Specific Changes to the Publications - February 1, 2022

All of these changes that affect Diamond publication.

If you use the Sapphire publication, the ones most relevant to you are 3,4,5, and 6.

#1 - New Numbers for the Model Portfolios

The portfolios in Diamond now use a new numbering scheme. All of the Diamond portfolios now have sg (sleeve group) numbers between 200 and 299. This series of numbers - in the 200s - indicate that these portfolios use 2x leveraged stock ETFs, which magnify daily returns by two.

The second two numbers in the portfolio number (e.g., “35” in “sg235”) indicate the maximum allocation to the leveraged stock ETFs. For example, “Diamond|Onyx 35|65 (MAIN) sg235” is a Diamond portfolio and has a maximum of 35% in the 2x DJIA-linked ETF (i.e., DDM).

If you have been using…
  • sg218 as your long-term portfolio, its new number is sg235
  • sg118 as your long-term, its new number is sg250
  • sg131, use sg265, it is the most similar
  • sg147, you can see the weight for DDM on Part III, p1, in the box on the right

The numbers in the decimal place will help me keep things organized when we add tactical sleeves, discussed below. Without a tactical sleeve, the decimal is “.1”.

#2 - All Portfolios Have the Same ETFs

Every portfolio is now a mix of the DJIA-linked and Onyx sleeves. Because of this change all model portfolios have the same ETFs and it will be easier for you to use the target weights of a different model portfolio to adjust the aggressiveness of your account, which is the third change.

#3 - Another Tool to Manage the Aggressiveness of Your Account 

From time to time, I will recommend that you temporarily use the target weights of a portfolio other than the one you have selected to use long term. This will allow us to shift the risk profile without increasing cash levels as much as we have in 2021.

I will give guidance for how many steps to shift away and in which direction from your long-term portfolio. For example, if there is a “-1” in the field marked “Box #3 Portfolio Shift” in the middle of page 1, use the target weights of the model portfolio one step to the left of (i.e., less aggressive than) your long-term portfolio in the chart on page 1. On the other hand, if there is a “1” in that field on page 1, use the target weights of the model portfolio one step to the right of (i.e., more aggressive than) your long-term portfolio.

I will continue to give guidance on the additional level of Box #2 Cash to hold. Going forward, however, we will use this tool for adjusting aggressiveness less frequently. Note that as of this week, we are using BOTH “Additional Box #2 Cash” and a leftward [less aggressive] “Box #3 Portfolio Shift.”

#4 - Box #2 Cash and Box #3 Shift Will Be Guidance for Virtually Everyone

In the past, I have said my suggestion to increase Box #2 Cash is for those with short time horizons (less than, say, 7 years) and/or who are sensitive to losses. I have been aggressive in increasing cash levels for those people.

Going forward, the guidance regarding Box #2 Cash and Box #3 Shift are for everyone except those with very long-time horizons AND who want the simplest trading possible.

#5 – Tactical Sleeves (replacing theme portfolios and add-ins)

In the past, we have used different techniques to add theme-related ETFs. The first was making available an add-in sleeve in April 2020 that included a NASDAQ-linked ETF. The timing of this was good; the NASDAQ ETFs have performed well from then through the end of 2021. We also introduced model portfolios for separate accounts that included a commodity-linked ETF, which was also well timed for the markets over the last roughly two years. Unfortunately, those techniques were cumbersome for users.

Going forward, I will add the most important theme related ETFs directly into the main portfolios. When that happens, I will also update the Shares-to-Trade worksheet. These steps will make it easier for you to take advantage of the themes.

The ETFs most likely to be added are NASDAQ-, commodity-, and gold-linked ETFs. I have added to the weekly publication "sleeve profiles" that show the historical performance of the computer models and algorithms related to holding these ETFs.

The charts illustrate the performance for:
  • The sleeve that actively rotates among the ETFs listed
  • A comparative mix, which is either the
    • The most aggressive ETF held over the entire period, labeled buy-and-hold (B&H)
    • A “neutral mix” of all the ETFs (NM). The comparative mix for Onyx is an equal-weighted mix of all four of its ETFs.
The profiles also show the Macro MRI for these ETFs, which will help you see when we are likely to add or remove these ETFs. These profile pages can be found after the detail pages for the model portfolios.

I am monitoring other ETFs for inclusion as tactical sleeves. These include global stock markets, Bitcoin, and other low-variability stock sectors.

#6 – Easy Access to Shares-to-Trade Current Worksheet

You will find a link to a current Shares-to-Trade worksheet in the middle of page 1 of the weekly publication. This worksheet, like the older worksheet, incorporates the Box #2 cash feature. In addition, it facilitates use of the Box #3 Shift feature. I will update the worksheet when tactical sleeves are added.

#7 - Upcoming Change: Performance of Actual Accounts

With the changes mentioned above, it will be difficult for the current performance system to track performance for these different variables.  I’ll provide more information at a later date. 


Here is an example of what I will do this week in my Diamond account to adapt to these changes.



Weekly Note - January 26, 2022

1. Market Comment 

As mentioned in December, the Macro MRI for the DJIA is just beginning a downleg in its cycle, which takes away a key source of resilience from the stock market. This makes the market less likely to fully recover from bad news or negative economic events. Historically, the downlegs last a few months to a few years. My current projections of the Macro MRI suggest this downleg will last at least a few months. Please see this web page for a discussion of the terminology I use: https://focused15investing.com/language.

However, we are close to the bottom of the Micro cycle, meaning that the Micro MRI may soon begin to provide the market with resilience, which would last several weeks. As of last Friday, the Micro MRI was at the 21st percentile of its levels since 1918 and still in the downleg of its cycle. This suggests that the Micro MRI will reach its lower extreme in a week or so. The Plant/Wait/Harvest designations are heavily influenced by the status of the Micro MRI (https://focused15investing.com/plant-wait-harvest).

When the Micro MRI for the DJIA moves to its upleg, we can expect stock prices to be more resilient and more likely to move higher from where they are now – even if there is little long-term resilience (as indicated by the Macro MRI being in the downleg of its cycle).

This pattern - stock prices moving higher when the long-term trend is down - has different names in the industry, including “dead cat bounce,” “relief rally,” “sucker’s rally,” or “bear market rally.” These terms convey the fleeting nature of the rally. However, I prefer the term “counter-trend rally” because it emphasizes that the short-term rally in stock prices runs counter to the larger downward trend.

