A Camp Kotok Debrief Plus Sector Rotation Ramifications

Excerpt from “A Camp Kotok Debrief Plus Sector Rotation Ramifications” by Jeremy Schwartz

Cumberland-Advisors-Matt-McAleer-In-The-News

Last week’s “Behind the Markets” podcast came on the back of the annual Camp Kotok investment retreat in Maine – with one of the key portfolio managers for Cumberland Advisors, Matt McAleer, joining us for a discussion on macro positioning and takeaways from the camp discussions.

McAleer discussed the continued headaches being caused by international markets – the U.S. markets remain very robust and resilient. In McAleer’s view, the 30 markets around the world are not trading well as he watches them making lower lows. McAleer’s current worry is how long the U.S. market can remain the standout while it is near highs and these other markets are trading down.

 

Read the full article at WisdomTree.

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Bursting Bitcoin Bubble?

Fundstrat Daily reports that “YTD, the crypto market is down -60.7%” as of July 2.

We have been asked again about Bitcoin and “bubbles” following the recent gyrations and the plunge. “Should I buy it?” asked a reader.


First, we offer the required disclosure: We don’t own any cryptocurrency in any Cumberland managed account. And we don’t own any derivative or other form of crypto. We have avoided the group. We don’t see crypto as a deep-enough and mature-enough assemblage of tokens to qualify as an asset class – yet. That assessment may change at some point but not likely soon.

Nick Colas and Jessica Rabe have been tracking Bitcoin for a while. They write about it from time to time. See http://datatrekresearch.com.

“We’ve been tracking Bitcoin wallet growth and Google search term volumes… as the carnage has unfolded. Our repeated message in these pages: the former is growing only slowly, and the latter is in outright decline. Bitcoin is ultimately a technology, and without incremental adoption growth it has a tough row to hoe.”

Later in their research they add the following warning: “To be clear: we’re not calling a bottom on Bitcoin, but its complete decoupling from stocks may be one sign of a washout [s]ince it now resembles the time before anyone but computer nerds really cared about it.”

Thank you, Datatrek, for keeping us up to date.

Readers may recall that in previous writings we argued that the world wants the use of crypto and security of blockchain linkage in a secret transaction. Illegal use is one reason. Privacy is another. So is having a wealth-hoarding mechanism that cannot be confiscated if the owner has to flee. As Fundstrat Daily noted (on July 2), “When comparing Bitcoin to other major asset classes (stocks, bonds, hedge funds, oil and gold), Bitcoin has the highest correlation to Gold (4.4%) and the lowest correlation to S&P 500 (-15.2%).”

We also see the eventual rollout of credible asset-backed crypto as an evolution in progress. Many gold-backed tokens are in the works or are in the start-up phase of issuance. That activity is mostly outside the US. We think it will expand and will intensify once the Venezuelan selling of gold has run its course. For more information about gold-backed crypto, see Goldscape’s weekly blog and guide at http://www.goldscape.net.

Note that Russia and China are continuously buying gold, according to official reports. Also note that a Sharia-approved, gold-backed crypto called OneGram (https://onegram.org/whitepaper) has launched in the Arab world. (This link is provided so readers can see this evolutionary development in crypto. It is not an endorsement.)

In sum, crypto is not over, though the Bitcoin bubble, having burst, may yet have more deflating to do.

The bursting of bubbles has a long history in finance and economics. That means the making of those bubbles is equally long in history. For a great recitation of bubble history see Charles MacKay’s famous classic, Extraordinary Popular Delusions and the Madness of Crowds (https://www.amazon.com/Extraordinary-Popular-Delusions-Madness-Crowds/dp/1539849589/ or find the PDF online.)

Commodities have bubbles. Silver, gold, copper and oil are examples.

Real estate has bubbles – housing, shopping centers, offices, the Florida land boom a century ago. The Florida condo boom today may become a future bubble.

