Tails, You Win.

Long-tail events represent those that occur on the tail ends of the statistical bell curve. Representing rare occurrences that exert a more dynamic impact on everyone and everything involved. Be that even good, or bad. These happenings represent the exception. Not the norm. They can be the two investments – out of 100 – that create one’s fortune. Or they can take the form of an unforeseen crisis. Like the Great Recession of 2008.

The following article on long-tail events was written by the ever-astute Morgan Housel. Excepted from his website, CollaborativeFund.com. Please enjoy.

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Week In Brief: June 22nd

Equity markets took it on the chin last week. Reeling like punch-drunk fighters clinging to ring ropes just to stay upright. The only market cap to eke out a gain was the S&P 600 Small-cap Index, which rose a meager 0.2 percent. The S&P 500 lost 0.88 percent. While the DJIA fell 1.82 percent. And has gone negative (-0.5 percent) on the year.

Market breath remains positive and continues to support higher prices. Sector breath also remains positive, with 71 percent of industries above their 50- and 200-day moving averages. Yet, global markets appear in retreat. With Europe down -4 percent. Brazil down -19 percent year to date. China down -10.75 percent. And India lower by -5.4 percent.

The year’s surprising top domestic industry group? Retail. Up +29 percent. While the worst performing groups have been tobacco, conglomerates, household products and food staples.
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The Genius and the Wolf.

Occasionally, one’s most epiphanic thoughts transpire at four in the morning. As the mind noodles through the day’s detritus. As mine did last night. Having introduced Pulp Fiction to my son. I found myself considering Tarantino’s character, Winston “The Wolf” Wolfe. Played perfectly by Harvey Keitel, Wolf is the classic fixer. Sui generis. Called upon to efficiently navigate any seemingly impossible scenario.

Musing over Keitel’s role, I was reminded that cool resolve and efficiency are often more valuable that intellect. That nerves of eight-inch coiled steel cable – the kind that tethers 300-ton ships to the harbor – can be more beneficial than genius.
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Week In Brief: June 8th

Last week saw the S&P 500 rise 1.6 percent as stocks elevated on four of last week’s five trading days. Year to date, the index has grown by 3.09 percent. And ended the week only 3.27 percent below January’s record high.

Nine years into the economic recovery, there seems to be no trick of which the stock market is not capable. Nor will any record highs be safe so long as this current market momentum persists.

February’s 10.02 percent decline frightened many within the investor class. Helping to separate the wheat from the chafe as it brought many non-convicted investors to question their market optimism. Which led to a big percentage of lily-livered cash positions by mid-February. As recent market entrants – many of whom had only recently delved back into the deep side of the equities pool – once again found themselves quivering like wet Chihuahuas in the face of soaring volatility.
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LeBron James: What the Return of the King Can Teach us About Investing

On Father’s Day, June 19th, 2016, I was gifted the impossible. LeBron James and the Cleveland Cavaliers won the NBA title. Beating the highly favored champions of yesteryear, the Golden State Warriors.

Much like this year’s championship duel, the Warriors had the better team. Set NBA records for points. Shooting. Three pointers. They had the league’s MVP — that season’s and the last. They had a talented coach who won multiple championships himself as a player. A well-rounded team with a surplus of stars. Yet, the Warriors didn’t have the one thing that would be singularly responsible for winning an improbable championship: The heart of LeBron James.

The following missive was written prior to that event. In July of 2014. A year in which the Cavaliers finished 33-49. Failing to make the playoffs by a wide margin. Because former Cavalier LeBron James was scoring 27 points per game in Miami. Yet, following that season, immediately before this piece was written, LeBron James announced his return to Cleveland. So completing his journey home. Culminating in that improbable Father’s Day title victory two years later. And the deliverance of a championship to Cleveland. Its first professional championship in 52 years.

Though LeBron James didn’t score the winning basket, he did everything else in his power to propel the Cavaliers to one of the best comebacks in sports history. Claiming an NBA title after trailing 3-1 in the Finals to a Warriors team that finished with the best regular-season record in league history. The Cavaliers became the first team in NBA history to overcome such a deficit in the Finals. 32 teams had previously tried to overcome a 3-1 margin. 32 teams had failed.

