Page 1

November, 2017

THE LENGTH OF DRAWDOWN VERSUS ALL-TIME PEAK PERIODS

WHEN ‘SELL IN MAY AND GO AWAY’ DOESN’T WORK

By Louis P. Stanasolovich, CFP®, CCO, CEO and President of Legend Financial Advisors, Inc.® and EmergingWealth Investment Management, Inc.®

By Blaine Rollins, CFA, 361 Capital, LLC

O

ne of the biggest challenges for investors when investing is long periods of drawdown (negative performance and losses) versus all-time peak performance.

For investors the reality is, only two positions exist, all-time highs in their portfolio and drawdowns. Drawdowns are the peak to trough loss an investor might experience with an investment. For example, if an investment was purchased for $1,000.00 and it declines to $800.00, the drawdown is 20.0%. It will then need to rise 25.0% ($200.00 divided by $800.00 = 25.0%) to breakeven.

Drawdowns, continued on page 6

HOMEBUILDING STOCKS ARE ON A STELLER RUN— CAN THE STREAK CONTINUE? By The Leuthold Research Team Edited by Louis P. Stanasolovich, CFP®, CCO, CEO and President of Legend Financial Advisors, Inc.® and EmergingWealth Investment Management, Inc.® Homebuilding stocks have been on a tear in 2017. Despite the November 2nd release of sweeping proposed changes to the U.S. tax code—which sparked a homebuilding stock selloff— Leuthold Group’s proprietary-weighted homebuilding group is still up more than 53.0% through November 3rd. It is the third best performing industry group of the 110 that they track, and it’s outperforming the S&P 500 by a spread of 36.0%. Strong returns have occurred across the board, too, with the median (50.0% are above the median and 50.0% are below the median) homebuilding company up 44.0%. Following this impressive run, and in light of proposed changes to U.S. homeowner tax incentives, do homebuilding stocks still have room to run? General thinking says yes. Once again, investors have overHomebuilding, continued on page 12

As excerpted by Diane M. Pearson, CFP®, PPCTM, CDFA®, Legend Financial Advisors, Inc.® and EmergingWealth Investment Management, Inc.® The longer-term outlook for U.S. equities remains positive now that the returns were so good during the late spring, summer and early fall slow down season. This year the Standard & Poors 500 rose more than 8.0% during May 1st to October 31st period. This six month period is often considered the “weakest six months of the year”. However, when the Standard & Poors 500 has done well during this period, the next six months have also been strong. Historically, the Standard & Poors 500 gains a median (50.0% of the returns are above and 50.0% are below) of 12.0% and closing the period with a gain 91.0% of the time. That sounds like some pretty good odds. (See “Six Months When Stocks Soar” chart on page 6. Sell In May, continued on page 6

THE DANGERS OF LONG-TERM U.S. TREASURY BONDS By James J. Holtzman, CFP®, Legend Financial Advisors, Inc.® and EmergingWealth Investment Management, Inc.® Since the early 1980s, interest rates have been declining. Interest rates on government securities of numerous countries’ have moved toward and, in some cases, reached 0.0%. Quantitative Easing (also known as QE) coupled with low inflation and tentative, at best, economic growth have pushed down many governments’ interest rates on bonds to at least, in most cases, historic lows. Investors today are concerned that interest rate sensitivity, known as duration, which has potentially become a source of risk (interest rate) when interest rates eventually rise. Please keep in mind though since the Spring of 2013, it has been the view of many investors that interest rates will start to rise. Most investors continue to consider lowering their duration exposure on bonds.

U.S. Treasury Bonds, continued on page 10

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ABOUT LEGEND FINANCIAL ADVISORS, INC.®

Editor Louis P. Stanasolovich, CFP® CCO, CEO, and President Legend Financial Advisors, Inc.® 5700 Corporate Drive, Suite 350 Pittsburgh, PA 15237-2829 legend@legend-financial.com

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

Newsletter Production Managers Lori. L. Albert legend@legend-financial.com

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.

EmergingWealth Investment Management, Inc.® 5700 Corporate Drive, Suite 360 Pittsburgh, PA 15237-2829

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”.

