ENR Asset Management, Inc.

05/31/2022

The U.S. Dollar is the Next Shoe to Drop as Growth Slows

Investors with the fortitude of owning commodities over the past 12 months have realized huge gains as inflation explodes higher. Plus, years of under-investment continue to drive prices sharply higher. More gains lie ahead because the U.S. dollar is the next shoe to drop in the bear market engulfing most risk-based assets since January. In yet another great year for the dollar, only the Russian ruble is up versus the USD this year.

Historically, the U.S. dollar and commodities are negatively correlated; the anomaly of this year's mega commodity bull market is occurring at the same time the dollar hits a 20-tyear high. As the dollar finally declines or plummets, investors in commodities will earn the next wave of big gains coupled with enormous profits in non-U.S. dollar denominated investments. The biggest gains for commodities previously occurred in the 1970s and the early 2000s -- when the dollar tanked.

The long period of U.S. asset outperformance is over. It ended (measured in dollar terms) in January after a multi-year massive bull market engineered by the Federal Reserve and cheap money. Foreign stocks have hugely trailed New York since 2009; in USD terms, investors have made almost no money over the past 14 years in international stocks. Emerging markets have fared even worse.

Now the pendulum is shifting to commodities, other real assets and international equities. It will also spread to foreign currencies once the dollar crumbles and to select emerging markets that benefit from rising raw materials. These countries, along with their respective currencies and companies, remain dirt cheap in dollar terms.

The U.S. Dollar has been on a tear over the past decade and approaching the end of its post-2011 secular bull market. This is the longest bull market for the USD since President Nixon ended convertibility to gold in 1971. The duration of previous dollar bull markets since 1971 has averaged about 5.5 years: This rally is really in the late innings.

A strong dollar is not good for sovereign borrowers, namely the emerging markets, foreign companies, and bad for most U.S. exporters. In my view, the dollar's uber strength -- now at a 20-year high -- will eventually result in a repeat of the 1985 Plaza Accord, which was engineered by the G-7 to weaken the dollar.

It is time to position now for the next U.S. Dollar bear market. Take action now and position accordingly.

03/08/2022

'Brainless' Indexing Under Pressure in New Multi-Polar World in 2022

• Whatever the outcome of the Ukrainian-Russian war, investors need to embrace a new macro environment driven by hostile geopolitics, higher structural inflation and increasingly, a challenge to the American-led post-WW II military and financial order;

• The global balance of power has already shifted from primarily a U.S. led order to multi-polar, whereby China, Russia, Turkey, and Iran are challenging U.S. military supremacy at a time of increasing American withdrawal from geopolitics. This process began under the Obama administration and continues today. As this new paradigm progresses, the dollar will eventually succumb to a bear market, not unlike of the early 1970s when Nixon severed the dollar-gold link, triggering runaway inflation;

Learn more about what we do and protect your assets. Since 1992, we have helped U.S. investors diversify assets safely with much less risk compared to benchmarks, including 2022. Indexing is low cost, but comes with great risk to your wealth. Hedging your risk is more important now that ever.

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12/06/2021

How to Position your Portfolio for Tougher Markets in 2022 and Beyond

Higher taxes, more regulation and Fed tapering pose challenges in 2022. Betting against the stock market has mostly been a one-way ticket to the poorhouse over the past 100 years. Over time, stocks always rise. Bear markets, wars, crises, pandemics (see S&P 500 Index chart below). The market survives, and eventually, thrives. Warren Buffett, CEO of Berkshire Hathaway, and arguably the world’s most successful investor since the Rothschild’s dynasty, declares ‘betting against America is a bad idea.’

Equities represent a piece of prosperity; when you own stock, you are wagering that strong management, corporate earnings and cash-flow will drive share prices higher over the long-term. In the United States, the S&P 500 Index is the highest quality index in the world, unmatched by the most profitable multinationals – unrivaled in several industries. Except for the 1930s period, investors have not suffered a losing decade in American stocks until the 2000s. The best-performing decades for the broader market have been the 1990s and the last ten years from 2011 to 2021. The last decade or since the financial crisis lows of March 2009, have been especially remarkable. The United States has enjoyed unprecedented dominance measured against most international bourses; this long period of outperformance has also been coupled by the biggest U.S. dollar bull market since President Nixon took the dollar off the gold standard in August 1971.

Very few markets come close to matching the S&P 500 Index in dollar terms over thew past decade. The S&P 500 Index has gained 16.2% per annum since 2011 – a tremendous run driven mainly by the incredible gains derived from fast-growing technology companies that dominate the benchmark. Information technology represents a whopping 28% of the broader market with trillion-dollar behemoths in the Top Five, including Microsoft Corp., Apple, Inc., Alphabet-Google, Amazon.com and Tesla Inc.; these Top Five alone represent 23% of the S&P 500 Index.