LeBron James did it all.

ESPN and the Elias Sports Bureau report that LeBron James led all players on both teams in points, rebounds, assists, steals and blocked shots. Marking the first time a player has led both teams in all those categories in any playoff series of any length.

LeBron James scored 109 points in Games 5, 6 and 7. The most by any player who was on a team that completed a comeback from a 3-1 deficit (non-championship).

In Game 7, LeBron James accrued 27 points, 11 rebounds and 11 assists. The third player to record a triple-double in Game 7 of the NBA Finals. The others? Jerry West in a losing effort for the 1969 Lakers. And James Worthy in the 1988 Lakers’ win.

LeBron James scored or assisted on 50 percent of the Cavaliers’ Finals points, his second-highest mark in a Finals, surpassed only by his 62 percent the previous season when, by the way, he was playing without Kyrie Irving or Kevin Love.

In Game 7, LeBron James scored or assisted on 52 of the Cavaliers 93 points, including 13 of 18 in the fourth quarter. In the series’ first four games, James scored or assisted on 45 percent of the Cavaliers’ points. He was responsible for 57 percent in the last three games. All victories.

In the 2015 NBA Finals, Andre Iguodala won the MVP award, in part due to his defense against LeBron James. Iguodala limited James to 35 percent shooting in the series. In this Finals, James shot 54 percent against Iguodala.

Moreover, LeBron James got it done on the defensive end. He held the Warriors to 36 percent shooting in the NBA Finals Game 7 (21-of-58). The best of any Cavs player. Stephen Curry was 1-of-7 against him. Klay Thompson was 2-of-6.

The Warriors did not make any of their seven shots against James in Game 6.

James blocked seven shots in transition. Including one on Andre Iguodala with 1:50 remaining in the fourth quarter of a tied Game 7 — the season’s signature moment. James was also the primary defender for 14 turnovers, tied for most of any player in the series.

This was James’ third NBA title. James, Michael Jordan, Bill Russell and Kareem Abdul-Jabbar are the only players to win three titles and four MVPs.

Lay low you doubters, detractors, denigrators and naysayers. The King has returned.
. . . . .

“And as I sat there, brooding on the old unknown world, I thought of Gatsby’s wonder when he first picked out the green light at the end of Daisy’s dock. He had come a long way to this blue lawn and his dream must have seemed so close that he could hardly fail to grasp it. He did not know that it was already behind him, somewhere back in that vast obscurity beyond the city, where the dark fields of the republic rolled on under the night.

Gatsby believed in the green light, the orgiastic future that year by year recedes before us. It eluded us then, but that’s no matter — tomorrow we will run faster, stretch out our arms farther. . . And one fine morning–

So we beat on, boats against the current, borne back ceaselessly into the past.”

-The Great Gatsby, F. Scott Fitzgerald
. . . . .

Whatever heights we may ascend, we remain forever drawn to those from whence we came.

Two weeks ago, as the sports world held its collective breath, Lebron James announced his return to Cleveland.

Four years prior, James severed ties with the Cavs’ inept front office in hopes of sunnier days in South Beach. Four championship appearances and two titles later, the King will return to Northeast Ohio.

Amid the sound and fury surrounding The Decision II, we identified four correlations between the machinations surrounding the NBA’s biggest name, and the dynamics within the U.S. stock market. And so here is what King James might teach us about investing, and life.

Be Proactive Throughout the Highs and Lows
Every endeavor worth pursuing involves highs and lows. Emotionally. Professionally. The means by which one responds to those junctures, be they positive or negative, will ultimately determine an outcome’s success, or lack thereof, each and every time.

After leading the Cavs to four playoff appearances including a trip to the finals in which they lost to the Spurs, Lebron grew tired of Cav’s owner Dan Gilbert. Tired of Gilbert’s lack of vision and inability to provide the complimentary pieces necessary to win a title.

For seven years, Lebron succeeded while carrying a cast of characters more reminiscent of the Washington Generals than an NBA championship team. Gilbert, putting all of the team’s hopes on the shoulders of his star, never delivered so much as a back-up scoring threat. Frustrated, Lebron analyzed the situation, appraised his options, and chose to be proactive in dictating his future circumstances.

