Comment

Stock Bull Market Still Intact!

We have been telling you that stocks are overvalued for over two years. We have also been telling you to expect volatility to return to the market. Stocks may have been overvalued but "Mr. Market" does not seem to care and volatility has been absent without leave (AWOL)!

During 2016 and 2017 our best performing investment strategy has been Dividend Diamonds. This is because it is 100% invested in stocks and stocks just keep trending upward. Dividend Diamonds also benefits significantly from the rising dividend income produced by the 40 stocks in the portfolio. The dividend income has risen every year since we introduced the strategy at the end of 2009.

Owning Dividend Diamonds is still one of the best ways we know to get a "raise in pay" on a regular basis. The strategy has offered solid growth and rising income since we introduced it.

Back in 2010 and 2011 we were still reporting composite performance of all accounts we managed within a particular strategy. We were using Schwab Performance Technologies software to calculate those performance reports. According to our records, Dividend Diamonds total return for 2010 was 15.93%. In 2011 it was 4.44%. That was a year when many stock markets around the world were down double-digits for the year.

We have not reported composite performance since 2011. We now report performance to each account holder for their specific accounts using Orion Advisors Performance Report app. We use one account in the strategy as the "model account" and continuously rebalance all the other accounts to be as closely invested to the model as we can. Our Model Dividend Diamonds account has averaged 8.83% annual time weighted return from December 31, 2011 through July 14, 2017, net of all fees.

Our Mendocino strategy is now 19 years old. Our promise for this strategy has always been to "provide market like returns with significantly lower volatility than the S&P 500".

We feel like we have kept that promise, even though Mendocino significantly underperformed in 2015 and 2016. We kept the portfolio hedged and missed most of the upside in stocks during those year. We were hedged in anticipation of that volatility we were looking for.

The longer term performance for Mendocino is solid. For example, we have managed an account for one of our clients continuously from August 11, 1998 through July 14, 2017. The average annual time weighted return is 5.89% per annum, net of all management fees. The return for the S&P 500 is 6.50% per annum over those same 19 years (without any management fees).

One's first reaction might be to say, "I would have been better of investing in the S&P 500 index". That would be true if you had invested in a very low cost ETF and if you had the stomach to buy it and hold it through all the ups and downs; including multiple stock market crashes.

We are still looking for the investor who actually did that! We know many who tried, but got shaken out of the market by the violent moves up and down.

Mendocino's return was accomplished while rarely being more than 60% invested in stocks. It was accomplished with volatility that was far and away less than that of the overall stock market. We believe it has been a "sleep well at night" strategy.

This year-to-date that same managed account is up 6.75%, net of all management fees.

During 2017 we have taken a page out of the Dividend Diamonds playbook for Mendocino. That is, we are focusing more and more on stocks that offer rising dividends.

We have not moved entirely in that direction. We still want to own pure growth stocks in Mendocino. For example the #1 performer in the strategy since inception is Facebook (FB). Dividend Diamonds can't own Facebook because it doesn't pay a dividend.

We would like to achieve a balance of about 70% allocation to high yield and/or rising dividend stocks and 30% to pure growth stocks.

As of this writing we have about a 25% allocation to cash in the Mendocino strategy. We also have an allocation of about 9% to hedges that will protect on the downside if we do get a correction.

We are entering the season when they normally happen, if they are going to happen at all.

We think a correction might be approaching, bearing in mind that we have been wrong before. Frankly we hope it happens and will consider it to be a buying opportunity to get the rest of that cash to work and lift the hedges.

We are not bearish about stocks in any way at this time. We think that any correction of 5 to 7% will get bought in a hurry by managers and investors shopping for bargains. A correction of that magnitude will take most U.S. stock indexes back to their 200 day moving averages. They should be met there by a buying frenzy--if a correction happens at all.

As for "Sell in May and Go Away", Tom Bowley, of Stockcharts.com, wrote the following on his blog today:

I believe the true "go away" period is from the July 17 close to theSeptember 27 close. This period has been difficult and it begins at Monday's close. Over the past 67 years on the S&P 500, this much shorter two month and ten day period has risen 37 times. The average return during this 71 day period is -0.42%. The annualized return has been -2.18%. While that might not seem like much, it's actually more than 11 percentage points beneath the average annual return of approximately 9% that the S&P 500 has enjoyed since 1950.

Here is potentially the biggest problem. When we've seen big moves on the S&P 500 from July 17th to September 27th in the past, they've generally been downside moves. The S&P 500 has moved +/- 10% or more 11 times during this period since 1950 and 8 of those moves have been declines. Here are the eight awful summers:

1957:  -12.41%
1966:  -10.31%
1974:  -22.31%
1981:  -13.86%
1990:  -18.11%
1998:  -11.97%
2001:  -16.13%
2011:  -10.69%

So clearly this is the time of summer - and the year - when the stock market has the tendency to underperform. And from the above, you can see that the underperformance can be quite severe certain years. While I believe the long-term viability of the current bull market is sound, we did break out to an S&P 500 all-time high close on Friday with a negative divergence present on the weekly chart - a sign of slowing upside momentum:

The last time we saw momentum slowing like this on the weekly chart was in 2015. Shortly thereafter, the S&P 500 dropped from 2135 to 1870 in two months! Perhaps it's a coincidence, but note that the highs were established in July 2015 and the ensuing weakness occurred in August and September - two notoriously bearish summer months that we're now approaching.

Will we see a repeat?  Stay tuned.....

If the correction happens Mendocino will be a buyer of the dip!

All the best,

PAUL KRSEK,
CEO
5TQ CAPITAL, LLC
595 Coombs Street, Napa, Ca, 94559
(707) 224-1340 Main

www.5TQCapital.com


5TQ Capital, LLC
Registered Investment Advisors
595 Coombs St., Napa, CA    94559
Phone:
 707-224-1340  Website: www.5TWealth.com

Disclosure and Disclaimer - Updated November 20, 2016 by Paul Krsek, Govinda Quish and Jeffrey Roush:
ELLUMINATION is the proprietary newsletter written for clients, friends, and affiliates of 5TQ Capital, LLC.  As of July 1, 2016, 5T Wealth Management, LLC has been renamed 5TQ Capital, LLC

SINCE 1998 Paul Krsek HAS BEEN the sole author of ELLUMINATION. While the views and representations found in the newsletter generally reflect the attitudes and opinions of the 5TQ Capital, LLC ("5TQ") members and staff, Paul Krsek wrote without editing was therefore solely responsible for the content and opinions contained in ELLUMINATION.

AS OF July 1st, 2016, ELLUMINATION IS NOW A COLLABORATIVE EFFORT OF THE INVESTMENT POLICY COMMITTEE OF 5TQ. THAT COMMITTEE IS CURRENTLY COMPRISED OF GOVINDA QUISH, PAUL KRSEK, AND JEFFREY ROUSH.

ELLUMINATION does not represent the opinions of Fidelity, Fidelity Institutional Brokerage Group, NFS or anyone employed by Fidelity in any capacity. Neither Fidelity, Fidelity Institutional Brokerage Group, nor NFS, nor anyone employed by Fidelity in any capacity has participated in the creation of ELLUMINATION and they are not responsible for the contents or distribution of ELLUMINATION.

ELLUMINATION is written to provide general information to clients, friends, and affiliates. The contents of ELLUMINATION are not to be taken as individual investment advice. No investment decisions should be made based on the opinions or information offered in ELLUMINATION.

5TQ does not represent that the information in ELLUMINATION is accurate or complete and it should not be relied upon as such. Opinions expressed herein are subject to change or modification without notice.

The investment portfolio models or management services mentioned in ELLUMINATION may or may not be available in some states, and they may not be suitable for all types of investors.

5TQ manages accounts with various histories and investment objectives. The third-party information and performance representations used in this document has been obtained from various published and unpublished sources considered to be reliable. However, 5TQ cannot guarantee its accuracy or completeness and thus does not accept liability for any direct or consequential losses arising from its use.

Investment returns may vary and are NOT guaranteed. Past performance may not be indicative of future performance.

Comment

Comment

5TQ Capital Post Election Update

Our President Elect, Donald Trump, has overcome the doubts of the media, pollsters, and political scientists to be elected as the 45th President of the United States of America. Clearly the mainstream political media strongly underestimated the depth of frustration that many Americans feel towards the Washington political elite.

By all counts Hilary Clinton was projected to be the winner of this year's presidential election. Instead voters from across the country turned out in numbers unpredicted by so called political experts to reshape the electoral map and deliver a victory to Trump. Analysis of the election results indicate that Trump won because he ad­dressed many of the legitimate grievances of blue collar workers in swing states that estab­lishment politicians had long ignored.