Postmaster: Send all address changes to: Legend Financial Advisors, Inc.® 5700 Corporate Drive, Suite 350 Pittsburgh, PA 15237-2829

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.

Copyright 2017 by Legend Financial Advisors, Inc.® and EmergingWealth Investment Management, Inc.® Reproduction, photocopying or incorporating into any information-retrieval system for external or internal use is prohibited unless permission in each case for a specific article. The subscription fee entitles the subscriber to one original copy only.

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. Unauthorized copying is considered theft. 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, November, 2017


THE PROS AND CONS OF HEDGING INTEREST RATE RISK WITH INVERSE BOND EXCHANGE-TRADED FUNDS By Louis P. Stanasolovich, CFP®, CCO, CEO and President of Legend Financial Advisors, Inc.® and EmergingWealth Investment Management, Inc.® Bond prices have steadily climbed over the past 35 years due to the fact that interest rates have generally been falling, but they don’t always go up. While not the only factor to affect bond prices, interest rates usually have the greatest influence. If interest rates increase, bond prices will usually decrease, which could result in significant losses in bond portfolios that have not been positioned defensively. Given the current low interest rate environment, bond investors should be wary of interest rate risk. Duration And The Impact Of Risking Rates: To quantify the potential impact of rising interest rates on one’s portfolio, it is important to look at the duration (See the article on page 1 entitled “The Dangers Of Long-Term U.S. Treasury Bonds”.). Duration is an approximate measure of the sensitivity (potential losses or gains) of the value of a bond (or bond portfolio) to a change in interest rates. A higher duration number generally means greater sensitivity, and a greater potential for loss when rates rise.

Inverse Bond Exchange-Traded Funds Can Be Utilized To Hedge Bond Portfolios:

necessary and perhaps more frequently if the intention is to hold these type of Exchange-Traded Funds over time.

Exchange-Traded Funds (ETFs) are designed to move in the opposite direction of their fixed-income indexes, rising as interest rates fall and vice versa. These inverse bond Exchange-Traded Funds are also designed to act as if they have a negative duration, which means that adding an inverse bond ETF to a bond portfolio should make the combination act as though it has a lower, less rate-sensitive duration. As a result, if bond prices decline, the hedge should help partially offset losses in the combined portfolio. The downside of such a strategy is a lower overall return because the combination will offset potential returns from both types of bond investment strategies against each other.

Also, the effects of compounding may cause the return of inverse ExchangeTraded Funds to be greater than or less than the index return times the fund multiple (Beware of 2x and 3x type funds. These are leveraged funds.) for any holding period greater than one day. Sometimes, the difference can be significant. In other words, the longer an inverse Exchange-Traded Fund is held, especially one that is leveraged, the compounding effect can cause such a fund to work against an investor despite the fact that the investment strategy is generally moving in the correct direction. It’s also important to keep in mind rebalancing strategies may result in additional transaction costs and tax consequences.

The Dangers Of Inverse Bond Exchange-Traded Funds:

COPYRIGHT 2017 LEGEND FINANCIAL ADVISORS, INC.®

Inverse Exchange-Traded Funds have one-day investment objectives, therefore careful monitoring is essential. Periodic rebalancing of such a position may be

REPRINTED WITH PERMISSION OF LEGEND FINANCIAL ADVISORS, INC.® PULSE

PRICE-TO-EARININGS (P/E) 10 (ROBERT SHILLER) RATIOS BY PERCENTILE

We Are In The Top 4.0% High Of All Time.

As of: November 3, 2017 COPYRIGHT 2017 CMG CAPITAL MANAGEMENTGROUP, INC.

Source: dshort.com via CMG Capital Management Group, Inc., On My Radar, November 3, 2017, www.cmgwealth.com REPRINTED WITH PERMISSION FROM CMG CAPITAL MANAGEMENT GROUP, INC.