In my analyses of counter-trend rallies over the last 100 years for the DJIA, I have found that the rallies have often coincided with both (a) a Macro MRI in the downleg of its cycle and (a) a Micro MRI in its upleg. The burst of resilience in the Micro MRI is often enough to overwhelm the lack of long term (Macro) resilience.

During a counter-trend rally, there is a sigh of relief among investors that the recent declines weren’t worse. But when the short-term cycle ends, that relief gives way to anxiety as prices fall again – often to a level that is lower than where the counter trend rally began.

During the downleg of a Macro cycle that covers several quarters or years, there are likely to be multiple counter-trend rallies. Historically, the Focused 15 Investing approach has done well participating in the upleg of the counter-trend rally and getting out before stock prices fall and follow the long-term trend down.

    Current Situation

At the end of last November, the Federal Reserve announced that it would fight inflation and allow interest rates to increase. This event accelerated a change that was already underway in the markets and detected by the MRI.  I saw that the algorithms were likely to be out of sync with the projected stock market MRI conditions for the December 2021 through early February 2022 period.  I concluded that there may not be enough time for the models to become better synchronized before prices fell. I decided to take steps to reduce the aggressiveness of our accounts by increasing the suggested levels of cash. My caution at that time may prove to have been too conservative if prices rebound sharply from where they are now (1/26/2022) and move higher, but I believe the probability of that happening is low. The Federal Reserve, which in the last has taken steps to calm the markets has indicated that it is less willing to do so. Plus, the Macro MRI is more solidly in the downleg of its cycle.  

With the end of Covid-related stimulus and expectations for higher inflation and interest rates that have not been experienced for decades, the markets will need to recalibrate on many levels. We are in the period of recalibration that I mentioned in early December: https://focused15investing.com/blog/f/after-near-term-recalibration-stock-market-is-likely-to-do-well.

The current plan is to follow the models and algorithms to participate in any counter-trend rallies, but do so with higher levels of Box #2 Cash and/or a shift to Box #3 Target Weight shift. We will be looking for a more definitive bottom in the stock market before shifting to a more aggressive stance.

    Trading the Micro MRI

We are now in a market with low long-term resilience; the Macro MRI for the DJIA is in its downleg. The DJIA can move higher than it is now, but those gains are likely to be temporary. Other major stock indexes are currently in the same condition. The current conditions appear similar to the period from 2000 to 2003. This period was when the Dotcom bubble deflated. The Macro MRI was in the downleg of its cycle during this entire period. Let’s take a closer look at that period.

As shown in chart 1, the DJIA dropped about 34% from January 18, 2000 to the bottom in October 7, 2002 (light blue line in chart below). The NASDAQ (black line) peaked a little later, on March 9, 2000. It lost 80% of its value through October 7, 2002.

Chart 1: DJIA and NASDAQ Performance 11/30/199 through 1/24/2005

Focusing just on the DJIA during the period 2000 to the market bottom in 2002, one can see that the declines of that period did not happen all at once or consistently over this 2+ year period. The long-term decline was punctuated by short-term declines and recoveries. These can be considered counter-trend rallies.

Chart 2 (below) shows the DJIA x2 Loss-Avoiding (blue line) and the Onyx (purple line) sleeves from January 2000 through late 2005 on a log scale. One can see that the DJIA sleeve (blue) generally increased over time through to 2003. Onyx (purple) did as well. The entire chart is shown in Note 1.

Chart 2: 2000 - 2006 - Traded DJIA Loss-Avoiding and Onyx Traded Sleeves 

A sharp decline in the NASDAQ and other growth sectors may be underway now, just as in the 2000-2003 period, but additional dynamics are affecting the markets. It appears that both inflation and interest rates are beginning rising trends. The last time we had high interest rates and inflation was in the 1970s and early 1980s.

Our DJIA loss-avoiding sleeves did well during the period of high inflation and interest rates, as shown in the ellipse in Chart 3 (below), which is on a log scale. The performance of the DJIA Loss-Avoiding sleeve is shown below by the green line from 1966 to last Friday. The performance of the DJIA is shown by the red line. A vertical line is shown at the date 1/7/2000 for reference.

Chart 3: Traded DJIA Loss-Avoiding 1966 though Early 2022

During the period highlighted by the ellipse, the algorithms were responding to changes in both the Macro and Micro MRI. The green line moves higher in a stairstep manner when the approach buys low and sells high on the MRI. The results from the approach are positive – the green line moves higher while the red line moves horizontally.

Viewing the long-term history of the DJIA and our investment approach, the approach does well when the market is not in a strong ascending trend. One can see the strong ascent of the DJIA in the late 1990s – just to the left of the vertical line. The approach had positive returns but these returns were not as strong as simply holding the DJIA (red line).

The Onyx sleeve does not go back to the 1970s (because of data limitations), so we cannot make similar comparisons for Onyx. However, many investment strategists believe the Consumer Staples sector of the S&P 500 (ETF “XLP), which is one of the four ETFs in the Onyx sleeve, is likely to do well during times of inflation. See Note 2, below for a recent reference to this sector.

The current situation may be more complicated than the two periods discussed, but I believe the markets will adapt. The important point to keep in mind is that we need to stay engaged with the stock, bond, and other markets over time. Investing is a very good way to protect and enhance our wealth in times of inflation - even periods of low inflation. The importance of investing in stocks is discussed in my December post: https://focused15investing.com/blog/f/after-near-term-recalibration-stock-market-is-likely-to-do-well.

2. Changes to the Publications

In order to navigate this market landscape more successfully, I will implement a few changes to the publication at the next Plant season. Many of these have already been made in the Sapphire publication.
  1. Theme-related ETFs will be included in the main model portfolios, with the most likely near-term candidate for inclusion being the commodities ETF GSG.
  2. All portfolios will be a mix of a DJIA Loss-Avoiding sleeve and the Onyx sleeve, which will make it easier to temporarily use a more or less aggressive portfolio.
  3. We will have two methods of adjusting account aggressiveness – increasing cash levels and temporarily using a different model portfolio.
  4. Current Shares-to-Trade worksheets (one for the Diamond newsletter and one for the Sapphire newsletter) will be linked to each weekly report for ease of access, and I plan to revise these sheets when a theme ETF is added or removed.
I will describe these changes in more detail when they are implemented.

Please contact me with questions or if you have any concerns about these changes.