Stock market bubbles are renowned –  bowling alley stocks, casinos, tech stocks, home builders, banks, savings and loans. From tulips to Trump’s Taj Mahal, the history of bubbles is littered with casualties.

Could FAANMG be the current stock market bubble? Is the hotel, leisure, cruise ship sector about to become a bubble, too?

Note that the bursting of a bubble doesn’t mean the selloff goes to zero. When the Nasdaq bubble burst 18 years ago, the Nasdaq lost two thirds of its value from peak to trough, but it didn’t go to zero. Some of the start-up companies that traded at price/fantasy ratios went to zero. Similarly, some start-up crypto ventures are now at zero.

In the end, markets clear to reasonable values, and the range of those reasonable values includes zero if the value is worthless.

Some have argued that Bitcoin’s rise was tied to stock market success and that the cryptocurrency’s subsequent decline portends a stock market crash. We’re not so sure of that linkage. We agree with the Datatrek conclusion: Despite occasionally looking like a barometer for systematic risk appetite, there continues to be no proof that Bitcoin’s price presages where the S&P 500 may go in the near term.”

We’re a lot more worried about the consequences of a trade war than we are about Bitcoin. We think the US economy is peaking in growth rate in Q2. The Trump-Navarro policy and an escalating trade war are already starting to bite. Ask Harley-Davidson. Ask a soybean farmer. Ask a Maine lobsterman. This is only the beginning.

We have some cash reserve. We took a defensive position in consumer staples. We favor small and midcap and domestic US versus international. We sold the overweight tech exposure.

David R. Kotok
Chairman & Chief Investment Officer
Email | Bio


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4Q2017 REVIEW: US ETF

The last quarter of 2017 revealed continued bullish momentum in the US stock market and ongoing increases in earnings of US public companies. Through the middle of December, the market made progressive new index highs. Rotation among sectors finally took some steam from the “FAANMG” stocks.

Notwithstanding the high price levels, we expect stocks to rise into next year. Earnings momentum is a powerful force. Tax policy changes portend well for US companies.

We end the year with an overweight of smaller-cap stocks. Note that in the first eleven months of 2017, the Russell 2000 Index achieved about half the return of the NASDAQ 100 (about 14% versus about 30%). We think that relative performance will reverse into yearend and early next year.

We have rotated down in our overweight of tech stocks. We have Energy positions focused on US domestic oil and gas. We like the Health sector. Our US ETF accounts are fully invested.

Over time various broad market measures tend to converge. This year’s divergence has been huge; we expect reversal. That anticipated convergence supports our small-cap overweight theme. For the last 10 years the annualized results range from Russell 3000 (lowest, at 8.5%) to NASDAQ 100 (highest, at 13%). Note that the FAANMG stocks’ recent extraordinary outperformance is responsible for this gap. Without FAANMG, the market averaged about 9% annualized for the decade. Remember that the decade includes the 2008–09 bear market period.

We do not think the bull market is over. In 2018, we expect more volatility within an upward trend.

David R. Kotok
Chairman and Chief Investment Officer
Email | Bio


Links to other websites or electronic media controlled or offered by Third-Parties (non-affiliates of Cumberland Advisors) are provided only as a reference and courtesy to our users. Cumberland Advisors has no control over such websites, does not recommend or endorse any opinions, ideas, products, information, or content of such sites, and makes no warranties as to the accuracy, completeness, reliability or suitability of their content. Cumberland Advisors hereby disclaims liability for any information, materials, products or services posted or offered at any of the Third-Party websites. The Third-Party may have a privacy and/or security policy different from that of Cumberland Advisors. Therefore, please refer to the specific privacy and security policies of the Third-Party when accessing their websites.

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Cumberland Advisors Market Commentaries offer insights and analysis on upcoming, important economic issues that potentially impact global financial markets. Our team shares their thinking on global economic developments, market news and other factors that often influence investment opportunities and strategies.