THE GLOBAL INVESTMENT PULSE, November, 2017

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Equal-Weighted, continued from page 23

CHART 3

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

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

EQUAL-WEIGHTED S&P 500 RELATIVE VALUATION AND SEASONALITY TABLE 1

November Through April

May Through October

(Annualized Excess Returns)

(Annualized Excess Returns)

Median Stock Cheap Versus S&P 500 (Relative NPE < 1.08)

+11.1%

-1.9%

Median Stock Expensive Versus S&P 500 (Relative NPE > 1.08)

+1.2%

-2.2%

Analysis for period January 1990 to October 2017. As of: November 7, 2017 COPYRIGHT 2017 THE LEUTHOLD GROUP, LLC

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

PULSE 4

THE GLOBAL INVESTMENT PULSE, November, 2017


CAP WEIGHT OR EQUAL WEIGHT? By Doug Ramsey, CFA, CMT, Chief Investment Officer, The Leuthold Group, LLC The Equal-Weighted S&P 500 now trails the S&P 500 by 400 basis points year-to-date, and the rally is increasingly assailed as too narrow. It’s all a matter of perspective, though (See Chart 1 to the upper right). Underperformance of the average stock has certainly hurt active managers this year… but the lag pales in comparison to the late 1990s’ hyper-concentrated market. The median S&P 500 Normalized P/E reached a new cycle high of 26.5x in October (See Chart 2), yet it’s one of the few ratios that we monitor which is still below its 2007 peak. Relative to the cap-weighted S&P 500 P/E, this measure has been in a steady decline since mid-2013—with the October closing value falling below its long-term median of 1.08 (See Chart 3 on page 4). After years above the median, we wouldn’t bet against this measure dropping further in the year ahead. Nonetheless, the decline in relative valuation has certainly improved the relative performance prospects of the “average” S&P 500 stock (and, by extension, of most actively managed portfolios). The S&P 500 Equal-Weighted Index has beaten the S&P 500 by about 4.0% annualized when the relative Normalized P/E ratio has traded below its long-term median of 1.08. It has underperformed the S&P 500 by 50 basis points annually when above that 1.08 threshold.

CHART 1

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

We’ve noted that seasonality has had a surprisingly large impact historically on both Small Caps and equal-weighted market measures. Table 1 on page 4 shows the combination of relative undervaluation and a favorable calendar has produced exceptionally strong relative returns for the Equal-Weighted S&P 500 (+11.1% annualized “alpha”). Time to trim the FAANGs?

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

CHART 2

Source: This article was excerpted from “Cap Weight Or Equal Weight”, by Doug Ramsey, CFA, CMT, Chief Investment Officer, The Leuthold Group, LLC, (Perception Express, November 7, 2017), www.leutholdgroup.com COPYRIGHT 2017 THE LEUTHOLD GROUP, LLC REPRINTED WITH PERMISSION OF THE LEUTHOLD GROUP, LLC

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

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

Equal-Weighted, continued on page 4

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Drawdowns, continued from page 1

Investors become nervous as to how much time they spend in drawdowns. It is an emotional challenge since most investors are concerned they are below the peak value they achieved in their portfolio. If an investor’s portfolio reached $500,000.00 recently up from $100,000.00 fifteen years ago, investors often think of their wealth in terms of their all-time high and not the original $100,000.00. If the portfolio drops to $400,000.00, many investors think they lost $100,000.00 rather than earning a long-term gain of $300,000.00. In short, it’s all investor psychology. When looking at how the asset classes to the right, performed since 1972, it is interesting to note how long they are in an all-time high mode versus a drawdown mode. Source: The returns were excerpted from “Don’t Expect A Minivan To Drive Like A Ferrari”, by Meb Faber, cofounder and Chief Investment Officer of Cambria Investment Management via Stephen B. Blumenthal, Founder and CEO, CMG Capital Management Group, Inc., (On My Radar, November 3, 2017), www.cmgwealth.com

COPYRIGHT 2017 CMG CAPITAL MANAGEMENT GROUP, INC. REPRINTED WITH PERMISSION OF CMG CAPITAL MANAGEMENT GROUP, INC. PULSE

Sell In May, continued from page 1

As of: November 6, 2017 COPYRIGHT 2017 361 CAPITAL, LLC

Source: Stock Almanac via Blane Rollins, CFA, 361 Capital, LLC, Weekly Research Briefing, November 6, 2017, www.361capital.com REPRINTED WITH PERMISSION FROM 361 CAPITAL, LLC

