Spectrum’s Equity Fund Shines

Spectrum Advisors Preferred Fund (SAPEX) was launched three years ago and has acquired a 5-Star Morningstar Rating Overall and 5-Star Morningstar Rating for 3 years in its fund category, Multi Alternative, made up of 288 funds. (Morningstar disclosure below) This Fund was created for investors who want equity exposure in a fund that can also reduce risk. The goal of the fund is to outperform the equity market in both up and down markets. The research and portfolio construction of SAPEX has allowed this fund to receive its high rating and perform according to its objectives. Spectrum’s research found that understanding the equity market environment is important. The stock market has different personalities in different economic environments. Depending on the market environment, Bear, Bull or Transitional, the Fund will use different “play books”. These market environment types are defined by Spectrum’s investment and research team and are not the common media definitions. The play books have different analysis tools, asset types, speed of trades, and exposure ranges that allow the Fund to be dynamic and adaptive in changing environments.


The chart above illustrates the Fund’s exposure to both stocks and bonds since inception. It had an “up market capture” of 103% and a “down market capture” of 81.5% of its blended stock-bond benchmark. For the first 6 months of 2018, SAPEX had a gain of 6.76% and outperformed the S&P 500 TR Index by 4.11% and outperformed the NYSE Composite TR Index by 7.83%. (See full performance information and disclosures below)

By combining all these strategies into an overall portfolio, the investment team strives to do four things based on the market environment: (1) Select the best stock pickers. (2) Determine how much and what kind of equity exposure to have. (3) Implement bear market strategies to reduce risk in economic recessions. (4) Specific selection of bond and credit investments may be used to add additional return when appropriate. To learn more about SAPEX, please call our office at 757-463-7600 or visit TheSpectrumFunds.com.

The performance data quoted represents past performance. Past performance does not guarantee future results. Investment return and principal value will fluctuate, so that shares, when redeemed, may by worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted and assumes the reimbursement of any dividend and/or capital gains distributions. To obtain performance data current to most recent month-end, please call toll free 1-888-572-8868.

Consider these risks before investing: Bond risk, derivatives risk, equity risk, inverse ETF risk, junk bond risk, leverage risk,
management risk, market risk, mutual fund and ETF risk, short position risk, small and medium capitalization risk, and turnover risk. There is no guarantee the fund will achieve its investment objective. You can lose money by investing in the fund. Please carefully review the prospectus for detailed information about these risks.

S&P TR 500 Index is a capitalization weighted index of 500 stocks representing all major domestic industry groups. The S&P 500 TR assumes the reinvestment of dividends and capital gains. It is not possible to directly invest in any index.

*60/40 NYSE Composite/Barclays U.S. AGG. Bond Index: This benchmark gives 60% weight to the NYSE Composite Index and 40% weight to the Barclays U.S. Agg. Bond Index. The NYSE Composite Index (NYA) measures the performance of all stocks listed on the New York Stock Exchange. It includes more than 1,900 stocks, of which over 1,500 are U.S. companies. Its breadth therefore makes it a much better indicator of market performance than narrow indexes that have far fewer components. The weights of the index constituents are calculated on the basis of their free-float market capitalization. The index itself is calculated on the basis of price return and total return, which includes dividends. The Barclays U.S. Aggregate
Bond Index measures the underlying index and performance of the total U.S. investment grade bond market. It is a market value-weighted index that tracks the daily price, coupon, pay-downs, and total return performance of fixed-rate, publicly placed, dollar-denominated, and non-convertible investment grade debt issues with at least $250 million per amount outstanding and with at least one year to final maturity.

Request a prospectus or a summary prospectus from your financial representative or by calling Gemini Fund Services at 855-582-8006 or access www.thespectrumfunds.com. These prospectuses include investment objectives, risks, fees, expenses, and other information that you should read and consider carefully before investing. Gemini Fund Services serves as transfer agent to the Fund and is not affiliated with the advisor, subadvisor or distributor.

*© 2018 Morningstar, Inc. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results. The Morningstar Rating TM for funds, or “star rating”, is calculated for managed products (including mutual funds, variable annuity and variable life subaccounts, exchange-traded funds, closed-end funds, and separate accounts) with at least a three-year history. Exchange-traded funds and open-ended mutual funds are considered a single population for comparative purposes. It is calculated based on a Morningstar Risk-Adjusted Return measure that accounts for variation in a managed product’s monthly excess performance, placing more emphasis on downward variations and rewarding consistent performance. The top 10% of products in each product category receive 5 stars, the next 22.5% receive 4 stars, the next 35% receive 3 stars, the next 22.5% receive 2 stars and the bottom 10% receive 1 star. The Overall Morningstar Rating for a managed product is derived from a weighted average of the performance figures associated with its three-, five- and ten-year (if applicable) Morningstar Rating metrics. The weights are: 100% three-year rating for 36-59 months of total returns, 60% five-year rating/40% three-year rating for 60-119 months of total returns, and 50% 10-year rating/30% five-year rating/20% three-year rating for 120 or more months of total returns. While the 10-year overall star rating formula seems to give the most weight to the 10-year period, the most recent three-year period actually has the greatest impact because it is included in all three rating periods.

It’s All Greek to Me: 5 Statistics to Better Understand your Investments

When it comes to analyzing new investment opportunities or your current investment portfolio allocation there is more than just performance to consider. Many of us hire financial advisors or use brokers so we do not have to think about the other important statistics, but knowing just enough and asking your advisors, or even yourself, the right questions is important for safeguarding your investments. After all this is your money, and many times a portfolio represents your financial dreams. The investment world has some confusing terms and complicated statistics. Your broker, financial planner or financial advisor may use words like beta, total return, r-squared or standard deviation. These statistics are often times found on mutual fund and ETF fact sheets. Many times, we just want to know “Did I do well? Did the investment or my portfolio do what it was supposed to do?”. These types of statistics can give you that information and reveal if you took on more risk than necessary. For example, various statistics can identify if your fixed income fund or equity ETF was more volatile than an alternative investment option that had the same or similar return. This blog article introduces and gives a general overview of 5 performance measures/statistics that you should understand when it comes to evaluating your portfolio: total return vs. annualized return, standard deviation, beta, and r-squared.

Total Return vs. Annualized Return- How much did I/it make?

Everyone wants to know: “How well did I do this year?”. A return is calculated by taking the ending value of your portfolio and subtracting it by the beginning value of your portfolio and dividing that number by the beginning value. This can be done for multiple time frames.

If you started with $10,000 in your portfolio and 24 months later the value of your portfolio was $15,000 (assuming no additions or withdrawals) what is your return?

  • $15,000-$10,000 = $5,000
  • $5,000/$10,000= .5
  • Your 24-month return is 50%

The 50% is also called your Total Return for 24 months- not bad! But what is your annualized return? For that calculation, you need to know what your total return was each year that the 24 months represents. This may be an over simplification but illustrates the point.

  • 2016 your portfolio had a total return of 3% and in 2017 your portfolio made 47%
  • 3% + 47% = 50%
  • 50%/2= 25%
  • Your annualized return is 25%!

But wait, did you make 25% each year? No, you did not. Think of your annualized return as your simple average, because that is the way it is calculated. You could make 0% one year and 50% the next year and your annualized return for your portfolio, or for an investment, will be 25%.