Though it was impossible to predict who would win the election, one thing that seemed certain on a very uncertain election night was that global investors would hit the panic button as soon as the world woke up to the news of President-elect Donald Trump. That is what economists, central banks, policy makers, and market analysts had been predicting for weeks.

Which is exactly what seemed to be happening during the election evening, global equities plunged as futures markets (which are open even when stock markets themselves are closed) tumbled further with each new hint of a Trump victory. At one point in the night, futures markets suggested the Dow Jones Industrial Average would start the daydown 1,000 points, worse than the worst days of the 2008 financial crisis, while the S&P 500 was down over 5%.

The following graph illustrates the reaction of the VIX index between 8pm on Nov 8th and Noon on Nov 9th Eastern Time. The VIX is an index that tracks equity market volatility. The lower equity markets fall, the higher the VIX index will rise.

As you can see, the VIX went up 55% as state after state reported numbers that unexpectedly favored a Trump victory and by noon Nov. 9th the VIX had come right back down to the point at which it began its assent.

As of today, the VIX has continued to decline and is currently at 14.3.

What can we expect going forward?

During the campaign, Trump promised to curb immigration and renegotiate trade deals, specifically focusing on China and Mexico. He also promised to cut taxes by trillions of dollars, while preserving Social Security, Medicare, and the military with $150 billion net defense spending.

He plans to boost infrastructure spending by $550 billion vowing to rebuild the nation's roads, bridges, airports, railways, and inner city development projects. To offset the cost of this development, U.S. corporations will be strongly encouraged to bring home profits currently parked overseas to avoid taxes, in exchange for a low tax rate.

He has also said he will implement a new tax deduction for child care expenses and expand the Earned Income Tax Credit. Some elements of his tax plan, such as eliminating the estate tax and lowering the corporate income tax rate, adhere to standard Republican orthodoxy, while others depart from tradition.

Some Republican critics have said this over ambitious economic plan will be either be dead on arrival in Congress, or will be significantly watered down by the legislature. The focus will instead shift to tax cuts and traditional Republican policies. We respectfully disagree.

There is no empirical evidence the GOP is actually fiscally conservative. First, the track record of the Bush and Reagan administrations do not support the adage that Republicans keep fiscal spending in check when they are in power. Second, Republican voters themselves only want "small government" when the Democrats are in charge of the White House. In contrast, with a Republican President in charge, they tend to forget their "small government" leanings.

Over the past 28 years, each new president has generally succeeded in passing their signature items. Congress can block some, however we anticipate that many of the above mentioned initiatives will likely be pushed through. The implementation of these policies could cause the U.S. economy to overheat, fueling inflation, and thereby forc­ing the Fed to raise rates more quickly that the markets anticipate.

Investment theme review: Trumponomics is a Game Changer

As a quick reminder, 5TQ began 2016 focusing our investment strategy on three main themes:

  • Increasing global equity market volatility will lead to lower returns and greater investment risk than we have seen in recent years.
  • The probability of currently unknown events shaping market behavior is high due to over extended financial markets and geopolitical uncertainties.
  • Divergent monetary policy combined with historically unprecedented Central Bank market intervention could lead to a liquidity crisis in the bond market.

Our overarching view is that the Trump presidency is a game changer that will impact the global economy and financial markets. Perhaps it would be helpful to walk through those details, theme by theme.

Greater equity market volatility, increasing risk, and decreasing return on investment.

Since the Nov. 8th global equity markets have had a mixed performance. Emerging markets have been hit hardest falling 6.55% in fear that President-elect Trump's protectionist proclivities will crimp their exports. Of 68 emerging country stock indexes tracked by Bloomberg, 51 fell in the three days after the election.

The following bar chart illustrates the mixed equity market reaction since the election. It is interesting to note that Russia is the only emerging market that has gone up.

The stock markets in developed countries have done much better. In the U.S., the rally has been led by cyclical stocks. The S&P 500 Financials Index has soared 9.29 % to levels last seen in May 2008 (see below graph of S&P Financials Index).

In the below graph we point out what we think of as a Shakespearean set of U.S. equity market happenstances. As you can see, from Nov. 7th to Nov. 8th the S&P 500 rallied 2.93% (the two days following FBI Director James Comey closing the Clinton email investigation, again). Keep in mind, this is after the market had been going down for 7 days in a row as a reaction to Comey reopening the investigation on Oct. 28th. So, clearly the market was happy (up 2.93%) when it thought Clinton would win the election.


Well, the punchline is clear..... Trump wins and the S&P 500 goes up! What the heck?

Bottom line, the U.S. equity markets are still over valued on a fundamental basis. In our view, the rally we have seen in the last 3 days has only added to this imbalance. Nevertheless, we are watching closely to see which of 2 possible outcomes will prevail.

  1. The combination of tax cuts, infrastructure spending, and the repeal of financial regulation will drive the bull market in equities to new all-time highs.
  2. The market rally of the last 3 days will be short lived as the potential for unknown consequences of Trump policy implementation begins to play a strong role in the market reaction function.

We have to keep in mind that Trump has not run a pro-corporate campaign. He has accused American manufacturing firms of taking jobs outside the U.S. and tech companies of skirting taxes. It is not clear to us that his corporate tax reform will therefore necessarily be a boon for the stock market.

Overall we are of the view that the current market rally will be short lived and that the Trump presidency will lead to greater equity volatilely as markets adjust to yet unknown outcomes of this unprecedented time in U.S. political history.

The probability of currently unknown events shaping market behavior is high due to over extended markets and geopolitical uncertainties.

The combination of BREXIT and the election of Trump marks 2016 as a year that will go down as a major inflection point in economic and geopolitical history.

BREXIT + Trump = a flip from deflation to inflation.
We anticipate the dominant inflection points to be the following:

  • Peak Liquidity: Expectations for central bank liquidity are peaking. Both the Bank of Japan and the European Central Bank are "walking back" their decision to introduce more negative interest rate policies. The Fed is likely to raise interest rates in coming quarters. Central banks are starting to feel political backlash for fueling inequality. In addition, "Quantitative Failure" (671 rate cuts since Lehman bankruptcy has fostered neither robust economic recovery nor "animal spirits" as corporations and households continue to hoard cash) means that the era of excess liquidity and Quantitative Easing is now largely behind us.
  • Peak Globalization: The 1981-2015 era of free trade, capital and labor mobility is also coming to an end. Electorates are shifting in an anti-immigration direction. Anti-trade populism is on the rise. A recent survey showed 65% of Americans say trade policies have led to a loss of U.S. jobs, versus 13% who believe trade policies created jobs. Events show nations are becoming less willing to cooperate, more willing to contest. Global trade growth in 2016 (+1.7%) will fall below GDP growth (+2.2%), a rare event without a recession, and before a true move toward protectionism has even occurred.
  • Peak Inequality: Electorates are demanding a "War on Inequality" via fiscal stimulus making it more likely that the developed economies spend less money on bonds (monetary stimulus) and more money on people (fiscal stimulus). Fiscal stimulus is already underway in Japan (5% of GDP), Europe (+1% to GDP growth), and widely expected in the U.S. in 2017. We believe a shift toward fiscal stimulus is likely to raise growth, interest rates, and inflation expectations.
  • Peak Returns: Peak liquidity + peak globalization + peak inequality = peak returns. Excess liquidity and globalization have been bullish forces for Wall Street, but far less bullish for Main Street. A reversal of these trends together with a shift toward fiscal stimulus and higher interest rates strongly indicates that the excess returns from stocks and bonds in the past 8 years are also likely to reverse.

Bottom line: If these inflection points hold true, it will lead to increasingly high inflationary pressure which in turn will speed up the transition out of what has been a 35 year bull market in bonds. As of Nov. 1st there is an estimated $13 trillion in outstanding global bonds that are paying negative interest rates according to the Fitch ratings agency (That's right, investors are paying to hold bonds).

As a result of this, the financial system has become even more leveraged than it was in 2007 at the beginning of the last debt crisis. The global bond market has grown by more than $20 trillion since 2008. Today, the global bond market is north of $100 trillion, with an additional $555+ trillion in derivatives currently trading. Yes, $555 TRILLION, more than seven times the global GDP, and more than 10 times the Credit Default Swap market ($50 trillion), which triggered the 2008 Crisis.

Does this mean a meltdown in the global bond market is imminent? No, it does not. It does however mean that we continue to be very defensive in our investment recommendations.

Divergent monetary policy combined with historically unprecedented Central Bank market intervention could lead to a crisis in the global bond market.

Since the middle of 2015 our concern has been that the reactionary function of the Fed will be too little too late. They risk setting a dynamic into motion in which interest rates will be forced higher much faster than the market anticipates. The outcome of this dynamic could potentially trigger a liquidity crisis in the bond market.

