Vol. 41 No. 6 George Dagnino, Ph. D. , Editor www.peterdag.com 3-26-2017

Investment Trends

Fig. 1. The S&P 500 is pausing, trying to digest past gains and incoming news. It may be saying the economy is not as strong as the administration would like.

Fig. 2. Gold is a commodity. It weakened like most other commodities when the economy downshifted in 2014-2016. It has the tendency, however, of strengthening when the market weakens.

Fig. 3. Lumber is soaring. This is very good news for the economy. It reinforces our belief the economy will keep expanding, earnings will grow and the overall market will eventually be heading higher.

Portfolio Strategy The stock market. I am overwhelmed by all the pundits telling us how they would manage a complex modern economy. If they are so smart how come we have so many problems? So much global discontent?

The long-term outlook (fundamental) – favorable. Credit conditions remain favorable. Spreads between various yields are heading lower – a bullish sign for equities. The manufacturing sector keeps doing well and our outlook remains favorable due to low inventories relative to business sales. High consumer sentiment, strong retail sales accompanied by robust auto sales and rising housing starts reflect an economy on a sound footing. Two trends may cause some caution. Inflation is rising quite rapidly. Commodities are not displaying the strength typical of an economy firing on all cylinders. Bottom line: financial and business environment remain favorable for growth in earnings and the stock market.

The long-term outlook (technical) – Bullish.

Near-term technical indicators – Momentum indicators remain bullish.

Seasonality – Stocks are moving closer to the unfavorable May-October seasonal period.

Sentiment – Optimism declined sharply. Good news from a contrarian viewpoint.

Strategy. Our equity, ETF and mutual fund models are performing well and are providing attractive profits. The bond position is held to reduce market volatility.

YOU ARE HERE

The US economy. The Atlanta Fed’s forecasting model is showing the economy is growing at a minuscule 0.9% pace in Q1. It is quite possible they are correct. Our indicators, however, suggest business activity is doing well. Consumer sentiment remains elevated. Retail sales, although up only 0.1%, have been rising at a solid +5.7% y/y pace. Auto sales remain in the 16-18 million units range. Housing starts keep rising with builders’ optimism soaring. Auto and housing are two important sectors and are still showing signs of strength. Industrial

production displays lukewarm growth because of the -7.4% decline in utilities’ output. Manufacturing output, however, is up 1.2% y/y. Employment (red line, right scale) keeps rising at a steady 1.6% y/y pace. The headwind is weak job openings (blue line, left scale) which are hindering employment growth (see above chart). The very good news is business sales keep rising faster than inventories, forcing business to increase manufacturing output, which is exactly what is happening.

Bottom line. Productivity is growing at a 1.0% pace, forcing the economy to grow at a 2.0%-2.5% pace. The expansion will continue creating a favorable environment for earnings’ growth.

Global trends. The global economy, according to OECD, is growing a bit faster, following the 2014-2016

slowdown. The countries showing the strongest economic growth are Canada, Germany, France, Chile, Austria, Brazil, and Korea.

The countries with the weakest economies are: Italy, UK, Mexico, Czech Republic, Greece, Portugal, China

and India. The countries with the highest yields are: USA (2.50%), Australia (2.86%), Greece (7.40%), and Italy (2.54%).

The main issue facing the global economy is the poor economic performance of Europe. While most EU countries are disadvantaged because of the austerity measures justified by their excessive debt, frugal Germany has the competitive advantage of a weak currency (the Euro) and low interest rates.

Commodities and Gold - Pausing. All commodities, including gold, declined during the mini recession of

2014-2016 as shown in the above chart. They rebounded in early 2016 as the economy gained some strength. Unfortunately the rebound in commodities (including crude oil and gold) since early 2016 is not reflecting a strong economy. Their slow growth since last July confirms what we have said before. The economy is improving but growth is closer to 2.0%-2.5% than the 3%-4% hoped by the administration.

Inflation - Up. Inflation keeps rising at a rapid pace. Consumer prices are up +2.8% y/y. Producer prices for finished goods rose +3.7% y/y and those of commodities jumped +5.4% y/y. The trend is definitely up.

Bond yields - Consolidating. Yields keep showing the same pattern as commodities. They declined sharply in 2014-2016. They rebounded at the beginning of 2016 and now they are pausing. The rise in inflation will eventually cause yields to rise.

The Dollar - Pausing. The Dollar is consolidating previous gains.

The Fed - They have finally increased the interbank rate as they recognized the dangerous trend of inflation and the improving strength of the economy.

Portfolio Management Objective of our portfolios: minimize risk and volatility while achieving attractive returns.

Our computer models are recommending no changes to our portfolios at this time.

Dag’s Exclusive Model Portfolios

Managed Equity Portfolio. The stocks in this “real money” portfolio have been selected to maximize returns and reduce risk over the long term. They are a subset of our master portfolio. Using a buy-and-hold equally weighted strategy, $10,000 invested in the master portfolio and reinvesting the dividends increased to $461,097 from January 1994 to February 2017 (Compound Annual Growth Rate (CAGR) +18.0%), and standard deviation (STD) of 15,8%. $10, 0000 invested in the S&P 500 appreciated to $78,019 during the same period (CAGR +9.3%, STD of 14.8%). The maximum loss of the master portfolio has been -42% vs. -51% for the S&P 500.