Note: Be careful when looking at annualized returns and understand that it does not mean that the annualized return is how much you will make, or did make, every single year.

You should always look at the time frames and the total return numbers per year to get a better understanding of how the investment/portfolio performs. This is also why you should be aware of a few other statistical numbers to better evaluate your portfolio or an investment.

Standard Deviation- How much does the return fluctuate?

The standard deviation of an investment, or your portfolio, is also known as its historical volatility, or fluctuation, in returns. It is a measure of the dispersion of a set of data from its mean. Stated otherwise, taking the average return for that investment how much did the other returns deviate from the average? Let’s use our return example from before and add on some more years.

  • 1 Year Returns: 3%, 47%, 8%, 0%, 2%
  • Total return (16,000-10,000= 6,000/10,000= 60%)
  • Annualized Return= 60%/5years= 12%
  • Standard Deviation= 19.79

What does 19.79 represent? Generally, the smaller the standard deviation the less variance there is to the average return. The higher the standard deviation, the greater the variations to the average return. Our example shows that there is a large difference between the 12% annualized return and the actual total return per year.

If you see a high number, then historically this investment can be very volatile. Depending on your tolerance for volatility and risk this may or may not be important to you.

Always remember, that past performance does not guarantee future results. Also pay attention to the time frame of these statistics. In our example, we based the standard deviation on 1-year calculations. Typically, 3-5-year calculations are used.

Beta- How volatile is the investment compared to its benchmark?

Beta is a comparative statistic, and measures the volatility of an investment/portfolio compared to a benchmark.

*A quick word about benchmarks, if you have invested in a fixed income fund that only invests in municipal bonds do not compare it to the S&P500, compare it to a municipal bond index. The principal is to compare apples to apples. The S&P 500 is an equity benchmark that only represents 500 of the largest companies that are publicly traded. Did you know that there are over 5,000 publicly traded companies that represent just the domestic (US only) equity market? And equities (stocks) are different from fixed income (bonds) in the way these investment products are structured and what influences their value.

Back to beta and how it measures the volatility of an investment compared to a benchmark. Why would you want to know this? Wouldn’t you like to know if you are invested in something that takes on more risk than another investment that has the same return? Beta is another puzzle piece to fully understanding, “How well did I do this year?”.

For this statistic, the market’s (chosen benchmark) beta is set at 1; a higher beta than 1 is considered to be more volatile than the benchmark, while a beta lower than 1 is considered to be less volatile.

Here is an example: If a fixed income mutual fund shows a beta of .83 or 83% as volatile as compared to the Barclays Aggregate Bond Index (benchmark used in this example) over a 3-year period, then it means the volatility was 17% less than the index (less because the beta is lower than 1 and 17% less because 1-.83 is .17). This is an important statistic to understand and know when you would like low volatility in your investments and/or portfolio.

R-Squared- How similar is this investment/portfolio to a benchmark?

R-Squared is a measurement of how closely an investment’s or portfolio’s performance correlates with a benchmark or index. The number can range between 0 and 1. An r-squared of 1 indicates perfect correlation, while a 0 indicates no correlation. For example, if I hold the S&P 500 index ETF my understanding is that it should mimic the S&P500 Index due to the ETF’s stated objective. For this investment I would like to see an r-squared of 1 or a number very close to 1. If I hold an actively managed fixed income mutual fund the r-squared should fluctuate with the fixed income market movements because it is actively managed. R-squared can tell me how the fund’s performance correlates to its benchmark. This is an important statistic to understand and know because it reveals valuable information.

Let’s use our example of the actively managed fixed income mutual fund.

The purpose of an actively managed fund is to lower or limit exposure to downside movements or drawdowns within its investable market, and then to expose the fund, or become invested, when the investable market is rising (this is how you make money after all!).

If the fixed income market is having a drawdown period, or bear market, I would want my r-squared statistic to show very low correlation because that means my returns for that time period are not similar to the market or benchmark. If it was correlated that would mean my investments or portfolio are having a drawdown period too, and that is not good. During a bull market, or a rising market, I would want my r-squared statistic to show a strong correlation because that means my investment’s or portfolio’s return is acting similar to the fixed income market or benchmark.

Know that you need to understand the purpose of your investment (mutual fund, etf, etc.) and its stated objective, and also have a clear understanding for what you want your investment or portfolio to look like and act like.

This will determine how you read and interpret the r-squared statistic.

Understanding what you are invested in and how well you did is very important. This blog article was an introduction to just a few different types of statistics and performance measurements that come in handy in evaluating a potential investment or a group of investments in your portfolio.

Limiting your focus to only performance may mislead or skew your analysis and lead to poor investment choices: either passing up a good investment or investing in a bad one.

The time frames used when calculating these statistics must be understood as well. Investing is personal and subjective. Before you begin investing or analyzing an investment with these statistics, first ask yourself how you would like your portfolio or investments to act. What types of drawdowns are you comfortable with? What types of returns would you like realistic to your personal risk tolerance? After you know what you want and what type of risk you can tolerate, these statistics help guide you to choose the most suitable investments. The statistics and performance measures we covered today were: total return vs. annualized return, standard deviation, beta and r-squared. The statistics on mutual funds or ETFs can change unintentionally overtime as portfolio managers perhaps lose their “mojo” or an investment becomes unsuitable for your current financial objectives. Spectrum monitors and analyzes the changes in these statistics to provide active management which is suitable for the current market conditions.  If you have any questions regarding your current portfolio allocation or would like more information on our products, feel free to give our office a call!

Using the US Dollar to Gain Insight

The US Dollar’s impact on various asset classes had morphed over the years. One that still seems to be relevant is to foreign equities.  One of the impacts is very direct and another is less direct.  The first is simply by way of currency translation.  A strengthening dollar, by definition, means a lower value in the local currency of which the foreign equities may be priced.  A lesser impact, but one still visible, is due to how many foreign economies have a relatively high reliance on commodity-based exports.  An uptrend in the US Dollar can act as a headwind to commodity prices, which in turn, can weigh on the fundamentals of foreign companies as they accept less compensation in their own currency.  Even most chart-focused investors would agree fundamentals make themselves known in the longer-term trends and patterns visible on charts.

US Dollar Index = red
MSCI World Index (ex-US) = green
Commodity Research Bureau Total Return Index = blue

This chart reinforces the concept that the US Dollar does not act as a primary driver of macro trends but can be an influencer of how the trends take shape. “Gusting” periods, in which the US Dollar moves rapidly up or down, tend to have the most obvious impact to the global equity markets as represented by the MSCI World Index ex-US (MXWDU).  Rally phases are not exclusive to falling dollar periods but that tends to be when foreign equities rise with the least amount of volatility.  Rising periods by the foreign equities can be seen during rising US Dollar phases but the effort appears to be much more volatile and labored, like someone walking up a hill during a windy day.  The sharpest declines in foreign equities appear to be when the US Dollar is accelerating higher.  Lower volatility sideways paths in the US Dollar seem to be when foreign markets likely follow broader fundamental influences such as global economic activity.