1. Traded DJIA Loss-Avoiding and Onyx Traded Sleeves (log scale)

2. “Here's Why You Should Invest in Consumer Staples ETFs” - Investors can consider putting their money in non-cyclical consumer staples amid an economic recession. This largely defensive sector is found to have a low correlation factor with economic cycles. Read in Entrepreneur: https://apple.news/A-f2mDy4MSwmJ40D6KasUqw


Refinements - 2021

Over the last several months, I have spoken with many subscribers about a few topics, including how they use the weekly publication and the recent practice of increasing Box #2 Cash.  This note summarizes the main points of these conversations and how the publications may change in response.  I hope to implement the changes before the next Plant season. Before discussing the refinements, I’d like to say that it is very helpful for me to hear your opinions of the portfolios; thank you.  My main objective is to make disciplined investing work for you.  The model portfolios and weekly publications are a means to that end.

A few main themes from subscribers and my comments:

·         Generally speaking, people are much more comfortable trading ETFs now than they were years ago.  When I first started over seven years ago, people wanted to trade just a few ETFs and were bothered when trades were clustered (meaning, for example, buying shares of UST one week and selling shares of UST the next).  I initially created model portfolios with one to four ETFs, and I intervened in the algorithms when I believed trades would soon be reversed.  Going forward, we will have portfolios with three to five or so ETFs, and I will not intervene to reduce clustered trades.  

·         Some people trade only a few of the ETFs in their selected portfolio.  In order to get the highest return with the lowest risk, one should trade all ETFs in the portfolio.  The only optional ETF is “SHY,” which has a cash-like return right now.  In a year or two, it may have a higher return, so I temporarily label it “optional holding,” and the corresponding amount of cash should be held as cash in your Schwab account. 

·         Some people have switched model portfolios a few times over the course of the last year.  Until the new refinements are fully implemented in a few weeks, the publications are not designed with switching in mind.  Especially in the early years of Focused 15 Investing, there was, by design, a wide range of portfolio structures in a single publication.  Some portfolios were aggressive.  Others were conservative.  Some rotated more aggressively. Others were stable. Some had more ETFs and some had fewer.  When I designed them, I thought it would be best to allow people to select the model portfolio right for them based on how many ETFs they wanted to trade, their risk tolerance, and how actively they wanted to rotate among the sleeves within the model portfolios.  Using the current and earlier portfolio lineups in the publications made switching based on recent performance problematic.  If one tried to improve returns by switching, one might switch TO a portfolio that has just finished its period of strong returns because of its structure.  Such switching is often too late.  To compound the losses, one could be switching FROM a portfolio that will soon begin its period of strong returns resulting because of its structure.  Going forward, all portfolios will have the same general structure and differ only in aggressiveness.  I’ll discuss this more in the future. 

·         People like the practice of increasing cash, which I discuss below.  Even those with long time horizons increased cash in 2021 and liked the practice. 

Box #2 Cash

The discipline of increasing cash is viewed favorably by virtually everyone.  As implemented over the last year or so, I suggested to people with short time horizons to increase the cash in their accounts when the MRI displayed what I consider a flash signal that has historically indicated a high risk of sharp but short declines that were difficult for the algorithms to respond to or navigate using our regular Friday trading schedule. These flashes occurred rarely, and one occurred just before the Covid crash in 2020. 

As luck would have it, in early 2021 there were several such flash signals.  However, NONE were followed by declines. By increasing the cash levels in response to these flash signals, our accounts had lower returns than the model portfolios we were following.  In 2021, the market moved higher consistently and any move out of the market hurt returns.  Very likely, the markets in 2021 were buoyed by various forms of pandemic stimulus, which probably made this practice unsuccessful. 

I discussed with subscribers the fact that increasing Box #2 Cash caused our accounts to underperform the model portfolio, yet most still liked the practice.  At the time of our conversations, they could recall the seemingly precarious nature of the markets at those times, and they liked my intervention. They also liked being able to take a psychological break.  I too have appreciated increasing cash levels during 2021.  I have slept better in 2021 than in 2020. 

Even so, I must be an advocate of getting the disciplines right and getting higher returns.  We need to have a better approach to making our accounts less aggressive in unusual situations. Increasing cash is a very blunt instrument. In most of the portfolios there are ETFs that should perform well during times of stress, such as UST and XLP, and increasing cash takes money away from these ETFs.  In addition, the amount by which to increase cash is subjective, which is a drawback.

Additional Option for Reducing Aggressiveness of Our Accounts

In the last few months, while researching forces that may drive the movement of the MRI, I identified additional signals that I believe will give us greater lead times in preparing for some vulnerable periods. While these signals are not currently strong enough to build into the algorithms themselves, they can be leveraged to implement an additional option for reducing the aggressiveness of our accounts, in addition to the current option of increasing cash levels. Both these options would be for those wishing to reduce risk of market declines (e.g., individuals with time horizons less than, say, 7 years).

Specifically, the new option is that I would instruct subscribers to switch to a model portfolio than the one they have selected for long-term use. This instruction could be gradual in the sense that I could suggest an addition switch later on to further reduce aggressiveness. My instruction would be informed by, among other things, the greater lead times in preparing for vulnerable periods (mentioned above). I expect that instructions to move to a less aggressive portfolio would be given within our regular Friday trading framework in most cases. This option is more methodical than the option of instructing subscribers to increase cash levels, which could occur at any time during the week,

The second option would be to give guidance to increase Box #2 Cash as we have done in 2021.  I would give this guidance in cases that require immediate action. 

We all must recognize that reducing aggressiveness may reduce our returns compared to staying with our selected portfolio.  But the mental health benefits of a switch may be worth that cost.  Again, those with long time horizons should generally avoid reducing the aggressiveness of their portfolios. 

On the surface, switching portfolios goes against the well-justified admonition to avoid switching portfolios that I espoused for many years. But the reality is that we need to manage our psychological health and be mentally ready to invest over the long periods ahead of us.  As investors, our risk tolerance does change over time especially we trade our own accounts.  The last few years have shown us the challenges of managing one’s own account. 

Current Period

Turning back to the projections of vulnerable periods that might not be navigated quickly enough by the algorithms, the present time is a key example of a period of projected vulnerability. While the MRI and computer models indicate that the market is still somewhat resilient, the projections have indicated that this time (early December of 2021) is likely to be the beginning of an especially vulnerable period – one that occurs every few years.  In similar conditions in the past, the algorithms responded but the response was a week or two late because the market had been especially strong just prior to the period.  The time from the projected beginning of the period of unusually high vulnerability to the actual strong stock market declines is from one to roughly seven weeks.  In addition, the higher the stock market valuations, the closer to the projected beginning of the period of vulnerability.  Both of these conditions appear to be present now. 

