ria economic & investment summit 2016

8/18/2019 RIA Economic & Investment Summit 2016

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Chief Investment Strategist

Clarity Financial, LLC ________________________________________

[email protected]‐501‐1791

www.realinvestmentadvice.com


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THE US ECONOMY

• “Those that doubt the strength of the U.S. economy are peddling

fiction.” – 2016 SOTU

• “US Job Creation Hits Record Not Seen Since The 1990’s”

• “US Unemployment Rates Falls And Economic Recovery

Strengthens.”

• “An Improving Economy Gives Obama His Game Back”

• “In Case You Missed It…The Economy Is Back.”


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15.00%

16.00%

17.00%

18.00%

19.00%

20.00%

21.00%

2007 2008 2009 2010 2011 2012 2013 2014

Social Benefits

As

%

Of

Real

Disposable

Income


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$50,000

$51,000

$52,000

$53,000

$54,000

$55,000

$56,000

$57,000

$58,000

$59,000

Jan‐00 Jan‐02 Jan‐04 Jan‐06 Jan‐08 Jan‐10 Jan‐12 Jan‐14

Seasonally Adjusted

Median

Household

Income

(March

2013

$)

Gallup Poll ‐ Family Of Four Living Needs


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6 5 4

6 0 7

5 9 8

1 7 4

‐ 9 5

8 1 3 6

5 6

‐ 4 2 1

8 0 1

1 , 2 5 4

1 2 2

9 3 8

1 2 0

5 2 2

3 6 7

1 9 0

7 1 0 8

3 8

1 , 6 0 9

1 , 3 6 5

1 , 3 4 8

1 , 9 5 1

1 , 2

9 8

8 0 6

6 2 5

1 , 3 5 6

7 5 8

2 , 1 5 8

2 , 2 8 2

2 , 0 6 0 2

, 3 0 9

1 , 9 8 0

2 , 2 9 4

1981 1985 1989 1993 1997 2001 2005 2009 2013

Workers Not In Labor Force Soars

Annual Chg.

To

NILF


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• More Than 93 Million Americans No Longer Counted

•

Roughly

80%

Of

The

Population

Lives

Paycheck‐

To‐

Paycheck• 1‐in‐4 Americans On Some Form Of Government Assistance

• Highest Level On Record Of 70+ Aged Individuals Still Working

• Equity Ownership In Private Business At Lowest Levels Since 2000

• Household Net Worth Lower Today Than In 2007

• Household Investments

In

Financial

Assets

Lower

Today

Than

In

2007


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‐8000.0

‐6000.0

‐4000.0

‐2000.0

0.0

2000.0

4000.0

6000.0

8000.0

10000.0

2009 2010 2011 2012 2013 2014 2015 2016

Employment Gains

Since

2009

‐ Including/Excluding

B/D

Adj.

Cumulative Employment Since 2009 Cumulative Employment W/O B/D Adjustment

Cumulative Employment Adj For Gallup


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42.00%

44.00%

46.00%

48.00%

50.00%

52.00%

54.00%

56.00%

58.00%

1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012

Employment To

Working

‐Age

Population

(16

‐54)

Does This Really

Look Like A 5.0%

Unemployment Rate


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THIS LOOKS A WHOLELOT LIKE 2007


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The Same Things I Looked At In 2007 – Are Here Again Today…


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The Same Things I Looked At In 2007 – Are Here Again Today…


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THE STOCK MARKET

REVENUE

R E T

U R N

SALES

REWARD

DIVIDENDS

B U Y B A C K S

EPS

I N V E

S T I N G

EARNINGS

VALUE

P R I C E / E A R N I N G S

RISK C

H E A P

ESTIMATES

RATIO

CAPECAGR

GROWTH

R

E T U R N

D

O L L A R

INVESTING WITH A LACK OF VALUE


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500.0

700.0

900.0

1100.0

1300.0

1500.0

1700.0

1900.0

2100.0

2007 2008 2009 2010 2011 2012 2013 2014 2015

S&P 500

Index

QE1 QE2 Oper

Twist QE3


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32

64

128

256

512

1024

2048

4096

8192

16384

32768

65536

1965 1973 1981 1989 1997 2005 2013 2021 2029 2037 2045 2053 2061

S & P 5 0 0 I n d e x A c t u a l & P r o j e c t e d ( L o g S c a l e )

What Analysts Promise & What Happens Likely Very Different

Actual S&P 500 Projected S&P 500 Expon. (Projected S&P 500)

7% Annualized

Return


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Capital Not

Available,

25.00%

Capital Needed

For Other Things,

25.00%

Psychological

Mistakes,

50.00%

A recent DALBAR study shows that much of the shortfall in

investor returns are due to psychological factors such as Loss

Aversion, Narrow Framing, Herding or Optimism.

