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It was 1957. My Mom settled down with my brothers, sister, and me and began to read. It was a book by one of my favorites, Dr. Seuss.  Unless you have spent the time since then living in a van down by the river, you’ve either read the book (or had it read to you), seen the TV cartoon account (1966) or Jim Carrey in Ron Howard’s motion picture version (2000) of How the Grinch Stole ChristmasEven the song has been a hit!

In the story, the Grinch, an evil villain, lives on a mountain top high above the village of Whoville.   The tiny Whos that inhabit the town are a happy lot, and that greatly disturbs the crusty old Grinch.  Together with his faithful but confused dog, Max, Mr. Grinch sets out on Christmas Eve to steal Christmas from the Whos below.

As I watched the stock and commodity markets fall last week, I could not help but think of Mr. Grinch. December is the time of the Santa Claus rally in stocks.  Christmas time is almost always a period of rising stock market prices.  Over the last 100 years, December registers the most consistently positive returns (75%) of any month. 


Source: Bespoke Investment Group

Last week, though, I saw an Internet post by an investor that said, “I was thinking of taking advantage of the Santa Claus rally to put a few dollars to work this year, but after the decline this week I’m not so sure.”

Truth is, though, as I pointed out last week, December almost always sees a decline that precedes the year-end rally.  Over 100 years of Dow history suggests a bottom on December 11th on average.  More recent data point to December 15th as the bottom of the mid-December slump. 

Whichever, the true “Santa Clause rally” actually occurs at month’s end (the last five days of the month plus the first two days of the year end is the official definition).  The period is almost 80% positive and usually delivers about half of December’s monthly gains.  And small-cap stocks (this year’s laggard) tend to benefit even more than the Dow stocks.

But enough of market history – isn’t this time different?  Oil prices have gone back underground, slipping about 50% since their high point a number of months ago.   


Source: Bespoke Investment Group

There is no doubt that oil’s precipitous fall has been noticed by investors.  In the past, however, falling oil prices have been good for the economy as more dollars are made available to consumers. 

The conflict this year is that with the US now being the top oil producing nation, the impact on the fast-growing oil producing companies in this country and our GDP growth rate may offset the advantage to consumers.  Some even believe that this is an attempt by the OPEC nations to drive many of our fledgling producers out of business.

While it is difficult to know which scenario will prevail, we do know that uncertainty is bad for the markets. However, odds do favor that the fall in prices will soon end or at least consolidate for a time. After all, we have now seen the third worst decline in oil prices since the eighties. 

I looked back in history to see how stocks (the S&P 500) have done after the ten worst oil price declines since 1983.  The results were not conclusive.  While stocks rose for the week-, month-, quarter-, and six-month periods after the top five declines ended, they declined for all periods for the top ten averages.  The number of positive outcomes was right around 50% in both studies.

With such a mixed bag of results, I think the stock market before year end will resume the post-October rally where it left off. Realize that even for most of the oil price decline, the stock market has been rocketing higher.  A new all-time high in the S&P 500 was registered just a week ago last Friday! 

Yet to borrow a phrase from early in the stock market boom of the eighties, “This is one of the most hated bull markets in history!”  Investors just don’t believe in it, have passed up the opportunity to benefit from it, and remain woefully underinvested in equities.  Given the number of actively managed strategies available to investors to gain their stock market exposure while having an exit plan in the event of a crash, this is hard to understand.  I sympathize with poor confused Max.

Last week’s economic reports provided ample evidence that the economy is on the right track on many fronts.  Giant leaps higher that defied expectations were registered across the board in the period.  For example, such gains were recorded in the NFIB Small Business Optimism Index, and the Retail Sales report, while the University of Michigan Confidence Index soared to its highest level since 2007.  In all, twelve of fourteen economic reports beat the average expert prediction last week.

At the same time, interest rates slid lower propelled by buying from foreign investors seeking refuge from their economic weakness and the rising Dollar.  When I reviewed my credit card reports from my Australia and New Zealand trip last month, I found a better than 10% advantage in Dollar purchasing power.  When I recently crossed our border to our northern neighbor, Canada, I found a 15% advantage!