These conditions cause me to be concerned about stock market losses over the short term, despite believing that past government stimulus and future spending will strongly support economic growth and support stock prices.  Our philosophy is to respond to the changes in resilience/vulnerability and not factors such as government spending. We may find that the stimulus again overwhelms the market’s vulnerability and stock prices may stay level or even move higher. If the Fed follows through on promise to allow interest rates to increase, it will cause investors to be less tolerant of high stock valuations, high real estate prices, and high commodity prices.  Since investors’ lower tolerance for these could be coming during a time of higher natural vulnerability, I believe it is prudent to be less aggressiveness with our accounts. 

Because I could not test, introduce, and answer any questions shifting model portfolios to reduce aggressiveness, I increased cash levels and took other measures to reduce risk during this period.  I believe it will be the last time I use this process to the current extent. 

Switching Model Portfolios to Reduce Aggressiveness

Going forward, I will indicate when we are coming to a vulnerable period that might not be navigated effectively by the algorithms.  Those with short investment horizons, can downshift to a less aggressive model portfolio.  This way, we can stay invested in the portfolios but reduce risk as we approach what I expect to be vulnerable periods.  I will maintain the option of increasing Box #2 Cash for more extreme cases. 

By refining the practice of switching portfolios, we may find other options for using it.  After a major market correction, some may want to temporarily use a more aggressive model portfolio.  I will indicate those times as well.  If you want to reduce aggressiveness for purely personal reasons, the publication and shares-to-trade worksheets will be set up for you to easily use a different model portfolio and stay invested.

I’ll provide more information over coming weeks. 



After Near-Term Recalibration, Stock Market is Likely to Do Well

The markets are likely to go through a process of recalibrating stock and bond prices to accommodate higher inflation, higher interest rates, and a Fed that is less willing to step in with support when the economy or capital markets feel distress. Stock prices may experience downward pressure when faced with higher interest rates but upward pressure with stimulus-induced economic growth. All else equal, downward pressures will result in sharper market declines during a period of unusually low resilience that I expect to begin in December. 

We may find that stimulus-induced strong economic growth more than compensates for the lack of resilience - and we may miss some positive returns if this happens. But our philosophy is to reduce our exposure to stocks when the market is vulnerable. Moving in and out of stocks is cheap and easy to do. We need to be looking ahead to the period after the next Plant season when it is appropriate to be aggressive.

This post discusses the current situation and a possible future condition that will be more economically rational and, I believe, better for the economy, for stocks, and for our portfolios. I believe we need to adjust our thinking to this emerging new reality because parts of it have not been experienced for decades. 

Sharp Minds Expect a Deep Decline in Stock Prices

Jeremy Grantham is a well-respected investor thinks it will be big. Here is a Q and A he had with Reuters in July 2021 (https://www.reuters.com/business/bubbles-bubbles-everywhere-jeremy-grantham-bust-ahead-2021-07-20/):

·  Q: What is your take on equity valuations now?

·  A: Looking at most measures, the market is more expensive than in 2000, which was more expensive than anything that preceded it.

·  My favorite metric is price-to-sales: What you find is that even the cheapest parts of the market are way more expensive than in 2000.

·  Q: What might bring an end to this bubble?

·  A: Markets peak when you are as happy as you can get, and a near-perfect economy is extrapolated into the indefinite future. But around the corner are lurking serious issues like interest rates, inflation, labor and commodity prices. All of those are beginning to look less optimistic than they did just a week or two ago.

·  Q: How long until a bust?

·  A: A bust might take a few more months, and, in fact, I hope it does, because it will give us the opportunity to warn more people. The probabilities are that this will go into the fall: The stimulus, the economic recovery, and vaccinations have all allowed this thing to go on a few months longer than I would have initially guessed.

·  What pricks the bubble could be a virus problem, it could be an inflation problem, or it could be the most important category of all, which is everything else that is unexpected. One of 20 different things that you haven't even thought of will come out of the woodwork, and you had no idea it was even there.

·  Q: What might a bust look like?

·  A: There will be an enormous negative wealth effect, broader than it has ever been, compared to any other previous bubble breaking. It's the first time we have bubbled in so many different areas – interest rates, stocks, housing, non-energy commodities. On the way up, it gave us all a positive wealth effect, and on the way down it will retract, painfully.


I have met Jeremy a few times for one-on-one conversations and have a great deal of respect for him.  He has a strong interest in valuations and has often been early in prior calls for markets to decline.  

I believe it will be a shift in resilience that starts the bubbles to pop. Based on the MRI research, the timing of that period of low resilience is likely upon us now. My theory of what pops the bubble is different than his, and I will discuss it in a future post.

Inflation Is Now Increasing

Inflation has been in the news recently. This month’s inflation reading is expected to indicate that prices have moved up over 6% since last year, the highest rate since 1991.  (https://finance.yahoo.com/news/consumer-price-index-what-to-know-this-week-190934215.html)

I believe there will be higher inflation and that a good case can be made that there should be higher inflation for an extended period, and Powell would probably agree with me on this.

Powell as an Inflation Fighter

Many articles on Powell’s recent reappointment focused on the need to battle inflation, as indicated by headline: “Biden Picks Jerome Powell to Lead the Fed for a Second Term as the US Battles Covid and Inflation.”


I believe that the Fed’s efforts to fight excessive inflation are important. They should strive to keep inflation from getting out control as it did in the 1970s. But I also believe the ultimate goal of the Fed and the policy makers around the world will not be extremely low inflation, such as the low levels of the 2008 to 2018 period - but instead a moderate level of inflation. A level of 2 to 4 percent might be more realistic for a protracted period.   

Global Economies Have Recently Confronted Something Worse than Inflation: Deflation

After the global financial crisis in 2008/9, inflation declined so much that the major concern among central banks around the world was not inflation but deflation – where prices decline over time. While this sounds good, it tends to harm economic growth. When consumers get a sense that prices will be lower in the future, they put off purchase to wait for better prices. When they do that, production declines and economic growth slows. Here is an article about deflation and I have included (below) the key passage (https://www.thebalance.com/what-is-deflation-definition-causes-and-why-it-s-bad-3306169):

·  Deflation slows economic growth. As prices fall, people put off purchases. They hope they can get a better deal later. You've probably experienced this yourself when thinking about getting a new cell phone, iPad, or TV. You might wait until next year to get this year's model for less.