This chart also shows how commodities, as measured by the CRB Total Return Index, has an inverse correlation to the US Dollar. This blog piece is primary to increase the awareness of the dollar’s impact on foreign equities.  Many foreign, especially emerging markets, often have high levels of reliance on commodity relates industries and commodity exports.  Monitoring changes in the dollar and its impact to commodities can give added color into some of what can influence foreign equities.  Once again, it is important to recognize the correlation as being one over time and not highly rigid during shorter time frames.

Chart-based assessment of the US Dollar can be a useful tool to investors seeking to diversify analysis techniques. Lower relative volatility of the US Dollar may lead investors to insights more difficult to conclude if focusing methods on underlying assets with higher volatility such as commodities and foreign equities.

February 2018 Spectrum Review

The transition from January to February was tumultuous, with volatility spiking 100% in a single day, and the Dow Jones Industrial Average posting its largest one day point drop in history. The panic was short lived however, as equities bottomed mid-month and rebounded sharply. Much of this was attributed to the rising 10-year Treasury yield which hit a 4-year high, and concerns over increased inflation as wage data and CPI (Consumer Price Index) readings came in hot. Declines were seen across the board, impacting not only domestic equity and fixed income sectors, but around the globe including a drop in commodity prices. Investor outlook appears to be edging back to bullish, but the recent shakeup has taken its toll on sentiment.

The sharp correction in the stock market allowed for interesting insights within the bond market. Investment grade bonds, represented in the chart above by the Barclays U.S. Aggregate Bond TR Index, and the US 30-year Treasury Bond Futures often benefit from equity market turbulence as fearful investors seek the relative safety of those bonds classes.  In February, however, that did not occur. This is perhaps due to the perception that a macro change to rising rates could erode the value of these interest sensitive bond classes.  The S&P Leveraged Loan TR Index weathered the February storm well as the class is generally perceived as having the ability to adjust to rising interest rates.  High yield bonds have benefited from low default rates as the growing economy has strengthened corporate balance sheets.  With yield spreads being tight, however, potential investors are currently being less compensated for risk.  This has made high yield bonds more sensitive to interest rate fluctuations, hence the increased volatility over the last twelve months.  Many other bond classes exist beyond what is being displayed in the chart above, but most fall under the same market forces as described.  Few bond categories are currently displaying leadership, but such transitional environments tend to be temporary and new trends will eventually emerge.

The charts above represent several categories within the high yield market. By looking at multiple categories, information regarding risk can be assessed which plays a role within Spectrum strategies.

Products such as the iShares iBOXX High Yield Bond ETF (HYG) and Credit Default Swaps tend to be more sensitive to changes in investor sentiment. Volatility and trends are monitored to assess the odds of a continued bullish outcome.  The yield spread is another measure of investment risk.  Generally speaking, it measures the difference in yield between treasury bonds and high yield bonds.  Spreads widen when investor fear is heightened, sometimes for valid, longer-term reasons, and sometimes for short-lived, more emotional reasons.  A favorable environment is characterized by declining yield spreads. This was the case for 2016.  The trend changed in early 2017 with a shift into a rather tight range and remained that way throughout the year.  An improving economy has been a positive underpinning for high yield bonds but the sideways range in the yield spread has removed one of the formerly favorable characteristics.  That can help explain the continued uptrend in high yield bonds but at a lesser slope.  A break to the upside by the spread, could possibly play a role in defining a more challenging period for high yield bonds.

Our strategies have various requirements before taking positions. The Dynamic High Yield Strategy often takes advantage of the shorter-term opportunities while the High Yield Strategy generally waits for lower volatility and more discernable positive trends.  The Leveraged High Yield Strategy incorporates elements of both.

Major equity indexes around the globe were very volatile in February as crowded trades built on over exuberance gave way to fearful selling. Non-U.S. equities also had the unfavorable influence of a shaky, but upward, bias in the U.S. Dollar.  Macro trends have become questionable, not full bullish and not fully bearish, as most major indexes ended February around the middle of multi-month trading ranges.

SecurityMaxx Strategies – An Inside Look

HIGH YIELD BOND
This strategy became invested in early January but the momentum loss in late January prompted a relatively quick exit by very early February and remained in cash for the remainder of the month.

LEVERAGED HIGH YIELD BOND
The strategy began the month with only core positions invested but quickly exited to the safety of cash as risk parameters moved beyond acceptable levels.

DYNAMIC HIGH YIELD
This nimble strategy sold to cash very early in February, but oversold readings soon warranted an invested position that remained throughout the rest of the month.

INTERNATIONAL SECTOR
Overall, exposure was reduced in emerging and developed foreign markets but smaller tactical trades were implemented as opportunities arose, primarily in the emerging markets.

CORE FOCUS
The Major Trend Index (MTI) slipped from positive to neutral as a result of weakening in the Momentum/Breadth indicators. If the MTI does not improve to positive, the discipline requires a reduction in stock exposure from the current 60% allocation. If concerns about trade tariffs persist, the current large cap stock bias can shift to small cap stocks that are less impacted by import/export relationships. Current small cap exposure is only 10% of the total portfolio.

 

BENCHMARK PERFORMANCE

TOTAL
RETURN

TOTAL
RETURN

             Feb

YTD

Barclays High Yield VL TR Index

-0.90%

-0.57%

All US Domestic Equity Funds (Avg. US Stock Fund)

-3.61%

0.57%

NASDAQ Composite TR Index (w/dividends)

-1.74%

5.54%

S&P 500 TR Index (w/ dividends)

-3.69%

1.83%

MSCI World ex USA TR Index

-4.70%

0.62%

 

Barclays U.S. AGG: Bond TR Index is a market capitalization-weighted index comprised of USD-denominated, investment-grade, fixed-rate, taxable bonds. The index includes government securities, mortgage-backed securities, asset-backed securities and corporate securities all with a maturity of greater than one year.

Barclays High Yield VL TR Index includes publicly issued U.S. dollar denominated non-investment grade, fixed-rate taxable corporate bonds that have a remaining maturity of at least one year, regardless of optionality.

S&P/LSTA U.S. Leverage Loan 100 TR Index comprised of the 100 largest bank loans with floating rate coupons.

iShares iBoxx High Yield Corporate Bond ETF (HYG) which seeks to track the investment results of an index composed of U.S. dollar-denominated, high yield corporate bonds.

CDS (Credit Default Swaps) a financial contract whereby a buyer of corporate or sovereign debt in the form of bonds attempts to eliminate possible loss arising from default by the issuer of the bonds. This is achieved by the issuer of the bonds insuring the buyer’s potential losses as part of the agreement.

Standard and Poor’s 500 TR Index (S&P500) is a capitalization weighted index of 500 stocks representing all major domestic industry groups and assumes the reinvestment of dividends and capital gains.

NASDAQ Composite TR Index is a broad-based capitalization-weighted index of stocks in all three NASDAQ tiers: Global Select, Global Market, and Capital Market.

All US Domestic Equity Funds: Is an arithmetic average of all US Domestic Equity Mutual Funds, provided monthly by the Wall Street Journal

Russell 2000 Small-Cap TR Index measures the performance of the small-capitalization sector of the U.S. equity market.

MSCI World ex USA TR Index (MXWDU) is a capitalization weighted index that monitors the performance of stocks from around the world other than the US.