I know the Grinches out there will point not only to the oil disruption, but also to the widely expected Federal Reserve actions to raise interest rates as reasons to be fearful of stocks.  The counter to the latter is that 1) inflation readings, even ex-oil, keep declining, giving the Fed few reasons to be in a hurry to raise rates, 2) it will take a greater increase in interest rates than what is contemplated to slow this economy down, and 3) higher interest rates will cause the Dollar to decline, putting even more pressure on our economic friends who are already facing lower sales and production.

Each week brings another commentator coming forward to agree with my opinion since this talk of higher rates began.  They argue that rates are likely to stay low longer and that Fed action is likely to be delayed longer than most think.  But time will tell.  Even if we are wrong, rates are so low presently that I don’t think a moderate increase will have a significant impact on stock prices or the secular bull market that we are now in. 

Contact our Internal Sales Representatives at (800) 347-3539 ext. 2 for a free book on secular bull markets (Aim Higher! Dow 85,000). It explores the unique history of Secular Bull Markets and what that can mean for your portfolio.

Yes, we will have a 20% correction – probably in the next twelve months, but a recession or return to the 50%-plus declines that twice punctuated stocks in the Secular Bear Market of the first decade of this century do not seem to be in the immediate future.

If you fast (?) forward 25 years after my mom’s first reading of How the Grinch Stole Christmas, you’d find me as Christmas neared sitting on the side of the bed with two small boys curled up, fascinated by the tale Dad was spinning for them. 

The illustrations were great, the Grinch was fearsome, and, yes, all the signs of Christmas were vacuumed into his massive bag and carted away. But best of all, when morning came, the inhabitants of Whoville were seen crowded into the town square, undisturbed and celebrating the true meaning of Christmas.

The Grinch’s heart was softened.  All the commercial parts of Christmas were returned.  And the last sighting of the Grinch was of him joining in the celebration, having learned the true value of Christmas.

I don’t think the Grinch will steal this year’s Santa Claus rally, but if he does, don’t be frightened. We are likely still in the early stages of a secular bull market that could have more than a decade to run before it’s done.  By the time it has run its course, I believe investors will be doing plenty of celebrating in their own town squares.

All the best,

Jerry


Holiday Hours
Next week our office will be closed from 1:00 on Wednesday, December 24th through the end of the week to allow our staff to have a long Christmas holiday. Our home office will reopen on Monday, December 29th.  Essential trading and transaction data collection will be uninterrupted thanks to a select crew of volunteers.  We thank you in advance for planning ahead and submitting any year-end account maintenance requests at your earliest convenience.


US equity markets were down last week: the NASDAQ Composite lost 2.66%, the S&P 500 was down 3.52%, and the Dow Jones Industrial Average lost 3.78%. Nine of the ten S&P industrial sectors were down for the week. The move downward was led by Energy (-8.05%), Materials (-6.21%), Telecommunications (-5.77%), and Industrials (-4.25%). Except for the Quantified Managed Bond Fund (QBDSX), which was up 0.90% for the week, the Quantified Funds were down. The largest loss was in the Quantified Market Leaders Fund (QMLFX, -4.72%), followed by the Quantified Alternative Investment Fund (QALTX, -2.59%), and then the Quantified All-Cap Equity Fund (QACFX, -1.40%).

Last week the Quantified All-Cap Equity Fund (QACFX) shifted its weightings in four leading stock baskets, which were over 55% of the portfolio’s composition: “All-Cap High Flier” (20%), “All-Cap Low Debt” (19%), “All-Cap Quality Acceleration” (11%), and “CPMS Asset Growth” (7 %). Among domestic sector distributions, Information Technology and Financials led with portfolio allocations of 23% and 15%, respectively. The largest stock holdings in the All-Cap portfolio were in the common stock of Heidrick & Struggles International Inc. (HSII, 2.01%) and the common stock of International Rectifier Corp. (IRF, 2.01%).

