Page 1

May, 2017

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IS IT 1999 AGAIN?

By Doug Ramsey, CFA, CMT, Chief Investment Officer, The Leuthold Group, LLC he market “bi-furcation” became so extreme during 1999 that professionals might remember the year very differently, depending on whether they owned any (or all) of four particular Tech stocks.

1. From an empirical point of view, none of our key capweighted measures has broken out to a 1999 level— although the S&P Price/Sales ratio (at 1.98x) is very close to doing so. Even the Price/Cash Flow ratio—which closed March at a 94th per1999, continued on page 16

THE STOCK/BOND RATIO REACHES THE 2007 PEAK

SIMPLIFYING THE UNDERSTANDING OF MUTUAL FUND CAPITAL GAIN DISTRIBUTIONS By Louis P. Stanasolovich, CFP®, CCO, CEO and President of Legend Financial Advisors, Inc.® and EmergingWealth Investment Management, Inc.®

Investors are often confused regarding capital gain distributions from mutual funds especially with regard to the actual mechanics of the process as well as the potential tax impact. This article is written to help alleviate the confusion with regard to the mutual fund distribution process. It may even help lower the tax bill for some investors.

“Bull markets are born on Pessimism, grow on skepticism, Mature on optimism and die On euphoria.” SIR JOHN TEMPLETON

By Bryce Coward, CFA, Knowledge Leaders Capital Blog As Edited By Louis P. Stanasolovich, CFP®, CCO, CEO and President of Legend Financial Advisors, Inc.® and EmergingWealth Investment Management, Inc.® The first quarter of 2017 finished in positive territory. An important valuation; The Stock to Bond Performance Ratio also reached a high for the current market, reaching levels not seen since mid-2007. The Stock to Bond Ratio measures the total return of the S&P 500 relative to that of the Bloomberg Barclays Global-Aggregate Total Return Index. When the blue line rises, stocks are outperforming bonds. Conversely, bonds then outperform stocks. Stock/Bond, continued on page 9

Capital Gain, continued on page 12

TECHNOLOGY BUBBLE: NO WAY!

By Doug Ramsey, CFA, CMT, Chief Investment Officer, The Leuthold Group, LLC The Standard and Poors 500 Index (S&P 500) eclipsed the “Twin Peaks” (2000 and 2007 highs) in 2013, and two years later the NASDAQ topped its 2000 high. Two more years have passed, and there’s a less-prominent index whose peak now looks vulnerable— the S&P 500 Information Technology Index which, after a 16.0% gain YTD, stands less than 5.0% below its high on March 24, 2000 (Chart 1 on the bottom of page 6). Is Tech experiencing another bubble? No, and it’s not even close. Yes, there’s investor excitement, along with a seeming acceleration of innovation. However, where bubble characteristics matter the Bubble, continued on page 6

THE GLOBAL INVESTMENT PULSE, May, 2017

1


ABOUT LEGEND FINANCIAL ADVISORS, INC.®

Legend Financial Advisors, Inc.® (Legend) is a Non-Commission, Fee-Only, Fiduciary U.S. Securities and Exchange Commission registered investment advisory firm with its headquarters located in Pittsburgh, Pennsylvania. Legend provides Personalized Wealth Management Services Including Financial Planning And Investment Management Strategies to affluent and wealthy individuals as well as business entities, medical practices and non-profit organizations as well as retirement plans. Legend and its award-winning advisors are Fiduciaries.

FIVE REASONS TO CHOOSE LEGEND 1. Legend is a Non-Commission, Fee-Only, Fiduciary advisory firm. Fee-Only means Legend is compensated exclusively by client fees. Unlike Legend, fee-based advisors and brokerage firms have numerous conflicts of interest due to the fact that they receive commissions. 2. Members of Legend’s Financial Advisory Team have been selected by National Publications such as Worth, Medical Economics and Barron’s more than 60 times as “The Best Financial Advisors In America”. 3. Unlike most advisory firms and all brokerage houses, Legend and its advisors have chosen to be governed by the Fiduciary Standard of Law. Fiduciaries are required to work in their clients’ best interests at all times. 4. Legend designs dynamic, creative and personalized financial planning and investment solutions for its clients. 5. Legend emphasizes low-cost investments where possible that are allocated and traded in an income tax-efficient manner.

ABOUT EMERGINGWEALTH INVESTMENT MANAGEMENT, INC.® EmergingWealth Investment Management, Inc.® (EmergingWealth), is the sister firm of Legend Financial Advisors, Inc.® (Legend) and is a Non-Commission, Fee-Only Securities and Exchange Commission (SEC) registered investment advisory firm. EmergingWealth provides Investment Management services to individuals as well as business entities, medical practices and non-profit organizations whose wealth is emerging. All investment portfolios are sub-advised by Legend. Both Legend and EmergingWealth share a common advisory team, Investment Committee and Fee Schedule.

