
Mid-way through May, 10-year U.S. Treasuries rose sharply by 16 basis points from 2.95% to 3.11% and importantly surpassed the heavily followed 2014 taper tantrum highs of 3.05%. But those levels would not hold and a month-end rally, initially inspired by rather dovish

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Our Two Cents on the Dollar

June 6, 2018

“There are benefits of where the dollar is and there are costs of where the dollar is,” Mnuchin said during a panel discussion at the World Economic Forum in Davos, Switzerland. “It’s not a shift in my position on the dollar at all. It is perhaps slightly different from previous Treasury secretaries.” “We do support free and floating currencies reflective of the market” courtesy: Bloomberg 1/25/2018
The market’s interpretation of the quote above from U.S. Treasury Secretary Steven Mnuchin is on par with the title of the Bloomberg article: Mnuchin Defends Weaker Dollar Comments as ‘Clear,’ ‘Consistent.’
Despite the recent uptick, the dollar has been steadily declining since the presidential inauguration, and the positive and negative implications of the trend are becoming more evident to

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The Headwind Facing Housing

May 30, 2018

There are a large number of public and private services that measure the change in home prices. The algorithms behind these services, while complex, are primarily based on recent sale prices for comparative homes and adjusted for factors like location, property characteristics and the particulars of the house. While these pricing services are considered to be well represented measures of house prices, there is another important factor that is frequently overlooked despite the large role in plays in house prices.
In August 2016, the 30-year fixed mortgage rate as reported by the Federal Reserve hit an all-time low of 3.44%. Since then it has risen to its current level of 4.50%. While a 1% increase may appear small, especially at this low level of rates, the rise has begun to adversely

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The “Trend Is Your Friend” – Until It’s Not

May 23, 2018

Before February 2018, the S&P 500 was positive for a record 15 months in a row. Despite the seemingly perfect track record, a series of daily record highs, and unprecedented levels of positive investor sentiment, the market’s tone changed abruptly in the last few days of January. Since the record highs achieved on January 26th, 2018, the S&P 500 initially fell by 11% and subsequently recovered about half that loss.
The natural reaction for most investors following jolts to markets and changes in its behavior is to link the unexpected price declines with specific catalysts. In Thinking, Fast and Slow, Daniel Kahneman, a renowned Nobel laureate and behavioral psychologist, states, “[All] headlines do is satisfy our need for coherence.”
By assuming one knows the cause for a market event and

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The Inconsistencies Lurking in ETFs : Judgement Awaits Part II

May 17, 2018

Consider the following companies:
A luxury automobile manufacturer whose cars average over $70,000 in price
A technology company that designs and manufactures consumer products
A video streaming company with a market cap of $134 billion, average revenue growth of 29% over the past five years and whose stock has risen by 243% in the last two years
A diversified energy conglomerate with a market cap of $324 billion
A technology company with a market cap of $849 billion
A financial institution with $5.2 trillion in deposits representing over 40% of all deposits held by U.S. commercial banks
The relativism of the equity market has taken on a whole new meaning over the past several years as the passive investment craze has re-ordered the equity universe according to its convenience. It

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Quick Take: What Do CO2 And MLB Have To Do With German Bunds?

May 16, 2018

The level of Carbon Dioxide (CO2) spewing from the Mauna Loa volcano in Hawaii influences the yield of German ten year Bunds.
The number of Major League Baseball (MLB) pitchers per season with at least five complete games influences the yield of German ten year Bunds.
Sound ridiculous?  We think so to, but read on.
The Federal Reserve (Fed) plays an important role in steering economic activity as well as influencing the direction of the financial markets. As such it is incumbent upon investors to be well versed on current monetary policy as well as on the mindset of the members of the Fed. Numerous speeches and white papers provide investors the means to do just this.
Equally important, and we believe a more difficult task, is not to allow the Fed’s views and biases to automatically

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Viewing Employment Without Rose-Colored Glasses

May 2, 2018

“Fed Officials Worry Economy Is Too Good. Workers Still Feel Left Behind” – New York Times 4/27/2018
This coming Friday the Bureau of Labor Statistics (BLS) will release the monthly employment report. Consensus expectations from economists are for an unemployment rate (U3) of 4.1% which is nearly unprecedented in the last fifty years.
On April 26, 2018, the Department of Labor reported that a mere 209,000 people filed for initial jobless claims. This weekly amount was the lowest since 1969. The data point is the lowest in almost 50 years and remarkable when normalized for the number of people considered to be of working age (ages 15-64).
Low initial jobless claims coupled with the historically low unemployment rate are leading many economists to warn of tight labor markets and impending

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Nowhere to Hide

April 25, 2018

The following article was originally a PowerPoint presentation that highlights several aspects of recent price movements across assets classes and within equity industry sectors. Many investors are unfamiliar with these relationships and their importance. While the current correction may prove only to be a speed bump on the way to higher prices, close inspection of asset class and security interactions often hold important clues about the future. The information contained in these pages argues for caution.
Click on any table below for a full size image making them easier to read.