James could have played the hometown hero. Always falling just short because of the ineptitude of those around him. But, that wasn’t his style. Even at his emotional nadir, he knew his value. So, he opted to play for a more capable, savvy and experienced management team in Miami. Led by the legendary Pat Riley.

Likewise, investors were collectively depressed and traumatized by the events of 2008. On the advice of their advisors, many had simply held on to portfolios that didn’t stand a chance. Failed to get proactive as financial markets deteriorated. Watched stoically as their nest eggs were eviscerated. Even as advisors admonished them to “stick with the plan.”

Problem was, there was no plan — at least not one to benefit investors. There were, however, empty words and a “buy-and-hope” methodology meant to simplify the lives of the advisors. Help advisors to avoid tough decisions. To avoid the creation of a genuine investment process.

Much like Dan Gilbert’s plan enhanced his financial circumstances without improving the team’s championship odds, advisors had adopted a lackadaisical course that prioritized their needs above those of clients.

Create and Execute a Plan
When Miami Heat general manager Pat Riley first approached James in 2009, he had no intention of obsequiously fawning over the NBA’s best player in order to woo him to South Beach. It was immediately obvious that Riley, a proven champion in his own right, had a plan. One that entailed building a compliment of experienced, talented role players willing to integrate their skills with, and defer their egos to, Lebron’s pursuit of NBA championships.

Impressed, Lebron bought in. He had never played within a strategic framework. His high school team, AAU team, even his seven-year stint with the Cavaliers — had all entailed one simple idea. Feed the ball to Lebron so that he could score and win.

Problem was, when James’ teams came up against talented, disciplined, tactically minded squads, they often employed strategies focused on shutting Lebron down. For they knew that if Lebron was held in check, the compliment of players around him were not capable of winning.

Consider the 2007 NBA championship pitting the Cavaliers against the Western-champion San Antonio Spurs.
Coming into the game, everyone knew that James would be the best player on the court. Accordingly, he would likely lead the Cavs to their first championship. But, Spurs coach Greg Popovich new better.

The Spurs employed a systematic offense that highlighted the talents of their three stars, Tim Duncan, Tony Parker and Manu Ginobili. Further, they employed a crushing defense designed to prevent Lebron from taking over games. It proved effective. The Spurs slowed down Lebron. The other Cavalier players failed to step up. And the Spurs routed the Cavs in four straight games.

In Miami, Riley assured Lebron that he would be able to trust upon his team to win games. That he would no longer be a one-man show. Riley laid out his plan. As well as the strategies and tactics designed to win championships. Lebron loved what his saw. Joined the Heat. Won two championships in four years. Because Pat Riley had a plan.

Similarly, investors must have a plan catering to their personal circumstances and designed to achieve their personal objectives. A plan that they adhere to. In all market environments.

Following the 2000 to 2002 bear market, the Wall Street Brokerages recognized the need to change their business models. They would no longer train brokers to customize each individual relationship to meet the personal needs of each client. Instead, they would retain the appearance of personalized relationships, while training brokers to employ generic, turn-key strategies that fit each and every client.

These mass-production strategies appeared effective as markets rose. Brokers were able to allocate client capital to a set array of mutual funds or money managers which would track the market. Enabling Wall Street’s sales force to frenetically market its wares to potential new clients, attract new assets under management (AUM), while paying scant heed to the attainment of real, personalized life goals of existing clients.

Clients, realizing that personal finance was not a strength, accepted the idea that allocating capital to a handful of investments and hoping for the best was a plan. That was, until the 2008 credit crisis revealed the ugly truth.

Process is Paramount
Throughout 15 years of competitive basketball, Lebron had acclimated to being the offensive and defensive centerpiece for every team on which he played. His coaches, realizing the vastly superior talent he possessed, knew that they would win, so long as Lebron was on the floor. Quite simply, when superhuman talent competes against human ability, little strategy is required.