In the last three days, U.S. treasury bonds have plunged with 30-year bond yields climbing the most since at least 1977 amid concern that a Trump administration and a Republican-led U.S. Congress will unleash a wave of spending to boost the U.S. economy, thus triggering a surge in inflation.

Since Trump was elected we have seen this dynamic pick up pace with unnerving speed as more than $1 trillion of global bond value has been wiped out in the last 3 days. This is only the second time in two decades that the bond market has suffered such a huge loss in such a short time.

This loss has been driven by a spike in yields on U.S. 30-year bonds, which are more sensitive than shorter maturities to the outlook for inflation. U.S. 30-year bonds have jumped almost 40 basis points since last Friday, heading for the biggest weekly increase since January 2009.

This bond market reaction has caught many investors off guard as it is the opposite of what was expected if Trump won. It is also the opposite of what we saw as a reaction to BREXIT.

This week the bond market gauge of inflation expectations climbed to the highest level since July 2013 amid speculation that a Trump administration and a Republican U.S. Congress will ramp up spending and drive up inflation.

Bottom line: These conditions continue to reinforce our conviction that the bond market currently holds much more risk than it does upside potential. We do not know if the Fed and other central banks will be successful in their attempt to engineer a new credit upcycle.

If the past bubbles are any guide, even as this reflation is happening, and the outlook is getting more and grimmer for the sustainability of the bond bubble, investors will be dismissing signs of a turn and sticking to their guns. So even as inflation starts to return, don't expect mainstream market commentary to recognize it. Nevertheless, in our current market conditions dictate that we focus on capital preservation and maintain our defensive positioning across all portfolios.

In Conclusion

In our view, Trumponomics is a game changer for global financial markets. The combination of BREXIT and the election of Trump marks 2016 as a year that will go down as a major inflection point in economic and geopolitical history.

BREXIT + Trump = a flip from deflation to inflation and from Wall Street to Main Street. The key inflection points that will impact the next four years are Peak Liquidity, Peak Globalization, Peak Inequality, and Peak Returns.

We have stated many times that the model of growth that has driven equity markets to the second longest Bull Run and historically unprecedented $ 5.6 billion new issuance of U.S. corporate bonds at all time low interest rates can only be maintained while there is little to no inflationary pressure in the economic system.

At this point the market expectation for higher and faster inflation is being driven by potential economic pressure created by Trump's stated economic policies. We do not yet have any clarity as to the resolution of the dramatic forces which have impacted the bond market over the last three days.

The pumping of cash into the financial system by central banks has lifted nearly all financial assets, a bond shock could force a dramatic repricing of assets across the board. If overpriced bonds and stocks get repriced more quickly than market expectation, investors could dash for the exits in an attempt to lock in any gains in both stocks and bonds before year end.

As we have been pointing out, although there are many, we will continue to actively monitor events in the coming weeks and will communicate any changes in our outlook and portfolio positioning as they occur. In the meantime, please feel free to call us any time or come by the office to have a conversation.

All the best,
5TQ Capital

GOVINDA QUISH, PAUL KRSEK, JEFF ROUSH, 
THE INVESTMENT POLICY COMMITTEE 
5TQ CAPITAL, LLC
595 Coombs Street, Napa, Ca, 94559
(707) 224-1340 Main
 
www.5TQCapital.com


Disclosure and Disclaimer - Updated last on July 17, 2016, 2016 by Paul Krsek:
ELLUMINATION is the proprietary newsletter written for clients, friends, and affiliates of 5TQ CAPITAL, LLC .

FROM JUNE 1998 to January 1, 2016 Paul Krsek was the sole author of ELLUMINATION. While the views and representations found in the newsletter generally reflect the attitudes and opinions of the 5TQ CAPITAL, LLC members and staff, Krsek wrote without editing was therefore is solely responsible for the content and opinions contained in ELLUMINATION.

AS OF JANUARY 2016 ELLUMINATION IS NOW A COLLABORATIVE EFFORT OF THE INVESTMENT POLICY COMMITTEE OF 5TQ CAPITAL, LLC. THAT COMMITTEE IS CURRENTLY COMPRISED OF GOVINDA QUISH, PAUL KRSEK, JEFFREY ROUSH AND PHILLIP LAMPE.

ELLUMINATION does not represent the opinions of Fidelity, Fidelity Institutional Brokerage Group, NFS or anyone employed by Fidelity in any capacity. Neither Fidelity, Fidelity Institutional Brokerage Group, nor NFS, nor anyone employed by Fidelity in any capacity has participated in the creation of ELLUMINATION and they are not responsible for the contents or distribution of ELLUMINATION.

ELLUMINATION is written to provide general information to clients, friends, and affiliates. The contents of ELLUMINATION are not to be taken as individual investment advice. No investment decisions should be made based on the opinions or information offered in ELLUMINATION.

5TQ CAPITAL, LLC does not represent that the information in ELLUMINATION is accurate or complete and it should not be relied upon as such. Opinions expressed herein are subject to change or modification without notice.

The investment portfolio models or management services mentioned in ELLUMINATION may or may not be available in some states, and they may not be suitable for all types of investors.

5TQ CAPITAL, LLC manages accounts with various histories and investment objectives. Various accounts may be managed differently from time to time.

On July 1, 2016 Govinda Quish took over as Chief Investment Officer of 5TQ Capital, LLC.  Quish and Krsek are currently collaborating, along with the other members of the Investment Policy Committee on investment strategy and portfolio construction.

Not all accounts managed by 5TQ CAPITAL, LLC are "modeled" accounts. We strongly urge our clients to understand which model or strategy, if any, are being used to manage their accounts.

From time to time 5TQ CAPITAL, LLC receives requests from clients to purchase securities that are not included in the model portfolios or strategies to which they are assigned. Effective May 24, 2006, 5TQ CAPITAL, LLC has encouraged clients to hold such securities in a separate account for the client. Because 5TQ CAPITAL, LLC is a "fee only" registered investment advisor" it charges its normal management fee for monitoring such securities in the separate accounts in which they are held.

5TQ CAPITAL, LLC makes every effort to exclude securities that are 'requested by the client' from the modeled portfolio accounts.

The investment objectives of various accounts and models may be substantially different from one another. Therefore topics or investments mentioned in E-Ellumination may or may not apply to specific managed accounts and/or models.

Trades or adjustments to accounts mentioned in ELLUMINATION may or may not happen in every account managed by portfolio managers at 5TQ CAPITAL, LLC.

If you are not satisfied with the investment results in your account it is your responsibility to inform Krsek or Quish to discuss possible changes that can be made to the account to accommodate and satisfy your needs.

The assets held in managed accounts at 5TQ CAPITAL, LLC may include stocks, bonds, cash, commodities, foreign exchange, mutual funds, exchange traded funds (ETF's), money market accounts or limited partnership interests that represent the same. They are subject to market fluctuation and the potential for losses. The assets are not insured. The value and income produced by these investment products may fluctuate, so that an investor may get back less than they initially invested.

The portfolio managers at 5TQ CAPITAL, LLC do not guarantee results.

Past performance should not be considered an indicator of potential future performance. If you do not consider yourself suitable, either emotionally or financially, to experience volatility and/or losses in financial markets, you should not invest.

From time to time the authors of Ellumination list the simple annual returns of model accounts mentioned in this newsletter. These accounts are "models" and do not represent the actual results accruing to individual accounts. Simple annual return does not represent "time weighted return" as reported individually to clients. 5TQ CAPITAL, LLC, LLC no longer provides composite performance reporting for "model" groups. Individual clients should request performance reporting on their specific accounts. 5T uses Orion Advisors to prepare those reports.

This document is for information purposes only and it should not be regarded as an offer to sell or as a solicitation of an offer to buy any securities or other instruments mentioned in it.

Comment

Comment

5TQ Capital Fourth Quarter Update for our 2016 Investment Themes

As we are now in the final quarter of 2016 we thought it would be helpful to revisit the investment themes we outlined at the start of the year. We began 2016 focusing our investment strategy on three main themes:

  • Increasing global equity market volatility will lead to lower returns and greater investment risk than we have seen in recent years.
  • The probability of currently unknown events shaping market behavior is high due to over extended financial markets and geopolitical uncertainties.
  • Divergent monetary policy combined with historically unprecedented Central Bank market intervention could lead to a liquidity crisis in the bond market.

We will briefly update you on each of these themes.

Greater equity market volatility, increasing risk, and decreasing return on investment.

The below chart shows that over the last twenty two months ending today an investor in the S&P 500 would have endured two drawdowns of over 12% while making no money.

The following points illustrate the underlying vulnerability of US equity prices as we approach the ninth year of a bull market.