The cash level within the All-Cap Fund increased to 10.12% last week. The Fund’s daily pattern trading of S&P 500 futures started the week 6% long, changed to 12% long on Wednesday’s close, and neutral on Friday’s close to begin this week. Our TVA-based futures hedge started the week neutral, changed to 10% long on Thursday’s close, and back to neutral on Friday’s close to begin this week.

The Market Environment Indicator (MEI) remained bullish last week. On Friday, equity asset class allocations in the Quantified Market Leaders Fund were maintained from last week: Large-Cap Growth (19.20%), Large-Cap Value (9.60%), Mid-Cap Growth (14.41%), and Small-Cap Growth (4.80%). Total sector ETF weightings remained at 52% from the prior week. Distribution of sector holdings and weights were as follows: Electronics (13%), Health Care (13%), Biotech (13%), and Technology (13%). The individual ETF positions with the leading portfolio weightings were the iShares Dow Jones US Technology ETF (IYW, 7.5%), the ProShares Ultra Nasdaq Biotechnology ETF (BIB, 6.5%), the ProShares Ultra Dow 30 ETF (DDM, 6.0%), and the ProShares Ultra Mid-Cap 400 ETF (MVV, 6.0%).

Within the Quantified Alternative Investment Fund (QALTX), the Long/Short Market Neutral Alternative sub-portfolio increased allocation to the Advantage Dynamic Total Return Fund (AVGRX, 3.04%).

Among the largest ETF positions there were a few changes: allocations to the iShares DJ US Pharmaceutical ETF (IHE, 3.19%) and the Materials Select Sector SPDR ETF (XLB, 2.94%) increased, while allocations to the Wisdom Tree Managed Futures Strategy ETF (WDTI, 4.44%) and the Market Vectors Nuclear ETF (NLR, 5.55%) decreased.

The cash level within the Fund increased to 21.09% last week. The daily pattern trading of S&P 500 Index futures with 10% fund capital allocation started the week 3% long, changed to 6% long on Wednesday’s close, and neutral on Friday’s close to begin this week. The 7.5% capital allocation of the volatility-based systematic trading of NASDAQ 100 Index futures started the week 13.5% long, changed to 15% long on Monday’s close, 12% long on Tuesday’s close, 13.5% long on Wednesday’s close, and 10.5% long on Thursday’s close to begin this week.

The Quantified Managed Bond Fund’s (QBDSX) two leading broad-bond index ETF holdings, the iShares S&P National Muni Bond ETF (MUB, 0.51%) and the iShares Barclay’s 7-10 Year Treasury Bond ETF (IEF, 1.82%), were up for the week.

The 10-year US Treasury yield decreased to 2.08% for the week. The Fund increased weightings in the iShares Barclay’s 7-10 Year Treasury Bond ETF (IEF) from 9.52% to 9.60% and in the iShares Barclay’s Aggregate Bond ETF (AGG) from 8.74% to 9.04%, while decreasing allocations in the PowerShares Build America Bond ETF (BAB) from 5.48% to 5.12% and in the Market Vectors High Yield Muni Bond ETF (HYD) from 2.76% to 2.34%. Cash decreased to 20.52%.

The 10% active portfolio exposure to 30-Year US Treasury Bond futures in the Fund started the week long and changed to short on Wednesday’s close to begin this week. The position gained around 0.85%.

Total Return

Fund (Inception) Symbol Qtr Ending 9/30/14 YTD Ending 11/30/14 1 Year Ending (11/30/14) Since Inception Ending (11/30/14)* Annual Expense Ratio
The Gold Bullion Strategy Fund (7/5/13) QGLDX (9.06%) (3.91%) (7.72%) (4.93%) 1.66%
Quantified Managed Bond Fund (8/9/13) QBDSX (1.66%)
2.02%
1.76% 1.42% 1.68%
Quantified All-Cap Equity Fund (8/9/13) QACFX (4.12%)
(2.25%)
(0.18)% 1.77% 1.51%
Quantified Market Leaders Fund (8/9/13) QMLFX (6.04%)
3.90% 6.15% 7.96% 1.71%
Quantified Alternative Investment Fund (8/9/13) QALTX (2.20%) 1.89% 4.23% 7.86% 2.20%

*Annualized

As of the most recent prospectus, the expense ratios for the Gold Bullion Strategy Fund are as follows: Investors’ Class (No Load), 1.66%; Class A, 1.66%; Class C, 2.41%. The maximum sales charge imposed on Class A share purchases (as percentage of offering price) is 5.75%. An additional 2% redemption fee applies to all share classes, including Investors’ Class, when shares are redeemed within 7 days of purchase.