There are actually three primary causes for the chronic

shortfall for both equity and fixed income investors:


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‐6000

‐4000

‐2000

0

2000

4000

6000

8000

10000

32

64

128

256

512

1024

2048

4096

8192

16384

32768

65536

1965 1973 1981 1989 1997 2005 2013 2021 2029 2037 2045 2053 2061

A c t u a l V s . P

r o m i s e d R e t u r n s

T h o u s a n d s

S & P 5 0 0 I n d e x A c t u a l & P r o j e c t e d ( L o g S c a l e )

Impact Of Bear Markets Are Have Substantial Effects On Outcomes

Promised Growth Of $10000 At 7% Actual Growth Of $10000 Return Gap

Actual S&P 500 Projected S&P 500 Expon. (Projected S&P 500)


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0

10

20

30

40

50

64.00

128.00

256.00

512.00

1,024.00

2,048.00

Jan‐1871 Jan

‐1886 Jan

‐1901 Jan

‐1916 Jan

‐1931 Jan

‐1946 Jan

‐1961 Jan

‐1976 Jan

‐1991 Jan

‐2006

Real S&P 500 Index With Recessions(Robert Shiller Real Price Data)

Recessions S&P 500 (Real Price) Expon. (S&P 500 (Real Price))


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0

5

10

15

20

25

30

35

40

45

50

‐

5%

0%

5%

10%

15%

20%

25%

30%

C A P E

R o l l i n g 2 0

‐ Y e a r R e t u r n s

S&P 500 Real Rolling 20‐Year Annualized Returns CAPE Valuations


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64.00

128.00

256.00

512.00

1,024.00

2,048.00

1909 1919 1929 1939 1949 1959 1969 1979 1989 1999 2009

Real S&P 500 Index With Record Highs(Robert Shiller Real Price Data)

Real S&P 500 Index


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300.0

500.0

700.0

900.0

1100.0

1300.0

1500.0

1700.0

1900.0

2100.0

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

S&P 500 Index Linear (S&P 500 Index)

Phase 1

Phase 1

Phase 1

Phase 2

Phase 3

Phase 2

Phase 2

Phase 3

Phase 3


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10 WARNING SIGNS


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Warning #1: Declining Profit Margins

32

64

128

256

512

1024

2048

3%

4%

5%

6%

7%

8%

9%

10%

11%

1957 1962 1967 1972 1977 1982 1987 1992 1997 2002 2007 2012

S & P

5 0 0 ( L o g B a s e 2 )

P r o f i t

s A s % O f R e a l G D P

Peaks In Real Profit Margins vs. S&P 500

Recessions Real Profits As % Of Real GDP

S&P 500 Stock Price Index Expon. (Real Profits As % Of Real GDP)

REALINVESTMENTADVICE.COM


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Warning #2: Price-To-Sales Expensive


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Warning #3: Economic Output Declines

0

10

20

30

40

50

60

70

‐15

‐10

‐5

0

5

10

1974 1978 1982 1986 1990 1994 1998 2002 2006 2010 2014

S t r

e e t t a l k E O C I

L E I & G D P

Economic Output Composite Index

Recessions GDP (Quarterly Change at Annual Rate)

LEI ‐ 6 Mth % Change Economic Output Composite Index



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Warning #4: Margin Debt Peaks

10000

60000

110000

160000

210000

260000

310000

360000

410000

460000

510000

‐200000

‐162000

‐124000

‐86000

‐48000

‐10000

28000

66000

104000

142000

180000

Jan‐80 Jan‐84 Jan‐88 Jan‐92 Jan‐96 Jan‐00 Jan‐04 Jan‐08 Jan‐12 Jan‐16

Margin Debt And Net Credit Balance

Net Credit Balance (lhs) Margin Balances Linear (Net Credit Balance (lhs))

June, 2007

March, 2000

Absolutely No Bubble Here

Sept, 1987

Crash of 1987

Dot.Com

Bubble

Credit Bubble

June, 2015


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Warning #5: Margin Debt/GDP History

0

500

1000

1500

2000

2500

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

1959 1963 1967 1971 1975 1979 1983 1987 1991 1995 1999 2003 2007 2011 2015

R e a l S & P 5 0 0 I n d e x

M a r g i n D e b t A s % O f G D P

Margin Debt As A % Of The Economy

Margin Debt As % Of GDP Real S&P 500 Index


87 Crash

Asian Contagion

Tech Bubble Bust

Financial Crisis

????