Source: This article was excerpted from “More Earnings? No Problem”, by Blaine Rollins, CFA, 361 Capital, LLC, (Weekly Research Briefing, November 6, 2017), www.361capital.com COPYRIGHT 2017 361 CAPITAL, LLC REPRINTED WITH PERMISSION OF 361 CAPITAL, LLC PULSE 6

THE GLOBAL INVESTMENT PULSE, November, 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, November, 2017

7


A RECESSION DOES NOT APPEAR TO BE ON THE NEAR TERM HORIZON By Louis P. Stanasolovich, CFP®, CCO, CEO and President of Legend Financial Advisors, Inc.® and EmergingWealth Investment Management, Inc.® According to the ISM Manufacturing Index, see Chart 1 below, the U.S. economy presently appears very strong. Currently, the index is at 61 - a rare occurance as can be seen by looking at the chart. Despite the recent increase in U.S. Recession Probability Model, see Chart 2 on the top of page 9, it appears that there is a likelihood of approximately a 10.0% chance of a recession at the present time. This, in comparison to the historical numbers indicated on the chart, appears it is unlikely we will head into a recession in the near term. The Global Recession Probability Model, see Chart 3 on the bottom of page 9, also appears that there is a low probability of recession in the near future. The shaded areas on all three charts indicates a recession occurred. COPYRIGHT 2017 LEGEND FINANCIAL ADVISORS, INC.® REPRINTED WITH PERMISSION OF LEGEND FINANCIAL ADVISORS, INC.®

ISM MANUFACTURING INDEX 1/1/1970 - 10/31/2017

CHART 1

75

A LONG WAY FROM A RECESSION

70

61

Recession Periods

65

ISM Manufacturing Index 60 55 50 45 40 35

As Of: October 31, 2017

12/31/2015

12/31/2013

12/31/2011

12/31/2009

12/31/2007

12/31/2005

12/31/2003

12/31/2001

12/31/1999

12/31/1997

12/31/1995

12/31/1993

12/31/1991

12/31/1989

12/31/1987

12/31/1985

12/31/1981

12/31/1979

12/31/1977

12/31/1975

12/31/1973

12/31/1971

12/31/1969

25

12/31/1983

During the past 30 years the ISM Manufacturing Index has rarely exceeded 60.

30

Source: Bloomberg Investment Services Copyright 2017 Legend Financial Advisors, Inc. ® Reprinted with Permission of Legend Financial Advisors, Inc. ® Recessions, continued on page 9

8

THE GLOBAL INVESTMENT PULSE, November, 2017


Recessions, continued from page 8

U.S. RECESSION PROBABILITY MODEL BASED ON STATE CONDITIONS Monthly Data November 30, 1979 to September 30, 2017

CHART 2

As of: October 27, 2017 COPYRIGHT 2017 CMG CAPITAL MANAGEMENTGROUP, INC.

Source: Ned Davis Research via CMG Capital Management Group, Inc., On My Radar, October 27, 2017, www.cmgwealth.com REPRINTED WITH PERMISSION FROM CMG CAPITAL MANAGEMENT GROUP, INC.

GLOBAL RECESSION PROBABILITY MODEL Monthly Data March 31, 1970 to October 31, 2017

As of: October 27, 2017 COPYRIGHT 2017 CMG CAPITAL MANAGEMENTGROUP, INC.

CHART 3

Source: Ned Davis Research via CMG Capital Management Group, Inc., On My Radar, October 27, 2017, www.cmgwealth.com REPRINTED WITH PERMISSION FROM CMG CAPITAL MANAGEMENT GROUP, INC.