·  This puts pressure on manufacturers to constantly lower prices and develop new products. That's good for consumers like you. But constant cost-cutting means lower wages and less investment spending.

For much of the 10-plus years after the global financial crisis, central banks sought to induce inflation and the US Federal Reserve set an inflation target of 2%, annually, which it struggled to achieve. Here is a quote from one of many articles on the topic from 2015 (https://www.cnbc.com/2015/10/13/the-us-is-closer-to-deflation-than-you-think.html.):

·  Nonvoting member James Bullard, who heads the St. Louis Fed, is among those pushing for a rate increase, as he believes policy has helped make “cumulative progress toward committee goals,” as he said in a speech Tuesday.

·  Fed Gov. Lael Brainard, who does have a vote on the FOMC, countered that deflationary pressures argue against an increase.

·  Our economy has made good progress toward full employment, but sluggish wage growth suggests there is some room to go, and inflation has remained persistently below our target,” Brainard said in a speech Monday. “With equilibrium real interest rates likely to remain low for some time and policy options that are more limited if conditions deteriorate than if they accelerate, risk management considerations counsel a stance of waiting to see if the risks to the outlook diminish.

How Inflation Might Be Used to Address Our High Levels of Debt

Inflation is likely to be higher over the coming years not only because of Covid stimulus,  infrastructure, and climate spending, but also because higher inflation addresses a more fundamental problem the US and other countries have. The article below requires a subscription, but I have included key sections below (https://www.bloomberg.com/opinion/articles/2021-11-16/greenspan-s-bond-yield-conundrum-has-returned-to-haunt-markets):

The writer, John Authers, does a good job of laying out a few key points:

  • This chart is from Deutsche Bank’s indefatigable financial historian Jim Reid and goes back to 1800. It compares debt/GDP ratio with real yields defined as the prevailing 10-year rate subtracting the five-year rolling average of inflation:

[Note from JHansen: The above chart focuses on just the US. I have added three big blue arrows to indicate the three earlier periods of low real yields (dark blue line labelled “SmoothRY”) and high Debt-to-GDP ratios (light blue line), plus, in yellow, the current period. The key thing to note is the high debt-to-GDP levels under the four arrows. Generally speaking, high levels are bad.]

·  On this view, real yields have been as low as this three times before in the last 200 years: during the U.S. Civil War, the Great Depression, and finally in the aftermath of the Second World War. In all cases, for obvious reasons, debt spiked. That has happened again [yellow arrow, JHansen], although not for reasons as horrific as a war or a depression.

·  The low real yields associated with the Second World War came during a period of explicit “financial repression” when the government held them [real bond yields] low to make it easier to pay off the debts incurred to finance the conflict, and the Fed had to surrender its independence for a matter of years. The Reid hypothesis is that with another epic debt pile to pay off, another episode of financial repression lies in our future. He also suggests that a combination of inflation (to reduce the value of the debt) and repressed yields (to make it cheaper to service) mean that real yields will stay negative for the rest of his career, and that this unenticing option is superior to the alternatives:

·  Financial repression has always won out. The previous debt spikes occurred around the Civil War, WWI and WWII. This latest climb had been steadier (but substantial) until Covid, which may explain why real yields have steadily but consistently declined. However, the economic response to Covid has been more akin to a war time response, with debt and spot real yields both spiking in opposite directions just like that seen around and after the wars discussed above.

·  [W]ithout financial repression, real yields would likely be consistently positive at the moment given the weight of global debt. But given this global debt pile, that would strongly increase the probability of financial crises across the world. So the risk to my “rest of my career” view is that something happens in the years ahead that prevents the authorities using financial repression. If this occurs then the global financial crisis may look like a dress rehearsal for a much bigger event. So the incentives for the authorities are there.

·  Beyond that, a world of financial repression would continue to be a world of TINA, where we are left grudgingly to buy stocks because There Is No Alternative [TINA = There is no alternative. Low yields mean that bonds deliver lower returns to investors. - JHansen]. It’s not appealing, and arguably it’s not really capitalism, but it might be the best way forward. It’s also a worryingly good explanation for the continued low long yields.

Low “real yields” means that the yield on bonds is low compared to the inflation rate, and “long yields” are yields on long term bonds.

"Financial repression" is known to those at the Fed.  Here is quote from a Fed paper on the topic (https://www.richmondfed.org/publications/research/econ_focus/2021/q1/economic_history):

A Tool of Debt Liquidation: In many countries during 1945-1980, financial repression effectively lowered the real returns to government debt holders and helped governments reduce their debt-to-GDP ratios, according to research by Reinhart and M. Belen Sbrancia of the IMF. Based on their calculations, real returns on government debt were negative in many countries over 1945-1980. The real returns to bond holders averaged -0.3 percent in the United States, and real returns were even lower on the bonds of those European governments that had been particularly ardent practitioners of financial repression, coming in at -6.6 percent in France and -4.6 percent in Italy. ... Ever since McKinnon and Shaw, financial repression has been associated with inflation...

Given this discussion, we might expect 1) bond yields and interest rates to increase enough to introduce greater sensitivity to stock valuations over the short term and improve only slightly the long-term return to some bond sectors, 2) interest rates  still low enough to encourage economic growth despite there being elevated inflation. 3) some upward pressure on stock prices because stocks have pricing power and can pass on any their higher costs to their customers, If this does turn out to be the case, investing in stocks will be most beneficial because of TINA – there is no alternative.

One Final Opinion: Expect to “Muddle Through” as Opposed to Expecting a “Crisis to be a Cleanser”

When I started in the investment business years ago, I thought of the economic and stock market cycles as periodic waves of getting rid of the old, inefficient aspects of the economy and allowing new ones to grow. While this rhythm does indeed take place, the periodic purges and sprouting new ways have never been as big as I thought they should have been. It is true that when the housing crisis started in 2007, it seemed that financial leverage and novel ways of packaging investments had become excesses before the crash of 2008, and these excesses were addressed.

When the dot-com bubble inflated in the late 1990s, there was much talk about the extreme valuations of companies with little or no revenue, and the subsequent bust of the bubble addressed those excesses. After the run-away inflation of the 1970s, it was clear that inflation had to be addresses, and Paul Volker increased interest rates and inflation was tamed by the early 1980s.