  • The 12 month forward looking Price to Earnings Ratio (P/E) for the S&P 500 is 17. That is well above the 5 year average of 14.7 and the 10 year average of 14.3.
  • The ratio of total market capitalization for U.S. stocks vs U.S. Gross Domestic Product (GDP) is 122.4%. The only time it has been higher was just before the Dot.com stock market bust in the year 2000.
  • The Shiller P/E for the S&P 500 is currently 27.2. That is a higher value than September 2007, just before U.S. stocks started to roll over. A value of 27.2 has been exceeded only twice. Once was at the peak of the market in 1929. The other time was at the peak of the market in 2000.
  • The "Q Ratio" is a measure of market valuation which is the total price of the stock market divided by the replacement cost of all of its companies. It has exceeded a value of 1.06 only 5 times between 1900 and today. Shortly after all 5 instances a significant correction took place. Recently the Q Ratio reached 1.10.

Do we think the above points are fatalistic indications that we are on the edge of a financial crisis on par with 2000 and 2008? No, it does not!

We must also ask ourselves, since the financial crisis of 2008 has the US economy experienced enough growth to justify a return to record high equity prices and the second longest bull market in US history? No, they are not!

These conditions reinforce our conviction that equity markets will continue on their path toward lower returns, higher volatility, and greater investment risk over the course of the next 12 to 24 months.

The probability of currently unknown events shaping market behavior is high due to over extended markets and geopolitical uncertainties.

Overall, what has transpired this year on the geopolitical front has far exceeded our expectations.

When we began focusing on this theme in mid-2015 our assessment was that geopolitical instability has two potential flashpoints:
 
1) The still fragile economic recovery of the European Union combined with the intense political infighting resulting from the refugee crisis created by the war in Syria. It is the worst refugee crisis faced by any nation or region since the end of the Second World War.

As you see in the graphic above, the UK has taken in the second smallest amount of refugees; second only to Switzerland. While Germany has been by far the most accommodating of the European nations. Keep in mind that the primary reason UK citizens who voted in favor of BREXIT said they did so in order to help curb the feeling of being overrun by refugees flowing into the UK from the Middle East and Eastern European countries.
 
The UK vote to exit the EU was as much a surprise to us as it was to the rest of the world. Before the vote, the global financial community made it clear that a vote in favor of the UK leaving the EU was a vote for what would inevitably be a financial meltdown in the UK and across the region.

Why then has the economic and financial impact of BREXIT been so mild?

  • Since BREXIT the Bank of England (BOE) has cut short-term UK interest rates in half and announced several other measures to help pour cash into the British economy.
  • The European Central Bank (ECB) with already negative interest rates has pledged to push rates farther into negative territory.
  • The Bank of Japan (BOJ) is not only stimulating their economy through negative interest rates, they are actually buying stocks in the open market. The BOJ is now a top 10 shareholder in 90% of the companies listed on the Nikkei 225 Stock Average.
  • After stating they would raise rates four times in 2016 the Federal Reserve went silent. The market now puts 70% likelihood on the Fed raising rates 0.25% in December. If that occurs it will be the first raise since December 2015.

The bottom line is, after BREXIT the BOE, ECB, and BOJ actively began pumping capital into their economies while the Fed backed away from all hawkish policy statements. As a result of this systematic suppression of volatility, global markets steadied as investors around the world concluded that "central banks have our back".

2) Potential meltdown in China. The combination of rapidly declining growth, skyrocketing debt as a percentage of GDP, and growing excess in industrial capacity all point to the potential for greater instability in the world's second largest economy.

At the beginning of the year our "base case scenario" was that China would continue with a moderate level of growth in the 6% range. The Chinese government is currently estimating 2016 Q4 GDP growth to be 6.4%. This is well below historic average, yet still remarkable considering China is the world's second largest economy.

As we move forward into 2017 we continue to assess the potential risk created by the increased financial linkage between the US, China, UK, EU, and Japan. The historically unprecedented monetary intervention by central banks as a reaction to the crisis of 2008 has introduced a level of risk that was not present before the crisis. The potential for a meltdown in the Chinese financial system continues to be a risk that we monitor closely.

However, we must also remember that China's capital account is heavily controlled, the government has strong influence on both sides of the balance sheet, and it remains a current account surplus economy with more than sufficient foreign reserves to avoid a balance of payment crisis. This doesn't mean things will get better soon, but it does mean the economic dysfunction can probably grind on much longer than we expect.

Elephant in the Room... what we did not know, we did not know.

After weeks of relatively calm expectations for a status quo U.S. election result putting a Democrat in the White House and mostly Republicans in Congress, investors worldwide are panicking about the possibility of a Donald Trump win on November 8th and the unknown impact this would have on the global financial markets.

In the last 6 days Donald Trump has closed the gap in the polls between himself and rivalHillary Clinton following a surge of support, apparently from independent voters. The following is an average of all national polls. Six day ago this average showed Clinton leading by a margin of +6.8 well above the margin of error. Today, she is leading by +1.3 which is well below the margin of error.

Since the Federal Bureau of Investigation dealt a blow to Hillary Clinton by reigniting controversy over her emails, safe haven assets are rising and riskier assets are falling.

The above is less dramatic than what analysts have said will happen if Donald Trump wins the election or the Democrats sweep the House. Most market analysts predict US market reaction will involve a drop of 9% to 16% in equity prices, while some predict much more. Since October 28th, the day the FBI announced the reopening of the Clinton email investigation the S&P 500 is down 2.58%.

In a report published this week, JPMorgan Chase & Co. raised a third possible surprise outcome, which could produce an even more negative market reaction. The title of the report said it all: "I demand a recount."

At this point the only thing we know for sure is that regardless of the outcome of November 8th the aftermath of this US election cycle will most likely continue to create uncertainty for the foreseeable future. What we also know is that markets tend to have a strong aversion to uncertainty.

Divergent monetary policy combined with historically unprecedented Central Bank market intervention could lead to a crisis in the global bond market.

Divergent Monitory Policy is a key theme influencing our macro view of the economic and market outlook for the coming years. For several decades, the willingness of both lenders and borrowers to embrace credit was a lubricant for economic growth and rising asset prices and, importantly, underpinned the effectiveness of monetary policy. During times of economic and/or financial stress, it was relatively easy for the Fed and other central banks to improve the situation by engineering a new credit upcycle. That all ended with the 2007-09 meltdown. Since then, even zero policy rates have been unable to trigger a strong revival in credit growth in the major developed economies.

In an attempt to engineer a new credit upcycle, fueled by ultra-low interest rates US companies have issued approximately $937 billion in new corporate bonds from January 2016 through July 2016. They are on track to far exceed over $1 trillion of new issuance this year, just as they did in 2015.

Much of that money is finding its way directly into the stock market in the form of share buyback plans. The biggest buyers of the U.S. stock market in 2016 are the companies that make up the market.

According to the Securities Industry and Financial Markets Association (SIFMA) total outstanding U.S. corporate debt was approximately $4.6 Trillion at the end of 2005. As of the end of Q1 2016 it was approximately $8.4 Trillion.

In an attempt to engineer a new credit upcycle central banks have created an environment that rewards excessive credit creation on an unprecedented scale. As long as ultra-low or negative interest rates are maintained, asset prices will remain over valued on a fundamental basis.

This model of growth can only be maintained while there is little to no inflationary pressure in the economic system. Our fear is that the Fed reactionary function will be too little too late, setting in motion a dynamic in which interest rates will be forces higher much faster that the market anticipates. The outcome of this dynamic could potentially trigger a liquidity crisis in the bond market. With low credibility and lacking monetary firepower the Fed will have few recourses to stem contagion into other markets and recalibrate the US economy.

The following chart illustrates the intensity with which bond yields are currently reacting to the slightest increase in inflation.

Again, do we think the above points are fatalistic indications that we are on the edge of a financial crisis on par with 2000 and 2008? No, they are not!

These conditions reinforce our conviction that the bond market currently holds much more risk than it does upside potential. We do not know if the Fed and other central banks will be successful in their attempt to engineering a new credit upcycle. We are eight years from the start of this experiment and the outcome is not looking so good to us.

In conclusion

We cannot say for certain whether higher volatility will last through November and December. They are normally pretty good months for stock market gains. That did not hold true in 2015, but it is true in most years. As well, this is a presidential election year and normally the election is not a big factor in the movement of stock prices. However, this year could be very different. There will likely be more surprises to come in the week ahead.

In the meantime our investment strategies are positioned defensively. Twelve months have passed since we set out the above investment themes and our portfolios are well positioned for the current environment.

Clearly markets can keep rising even when they are overvalued. That is exactly what happened from 1997-2000. It took three years before the market finally corrected meaningfully. It is also clear that central banks will continue to do everything in their power to suppress market volatility by keeping interest rates low and/or negative for as long as they can.