Major Trend Index (MTI, developed by The Leuthold Group LLC) is designed to recognize major market trends rather than intermediate moves, combining over 180 individual components to assess the overall health of the stock market. It includes Intrinsic Value Indicators, Supply/Demand Tools, Market Action Tools, Attitudinal Gauges, and Economic/Interest Rates/Inflation Measures. Revisions and weighting adjustments are made from time to time.

Spectrum Market Update

After an overly optimistic start in the month of January the markets have corrected in a volatile decline, the likes of which we have not seen in several years. The combination of euphoric buying, overvalued stock prices, and the realization that the Federal Reserve will be raising interest rates several times this year to fight inflation contributed to a severe selloff and extreme market volatility. In 9 days the Dow Jones Average has dropped 10%, one of the fastest corrections in history. This follows a period of over 500 days of not having a 10% correction. The longer the market goes without a correction, the more violent it can be to work out the excesses in the financial system. While the majority of the time a situation like this leads to favorable returns over the 12-month period following a correction, there are a number of times when very nasty things happen. A majority of the investment managers today are younger and have not experienced what can happen to buy and hold investors. More recently, in the past 20 years, we have had two stock market corrections in excess of 50%. This kind of activity can cause investors who have buy and hold portfolios to change their lifestyle.

Current Portfolio Updates show reduced exposure to portfolios prior to the correction:

Spectrum High Yield Bond Strategy: Exposure was moved to the safety of the money market on Feb 2.

Spectrum Dynamic High Yield Bond Strategy: exposure continues to take advantage of shorter term movements while maintaining a strict focus on risk management

Spectrum International Sector Strategy: exposure to volatile equity sectors has been reduced and exposure to alternative risk-adjusted sources has been maintained.

Spectrum Core Focus Strategy: continues its hedge equity exposure due to unchanged macro themes despite the heightened volatility.

The Spectrum Low Volatility Fund: SVARX had no high yield bond or stock exposure for the decline, and leverage of other credit positions has been eliminated.  It remains the number 1 ranked U.S.-domiciled nontraditional bond fund by Morningstar out of 280 funds for the past three years date ending 2/8/18*. Please visit www.thespectrumfunds.com for more information and fund documents.

The Spectrum Advisors Preferred Fund: SAPEX, our alternative equity fund, transitioned exposure out of traditionally higher beta positions while still maintaining exposure for this macro bull market trend. The fixed income exposure has been reduced due to the few fixed income sectors having acceptable technical characteristics. Please visit www.thespectrumfunds.com for more information and fund documents.

The Hundredfold Select Alternative Fund: SFHYX/HFSAX, managed by Hundredfold Advisors, LLC (Ralph Doudera, Portfolio Manager), also has little high yield bond exposure and very modest stock exposure. Leverage of credit positions has also been eliminated. The alternative exposure has actively managed the commodities space maintaining the objective of low volatility. Please visit www.hundredfoldselect.com for more information and fund documents.

Our portfolios are very actively managed. Spectrum has been managing risk for over 30 years, and has seen about every market condition imaginable. Our primary concern is not making lots of money, but by providing superior risk adjusted returns for clients. We want clients to know that they don’t have to pay attention to market volatility because that is what we do best. While this correction may be just a hiccup on the way to new high prices, it may also be the beginning of a bear market. Bear markets begin with extended prices, and optimism. Our Bull/Bear monitoring system this week raised the caution flag after several years, but has not gone to the sell side yet. It is in a wait and see mode.  Any investors who are buy and hold stock investors need to think through whether or not a 50% decline in their account will change their lifestyle, and if so, pay attention. Remember almost every bull market has eventually had a correction of about 50% of the gains, and this market is up 300% since 2009.

Remember: Steady plodding brings prosperity, hasty speculation brings poverty. Proverbs 21:5

*© 2017 Morningstar, Inc. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results.

Does Bitcoin belong in your Portfolio?

Recently we visited the New York Stock Exchange, and there was a Bitcoin buzz in the air. With Bitcoin futures beginning to trade on the CBOE, there were supporters and nay-sayers. Due to a recent soar in prices of Bitcoin, and other cryptocurrencies, these have become a tempting alternative investment. However Bitcoin is currently unregulated, and highly volatile. There is no FDIC to back this new currency.

So what is a Bitcoin? It is a digital currency that can be used to make peer-to-peer payments without an intermediary or bank. Bitcoins have no central backer and rely on a decentralized network of record keepers that all work the same ledger of transactions. These transactions are called the “block chain”. The idea of the block chain is to record all transactions and share this information with the Bitcoin network without having to rely on one entity to verify or control the currency. Miners are rewarded for validating transactions utilizing an equation and in return are paid in Bitcoins. The honest chain will always beat an attacker’s chain by a process known as Binomial Random Walk. This calculation is similar to the Gambler’s Ruin principal.  The Good chain will always prevail, similar to how the House always wins in Vegas.

Bitcoin is only worth what the sum of its buyers are willing to pay for it. As with any asset, if everyone stops holding it, the value plummets.

Bitcoin is officially the biggest bubble the world has ever seen as measured as a multiple of its starting price. The spike eclipses the chaos around Dutch “tulip mania” in the 1600s, the Mississippi Bubble of the 1700s, and the dot-com bubble of the late 1990s and early 2000s. Bitcoin has already surged 2000% in the last year alone. But that doesn’t necessary mean the party is over. Blockchain technology has numerous benefits and is here to stay. This technology has the potential to revolutionize transactions by reducing complexity, costs, boosting accuracy and lowering risk.

Will Bitcoin be a homerun, or the biggest loser of this century?
Only time will tell.

“Steady plodding brings prosperity; hasty speculation brings poverty” (Proverbs 21:5, LB) is written on the back of every newsletter Spectrum has written. We believe in protecting principal so goals like retirement, dream purchases, sending kids or grandkids to college, can be achieved.  So, does Bitcoin belong in your Portfolio?

The Current Market Environment: Where is the Risk?

Markets have historically had psychological booms and busts since the beginning of time. The fear/greed syndrome will continue to drive investors into making emotional decisions at the wrong time. Human nature will remain the same. Mania has always gripped the markets from season to season. Gold, tulip bulbs, real estate, tech, oil. Bubbles tend to develop, and while “bubbles” can continue a lot longer than predicted, they will all come to a very unpleasant ending. For example, Japan’s market hit it’s high in 1989 and 18 years later it was still down 55% from its high. Knowing which markets to avoid and when to exit them is an important philosophy to have present in a portfolio. While I expect the markets to continue their bull market run, we always need to sit close to the exits when technical market conditions deteriorate.

In April of 2007, I wrote the paragraph above in our quarterly newsletter to our clients. In January of 2008 we received our bear market signal and saved clients a lot of money by going to cash. Liquidity is a pillar of risk management, and our clients were positioned to make double digit returns in 2009. In 2017 I have the same feelings: While I expect the markets to continue their bull market run, we always need to sit close to the exits when technical market conditions deteriorate.

