Alpha Power Investing NewsletterJune 18, 2015
The Best Case Scenario
The Federal Reserve's zero interest rate policy has just about reached its zenith. By keeping short-term rates at near zero and below the rate of inflation, the Fed has pushed most investors into riskier investments than they would normally tolerate. As a result, investors seeking income have gravitated to large, blue chip companies which offer a steady and growing dividend.
As long as the bull market continues, this strategy is rewarded. As more and more investors are frustrated by the poor returns of the bond market, they enter the stock market in increasing numbers because the recent past (now going on six years) has been so rewarding for earlier investors. Long bull markets create speculative bubbles as the fear of a market collapse diminishes.
At some point, the Fed will reverse course. This is, of course, impossible to predict in detail, but the long-term outcome is completely predictable. The Fed cannot, on its own, create economic growth and prosperity by manipulating interest rates. The productive elements of society (i.e. businesses) must cooperate by using cheap money to create new efficiencies and new products. In other words, businesses must take on long-term projects that involve risk. By and large, this is not happening. Businesses are flush with borrowed cash and they are using the debt to enhance their share price with buy-backs, spin-offs, and other financial tactics which reward shareholders and speculators, but do nothing for the economy.
When this comes to a halt and sanity returns to the stock market, conservative investors could get the shock of their lives when their blue chip, dividend-paying stocks drop much farther than they ever dreamt was possible.
Alpha's newest strategy tackles this threat head-on. We have entered into a special arrangement with Jay Kaeppel, author of "Seasonal Stock Market Trends" (Wiley, 2009), who has developed and is the portfolio manager of the Alpha Multi-Income Strategy. Unlike our seasonal offerings, this strategy uses a formula developed by Jay, based on market momentum, to determine when the stock market is too risky to continue our exposure. We call this formula the Alpha Market Trend Filter.
A detailed explanation of the Alpha Market Trend Filter is available by clicking the black box at the bottom of the Home page of our website at www.alphaim.net, where it is laid out from top to bottom.
Jay has developed the Alpha Market Trend Filter to be friendly to long-term investors. The system trades very infrequently, so long-term gains are a prominent feature. The last sell signal was February 29, 2008 and the last buy signal was June 30, 2009. As you can see, the sell signal held throughout the worst of the bear market, and the buy signal continues to hold today.
The Alpha Multi-Income Strategy invests in a package of five income-producing Vanguard mutual funds that are directly correlated with the stock market. The five funds are equally weighted (20% each) and are held until the Alpha Market Trend Filter turns negative. When that happens, they are replaced by a conservative government bond index fund.
The five Vanguard funds are:
Vanguard Dividend Growth Fund Investor Class (VDIGX)
Vanguard Equity Income Fund Investor Class (VEIPX)
Vanguard REIT Income Fund Investor Class (VGSIX)
Vanguard High-Yield Corporate Fund Investor Class (VWEHX)
Vanguard Wellesley Income Fund Investor Class (VWINX)
Over the long-term, this package of funds has a correlation of about 90% to the S&P 500. This means, of course, that it does well in a bull market, poorly in a bear market.
The Alpha Multi-Income Strategy went live in February 2015 and is currently available as a separately managed account at Trust Company of America. The chart below shows you the hypothetical computer backtested net returns of the strategy.
For more information about the Alpha Multi-Income Strategy, please download the brochure at the Strategies and Performance section of our website.
P.S. I am pleased to announce that Alpha now manages over 12,000 accounts as a separate account manager and as a sub-advisor to several investment platforms, broker-dealers, and investment advisory firms.
Disclosure: Past performance is not a guarantee of future performance.
© 2015 Alpha Investment Management, Inc.