To be sure, these were major adjustments, but it surprised me at those times just how much of the economy continued and absorbed these changes. It surprised me how much stayed the same.

I think I had in mind the experience of the Great Depression when the stock market dropped about 80-plus percent, the economy in the 1930 was indeed a shambles, and it took years (and probably WWII) to get back on its feet. After that collapse, the economy and the country were completely different in many ways. I think I was expecting change of similar magnitude. But now, I realize that this expectation was unrealistic.

The economic collapse after the 1929 stock market crash was different. At the time the Fed and the government responded with a tough-love approach. There were government and business leaders who expected and maybe even welcomed a cleansing crisis that would abolish the excesses and provide fertile soil for new economic growth. This is a quote from a very interesting Federal Reserve history piece (https://www.federalreservehistory.org/essays/great-depression):

·  A few governors subscribed to an extreme version of the real-bills doctrine labeled “liquidationist.” This doctrine indicated that during financial panics, central banks should stand aside so that troubled financial institutions would fail. This pruning of weak institutions would accelerate the evolution of a healthier economic system. Herbert Hoover’s secretary of treasury, Andrew Mellon, who served on the Federal Reserve Board, advocated this approach.

However, as the article indicates, this view is now considered by the Fed to be a mistake. Instead, during a crisis the Fed should be very benevolent so the economy does not collapse and gets back to growth quickly – economic growth addresses many problems. One need only look at the response to the Covid crisis to see that this mindset still prevails at the Fed and in our broader government, which have been excruciatingly benevolent. But the Fed has concluded, rightly I believe, that addressing the subsequent excesses resulting from benevolence when the economy is stronger is much better than not being benevolent during a crisis.

This means that we will muddle through each crisis and muddle through the effects of the remedies used to prevent economic collapse during each crisis. At present, this means addressing inflation while promoting economic growth and allowing the debt level to shrink in proportion to the growing economy.

I expect the Fed to allow the economy to run “hot,” which means that it will encourage economic growth and allow a moderate level of inflation to take place. Stocks will be likely be the main investment that produces a strong return in these future conditions. Thus, after an initial period of recalibration and potential decline, I expect stocks and to be influenced by the natural cycles of resilience.  

I always pay attention to what Jeremy Grantham says. He may be right about a big decline that results in lower stock valuations.  But even during the collapse of the internet bubble in the early 2000s, the natural cycles of resilience still allowed the MRI-based process to generate good returns. The same was true in the 1970s with its high inflation and the 1980s when inflation was fought. The same was true before and after the stock market peak in 1929.  I expect our portfolios to do well in the environment described above and in other environments that are used to muddle through. The natural cycles persist.  

Again, the implication for us is to get out of the stock market when it is vulnerable and to be ready to participate later in the growing economy, to earn high returns in our portfolios, and to keep well ahead of inflation when markets are resilient.



Weekly Note - August 4, 2021 - Valuation of the DJIA - Part Two

Last week’s post discussed the current valuation of the DJIA compared to valuations over the last 20+ years (https://marketresilience.blogspot.com/2021/07/weekly-note-july-28-2021-perspective-on.html).

This week’s post discusses alternative interpretation [or interpretations] of today’s high PE valuation. It also points out how our focus on resilience cycles reduces the importance of which view of valuations proves to be most accurate.

Recap of Last Week’s Post

I mentioned last week that valuation ratios have declined since March of 2021, and this might give some investors hope for higher stock prices. The graph below shows the PE ratio for the DJIA in yellow (calculated by Bloomberg using recent 12 months earnings). Price is shown by the black line on a log scale. In general, we want to buy assets – in this case earnings – when price is low and sell when high. Note that the PE ratio has declined since the beginning of April 2021. As the DJIA PE ratio descends from its high level, prices can move higher, all else equal, to approach a PE valuation level that the market has already tolerated.

We are in a period of low interest rates and there is a reasonable expectation for high corporate earnings growth because of massive economic stimulus. These factors allow PE ratio levels to be higher than they otherwise would be. At the moment, investors globally are voting with their dollars and saying that current PE ratios are not a concern and stock prices can continue to move higher as corporate earnings increase. This is an optimistic case for stock prices.

An Alternative View of the Same Chart

A contrary view is that the market – reflecting the collective wisdom of investors globally – believes that earnings will not continue to grow in the future at the same high rate that they have in the recent past – that we are now seeing peak earnings. Therefore, stocks do not justify as high a PE Ratio even though interest rates are still at an extremely low level. Prices may decline as earnings fail to grow as expected and move the PE ratio to a more normal level compared to the last 20+ years. This is a pessimistic case for stock prices.

Thus, multiple conclusions can be drawn from a given PE valuation level or trend in levels. In the context of the Focused 15 Investing approach, we focus on the tug of war between optimistic and pessimistic investor perspectives through the Market Resilience Indexes. When optimism prevails, the MRI tend to be in the uplegs of their cycles, and we tend to be buying stocks. When pessimism prevails, the MRI tend to be in the downlegs of their cycles and we move out of stocks.

A Regular Pattern of Cycles

The cycles between collective optimism and pessimism are regular. The cycles, especially the shortest cycle we discuss, the Micro MRI, are regular like the tides. When the tide comes in it will lift all boats. When it goes out, all boats will drop. With tides, we know pretty accurately when the next tide will be and how high or low it will be. A severe storm can flood coastal areas and push tides higher or lower, but the tidal forces occur at regular intervals. Humans observed these patterns long before they knew what caused the tides.

The Micro and Macro MRI are both in the uplegs of their cycles as of when the Micro switched to its upleg at the end of July. The Macro has been in the upleg of its cycle since early December 2020. At the moment, tidal forces are lifting all boats. Thus, the optimistic view of stock valuations is currently prevailing.

Based on historical norms, the optimistic view should last into September. I project upleg of the short-term cycle (Micro MRI) to end in September. At that time, a more pessimistic view will likely prevail and perhaps high valuations will be the focus of that pessimism. I review what the MRI are saying about the tug-of-war between the optimists and the pessimists, approaching storms, and if the upleg of the Micro MRI cycle might occur earlier or later than expected. At this time, September appears to the next period of reduced resilience (and heightened vulnerability) for stock prices.