PULSE THE GLOBAL INVESTMENT PULSE, November, 2017

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U.S. Treasury Bonds, continued from page 1

What Is Duration?: Duration is a formula that measures the expected change in the value of a financial asset to future changes in interest rates. For example, long-term U.S. Treasuries with low coupon interest rates have a long duration, therefore; are one of the most volatile types of bonds with interest rates rise. Usually only long-term zero coupon U.S. Treasury are more volatile. Fighting Interest Rate Volatility: One way to combat the problem of long duration bond, other than by buying

shorter-term bonds with very low yields, is by investing in a portfolio of investable securities that invest across a spectrum of fixed and variable debt securities, not just U.S. Treasuries. These types of portfolios will have more sources of risk and return than just U.S. interest rates. For example, High Yield corporate bonds have a lower duration than U.S. Treasuries even when the maturities match because High Yield bonds have a higher coupon interest rate. This is because the factors that lead to higher U.S. Treasury yields, reflecting a stronger economic environment are good for high yield bonds and therefore would lower their yields.

In today’s changing rate environment, investors may want to consider utilizing multi-sector bond portfolios to combat rising interest rates. There are no guarantees that investors will not have losses, but in many circumstances, the loss due to rising interest rates will be less. COPYRIGHT 2017 LEGEND FINANCIAL ADVISORS, INC.® REPRINTED WITH PERMISSION OF LEGEND FINANCIAL ADVISORS, INC.® PULSE

MONTHLY RISK AVERSION INDEX (RAI)

RISK INDEX DECREASES TO NEAR LOWEST LEVEL EVER Note: The Risk Aversion Index combines ten market-based measures including various credit and swap spreads, implied volatility, currency movements, commodity prices and relative returns among various high- and low-risk assets.

4

4

3

3

2

2

1

1

0

0

1980

1982

1984

1986

1988

1990

1992

1994

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

10

THE GLOBAL INVESTMENT PULSE, November, 2017

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

2016

Source: The Leuthold Group, LLC, Perception Express, November 7, 2017, http://leuth.us/bond-market

REPRINTED WITH PERMISSION FROM THE LEUTHOLD GROUP, LLC


FED WATCH INTEREST RATES AS OF NOVEMBER 29, 2017

Fed Funds Rate Range:

1.00% to 1.25%

Fed Discount Rate: 1.75%

2017 UPCOMING FED MEETING SCHEDULE December 12-13 PROBABILITY OF FED FUNDS RATE HIKE DECEMBER-2017

110.0%

95.9%

100.0% 90.0% 80.0% 70.0% 60.0% 50.0% 40.0% 30.0%

As of November 28, 2017

As of: November 28, 2017

11/23/2017

11/16/2017

11/9/2017

11/2/2017

10/26/2017

10/19/2017

10/12/2017

10/5/2017

9/28/2017

9/21/2017

9/14/2017

9/7/2017

8/31/2017

8/24/2017

8/17/2017

8/10/2017

8/3/2017

7/27/2017

7/20/2017

7/13/2017

7/6/2017

6/29/2017

6/22/2017

6/15/2017

6/8/2017

10.0%

6/1/2017

20.0%

Source: Bloomberg Investment Services Source:Inc. Bloomberg Copyright 2017 Legend Financial Advisors, Reprinted with Permission of Legend Financial Advisors, Inc.

THE GLOBAL INVESTMENT PULSE, November, 2017

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Homebuilding, continued from page 1

reacted to the proposed income tax reforms, which in effect has provided an even more attractive entry point into the homebuilding group. Attractive Homebuilders: Third Time’s A Charm?: As indicated in the charts suppled by The Leuthold Group, currently, homebuilding scores “Good” in both Growth and Value categories— a not-too-common, favorable combination. Still decent Value metrics are impressive given the recent run in prices. Chart 1 on the top of page 13 shows the group’s Free Cash Flow Yield (FCFY) rising, holding above the historical median. Earnings-based value factors also have solid scores. Among Growth factors, both Sales and Earnings Per Share (EPS) Growth each rank highly. Technical scores are the most robust among all factor subsets, scoring “Excellent” on both an intermediate and longer-term basis (Chart 2 on the bottom of page 13). Homebuilding Hindrances: Homebuilders have had a tough go of it since the housing bubble burst. Following the group’s first post-bust bounce that coincided with the economic recovery, 2012 (when the housing market finally recovered) marked the only year to log significant homebuilding relative stock gains. Since then, persistently low interest rates, rising home prices, and an increasingly compelling supply/demand picture have not been enough to outweigh trouble lurking on either side of the equation. On the demand side, setbacks have included a historically low homeownership rate due to a sluggish labor market, millennial mentality (they prefer to rent), delayed household formation, and tight lending standards. On the supply side, Homebuilding labor shortages, high building material and regulatory costs, and a lack of lower-priced new homes have played a part. Furthermore, consumers and investors have remained a bit leery of the industry that burned so many in stillrecent memory. Proposed Homeowner Tax Incentive Reform: Reaction Appears Overblown: Many of the aforementioned issues have continually improved in recent years. However, just when homebuilding stocks had appeared to turn a corner, enjoying strong stock returns of late, a new wrench was thrown into the mix. The newlyreleased tax reform bill is proposing cuts to tax incentives including a halved cap

