We’ve completed our eighteen-month audit for our Fishbone
Trading Fund. Since (July 2015) we are up 29.1% gross return. We trade
primarily large cap US equities that reside in the S&P 500. Using this
index as our benchmark, the S&P 500 was up 5.2% during the comparable
period.
The Fishbone Trading Fund is a discretionary portfolio
dedicated to providing superior returns on investments in all market
conditions. The objective is capital
appreciation and growth. The portfolio aims to achieve a high absolute rate of
return by utilizing proprietary fundamental metrics applied with proven
behavioral finance methods expressed mathematically.
Market Sentiment
Post-election, market sentiment and economic expectations
are really picking up momentum. From Business
Insider, “The final
January reading of consumer confidence from the University of Michigan came
in higher than expected. The reading on US consumers'
outlook was 98.5, better than the 98.1 expected
by economists. This was also above the initial reading of 98.1
earlier in the month.”
“Consumer confidence
has surged in the wake of the US election, as improved outlooks for growth and
jobs have bolstered the index.
"Consumers
expressed a higher level of confidence January than any other time in the last
dozen years," said Richard Curtin, the survey's chief economist. "The
post-election surge in confidence was driven by a more optimistic outlook for
the economy and job growth during the year ahead as well as more favorable
economic prospects over the next five years."
Curtin did
caution that the current boost in confidence comes from expectations
and not actual improved circumstances. "Overall, the post-election surge
in consumer confidence was based on political promises, and not, as yet, on
economic outcomes," said the press release.”
“According to Curtin,
consumers are actually borrowing more in anticipation of interest rate hikes
from the Federal Reserve. Increasing inflation expectations have led the Fed to
raise their expectations for the number of interest rate hikes in 2017.”
We see this divergence between expectations and actual data
with the latest durable goods orders from the Commerce Department falling short
of expectations and the tepid 4Q16 GDP figures.
Small business optimism has surged post-election on
expectations of brighter days ahead.
According to Calafia
Beach Pundit, “Small businesses, who
employ 48% (57 million) of all private sector employees, are apparently feeling
MUCH better about the future, presumably because they believe that
President-elect Trump will be good for business. Regulatory and tax relief such
as Trump promises would almost certainly result in more investment, more jobs,
and more growth.”
“As the chart above
shows, consumers are also feeling better these days. According to the
Conference Board, consumers are more confident today than at any time since the
current recovery started.
All of this is crucial
and augurs very well for stronger—perhaps much stronger—growth in the years to
come. Confidence has been sorely lacking during this recovery, and it shows in
the lackluster growth of business investment, as seen in these charts:”
Tracking fund flows is another way we track market optimism.
As seen from the ICI fund flows data, equities as a percent of total assets is
roughly 52%. At the start of the past two bear markets, market euphoria was
much higher than it is today as measured by equities as a percent of total assets. The number that we look for is 55% exposure to equities as a sign that
market sentiment is running full steam. This means there is quite a bit of
money out there that can be rotated into equities providing the fuel higher.
The Fat
Pitch blog goes further on the asset allocation. “Among the various ways of measuring investor sentiment, the BAML
survey of global fund managers is one of the better as the results reflect how
managers are allocated in various asset classes. These managers oversee a
combined $500b in assets.
The data should be
viewed mostly from a contrarian perspective; that is, when equities fall in
price, allocations to cash go higher and allocations to equities go lower as
investors become bearish, setting up a buy signal. When prices rise, the
opposite occurs, setting up a sell signal.”
“Fund managers' cash
levels dropped from 5.8% in October to 5.1% in January; cash is up slightly
from December. Recall that 5.8% was the highest cash level since November 2001.
Cash remained above 5% for almost all of 2016, the longest stretch of elevated
cash in the survey's history. Some of the tailwind behind the rally is now gone
but cash is still supportive of further gains in equities. A significant
further drop in cash in the month ahead, however, would be bearish.”
“Fund managers were
just +5% overweight equities at their low in February 2016; since 2009,
allocations had only been lower in mid-2011 and mid-2012, periods which were
notable bottoms for equity prices during this bull market. Allocations in
January have jumped to +39% overweight, a 13-month high. This is now slightly
above neutral (0.4 standard deviation above the long-term mean). Over +50%
overweight has historically been bearish (dashed line).”
“In February 2016, 16%
of fund managers expected a weaker economy in the next 12 months, the
lowest since December 2011. They are now optimistic: 62% expect a stronger
economy in the next year, a 2-year high. Pessimism explained their prior low
allocation to equities and high allocation to cash; that has now changed.”
“US exposure had been
near an 8 year low during the past year and a half, during which US
equities outperformed. US equities have been under-owned. That's changed.
In January, fund managers were +14% overweight (the same as last month). This
is 0.9 standard deviations above its long-term mean. Bearish
sentiment is no longer a tailwind for US equities. Above +20%
overweight and sentiment would become a headwind (dashed line). Close, but not
yet.”
Bottom Line: The
market sentiment picture is improving at a brisk pace. Whether economic
realities can live up to expectations remains to be seen. We are cautious in
our outlook but understand “animal spirts” is a powerful market force that will
propel the market higher.
Joseph S. Kalinowski, CFA
Joseph S. Kalinowski, CFA
Email: joe@squaredconcept.net
Twitter: @jskalinowski
Facebook: https://www.facebook.com/JoeKalinowskiCFA/
The above information should not be construed as a
solicitation to buy or sell the securities discussed herein. The
publisher of this report cannot verify the accuracy of this information.
The owners of Squared Concept Asset Management, LLC and its affiliated
companies may also be conducting trades based on the firm’s research
ideas. They also may hold positions contrary to the ideas presented in
the research as market conditions may warrant.
This analysis should not be considered investment advice and
may not be suitable for the readers’ portfolio. This analysis has been written
without consideration to the readers’ risk and return profile nor has the
readers’ liquidity needs, time horizon, tax circumstances or unique preferences
been considered. Any purchase or sale activity in any securities or other
instrument should be based upon the readers’ own analysis and conclusions. Past
performance is not indicative of future results.
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