The chart below illustrates our Market Environment Model. This model has indicated a bull market environment since early 2016, following a significant market sell-off beginning in mid-2015. The indicators that we utilize illustrate higher market risk, and can cause us to significantly reduce exposure to stocks. We currently use a proprietary combination of four components: (1) Moving average model of major equity indexes, (2) Weekly Directional Movement Index model, which defines the quality of the trend, (3) Negative Leadership Composite as defined by Investech, and (4) Spectrum’s High Yield Bond signal, which confirms a healthy economy. These four indicators together are not a forecasting device, but they give us insight into levels of market risk. Depending on this evaluation, we adapt trading strategies to become more aggressively invested or more defensive to reduce risk.Created with TradeStation. © TradeStation Technologies, Inc.  All rights reserved.

With the stock market hitting new highs, investors are beginning to get overly-excited about this bull market. Since 1932, there have been 16 bull markets, the average of which lasted 3.8 years. The current one is 8.4 years old and is approaching the longest of 9.4 years in the 1990s. Clients, managers and allocators tend to forget about risk when they are making money. I always think about risk because I have seen a lot of those 16 bull markets. I remember quite well 1987 when the market corrected 30% in two weeks. That changed a lot of plans for a lot of people. Are you evaluating risk in 2018?

Still A Bull Market?

Spectrum developed a propriety indicator that shows us when to step to the sidelines to reduce equity exposure. This methodology is designed to capture many technical indicators and consolidate them to illustrate bullish and bearish environments.

Created with TradeStation. © TradeStation Technologies, Inc.  All rights reserved.

The lower section charts this methodology and provides “buy” and “sell” points indicated by the yellow circles. This macro view of the general market can be used not only in equity positioning but also in our bond models.  Risk management is at the forefront of our investment philosophy and preserving principal is extremely important for our clients.

InvestTech says it best in its November 17, 2017 issue.

If the S&P 500 closes high in November, it will have posted a positive total return for 13 consecutive months, surpassed only once in 90 years – 1959. The next year (1960) the economy entered a recession.
We’re not sharing these insights because we have turned bearish in our market outlook. We haven’t.  Most technical evidence and virtually all macroeconomic data still point to new bull market highs immediately ahead.  However, it is becoming increasingly important to remember that trees do not grow to the sky, and bull markets do not last forever.  And don’t forget that virtually every bear market except one (1956) has repossessed or taken back roughly one-half or more of the previous bull market’s gain.  www.investTech.com

it is becoming increasingly important to remember that trees do not grow to the sky, and bull markets do not last forever. 

Spectrum agrees. Our models also indicate a bullish market environment for equities so until our indicators reveal elevated risk we will participate, but our exposure is watched closely on a daily, hourly, even minute by minute basis.  We will act quickly to reduce exposure when our indicators reveal elevated equity risk.

Equally important to remember – just like all bull markets come to an end, bear markets end as well. Spectrum’s philosophy, investment methods, and analysis tools allow us to position our client’s preserved principal to take advantage of the next market opportunity.

US Dollar Impact on Bonds and Interest Rates

Well known technical analyst and commentator, John Murphy, CMT, authored the groundbreaking book, “Intermarket Technical Analysis”, published in 1991. He covered his research of how stocks, bonds, commodities, and currencies influence each other with varying degrees and various lead and lag times.  Armed with a ruler, a plain white sheet of paper, and a pencil, I was able to make a cross comparison grid that displayed all the asset classes he noted in the book.  Each cross comparison highlighted the direct or indirect influence, the lead, lag or coincident impact, and the typical time in months of that impact.  The US Dollar stood out on the grid because his work found that it had a leading tendency across most of the asset classes with a couple being coincidental while not being a laggard to any.  A couple of years later, in 1994, I met John at a conference.  Like a star struck teenager getting a Taylor Swift autograph, I excitedly had him sign my copy of his book.  I also showed him the grid.  He smiled and said, “perhaps I ought to add something like that to my next revision”.  That made my day.  He also said something extremely important.  He said that he was noticing the intermarket relationships were evolving…

The US Dollar is like the wind blowing through the investment world. It can act as a headwind or a tailwind to most all asset classes.

Sometimes the influence is only slight and other times the gusts can be highly influential and blow an asset sharply off course.  Over the last 25 years, the world has changed significantly.  Technical or chart-based investors focus less on the why and more on the bottom line.  That said the dollar’s role has evolved as relatively new players have entered the scene.  Historically small economies, such as China, have recently taken on greater roles in trade.  Global oil trade in US Dollars has undergone correlation changes as the US has become less dependent on foreign oil.

With what has been covered so far, there are many paths we can walk down in how the US Dollar influences other assets or is impacted by other assets. To rein it in, let’s start with bonds and interest rates.

Created with TradeStation. © TradeStation Technologies, Inc.  All rights reserved.

In our example (chart above), we will use the iShares 20+ Year Treasury Bond ETF (TLT) to represent longer-term bond prices. Keep in mind as bond prices rise, interest rates fall.  As mentioned earlier, the US Dollar is like a wind that generally blows against the direction of bond prices and in the same direction of yields.  At the risk of oversimplifying, rising rates attract dollar denominated investment.  A reason why that risks oversimplification is because investors often take action in anticipation of future events.  Therefore, the US Dollar can lead if domestic economic activity is improving, attracting investors from around the globe to need US dollars for US investments.  As economic activity improves, interest rates rise which can increase demand for dollars.  However, sometimes interest rates are held artificially low as economic activity shows signs of improvement.  I have heard it said that the US Dollar is the stock certificate of the United States.  If people are bullish on America, then they need US Dollars to put their investment plan in action.  So there really is not a consistent starting point but we can recognize the inverse nature of the US Dollar to bond prices.  Don’t be too eager to assign a cause and effect because sometimes demand for the dollar leads and sometimes it is demand for bonds.  Be satisfied in simply knowing a relationship exists.  Arrows on the chart illustrate the concept of inverse directional bias.  The general trend of the TLT has been up during the first three quarters of 2017, while the general trend of the dollar is down.  Trend direction appears to have changed in early September.

So why go through all the trouble? Investors implementing charting techniques may find it easier to analyze the dollar and then draw conclusions about bonds and interest rates.  Traditional chart methods such as breakout/breakdown implications and trend line breaks are much more misleading on charts of the TLT versus the lower volatility trending nature of the US Dollar.  No method is perfect but it only takes a quick look to conclude the price action in the TLT is more volatile than the US Dollar.

It can be very frustrating to learn a new concept and have it appear to not work. Setting expectations is important and in this case, the inverse direction bias of the dollar to bonds should not be assumed as being in rigid lock-step.  In the lower pane of the chart, two measures of correlation are displayed.  If the dollar (UUP) moves in the opposite direction as the bond (TLT), then a blue dot is plotted at -1.0.  Those are the days in which the theme of this blog is easy to embrace.  If the dollar (UUP) moves in the same direction as the bond (TLT), then the blue line is plotted at +1.0.  During 2017, there are many days in which the bond and the dollar moved in the same direction.  For example, those are the days in which a viewer may be tempted to abandon these concepts – abandoning what ultimately could be a useful concept.  A red line can be seen in the lower pane that represents a 21-day average of the 1-day correlation.  Other than in mid-February and mid-July, the rolling 21-day average of correlation fits the norm of being inversely correlated.

If we are comfortable with the idea of inverse correlation but with the understanding it is not precise, then we can take the next step. Instead of focusing on implementation of trend analysis and other charting techniques applied to bonds or interest rates,

applying methods to the less volatile US Dollar could prove useful.