on the mortgage interest deduction up to $500,000 in debt (formerly $1 million), and another cap of $10,000 on the local property tax deduction (formerly unlimited). The mortgage interest deduction change would only be applicable to newly originated loans; existing loans would be grandfathered in. This news sent homebuilding stocks tumbling. However, investor reaction was probably overblown. For one, the released proposals are only a first draft and not yet reality; powerful realtor and homebuilder lobbyists will undoubtedly work tirelessly to upend these proposed changes. They’ve certainly been successful in the past given that the current mortgage interest deduction cap on a $1,000,000.00 loan has been in place since 1986. If these proposed changes do become law, the repercussions should be muted relative to the expectations set by recent sensationalized media reports and “thesky-is-falling” sentiment of opponents. The argument is that these tax code changes will provide disincentive for consumers to buy more expensive (typically higher margin) homes, and this is certainly a valid concern. However, the reality is that the impact would be confined to but a small subset of the population. New homes sell at a premium to existing homes (most recent median price tags are $320,000.00 versus $245,000.00, respectively). Chart 3 on the top of page 14 shows that even among pricier new homes, the most expensive subset (those over $750,000) still accounts for just a small portion (6.0%) of homes sold. Of all houses sold (existing plus new), only about 14.0% currently sell for more than $500,000.00 and far fewer people are seeking to obtain loans that high. According to ATTOM (the nation’s largest property database), just over 5.0% of all mortgage loans originated this year were for more than $500,000.00. Also, let’s not forget that taxpayers can still deduct interest on up to $500,000.00 of their loan (in many cases a majority of interest paid). So in a simplified “worst case” scenario under the new law, a consumer buying a $1.25 million home with a 20.00% down payment would have a $1 million loan (the former cap on mortgage interest deduction). Assuming a 4.0% mortgage rate and a 35.0% tax bracket, they would owe roughly $7,000.00 more per year in taxes. We are skeptical that this amount would sway a purchase decision of this size in most cases. The proposed property tax deduction cap will also impact but a sliver

(likely the same sliver) of the nation. According to ATTOM, only a little over four million people in the U.S. pay property taxes over $10,000.00 per year. Finally, it’s worth noting that in recent years, jumbo mortgage loan interest rates have converged with conforming loan rates; in some cases they are even less, due to competition among lenders, helping to lower the overall cost of a more expensive home purchase. New Avenue Of Growth: A large swath of non-entry-level homeowners who wanted to upgrade to larger homes have already done so, as historically low mortgage rates have persisted now for years. Many homebuilding stocks have thus been banking on a new and different avenue of growth: building lowerpriced homes to feed pent-up demand from millennial/entry-level buyers. Although millennials are not as enthusiastic about homeownership compared to their parents, the sheer size of the cohort is greatly expanding the potential new homeowner pool. Plus, they’re typically buying at an older age, meaning they’re likely able to afford “more house.” Homebuilding’s new lower-priced homes coming to market are reflected in flattening median new home sales prices (Chart 4 on the bottom of page 14), while total new home sales continue to reach new cycle highs. Everyone needs a place to live, and it’s likely even more people will turn to new construction as renting and existing/used homes become less appealing options. Chart 5 on the top of page 15 shows that median rent continues to sky rocket (now north of $900.00/month) while vacancy rates are at historically low levels. This trend is beginning to show up in the data, too, as early this year owner-occupied households began to grow faster than renter-occupied households for the first time since the recession. Buying an existing home has proved challenging as median prices continue to rise and inventory plummets to new lows (Chart 6 on the bottom of page 15). These trends are a boon for homebuilding, especially if they can continue to bring lower-priced homes to market. Pent-up demand from millennials is expected to carry on for years, and increased demand could help offset lower margins that come along with lowerpriced new builds.