Skipping college and going directly to the NBA, Lebron was still dominant. His physical strengths and on-court skills were simply that good. Yet, James quickly realized that he could no longer single-handedly determine a game’s outcome in the NBA. The competition was too tough.

Cavalier’s coach Mike Brown attempted to develop an offense that took some of the pressure off Lebron. But, the portfolio of players around him was simply not up to the task. Time and again, Lebron and the Cavs fell short of their championship dreams.

The Miami Heat, however, were coached by Pat Riley protégé Eric Spoelstra, who recognized that the greatest of NBA players had required a system that enabled teams to leverage that greatness, while providing complimentary assistance along the way.

That in mind, Spoelstra developed an offense predicated on explosively attacking the lane. This permitted the team’s sharp shooters to spread the offense out, and stretch defenses thin. Accordingly, James, Dwayne Wade, Chris Bosch, or any of the Heat players could drive to the basket and choose to take the shot or, if the defense collapsed on them, kick the ball out to a compliment of sharp shooters waiting on the wings.

Combined with the league’s most tenacious defense, the Heat had a recipe for success that overwhelmed the average opponent. Permitting them to play in four NBA championships in four years, winning twice, and fulfilling Lebron’s championship ambitions.

Yet, process and methodology are not strictly the fare of professional sports. Every walk of life is enhanced by a proven process capable of minding the details, endeavoring towards the attainment of goals, and mitigating risk whenever possible.

In 2008, as advisors pleaded with clients to “stick with your plan,’ investors increasingly saw that their plans were nothing more than ploys. Plans that worked in good times, not in bad. That enabled the broker to collect an annual fee for doing little more than outsourcing client capital to third-party managers, then discussing the merits of these funds or managers twice per year.

As stocks plummeted, and client portfolios dropped dollar for dollar, investors realized that their brokers had no more an investment process than they did a means of protecting their clients’ downsides.

Suddenly, all the pithy aphorisms long used by brokers sounded like suicide pacts.

“I don’t know where stocks will be in three months, but in three years, if we patiently ride this out and stick to our plan, you will be fine.”

Only, these suicide pacts were one-way agreements, as the brokers were often investing their own capital in ways completely different than the auto-pilot portfolios utilized for clients.

There were no risk mitigation strategies. No alternative investment classes with little to no correlation to the stock market. No means of preserving capital in desperate, panic-driven markets. Just empty words on a phone line that did nothing to preserve the nest eggs cobbled together during the course of a lifetime.

Management guru Dr. W. Edwards Demming often said, “If you can’t describe what you are doing as a process, then you don’t know what you’re doing.”

By January 2009, investors realized that their brokers had little real idea as to what they were doing from an investment standpoint. Unfortunately, the damage was done.

Reversion to the Mean
Following the 2013-14 NBA season, and a soul-crushing loss in the finals to the San Antonio Spurs, Lebron James contemplated change.

Miami had been good to him. He loved playing with close friends Wade and Bosch. The Heat’s leadership, Riley and Spoelstra, possessed excellent basketball minds as well as big hearts. James had fulfilled his championship aspirations.

Yet, James’ family, friends and heart remained in Northeast Ohio. His Miami experience had enabled him to grow. As a player. And a human being. He now realized that the fulfillment of his ultimate ambitions did not involve winning more championships in South Beach. But bringing one to his hometown.

He would return to the place he’d begun. His life. And his career. Even given the difficult circumstances under which he’d departed Cleveland, the wounds had healed. He could go home.

Lebron’s decision to return to Cleveland underscored a central tendency in all established yet complex systems: reversion to the mean.

History. Psychology. Mathematics. Science. Each discipline is littered with examples of this principle. Similarly, the history of asset investment is replete with tales of mean reversion. Asset prices go up. Asset prices go down. Markets serve as a pricing mechanism for the underlying assets therein. All the while, investors are driven by the perpetual cycle of fear, ignorance, hope and greed.

When markets burn white hot, investors jump in head first. Committing capital at the most inopportune times. When markets plummet, and fear permeates every motive, investors avoid assets that can, at last, be purchased for reasonable prices.

