Market Climateand Weather Forecast

Presented by Herb Geissler, Managing Director of The St.Clair GroupRational Investing/VectorVest Special Interest Group of Pittsburgh AAII

AAIIMay, 2012

"It is not the strongest of the species that survives, nor the most intelligent, but the ones most adaptable to change." Charles Darwin

Two Time Frames

• Secular Overview to determine best Secular Overview to determine best broad investing strategies over yearsbroad investing strategies over years

• Cyclical Climate over next year or so for Cyclical Climate over next year or so for specific strategies to get good gainsspecific strategies to get good gains

Simple Buy & Hold Not Likely to Be Productive

for the next dozen years

Kuznets’ Infrastructure cycle averages 17.6 years for each bull or bear phase

Ten-fold, 15-20 year

Big Bull Market

15-20 yearConsolidating Bear Market

Demographics Dictate Destiny

About 2/3 through to trough-bottom in 2015

Corporate Profits Generally Track Growth in GDP

Although Exogenous Events can “put a thumb on the scale”

Oil Crisis

Asian Crisis

Credit Crunch

And the Stock Market also Tracks Growth in GDP

Consumptive Spending leaves little over for future users or for economic growth

Private Consumption Demand, plus Gross Fixed Investment Spending, plus Government Consumptive Spending (all

levels)

Plus/minus exports and imports

Gross Domestic Product consists of:

US Government SpendingSqueezes Private Sector Growth and Consumer

SpendingS&P 500

Financed WithOther People’s Money

Chrushing Consumers, while neglecting growth

priorities

Economy in Troublewith Housing in the “Pits”

Economic Growth Driven by Economic Growth Driven by “Permanent” Investments “Permanent” Investments

Latest Readings4Q/11 +2.8%

3Q/11 +15.7%

GDP Stagnates During Next Several Years

Huge Surge in Unemployed

13 millionUnemployed

Massive Structural Unemployment

9% jobless rate actually closer to 20% Low-cost countries displaced US workers Technology is obsoleting many jobs

USPS cut 110,000 jobs in past 4 years and must cut 220,000 more from 572,000 in next 5 years

Austerity requires doing more with less Education systems are geared to yesterday

Siemans’ US 70,000 employees plus 3,000 open

Spiral: less income means less demand

Secular Challengesduring this coming decade

Increasing structural unemployment Declining GDP means less output and

fewer jobs Massive global debt requires austerity

and write-offs Global politicians unwilling to resolve

problems, kicking can down road Lacking confidence in political

leaders, both industry and consumers retrench

To Correct Economic Malaise and Structural Unemployment

1. Pay-down U.S. debt to sustainable level through austerity first and then economic growth

Slicing is less painful than slivering over several years

2. Create 15 million “new” jobs (10% more than today) Not just service jobs in retailing, distribution and

finance Need jobs producing technology products that provide

more goods and services from less resources to enhance standard of living

Secular Strategic Game Plan

for Investing in this Decade

Replace Buy&Hold of index or stocks with disciplined tactical allocation (select the

few best asset-class ETFs or stocks) and Use Dynamic Asset Allocation (market

timing) to switch from yesterday’s heroes to strongest horses

IVY tactical and dynamic allocation strategies require just a few minutes every month for above-average returns and below-average drawdown (spreadsheet discs available)

Cyclical Climate

Examine forces that shape economic growth over the next year or two

Identify a few indicators that measure where we are and where we’re headed

Determine investing strategies and tactics to match these conditions

Cyclical ClimateNew Political Agendas and Administrations

globallythrough 2013

Still in churning phase of Kuznets cycle Europe is sick with sovereign debt, US healing slowly from debt crisis and is improving

manufacturing efficiencies with fewer workers emerging markets coping with demand shrinkage

from their major markets in developed countries

Then why has US stock market been so strong?

Recent Market Surges WereFueled by Fed Stimulus

Liquidity

ISMs (PMIs) Confirm Direction of Stock Market

Market rises when ISM is above 50, except right after 9/11/2001

9/11

NAPM = 54.8

NMBA = 53.5

in April ‘12

For 40 years, ECRI’s

WLI Called every major SP500 Drop

The leading economic indicator (LEI), published by Economic Cycle Research Institute, is a weighted average of ten different economic and financial indicators. Above 50 is expansion, below 50 is contraction

