Financial Strategy

Importance of Trends

• Markets tend to form recurring "trend patterns" over the course of complete business cycles. Specific market segments within the primary asset class groups (equities, fixed income and commodities) exhibit strong historic tendencies to trend upward when the economy is vibrant and expanding or trend down if the economy is contracting. As we construct client portfolios we assess the current position of the ever-changing economy as it evolves within the business cycle.
• Our fundamental question: Is GDP growing, moving sideways, or contracting today and for the foreseeable future? The answer to this key question will frame corporate earnings growth and the probable trend of rising or lowering interest rates in the bond market. Important risk characteristics are linked to these trend patterns.

Understanding the Cycle within the Phase Prism

• A typical business cycle will span three to five years from beginning to end. A complete business cycle consists of six different stages or phases, all exhibiting different types of economic activity. Dr. Martin Pring describes the phase phenomenon in great detail in his book, The All-Season Investor.
  
  Six Phases:

1. The economy attempts to recover from the negative effects that linger at the end of the previous cycle. In this initial phase the economy struggles to find a sturdy new bottom from which GDP growth can resume.
   
   
2. GDP losses are visible, but in the past and economic growth begins to start anew.
   
   
3. GDP growth flourishes and provides quite favorable environments for stocks, bonds, and commodities. This is the most prolific stage with the lowest level of investor risk in all asset classes. We tend to invest very aggressively during this period when risk is at its lowest point within the overall cycle.
   
   
4. GDP growth and related corporate earnings growth begin to peak and show signs of running out of steam.
   
   
5. Commodities tend to become over-priced as inventory levels overshoot from false expectations that GDP growth will sustain indefinitely.
   
   
6. Recession possibilities emerge as the economy attempts to remove prior excesses, triggering higher unemployment levels and measurable decline in consumer spending. During the final phase of the cycle, investors should seek market neutrality, by minimizing exposure to stocks, bonds, and commodities through some combination of sale or hedging.
   
   
• These phases guide us to invest in market segments that have the highest likelihood of persistent positive trending and out-performance relative to the broad market, thereby minimizing the level of systemic risk.
• We build our investment mix around more favorable trending market segments and adjust weightings as required with the goal of achieving above market returns while incurring below market volatility.