Musings

Current Newsletter

January 2017

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ATTENTION ALL READERS

Posted on January 10, 2017

Big changes are coming to Critical Math. As many of you are aware, we are in the process of closing our managed funds, the Adaptive Allocation Fund and the Adaptive Allocation Portfolio. Shortly thereafter, we will close Critical Math Advisors, LLC. The expense and regulatory burdens of being a Registered Investment Advisor have become onerous. Critical Math’s investment strategies will continue through our broker/dealer, Ceros Financial Services, Inc., and their affiliated Registered Investment Advisor, AtCap Partners, LLC. We will continue to manage our clients’ accounts using brokerage accounts through National Financial Services. We believe the changes will allow us to be more flexible in the use of our proprietary risk reduction strategies and, with improved cost efficiency, may lead to improved returns.

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Update to most recent musing…

Posted on November 16, 2016

Critical Math Advisors is now making available to investors our energy infrastructure model which was out of the market between October 2014 and April 2016 during which time the energy infrastructure index investment vehicle we use dropped nearly 40%.

Please click here for Energy Infrastructure Strategy details including important disclosure information.

Also, note that our High Yield Municipal Bond model discussed previously (click here for High Yield Muni Strategy details including important disclosure information) moved to cash last week after being invested since October 2013.

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Seeking Tax Favorable Returns with a Risk Reduction Strategy?

Posted on October 26, 2016

Many bond investors in today’s environment are seeking income but seem unwilling to take significant risks to achieve their goals. With talk of the Federal Reserve possibly raising rates, they are concerned that bond prices might fall, perhaps significantly.

We have developed an investment strategy that addresses these issues.

For over seven years, in actual, real-time trading, this fixed income model has produced an annualized total return of over 10%, net of all costs. Additionally, a good portion of the return was federal income tax free. This was accomplished with zero exposure to the stock market.

Please click here for Investment Strategy details including important disclosure information.

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As they gaze into their crystal ball…

Posted on June 24, 2016

The news out of Great Britain regarding their involvement with the European Union proves, once again, that expert attempts to forecast the future are very difficult to rely on. The bookmakers in England, as the polls closed, showed something around 90% likelihood that Great Britain would choose to remain in the EU. Within hours, those odds virtually reversed.

We prefer to deal with data and trends and avoid speculation about future events.


Market Mood

Posted on May 17, 2016

Excerpts from The Economist (www.economist.com) Buttonwood Blog, “The Great Switchover: The mood of the markets has changed” published April 30, 2016.

“Global economic forecasts for 2016 are still being revised downwards and the rate of defaults on corporate bonds is rising sharply… Things may not be great, but they are not as bad as was feared earlier in the year.”

“Rob Arnott at Research Affiliates, an advisory firm, says conditions at the start of 2016 resembled those that pertained in early 1999. Inflation expectations had been falling, emerging equities and currencies were underperforming and “growth stocks” (in technology, for example) were beating “value stocks”—those that look cheap relative to their peers. All these trends have since reversed.”

“The markets’ mood swings may reflect the difficulty in analyzing the global economy since the financial crisis of 2008. It has neither recovered as strongly as many expected nor slipped back into recession.”

“Whenever the economic outlook darkens, investors sell equities. But the sell-offs don’t last long given the paltry returns available elsewhere.”

“Bond yields are very low and can hardly fall much further; equity valuations are already high; GDP and productivity growth have disappointed recently; profit margins are high and seem more likely to fall than rise (the slowdown in tech profits reinforces that impression).”

“McKinsey, a management consultancy, reckons that, in a slow-growth environment, real annual returns from equities over the next 20 years may be 4-5%, well below the average of the past 30 years; real bond returns may be just 0-1%. Even a rebound in American growth to 2.8% a year might generate real equity returns of only 5.5-6.5%, below the average of the past three decades.”

“Central banks, by offering support to asset markets in the form of quantitative easing, may have pushed up valuations (and pushed down yields) in the short term. But in essence this means that the markets have “borrowed” returns from the future; from a starting point of higher valuations (lower yields), future returns are likely to be lower.”