The messages from shifting cross asset and S&P 500 sector correlations

Why Correlations Matter
Correlation is a statistical measure that quantifies the relationship between two financial assets or securities.

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Quick Take: Is Hypervolatility Signaling a Bottom?

April 23, 2018

The steady gains accompanied by the historically low volatility of 2017 have vanished. Given this new trading atmosphere, we must contemplate whether the recent spate of volatility and lower prices is the beginning of a trend change or merely a temporary speed bump on the way to higher prices.
Despite a bull market and economic recovery that are historically long in the tooth, we recently read an interesting article that waived the all clear flag for investors. Hyper volatility in stocks suggest the market has bottomed, authored by Simon Maierhofer, points to historical bouts of volatility as well as money flows into stocks as a reason to be optimistic. The author argues that bottoms are typically formed when volatility surges and that view is currently bolstered because “money is flowing

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Triffin Warned Us

April 18, 2018

Trade negotiations and threatening global tariff volleys are contributing to significant volatility in the financial markets. Although applicable in many ways, the Smoot-Hawley protectionist act of 1930 is unfairly emphasized as the primary point of reference for understanding current events.
In 1944, an historic agreement was forged amongst global leaders that would shape worldwide commerce for decades. The historical precedence of post-WWII trade dynamics offers a thoughtful framework for understanding why trade negotiations are so challenging. This article uses that period as a means of improving the clarity of our current lens on complex and fast-changing trade dynamics.
The following article was originally published to subscribers of 720Global’s The Unseen. We are now releasing it to

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Value Defined: An Interview with Value Investor Eric Cinnamond

April 11, 2018

“Instead of relying on central banks as the foundation of my risk mitigation strategy, I plan to remain committed to my absolute return process and discipline.” –Eric Cinnamond
The world’s oldest investment philosophy, buy low and sell high, is not only the most logical but it is also most neglected when it matters.
Outside of the financial markets, we seek deals on everything. We drive past three gas stations to find one that is a nickel cheaper. We shop at the Costco in the next town instead of the grocery store around the corner. We haggle with car dealers for hours to save a few hundred dollars. Juxtaposed to rational consumer behavior, investors frequently take the opposite tack. Interest in buying stocks and many other financial assets tend to rise as prices increase and decline

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Quick Take: The Real Catalyst Behind Monday’s Tech Beating

April 6, 2018

Following Monday’s 2.75% rout of the technology-laden Nasdaq index, the lead story in the Washington Post print edition was entitled “Tech stocks take a beating.” The sub-headline which caught our attention read as follows:
“Trade, regulatory threats hurt sector, experts say.”
The article puts the blame for Monday’s loss, as well as the 10% retreat from recent highs, on verbal attacks by the Trump administration on Amazon as well as his “bellicose talk” on trade and concerns for how China might react. While true in part, in their efforts to frame a catchy narrative, the media is missing the real story.
In the name of superficial expedience, the article fails to attribute any blame to valuations for the market as a whole or the companies mentioned in the article, including Amazon (which

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Contours of The Correction

April 4, 2018

In early February, the markets experienced some turmoil. Volatility spiked, stocks sold off roughly 10% and credit spreads widened. These were strange events given that over the prior 15 months the total return for the S&P 500 was positive each and every month. From November 2016 through January 2018, stocks and most other risky assets enjoyed a historic run of positive performance where temporary downturns were very limited. There are a lot of explanations for this, ranging from the policy agenda of President Trump to synchronous global growth. Rather than guess, and with the streak of consecutive positive months now broken (February closed down -3.69%), we thought it an opportune time to evaluate some of February’s dynamics to draw reasonable conclusions about where we might be headed

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Quick Take: GDP Linked Bonds?

March 30, 2018

There is a core concept in finance that states that an investor should be properly compensated for the amount of risk taken. While central banks have certainly distorted the amount of compensation per degree of risk, the axiom still holds true.
It is in this light that we recently read an article entitled GDP-linked bonds could be an insurance policy against depression. The article by Robert Shiller makes a case for sovereign debt whose principal and interest are not fixed but instead linked to the level of economic activity. The genius behind Mr. Shiller’s idea is that as a nation’s economic activity deteriorates, and their ability to pay principal and interest on outstanding debts decline, the interest rate on the existing debt and new debt would decline. This, in theory, would reduce

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