We cannot time the next major market correction. It is our job to be prudent and not get over committed to a highly priced market. We have always believed in preserving our capital first. We have always believed in buying assets at a discount, not when they are overvalued.

We believe that current market conditions dictate that we focus on capital preservation, while we wait for better days to be aggressive buyers of stocks and bonds. We are quite certain they will be on sale again one day. Today is simply not that day.

All the best,
5TQ Capital

GOVINDA QUISH, PAUL KRSEK, JEFF ROUSH, 
THE INVESTMENT POLICY COMMITTEE 
5TQ CAPITAL, LLC
595 Coombs Street, Napa, Ca, 94559
(707) 224-1340 Main
 
www.5TQCapital.com


Disclosure and Disclaimer - Updated last on July 17, 2016, 2016 by Paul Krsek:
ELLUMINATION is the proprietary newsletter written for clients, friends, and affiliates of 5TQ CAPITAL, LLC .

FROM JUNE 1998 to January 1, 2016 Paul Krsek was the sole author of ELLUMINATION. While the views and representations found in the newsletter generally reflect the attitudes and opinions of the 5TQ CAPITAL, LLC members and staff, Krsek wrote without editing was therefore is solely responsible for the content and opinions contained in ELLUMINATION.

AS OF JANUARY 2016 ELLUMINATION IS NOW A COLLABORATIVE EFFORT OF THE INVESTMENT POLICY COMMITTEE OF 5TQ CAPITAL, LLC. THAT COMMITTEE IS CURRENTLY COMPRISED OF GOVINDA QUISH, PAUL KRSEK, JEFFREY ROUSH AND PHILLIP LAMPE.

ELLUMINATION does not represent the opinions of Fidelity, Fidelity Institutional Brokerage Group, NFS or anyone employed by Fidelity in any capacity. Neither Fidelity, Fidelity Institutional Brokerage Group, nor NFS, nor anyone employed by Fidelity in any capacity has participated in the creation of ELLUMINATION and they are not responsible for the contents or distribution of ELLUMINATION.

ELLUMINATION is written to provide general information to clients, friends, and affiliates. The contents of ELLUMINATION are not to be taken as individual investment advice. No investment decisions should be made based on the opinions or information offered in ELLUMINATION.

5TQ CAPITAL, LLC does not represent that the information in ELLUMINATION is accurate or complete and it should not be relied upon as such. Opinions expressed herein are subject to change or modification without notice.

The investment portfolio models or management services mentioned in ELLUMINATION may or may not be available in some states, and they may not be suitable for all types of investors.

5TQ CAPITAL, LLC manages accounts with various histories and investment objectives. Various accounts may be managed differently from time to time.

On July 1, 2016 Govinda Quish took over as Chief Investment Officer of 5TQ Capital, LLC.  Quish and Krsek are currently collaborating, along with the other members of the Investment Policy Committee on investment strategy and portfolio construction.

Not all accounts managed by 5TQ CAPITAL, LLC are "modeled" accounts. We strongly urge our clients to understand which model or strategy, if any, are being used to manage their accounts.

From time to time 5TQ CAPITAL, LLC receives requests from clients to purchase securities that are not included in the model portfolios or strategies to which they are assigned. Effective May 24, 2006, 5TQ CAPITAL, LLC has encouraged clients to hold such securities in a separate account for the client. Because 5TQ CAPITAL, LLC is a "fee only" registered investment advisor" it charges its normal management fee for monitoring such securities in the separate accounts in which they are held.

5TQ CAPITAL, LLC makes every effort to exclude securities that are 'requested by the client' from the modeled portfolio accounts.

The investment objectives of various accounts and models may be substantially different from one another. Therefore topics or investments mentioned in E-Ellumination may or may not apply to specific managed accounts and/or models.

Trades or adjustments to accounts mentioned in ELLUMINATION may or may not happen in every account managed by portfolio managers at 5TQ CAPITAL, LLC.

If you are not satisfied with the investment results in your account it is your responsibility to inform Krsek or Quish to discuss possible changes that can be made to the account to accommodate and satisfy your needs.

The assets held in managed accounts at 5TQ CAPITAL, LLC may include stocks, bonds, cash, commodities, foreign exchange, mutual funds, exchange traded funds (ETF's), money market accounts or limited partnership interests that represent the same. They are subject to market fluctuation and the potential for losses. The assets are not insured. The value and income produced by these investment products may fluctuate, so that an investor may get back less than they initially invested.

The portfolio managers at 5TQ CAPITAL, LLC do not guarantee results.

Past performance should not be considered an indicator of potential future performance. If you do not consider yourself suitable, either emotionally or financially, to experience volatility and/or losses in financial markets, you should not invest.

From time to time the authors of Ellumination list the simple annual returns of model accounts mentioned in this newsletter. These accounts are "models" and do not represent the actual results accruing to individual accounts. Simple annual return does not represent "time weighted return" as reported individually to clients. 5TQ CAPITAL, LLC, LLC no longer provides composite performance reporting for "model" groups. Individual clients should request performance reporting on their specific accounts. 5T uses Orion Advisors to prepare those reports.

This document is for information purposes only and it should not be regarded as an offer to sell or as a solicitation of an offer to buy any securities or other instruments mentioned in it.

Comment

Comment

5T Wealth Management, LLC is now 5TQ Capital, LLC

Many of you are already aware of this news, but we are excited to announce that as of July 1st, 2016, 5T Wealth Management, LLC officially became 5TQ Capital, LLC.

Paul and Meghan Krsek and the entire team have consistently sought to improve our services, investment strategies and ultimately act as your most ardent wealth guardians in seeking to meet and surpass all your goals.

This name change is accompanied with the addition of three Partners, whom many of you have already met, or will meet soon.   Paul and Meghan Krsek are now complemented with Govinda Quish, Jeffrey Roush and Hien Scozzafava, as new Partners.

Together, we all endeavor to build upon and enhance 5TQ Capital's long standing wealth management capabilities.

Our required regulatory Brochure and Supplements are provided below to you if you care to review them.  We thank you for your continued patronage and welcome any inquiries regarding this wonderful news.

Our Office Information remains the same:
 
595 Coombs Street
Napa, CA 94559
Phone: (707) 224-1340
Fax: (707) 224-2521
Hours: M-F, 8:30am - 5:00pm
 
Our 5TQ Team:
Paul Krsek, Chief Executive Officer
Paul@5TQcapital.com
 
Jeffrey Roush, Chief Operating Officer & Chief Compliance Officer
Jeff@5TQcapital.com
 
Govinda Quish, Chief Investment Officer
GQ@5TQcapital.com
 
Phillip Lampé, Analyst
Phillip@5TQcapital.com
 
Meghan Krsek, Chief Financial Officer
Meghan@5TQcapital.com
 
Pamela Maloney, Family Office Accounting
Pam@5TQcapital.com
 
Hien Scozzafava, Family Office & Sr. Client Services Representative
Hien@5TQcapital.com
 
Jessica Sartain, Operations & Client Services Representative
Jessica@5TQcapital.com
 
Please click here, to view our updated Brochure and Supplements
(ADV Part 2) listing all 5TQ Capital LLC updates in full.

Thank you, 
All the 5TQ Capital Partners

5TQ CAPITAL, LLC
595 Coombs Street, Napa, Ca 94559
(707) 603-2672 Office
(707) 486-7333 Cell

Paul@5TWealth.com

www.5TQCapital.com


Disclosure and Disclaimer - Updated last on July 17, 2016, 2016 by Paul Krsek:
ELLUMINATION is the proprietary newsletter written for clients, friends, and affiliates of 5TQ CAPITAL, LLC .

FROM JUNE 1998 to January 1, 2016 Paul Krsek was the sole author of ELLUMINATION. While the views and representations found in the newsletter generally reflect the attitudes and opinions of the 5TQ CAPITAL, LLC members and staff, Krsek wrote without editing was therefore is solely responsible for the content and opinions contained in ELLUMINATION.

AS OF JANUARY 2016 ELLUMINATION IS NOW A COLLABORATIVE EFFORT OF THE INVESTMENT POLICY COMMITTEE OF 5TQ CAPITAL, LLC, LLC. THAT COMMITTEE IS CURRENTLY COMPRISED OF GOVINDA QUISH, PAUL KRSEK, JEFFREY ROUSH AND PHILLIP LAMPE.

ELLUMINATION does not represent the opinions of Fidelity, Fidelity Institutional Brokerage Group, NFS or anyone employed by Fidelity in any capacity. Neither Fidelity, Fidelity Institutional Brokerage Group, nor NFS, nor anyone employed by Fidelity in any capacity has participated in the creation of ELLUMINATION and they are not responsible for the contents or distribution of ELLUMINATION.