74 Bear Market


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Warning #6: Equity Ownership


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Warning #7: Momentum Overdrive


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Warning #8: Prior Peak Earnings


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Warning #9: Junk Bonds

5.0

7.0

9.0

11.0

13.0

15.0

17.0

19.0

21.0

23.0600

800

1,000

1,200

1,400

1,600

1,800

2,000

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Y i e l d s

‐

I n v e r s e S c a l e

S &

P 5 0 0

Falling "Junk Bond Yields"

S&P 500 BofA Merrill Lynch US High Yield Master II Effective Yield©



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Warning #10: Topping Processes


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I n t e r

n a l s S

i g n a l C

a u t i o n


37/55

MANAGING FOR UNCERTAINTY


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20000

40000

80000

160000

320000

640000

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

MISSING THE

10

‐Best

vs

10

‐Worst

Days

$100,000 Missing 10 Best Days $100,000 Missing 10 Worst Days $100,000 Invested In Index (Buy and Hold)


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0

10000

20000

30000

40000

50000

60000

70000

80000

1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

Compound REAL Return Of $1000 Plus $100 Monthly Contributions (DCA vs Lump Sum)

Compound Value Of $1000 plus $100 Monthly Contributions (DCA)

Compound Value Of $1000 + $100 Mthly Cont. (Lump Sum)

RETIRE

OR NOT…

Missed The TopAnd The Bottom

Missed The TopAnd The Bottom


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(20)

(15)

(10)

(5)

‐

5

10

15

20

25

30

32

64

128

256

512

1024

2048

4096

8192

1 / 1 / 1 9 0 0

1 / 1 / 1 9 1 0

1 / 1 / 1 9 2 0

1 / 1 / 1 9 3 0

1 / 1 / 1 9 4 0

1 / 1 / 1 9 5 0

1 / 1 / 1 9 6 0

1 / 1 / 1 9 7 0

1 / 1 / 1 9 8 0

1 / 1 / 1 9 9 0

1 / 1 / 2 0 0 0

1 / 1 / 2 0 1 0

C A P E R a t i o , I n f l a t i o n

I n f l a t i o n A d j u s t e d

R e t u r n O f $ 1 0 0

The Real Value Of CashMonthly Compound Real Return Of $100Valuation Adjusted Return Of $100 (23x = Cash, 6x = Stocks)P/E Capped At 25xAnnual Change In Inflation


41/55

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

1990 1994 1998 2002 2006 2010 2014

S&P 500 Stock Price Index

SELL IT ALL…SELL IT ALL…

???

Not Here

Either...

Absolutely

Not Here...

Liquidity Bubble

Credit/Real Estate

Bubble

Nope...No

Bubble Here.

Tech Bubble


42/55


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44/55

$99,566.39

$99,008.24

$99,583.97

8800089000

90000

91000

92000

93000

94000

95000

96000

97000

98000

99000

100000

101000

102000

103000

104000

Dec‐14 Jan‐15 Feb‐15 Mar‐15 Apr‐15 May‐15 Jun‐15 Jul‐15 Aug‐15 Sep‐15 Oct‐15 Nov‐15 Dec‐15 Jan‐16 Feb‐16 Mar‐16

60/40 Benchmark

vs.

Risk

Adjusted

60/40

Allocation

$60k Invested In VFINX (stocks) & $40k in VBTIX (bonds) ‐ Capital Appreciation Only

60/40 Model Risk Adjusted 60/40 Allocation Model Performance S&P Index


45/55

50000

6000070000

80000

90000

100000

110000

120000

130000

140000

150000

160000

170000

180000

190000

200000

210000

220000

230000

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

60/40 Benchmark vs. Risk Adjusted 60/40 Allocation$60k Invested In VFINX (stocks) & $40k in VBTIX (bonds) ‐ Capital Appreciation Only

60/40 Model Risk Adjusted 60/40 Allocation Model Performance


46/55

OIL, GOLD & INTEREST RATES


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0

500

1000

1500

2000

2500

4000

5000

6000

7000

8000

9000

10000

1991 1996 2001 2006 2011 2016

R i g C o u n t

S u p p l y

Plunging Rig Count Not Affecting Supply

U.S. Field Production of Crude Oil (Thousand Barrels per Day) OIL PRICE / BBL


source: EIA


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51/55


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1.4

1.5

1.6

1.7

1.8

1.9

2.0

2.1

2.2

2.3

‐5.0

‐3.0

‐1.0

1.0

3.0

5.0

7.0

9.0

11.0

13.0

15.0

1959 1964 1969 1974 1979 1984 1989 1994 1999 2004 2009 2014

M o

n e t a r y V e l o c i t y

I n t e r e s t

R a t e s , G D P , I n f l a t i o n

Interest Rates A Function Of Economic Growth, M2 Velocity & Inflation

Gross Domestic Product Inflation (CPI) 10‐Yr Treasury Rate Velocity of M2 Money Stock



54/55


55/55

Q&ALance Roberts

Chief Investment

Strategist

Clarity Financial, LLC ________________________________________

[email protected]

281‐501

‐1791

www.realinvestmentadvice.com

ria economic & investment summit 2016

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