Conclusions derived from chart analysis of the dollar can then be transferred over to bonds (inverse conclusions) or the interest rates (same conclusions).  Actual chart-based methods are vast and beyond the scope of this blog.  The bottom line concept is if bullish conclusions are derived after assessing the dollar then a bullish outlook on interest rates (bearish on bond prices) can be concluded.

Chart-based assessment of the US Dollar should not be the only method but can be a useful tool to investors seeking to diversify analysis techniques within bond and interest rate assessment. Lower relative volatility of the US Dollar may lead investors to insights more difficult to conclude if focusing methods on underlying assets with higher volatility such as long-term interest rates.

Selective Leverage: Achieving Returns and Low Beta

If you could purchase an apartment building today that produced a cash flow after all expenses of 8% a year, you might be pleased with your cash on cash return in the current interest rate environment. If you financed your property with a 50% mortgage which had an interest rate of 4%, you could purchase two apartments for the same equity. Scenario one has a net investment return of 8%, but the second scenario will generate a 12% net rate of return on the same investment. A downturn in real estate values might depress the investment return upon sale, but increasing values will give an even higher return. This uses the concept of leverage which can have significant advantages in certain market conditions.

The chart below illustrates the performance of the SFI Floating Rate Index since 2012. This index is an average of four short-term senior floating rate mutual funds which accrue a daily dividend. It is normally a low risk investment that has a dividend payout currently of about 5%. Let’s say if I were able to borrow funds currently at 1.5% , and have a 50% loan amount like the previous example, I will enhance my return by 3.5% a year on the portfolio. The difference between this example and the real estate example is

with liquid investment vehicles there is daily liquidity on the investments- you must have liquidity to manage risk well.

You can go to a liquid cash position without a real estate commission or waiting around for a buyer to come along. The liquidity of the investment vehicle combined with the low volatile characteristics of this asset class can make the use of selective leverage low risk. This concept can enhance returns while still controlling investment risk when you layer a low volatile investment, like the floating rate exposure, with maybe riskier asset classes, like high yield bonds in a fund.

Selective leverage is one tool to use to meet the objectives of enhancing returns and controlling investment risk- something every investor and shareholder want. I have been applying leverage to high yield bonds and other fixed income asset classes since 1996 in SMA strategies and later in the mutual funds I manage, via derivatives and swap contracts, with the ability to still maintain low beta. Why? Because I think about risks before returns, I always use liquidity, and I know the characteristics of my underlying investments. There are times to use leverage and times when the entire portfolio should be in a liquid cash position. There must be expertise present to determine when, and where, to put leverage on or take it off. Leverage and the tools you use to present leverage in your funds or portfolios does not always mean higher risk.

How many of you have enough money?

I asked this question to an adult Sunday school class I was teaching a few years ago. Not many hands went up. I didn’t dare to ask how many were tithing (or giving the first 10% of their income away). That seems to be a topic as sensitive as asking about someone’s sex life.  But when I asked who would give more if they won the lottery, all hands went up.  My observation has been that if someone was not giving 10% now, he or she wouldn’t give any more even if they had more.

Stewardship is not based on what you don’t have, but on what you currently do have .

Stewardship is a New Testament concept, whereas tithing is taught in the Old Testament. “…The purpose of tithing is to teach you always to put God first in your lives” (Deuteronomy 14:23 The Living Bible).  The concept of stewardship puts a new perspective on giving.  It takes the “my” out of what I control, and returns ownership back to God.  I only control its use.  The New Testament teaches that “If you are not faithful in the way you manage unrighteous mammon, God will withhold from you true riches which are spiritual blessing.” (Luke 16:11 paraphrased). So how do I apply these principals to my own life?

I established a lifetime giving goal, and a new accounting system .

I keep a financial statement that reflects temporary and permanent assets.  Temporary assets include assets I still control such as real estate and investment accounts.  Permanent assets include what I have already given away to charities that I believe God would spend His money on.  I have much farther to go to meet my lifetime giving goal, but my permanent new worth has finally exceeded my temporary net worth.  Next time you prepare your financial statement, try this new accounting system.  Mother Teresa said, “Everything that is not given is lost.” I wrote a book a number of years ago, “Wealth Conundrum”, if you would like a complimentary copy, please contact our office.

The Relationship between Liquidity and Certainty

Ralph Doudera is the CEO and head portfolio manager of Spectrum Financial. He has been successfully managing money for 44 years and he will never sacrifice liquidity.

When you are a money manager for 44 years, you learn some lessons, sometimes the hard way.

That is why he chose to manage money with mutual funds and not hedge funds. Even with up to 300% leverage at times in his funds, he can be out of everything by end of day. Liquidity is important to Ralph because he has managed money in the worst bear markets since 1973. When you maintain liquidity, you can rotate into more favorable investments, even cash, depending on the market environment. Liquidity becomes your cornerstone for risk management.

Let’s pretend that you knew 2018 was going to be comparable to 1987 or 2008 – total chaos in the domestic and international financial markets.

How important would liquidity be to you?

There is a positive correlation between the certainty of bear markets and the value of liquidity (and risk management in general). Stepping back into reality, we are not certain there will be a bear market in 2018, but there will be a bear market.

Dr. Michael Burry, the hedge fund manager of Scion Capital (played by Christian Bale in the movie The Big Short), was right early, but he still ended up being right.

Actively managed strategies should always make up a percentage of your portfolios.

At a family office conference I attended in July this year, the CIO of a billion-dollar family office asked the attendees why he would sacrifice his liquidity in the private market if he could get a better risk adjusted return in the public market. He wouldn’t. Diversification does not just apply to manager investment philosophies or market sectors. It applies to the types of investment products you use and the managers you choose.

All clients value making money and not losing it. Do not become a complacent buy and hold investor in an extended Bull Market. The markets, when they correct, will not wait for you to adjust. Austin Kiplinger said, “The foundations of future fortunes are laid in bear markets.” Adversity always has a way of sifting the important things to the surface, like risk management and liquidity.

Duration vs. Maturity and Why the Difference Matters

Understanding the complexities of the bond market is important when evaluating the types of products and exposure a portfolio has within the asset classes of fixed income. The terms “duration” and “maturity” differ in the world of finance from their common everyday use. In finance, both duration and maturity refer to different characteristics a bond may have. Clarification of the definitions should help those wishing to dive a little deeper into what may be subtle yet important difference among bonds whether looking at fixed income mutual funds, ETFs, or individual bond issues.

MATURITY

How long something lasts is commonly associated with the word “duration”. An example of this would be a movie with perhaps a duration of two hours or a roller coaster with a duration of one and a half minutes.

When assessing a bond or a bond portfolio, how long the bonds last, if not sold early, is closer to the definition of “maturity”.

A 30-year Treasury Bond, as the name implies, matures or pays back its face value 30 years from its initial date. Investors are not obligated to hold the bond for the entire period as they have the option of being sold within the secondary market.  Therefore, ten years after its initial offering, a 30-year Treasury Bond will have a maturity of twenty years but is still called a “30-year” Treasury Bond.