The performance data quoted represents past performance; past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate and an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be higher or lower than the performance data quoted. For current performance, please call 1-855-647-8268.

Risks associated with the Quantified Funds include active frequent trading risk, aggressive investment techniques, small and mid-cap companies risk, counter party risk, depository receipt risk, derivatives risk, equity securities risk, foreign securities risk, holding cash risk, limited history of operations risk, lower quality debt securities risk, non-diversification risk, investing in other investment companies (including ETFs) risk, shorting risk, asset backed securities risk, commodity risk, credit risk, interest risk, prepayment risk, and mortgage backed securities risk. For detailed information relating to these risks, please see prospectus. 

The principal risks of investing in The Gold Bullion Strategy Fund are Risks of the Sub-advisor’s Investment Strategy, Risks of Aggressive Investment Techniques, High Portfolio Turnover, Risk of Investing in Derivatives, Risks of Investing in ETFs, Risks of Investing in Other Investment Companies, Leverage Risk, Taxation Risk, Concentration Risk, Gold Risk, Wholly-owned Corporation Risk, Risk of Non-Diversification and interest rate risk. “Gold Risk” includes volatility, price fluctuations over short periods, risks associated with global monetary, economic, social and political conditions and developments, currency devaluation and revaluation and restrictions, trading and transactional restrictions. 

An investor should consider the investment objectives, risks, charges and expenses of each Quantified Fund and The Gold Bullion Strategy Fund before investing. This and other information can be found in the Funds’ prospectus, which can be obtained by calling 1-855-647-8268. The prospectus should be read carefully prior to investing in The Quantified Funds or The Gold Bullion Strategy Fund. 


There is no guarantee that any of the Quantified Funds or The Gold Bullion Strategy Fund will achieve their investment objectives.

 

For more information on the Quantified Funds, sub-advised by Flexible Plan Investments, Ltd., please review the prospectus and fund performance.

Current or historical holdings of the funds

 


Over the last week, the gold spot price jumped 2.54% as the US Dollar weakened. The Gold Bullion Strategy Fund (QGLDX) gained 2.68% for the week, which was almost all due to QGLDX’s early close at 1:30PM (rather than 4:00PM for the gold spot price). The prices of short-duration fixed income ETF holdings were flat, on average, over last week, while the COMEX gold futures advanced 2.70%.

Total Return

Fund (Inception) Symbol Qtr Ending 9/30/14 YTD Ending 11/30/14 1 Year Ending (11/30/14) Since Inception Ending (11/30/14)* Annual Expense Ratio
The Gold Bullion Strategy Fund (7/5/13) QGLDX (9.06%) (3.91%) (7.72%) (4.93%) 1.66%
Quantified Managed Bond Fund (8/9/13) QBDSX (1.66%)
2.02%
1.76% 1.42% 1.68%
Quantified All-Cap Equity Fund (8/9/13) QACFX (4.12%)
(2.25%)
(0.18)% 1.77% 1.51%
Quantified Market Leaders Fund (8/9/13) QMLFX (6.04%)
3.90% 6.15% 7.96% 1.71%
Quantified Alternative Investment Fund (8/9/13) QALTX (2.20%) 1.89% 4.23% 7.86% 2.20%

*Annualized

As of the most recent prospectus, the expense ratios for the Gold Bullion Strategy Fund are as follows: Investors’ Class (No Load), 1.66%; Class A, 1.66%; Class C, 2.41%. The maximum sales charge imposed on Class A share purchases (as percentage of offering price) is 5.75%. An additional 2% redemption fee applies to all share classes, including Investors’ Class, when shares are redeemed within 7 days of purchase.