Growth in WLI since January ’12 is now weakening

and WLI (absolute) is barely above 50 and remains below par

Consumer ConfidenceStruggling to Reach Prior

Lows

Consumer confidence still close to the worst during Normal periods

Small Business Confidenceis below normal and

weakening

Presidential CyclePresidential CycleFavors 2011 and 2012Favors 2011 and 2012

DJIA Gains during Presidential Cycle

sincesince 18861886 sincesince 19501950

% up % up YearsYears

Annual Annual GainGain

% up % up YearsYears

Annual Annual GainGain

Pre-ElectionPre-Election 79%79% 11.1%11.1% 100%100% 18.7%18.7%

ElectionElection 6969 8.48.4 9191 10.110.1

Post-ElectionPost-Election 5252 5.05.0 4545 2.02.0

MidTermMidTerm 5555 4.04.0 5555 4.64.6

This Cycle likely to be much below normal

2011Only unprofitable year in over 60

years

Rhetoric Causes Trading Rhetoric Causes Trading RangesRanges

2013 Bull Rally 2013 Bull Rally Hinges on Hinges on Severity of Severity of AusterityAusterity

SPY violated the 50/50/0 Markers in April,

but may find support at past highs

Would you be long

now?

RSI less than 50

Price is below MA50

MACD sloping down

and is under zero

DMIs are net-

negative

2012 Intermediate-Term 2012 Intermediate-Term Strategic ConclusionsStrategic Conclusions

Walk softly and carry a big stickWalk softly and carry a big stick

1. Active institutional bottom-fishing and Operation Twist in November 2011 produced strong relief rally to end-March, 2012, as cash hoards were put to work

2. Liquidity from Fed is over, Europe is in sovereign debt crisis, emerging markets slowing down: all likely to cause US stocks to sag into seasonal low by July 4 th, ‘12

3. U.S manufacturing sector becoming healthier from “creative destruction” and better technologies. But investing methods require greater selectivity in strategies and vehicles during such uncertain times

4. Political uncertainties and posturing delays problem-solving into next administration. Stocks bobble (crab-like) through 2012 into a political relief rally in Fall 2012

5. Next administration “forced” to drastically cut spending, paring Government from 20% of GDP closer to historical 15%, increasing job-losses. Big Slice will be received better than frequent small slivers. European socialism/populism will worsen problems

6. Thus 2013 likely to be a “blood bath” year for the US economy and the stock market. Using Contras and Defensives could be critical to getting any positive returns.

Depends on Who You Are?Depends on Who You Are?

Passive Investor is defined by absence of Passive Investor is defined by absence of disciplined rules to sell-off losersdisciplined rules to sell-off losers ““Snooze and lose” has destroyed many nest eggsSnooze and lose” has destroyed many nest eggs

Active investors vary in degree of activityActive investors vary in degree of activity Timing to avoid big losses = dynamic asset allocation = MA12Timing to avoid big losses = dynamic asset allocation = MA12 Periodic rebalance ETFs = tactical asset allocation = IVYPeriodic rebalance ETFs = tactical asset allocation = IVY

Monthly weed and refresh of stocks = position tradingMonthly weed and refresh of stocks = position trading Daily or weekly trading = swing tradingDaily or weekly trading = swing trading

Modestly active investors need better tools to trigger Modestly active investors need better tools to trigger sound entry and exits that stay out of harm’s waysound entry and exits that stay out of harm’s way

Strategy PreferencesStrategy PreferencesFor Intermediate Term For Intermediate Term

InvestorsInvestors

Limiting Losses Keeps More of Your

GainsSince 1885, the DJIA spent

32% of time in bear markets, going down 44% of time getting back to break-even 24% of time in net bull territory

Data from Ned Davis Research

Disciplined timing takes you out of harm’s way,when the bear market begins or in progress.

Keep more of your gains Recover losses more quickly Make more money, more of the time IVY spreadsheet discs are still available at $30

Three Simple Strategiesfor Moderately Active Investors

to stay on the RIGHT side of the market

1. Exit stocks whenever Index drops below its 12 month moving average

2. Diversify risk by holding 5 non-correlated ETFs only when each above its 10 month MA

3. Find single best-class to boost return, with moderate drawdown, by holding the “top performing” ETF of the 5, refresh monthly

During past 60 years,

Timing with 12 Month Moving Average Earned 35% More than Buy&Hold

For Dynamic Asset Allocation during Cyclical Periods,For Dynamic Asset Allocation during Cyclical Periods, 12 Month Moving Average 12 Month Moving Average

Pinpoints Reversals and Minimizes Pinpoints Reversals and Minimizes Draw-downsDraw-downs

