MPG Core Tactical 60/40: June 2015 Performance Update


Dear Mr. Market:

Like clockwork you set us up for another stretch of pretending that you wanted to inch up higher and then sold off the last week of the month. How you behaved in May is similar to what you did in June except this time your volatile temper began to show more of a resolve and rattled investors. You began the month with some semi-positive economic news along with dovish Fed commentary all to have it dampened by the Greek debt fiasco.

The S&P 500 lost -2.17% for the month of June. The poor performance turned in by our domestic markets pales in comparison to what has transpired in China. If you’re waiting for another proverbial “bubble” to burst…perhaps it’s here. In about three weeks Chinese stocks sold off sharply losing -30%. We’ll talk more about this later in this article but for those “experts” claiming that this is a good time to buy Chinese stocks, consider the reality that they are still quite expensive. If you think our markets are frothy after a six-year bull market run and a current P/E ratio of 20.5, the median P/E ratio for Chinese companies is still at 55 (down from 108!).

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

Click here to compare our portfolio against the benchmark.

What adjustments did we make?

6/9/15:            Sold 91 shares of TSLA (Tesla Motors) @ $255.78 ~$23k

If our ownership of Tesla stock was like a relationship, one could easily point out that we are in love but not truly committed. Eventually we’ll write a detailed article on this company but for now please don’t assume we’re day trading the stock. As much as we’ve been enamored with its potential we want to avoid any company that starts becoming a daily staple with calls to Jim Cramer or gets highlighted on Fast Money. We’ve traded in and out of Tesla twice now (each time for a profit) but once this fine and innovative company gets labeled a “mo-mo” or momentum stock…we force ourselves to take a break from owning it.

With our standard and passively managed 60/40 Benchmark we made the monthly and automated adjustment to the allocation. For the first time since we began the MPG Core Tactical 60/40 portfolio we had to buy both asset classes due to the amount of dividends the portfolio received as well as the sideways nature of the market in June. On the first trading day of the new month we bought equities and bought bonds:

7/1/15:            Bought 24 shares of IVV (S&P 500 Index) @ $212.58 ~$5k

7/1/15:            Bought 71 shares of BND (Vanguard Total Bond Index) @ $82.34 ~$6k

Where are we going from here?

Throughout this series of articles we have continuously warned that the markets will eventually come to a halt. This recurring theme of ours is with no pun intended …Earlier this week the New York Stock Exchange halted trading for a solid three plus hours. Without intending to rain on anyone’s parade the facts remain that this market is overdue for a beating. When, where, and how it will come to pass is what makes this a fascinating debate. The smartest people on the planet have absolutely no clue so always keep that in mind as you select your news sources.

All that said, the broad markets have weathered all these worries on Greece quite well. Without downplaying that story our greater concern is on what we are NOT prepared for. The Fed story line is obvious; rates will eventually increase (although we still doubt it will be even this year). The “kick the can down the road” story in Greece is also unnerving but obvious and for the most part Mr. Market is digesting things as well as can be expected. What will throw a wet blanket on this party, however, is something like a cyber attack or some other form of a black swan terrorist action.

In the near-term, the story that we will watch closely is actually China. Again, perhaps it’s no surprise that a slow-down was overdue; the real issue could be a financial contagion. Commodities are also feeling China’s pain and in our opinion may present a very tempting value proposition along with a hedge in the event both stocks and bonds get hit at the same time. Valuations always correct themselves but with the sheer size of the Chinese markets, one must be prepared for increased volatility and a spillover effect into Europe and other Emerging Markets. Even with these threats we remain over-weighted towards those two asset classes over domestic equities. We’ll be cautious but continue to nibble on any dips. Equities in general present risk but, like them or not, they unfortunately have much more appeal and potential upside over the next few quarters than do bonds or cash. Stay the course for now but also stay nimble…

See you next month!

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