LOUIS P. STANASOLOVICH, CFP®, EDITOR Louis P. Stanasolovich, CFP® is founder, CCO, CEO and President of Legend Financial Advisors, Inc.® (Legend) and EmergingWealth Investment Management, Inc.® Lou is one of only four advisors nationwide to be selected 12 consecutive times by Worth magazine as one of “The Top 100 Wealth Advisors” in the country. Lou has also been selected 13 times by Medical Economics magazine as one of “The 150 Best Financial Advisors for Doctors in America”, twice as one of “The 100 Great Financial Planners in America” by Mutual Funds magazine, five times by Dental Practice Report as one of “The Best Financial Advisors for Dentists In America” and once by Barron’s as one of “The Top 100 Independent Financial Advisors”. Lou was selected by Financial Planning magazine as part of their inaugural Influencer Awards for the Wealth Creator award recognizing the advisor who has made the most significant contributions to best practices for portfolio management. He has been named to Investment Advisor magazine’s “IA 25” list three times, ranking the 25 most influential people in and around the financial advisory profession as well as being named by Financial Planning magazine as one of the country’s “Movers & Shakers” recognizing the top individuals who have done the most to advance the financial advisory profession. 2

THE GLOBAL INVESTMENT PULSE, May, 2017


EXPLAINING THE FRIDAY EFFECT ON EARNINGS RELEASE-DAY PRICE MOVEMENT? By Jun Zhu, CFA, Senior Analyst, The Leuthold Group, LLC

There could be a few explanations: 1. Fridays are the last trading day of the week, so when a company’s earnings are released on that day, it is the last opportunity for investors to adjust positions before the weekend. In effect, concentrating Earnings Release-trading activity on a single day drives up price volatility. In contrast, when companies release earnings on a Monday, investors may take more time to act and trade throughout the week. 2. Could this phenomena have anything to do with options trading since options expire on Fridays? Weekly options expire every Friday, monthly options expire on the third Friday of the

month, and quarterly options expire on the last trading day of each calendar quarter. The Chart below shows that Earnings Release-day stock price volatility increases for those companies that also have options trading on those Fridays. 3. Quarterly rebalancing may also add to the effect. In fact, in addition to the third Friday of the last month of the quarter, companies reporting earnings on the last trading day of the quarter show elevated price volatility. When companies report close to the end of a calendar quarter, their prices may be affected to a larger extent by institutional quarter-end rebalancing.

Source: This article was excerpted from “Calendar Effect On Earnings-Release Day Price Movement”, by Jun Zhu, CFA, Senior Analyst, The Leuthold Group, LLC, (Perception Express, December 7, 2016), http:// leuth.us/stock-market COPYRIGHT 2016 THE LEUTHOLD GROUP, LLC REPRINTED WITH PERMISSION OF THE LEUTHOLD GROUP, LLC

PERCENT OF LARGER THAN 5.0% MOVE ON EARNINGS RELEASE DAY 50.0% 45.0% 40.0% 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% Fridays

Third Friday Of Months

All Reporting Companies As of: December 7, 2016 COPYRIGHT 2016 THE LEUTHOLD GROUP, LLC

Third Friday Of Last Month In A Quarter

Companies With Options

Source: The Leuthold Group, LLC, Perception Express, December 7, 2016, http://leuth.us/stock-market REPRINTED WITH PERMISSION FROM THE LEUTHOLD GROUP, LLC

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SMALL CAP SEASONALITY

By Doug Ramsey, CFA, CMT, Chief Investment Officer, The Leuthold Group, LLC In recent weeks we’ve seen several analyses of the “Sell In May” phenomenon from pundits not constrained to a monthly publication cycle. Once again, though, none of them addressed the most salient feature of this anomaly, which is that it’s historically been a predominantly Small Cap phenomenon. Since 1926, S&P 500 annualized total returns during the historically weak May-to-October period have been about half those generated during November through April (+6.8% versus +13.4%, Chart 1 below). Significant, yes, but not overwhelming. Anyone looking to capitalize on this effect should instead be using Small Caps (Chart 2below), which have shown a ten-to-one performance disparity over the last 91 years based on this simple calendar pattern!

The seasonal pattern has been so powerful that one could have actually beaten the Small Cap “buy-and-hold” approach by moving assets into Treasury bills during the May through October period. Since 1926, this strategy has generated an annualized total return of +12.0% versus +11.3% for the Small Cap Total Return Index (Chart 3 on page 5). The standard deviation of the active strategy is 18.6% versus 28.3% for buy-and-hold, thanks to the six-month intervals when the portfolio is safely parked in cash. The “inverted” calendar strategy, in which Small Caps are owned only during the seasonally weak May through October period, has been a disaster—lagging behind even the long-term Treasury bill return of +3.4% annualized.

Admittedly, there’s no fundamental rationale for this performance anomaly—possibly a reason it has remained so reliable. Source: This article was excerpted from “Small Cap Seasonality”, by Doug Ramsey, CFA, CMT, Chief Investment Officer, The Leuthold Group, LLC (Perception Express, May 5, 2017), http://leuth.us/stockmarket. COPYRIGHT 2017 THE LEUTHOLD GROUP, LLC REPRINTED WITH PERMISSION OF THE LEUTHOLD GROUP, LLC

CHART 1 “SELL IN MAY” EFFECT IN THE S&P 500, 1926 TO DATE May - October

November - April

13.4%

6.8%

Annualized total returns. As of: May 5, 2017 COPYRIGHT 2017 THE LEUTHOLD GROUP, LLC

Source: The Leuthold Group, LLC, Small Cap Seasonality, May 5, 2017, http://leuth.us/stock-market REPRINTED WITH PERMISSION FROM THE LEUTHOLD GROUP, LLC

CHART 2 “SELL IN MAY” EFFECT IN SMALL CAP STOCKS, 1926 TO DATE May - October

November - April 21.2%

2.1% Total returns from Ibbotson SBBI from 1926 through 1979; Russell 2000 thereafter. As of: May 5, 2017 COPYRIGHT 2017 THE LEUTHOLD GROUP, LLC

Source: The Leuthold Group, LLC, Small Cap Seasonality, May 5, 2017, http://leuth.us/stock-market REPRINTED WITH PERMISSION FROM THE LEUTHOLD GROUP, LLC

Small Cap, continued on page 5

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THE GLOBAL INVESTMENT PULSE, May, 2017


Small Cap, continued from page 4

CHART 3 SMALL CAP SEASONAL SWITCHING STRATGEY 1926 TO DATE Own Small Caps from November through April, own T-Bills rest of time.