Homebuilding, continued on page 13

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THE GLOBAL INVESTMENT PULSE, November, 2017


Homebuilding, continued from page 12

CHART 1 HOMEBUILDING FCFY

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

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

CHART 2 LEUTHOLDâ&#x20AC;&#x2122;S HOMEBUILDING TOTAL RETURN

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

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

Homebuilding, continued on page 14

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Homebuilding, continued from page 13

CHART 3 PERCENT OF NEW HOMES SOLD IN U.S.

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

Source: U.S. Census Bureau via The Leuthold Group, LLC, Perception Express, November 7, 2017, http://leuth.us/equity-strategies REPRINTED WITH PERMISSION FROM THE LEUTHOLD GROUP, LLC

CHART 4

Thousands of Units

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

Source: U.S. Census Bureau via The Leuthold Group, LLC, Perception Express, November 7, 2017, http://leuth.us/equity-strategies REPRINTED WITH PERMISSION FROM THE LEUTHOLD GROUP, LLC

Homebuilding, continued on page 15

14

THE GLOBAL INVESTMENT PULSE, November, 2017


Homebuilding, continued from page 14

CHART 5

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

Source: U.S. Census Bureau via The Leuthold Group, LLC, Perception Express, November 7, 2017, http://leuth.us/equity-strategies REPRINTED WITH PERMISSION FROM THE LEUTHOLD GROUP, LLC

CHART 6

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

Source: NAR, NSA via The Leuthold Group, LLC, Perception Express, November 7, 2017, http://leuth.us/equity-strategies REPRINTED WITH PERMISSION FROM THE LEUTHOLD GROUP, LLC

Homebuilding, continued on page 16

THE GLOBAL INVESTMENT PULSE, November, 2017

15


Homebuilding, continued from page 15

Keeping It “Real” With Financing:

CHART 7

Low interest rates have helped buffer the cost of homeownership as home prices have risen, but rising rates are not necessarily a homebuilding stock concern. For one, perpetually falling rates since the recession didn’t benefit homebuilding’s relative returns. We like to look at the “real” rate which adjusts the nominal 30-year mortgage rate by subtracting housing inflation. Chart 7 to the top right depicts the strong negative relationship between this “real” (after inflation) interest rates and homebuilding relative stock returns. The reading in recent years has been oscillating in its “sweet spot,” where low rates plus rising home prices measure at a negative (but not too negative) level that has historically led to outsized homebuilding stock returns. Rising competition among lenders continues to fuel further loosening of credit standards. Fannie Mae’s Third Quarter 2017 Mortgage Lender Sentiment Survey reached a new high, as the net share of lenders reported easing credit standards across all loan types. Improving loan demand is shown in Chart 8 to the bottom right, and the 13-week moving average of the year-over-year change has also recently turned to the upside.

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

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

CHART 8

Conclusion: Since the homebuilding selloff on November 2nd, homebuilding stocks have already rebounded. In other words, look at the results and adjust the investment strategy accordingly. Source: This article was excerpted from “Homebuilding Stocks Are On A Stellar Run—Can The Streak Continue”, by The Leuthold Research Team, The Leuthold Group, LLC, (Perception Express, November 7, 2017), www.leutholdgroup. com COPYRIGHT 2017 THE LEUTHOLD GROUP, LLC REPRINTED WITH PERMISSION OF THE LEUTHOLD GROUP, LLC As of: November 7, 2017 COPYRIGHT 2017 THE LEUTHOLD GROUP, LLC