Yet, eventually every high and low reverts to the mean. The S&P 500 returns to its traditional price-to-earnings ratio of 15x. Apple’s price-earnings-to-growth ratio normalizes to 2.25. Students of the market understand this. Which enables them to think calmly when markets rise parabolically. To remain sanguine when hysteria reigns. To avoid the poor decisions that doom investors to repeat the same poor decisions over and again. From the days of bartering in the markets aside the Roman Coliseum, to today’s trading pits within The New York Stock Exchange.

Everything eventually returns to its proper historical place. That neighborhood, trend line or birthplace at which one was meant to reside. The place to which prices, valuations or the human heart must return.

Be it a stock price, an index, a political system, or a young boy from Akron Ohio.

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Financial Markets Weekly: May 26th

Here’s your financial markets weekly report for May 26, 2018.

Hoping everyone had an enjoyable Memorial Day weekend. Spent a bit of time remembering our fallen heroes. And reveling in the idea that summer has arrived.

And while spring showers will soon give way to sunny summer horizons, investors should beware. As some pundits believe the U.S. stock market may be in for a summer storm.

On the surface, things look reasonably placid. Despite last week’s volatile geopolitical events (e.g. trade war, Trump and North Korea, Italian bonds/government), markets remained strong. Underneath that positive surface, however, resides some real bearishness.

The average stock in the S&P 500 is underperforming the market by nearly a whole percent. While the S&P 500 is up three percent this year, the average stock has gained just 2.1 percent, showing that market breadth has narrowed. Which bodes ill for equity indices. As one of the bearish indicators typically occurring prior to a major correction is a negative advance/decline reading. Where stocks continue to elevate or trade sideways, even as more share prices fall than those heading higher. Such a condition reveals weakening market breadth. And typically precedes a move lower.

That said, the market will be forced from its indecision sooner than later. As the S&P 500 has furrowed itself into a wedge-consolidation pattern that eventually forces the underlying index to move higher or lower.

In geopolitics, it appears that the U.S./North Korean Denuclearization Summit could be back on. And the pending resumption of economic sanctions is on hold. Though we won’t be counting those chickens till they hatch. Still, N. Korean strong man Kim Jong-un’s right-hand man is scheduled to arrive in the U.S. this week under the auspice of continuing to lay the groundwork for a potential June 12th summit in Singapore.

General Kim Yong-chul has long been in the thick of intrigue wherever North Korea is concerned. The former head of military intelligence was allegedly the mastermind behind the Sony hacking related to the movie “The Interview.” As well as attacks on the South Korea warship Cheonan and Yeonpyeong Island in 2010.

Kim’s appearance marks the highest level North Korean visit to the U.S. since 2000. Check out the BBC’s profile of the general, here.

Staying in Asia, the Trump administration sent a brash message to Beijing: The U.S. is moving forward with tariffs on Chinese imports and restrictions on China’s access to sensitive U.S. technology. The White House will announce a final list of $50 billion in targeted Chinese imports by June 15. Planned investment restrictions are due by June 30. The move came as a surprise to Chinese officials. Given that the White House had for days suggested it would put such measures on hold during negotiations to narrow the $375 billion annual trade gap between the countries.

Perhaps the move was made for negotiating leverage. Or to simply make the point that this administration is through with Chinese stalling tactics that ensure nothing is accomplished while Beijing reaps the whirlwind of its trade surplus. Not to mention its ongoing thievery of western intellectual property. Either way, it’s good to see a hard stand being made. As the only position the Chinese seem to recognize is one of strength.

In Europe, Italy’s political situation continues to roil an increasingly fragile Union. March’s electoral victory by two populist anti-EU parties has prevented the establishment of a coalition government and could force another round of elections later this year.

Meanwhile, Italy’s escalating debt situation requires immediate solutions. Problematic, given the country’s inability to appoint an economics minister. Italy’s debt is more than 130 percent of its gross domestic product. Rendering it the most indebted European country behind only Greece. And unlike many of its eurozone peers, Italy’s economy remains weaker today than it was before the last crisis.

Italian two-year bonds have shot from offering negative yields to yielding 2.77 percent virtually overnight. A shocking move given the typically glacial pace of debt markets. Where a move of that size typically takes years. Shock waves resonated throughout the Italian economy. Having brought European finance minsters to shudder at the consequences should Italy spiral into a deeper debt crisis.

