Some Thoughts For March 2021

Summary

• The momentum of high yield municipal bonds turned decisively negative on February 16th, and I hope everyone sold their holdings early in the drawdown.
• Non-agency RMBS funds like IOFAX continue to exhibit good momentum and have been very profitable over the first two months of 2021.
• I am holding TBF to gain from rising long-term treasury rates and PDBC to gain from inflationary fears. Friday was not a good day for these holdings.
• The total return in my Schwab accounts is 2.4% YTD and the total return in my Vanguard accounts is 0.8% YTD.
• With a new stimulus bill coming and the nation's debt souring, it is hard to know where the market is heading. We just need to follow the momentum. In my opinion, having some money in cash is a good idea.

Give a portion to seven, or even to eight

for you know not what disaster may happen on earth. (Ecc. 11:2)

Overall, long-term treasury rates keep going up at least in the short-term and the market seems to be anticipating higher inflation too. However, Friday did not follow the script. After a month of rising long-term treasury rates, on Friday the 10-year yield dropped from 1.54% to 1.44% (according to YCharts). A day earlier, the yield had risen close to the same amount. These are really big up and down changes over two days.

Equities are showing a lot of volatility too, and the rising rates may be causing a negative effect on them. We are all awaiting the passage of another large stimulus bill that should enhance growth in the short-term, and push treasury rates and inflation higher. Of course, the long-term effect of this debt will probably not be good for the market, but, for now, almost everyone is betting on equities going higher. I'm not so sure.

On the bond front, the big three classes that we study and watch, i.e. high yield corporate bonds, high yield municipal bonds, and senior bank loans, have lost momentum. High yield municipal bonds have not only lost momentum, but have experienced a sharp drawdown after 3 1/2 months of very good gains. The drawdown has been quite dramatic, starting on February 16th. There were seven straight days of losses in the 0.3 - 0.4% range before Friday (end-of-the-month) saw essentially no NAV change. I got out very early in the downturn as I commented on last month's blog, and I think many of you did likewise. If the drawdown continues for a few weeks and we see an overall drop of 3-4%, there should be a great buying opportunity when these funds start recovering. We can realize nice gains if we re-invest in them once the recovery starts.

It is hard to say what is going to happen with high yield corporate bonds. One might think owning high yield corporate bond funds would be beneficial in a growing economy after more stimulus, but sooner or later higher rates will affect growth and more defaults might occur. In general, the high yield corporate bond class seems to be losing momentum. However, for some reason, WHIYX has done substantially better than other funds in this class (although its NAV has fallen the last two days too). Not exactly sure why WHIYX has done better, but holding WHIYX in February would have been quite profitable. It was up 2.54% in February. Unfortunately, I made the mistake of not remaining invested in WHIYX like MDBS_MF recommended.

The momentum of senior bank loans is essentially flat, but for diversity, I have decided to own AFRAX and EAFAX in my portfolio. I'm not sure this is wise, but I am doing it anyway.

The highest allocations in my portfolio are in non-agency RMBS funds, such as IOFAX, HOBEX, and BDKAX. I would also classify SEMPX in this class, but I don't own any SEMPX shares at the present time. As you know, my favorite fund in this class is IOFAX. After its March 2020 meltdown, IOFAX has rebounded and has shown good momentum with very few negative days. And there have been ten large one-day returns since the drawdown in March, including two in February. 

Two other somewhat large holdings in my portfolio are the inverse long-term treasury ETF TBF (to gain from rising rates) and the commodity ETF PDBC (to gain from inflation). Both of these were during well in February, but on Friday (end-of-the-month), they got hammered. I have to think that these ETFs will continue to do well over the next few months based on macro economic trends. TBF has gained 9.0% YTD while PDBS is up 13.9% YTD.

Links for 2021 Strategies

Here is my list (and links) of strategies that I use as guides, along with their current selections:

Weekly MDBS_MF: This strategy now selects three funds each week. The three selections at the present time are WHIYX (#1 and very strong), LSFAX (#2 but substantially lower momentum), and the out-of-market asset (#3 and essentially no momentum). Because of its negative overall momentum, NHMAX is not selected at the present time. The strategy gained 0.77% in February, and has gained 2.15% YTD. Please note that I have included the EOM distributions that may not yet be included in PV. For comparison, Vanguard total bond market ETF BND lost 1.53% in February and has lost 2.37% YTD.