The current portfolio, however, is different from the master portfolio, which we use as a guideline, because our objective is to minimize risk and the odds of catastrophic losses from sudden sharp market corrections. For this purpose we use cash and bonds. We will reduce the amount held in cash and bonds as the upside potential for the portfolio increases. We are also overweight the positions with the strongest performance and underweight the weakest ones.

The above portfolio does not reflect current recommendations.

Managed ETF Portfolio. Our research (see also my book Easy Ways to Beat the Market with ETFs) has shown that a portfolio of low volatility ETFs has superior returns over the long term. Using our proprietary timing model, $10,000 invested in this portfolio appreciated to $22,094 from January 2007 to February 2017 (CAGR +8.11%, STD 7.0%) . The same investment in the S&P 500, using a buy-and-hold strategy, increased to $20,498 (CAGR +7.31%, STD 15.4%). While the S&P 500 suffered losses as high as -51.0%, the ETF portfolio never lost more than -7.42% during the period tested. The ETF portfolio is currently invested 16.6% of the portfolio in each: XLU, XLP, XLE, XLV, and KIE with 16.6% in money market.

Fidelity Mutual Fund Portfolio. Using our proprietary timing model, $10,000 invested in this portfolio appreciated to $22,051 from January 2007 to February 2017 (CAGR +8.09%, STD 7.5%). The same investment in the S&P 500, using a buy-and-hold strategy, returned $20,498 (CAGR +7.3%, STD 15.4%). While the S&P 500 suffered losses as big as -50.97%, the mutual fund portfolio never lost more than -7.63%. The portfolio is currently invested 16.6% of the portfolio in each: FSCSX, FSENX, FSPCX, FDFAX, FSUTX and 16.6% in money market. The performance of this portfolio is mostly due to the selection of the sectors and to a much lesser extent to the family of mutual funds.

Managed Vanguard Mutual Fund Portfolio. Using our proprietary timing model, $10,000 invested in this portfolio appreciated to $20,120 from January 2008 to February 2017 (CAGR +7.9%, STD 7.2%). The same investment in the S&P 500 using a buy-and-hold strategy, returned $19,450 (CAGR +7.5%, STD 15.9%). While the S&P 500 suffered losses as big as -48.47%, the portfolio never lost more than -7.3%. The portfolio is currently invested 16.6% of the portfolio in each: VHDYX, VGENX, VASVX and VQNPX. It is invested 20% in money market.

Relative to S&P 500 strength analysis

The table below shows the 30 stocks in the Dow Jones Industrial Average and 30 ETFs. They are ranked by price action and relative strength – near term and long term. The most attractive investments are those displaying rising price and rising strength relative to the S&P 500. UP means price and relative strength are rising. DOWN means price and relative strength are declining.

Financials, technology, insurance, and housing have been the strongest stocks in terms of relative strength (AAPL, AXP, UNH, HD). The ETF sectors are sending a negative message as far as the economy is concerned. Transportation, industrials, materials, retail (IYT, XLI, XME, XLE, XLB) have lost relative strength. Low volatility stocks, on the other hand have gained relative strength (SPLV). The market has become more defensive with bonds and utilities strengthening (TLT, XLU).

Publication schedule:

The Peter Dag Portfolio: Sunday, April 2, 2017

Market Update: Sunday, April 9, 2017

5

THE FRAMEWORK OF OUR INVESTMENT STRATEGY

Financial history repeats itself. Why not take advantage of it!

The following information and charts closely reflect the approach to managing portfolios and portfolio risk as discussed in Dr. George Dagnino’s book Profiting in Bull or Bear Markets (McGraw-Hill), now available in Mandarin from McGraw-Hill Education and in Easy Ways to Beat the Market with ETFs.

THE BUSINESS CYCLE

Fig. 4. The position of the arrow has been changed to show the economy is gaining strength.

The business cycle remains in a slow growth phase - Phase 1. In this phase commodities, inflation and interest rates bottom and then rise. This is exactly what has been happening since early 2016.

1. Autos and housing starts (see Fig. 5). Auto sales are holding up at high levels. Housing

starts keep moving higher, an important engine of economic growth. These two sectors are playing an important positive force in the current business environment.

2. Retail sales and consumer sentiment (see Fig. 6). Retail sales are growing at a healthy +5.7% y/y. Consumer sentiment remains at high levels, reflecting a confident consumer. These trends bode well for the economy.

3. Manufacturing (see Fig. 7). Industrial production is not showing solid growth because of the weakness of the utility sector – down -7.0% y/y. Manufacturing output, on the other end, is up 1.2% y/y and mining output jumped 1.8% y/y.

4. Sales and inventories (see Fig. 8). Business sales are growing at a much faster pace than inventories. Business will have to keep expanding output to replenish inventories.