90000 62500 42500 30000 20000

+12.0%/year

90000 62500 42500 30000 20000

12500

12500

7500

7500

5000

5000

2500

2500

Buy & Hold Small Cap Stocks

+11.3%/year.

Own Small Caps from May through October, sit in T-Bills rest of time.

+2.7%/year.

1930

1940

1950 1960

As of: May 5, 2017 COPYRIGHT 2017 THE LEUTHOLD GROUP, LLC

1970

1980

1990 2000

2010

Source: The Leuthold Group, LLC, Small Cap Seasonality, May 5, 2017, http://leuth.us/stock-market REPRINTED WITH PERMISSION FROM THE LEUTHOLD GROUP, LLC

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5


Bubble, continued from page 1

most—in sector valuations—they’re entirely absent (Charts 2 & 3 on page 7). Median S&P 500 Tech valuations, measured by Price/Cash Flow (P/CF), have struggled to break above the 15x (15 times) threshold that served as a valuation floor during the 2002-07 bull market. Note that all of the 60.0%-plus gain in S&P 500 Technology since the end of 2013 has occurred with the P/CF ratio essentially “hugging” that 15x level. The implication is that cumulative cash flow growth for the median S&P 500 Tech stock has also been around 60.0%. Not bad, considering cumulative real Gross Domestic Product (GDP) growth over the same span has been less than 8.0%. Tech margins peaked in 2010, but have yet to dip below the last two cycles’ peaks (Chart 4 on page 8). All of this is not to say the sector won’t fully participate in the next bear market. It is important to note that our use of sector medians probably hides a couple of

catastrophes waiting to happen. However, use of the “bubble” label further degrades a term that’s already lost most of its meaning. When Jimmy Carter’s Chief Economist was asked in 1979 to avoid using the “Rword,” he cleverly substituted another— and then promptly forecast the nation was “headed for a serious banana”. We wish Alfred Kahn, who died in 2010, had coined an alternative for the “B-word” before it came to describe almost any asset with a price chart showing a move “from the lower left to the upper right.” With Tech valuations at a fraction of their 2000 peaks, we present this sampling of recent opinion. Median Technology sector valuations in the spring of 2014 stood at 21x Trailing Earnings Per Share (EPS) and 14x Cash Flow—about 10.0% below their longterm medians. (The bubble peaks were

79.4x EPS and 60.0x Cash Flow.) We’ll say it again. It’s not the excitement, nor the gee-whiz innovations like augmented reality or self-driving cars that make a Technology bubble; the valuations must be ridiculous. They weren’t in 2014, and they aren’t now. Source: This article was excerpted from "Technology: Popping The “Bubble” Talk”, by Doug Ramsey, CFA, CMT, Chief Investment Officer, The Leuthold Group, LLC (Perception Express, May 5, 2017), http:// leuth.us/stock-market. COPYRIGHT 2017 THE LEUTHOLD GROUP, LLC REPRINTED WITH PERMISSION OF THE LEUTHOLD GROUP, LLC

CHART 1 110

One of the few Y2K highs still standing…

1100 1000

100

900

S&P 500 TECHNOLOGY SECTOR (Right Scale)

90 80

800 700 600

70

500

60

400 50 300 40

200 30

RELATIVE TO S&P 500 (Left Scale)

2000 As of: May 5, 2017 COPYRIGHT 2017 THE LEUTHOLD GROUP, LLC

6

THE GLOBAL INVESTMENT PULSE, May, 2017

2010 Source: The Leuthold Group, LLC, Technology: Popping The “Bubble” Talk, May 5, 2017, http://leuth.us/stock-market REPRINTED WITH PERMISSION FROM THE LEUTHOLD GROUP, LLC

Bubble, continued on page 7


Bubble, continued from page 6

CHART 2 S&P 500 TECHNOLOGY PRICE/CASH FLOW (SECTOR MEDIAN) August 2000 = 60.0x

60

60

55

55

50

50

45

45

A Price/Cash Flow ratio of 15x served as a floor for Tech during the 2002-2007 bull market, but has proven a ceiling since the Global Financial Crisis.

40 35 30 25 20

15.2x

40 35 30 25 20

15

15

10

10

5

5 00

02

04

06

08

10

12

14

16

18

Source: The Leuthold Group, LLC, Technology: Popping The “Bubble” Talk, May 5, 2017, http://leuth.us/stock-market REPRINTED WITH PERMISSION FROM THE LEUTHOLD GROUP, LLC

As of: May 5, 2017 COPYRIGHT 2017 THE LEUTHOLD GROUP, LLC

CHART 3 S&P 500 TECHNOLOGY PRICE-TO-EARNINGS ON 12-MONTH TRAILING EARNINGS PER SHARE (SECTOR MEDIAN) April 2000 = 79.4x

80

80

75

75

70

70

65

65

60

60

55

55

50

50

45

45

40

40

35

35

30

30

25

24.7x

20

25 20

15

15

10

10 00

02

04

As of: May 5, 2017 COPYRIGHT 2017 THE LEUTHOLD GROUP, LLC

06

08

10

12

14

16

18

Source: The Leuthold Group, LLC, Technology: Popping The “Bubble” Talk, May 5, 2017, http://leuth.us/stock-market REPRINTED WITH PERMISSION FROM THE LEUTHOLD GROUP, LLC

