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PCM's February Total Return Index Commentary

PCM Index Commentary February 1, 2013


  1. Macro Asset Classes, European and US Equities, Broad Commodities, Corporate High-Yield Bonds and the Euro.
  2. Global Tactical Index showed a broad move from international equity, a great place to be the last 6 weeks, into U.S. equities.


  1. In the U.S. Equity Markets, Midcaps and the Russell 2000 are showing more strength than the larger-cap S&P 500.
  2. Brazil, Russia, India and China are strong in emerging markets going into February.
  3. International equities favor the European safe haven of Switzerland, along with Canada and Australia, with a slight risk exposure to Mexico.


  1. There is no change in our Commodity Index. We continue to hold Cotton and Oil.
  2. PCM's Currency Index continues to favor the Euro.


  1. The U.S. Bond Total Return Index shows the most significant swing as it continues to be more bearish on long-term treasuries. Our index holdings, to a large degree, have slid to the shorter side of the yield curve (less than 24-month in duration) while maintaining an inverse (short position) in long term treasuries. This short-duration vs. short position spread indicates continued weakness in U.S. bonds with longer maturities and a rotation into other asset classes.
  2. Our managed TIPS (Treasury Inflation-Protected Securities) favors international inflation-protected bonds over US inflation-protected bonds. A theme that has existed for the past 8 weeks.
  3. PCM's Absolute Bond Index, which includes global bonds, is split between international corporate bonds (slightly higher risk) and short U.S. long term treasuries. From our perspective this is an interesting spread affirming a move away from US Treasury Bonds.
  4. The search for yield (higher investment income) continues for the main street investor and institutions alike. The trailing 12-month yield on PCM's Dividend & Income Players and Absolute Equity Income Indexes stand at 3.64% 4.61% respectively. There continues to be few options for income without excessive reach for yield and the corresponding associated risk.

From a macro perspective, PCMs indexes are biased towards market bulls. Entering into the mid-first quarter, there is clear strength in U.S. Equities and continued weakness in U.S. Treasury Bonds. Whether or not the U.S. equity markets continue one of the best January starts in history into the first quarter of 2013 remains too been seen. On the short-term, U.S. Stocks appear to be the "place-to-be".

On the longer term, we feel a little less optimistic as U.S. Policy Makers have not addressed the ongoing federal deficit or the unprecedented levels of U.S. debt. This is why we continue to advocate for our quantitative, risk managed index solutions. It seems there is consensus among many of our colleagues that the proverbial shoe will drop when Main Street recognizes the current patch to fiscal policy is unsustainable.

Still, our short-term optimism does not conflict with our long term skepticism and it is our quantitative strategies and approach that provides peace of mind across all time horizons. For the long term, we continue to advocate PCMs lower-volatility indexes as a strong core to any portfolio.

Clients whose accounts attempt to track our indexes will ride the strength in U.S. stocks and weather the gyrations in the US Treasury market. From a macro perspective we favor a broader commodity basket over a specific allocation to gold. Look for dividend yield and investment income in PCM indexes where the risk/reward relationship is more favorable to the investor.

Todd Wood

Co-Chief Investment Officer

Chief Operations Officer

Provident Capital Management, Inc.

The views and strategies described herein are for illustrative purposes only and may not be suitable for all investors. The information is not based on any particularized financial situation, or need, and is not intended to be, and should not be construed as investment advice or a recommendation for any specific PCM or other strategy, product or service. Investors should consult their financial advisor prior to making an investment decision. There is no guarantee that these investment strategies will work under all market conditions and each investor should evaluate their ability to invest long-term, especially during periods of downturn in the market.

This material contains the current opinions of the author(s) but not necessarily those of PCM and such opinions are subject to change without notice. This material is distributed for informational purposes only. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this article may be reproduced in any form, or referred to in any other publication, without express written permission. Provident Capital Management, Inc, PCM and Absolute Return Index are trademarks or registered trademarks of Provident Capital Management, Inc., in the United States.©2013, PCM.

Disclosure: I am short SPY.

Additional disclosure: I am currently own SPY Puts as a hedge to a long portfolio. For detailed disclosures information please go to