The Shutdown is Over, So What Now?

With the end of the government shutdown and the lifting of the debt ceiling, it’s time to review how we’ve positioned Pinnacle’s portfolios. First, our stance has been that the political impasse was mostly noise — that’s why we didn’t pull volatility down over the past few weeks. Washington’s politicians waited until the last minute, hoping to force some policy concessions, but had to acknowledge the practical reality that making a deal was better than the alternative.

How to Make Money at Neutral Volatility

Lately I have participated in several discussions about how to make money at “neutral vol,” or when Pinnacle portfolios are positioned to have roughly the same volatility as our benchmark portfolios. A good starting point for the conversation is to analyze the total equity positions we own in the portfolio versus the neutral allocation to equity in our benchmark portfolios. In Investment-Speak, changing the overall portfolio risk posture by underweighting risk assets is called a “beta trade.” We are reducing the portfolio allocation to market risk.

The Problem with Monthly Returns

I recently wrote about three “red flags” that I look for when evaluating portfolio manager returns. The third item – a firm dropping a specific time frame from its performance reports – is particularly relevant, because we’ve decided to make our own change to the time horizon for our performance numbers. Beginning next month, Pinnacle will no longer publish monthly portfolio returns.

Why We’re Changing Our Performance Benchmarks

As a longtime observer of portfolio manager performance, I have noticed a few common warning signs that there might be trouble brewing with a money manager. They are, in no real order of importance:

1. When there is a major change in the management team of a fund

2. When a specific time frame of historical portfolio performance is no longer reported by the firm

3. When a firm changes the benchmark for its performance reporting

The Markets and the ‘Triple Witch’

Today you’ll hear the term ‘triple witching’ a lot in the media — it refers to four Fridays a year when stock index futures, stock index options, and stock options all expire on the same day. The expiration can lead to unusual volatility in markets as traders scramble to offset positions. This could make things quite bumpy, but I think there may be a more important triple witch – one that has provided the catalyst for a deep correction in U.S. markets.

How to Choose a Financial Advisor

We recently received a question at our website from a troubled consumer of financial advice who wondered how he might compare Pinnacle’s wealth management process to that used by his current advisor. That’s an excellent question. After all, there is no Consumer Reports for financial advisors where firms are evaluated by objective and independent experts. The best we can do is recommend a process of evaluation that will give an educated consumer confidence in choosing the right financial advisor.

The Market Sends a Warning

Over the past few weeks our proprietary quantitative model has experienced a significant decline, falling from an almost unequivocally bullish reading of 7.45/10 to a lower neutral reading of 4.33/10. The deterioration in the overall score was caused by a broad-based decline in several important variables including, among others, the relative momentum in early cyclical, late cyclical, and defensive sectors, the steepening of the yield curve, the growth-sensitive Australian dollar to Canadian dollar exchange rate, and implied volatility.