Bubble, continued on page 8

THE GLOBAL INVESTMENT PULSE, May, 2017

7


Bubble, continued from page 7

CHART 4 S&P 500 TECHNOLOGY – TRAILING FOURTH QUARTER NET PROFIT MARGIN (SECTOR MEDIAN) 16 15 14 13 12

2010:Q4 = 15.3%

16 15 14 13 12

14.6%

11 10 9 8 7 6 5 4 3 2 1 0 -1 -2 -3 -4

11 10 9 8 7 6 5 4 3 2 1 0 -1 -2 -3 -4 1990

2000

2010 Source: The Leuthold Group, LLC, Technology: Popping The “Bubble” Talk, May 5, 2017, http://leuth.us/stock-market REPRINTED WITH PERMISSION FROM THE LEUTHOLD GROUP, LLC

As of: May 5, 2017 COPYRIGHT 2017 THE LEUTHOLD GROUP, LLC

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THE RALLY WITHOUT A 3.0% TO 5.0% SELL-OFF THAT IS TYPICAL EVERY 2 TO 3 MONTHS IS NOW RUNNING OVER 4 MONTHS AND IS IN THE TOP 10.0% OF SUCH RALLIES BY DURATION 200

200 Duration between two 3.0%+ Drawdowns (S&P 500, trading days, post World War II)

180

180

160 140

160 Current Episode Percentile: 91st ExRecession Average (51)

120

Current (90)

100 80

120 100

Median (38)

Average (48)

80

60

60

40

40

20

20

0

As of: March 20, 2017 COPYRIGHT 2017 361 CAPITAL, LLC

8

140

THE GLOBAL INVESTMENT PULSE, May, 2017

0 Source: 361 Capital, LLC, Weekly Research Briefing, March 20, 2017, www.361capital.com

REPRINTED WITH PERMISSION FROM 361 CAPITAL, LLC


Stock/Bond, continued from page 1

Stocks outperforming bonds isn’t all that surprising, especially in a bull market. However, the recent acceleration is not typical. Over the last two quarters (4th quarter 2016 and 1st quarter 2017) stocks have outperformed bonds by 15.55%, which is highest spread since 2011. In 1999, stocks outperformed bonds by a significantly larger margin over the last two calendar quarters.

such a short period, that period of outperformance will usually move towards zero in the next period. While it is impossible to predict the performance of either stocks or bonds, the reader can fairly easily come to the conclusion that further stock strength versus bonds is probably unlikely over the next several months.

This fairly simple performance measurement chart tells us that over short periods of time, the relative performance of stocks and bonds fluctuates around an average of approximately zero. When the S&P 500 outperforms bonds by a large amount over

REPRINTED WITH PERMISSION OF LEGEND FINANCIAL ADVISORS, INC.®

COPYRIGHT 2017 LEGEND FINANCIAL ADVISORS, INC.®

STOCK TO BOND RATIO

5.0

S&P 500 Index Relative to Bloomberg Barclays Global-Aggregate Total Return Index 12/31/1992 - 3/31/2017

4.5 4.0 3.5

HIGHEST SINCE 2007

3.0 2.5 2.0 1.5 1.0 0.5 0.0 -0.5 -1.0

S&P 500 Index / Bloomberg Barclays Global-Aggregate Total Return Index

-2.0

12/31/1992 7/31/1993 2/28/1994 9/30/1994 4/30/1995 11/30/1995 6/30/1996 1/31/1997 8/31/1997 3/31/1998 10/31/1998 5/31/1999 12/31/1999 7/31/2000 2/28/2001 9/30/2001 4/30/2002 11/30/2002 6/30/2003 1/31/2004 8/31/2004 3/31/2005 10/31/2005 5/31/2006 12/31/2006 7/31/2007 2/29/2008 9/30/2008 4/30/2009 11/30/2009 6/30/2010 1/31/2011 8/31/2011 3/31/2012 10/31/2012 5/31/2013 12/31/2013 7/31/2014 2/28/2015 9/30/2015 4/30/2016 11/30/2016

-1.5

As of: March 31, 2017

Source: Bloomberg

PULSE

THE U.S. TAX CODE: WOULD YOU READ IT? WHAT A SNORE!

By James J. Holtzman, CFP®, CPA, Legend Financial Advisors, Inc.® and EmergingWealth Investment Management, Inc.® The federal tax code and accompanying federal tax regulations contain 10 million words, a publication that would take an individual reading 300 words a minute (the average speed for an adult) more than 23 days of non-stop reading to digest. (Source: Tax Foundation) THE GLOBAL INVESTMENT PULSE, May, 2017

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56.0% POSITIVE CLOSES FOR THE STOCK MARKET IN 2017 By Blaine Rollins, CFA, 361 Capital, LLC

As market participants know, this current stock has been a very broad rally that has event provided dips to buy. The momentum has been nothing short of remarkable. Every so often, we like to check on the percentage of trading days closing positive for the year. We are nearly five full months into the New Year and the percentage of days closing positive for the year is 56.0% (see the table below). This is a very strong momentum reading. For some context, the highest annual reading going back to 2000 is 58.0%, registered in 2013 when the S&P 500 was up 29.6%

Source: This article was excerpted from “Bogged Down…”, by Blaine Rollins, CFA, 361 Capital, LLC, (Weekly Research Briefing, March 20, 2017), www.361capital.com COPYRIGHT 2017 361 CAPITAL, LLC REPRINTED WITH PERMISSION OF 361 CAPITAL, LLC

Percent Of Days Closing Higher

Percent Change

2017

56.0%

8.81%

2016

52.0%

9.54%

2015

47.0%

-0.73%

2014

57.0%

11.39%

2013

58.0%

29.60%

2012

53.0%

13.41%

2011

55.0%

0.00%

2010

57.0%

12.78%

2009

56.0%

23.45%

2008

50.0%

-38.49%

2007

55.0%

3.53%

2006

56.0%

13.62%

2005

56.0%

3.00%

2004

56.0%

8.99%

2003

54.0%

26.38%

2002

44.0%

-23.37%

2001

48.0%

-13.04%

2000

48.0%

-10.14%

As of: May 26, 2017 COPYRIGHT 2017 361 CAPITAL, LLC

Source: Blooberg via 361 Capital, LLC, Weekly Research Briefing, www.361capital.com