“This has big implications for today’s workers. McKinsey reckons that a 30-year-old will have to work seven years longer or save almost twice as much to afford the same pension as the typical baby-boomer. But with job security weak and wage growth hard to come by, few 30-year-olds will have enough income to ramp up their savings.”


Liquid Leak

Posted on March 02, 2016

Excerpts from The Economist (www.economist.com) Buttonwood Blog, “Liquid Leak; Can weak markets be explained by changes in bank balance-sheets?” published February 20, 2016.

“ECONOMISTS have been a bit puzzled by the market turmoil of early 2016. It seems to be driven, in part at least, by fears of either an American recession, or a sharp Chinese slowdown, neither of which looks likely from the data. Perhaps the answer to the conundrum is that market movements are not being driven solely by fundamentals but by recent developments in market liquidity.”

“CrossBorder Capital, a research firm, says that the combined balance-sheets of the Federal Reserve and the People’s Bank of China were growing at more than 10% a year for much of the past decade—and reached a peak of 64.5% growth in 2008. But over the past year, they have actually contracted (see chart). Both the European Central Bank and the Bank of Japan are still adding assets, of course. Nevertheless, CrossBorder’s global liquidity index, which reflects changes in the balance-sheets of a range of central banks, has fallen to 35; a world recession, says the firm, is signalled when the index drops below 30.”

“Another sign that liquidity is shifting can be seen in the world of exchange-traded funds (ETFs)—portfolios of assets that can be traded on the stockmarket. According to BlackRock, which operates the biggest high-yield ETF, daily trading in the fund was briefly worth a quarter of the value of all American corporate-bond trading in December. Buying and selling an ETF has become a more liquid way of shifting an investor’s asset allocation.”

“Since the crisis commercial banks seem to have retreated from their market-making role. The impact of this shift has been disguised by the huge amounts of liquidity injected by central banks. But as central banks scale back their support, the underlying investors (pension funds, insurers, hedge funds and the like) will have to rely on each other to act as willing buyers and sellers. That seems highly likely to result in more volatile markets than in the past, especially when the outlook for the economy is unclear. Buckle up.”


David Stockman Observations

Posted on February 19, 2016

David Stockman has some interesting views about which we thought you might like to read. He is quite bearish in general, but some of his specific observations are interesting. None of these opinions and forecasts affects what we do, but we still like to be in touch with some of these nerdy observations. Here are some excerpts/charts posted on DavidStockmanContraCorner.com.

From David Stockman Interview on Turbulent Financial Markets: “There’s A Train Wreck Coming” Posted August 13, 2014:

“Train wreck is a pretty good term to describe what is coming. But this train wreck isn’t simply going to hit a wall out of the blue. Actually, it has been forming and accumulating and expanding for many years now, and yet it has simply been ignored, particularly by the financial markets which have ridden this bubble to these extreme and historic heights.”

“But when you take the balance sheet of the Fed from $900 billion to $4.5 trillion in less than 70 months, and when that pattern is replicated around the world, that is a train wreck in slow motion. The only issue is, when does it hit the wall? The answer to that question is it’s not very far down the road, and I can promise you that is when all hell is going to break loose.”

From “Why The Bulls Will Get Slaughtered” Posted February 6, 2016:

“At the end of the day, the monthly jobs report is an economic sideshow. The nonfarm payroll part of it, in particular, is a relic of your grandfather’s economy when most jobs represented 40-50 hours per week of paid employment on a year round basis.”

“And if we need aggregated data on employment trends, the US government itself already publishes a far more timely and representative measure of Americans at work. It’s called the treasury’s daily tax withholding report, and it has this central virtue: No employer sends Uncle Sam cash for model imputed employees or for 2.1 million seasonally adjusted payroll records that did not actually report for work.”