The performance data quoted represents past performance; past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate and an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be higher or lower than the performance data quoted. For current performance, please call 1-855-647-8268.

Risks associated with the Quantified Funds include active frequent trading risk, aggressive investment techniques, small and mid-cap companies risk, counter party risk, depository receipt risk, derivatives risk, equity securities risk, foreign securities risk, holding cash risk, limited history of operations risk, lower quality debt securities risk, non-diversification risk, investing in other investment companies (including ETFs) risk, shorting risk, asset backed securities risk, commodity risk, credit risk, interest risk, prepayment risk, and mortgage backed securities risk. For detailed information relating to these risks, please see prospectus. 

The principal risks of investing in The Gold Bullion Strategy Fund are Risks of the Sub-advisor’s Investment Strategy, Risks of Aggressive Investment Techniques, High Portfolio Turnover, Risk of Investing in Derivatives, Risks of Investing in ETFs, Risks of Investing in Other Investment Companies, Leverage Risk, Taxation Risk, Concentration Risk, Gold Risk, Wholly-owned Corporation Risk, Risk of Non-Diversification and interest rate risk. “Gold Risk” includes volatility, price fluctuations over short periods, risks associated with global monetary, economic, social and political conditions and developments, currency devaluation and revaluation and restrictions, trading and transactional restrictions. 

An investor should consider the investment objectives, risks, charges and expenses of each Quantified Fund and The Gold Bullion Strategy Fund before investing. This and other information can be found in the Funds’ prospectus, which can be obtained by calling 1-855-647-8268. The prospectus should be read carefully prior to investing in The Quantified Funds or The Gold Bullion Strategy Fund. 


There is no guarantee that any of the Quantified Funds or The Gold Bullion Strategy Fund will achieve their investment objectives.

 

For more information on the Quantified Funds, sub-advised by Flexible Plan Investments, Ltd., please review the prospectus and fund performance.

Current or historical holdings of the funds

 


We are continuing with the question of China’s possible negative effect on Japan’s and Europe’s battles against deflation. This is important for gold investors, because if deflation becomes widespread, it could end up boosting gold prices in all currencies.

As Bob Davis writes in The End of China’s Economic Miracle?:  “But growth is now decelerating toward 7%. Western business people and international economists in China warn that the government’s GDP statistics are accurate only as an indication of direction, and the direction of the Chinese economy is plainly downward. The big questions are how far and how fast…

“We are seeing just how much of China’s success depended on a debt-powered housing bubble and corruption-laced spending … One interview with an environmental engineering student at Tsinghua University stuck with me. His parents grew wealthy by building companies that made shoes and water pumps. But he had no desire to follow in their footsteps—and they didn’t want him to either. Better that he work for the state, they told him: The work was more secure, and perhaps he could wind up in a government position that could help the family business.” (Emphasis added.)—Wall Street Journal, 11/21/14

In the 1990s, Japan’s incestuous connections between government, banks and industry brought everything down together, as it became impossible to unwind the unholy bindings. China’s “capitalism” is this same type of corrupt system that comes when governments attempt to control an “ordered economy.”


Crude prices drag down stock prices

Bears freely roamed Wall Street last week, with a major selloff occurring Friday. In fact, December 8-12 represented the worst week for the Dow since 2011. The 5-day losses across the major indices were severe: DJIA, 3.78% to 17,280.83; S&P, 3.52% to 2,002.33; NASDAQ, 2.66% to 4,653.60.2,4

% Change Y-T-D 1-Yr Chg 5-Yr Avg 10-Yr Avg
DJIA
+4.25
+9.79
+13.01

+6.24

NASDAQ
+11.42
+16.39
+22.49
+11.66
S&P 500
+8.33
+12.78
+16.20
+6.70
Real Yield 10/17 Rate 1-Yr Ago 5-Yrs Ago 10-Yrs Ago
10Yr TIPS Yd
0.46%
0.75%
1.41%
1.65%

  YTD-Nov returns
DJIA
7.55%
NASDAQ
14.73%
S&P 500
11.86%

Sources: online.wsj.com, bigcharts.com, treasury.gov - 12/12/14 5,6,7,8
Indices are unmanaged, do not incur fees or expenses, and cannot be invested into directly.
These returns do not include dividends.