REPRINTED WITH PERMISSION FROM 361 CAPITAL, LLC

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THE GLOBAL INVESTMENT PULSE, May, 2017


“Do You Want A Second Opinion?” To see if your investment portfolio is built to navigate the pitfalls and opportunities ahead, call us today for a “Free Second Opinion” at

(888) 236-5960

www.legend-financial.com THE GLOBAL INVESTMENT PULSE, May, 2017

11


GLOBAL VALUATION CHECKUP

By Doug Ramsey, CFA, CMT, Chief Investment Officer, The Leuthold Group, LLC Foreign equities beat the U.S. in the first quarter, but the performance gap that’s opened up since the 2007 market highs remains astounding. While the MSCI USA Index is more than 50.0% above its October 2007 peak, both the World Ex-USA and Emerging Markets Index would need to rally by 33.0% and 39.0%, respectively, just to recoup their 2007-09 losses (Chart 1 on page 17). While hopes for a synchronized global expansion have repeatedly been dashed over the last six years, Chart 2, on page 17, shows that trailing 12-month Earnings Per Share (EPS) for the U.S., non-U.S. Developed world, and Emerging Markets are all moving up for the first time

since early 2011. The latter two regions, though, will require dramatic EPS gains in coming years to reverse the recent downward trend in 5-Year Normalized EPS (Chart 3 on page 17). While foreign equity valuations (especially within Emerging Markets) have rebounded from February 2016 lows, the bounce has done little to close their enormous Price-to-Earnings discounts relative to the U.S. market. Based on 5-Year Normalized EPS, the World Ex-USA Price-toEarnings of 17.4x is almost 30.0% below the USA’s (23.8x), while the Emerging Markets Normalized Price-to-Earnings of 13.1x is 45.0% below the U.S. multiple. If one assumes that foreign profitability

has begun to revert up toward the mean (average), the effective valuation discount is substantially larger than even our numbers suggest. Source: This article was excerpted from “Global Valuation Checkup”, By Doug Ramsey, CFA, CMT, Chief Investment Officer, The Leuthold Group, LLC (Perception Express, April 2017), http://leuth.us/ stock-market. COPYRIGHT 2017 THE LEUTHOLD GROUP, LLC REPRINTED WITH PERMISSION OF THE LEUTHOLD GROUP, LLC Global Valuation Checkup, continued on page 17

Capital Gain, continued from page 1

The origin of capital gain distributions for mutual funds is similar to that for investors owning individual stocks. Whenever an investor sells a stock, bond or other asset, a capital gain or loss is generated for income tax purposes. Likewise, when a mutual fund portfolio manager sells securities within the fund that they manage during the fund’s income tax year there will be capital gains or losses incurred. Other activities, such as corporate mergers or acquisitions related to fund holdings may also produce capital gains. If the net result of all transactions and activity within a mutual fund during the year is a gain, then a fund is generally required to distribute the amount of that gain to its shareholders (Like individual investors net losses within the mutual fund may be used to offset gains in the future years). Investors are often confused with regard to two different aspects of capital gain distributions. The first is when a mutual fund declares a capital gain. Many investors believe they are receiving extra monies when in reality, it is only an accounting calculation. The reality is the value of the investment does not change. The example below will clarify the reader’s understanding of this result: 1. Assume the investor owns 1,000 shares of the XYZ mutual fund. 2. The share price of the XYZ mutual fund is $12.00 resulting in a total investment value of $12,000.00 (1,000 shares x $12.00 per share). 3. A $2.00 per share capital gain distribution is declared by the XYZ’s Board of Directors.

4. The value for the underlying securities held within the XYZ mutual fund does not change. Prior to the distribution, the investor, who also can be called a shareholder, has $12,000.00 in assets within XYZ mutual fund. The XYZ mutual fund will drop in price by the $2.00 distribution amount per share to $10.00 when the distribution actually occurs. The investor will receive $2,000.00. If the investor has preselected the option to do so, the distribution proceeds will be reinvested by purchasing 200 more shares at $10.00 each. The final result is after the distribution, that shareholder will own 1,200 shares at $10.00 per share valued at $12,000.00. Obviously, if the investor receives the distribution in cash, the investor would instead own 1,000 shares at $10.00. In addition, they would have the $2,000.00 in cash to do with as they please. In short, either choice of reinvestment or not results in a tie, economically speaking. The second issue concerning mutual fund capital gain distributions that often confuses investors is the fund price drop from $12.00 per share to $10.00 per share on the payout date. Many shareholders who closely track the fund’s price are concerned if they are unaware of the distribution amount and payout date. If there is such concern, the reader should call their Fee-Only advisor or broker. If the reader is a do-it-yourself investor, it is best to call the mutual fund directly to obtain a more detailed explanation. For taxable accounts, capital gain distributions will impact taxes for the current

income tax year. Distributions, therefore, are taxable whether they are reinvested or not. Payouts consist of either shortterm or long-term gains or a combination thereof. Short-term capital gains are subject to ordinary income rates whereas long-term capital gains are taxed at the long-term capital gain tax rate. Another important issue to point out is that in order to minimize the investor’s income taxes, it is important when reinvesting capital gains distributions that the amount of reinvested gains should be added to the cost basis. In the example above, $2,000.00 would need to be added to the investor’s cost basis. By doing so, the future capital gains will be less. The payout dates of capital gain distributions will vary from fund group to fund group. Some funds pay them out throughout the year. Some funds make payments either monthly, quarterly or once in November or December. It is important to know when capital gain payouts will take place. Investors with astute advisors can avoid non-favorable payouts by selling the mutual fund prior to payout if there is a loss or even a small gain on the fund and, therefore, avoid unnecessary income taxes. COPYRIGHT 2017 LEGEND FINANCIAL ADVISORS, INC.® REPRINTED WITH PERMISSION OF LEGEND FINANCIAL ADVISORS, INC.® For more information call Louis P. Stanasolovich at (888) 236-5960. PULSE