Traditionally, bonds represent the boring end of the investment spectrum. So, when such instruments — especially those of a sovereign government — make such volatile moves, it can only indicate a real sense of fear on behalf of bond investors who have essentially demanded much higher yields to compensate for the perceived risk of buying and/or holding such instruments. Something wicked this way comes…

Not that the world isn’t perfectly acclimated to Italian political crises. Silvio Berlusconi ran the place like his personal carnival for years. But this comes at a sensitive time for the EU. And, if push comes to shove, an Italian exit (Itexit?) from the EU would be standard deviations more harmful than Brexit.

For Europe, this Italian goat rodeo represents a self-reinforcing catastrophe: Lower sovereign bond prices (and thus higher yields) weaken bank stocks and bonds, resulting in a pullback in lending and capital market losses. Which in turn weakens the economy. Lowering tax revenues. Which further lowers government bond prices and raises borrowing costs as politicians are forced to consider bailing out their banks. Underscored by the realization that the situation can only get worse before it gets better. And whereas the EU was able to navigate Greece’s crisis five year ago, Italy’s economy is eight times larger. And its bond market, because of its indebtedness, is the world’s third largest. Making this a much bigger pill to swallow.

Of course, Italy will contend that it can batten down the hatches and reign in its spiraling debt concerns. Which, quite frankly, sounds about as plausible as a Wells Fargo apology ad. We’ll stand by the old John Michel dictum: watch what they do, not what they say.

The entire house of cards brings me back to another recent Southern European debt crisis. Athens, Greece. Summer of 2011. Protesting against austerity requirements mandated by the Northern European Industrial Overlords, the Greeks spent the summer gnashing their teeth, lobbing Molotov cocktails at government buildings, and making headlines. And why don’t these things ever occur during the winter? Perhaps Mediterranean mobs refuse to angrily take to the streets until its just a wee bit warmer…

Still, domestic markets long ago learned to acclimate to foreign financial and economic turbulence. Though caterwauling headlines will bring otherwise prudent investors to feign nervous tension in the weeks ahead, equity markets will soon enough digest Europe’s current crisis. Seeing it for what it is — foreign economic woes. And then returning to the business at hand: risk, reward, earnings growth and the fundamental merits of prospective opportunities.

Stay tuned for your next financial markets weekly update…

Financial Markets Weekly Recap

Major indices finished higher last week. The DJIA gained 0.15%. The S&P 500 rose 0.31%. The Nasdaq climbed 1.08%. While small ap stocks gained 0.02%. 10-year Treasury bond yields fell 12.5 basis points to 2.932%. While gold closed at $1,301.7, up $9.70 per ounce, or 0.70%.

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Catalysts for the Next Financial Crisis

What are the catalysts for the next financial crisis? On America’s west coast reside a variety of geologic fault lines whereby the earth’s large, shifting tectonic plates butt up against one another. Sometimes, these tectonic plates — and the fault lines where they meet — shift and move in such a way that we hardly notice without the aid of seismic monitoring technology.

Other times, however, these machinations occur in such violent fashion that the resulting earthquakes can destroy much of that which rests upon them.

Analogously, economic fault lines exist, which could act as catalysts for the next financial crisis, exposing the massive tectonic plates that ebb and flow beneath the global economy. On occasion, the shifting economic plates result in downturns in indicators by which their monitored. But sometimes, the shifts cause massive disruptions to the sovereign and global economies. Wreaking financial havoc upon the economic participants that rest upon them.
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Financial Markets Weekly: May 18th

Here’s your financial markets weekly report for May 18th, 2018. Equity indices finished lower last week. With the S&P 500, DJIA and Nasdaq posting slight losses. Small caps, however, managed a 1.6 percent gain. And now represent the best performing index year to date. I guess it isn’t the size of the ship after all.

Overseas, things have worsened. With Italy still the clubhouse leader at +five percent, but down four percent over the last few weeks. Most other nations are flat or negative. With India and Mexico leading the losses, at -8.1 percent and -7.6 percent, respectively.