5. Commodities (see Fig. 9). Commodities, following the sharp increase in 2016, are pausing. 6. Inflation (see Fig. 10). Consumer prices are up +2.8%. Producer prices for finished goods

rose +3.7% and those for commodities jumped +5.4%. Inflation at the consumer level will continue to rise as long as commodity prices rise faster than consumer prices.

7. Bond yields (see Fig. 11). The long-term trend is up due to rising inflation. Pausing in the near term.

8. The Dollar (see Fig. 12). Pausing. 9. Stock market - long-term (see Fig. 13 and Fig. 14). Positive outlook. 10. Stock market - near-term (see Fig. 15). Rising.

YOU ARE HERE

6

The investment environment – The economy will keep growing at a 2.0%-2.5% pace.

Autos and housing – growing.

Fig. 5. Auto sales (blue line, left scale) are holding up at high levels. Housing starts (red

line, right scale) keep moving higher, an important engine of economic growth. These two sectors are playing an important bullish role in the current business cycle.

Retail sales – growing.

Fig. 6. Retail sales (red line, right scale) are growing at a healthy +5.7% y/y. Consumer

sentiment (blue line, left scale) remains at high levels, reflecting a confident consumer. These trends bode well for the economy.

7

Manufacturing – growing

Fig. 7. The mini-recession started in 2014 ended in early 2016. Capital investments (blue

line, left scale) have been growing since then – up +1.0% from the 2016 bottom. Industrial production (red line, right scale) is not showing solid growth because of the weakness of the utility sector – down -7.0% y/y. Manufacturing output, on the other end, is up +1.2% y/y and mining output jumped +1.8% y/y. The point is manufacturing activity is expanding as we anticipated.

Inventories – to be replenished

Fig. 8. Business sales (red line) are growing at a much faster pace than inventories (blue line). Business will have to keep expanding output to replenish inventories. This is good news for the economy.

8

Commodities – up.

Fig. 9. The indicator in the lower panel suggests the odds favor higher commodity prices.

Inflation – rising.

Fig. 10. No question about it. Inflation is rising and its momentum is quite strong.

Consumer prices (red line) are up +2.8%. Producer prices for finished goods (blue line) are up +3.7% and those for commodities (brown line) jumped +5.4%. Inflation at the consumer level will continue to rise as long as commodity prices rise faster than consumer prices.

COMMODITY INDEX

9

Bond prices – down.

Fig. 11. The indicator in the lower panel suggests the odds favor lower bond prices ahead. The time to be aggressive buyers is when the indicator in the lower panel starts rising.

The Dollar – rising.

Fig. 12. The trend of the Dollar is up. It suggests the economy is performing well and has a competitive advantage relative to the economies of most other countries.

TLT LONG-TERM

TREASURY BONDS

10

THE STOCK MARKET

Long-term outlook: favorable

Unemployment claims (see Fig. 13). Claims have been declining, suggesting the economy is doing fine, earnings will grow and the market will keep heading higher. The time to worry is when claims rise for a few months, a sign the economy is weakening and earnings are likely to suffer.

Home Market Index (see Fig. 14). Home builders’ optimism, or HMI, keeps rising, suggesting the housing sector is doing fine. It points to a growing economy and earnings – a bullish mix for stocks.

Near-term technical outlook: up

Proprietary indicator (see Fig. 15). Market momentum remains up.

Strategic implication. Equities remain attractive.

Unemployment claims – bullish.

Fig. 13. Unemployment claims (red line, right scale) have been declining, suggesting the economy is doing fine, earnings will grow and the market will keep rising. The time to worry about the market is when unemployment claims start rising for a few months (as in 2007), indicating the economy is slowing down thus having a negative impact on earnings and equities.

11

Homebuilders’ optimism - bullish.

Fig. 14. Home builders’ optimism (red line), or HMI, keeps rising, suggesting the housing

sector is doing fine. It points to a growing economy and earnings – a bullish mix for stocks. The time to worry is when the HMI declines for several months as shown in the chart.

Proprietary indicator – bullish.

Fig. 15. The indicator in the lower panel suggests the odds favor higher prices ahead. The time to worry is when this gauge stops rising and turns down as in 2015.

12

Reminders

1. Past performance does not guarantee future results.

2. Please do not ask us to change your account information (email address, credit card number, address, and subscription terms).

You should use the icon “Update Your Account” on our home page www.peterdag.com for this purpose.

3. If you receive an email saying that your credit card has expired or that it could not be

processed you need to renew your subscription by clicking on the icon “Renew Your Subscription” on our home page www.peterdag.com.

4. We refund on a pro-rata basis only yearly subscriptions.

5. Subscriptions need to be cancelled before midnight EST of the day prior to the

expiration day. Please do not ask us to cancel your subscription in order to avoid unpleasant situations. We appreciate your understanding.

------------------------------

It took me 40 years to write this book. Everything I know – in a nutshell.

To receive the autographed copy of Dr. George Dagnino’s book

“Easy Ways to Beat the Market with ETFs”

Please send a check for $20 (free shipping) to: Peter Dag & Associates, Inc.

65 Lakefront Dr. Akron OH 44319 or call our office at 1-800-833-2782