During 10 difficult years, would have averaged 6.6% annual gain with 11.5% max draw-down

vs 1.2% gain and 52.6% mdd with Buy & Hold

Explained more fully in Dynamic Allocation book

Spreadsheet, posted monthly,

Keeps you Out of Trouble

For tactical investorsFor tactical investors

Two Easy Monthly Two Easy Monthly Refresh StrategiesRefresh Strategies

Ivy PortfolioIvy Portfolio5 asset class ETFs provide diversification5 asset class ETFs provide diversificationSimple timing avoids big draw-downsSimple timing avoids big draw-downsFew minutes each month is easy to takeFew minutes each month is easy to take

Rotation VariationRotation VariationCalculate weighted average return of Calculate weighted average return of each of the 5 ETFseach of the 5 ETFsInvest only in the top 1 or 2 ETFsInvest only in the top 1 or 2 ETFs

5 asset class ETFs5 asset class ETFsprovide diversificationprovide diversification

VTI = Vanguard Total US Market, VTI = Vanguard Total US Market, VEU = Vanguard All World ex US, VEU = Vanguard All World ex US, IEF = Intermediate Treasury Bonds,IEF = Intermediate Treasury Bonds, VNQ = Vanguard Real Estate Trust VNQ = Vanguard Real Estate Trust

Index, Index, DBC = DeutscheBank Commodities DBC = DeutscheBank Commodities

IndexIndex

Simple 10 Month Moving Simple 10 Month Moving Average avoids big draw-Average avoids big draw-

downsdowns

Diversification into 5 Asset Diversification into 5 Asset Classes Avoids Big Draw-Classes Avoids Big Draw-

downsdowns

CAGR 2.75% 9.5%pa

4750

2900

But TimingHelps KeepThe Gains

Hold the5 ETFS

IVY Basic Produces IVY Basic Produces Good Results with Little EffortGood Results with Little Effort

Refresh monthly (can rebalance Refresh monthly (can rebalance annually to 20% in each ETF). annually to 20% in each ETF).

Since 1973, beat S&P 500 and only Since 1973, beat S&P 500 and only one losing year (half-of-one percent)one losing year (half-of-one percent) 11.3% for IVY vs 9.8% for buy-and-hold11.3% for IVY vs 9.8% for buy-and-hold Max drawdown pared from 36% to 9.5%Max drawdown pared from 36% to 9.5%

IVY Spreadsheets, posted monthly,

Tells You Which ETFs to Hold

IVY BASIC, as shown, keeps you out of trouble and beats buy-and-hold returnsIVY TOP, best single ETF, produced 17.3% compound annual return over past five years

Buying the Buying the Best IVYBest IVY

Boosts Return and Draw-downBoosts Return and Draw-down

Faber calculated the 3, 6, 12 month gain for each ETF, Faber calculated the 3, 6, 12 month gain for each ETF, monthly, and then calculated the Average Returnmonthly, and then calculated the Average Return

• Boosts return to 17.6% vs 11.3% timed Ivy, but increases volatility and max drawdown

• Buying top two drops return to 16.4%, but improves volatility and Max DrawDown (and comfort level)

• Drawdown may be sharply reduced by going to cash whenever choices are below their 10 month MAs

1973 through

2008

Timed

Ivy

Top

1

Top

2

Top

3

Annz Return 11.27% 17.55% 16.42% 13.94%

Volatility 6.87% 18.62% 12.39% 10.84%

Max.Drawdown -9.53% -33.90% -27.52% -32.60%

HEG Variation had High Gains and Lower Draw-

down

Faber’s method boosts return to 17.6% vs 11.3% timed IVY, but increased one-time max drawdown to 34%

HEG variation, IVY TOP, doubled in value from January 2007 to end 2011 (17.4% annual gains with a max DD of 12.5% during Credit Crash in 2008), while buy&hold US stock ETF lost 20% thru September and 47.8% drawdown in 2008

Linked spreadsheet requires no additional time to post ETF values and isolate top performing ETF

Linked Spreadsheet Tells You Which Best ETF to Hold

Recap of Key Points

Economy and stock market will be distressed and risky for several years

Major losses can be avoided by moving out of stocks whenever below MA12

IVY BASIC stays in diversified ETFs only when each is bullish; can be 100% cash

IVY TOP skims the cream for more gain

Any Questions ?

CDs with the 3 spreadsheets and 3 tutorials

are available for $30 here or by mail.Send check and return address to:

Herb Geissler1792 Taper Drive

Upper St. Clair, PA 15241