Looking at commodities, crude oil leads the pack. Up 20.1 percent year to date.

On the fixed-income spectrum, everything has been roughed up. With Treasury, Junk and Corporate bonds down from two-to-seven percent year to date.

The plight of fixed-income investors may be the most telegraphed risk of 2018. As investors are forced to endure losses across fixed-income portfolios. Following a 35-year bull market in bonds, interest rates are now rising. And remember, there is an inverse relationship between interest rates and bond values… when one rises, the other drops.

While no honest arbiter can tell you where stock indices will be a year from now, most market observers can say with near certainty that interest rates will be higher. Translating to lower bond values. So, those holding bonds and bond funds will see bond values drift lower. Forcing them to contend with the idea that the allegedly most conservative facet of their portfolios is causing the most volatility. And potentially the biggest losses.

Consider the venerable PIMCO Total Return fund, a fixed-income stalwart in portfolios nationwide, which has lost 2.5 percent year to date. A tough pill to swallow. Especially for retirees who naively placed the lion’s share of their IRA rollovers into — what they believed were — conservative, buoyant, fixed-income mutual funds.

Of course, Wall Street has been selling Main Street on the diversification benefits of “stocks, bonds and cash” for years. Little wonder when two or more don’t work, investors are beside themselves.

Ironically, there are a myriad of fixed-income alternatives from which to consider. But most investors don’t know where to look. And most advisors are too lazy to find them. Negative duration vehicles and LL bonds represent a couple options that might shield clients from falling bond values. But investors need consider this conundrum moving forward. Because rising rates will be part of the landscape for some while.

While we’re on the topic of interest rates, we may have reached an inflection point in the market-economy mechanism. For the first time since 2008, short-term Treasury yields have just reached the same level as equity dividend yields. It is not even the two-year Treasury we are discussing. But rather the three-month. Now sporting a yield of 1.9 percent. The same as equities.

Not trying to sound alarmist. But the convergence of various yield rates has historically provided a strong warning of a pending recession.

That said, the world’s largest asset manager has just recommended that we stick with U.S. equities. Summarizing, BlackRock believes that “fears of peaking earnings are overdone”. The mega-manager believes that worries over macro concerns have overshadowed what has been very strong fundamental performance.

Further, we’d think Q1 earnings results would be enough to bolster investor confidence. With earnings season nearly complete, top and bottom-line results were strong. Especially compared to expectations.

The Q1 earnings-per-share beat rate was 67.9 percent. While the revenue beat rate was an even-more-impressive 71.6 percent. Both of which represent great results. Importantly, earnings guidance moving forward pointed towards further quarters of above-average earnings growth.

Still, don’t get overly sanguine. We’re not completely in the clear yet. With any number of major downside catalysts to navigate in the months ahead. Mid-term elections. Surly Democrats vying to take the House and impeach the president. Trade talks with China, Mexico and Canada. The results from the special counsel investigation into Russian interference in the 2016 election. Increasing militarization in the Middle East. And seasonal headwinds. Like the idea that we’re entering what has traditionally been the worst six months of the year for stocks.

The point? You’d best have low-correlation investment vehicles in your portfolio. Learn more by reading the white paper on navigating bull and bear markets, here.

In the oil patch, Brent and WTI crude have each set new three-year highs. While their stock-index proxies sport some of the prettiest charts in the market. Since June 2017, geopolitics, OPEC’s commitment to lower production and increased demand have conspired to drive oil prices higher. With the Energy Sector SPDR (XLE) up 9.97 percent on the year. Compared with a 2.5 percent gain for the S&P 500.

Though investor sentiment has drifted lower, we remain in a bull market. And the SPX Energy sector will likely log 65 percent earnings growth this year. Another 7 percent in the next. And 11 percent in the third-year estimate.

Current energy sector EPS estimates represent by far the best number among all S&P sectors. And though the earnings number is outsized due to a rough stretch from 2014 to late 2017, with a P/E of 18x forward earnings, this sector remains inexpensive, assuming earnings come through. More attractively, the sector’s dividend yield is 3.56 percent on forward numbers. And 8.4x cash flow versus a 2 percent dividend yield on the S&P 500 and its 11.2x cash flow reading.