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Global Valuation Checkup, continued from page 5

CHART 2

CHART 1 2000 1500

MSCI USA Index

1000 500

1000

MSCI Emerging Markets

40 20

MSCI Emerging Markets 12-Month Earnings Per Share

2000

still -37.0% below 2007 high

60

5-Year Normalized EPS

still -29.0% below 2007 high

MSCI World Ex USA Index

100 80

MSCI USA 12-Month Earnings Per Share

150 100 50

5-Year Normalized EPS 1500

5-Year Normalized EPS

MSCI Emerging Markets 12-Month Earnings Per Share

1000 500

100 80 60 40

20

1970

1980

1990

2000

1970

2010

Source: The Leuthold Group, LLC, Perception Express, April 7, 2017, http://leuth.us/stock-market REPRINTED WITH PERMISSION FROM THE LEUTHOLD GROUP, LLC

As of: April 7, 2017 COPYRIGHT 2017 THE LEUTHOLD GROUP, LLC

1980

1990

As of: April 7, 2017 COPYRIGHT 2017 THE LEUTHOLD GROUP, LLC

CHART 3

2000

2010

Source: The Leuthold Group, LLC, Perception Express, April 7, 2017, http://leuth.us/stock-market REPRINTED WITH PERMISSION FROM THE LEUTHOLD GROUP, LLC

CHART 4

MSCI USA Price-To-Earnings On 5-Year Normalized EPS

35 30 25

35

MSCI USA Price-To-Earnings on 12-Month Trailing EPS

30 25 20

20

Median = 19.3x

15

15

MSCI World Ex USA Price-To-Earnings on 5-Year Normalized EPS

Median = 17.0x

10

MSCI World Ex USA Price-To-Earnings on 12-Month Trailing EPS

40 35

Median = 19.7x old support becomes new resistance

30

30 25 20 15

Median = 17.0x

10

25 20 15

MSCI Emerging Markets Price-To-Earnings on 12-Month Trailing EPS

10 5 40 35 30

Median = 14.4x

25 20 15

Median = 15.0x 1980

35

20

30

1970

40

25

15

MSCI Emerging Markets Price-To-Earnings On 5-Year Normalized EPS

10

10 1990

As of: April 7, 2017 COPYRIGHT 2017 THE LEUTHOLD GROUP, LLC

2000

10

retest of 2008-09 2010

Source: The Leuthold Group, LLC, Perception Express, April 7, 2017, http://leuth.us/stock-market REPRINTED WITH PERMISSION FROM THE LEUTHOLD GROUP, LLC

1970

1980

1990

As of: April 7, 2017 COPYRIGHT 2017 THE LEUTHOLD GROUP, LLC

2000

2010

Source: The Leuthold Group, LLC, Perception Express, April 7, 2017, http://leuth.us/stock-market REPRINTED WITH PERMISSION FROM THE LEUTHOLD GROUP, LLC

PULSE THE GLOBAL INVESTMENT PULSE, May, 2017

13


SECULAR BEAR MARKET WATCH April 1, 2000 to April 30, 2017 (17 years and 1 month) Annual Compound Return

Total Return

Consumer Price Index (Inflation)

2.11%

42.83%

90-Day Treasury Bills Index-Total Return

1.57%

30.42%

Barclays Aggregate Bond Index-Total Return

5.14%

135.63%

High Yield Corporate Bond Index – Total Return

9.13%

345.23%

S&P Leveraged Loan Index – Total Return

4.98%

129.40%

HFRX Global Hedge Fund Index

2.43%

50.70%

S&P 500 Index (U.S. Stock Market)

4.76%

121.50%

MSCI EAFE Index (Developed Foreign Equities)

3.37%

76.17%

MSCI Emerging Market Index (Equities)

6.74%

204.92%

Newedge CTA Index (Managed Futures)

4.69%

118.74%

Dow Jones–UBS Commodity Index-Total Return (USD)**

-0.93%

-14.73%

Dow Jones U.S. Real Estate Index-Total Return (USD)**

10.78%

474.69%

9.28%

355.57%

Gold Bullion As of: April 30, 2017

SECULAR BEAR MARKET WATCH (CONTINUED) April 1, 2000 to April 30, 2017 (17 years and 1 month)

Compound and Total Returns include reinvested dividends. MSCI Indexes do not include dividends prior to 2002. Newedge Index is equally-weighted. COPYRIGHT 2017 LEGEND FINANCIAL ADVISORS, INC. ® ** USD = U.S. Dollar REPRINTED WITH PERMISSION OF LEGEND FINANCIAL ADVISORS, INC. ® Source: Bloomberg Investment Service