ELLUMINATION is written to provide general information to clients, friends, and affiliates. The contents of ELLUMINATION are not to be taken as individual investment advice. No investment decisions should be made based on the opinions or information offered in ELLUMINATION.

5TQ CAPITAL, LLC does not represent that the information in ELLUMINATION is accurate or complete and it should not be relied upon as such. Opinions expressed herein are subject to change or modification without notice.

The investment portfolio models or management services mentioned in ELLUMINATION may or may not be available in some states, and they may not be suitable for all types of investors.

5TQ CAPITAL, LLC manages accounts with various histories and investment objectives. Various accounts may be managed differently from time to time.

On July 1, 2016 Govinda Quish took over as Chief Investment Officer of 5TQ Capital, LLC.  Quish and Krsek are currently collaborating, along with the other members of the Investment Policy Committee on investment strategy and portfolio construction.

Not all accounts managed by 5TQ CAPITAL, LLC are "modeled" accounts. We strongly urge our clients to understand which model or strategy, if any, are being used to manage their accounts.

From time to time 5TQ CAPITAL, LLC receives requests from clients to purchase securities that are not included in the model portfolios or strategies to which they are assigned. Effective May 24, 2006, 5TQ CAPITAL, LLC has encouraged clients to hold such securities in a separate account for the client. Because 5TQ CAPITAL, LLC is a "fee only" registered investment advisor" it charges its normal management fee for monitoring such securities in the separate accounts in which they are held.

5TQ CAPITAL, LLC makes every effort to exclude securities that are 'requested by the client' from the modeled portfolio accounts.

The investment objectives of various accounts and models may be substantially different from one another. Therefore topics or investments mentioned in E-Ellumination may or may not apply to specific managed accounts and/or models.

Trades or adjustments to accounts mentioned in ELLUMINATION may or may not happen in every account managed by portfolio managers at 5TQ CAPITAL, LLC.

If you are not satisfied with the investment results in your account it is your responsibility to inform Krsek or Quish to discuss possible changes that can be made to the account to accommodate and satisfy your needs.

The assets held in managed accounts at 5TQ CAPITAL, LLC may include stocks, bonds, cash, commodities, foreign exchange, mutual funds, exchange traded funds (ETF's), money market accounts or limited partnership interests that represent the same. They are subject to market fluctuation and the potential for losses. The assets are not insured. The value and income produced by these investment products may fluctuate, so that an investor may get back less than they initially invested.

The portfolio managers at 5TQ CAPITAL, LLC do not guarantee results.

Past performance should not be considered an indicator of potential future performance. If you do not consider yourself suitable, either emotionally or financially, to experience volatility and/or losses in financial markets, you should not invest.

From time to time the authors of Ellumination list the simple annual returns of model accounts mentioned in this newsletter. These accounts are "models" and do not represent the actual results accruing to individual accounts. Simple annual return does not represent "time weighted return" as reported individually to clients. 5TQ CAPITAL, LLC, LLC no longer provides composite performance reporting for "model" groups. Individual clients should request performance reporting on their specific accounts. 5T uses Orion Advisors to prepare those reports.

This document is for information purposes only and it should not be regarded as an offer to sell or as a solicitation of an offer to buy any securities or other instruments mentioned in it.

Comment

Comment

Things that make us ask "What the Heck?"

As the stock market closed last week we were left rubbing our chins and asking ourselves, "What the Heck" as markets continue to move effortlessly to new highs.

We are starting to sense another bubble in U.S. stocks, but like many bubbles, this one may grow significantly larger before it pops.

In the meantime here are some of the things that make us ask "What the heck?"

The 12 month forward earning Price to Earnings ratio (P/E) for the S&P 500 is 17. That is well above the 5 year average of 14.7 and the 10 year average of 14.3.

The ratio of total market capitalization for U.S. stocks vs U.S. Gross Domestic Product (GDP) is 122.4%. The only time it has been higher was just before the Dot.com stock market bust in the year 2000.

The Shiller P/E for the S&P 500 is 27.2. That is a higher value than September 2007, just before U.S. stocks started to roll over. A value of 27.2 has been exceeded only twice. Once was at the peak of the market in 1929. The other time was at the peak of the market in 2000.

The "Q Ratio" is a measure of market valuation which is the total price of the stock market divided by the replacement cost of all of its companies. It has exceeded a value of 1.06 only 5 times from 1900 to present day. Shortly after each previous time a significant correction took place. It was recently at 1.10.

On April 14, 2016 Bank of America Merrill Lynch reported that going back to 1964 the S&P 500's total market capitalization has averaged 57% of annual US GDP. If the "tech bubble" years are excluded the number falls to 53%. As of the end of March 2016 the ratio was 99%. That is more than 70% above the historic average level--and the market has gone up more since then!

U.S. stocks are clearly back in the stratosphere as far as we are concerned. But it is quite possible that they will continue to move higher for the foreseeable future.

In fact from a purely technical perspective that is the odds on case.

One question we keep asking ourselves is why there is such a "bull market" in complacency about the stock market? No one seems overly concerned about these extreme valuations. But then, few seemed concerned in 2000 or 2007 either.

Conditions are very different now and we are not predicting collapses of the magnitude that happened back then. Yet we are quite concerned that valuations are very stretched.

The "VIX" is an index that measures stock market volatility. When the VIX is high that means volatility in the market is high. When it is low that means that volatility in the market is low.

Since 1990 the "VIX" has oscillated between a low of 9.31 in late 1993 and a high of 89.53 as the market was falling apart in 2008. It closed Friday at 11.26. That is not far from the all time low in 1993.

The answer to why there is a "bull market" in complacency is in plain sight. Central banks around the world seem to be working in unison again. Monetary policy is easy everywhere. Most central banks are still adding multiple stimulus packages to their national economies.

The U.S. Fed had diverged from the others in late 2015 by raising interest rates for the first time in eight years.  They were threatening up to four more increases in 2016.

It now appears that they may raise once in 2016, if at all. They have really backed off their more hawkish stance and are among the "doves" again, or so it seems.

Since "BREXIT" the Bank of England (BOE) and the European Central Bank have both gotten more dovish. Short term interest rates in Britain have been cut in half and the BOE announced several other measures to stimulate and shore up the British economy.

The Bank of Japan (BOJ) is not only stimulating their economy through negative interest rates and other forms of easy monetary policy. They are actually buying stocks in the open market.

Bloomberg reports that the BOJ is now a top 10 shareholder in about 90% of the companies listed on the Nikkei 225 Stock Average. That makes the BOJ a bigger shareholder than the likes of BlackRock, Inc. or Vanguard.

Bloomberg also recently reported that US companies have issued approximately $937 Billion in new corporate bonds from January 2016 through July 2016. They are on track to far exceed over $1 Trillion of new issuance this year; just as they did in 2015.

Much of that money is finding its way directly into the stock market in the form of share buyback plans. The biggest buyers of the U.S. stock market in 2016 are the companies that make up the market!

According to the Securities Industry and Financial Markets Association (SIFMA) total outstanding U.S. corporate debt was approximately $4.6 Trillion at the end of 2005. As of the end of Q1 2016 it was approximately $8.4 Trillion. Does anyone else ask "What the Heck" when they see data like that?

The bottom line for U.S. and Japanese stocks is that the path of least resistance is upward. This is probably true of other markets as well, including Emerging Markets. They will suffer if the U.S. Dollar starts to appreciate significantly. But that is not likely to happen if U.S. interest rates stay lower for longer, which now appears more likely.

When 5TQ entered 2016 our base case for U.S. stocks was that they were likely to churn in a broad trading range and that volatility would increase significantly.

We believed that investors would benefit from betting on high volatility rather than making a directional bet on stocks actually going up or down.

We believed that monetary policy was about to diverge among the major central banks. The U.S. Fed was obviously signaling its intention to raise rates multiple times and stop quantitative easing (QE). All other central banks were still in full throttle QE. We expected that this divergence in policy would lead to increased volatility in U.S. stocks, and potentially around the world.

Divergent monetary policy went completely out the window with the surprising result of the "BREXIT" vote in Great Britain. Central banks are now all on deflation, recession watch again and ready to stimulate on a moments notice.

Stock markets are saying to themselves that "The Fed's got my back" and are ready to rise! That is happening everywhere that there is a really active central bank.

We believe that US stocks are now quite overvalued. We also suspect that they are about to get even more overvalued. We have lived and worked with these markets long enough to know that bubbles get bigger and bigger right up to the moment that they pop.

That moment is not likely at hand with all the current central bank stimulation and corporate bond activity. It is all simply supplying much more liquidity to drive markets higher.

But we have read this book before and we know how it ends. We intend to be ready.