Bull Market Climb a Wall of Worry

Our current situation reminds me of a common investment industry adage, “a bull market climbs a wall of worry.” This means that during a bull market, the path to higher stock prices is a slow climb up and is never free from worry about company growth, stock valuations, the US dollar, trade wars, Washington, etc. If one were to wait until the market is worry-free, one would miss an entire bull market. This may describe the current environment. 

Some in the industry add on, “A bear market jumps out the window.” This means that once a bear market begins, the market moves down quickly and without regard for the specifics of the situation. Historical data validate this; bull markets tend to last much longer than bear markets.

Others in the industry add on, “Valuation tells you what floor the bear is on when it jumps.” A high stock valuation means the bear is on a high floor and has farther to fall. My concern is that we are currently on a high floor. If the bear jumps soon, the declines could be large.

I will add, “the cycles of resilience tell you when the bull and bear will start and end their journeys.” Timing is everything. At the moment, we do not have the conditions typical of when the bears jump.

This is way of saying that while I am concerned about high valuations, perhaps my concerns are simply part of the wall of worry. The best way to know where the market is going near term is to track the tug-of-war using the MRI. At the moment, it appears that the optimists will prevail into September.

The broader market dynamics suggest that the next decline will not be a sharp decline for stocks like March 2020, 2008, or 1987. Instead, they suggest a long decline like the that occurred from the beginning of 2000 to the end of 2002. This coincided with the deflating of the Dotcom bubble of the late 1990s, which also was a period of high valuations.

Disciplines are Important

An expected part of managing money – either for institutions, other individuals, oneself – is that one must contend with all the usual fear and greed, plus climbing bulls and jumping bears, and tides and storms. Making investment decisions is challenging at most times. But if one has a disciplined investment approach based on measurable and meaningful dynamics in the markets, one can do well longer term. I believe we have this in the MRI-based investment approach. Through the challenges, adhering to process and discipline will help us deliver attractive returns.

We don’t buy low and sell high on prices or valuations measures. Valuation measures are driven by stock prices, which are greatly influenced by the news of the day. Valuation ratios are also difficult interpret. We take what I believe is a more reliable path; we buy low and sell high on the naturally occurring cycles of resilience tracked by the MRI.



Weekly Note - July 28, 2021 - Perspective on DJIA Valuation - Part One

With the stock market at all-time high price levels, it is a good time to review a common valuation measure to get perspective on the recent past and how the DJIA may move higher from this level. This note covers the average Price-to-Earnings (PE) ratio of the DJIA currently and compared to the 20+ years since the Dotcom boom of the late 1990s.

While still at historically high levels, the PE ratio of the DJIA has declined recently as company earnings have increased. This shift has made the stock market less expensive by this measure and may support the higher market resilience that the MRI are implying for the upcoming several weeks.

All else equal, one wants to buy assets at low prices and sell them at high prices. Consistent with this idea, one wants to buy stocks when the PE ratio is low and sell when it is high. A low PE ratio means that stocks are relatively inexpensive and you are paying less for the company’s earnings, all else equal. A high PE ratio means that stocks are expensive and you are paying more for the company’s earnings.

The diagram below shows the price level of the DJIA (black, on the right log scale) and the PE ratio (yellow, on the left scale, which is calculated by Bloomberg) for the period 8/29/2012 to 7/28/2021. One can see at the far right of the chart that the PE ratio has actually moved down recently as the price of the DJIA has moved higher. The current PE level is 22.19, which is lower than its peak of 26.9 at the end of March 2021 (red arrow). By this measure, the DJIA is getting less expensive and more attractive to buy because corporate earnings are growing more quickly compared to the price of the DJIA.

The recent peak of the PE ratio was very high compared to the last 20+ years. The last time the market had a PE valuation as high as it was in March 2021 was back in the late 1990s, on 8/20/1999. That date is shown in the figure below (yellow arrow) and was at the height of the Dotcom boom, just before the Dotcom bust of the early 2000s. Since the end of 1999, all PE readings for the DJIA have been lower – even through the peak of the DJIA just before the Global Financial Crisis of 2007 to 2009. The figure below shows the PE ratios and DJIA prices beginning in 1997.

Thus, compared to the PE ratio levels since 1999, the March 2021 reading was high. The recent reading of 22.19 is also high compared to the time period shown (Bloomberg does not have comparable PE ratios for earlier periods). That said, the decline of PE ratios since March (due to earnings growth) may help convince investors that current or even higher prices can be sustained.

Other factors influence PE ratios, including expected earnings growth and interest rates. We are experiencing very low interest rates now and there is also a high level of economic stimulus, both of which may accelerate the growth of corporate earnings. These factors are justifying higher valuation ratios for many investors. Although not shown in the figures, investment professionals tracked by Bloomberg expect high earnings growth to continue for companies in the DJIA, potentially leading to even cheaper valuation levels and or higher prices.

The PE ratio and other valuation measures do not directly affect our investment models or algorithms. Instead, investors globally consider PE, many other valuation measures, and expectations for future growth and interest rates in their decisions to buy or sell stocks. The price movements resulting from their decisions in turn affects our resilience measures. An expectation of an increase in interest rates or deceleration of corporate earnings growth would cause investors to be less tolerant of high valuations. Many investors globally are keenly focused on these issues and should they shift to a more pessimistic stance, we should see a shift in the market resilience measures. Based on historical norms for the cycles of resilience, I expect the market to be resilient for several weeks. A period of lower resilience is more likely to occur in the fall (late September).  



Weekly Note - June 30, 2021 - Increasing Box #2 Cash

This post covers:
  • Why we increased Box #2 Cash this week
  • Why increasing cash was done outside of our regular Friday trading schedule
  • Why I selected 70%
  • The magnitude of the potential decline
  • Factors that might affect the magnitude of decline
  • How this event affects a longer-term market outlook

Why we increased Box #2 Cash this week…

I gave guidance this week to increase Box #2 Cash because of a shift in one of the Market Resilience Indexes for the DJIA. The event that caused this change is that the Exceptional Macro MRI ended and ceased to provide resilience last week. This and other market conditions fit the criteria I established for signaling that we should increase the amount of cash in our accounts outside the regular Friday trading schedule.

The Exceptional Macro provides resilience infrequently. Over most periods it is absent. It is designed to appear at the beginning of a strong market rally, which typically occurs just after a major market decline. The appearance of the Exceptional Macro MRI indicates that the Macro MRI is likely to shift to a more positive trend. In many cases, this marks the beginning of a strong and long-lasting period of high returns that last roughly a year for the DJIA. Our algorithms are designed to shift money into the stock market when the Exceptional Macro begins.