Americans buy more, sentiment index soars

Commerce Department data showed retail sales jumping 0.7% for November – the best monthly advance recorded in a year. More good news came from the University of Michigan – its initial December consumer sentiment index came in at 93.8, way up from 88.8 at the end of last month. The improvement may reflect relief at falling gas prices as well as added belief in the economy.1



When will oil hit bottom?

Last week saw the International Energy Agency lower its estimates for 2015 global oil demand, and so NYMEX crude for January delivery finished Friday’s trading day at just $57.81 a barrel. At Friday’s close, oil was down 12.94% MTD and 25.90% over the past 30 days. COMEX gold futures, on the other hand, were up 4.75% MTD and settled at $1,222.50 Friday.2,3


Wholesale prices dip

The Producer Price Index is yet another indicator affected by cheap oil. It declined 0.2% in November, taking the annualized gain down to 1.4%. The core PPI was flat last month and up 1.8% in a year.1



Citations

1 - investing.com/economic-calendar/ [12/12/14]
2 - proactiveinvestors.com/companies/news/58785/dow-drops-over-300-pts-to-end-worst-week-in-3-years-58785.html [12/12/14]
3 - money.cnn.com/data/commodities/ [12/12/14]
4 - markets.on.nytimes.com/research/markets/usmarkets/usmarkets.asp [12/12/14]
5 - markets.wsj.com/us [12/12/14]
6 - bigcharts.marketwatch.com/historical/default.asp?symb=DJIA&closeDate=12%2F12%2F13&x=0&y=0 [12/12/14]
6 - bigcharts.marketwatch.com/historical/default.asp?symb=COMP&closeDate=12%2F12%2F13&x=0&y=0 [12/12/14]
6 - bigcharts.marketwatch.com/historical/default.asp?symb=SPX&closeDate=12%2F12%2F13&x=0&y=0 [12/12/14]
6 - bigcharts.marketwatch.com/historical/default.asp?symb=DJIA&closeDate=12%2F11%2F09&x=0&y=0 [12/12/14]
6 - bigcharts.marketwatch.com/historical/default.asp?symb=COMP&closeDate=12%2F11%2F09&x=0&y=0 [12/12/14]
6 - bigcharts.marketwatch.com/historical/default.asp?symb=SPX&closeDate=12%2F11%2F09&x=0&y=0 [12/12/14]
6 - bigcharts.marketwatch.com/historical/default.asp?symb=DJIA&closeDate=12%2F13%2F04&x=0&y=0 [12/12/14]
6 - bigcharts.marketwatch.com/historical/default.asp?symb=COMP&closeDate=12%2F13%2F04&x=0&y=0 [12/12/14]
6 - bigcharts.marketwatch.com/historical/default.asp?symb=SPX&closeDate=12%2F13%2F04&x=0&y=0 [12/12/14]
7 - treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=realyield [12/12/14]
8 - treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=realyieldAll [12/12/14]

 


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Disclosures

To our readers
Over the past week, an inordinate number of mutual funds held in Flexible Plan strategies have paid dividends or capital gains. While we and our data sources have accounted for these price changes as thoroughly as possible in our transaction reports, it is possible that some of the performance numbers contained in this edition of our Hotline may be slightly different than actually occurred over the last week.

Everything in the newsletter pertains to strategies available on our Strategic Solutions platform at Trust Company of America. The same strategies are implemented on many other products: mutual funds, variable annuity, variable life and retirement platforms. Therefore, we expect the strategic discussion may be of interest to you. Note, however, that since these products have their own subaccount and fund universes and different internal expenses, the results and trading of the same strategy on other platforms may differ substantially from those described herein.

Managed Retirement Plan Participants:
Most of you are managed using Lifetime Evolution and our sub-advised funds, so those topics will be most applicable to your account. But, more and more of you are in plans using Market Leaders. If so, that newsletter section may interest you