Note: During Secular Bear markets U.S. Stocks have historically returned a little more than inflation or a little less than inflation—plus or minus 1.50%—and generally last between 15 to 25 years. The last Secular Bear market (1966 to 1982) lasted 17 years and underperformed inflation by approximately one-half of one percent per year. The other Secular Bear markets since 1900 were 1901 to 1920 and 1929 to 1949. In both cases, the U.S. Stock market outperformed inflation by approximately 1.50% per year. All of the aforementioned performance numbers are pre-tax. The performance of the U.S. Stock market so far in the current period (April 1, 2000 to the present) certainly appears to indicate that we are in a Secular Bear market. Long-term returns (over the next 10 years) for the S&P 500 will probably be slightly worse than the last 17 years and 1 month. Current 10 year normalized P/Es (long-term valuations) indicate approximate annual compound returns of slightly less than 3.00% over the next 10 years. Of course during the next 10 years, returns during various periods will be significantly higher and lower than the expected return. For example, the more the stock market rises in the near term, the less returns after that period will be and vice versa. 14

THE GLOBAL INVESTMENT PULSE, May, 2017


2017 YEAR-TO-DATE PERFORMANCE January 1, 2017 to April 30, 2017 (4 months) 2017 Year-To-Date Return Consumer Price Index (Inflation)

1.28%

90-Day Treasury Bills Index-Total Return

0.21%

Bloomberg Intermediate Term Corporate Bond Index

2.66%

Barclays Aggregate Bond Index-Total Return

1.59%

High Yield Corporate Bond Index – Total Return

3.18%

S&P Leveraged Loan Index – Total Return

1.58%

HFRX Global Hedge Fund Index

2.09%

S&P 500 Index (U.S. Stock Market)

7.16%

MSCI EAFE Index (Developed Foreign Equities)

10.25%

MSCI Emerging Market Index (Equities)

13.94%

Newedge CTA Index (Managed Futures)

-0.06%

Dow Jones–UBS Commodity Index-Total Return (USD)**

-4.00%

Dow Jones U.S. Real Estate Index-Total Return (USD)**

3.80%

Gold Bullion

10.12%

As of: April 30, 2017 Compound and Total Returns include reinvested dividends. Newedge Index is equally-weighted. ** USD = U.S. Dollar COPYRIGHT 2017 LEGEND FINANCIAL ADVISORS, INC. ® Source: Bloomberg Investment Service

REPRINTED WITH PERMISSION OF LEGEND FINANCIAL ADVISORS, INC. ® THE GLOBAL INVESTMENT PULSE, May, 2017

15


1999, continued from page 1

centile reading of 15.2x—is “merely” on par with its February 1998 reading. 2. Based on a median of the six measures shown in Chart 1, below, today’s S&P 500 valuation profile equates to the one prevailing on August 31, 1997. The S&P 500 closed at 899 that day, and would rally more than 60.0% over the next 2 1/2 years before peaking. (This is not our forecast for the current bull.) 3. While new entrants to the U.S. stock market are bound to be disappointed by their likely long-term (seven to 10-year) realized returns, this analysis suggests it’s still premature (after eight years!) to call the market a bubble. While capitalization-weighted valuation measures remain well below their Technology bubble peaks, the same can’t be said of valuation readings for the “typical” or median stock. Based on an average of

the Trailing P/E (Price-to-Earnings), Normalized (Five Year Average) P/E, Price/ Cash Flow, and Price-to-Book ratios, the median S&P 500 stock now trades at valuation levels seen back in March 1998 (Chart 2, top of page 11)—just a month prior to the late 1990’s peak in broad market valuation. 1. Yes, the S&P 500 and NASDAQ upswings would continue for two more years. Remember, though, that one’s bull market experience hinged entirely on the chosen portfolio weighting scheme. The capitalization-weighted S&P 500 rose another 39.0% from April 1998 to the March 24, 2000 peak, while an equal-weighted S&P 500 portfolio gained just 6.0% during the same span. During this greatest of all stock market manias, in its final phase, liquidity proved sufficient to lift only a shrunken list of S&P megacaps.

2. As noted previously, there’s plenty of room for an assault on the March 2000 capitalization-weighted valuation peak. However, the same metrics for the median (half are higher, half are lower) S&P 500 stock are now within a stone’s throw of their late-1990s’ highs, leaving us to wonder whether it might be 1999 again after all. Source: This article was excerpted from “The Valuation “Time Clock” Revisited”, By Doug Ramsey, CFA, CMT, Chief Investment Officer, The Leuthold Group, LLC (Perception Express, April 7, 2017), http://leuth. us/stock-market. COPYRIGHT 2017 THE LEUTHOLD GROUP, LLC REPRINTED WITH PERMISSION OF THE LEUTHOLD GROUP, LLC

Chart 1

S&P 500, 1994 - 2000 (WEEKLY)

When did various valuation measures first reach their current levels during the great stock market mania of the late 1990s?

*Price-to-Book, Price/Cash Flow and Price/Sales are for the S&P Industrial Average; remaining statistics are for the S&P 500. As of: April 7, 2017 COPYRIGHT 2017 THE LEUTHOLD GROUP, LLC

Based on a median of the six measures shown above, the S&P 500 today trades at a valuation level first reached on August 31,1997 (… with the S&P 500 at 899—on its way to 1527 in March 2000.) Source: The Leuthold Group, LLC, Perception Express, April 7, 2017, http://leuth.us/stock-market REPRINTED WITH PERMISSION FROM THE LEUTHOLD GROUP, LLC

1999, continued on page 17

16

THE GLOBAL INVESTMENT PULSE, May, 2017


1999, continued from page 16

Chart 2

S&P 500 EQUAL-WEIGHTED INDEX,1994 - 2000 (MONTHLY)

When did various median S&P 500 valuation measures first reach their current levels during the great stock market mania of the late 1990s? Based on a median of the four measures shown above, the median S&P 500 stock today trades at a valuation level first reached in March 1998. While the bull market would continue for another two years, the S&P 500 Equal Weighted Index would gain only +6.0% into the “official” bull market top on March 24, 2000. As of: April 7, 2017 COPYRIGHT 2017 THE LEUTHOLD GROUP, LLC