After about a year, however, the Exceptional Macro ends and the market often makes an abrupt but brief decline. It is this dip that we hope to avoid at this time.

Why done outside of regular Friday trading schedule…

The end of the Exceptional Macro has been a very good signal for near-term price declines over the last 100 years, but its key drawback is that we must respond to it quickly. Historically, if we wait to trade the following Friday, the losses are not avoided in many cases. Thus, we need to trade early in the week – earlier than Friday - to benefit from this signal.

The historical simulations that I show do not reflect acting on this signal. The performance of the algorithms is strong without responding to this signal. But for those with short time horizons (say, less than 7 years) responding to these circumstances can reduce losses and increase returns.

Another point that favors responding to the signal is that small declines can increase investor anxiety. Anxious investors tend to sell and selling pressure can lead to further declines. Thus, avoiding smaller losses can help us avoid potentially larger losses.

Why I selected 70%...

I suggested increasing Box #2 Cash by an additional 70 percentage points. The 70% is a large move and I decided to make a large move out of the stock market early and move gradually back in the market on our Friday trading schedule, as appropriate.

An alternative to this approach would be to reduce our allocation to stocks more gradually, say, increasing Box #2 Cash by 20% each week. This approach is suited to when there is ambiguity about the signal and the declines are not abrupt, neither of which is not the case in this situation. The signal is clear and the declines associated with these conditions are typically abrupt - taking place over a few weeks. After the decline, the stock market is likely to resume an upward trend, all else equal.

We could start moving back into the market on our regular Friday schedule as early as next week.

The magnitude of the potential decline…

The end of the Exceptional Macro MRI alone could precipitate a decline of about 15%. I mention below other factors that might lead to deeper and shallower declines.

From a purely resilience perspective, the situation as it stands today is not commonly associated with the biggest stock market declines (those down more than 20%). The stock market decline of 2011 is the most recent good example of how quickly the declines can occur.

In 2011, there was a decline of about 15% from July 1 through early August. The recovery began at the end of September. The time of year is similar to today but I see the situations as different and do not look to 2011 as an exact model for how the current situation will play out.

The key point of 2011 is that the decline was sharp – most of the decline took place in about a month – and was big enough to try to avoid. Based on dozens of similar situations over 100 years, my expectation is that the decline, if it occurs, will be abrupt.

Factors that may affect the magnitude of decline…

A factor that may result in a deep decline is currently high stock valuations in the context of rising interest rates. High current stock prices compared to corporate earnings and the book value of company assets may be justified by historically low interest rates. Yet, interest rates are likely to experience more upward pressure over the next few weeks (based on the MRI readings for the US 10-year Treasury bond index). As interest rates rise, the high valuations of stocks may be less justified.

Factors that may result in a shallow decline are, first, ample government stimulus underway contributing to strong post-pandemic economic growth. Since April of 2020 the stock markets have been supported by the expectation of stimulus and high post-pandemic growth. Strong economic growth could more than compensate for higher interest rates, which are likely to remain low by historical norms.

Second, the Micro MRI, indicating the shortest cycle of resilience I typically discuss, is toward the lower end of its normal cycle. As of last week, it was at the 24th percentile of levels since 1918. While it is still in the downleg of its cycle, it may move to the upleg of its cycle in a few weeks.

How this event affects a longer-term market outlook...

Over the last 100 years, the stock market often continues an upward trend after experiencing the abrupt decline associated with this signal. It a few cases, the market has begun a more negative trend. Both paths are reliably managed by the algorithms. Thus, by itself, this event has little bearing on a long-term outlook for the market.


Weekly Note - March 17, 2021

All major stock markets around the world have strong Macro resilience, indicating that their longer-term price trends are positive.  I expect 2021 to be a year of good stock returns.  The following comments focus on where the different sleeves are in their Micro MRI cycles.  Recall that the Micro MRI indicates the short bursts of resilience lasting 5 to 15 weeks. For a reminder of how I describe the MRI conditions: https://focused15investing.com/language.

The different model portfolios have different positions in their Micro MRI cycles based on their dominant sleeves.  The positions are:

I provide more detailed notes about each below, but a key point is that while the Onyx mix portfolios have not performed as well as the DJIA-focused portfolios so far this year, the Onyx sleeve will soon get its burst of resilience and make up some of this deficit. In 2020, the reverse was true - the Onyx mixes did better than the DJIA-focused portfolios.  While one could switch to a DJIA-focused portfolio at this time (because it is a Plant season for these portfolios), I expect the Onyx mixes to move higher in the next few weeks.  I do not believe the Onyx mixes are broken – they are simply pausing after a strong 2020. 

Detailed Notes (Optional Reading)
  1. The DJIA-focused model portfolio’s such as Diamond 70-30 (MAIN) (sg131) and Sapphire (MAIN) 70-30 (sg188): These portfolios are primarily invested in DJIA-linked ETFs. The DJIA is mid-level and moving higher in its Micro MRI cycle. It is at the 46th percentile. I expect the Micro MRI for the DJIA to be providing resilience well into May. Since it is at the mid-level of its cycle, this week will be its last in the current “Plant” season.
  2. Portfolios incorporating the Onyx sleeve of four low volatility ETFs: This sleeve had a very good year in 2020, but has not produced strong returns this year through last Friday. Thus, the Onyx mix model portfolios look weak compared to the DJIA-focused portfolios. But the Onyx sleeve is just now at the lower end of its Micro MRI cycle. It is at the 12th percentile and started moving higher this last week. From this perspective, the Onyx sleeve should start to have better performance. If you are using one of the Onyx mixes (e.g. sg218, sg118) and are happy with the long-term performance profile of the portfolio, it is appropriate to stay with it. It is likely to produce higher returns over the next few weeks.
  3. 2020 Recovery (sg20.2). This add-in sleeve is at the 36th percentile of its Micro cycle. From this perspective, it is likely to produce good returns over the next several weeks, most likely into May. I will wait until this sleeve is higher in its Micro cycle to update it for 2021 (tentatively called “2021 Themes”).
  4. Emerald (sg30.2). This add-in sleeve is at the 13th percentile and moving lower. Given its low position, I expect it to turn and start moving higher over the next few weeks. The current target weights of this sleeve are defensive and we have avoided some of the recent losses. But I believe the target weights will be more aggressive over the coming weeks and that the returns will be higher.