All the best,

GOVINDA QUISH, PAUL KRSEK, JEFF ROUSH, 
THE INVESTMENT POLICY COMMITTEE
 
5TQ CAPITAL, LLC
595 Coombs Street, Napa, Ca, 94559
(707) 603-2672 Office
(707) 486-7333 Cell
Paul@5tqcapital.com
 
www.5TQCapital.com


Disclosure and Disclaimer - Updated last on July 17, 2016, 2016 by Paul Krsek:
ELLUMINATION is the proprietary newsletter written for clients, friends, and affiliates of 5TQ CAPITAL, LLC .

FROM JUNE 1998 to January 1, 2016 Paul Krsek was the sole author of ELLUMINATION. While the views and representations found in the newsletter generally reflect the attitudes and opinions of the 5TQ CAPITAL, LLC members and staff, Krsek wrote without editing was therefore is solely responsible for the content and opinions contained in ELLUMINATION.

AS OF JANUARY 2016 ELLUMINATION IS NOW A COLLABORATIVE EFFORT OF THE INVESTMENT POLICY COMMITTEE OF 5TQ CAPITAL, LLC, LLC. THAT COMMITTEE IS CURRENTLY COMPRISED OF GOVINDA QUISH, PAUL KRSEK, JEFFREY ROUSH AND PHILLIP LAMPE.

ELLUMINATION does not represent the opinions of Fidelity, Fidelity Institutional Brokerage Group, NFS or anyone employed by Fidelity in any capacity. Neither Fidelity, Fidelity Institutional Brokerage Group, nor NFS, nor anyone employed by Fidelity in any capacity has participated in the creation of ELLUMINATION and they are not responsible for the contents or distribution of ELLUMINATION.

ELLUMINATION is written to provide general information to clients, friends, and affiliates. The contents of ELLUMINATION are not to be taken as individual investment advice. No investment decisions should be made based on the opinions or information offered in ELLUMINATION.

5TQ CAPITAL, LLC does not represent that the information in ELLUMINATION is accurate or complete and it should not be relied upon as such. Opinions expressed herein are subject to change or modification without notice.

The investment portfolio models or management services mentioned in ELLUMINATION may or may not be available in some states, and they may not be suitable for all types of investors.

5TQ CAPITAL, LLC manages accounts with various histories and investment objectives. Various accounts may be managed differently from time to time.

On July 1, 2016 Govinda Quish took over as Chief Investment Officer of 5TQ Capital, LLC.  Quish and Krsek are currently collaborating, along with the other members of the Investment Policy Committee on investment strategy and portfolio construction.

Not all accounts managed by 5TQ CAPITAL, LLC are "modeled" accounts. We strongly urge our clients to understand which model or strategy, if any, are being used to manage their accounts.

From time to time 5TQ CAPITAL, LLC receives requests from clients to purchase securities that are not included in the model portfolios or strategies to which they are assigned. Effective May 24, 2006, 5TQ CAPITAL, LLC has encouraged clients to hold such securities in a separate account for the client. Because 5TQ CAPITAL, LLC is a "fee only" registered investment advisor" it charges its normal management fee for monitoring such securities in the separate accounts in which they are held.

5TQ CAPITAL, LLC makes every effort to exclude securities that are 'requested by the client' from the modeled portfolio accounts.

The investment objectives of various accounts and models may be substantially different from one another. Therefore topics or investments mentioned in E-Ellumination may or may not apply to specific managed accounts and/or models.

Trades or adjustments to accounts mentioned in ELLUMINATION may or may not happen in every account managed by portfolio managers at 5TQ CAPITAL, LLC.

If you are not satisfied with the investment results in your account it is your responsibility to inform Krsek or Quish to discuss possible changes that can be made to the account to accommodate and satisfy your needs.

The assets held in managed accounts at 5TQ CAPITAL, LLC may include stocks, bonds, cash, commodities, foreign exchange, mutual funds, exchange traded funds (ETF's), money market accounts or limited partnership interests that represent the same. They are subject to market fluctuation and the potential for losses. The assets are not insured. The value and income produced by these investment products may fluctuate, so that an investor may get back less than they initially invested.

The portfolio managers at 5TQ CAPITAL, LLC do not guarantee results.

Past performance should not be considered an indicator of potential future performance. If you do not consider yourself suitable, either emotionally or financially, to experience volatility and/or losses in financial markets, you should not invest.

From time to time the authors of Ellumination list the simple annual returns of model accounts mentioned in this newsletter. These accounts are "models" and do not represent the actual results accruing to individual accounts. Simple annual return does not represent "time weighted return" as reported individually to clients. 5TQ CAPITAL, LLC, LLC no longer provides composite performance reporting for "model" groups. Individual clients should request performance reporting on their specific accounts. 5T uses Orion Advisors to prepare those reports.

This document is for information purposes only and it should not be regarded as an offer to sell or as a solicitation of an offer to buy any securities or other instruments mentioned in it.

Comment

Comment

BREXIT Shakes up the markets. Our first reaction.

As you may now know the United Kingdom (UK) held a referendum of the people last Thursday to decide whether or not the United Kingdom should stay in or leave the European Union (EU). The people voted to leave the EU by a margin of 51.9% for Leave to 48.1% for Stay. Great Britain will be exiting the EU (BREXIT!)

It was widely predicted that the UK would vote to stay in the EU and as such this vote has caught financial markets completely by surprise. The immediate reaction, in all financial markets, was pure shock on Friday.

The U.S. stock market suffered its worst drop in 10 months. Equity markets around the world retreated. The most pain was felt in European markets. Interest rates around the world moved lower. The 10 year U.S. Treasury yield dropped to 1.57%, near a record low. The 10 year German Bund yield dropped to a negative -.05%.

Gold, on the other hand, moved to a 2016 high price of $1319 per ounce as investors fled other assets.

Great Britain's Prime Minister, David Cameron, resigned as a result of the stunning defeat of his campaign to stay in the EU. This brought more anxiety to markets.

Amid swirling uncertainty over the impact of BREXIT, the Dow Jones industrial average tumbled 611 points, or 3.4%, to close at 17,400. The Standard & Poor's 500 fell 3.6%. The losses dropped both stock measures back into negative territory for 2016. The Nasdaq composite, which already had been in the red for the year, fell 4.1%. The drop erased roughly $800 billion in U.S. market value, as measured by the Wilshire 5000 index.

The British pound sterling dropped 10% to a 31 ­year low, and the euro fell by 3.8%. The yen surged, briefly trading below 100 yen to the dollar for the first time since November 2013. In short, June 24th 2016 will go down as one of the more painful days in the history of financial markets.

As a client of 5T you might be asking yourself, how did this impact my investment portfolio?

As part of our ongoing commitment to safeguard and grow our client's assets we began the process of orienting our portfolios to be long volatility, market neutral, and to mitigate risk from government and central bank policy intervention during the second half of 2015 and into 2016.

This simply means we are attempting to limit downside risk and hopefully position portfolios to make money regardless of volatile movement in the markets.

In our Q1-2016 newsletter we outlined our view that both equity and fixed income markets, around the world, were likely to experience increasing volatility in 2016.

In the aftermath of the vote to leave the EU global financial markets experienced their most volatile day of the year. It was a true test of our investment philosophy and we are happy to say that we believe that we performed well across all portfolios and strategies.

We continue to manage a variety of investment strategies, each of which can produce differing results at different inflection points in markets.

All of them have been holding substantial cash balances in anticipation of significant market dislocations that could create interesting buying opportunities.

Some of them are structured as very tactical strategies that can potentially profit from high volatility.

We look forward to reviewing this with you in your next meeting to make sure that you completely understand your portfolio.
 
We believe that markets will remain volatile and uncertain for the foreseeable future. While that may be true there will also be great opportunities for astute investors.

All the best,

GOVINDA QUISH, PAUL KRSEK, AND JEFF ROUSH

THE INVESTMENT POLICY COMMITTEE
5T Wealth Management, LLC
(707) 603-2672 Office
(707) 486-7333 Cell

Paul@5TWealth.com  

UPDATED LAST ON MAY 18, 2016 BY PAUL KRSEK:

ELLUMINATION is the proprietary newsletter written for clients, friends, and affiliates of 5T WEALTH MANAGEMENT.

SINCE 1998 Paul Krsek HAS BEEN the sole author of ELLUMINATION. While the views and representations found in the newsletter generally reflect the attitudes and opinions of the 5T WEALTH MANAGEMENT members and staff, Krsek wrote without editing was therefore is solely responsible for the content and opinions contained in ELLUMINATION.

AS OF JANUARY 2016 ELLUMINATION IS NOW A COLLABORATIVE EFFORT OF THE INVESTMENT POLICY COMMITTEE OF 5T WEALTH MANAGEMENT, LLC. THAT COMMITTEE IS CURRENTLY COMPRISED OF GOVINDA QUISH, PAUL KRSEK, JEFFREY ROUSH AND PHILLIP LAMPE.