“In fact, his (colleague Lee Adler) latest report as of February 6th indicates that, The annual rate of change in withholding taxes has shifted from positive to negative. It has grown increasingly negative in inflation adjusted terms for more than a month. Following on the heels of a weak December, it is a clear sign that the US has entered recession……..the implied real growth rate is now roughly negative 4.5% per year……it is the most negative growth rate since the recession. It follows the longest stretch of zero growth in several years, This can no longer be considered temporary or an anomaly. It has all the earmarks of a trend reversal and is getting worse.”

“Food stamp participation rates are still the highest in history, and bear no resemblance to where these ratios stood during earlier intervals of so-called full employment. In a word, 4.9% unemployment can’t be true in a setting where the food stamp participation rate is nearly 15%.”

About David Stockman-

He became Director of the Office of Management and Budget under President Ronald Reagan, serving from 1981 until August 1985. After leaving government, Stockman joined Wall Street investment bank Salomon Bros. He later became one of the original partners at New York-based private equity firm, The Blackstone Group. Stockman left Blackstone in 1999 to start his own private equity fund based in Greenwich, Connecticut. For additional information go to: davidstockmanscontracorner.com


Market Volatility

Posted on January 15, 2016
With the enormous amount of volatility in the markets lately, many clients have asked what we think is going to happen. Well… we are definitely certain that we have no idea. We do not speculate or prognosticate. We let our proprietary models tell us when to be in or out of the multiple asset classes in which we invest. Having said that, in looking at the charts, from a traditional, technical perspective, we would suggest looking at the lows of August, September and October and seeing if those lows are significantly breached to the downside. If they are, many technical analysts would suggest that there is a long way down yet to come. If they are not, there might be a reversal to the upside. Keep in mind that these are only our musings and are in no way projections.

It appears to us that this market volatility may be in great part due to traders. For example, on a day when the market is up, it is up more in the morning and less in the afternoon. When early buying moves the market up, the pullback towards the close hints at traders taking profits. On days when the market is down, it is down more in the morning and down less at the close. This suggests to us that traders are going short early in the day and covering those shorts at the end of the day, creating “buying” by definition. It seems to us that conventional market participants have not yet made any significant moves to sell, which may or may not turn out well.


Oil Slump

Posted on January 15, 2016
We were thinking about the dramatic drop in oil prices from over $100 a barrel to under $30. Other commodity prices, like iron and copper, have also tumbled. We believe that there is a slowdown in Chinese manufacturing and construction that has led to these steep declines. Analysts seem to be all over the place with their oil price projections. Some are saying below $20 and others are saying over $60. We, of course, have no idea but are wondering where price increases could come from. Some people say that the solution to low prices is low prices, and that because prices are low, demand (or buying) will be forthcoming. As we look at the world, we see some very troubling issues. Russia’s revenue is overwhelmingly oil based. Mr. Putin is spending substantially on defense, and we think it would be difficult for Russia to reduce its costs. Saudi Arabia subsidizes the costs of fuel and electricity to its citizens. That subsidy has recently been reduced. Brazil has all kinds of political issues and rising inflation. With sanctions about to be reduced in Iran, substantial additional oil production may be coming into the marketplace. We, therefore, presume that the major oil producers in the world, aside from the United States, can’t afford to reduce production. Several Middle Eastern producers are low cost producers and can break even at these levels. The United States’ break-even is thought to be north of $50 a barrel. However, that includes the cost of drilling. Once the well is in the ground, the extraction cost is relatively low. So from a supply perspective, it seems to us, a reduction is unlikely. Much of the recent commodity boom was created by China. With China assumptively slowing down, where will the demand come from? We think the only country with enough population to matter is India, but it doesn’t appear as though politically or culturally, anything like China is likely to occur anytime soon. If we were involved in commodities, and, by the way, we are not, we think we would be quite concerned.


CMA has relied upon information provided by sources deemed to be reliable & is available upon request. Sources may include Gemini Fund Services, Morningstar, Bloomberg, Barron’s, CNBC, Yahoo, Marketwatch and The Economist. The data herein is not guaranteed.