Our Response to Recent Market Events


It is hard to believe that in three trading days, the market has penned its first 10% correction in over 900 trading days. This decline may be an unfortunate reminder of the last bear market, and if you are feeling anxious about your portfolio, don’t worry—you have lots of company. In fact, the market has set a new record for the speed and breadth of market volatility.

Not only has the market dropped, but we have also witnessed several areas of the evidence we follow move into bearish territory. Given this recent downgrade, we now believe the probabilities are high that we are transitioning from a bull market to a bear market cycle.

In the remainder of this post, I’ll summarize our response to the recent market events in each of our three Pinnacle strategies.

Dynamic Prime Strategy

Our indicators now show that the possibility of a steeper decline is rising, and we are taking steps to adjust your portfolio asset allocation to reduce risk. These adjustments, coupled with the fact that your portfolio is well diversified, should help reduce portfolio volatility if a bear market actually materializes.

Over the next few days, you will be seeing trade confirmations as we change the risk/reward character of your portfolio to reflect this new investment environment. It is worth noting that for the past six years, investors who have acted to defend against market declines have not been rewarded as the market has continued to climb higher. That may once again be the case. However, our investment process provides us with a systematic and disciplined approach to dealing with market volatility, and we feel that protecting your capital is a higher priority than it was a week ago.

Dynamic Market Strategy

The satellite of the Dynamic Market strategies, comprising 30% of the portfolios, currently remains on a defensive posture, where it has been all year due to valuation concerns. Barring a sudden and large enough decline in stock prices to alleviate those concerns, the satellite will most likely continue to avoid stocks entirely and remain on a defensive posture in the near future.

Dynamic Quant Strategy

The allocation of the quantitative satellite, comprising 37.5% of the Dynamic Quant Strategy, has remained invested in stocks so far in the third quarter. The sector allocation has seen very little change, with only one trade going off between Consumer Staples (downgraded from mild overweight to neutral) and Telecom (upgraded from neutral to mild overweight).

However, the recent turbulence experienced by the stock market has caused some deterioration in the technical component of the strategy, which has been moving closer to issuing a potential “sell” signal for stocks in the upcoming days. In the event of such signal, the entire satellite of the strategy will immediately move to a defensive posture by selling out of stocks entirely.

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We will do our best to keep you updated as events unfold, but we ask for your patience given that markets are moving at the speed of light right now. Should you have any questions or concerns, please contact your Wealth Manager.

Six Questions to Ask Before Buying That Vacation Home


With a humid mid-Atlantic summer in full swing, many Marylanders are entertaining the idea of purchasing a vacation home. That might be wise — it can be a great place to rejuvenate and spend time with family and friends.

However, a vacation property also comes with its own set of challenges and those considering a purchase should be aware of them. With that in mind, here are six important questions to ask before making the move.

1. Will the vacation home be mortgaged?

If you’re not going to purchase the home outright, you’re probably thinking about a mortgage. If that’s the case, you should know that there are generally more stringent requirements for a second mortgage, and you may need to put more money down than you would if you were getting a first mortgage.

2. Do you have enough money to put down to avoid private mortgage insurance?

If your down payment on a new home is less than 20% of the cost, you will have to pay for private mortgage insurance (PMI). Insurance fees run between 0.3% to close to 1.5%, depending on your down payment and credit score.

3. Have you seriously considered the upkeep costs?

Like your primary residence, a vacation home requires upkeep. A good rule of thumb for general maintenance costs is 1% of the purchase price per year.

Of course, you must also factor in utilities. Even though the home would only be occupied for a portion of the year, some utility expenses (water/gas/electric) can be comparable, whether the home is being lived in or not (this depends on location). For example, a home needs air circulation throughout the year to prevent mold, and pipes must be kept minimally warm in the winter to avoid freezing.

When it comes to cable/satellite/Internet costs, you can always opt for seasonal billing (if it’s available). With that, you have a wider selection of channels in those months when you’re in residence and a much reduced (and less expensive) lineup when you’re not. This is worth investigating, since you don’t want to pay for services you’re not going to be there to enjoy.

4. How much will extra insurance cost?

Since you’re insuring a second home, you may need an additional policy to cover it. If your new home is in a coastal area, you might also need flood insurance (if it’s available in that area).

5. Have you priced out a security system or service?

Because vacation homes are empty for much of the year, they can be popular targets for thieves. If you store any valuables there — computers, televisions, expensive kitchen items, recreational equipment, etc. — it might make sense to invest in a security system or service. That could give you peace of mind during the off season.

6. What will you be paying in new taxes (property and otherwise)?

Your vacation home may very likely be in a different state, with a different tax code. Have you checked to see how tax friendly that new state is? What will you be paying in property taxes (if anything)? And do you intend to rent your home out in the off-season? If so, you may have to report and pay taxes on it.

A vacation home can be a great purchase for a family, but make sure you’ve considered all the costs and ramifications first. Talk to your financial adviser about financing options and how much you can afford for a down payment without negatively affecting your financial future.


This article originally appeared in the July 2015 issue of BizMonthly.