Non-U.S. markets, however, tell a different story over the past ten years. The MSCI EAFE Index (Europe, Australia, and the Far East), which dominated global performance from the 1970s until the 2000s, has gained a paltry 4.7% per annum since 2011. That is a huge 71% performance differential compared to the S&P 500 Index. Worse, the once fast-growing emerging markets led by stalwarts like China, India and Brazil have grown only 2.5% per year since 2011 based on the MSCI Emerging Markets Index; that uninspiring return is a massive 85% performance differential compared to the United States. Basically, global diversification has not paid-off for investors since the 2008 financial crisis. In fact, moving funds overseas has penalized dollar-based portfolios when also including the soaring dollar vis-à-vis foreign currencies.

That is a brief performance history of the United States compared to the world. The bad news is that investors have come to expect big stock market gains in most years because we all tend to invest using a rear-view mirror. The past is not always a guarantee for future returns.

Combined with the seemingly endless liquidity supplied by the Federal Reserve (Fed), record corporate stock buybacks, competitive tax rates and record stock market inflows through ETFs and mutual funds this year, the market has been a bastion of wealth creation for the last decade, and beyond. And rightly so. But the big question to ask is what comes next? Consider the following facts and how they might impact your future returns. Indeed, even the most ardent bull would have to concede that speculative activity is at the point of irrational exuberance:

• Shiller CAPE P/E Ratio: Second most expensive on record at 38.4x for S&P 500 Index
• Fiscal and Monetary Policy Tightening: Best of ‘easy money’ now behind us
• Margin debt: All-time highs at record $936 billion as of October 2021
• Inflows into stocks in 2021 exceed combined inflows over past 19 years (see chart next page)
• ‘Bubbles’ in crypto, meme stocks, NFTs, fine art, residential real estate
• Credit spreads at all-time lows: Junk bonds, leveraged loans, CLOs all trade at highs
• Inflation at 30-year highs at 6.2% year-over-year
• Insider selling at all-time highs as corporate executives sell $69 billion of stock in November
• Stock buybacks at record highs
• Private equity deal-making at all-time highs
• Despite record growth across all segments of capital markets and a strong GDP recovery since Covid-19 lows, ten-year U.S. Treasury rates stuck around 1.5% and well below 2%


Build a Ballast in Your Portfolio

In November, global equity markets tumbled on news of the Omicron Covid variant. Initial data suggests it is highly transmissible and potentially vaccine resistant, which has already led to many countries imposing travel restrictions. Meanwhile, Federal Reserve Chair Jerome Powell has hinted at an accelerated tapering as inflation is rising rapidly. The double whammy has sent the VIX soaring. As we shortly approach the of the year, it is time to prepare your portfolio for harder times. The good news is many of these liquid alternatives to hedge your stock market risk remain cheap.

Before recommending hedges to help cushion your stocks from losses, let’s review portfolio construction. The first task is to reduce portfolio volatility. Below is a roadmap for you to get started. Review your stock holdings and classify each position under a risk category: Growth stocks include technology companies like Apple, Inc. and Microsoft, and others like Tesla, Nvidia, Home Depot, Visa, and PayPal Holdings, for example. Value equities include companies like JP Morgan Chase, Citigroup, Berkshire Hathaway, Pfizer, United Health, and Comcast, for example. On the far right of our spectrum are Defensive companies like Procter & Gamble Corp., Johnson & Johnson, Nestlé, Verizon Communications, Coca-Cola Co., and McDonald’s.

Growth Value Defensive
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A diversified portfolio should therefore have a balance between these three investment categories. It is called building a ‘ballast’ or achieving an equilibrium while attempting to dilute volatility. This way, you will maximize market cycles across major styles and take advantage of prevailing trends. For example, growth stocks have blasted ahead of value equities since 2009 and now fetch the highest premium versus the latter since 2016 (see chart, top next page). Value equities, I believe, should eventually outpace growth stocks in the next market cycle or economic slowdown. This is what occurred in the 2000 to 2002 bear market. Value stocks heavily trailed growth companies for almost a decade until the bull market peak of March 2000. Now is a good time to build fresh positions in value-based securities after years of poor relative returns compared to expensive growth stocks.