Source: Mortgage Bankers Association Weekly Data, SA via The Leuthold Group, LLC, Perception Express, November 7, 2017, http://leuth.us/equity-strategies REPRINTED WITH PERMISSION FROM THE LEUTHOLD GROUP, LLC

PULSE 16

THE GLOBAL INVESTMENT PULSE, November, 2017


2017 YEAR-TO-DATE PERFORMANCE January 1, 2017 to October 31, 2017 (10 months) 2017 Year-To-Date Return Consumer Price Index (Inflation)

2.17%

90-Day Treasury Bills Index-Total Return

0.72%

Bloomberg Intermediate Term Corporate Bond Index

5.48%

Barclays Aggregate Bond Index-Total Return

3.20%

High Yield Corporate Bond Index – Total Return

6.45%

S&P Leveraged Loan Index – Total Return

3.60%

HFRX Global Hedge Fund Index

5.15%

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

16.91%

MSCI EAFE Index (Developed Foreign Equities)

22.36%

MSCI Emerging Market Index (Equities)

32.60%

Newedge CTA Index (Managed Futures)

1.47%

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

-1.52%

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

7.18%

Gold Bullion

10.32%

As of: October 31, 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, November, 2017

17


SECULAR BEAR MARKET WATCH April 1, 2000 to October 31, 2017 (17 years and 7 months) Annual Compound Return

Total Return

Consumer Price Index (Inflation)

2.10%

44.08%

90-Day Treasury Bills Index-Total Return

1.55%

31.08%

Barclays Aggregate Bond Index-Total Return

5.08%

139.35%

High Yield Corporate Bond Index – Total Return

9.05%

359.33%

S&P Leveraged Loan Index – Total Return

4.95%

133.92%

HFRX Global Hedge Fund Index

2.53%

55.22%

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

5.15%

141.82%

MSCI EAFE Index (Developed Foreign Equities)

3.89%

95.67%

MSCI Emerging Market Index (Equities)

7.48%

255.63%

Newedge CTA Index (Managed Futures)

4.64%

122.08%

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

-0.76%

-12.52%

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

10.65%

493.40%

9.01%

356.36%

Gold Bullion As of: October 31, 2017

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

18

THE GLOBAL INVESTMENT PULSE, November, 2017


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 7 months. 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.

JAPAN'S STILL IN A SECULAR BEAR MARKET BUT BOUNCING BACK 1/1/1988 - 11/24/2017

45,000

Nikkei 225 Index (NKY)

40,000

All-Time High 38,915.87

35,000 30,000

Japan's Nikkei Stock Average has jumped to its highest level since 1996.

25,000 20,000 15,000

As10,000 of: October 31, 2017

COPYRIGHT 2017 LEGEND FINANCIAL ADVISORS, INC. ®

As Of: November 24, 2017

1/1/2017

1/1/2016

1/1/2015

1/1/2014

1/1/2013

1/1/2012

1/1/2011

1/1/2010

1/1/2009

1/1/2008

1/1/2007

1/1/2006

1/1/2005

1/1/2004

1/1/2003

1/1/2002

1/1/2000

1/1/1999

1/1/1998

1/1/1997

1/1/1996

1/1/1995

1/1/1994

1/1/1993

1/1/1992

1/1/1991

1/1/1990

1/1/1989

1/1/1988

0

1/1/2001

REPRINTED WITH PERMISSION OF LEGEND FINANCIAL ADVISORS, INC. ®

5,000

Source: Bloomberg Investment Services Copyright 2017 Legend Financial Advisors, Inc. ® Reprinted with Permission of Legend Financial Advisors, Inc. ®

THE GLOBAL INVESTMENT PULSE, November, 2017

19


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. 20

THE GLOBAL INVESTMENT PULSE, November, 2017


THE GLOBAL INVESTMENT PULSE, November, 2017

21

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

Profile for Legend Financial Advisors, Inc.

The Global Investment Pulse, November 2017 Issue  

The Global Investment Pulse, November 2017 Issue

The Global Investment Pulse, November 2017 Issue  

The Global Investment Pulse, November 2017 Issue

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