Photo Copyright: dolgachov / 123RF Stock Photo

Will Greece Trip Up the Bull?


The headlines out of Greece are coming fast – deal, no deal, default, referendum, etc. It’s enough to make investors’ heads spin trying to keep up with the news flow. Markets have been volatile this week in reaction to the back and forth, and the rising possibility that Greece may leave the Eurozone. Investors are starting to fear that this could potentially be another “Lehman moment” that results in financial contagion across global markets.

However, regardless of the results of Sunday’s referendum, it’s our belief that the global economy and financial markets are much better prepared to handle a possible “Grexit” compared to a few years ago, for several reasons:

  1. Greece’s economy is relatively small, representing just 1.5% of European GDP, and a mere 0.33% of global GDP. Meanwhile, Europe’s economy is in much better shape now as opposed to the double-dip recession they experienced in 2012. Not only is the economy expanding again, but it’s actually accelerating through the first part of this year.
  2. There’s much less exposure now to Greece’s debt and banking system by the private sector following the previous debt restructuring in 2012. Therefore, any additional losses should be much smaller and more easily absorbed.
  3. Perhaps most importantly, there are meaningful backstops in place that didn’t exist in 2011-12, in particular the European Central Bank’s current quantitative easing program involving the purchase of over 1 trillion euros of European bonds, which could easily be expanded if needed.

So while Sunday’s vote has the potential to create a second round of fireworks this weekend, we don’t think developments in Greece are likely to knock the current bull market off track. There’s certainly the potential for further market gyrations in the coming days and weeks, but once a resolution occurs, financial markets should be able to refocus their attention on a solid global growth backdrop supported by plenty of liquidity still being provided by central banks.

No Pain, No Gain – Taking the Long View on the Dollar and Commodities


“Long ago, Ben Graham taught me that price is what you pay; value is what you get. Whether we are talking about socks or stocks, I like buying quality merchandise when it is marked down” – Warren Buffett

We pointed out in our recent quarterly commentary that a major countertrend movement was brewing in both the dollar and commodity patch. In other words, the primary trends for the dollar (up) and commodities (down) might have hit a point where their respective gains and losses were overdone in the short-term, but we have a firm conviction that the strong dollar and weak commodity thesis should continue to dominate the backdrop in the long-term.

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Pondering Halftime Adjustments


At the beginning of the year, we wrote about an aging bull market that we thought could be ridden, but with the caveat that one wouldn’t want to take too much risk given the magnitude of the move, current valuation levels in the U.S., and an overall evidence profile that was clearly mixed with pockets of both strength and weakness. When weighing the evidence, our dashboards offered no reason to reach for additional risk this late in the cycle, but instead we tried to focus on some big picture themes that could help us find attractive opportunities to position for.

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Make or Break Time for Transportation Stocks

Airplane cargo

We’ve been looking at transportation stocks as an intra-industrial sector investment, due to a variety of factors: our forecast for a secular bear market in crude oil, sustainable airline profits, and high domestic exposure as compared to multi-national industrials hurt by a strong dollar. Nevertheless, transportation stocks have had a rough start to the year. As a market technician, I look to charts to tell us when we’re wrong.

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Treat Your Finances Like the NFL Draft

Football stadium tunnel

It’s the middle of April, and the 2015 NFL draft is quickly approaching.

This means aspiring professional football players have made their way to the NFL scouting combine, where talent evaluators have scrutinized their speed, strength, and agility. General managers and coaches are looking at both their existing rosters and the young players hoping to fulfill a lifelong dream by being drafted into the NFL.

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How Are The Year’s Investment Themes Playing Out?


At the beginning of the year, we identified several themes that might drive investment markets in 2015. Forecasting is a hazardous process, but it’s part of the job for tactical managers who have the freedom to move portfolios according to changes in macro and market conditions.

I recently reviewed our themes for the year (written up in detail in our latest quarterly), and made a few notes regarding how those themes are playing out.

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Man Versus Machine in Investing


Over the last couple of months, we have been preparing to expand our product offering by launching two new sets of strategies, called the Market series and the Quant series. They are offered as alternatives to our traditional strategies, now referred to as the Prime series, for a chance to help our current and future clients achieve their financial goals. While the Market series and the Quant series are different under many aspects, they share one important feature: under both strategies, a portion of the client’s portfolio is managed according to a rules-based, quantitative model developed in house at Pinnacle. Diversification has always been a core tenet of Pinnacle’s investment process and the way we manage risk. However, with this move, Pinnacle has now further expanded the diversification it offers to clients to a new dimension of risk: decision risk. While the Pinnacle traditional (now Prime) strategies rely primarily on the time-proven judgment, experience, and intuition of the members of the Investment Team, the new strategies are based on a rules- based decision-making process that is more objective and unemotional. In Pinnacle jargon, we say the Prime strategies are subject to manager risk, while the new strategies are subject to model risk. Modern Portfolio Theory tells us that by combining different sources of uncorrelated risks, we can move our portfolio farther out in the efficient frontier and achieve a better expected return-to-risk ratio.

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