International equities, trailing Wall Street since 2009, also deserve a place in a diversified portfolio of growth, value, and defensive equities. The chart below depicts the extreme premium commanded by U.S. equities over international stocks since 1950; if the periods including the Nifty Fifty (late 1960s to early 1970s) and the Internet ‘bubble’ (late 1990s) are coined extreme, today’s premium is extraordinary! U.S. stocks have never recorded such a huge performance premium over international stocks since World War II. I suspect this massive performance gap will narrow at some point, probably in conjunction with a U.S. dollar bear market.


How Hedging Helps

As global financial markets crashed in March 2020, triggered by the first pandemic in 100 years, the median ENR Global Contrarian Portfolio – our flagship investment strategy -- declined about 3% compared to a 13.5% plunge for the MSCI World Index, a 12.5% loss for the S&P 500 Index and a bruising loss of 17% for the MSCI World Value Index. We still lost money in March 2020, but much less compared to benchmarks. Hedging, or applying portfolio insurance across several securities providing a negative correlation to stocks, proved invaluable, cutting our losses, and dramatically reducing volatility. The median portfolio declined approximately 78% less than the MSCI World Index and 83% less than the MSCI World Value Index in March of last year.

Buy Tail Risk Protection Now

Instead of dumping your stocks in a brutal bear market, and triggering expensive realized capital gains, what about reducing your portfolio risk now and avoiding an emotional outcome that usually triggers investment mistakes (not to mention a tax bill). What’s more, you should buy several securities that will help to hedge or cushion your stock market losses. Over the last 30 years, I have witnessed real carnage amid bear markets. I am amazed how most investment advisors (IAs) do not try to protect client assets ahead of a big market plunge. For most IAs, losing 20% in a calendar year when the broader market is down 25%, is a favorable outcome. Wrong! That is the wrong way to manage risk, protect your client assets, and build long-term relationships. Yet, the industry is not sufficiently educated around portfolio protection or how to stem portfolio losses. It is all about buy, buy and buy!

In February 2020 – a few weeks ahead of the Covid-19 March stock market crash – I started purchasing tail risk for my clients. The ETF we purchased is the Cambria Tail Risk ETF (see chart below). Tail risk protection means buying ‘downside’ stock market insurance ahead of a crash or dislocation. I trade these instruments regularly, and as market risk increases, I build new positions to shield my clients’ stock holdings. These products include tail risk ETFs like Cambria Tail Risk, long-term Treasury bonds, foreign ‘safe-haven’ currencies, gold, and other securities with a negative correlation to the S&P 500 Index. I believe an investor today should hold several tail risk securities to help protect them from a bad market outcome amid the most speculative and most expensive market since the late 1990s. I will not drive a car without insurance. Will not own a home without coverage. And will not travel without health insurance. I feel the same way about portfolio insurance. It is not cheap to buy insurance, but it brings ‘peace of mind’ to a portfolio of stocks, especially when a bull market advance has resulted in sizeable unrealized capital gains for clients.
The Cambria Tail Risk ETF (AMEX-TAIL) is a relatively new product that provides stock market investors with potential downside protection. TAIL, managing $338 million in assets, is an actively managed fund that attempts to earn money when U.S. equities fall. From its low in the first quarter just before the Covid-19 crash, TAIL rallied 30% before peaking. This is an ETF that does what it is supposed to do in a market crash – rise in value. Ideally, we want to buy TAIL now when sentiment is too bullish, and markets are extremely frothy. Alternately, we want to sell at the point of ‘maximum pessimism’ or when markets get ‘bombed out.’ The hardest part of this trade is when to sell. We are looking to exit this position when stocks get hammered day after day, and sentiment turns bearish. That is when to sell most of your portfolio protection.

How it works: TAIL invests in a combination of U.S. Treasuries and in put options on U.S. indices. The options are out-of-the-money put options with strike prices between 0%-30% below the current price but usually falling in the 5%-15% range. The expiration of these options is between 1 and 16 months. The puts, however, are not held to expiration in order to avoid the accelerated time decay that occurs in the last stages of the life of an option.
The fund generally tries to hold about 90% in U.S. Treasuries and 1% in put options, but given that it is actively managed, Cambria Investment Management may consider it opportune to increase or decrease the allocations.

11/05/2021

SEC Looks to Tighten Rules on Leveraged and Inverse ETFs

The United States Securities and Exchange Commission (SEC) looks to tighten rules for leveraged exchange-traded-funds and products. Leveraged ETFs and similar index-linked products employ derivatives to multiply the one-day performance of a benchmark; but these bets compound when investors hold them for more than a single trading day, exacerbating losses. Global assets invested in leveraged and inverse ETFs stood at $112 billion on August 31, according to The Financial Times.