Weekly MDBS_ETF: Currently this strategy selects SRLN. This strategy is somewhat similar to MDBS_MF except it utilizes ETFs instead of mutual funds, and selects only one ETF each week. There are no frequent trading limitations or trading costs on the ETFs; however the volatility of bond ETFs is higher than the volatility of bond mutual funds, so there is a higher probability of false indications and whipsaw for this strategy (compared to weekly MDBS_MF). For those investors outside the U.S., this ETF version is probably the only version you can use.

This strategy returned -1.70% in February (yikes!) and has returned +0.10% YTD.

Eric Basmajian's (EPB Macro Research) Tactical Strategy. This strategy starts from Ray Dalio's Permanent All-Weather Strategy and updates the allocations on a monthly basis. The strategy tries to control beta by using a form of risk parity, and then tries to gain alpha by underweighting or overweighting the allocations based on short-term and long-term macro economic trends. The allocations in Eric's strategy are proprietary. The strategy lost 1.10% in January and lost 0.87% in February. I don't particularly like Eric's allocations, but I do like the research that Eric provides based on macro economic conditions, and I make some of my choices of assets based on his research. His research is why I have significant allocations of TBF and PDBC in my portfolio.

Permanent Portfolio Combined With Downside Volatility Targeting. The allocations for March are: 7.4% QQQ, 7.4% IHI, 10.6% TLT, 3.2% SGOL, 3.2% UUP, 68.3% SHY. I will use the MINT Strategy (see below) to determine whether I will invest in MINT or SHY in this strategy. The MINT strategy says to invest in SHY at the present time. In today's reality, it is probably best to put the SHY allocation in cash.

This strategy was down 1.32% in February, caused mainly by the large loss of TLT (down 5.73% for the month). The strategy has been down 1.74% YTD. I doubt any form of permanent portfolio has done well in 2021 because of the very negative returns of long-term treasuries.

Weekly IOFAX Strategy: Currently selects IOFAX. This strategy was up 1.68% in February with only one very small down day when the dividend was distributed (all other days were positive or zero return). There were two days when there were extra large returns: February 3rd (0.91%) and February 16th (0.64%). We never know when these large one-day gains will come, but are always glad to see them. IOFAX has gained 4.71% YTD.

TrendXplorer VAA-G4 Strategy: Continues to be risk-off; selects SHY (100%) for March. Being risk-off in February (investing in SHY) turned out to be a good call. This strategy lost 0.06% in February, but has gained 24.40% in the past 12 months. Although this strategy has performed well since I started tracking it (since mid-2019 I think), I am not currently investing in this strategy. Maybe I should reconsider!

Allocate Smartly GPM Daily Allocations: For the month of March, this strategy selects CASH 50.0%, DBC 16.7%, EWJ 16.7%, and QQQ 16.7%. For the month of February, this strategy had selected CASH 16.7%, DBC 27.8%, EWJ 27.8%, and QQQ 27.8%. This strategy returned +3.29% in February and has returned +0.51% YTD. There was a lot of volatility in both January and February for this strategy.

The daily allocations can be found at Allocate Smartly at the above link (using its free subscription service). Or you can go to the TrendXplorer website and see the allocations. This strategy has also done well since I started tracking it, but I am not currently investing in this strategy either.

Weekly MINT Strategy. I have started using this strategy to try and improve my return on some of my cash holdings. Currently, it says to own SHY. MINT has lost its positive momentum, and had an especially bad day on Friday (down 0.05%). So the strategy has switched to its safe haven SHY. This strategy lost 0.05% in February and has returned +0.03% YTD. 

I don't strictly follow these strategies, but I review them at least weekly and base many of my holdings on them.

My Holdings at Beginning of March

I hold the following bond assets at the start of March: BDKAX, IOFAX, and HOBEX (RMBS funds), and AFRAX and EAFAX (senior bank loan funds). I hold significant shares of TBF and PDBC, and very smallish allocations of QQQ, VXUS, ARKK, and ARKG. I have about 33% of my portfolio in cash or cash equivalents at the present time.

Final Remarks

Overall, I am up 2.4% YTD in my Schwab accounts (3/4 of my portfolio). In my Vanguard accounts (1/4 of my portfolio), I am up 0.8% YTD. The last week of February was not kind to me; before then, I was generally pleased with February returns. There is a lot of volatility in the market right now, and I refuse to go all-in by investing in equities or equity-based strategies. I think we need to see what happens first in the bond market and then follow where momentum leads us.

I have tried to be accurate in these numbers, but there could be mistakes.

Soli Deo Gloria