MPG Core Tactical 60/40: December 2014 Performance Update

MW-BB798_sm6040_20130422180557_MDDear Mr. Market:

We’re already two weeks into the New Year and want to make sure we wrapped up any loose ends with how you finished up 2014.

We finished up last month’s edition of the MPG Core Tactical Portfolio series by saying that oil prices could continue dropping to even under $50 per barrel. We’re not in the business of peering into a crystal ball and prognosticating, however this “prediction” was mentioned simply due to all the noise surrounding oil and its dramatic plunge. A multitude of experts began making statements that oil prices “are very near if not already at a bottom”. Mind you, this was just last month when oil finally dipped under $65 per barrel. The problem with these “experts” predicting bottoms (or anything for that matter)…is that not a single one knew that oil was near a top back in June or that it would fall as fast as it has. As of this writing oil has dipped again and now sits just under $45 per barrel!

What does about a 60% haircut in oil prices mean to the stock market? Simply put, the bulls believe that it is a positive for economic growth and is basically like a huge tax cut for consumers and therefore acts much like fiscal stimulus. The bears will opine that falling oil prices mean that the risks of global deflation are real and that the “kick the can down the road” mentality of a market that has been propped up for over five years is about to come to an ugly end.

Before we tell you where which camp we think is right let’s first wrap up our year-end summary on all of the MPG Core Tactical 60/40 positions:

Here’s the current summary of the MPG Core Tactical 60/40 portfolio mix, which is updated as of this writing (January 2, 2015).

Click here to compare our portfolio against the benchmark

What adjustments did we make?

The following moves were made during the month of December:

12/31/14:     Sold 373 shares of Direxion Indexed Managed Futures Strategy (DXMIX) @ $42.95 (~$16k worth).

12/31/14:     Bought 372 shares of ConocoPhillips (COP) @ $69.50 (~$26k total).

The trades we made just two weeks ago are rather interesting because each has a story that will spook or tempt the average investor. To practice what we preach we actually sold some of our Direxion Indexed Managed Futures Strategy (DXMIX) holding. Most financial advisors had been pounding the table on buying managed futures a few years ago. Once that asset class underperformed relative to the stock market they lost faith in it and cut bait. Isn’t that the opposite of what you’re supposed to do? Over the past 12 months DXMIX is up over +17%, which is about 7% in excess of the stock market. December was a rough month for the S&P 500 (down about -1%) while our selected managed futures fund continues to outperform (up +5.5%). Is that how things are supposed to happen? Not necessarily but this is exactly why you should own things that aren’t always in lock-step or highly correlated with the broad markets.

Conversely, we opened a small position with our first Energy play, buying ConocoPhillips (COP). Since that initial purchase, the stock has been hit some more but perhaps that’s a good thing. Albeit a short evaluation period, if the stock had miraculously gone up against the current downward trend of all oil stocks, we’re at least in at a low price. If it went down, as it has, we own a quality company that yields us 4.24% in dividends. Once it dips lower we’ll likely buy more and round out our position for the long-term.

With our standard and passively managed 60/40 Benchmark we made the monthly and automated adjustment to the allocation. On the first trading day of the month we bought equities and more bonds. Most months we simply rebalance but one thing that allowed us to buy more of each at year-end was extra cash from all the dividends that accumulated:

1/2/15:          Bought 6 shares of IVV @ $207.76 (S&P 500 Index)

1/2/15:          Bought 19 shares of BND @ $82.43 (Vanguard Total Bond Index)

As of this writing the MPG Core Tactical Portfolio returned about +2.73% over one year. The passively managed 60/40 Benchmark came in at about +9.33% for the same period. The S&P 500 bounced around all year but kept trending positive to finish at +10% during that stretch. For anyone who had a well diversified portfolio, they’ll review 2014 and see that they lost to those who were heavy in domestic equities. The International index we track was negative at -7.95%. Emerging markets soared as high as +15% but finished barely positive. This point speaks to something that everyone should know: If you truly have a diversified portfolio there will ALWAYS be something in there that you absolutely cannot stand and wish to get rid of! REIT’s led from start to finish as the leading asset class with about a +29.46% return!

Where are we going from here? 

All eyes are watching the price of oil now but once that story settles and a proverbial “bottom” is put in, we’ll revert back to what the magic of supply and demand dictates. The focus for investors will at that time switch to what the Fed does in 2015.

The bets in place right now are that the Fed will raise rates in 2015. This reminds us of the mindset that if “you say something enough times you begin to believe it”. That being said, do you really believe that the Fed should raise rates? Interest rates are still at historic lows and inflation is certainly coming,…right? If the idea is for the Fed to tame inflation concerns, we believe one should take a closer look at actual economic realities.

The bottom line is that core inflation, which is the best measure of future inflation, will barely get to the 2% target this year. The current global trend of disinflation coupled with falling commodity prices, will handcuff the Fed from raising rates in the near-term.

Another major theme we believe investors need to continue to be reminded of is that just because the calendar has turned a page and we are starting a New Year, it doesn’t mean the market is any different than it was last month. In other words, we see the same trends in place for the near-term that were in play for the back half of 2014. This was a year when those who “bought the dips” were rewarded. We’re still gravely overdue for a market correction and each one that attempted to materialize was extinguished by buyers rushing in.

We have a market environment that is almost perfect for what we would deem as a “good but not great” year. Taking into account low-interest rates, tame inflation, improving corporate and economic growth and healthier employment numbers, we are in an almost perfect environment to see high single digit or low double-digit stock market returns. Expect a correction (as one always should) but have the confidence to retain the appropriate exposure to equities that your portfolio model suggests.

Lastly, let us leave you with two little nuggets of information that may be worth knowing. 2014 also enjoyed a year where the U.S. Dollar Index was north of 10% (strong dollar). Since 1965 the stock market has never been negative following such years and has averaged a robust 15.3%. 2015 also happens to be the third year of President Obama’s second term. There are never any guarantees that history will repeat itself, but the last two years of the Presidential Election Year Cycle tend to be positive. The third year of presidential terms average +15% versus non-third years at 4.4%. Additionally, third years in second terms are even healthier coming in at 18.7%. The odds are decent that we’ll finish positive in 2015 and if you’re curious to know the exact percentage of that happening…it’s officially 82%.

See you next month!

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