I agree that most of these leveraged products are too dangerous for investors. However, there is a suitability factor for these important products in some managed accounts where professionals use them to hedge portfolio risk, or downside volatility. We occasionally use such products as short-term trading instruments and believe they are one of the few instruments available to potentially protect a stock portfolio from the financial consequences of a market dislocation or a crash. Only professional advisors should use these products on behalf of their clients. Without these securities, investors are left relying on bonds, gold and Bitcoin -- all of them vulnerable to a market liquidation along with equities. Only a truly negatively correlated index or an inverse ETF can help to offset market losses.

10/26/2021

Basic intro to MMT. But does nothing to explain the real dangers if inflation takes off as a result of wild debt monetization.

Given worsening inequality, financial crises, and lack of public confidence in traditional economic thought, modern monetary policy is likely not a passing trend, writes Stephen Dover.

01/08/2021

Outlook 2021: Overvalued Market Supported by Massive Fiscal Spending and Fed $120 Billion/mo. Backstop

My outlook for 2021 is positive for stocks, bearish on bonds and bullish on precious metals and commodities. I also like most foreign currencies as the U.S. dollar enters the den of a bear market for the first time since 2001. COVID-19 vaccines are a big game-changer, and the Fed is committed to cheering on the economic recovery. Combined with a high household savings rate, a housing boom, resilient global PMIs (Purchasing Managers Index) and an end to the pandemic, all point to a potentially strong year for risk assets. I would keep portfolio hedges to a minimal, mostly in gold.

Massive Federal Reserve support through regular asset purchases, zero interest rates and a $900 billion stimulus package (second largest in American history), lend strong support to an economic recovery later this year. Plus, an infrastructure bill is coming later this year. Markets love stimulus. I would not short this market.

As a final word of caution, investors should raise cash levels ahead of a severe short-term correction. Sentiment indicators, speculation vis-a-vis record NYSE margin debt and a bombed-out dollar all portend to a violent shakeout soon. Be prepared.

12/24/2020

Will the Fed Buy Stocks Next?

With the Federal Reserve engaged in regular asset purchases of bond ETFs in the United States since last spring, including junk bond ETFs, one has to wonder if common stocks are next on Mr. Powell's shopping list. His predecessor, Janet Yellen, suggested the central bank should buy equities amid the Covid market meltdown last March, according to The Wall Street Journal.

The Bank of Japan already owns approximately 25% of the Nikkei Index, mostly vis-a-vis ETFs since 2014. That's a major chunk of Japanese public companies now owned by the government. The ECB is mulling buying stocks, too, because they're already at the limits of their regular bond purchases; the ECB owns swaths of sovereign EU debt, including corporate paper. Most of the current 76% of global sovereign debt outstanding trades in the euro-zone (others include Denmark, Sweden, Switzerland and Japan).

Central banks since 2008 have gone way beyond saving the financial system. They've bastardized bond markets, encouraging all sorts of speculation while backstopping zombie companies by owning high-yield debt ETFs and government paper in some countries that have no business being in the euro-zone (Italy, Greece).

We've grown accustomed to 'buying on the dips' because we know the Fed will step in with unlimited firepower to buy risk assets in a crash. The next market dislocation might see the Fed buying stakes in American publicly-traded companies in order to deflect a recession or depression. Capitalism is going in the wrong direction since 2008; risk-takers really don't take risk because they surmise the Feds will always safeguard the public markets. I'm not sure what to call it, but it isn't market capitalism.

12/21/2020

Bitcoin isn't a Reliable Store of Wealth but it's a Great Speculation

An asset that crashes 80% one year (2018) and then skyrockets 185% two years (2020) later, isn't a reliable store of wealth. You need a pack of Tums to own Bitcoin -- it's incredibly volatile.

Though I recognize and appreciate how digital currency is changing how we transfer funds while reducing SWIFT fees, I still don't think most professionals in finance can fully explain what IS Bitcoin. Myself included. I'm also going to argue Bitcoin is in a Bubble. One Bitcoin today at $23,248 is worth more than a Honda Civic, 510 barrels of oil and a down-payment on a house in most affordable residential markets. That's a bubble.

Another challenge facing Bitcoin is eventual government regulation. It's only a matter of time until Bitcoin is regulated or banned. Bitcoin has a finite supply; it's also possible we'll see more Bitcoin hit the market, aggravating prices.

Supply and demand anomalies, volatility tied to Bitcoin and the boom and bust cycles suggest a speculative vehicle that should not represent a significant holding in portfolios, unlike gold -- a monetary hedge and reliable store of value for 5,000 years. Yeah, gold might be boring compared to Bitcoin, but it'll still be here tomorrow. Bitcoin? I'm not so sure.