Individual investors or portfolio managers can buy or sell bond holdings to adjust the average maturity of the portfolio. Why would they want to do that?  Generally speaking, the further out the maturity, the wider the potential price swings of the market value of the bond.  That is a very important concept to bond investors, but it is a general concept as compared to an attempt at better detailing the relationship when we cover duration.

Keep in mind bond investors recognize two types of return, the first is the interest payment income which may be paid quarterly, semi-annually or even annually.  If investing in a fixed-income mutual fund, interest payments are in the form of mutual fund dividends and may be paid monthly.  Those payment cycles will play a role when duration is covered.  The second type of return is from price changes of the bond itself (why maturity matters).  Putting the two types of returns together, an investor gets the “total return”.

Bonds are often quoted with two yields. See the diagram below to understand the relationship between the bond’s price and its interest rate (or coupon rate).

  1. A bond is quoted with its “coupon yield”. This refers to the annual interest payable as a percent of the original face or par value. An 8% bond with a par value of 1000 would receive $80 per year.
      1. Coupon/Interest Rate= 8%
      2. Original face or par value= $1,000
      3. Math= .08(1000)= $80
  2. The second is the “yield to maturity” (YTM). This quote takes into account the amount of years left until the bond matures and the impact the market and secondary trading of the original bond has had on the investors final total return.
    1. Example: 10 years later the original 8% bond with a par value of 1000 is actually trading at $950. Remembering the above diagram, this means the coupon/interest rate would be higher than the original 8%. So what would be the bond’s yield to maturity?
      1. The formula for YTM takes several things into account:
        1.      Original Coupon/Interest Payment (C)
        2.      Original Face or Par Value (F)
        3.      Price bond was purchased (P)
        4.      Years to maturity (n)
    2. If you plug in all the numbers and calculate the YTM when n=20 (10 years later…) the YTM quote is 8.46%
    3. Let’s say that 5 years later, interest rates have dropped and now the bond is purchased in the aftermarket for $1060. The Yield to Maturity is 7.38%

So what’s the bottom line when it comes to maturity?

Other than a few reasons that would cause a bond to end its existence prior to maturity, the life span of a bond tells an investor how long the bond may be exposed to risk – the primary one being the erosion of its value (purchasing power) when inflation is present (higher bond price, and a lower return than the coupon rate as in example 2 on YTM).

DURATION

Plain and simple, duration is the measure of a bond’s sensitivity to changes in interest rates. Complexity increases in the details of various ways duration is calculated.  We will quickly outline the calculations but then then circle back and focus on the broader concept and why investors look at duration in conjunction with maturity.

Macaulay duration, modified duration and effective duration are three types of duration calculations. Investors will more than likely run across effective duration numbers.  It is calculated by taking into account how fast a bond’s initial purchase price will be repaid based on its cash flow – this may be a weighted average if looking at a bond portfolio such as in an ETF or mutual fund.

Despite the fancy math of the different versions, duration is more of a concept and not a tool to measure an exact expected price change of the bond when interest rates change.

So what’s the bottom line when it comes to duration? An example should drive the concept home.

An investor that purchases a bond with a face or par value of $1000 would naturally wonder how much that price could be impacted by changes in interest rates. If a bond has a duration of 6 years, then a 1% change in interest rates should cause the bond to lose approximately 6% (to about $940).  Keep in mind the image of a see-saw on a playground conveying the idea that when interest rates go up, bond prices go down and the opposite is true.

As noted earlier, duration is more of a concept that estimates the impact to the bond when interest rates change. It is an estimation of the amount of up/down swing in that see-saw image.  Ultimately, market participants determine price, but keep in mind market participants would probably be using models to calculate duration in an attempt to determine supply (selling) and demand (buying).

You may have noticed the duration example had the term listed as years. That is the norm used to note duration and also the probable reason why it is can be easily confused with maturity.  Recall that the formula(s) for duration measured how long it took for the cash flows to repay the initial investment.

Now, the bottom line of the bottom line. Two bonds may have the same maturities, but their sensitivity to interest rate changes may be different.  Investors and portfolio managers not only can diversify holdings in regards to when the holdings may expire or mature, but now can diversify holdings in regards to the possible volatility or impacts to bond price movements as interest rates change.

Take high yield bonds for example – according to the iShares website (www.ishares.com), the High Yield Bond ETF (HYG) has a Weighted Average Maturity of 4.15 years and an Effective Duration of 3.59 years.  On the same website, the 3-7 Year Treasury Bond ETF (IEI) has a Weighted Average Maturity of 4.70 years and an Effective Duration of 4.42 years.  Morningstar (www.morningstar.com) lists the Guggenheim Floating Rate Fund (GIFIX) has having an Average Maturity of 5.12 years and an Effective Duration of only 0.27.  The bonds within these portfolios have, on average, a relatively similar period of time until the principal is assumed to be paid as shown by the average maturities.  However, high yield bonds are implied to have greater insulation to changes in interest rates versus the 3-7 year Treasuries.  Floating rate, as the name implies, has the characteristic of periodically adjusting their interest rate payouts making them even less susceptible to rate changes than the other two.  An investor or fund manager may be comparing these potential investments in their due diligence process.  If they have an opinion on the direction and speed of possible interest rate changes, then duration would be an important factor.

Those newer to fixed income assessment often start with seeing the bond market as one entity, perhaps thinking “the bond market was up today…”, etc. That is certainly not the case.  The next step in learning more about fixed income is to see how various classes within the bond market actually differentiate themselves in price direction and volatility.  Maturity and Duration are simply two measures among many that investors explore when attempting to separate the parts that make up the bond market.

 

Phishing Smishing: If you didn’t order it, don’t click on it.

It’s the oldest online scam in your inbox: They send out an official looking e-mail. “Your password has expired,”  “Your account is in arrears,”  “Please verify a charge,” or some emergency that needs you ASAP.  These are the tricks “phishers” use to get you to click 1st and think 2nd. So how do you protect yourself from phishing schemes?

BE WARY OF E-MAILS WITH LINKS YOU DID NOT REQUEST

Very simply–if you see an official looking communication from your bank, credit card, Amazon or any entity, directing you to take action by clicking a link–don’t!  Click it, and the bad guys verify your existence.

COMPANIES DON’T ASK FOR PASSWORDS IN E-MAILS

Hackers are really good at creating phony e-mails that look like the real thing.  The company “will never ask you for your password in an e-mail or send you a password as an attachment.”  The same goes for the IRS, banks and other officials–if you’re under an audit, you’ll be notified by the US mail. You don’t need to sign into an account that’s probably bogus.

HOW TO SPOT A FAKE E-MAIL

Fake e-mails usually look spot on, but there’s often a typo, a mis-spelled word, a contact address that isn’t a google.com or amazon.com , but instead a webmail address. Perhaps you have a Wells Fargo account and get an email from: Wells Fargo Support. Looks legit, but would they use WellsFargoSupport@gmail.com   Not likely!  I have even seen domains registered close to the legitimate such as info@amazzon.com   Just a small misspelling could get your information compromised.

Many times the pages served by these links are not secure. They will show up as http:// instead of secure https:// The S stands for secure, by the way.

WHAT IF A FRIEND SENDS YOU AN E-MAIL WITH JUST A LINK?