Following all the sector’s tumult these last few years? One helluva turnaround story! Those who’d continued to short the energy stocks have learned a powerful lesson this last year: assets can lose value for a lifetime. But, once they’re cheap, hated and in an uptrend? Mean reversion can’t be far off.

In the nation’s capital, a recent audit reveals continuing shoddy cybersecurity measures at the IRS. Stating that the agency hasn’t accurately cataloged all the components of its highest value hardware and software systems. Nor does it have an exact count of who has privileged access to its most sensitive systems.

Further, the IRS also likely isn’t patching software vulnerabilities on its highest value assets within the 30-day timeframe required for federal agencies. And because the agency doesn’t maintain historical data about patching, however, it’s difficult to say for certain how long vulnerabilities remain unmatched.

Bottom line? Government agencies with access to the most sensitive U.S. taxpayer data continue to lag woefully behind their private sector counterparts. Leaving taxpayer data vulnerable to hackers, foreign governments, terrorists and myriad other bad actors.

Now, a look at geopolitics.

Two weeks ago, President Trump pulled the plug on the Joint Comprehensive Plan of Action (JCPOA). Terminating the agreement designed to keep Iran’s nuclear ambitions in check over concerns that Iran was using much of its newfound economic clout to sponsor terror (Iran is the world’s largest state sponsor of terror) and unrest from Syria to Yemen. Worth noting that many of Iran’s neighbors doubted that the JCPOA had ever prevented Iran from moving – albeit more slowly – towards its nuclear ambitions.

The consequences of last week’s decision?

New investment in Iran, from both Asia and Europe, will slow if not cease because of the new U.S. sanctions. Economic forces are being set in motion which will cause significant problems for the Iranian regime. Especially considering that Tehran’s military activities in Syria, Lebanon, Gaza, and Yemen have much increased since the JCPOA was signed.

With less oil to sell into the markets, Iran’s cash flow will diminish. As will, hopefully, its status as the world’s leading state terrorism sponsor.

Regarding those who argue that Iran is now set to resume its nuclear program? The “locals” in the Middle East do not believe that Tehran ever stopped. But that they simply sent remnants of the program further underground. And we believe Iran’s neighbors, those scrutinizing the Islamic Republic most closely, probably know best. They report that Tehran continued to move ahead on its nuclear ambitions even after the agreement was signed. Moreover, the JCPOA was never air tight enough to ensure that the mullahs weren’t still building a bomb.

More recently, the tariff truce established this week was welcomed news in D.C., Beijing and on Wall Street. And don’t think for a moment that these talks are not tied to North Korea.

Trump has tied everything together. National security. Economics. Trade. Tariffs. Intellectual property. Tech. And energy.

It’s likely that the tariff treaty will now set the stage for North Korean talks. Moreover, the truce could help the U.S. farm bill to pass. And boost equity markets at a time when shares have been consolidating.

Though Europe remains agnostic on the situation between D.C. and Beijing, they are livid about the Iran sanctions. And the enthusiasm with which D.C. has pursued them. Clearly, tough sanctions are coming. With or without EU support.

All of which, by the way, will be bullish for oil, energy stocks and inflation.

Finally, Venezuela’s government — which uses more gimmicks than a traveling carnival — conducted another sham election over the weekend. “Re-electing” Nicolas Maduro, who has managed to destroy the nation’s economy, ruin Venezuela’s energy sector while global oil prices have shot higher, and starve large swaths of the population. Otherwise, he’s done a fabulous job for the Venezuelan people and will remain in office for a second term.

You can either enjoy the absurdity, or drown in it. Stay tuned for your next financial markets weekly update…

Financial Markets Weekly Recap

Major indices finished mixed last week. The DJIA lost 0.47%. The S&P 500 fell 0.54%. The Nasdaq fell 0.66%. While small cap stocks gained 1.23%. 10-year Treasury bond yields rose 8.8 basis points to 3.059%. Gold closed at $1,292.60, down $25.70 per ounce, or 1.95%.

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