Source: The Leuthold Group, LLC, Perception Express, April 7, 2017, http://leuth.us/stock-market REPRINTED WITH PERMISSION FROM THE LEUTHOLD GROUP, LLC

PULSE

FED WATCH INTEREST RATES AS OF MAY 3, 2017 Fed Funds Rate Range: Fed Discount Rate:

0.75% to 1.00% 1.50%

2017 UPCOMING FED MEETINGS SCHEDULE June 19-20 September 19-20 July 25-26 October 31/November 1 December 12-13 THE GLOBAL INVESTMENT PULSE, May, 2017

17


LEGEND FINANCIAL ADVISORS, INC.® & EMERGINGWEALTH INVESTMENT MANAGEMENT, INC.’S® INVESTMENT MANAGEMENT SERVICES Legend Financial Advisors, Inc.® (Legend) and EmergingWealth Investment Management, Inc.® (EmergingWealth) offer Personalized Investment Management Services to individuals and institutions. Investment portfolios are developed to match the client’s return and risk requirements, which are determined by the clients’ completion of a Risk Comfort Zone Questionnaire, with the guidance of a Legend Wealth Advisor or EmergingWealth Advisor, respectively. Each type of investment portfolio is managed to achieve the short, intermediate and long-term investment objectives of the client, as may be applicable.

INVESTMENT PROCESS Investment Portfolios: Unlike most financial advisory firms that offer one style of investment or portfolio type, we offer a wide array of investment portfolios that usually fit with the large majority of client needs. If necessary, we will create customized solutions as well. For the types of investment portfolios, please see our Investment Portfolios, Potential Return and Risk Spectrum Chart on the next page. For a detailed description of our portfolios, please contact Louis P. Stanasolovich, CFP®, founder, CCO, CEO and President of both firms for a confidential discussion at (412) 635-9210 or e-mail us at legend@legend-financial.com. Investment Research: Our Investment Committee performs extensive research to identify opportunities, mitigate risks and structure investment portfolios. Emphasis is placed on developing portfolios that maximize the potential return relative to the amount of risk taken. In-depth due diligence including face-to-face interviews in many instances with portfolio managers for open-end mutual funds is performed on each investment we select for a portfolio. Factors (both from a qualitative and quantitative standpoint) that we conduct a thorough analysis of each investment include, but is not limited to, liquidity (including the primary investment and/or the underlying investments, if utilizing pass through vehicles such as openend mutual funds or exchange-traded products), income taxation, all related costs, return potential, drawdown potential (historical declines from peak-to-trough), volatility and management issues (Anything having to do with the management team of a stock, open-end mutual fund or an exchange-traded product.). All portfolios for EmergingWealth are subadvised by Legend. Client Education: Education is very important to us. We are dedicated to educating each client about the different investment portfolio types and how they relate to market volatility, time horizons, and investment returns. It is our goal to ensure that the client understands and agrees with our investment philosophy. Furthermore, we assist each client in selecting a risk tolerance level with which they are comfortable. Ultimately, an investment portfolio is designed to meet the client’s objectives.

PERFORMANCE REPORTING Many investment firms only offer monthly brokerage statements, which provide minimal information; typically only account and investment balances. We, on the other hand, provide detailed quarterly reports that outline performance, income and management fees (among other items) in a simple, easy-to-read report. In addition, each performance report is sent with an extensive index page that illustrates the investment environment during the reporting period.

FEES To find out more about the fees for either Legend or EmergingWealth’s Investment Management services, please contact Louis P. Stanasolovich, CFP®, founder, CCO, CEO and President of both firms for a confidential discussion at (412) 635-9210 or e-mail us at legend@legend-financial.com. 18

THE GLOBAL INVESTMENT PULSE, May, 2017


THE GLOBAL INVESTMENT PULSE, May, 2017

19

HIGHER

POTENTIAL RETURN

LOWER

For A Description Of Each Investment Portfolio Contact One Of Our Advisors

LOWER RISK (COLD BLUE)

LOWER VOLATILITY

®

®

Global Strategic Balanced 20.0% Equity 80.0% Fixed

Global Strategic Balanced 30.0% Equity 70.0% Fixed

Global Strategic Balanced 60.0% Equity 40.0% Fixed Income

RISK (VOLATILITY/STANDARD DEVIATION)

Global Strategic Balanced 40.0% Equity 60.0% Fixed

Global Strategic Balanced 50.0% Equity 50.0% Fixed Income

®

HIGHER VOLATILITY

Past Performance Does Not Guarantee Future Results

© 2014 Legend Financial Advisors, Inc. ® All Rights Reserved ©2014 Legend Financial Advisors, Inc.® All Rights Reserved

Global Strategic Balanced 70.0% Equity 30.0% Fixed Income

UltraSpeculative 100% Equity

Global Strategic Balanced 100% Equity

Legend MultiStrategy 100% Equity

High Quality 100% Equity

HIGHER RISK (BLAZING HOT)

Global Strategic Balanced 80.0% Equity 20.0% Fixed Income

The Portfolios In Red Despite Their Placement All Have Similar Potential Return And Risk Profiles

ALL PORTFOLIOS ARE MANAGED BY LEGEND FINANCIAL ADVISORS, INC.

MODERATE RISK (WARM)

LEGEND FINANCIAL ADVISORS, INC. AND EMERGINGWEALTH INVESTMENT MANAGEMENT, INC.'S INVESTMENT PORTFOLIOS, POTENTIAL RETURN AND RISK SPECTRUM S&P 500 Risk

The Global Investment Pulse May 2017 Issue  

The Global Investment Pulse May 2017 Issue