Be wary, inspect it, ask the friend what the intent was before agreeing to click on the link. If it doesn’t seem legit, don’t be tempted, just delete it.  If the e-mail is from a company, and you’re addressed as “sir” or “madam” and not by your name, and you’re also asked to fill out a form, the smartest solution–don’t.

SMISHING: MOBILE MAKES IT HARDER

Smishing is a phishing scam that is sent over Short Message Service (SMS) Text message. It’s not just your inbox that they are after anymore.  Most texting fraud is an attempt to get your private information by responding by text.   They often use fear tactics to get you to respond hastily.  In an age where we live on our smart phones, these fraud attempts are smaller, harder to spot, and more frequent, so you’ll need to be that more diligent and take the time for inspection.

HOW TO RESPOND TO A COMPANY WE TRUST?

Google, Facebook, Amazon, Apple and other companies routinely ask us, via an e-mail, to update our passwords when we’ve forgotten them. Their pages look authentic, and they offer e-mails with links when we ask for a reminder. So why should I click their link when they send it to re-set the password? Because you requested it from the company.  If you’re worried and want to play it safe, skip clicking in any email and go straight to your browser. Most company websites let you change your password at their registered .com addresses, by going to the account section and opting for a new password.

Finally, it goes without saying, while I have your attention, that this is a great time to update your passwords with hacker proof collections of numbers, symbols, upper and lower-case letters. Stay away from hacker favorites like “password,” 123456″ the name of your street, default, or your pet’s name.

Long passwords from a pass phrase work well. “JimwasmyfavoriteCollegePal1” is an example of a strong password.  There are secure password manager programs such as Roboform, https://www.roboform.com/ that can also securely help you keep track of your passwords.

WHAT TO DO IF I GET IN TROUBLE?

Always act quickly when you come face to face with a potential fraud, especially if you’ve lost money or believe your identity has been stolen.

FBI – If a phishing scam rolls into your email box, be sure to tell the company right away. You can also report the scam to the FBI’s Internet Fraud Complaint Center at https://www.ic3.gov/

SEC – If the email purports to come from the Securities and Exchange Commission, alert the SEC by submitting a tip online at https://denebleo.sec.gov/TCRExternal/disclaimer.xhtml

FTC– If you think that your personal information has been stolen, visit the Federal Trade Commission’s feature on Identity Theft at www.consumer.ftc.gov/features/feature-0014-identity-theft for information on how to control the damage.

High Yield Returns When Yield Spreads Are Low

This blog is taken from our January 2017 newsletter discussing yield spreads.

High Yield Returns

The yield differential between high yield bonds and US government bonds is currently only about 3.8%. This indicates that the yield on high yield bonds is paying 6.3%, where 10year government bonds only yield 2.5%.

A normal range for this yield spread is between 3% and 7%.  The lower this number is, the lower the potential returns are.

Looking at what happened in 2004, when we were midway in an economic expansion and the yield spreads were about where they are today, these charts illustrate the returns for the three years following this similar economic period. Total returns for the next few years averaged about 8.5% annually for high yield bonds. If the yield spread continues to drop, high yield bonds should continue to appreciate, but if this spread drops below 3%, a defensive strategy is likely.  Currently the yield spread is 3.33%

*The CSFB High Yield Index is designed to mirror the investible universe of the $US-denominated high yield debt market.

 

Why Use Leverage?

 

Leverage is a tool that most people use on a daily basis without the knowledge they are even using it. Think of a home mortgage, this is leverage. A person is able to put down 15-20% the actual cost of the home and borrow the remainder. That person has now leveraged their money 4-5 times beyond its normal purchasing power.

Spectrum uses leverage in some of our SMA accounts and sub-advised mutual funds to borrow money or increase exposure to potentially increase potential returns when our proprietary models indicate risk is lower and trends are established. Below is a graph showing a sampling of these periods.


Managing high yield bonds has been Spectrum’s core investment strategy since offering investment management services in 1988. We have seen about every scenario possible—war, the great recession, over- and under-valuation, and have had experience in all of them. We understand bonds, and consider them predictable, since we have observed them for over 10,000 days. If we can borrow money at 2% and purchase bonds that yield 7%, we can make a net gain of 5% in addition to the 7% bond yield. This is called “carry trade”. However, we need to have liquidity to exit these positions when they are no longer in an uptrend. Since all the funds we use have daily liquidity, we can use this strategy when appropriate without having to ride out a serious decline. So our philosophy is simply; there are times when it is good to own them, good to stand aside, and even times to consider borrowing money to own more for short periods of time when “the wind is at your back”.

Give me your Credit Card

Most of us do some shopping online. Some of us a lot! So how can we stay safe with using our credit card for all those purchases? Here are a few tips that go a long way toward protecting your assets while taking care of business:

Only shop at sites you know and trust. Most of the problems come from sites that are just a little off the beaten path. That “Unbeatable Deal!” might be a trick to steal your credit card info. But, large well-known sites are seldom a problem.

Credit is safer than Debit. Credit cards have some built-in protection like a limit on your liability. It can be as low as $50 or even zero-liability. Debit cards do not have this same protection.

Secure sites. A secure site encrypts your credit information so it can’t be stolen. Look in the website address for the extra “s” near the beginning. “https”. This means that the site is secure. It doesn’t mean that your 100% safe, but it helps a lot.

PayPal. Is PayPal safe? Absolutely. It may be safer than your credit card because it has powerful fraud and consumer protections in place. If you use PayPal, it’s best to link it to your credit card, not your bank account. This way you’ll also gain the extra layer of protection that your credit card provides. Double protection!

Protect your social. Never give out your social security number for a purchase. It’s never needed for an online transaction. If they ask for it or for more info than is needed for the transaction, cancel the purchase and run.

Review your transactions regularly. Small unfamiliar charges that show up on your bank statement could be a test from a hacker, and can give them the green light to larger fraudulent charges.

Stay Private. Don’t do online transactions on public computers or Wi-Fi. Your credentials could be saved or hacked. This could lead to identity theft or fraudulent credit card charges.

Rising Interest Rate Risk

Spectrum continues to get many questions about investing in bonds in a rising interest rate environment.

The study below shows an updated chart illustrating every period of rising government bond rates for four or more quarters since 1982. These results show that while government bonds can have loses due to interest rate risk, high yield bonds can have gains.

The CSFB High Yield Index (CSHY) is designed to mirror the investible universe of the $US-denominated high yield debt market. *Data obtained from Bloomberg.

The primary reason for this is that interest rates generally increase when economic indicators are improving, causing government bond prices to go down. However, an improving economy reduces the risk of owning high yield bonds because they should strengthen as their credit rating improves. High yield bonds act more like stocks than bonds in a favorable economic environment. This is consistent with the Federal Reserve’s commitment to keep rates low until the economy is stronger.

We believe high yield bonds should have more room to continue to be profitable in any case.

An impending recession would provide reason to reduce high yield bond exposure due to the fact that risk of default is high. By moving to a cash position when a recession becomes likely, we will be in a position to reinvest the funds and take advantage of a purchase at much lower prices. Currently high yield bonds offer a yield of 3.6% more than government bonds.

This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Spectrum Financial, Inc. in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Spectrum Financial, Inc. expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.  For full disclosure please see disclosures page here.

 

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Spectrum Financial, Inc 2018