ELLUMINATION does not represent the opinions of Fidelity, Fidelity Institutional Brokerage Group, NFS or anyone employed by Fidelity in any capacity. Neither Fidelity, Fidelity Institutional Brokerage Group, nor NFS, nor anyone employed by Fidelity in any capacity has participated in the creation of ELLUMINATION and they are not responsible for the contents or distribution of ELLUMINATION.

ELLUMINATION is written to provide general information to clients, friends, and affiliates. The contents of ELLUMINATION are not to be taken as individual investment advice. No investment decisions should be made based on the opinions or information offered in ELLUMINATION.

5T WEALTH MANAGEMENT does not represent that the information in ELLUMINATION is accurate or complete and it should not be relied upon as such. Opinions expressed herein are subject to change or modification without notice.

The investment portfolio models or management services mentioned in ELLUMINATION may or may not be available in some states, and they may not be suitable for all types of investors.

5T WEALTH MANAGEMENT manages accounts with various histories and investment objectives. Various accounts may be managed differently from time to time.

Paul Krsek is the acting CEO of 5T Wealth Management working with the investment committee in the establishment and selection of client portfolio strategies. Krsek may make reference to model portfolios and investment strategies including but not limited to Dividend Diamonds and Mendocino. Krsek is responsible for making all trading and management decisions for all client accounts being managed according to specific portfolio models and strategies. A description of the models and strategies can be obtained by contacting Paul Krsek at 5T Wealth Management’s Napa headquarters.

During 2016 Govinda Quish will take over as Chief Investment Officer. Krsek & Quish are currently collaborating, along with the other members of the Investment Policy Committee on strategy and portfolio construction.

Not all accounts managed by 5T WEALTH MANAGEMENT are "modeled" accounts. We strongly urge our clients to understand which model, if any, are being used to manage their accounts.

From time to time 5T WEALTH MANAGEMENT receives requests from clients to purchase securities that are not included in the model portfolio to which they are assigned. Effective May 24, 2006, 5T WEALTH MANAGEMENT has encouraged clients to hold such securities in a separate account for the client. Because 5T WEALTH MANAGEMENT is a "fee only" registered investment advisor" it charges its normal management fee for monitoring such securities in the separate accounts in which they are held.

5T WEALTH MANAGEMENT makes every effort to exclude securities that are 'requested by the client' from the modeled portfolio accounts.

The investment objectives of various accounts and models may be substantially different from one another. Therefore topics or investments mentioned in ELLUMINATION may or may not apply to specific managed accounts and/or models.

Trades or adjustments to accounts mentioned in ELLUMINATION may or may not happen in every account managed by portfolio managers at 5T WEALTH MANAGEMENT.

If you are not satisfied with the investment results in your account it is your responsibility to inform Krsek or Quish to discuss possible changes that can be made to the account to accommodate and satisfy your needs.

The assets held in managed accounts at 5T WEALTH MANAGEMENT may include stocks, bonds, cash, commodities, foreign exchange or mutual funds or exchange traded funds (ETF's), money market accounts or limited partnerships that represent the same. They are subject to market fluctuation and the potential for losses. The assets are not insured. The value and income produced by these investment products may fluctuate, so that an investor may get back less than they initially invested.

The portfolio managers at 5T WEALTH MANAGEMENT do not guarantee results.

Past performance should not be considered an indicator of potential future performance. If you do not consider yourself suitable, either emotionally or financially, to experience volatility and/or losses in financial markets, you should not invest.

Model accounts and strategy performance quoted in the ELLUMINATION Newsletter and elsewhere to clients do not represent actual results accruing to individual accounts.   Simple annual return does not represent “time weighted return” as reported individually to clients in their quarterly reports prepared using Orion and other performance report firms who are external service providers.  The reports provided via Orion and other providers are for informational purposes only and clients are urged to carefully review and compare it with the separately delivered custodian statement.   The information is based on pricing information provided by third party sources and is believed reliable, but its timeliness, accuracy and completeness are not guaranteed.

This document is for information purposes only and it should not be regarded as an offer to sell or as a solicitation of an offer to buy any securities or other instruments mentioned in it.

Comment

Comment

Stocks are on their way to nowhere. Big changes at 5T.

"Our base case is that 2016 is likely to be marked by a higher level of volatility and overall lower average market returns than we have seen in recent years."
Ellumination, January 7, 2016

It is now five months later and our base case is playing out so far, just as expected. Stocks, in particular, have remained volatile and in the end have gone no where so far this year.

Rarely does one chart tell the story of a market as well as this one. It is called "Fed Balance Sheet Driving Asset Prices". The RED line shows the growth of the Federal Reserve Bank's balance sheet from January 2008 through Q1 of 2016. The BLUE line shows the progress of the S&P 500 over the same period of time. It is clear that stocks have risen during the periods when the Fed is pumping liquidity into markets through their "Quantitative Easing" programs (QE).

It is also clear that as each program ended the market trended sideways or retreated while waiting for more easing from the Fed.

QE-1, QE-2, Operation Twist, and QE-3 are now clearly in our rear view mirror, but they drove this index from a low of 666 in March of 2009 to a high of 2134 in May 2015. Stocks have not been able to advance further for over a year now.

5T has made it clear that we expect the market to have trouble moving higher from current levels. We also expect increased volatility for the foreseeable future. That is not to say that we are expecting a major collapse for stocks. We simply see an era of potentially very modest returns coupled with higher volatility.

5T believes that U.S. and global stock prices would be much lower had there not been so much QE on a global scale. All major central banks have used QE to inflate asset prices.

We present a second chart that helps to confirm why stock prices are not likely to advance much farther in the absence of massive QE. This chart and commentary are from BreakPointtrades.com.

The time frame on the chart is different from the one above. It shows market progress since October 1, 2011. The S&P 500 has risen 83.44% since then, while earnings of the companies that make up this index have actually FALLEN.

This chart is simply showing us that the entire move up in the S&P 500, during this period, is from "multiple expansion". That means the index has risen only because buyers have been willing to pay higher and higher prices for the same amount of earnings. This is never a sustainable trend. Either earnings will have to rise or stock prices will need to come down to bring the "price to earnings" ratio of the market back in line with historic norms.
 
The Shiller Price/Earnings ratio (SPE) is currently 26.2. That is 57.5% above the historic SPE mean of 16.7. Gurufocus.com estimates that the probable return for the S&P 500 will be -.2% over the next twelve months, based on historic trends when the SPE at this level.
 
At the present time only Energy stocks and Financial stocks are priced at significant discounts to the overall market. Both sectors remain depressed for specific reasons.

Energy stocks are weighed down by uncertainty over the future of oil prices. 5T does not see significant upside for the price of oil over the next twelve months. On the other hand, supply/demand dynamics for natural gas seem to be changing in favor of rising prices over the next 12-24 months.
 
Financial stocks continue to feel the pinch of low interest rates. It is difficult for banks and insurers alike to expand profits in an environment where both short term and long term rates are near all time lows.
 
The Industrial sector is priced at a small discount to the overall market. However, within the sector there are some bargains to be had.
 
5T's believes that if investors own stocks (are long) in today's market it is important to be picking stocks, rather than indexing. The time to index is when ALL stocks are cheap.
 
5T also believes that it is the perfect time to diversify your portfolio away from being "long only" common stocks.
 
Owning a "long/short" strategy that can profit from moves that are either up or down makes sense to us.
 
Owning alternative assets that are not at all correlated to the price movement of stocks makes sense to us.
 
Three of our newest investment strategies are designed to provide alternatives to a "long only" stock portfolio. 
 
If we haven't already talked to you about these strategies, we will soon. We are intending to meet with every client we have to provide an overview of them as well as a more detailed overview of all current conditions in financial markets. We will also be discussing suitability for the new strategies with each client family during our meeting. 
 
5T believes that investors can make solid returns over the next 12-24 months, but those returns are probably not going to be derived from conventional strategies.

A 5T UPDATE

Two weeks ago we adopted an amended operating agreement for 5T Wealth Management, LLC which will become effective July 1, 2016. At that time Govinda Quish will officially become the fifth partner in 5T and will officially assume the title Chief Investment Strategist.

We will also be changing the name of our company to 5TQ Capital, LLC on July 1st.

Govinda has been acting as Chief Investment Strategist since January 1. It will become official on July 1. He has been hard at work designing strategies that should benefit all of 5T clients.

Hien Scozzafava was admitted as a partner in 5T as of the signing of the amended agreement.

Jeff Roush, Meghan Krsek and Paul Krsek are extremely pleased to welcome both Govinda and Hien into the partnership.

5T and Quish & Co. have decided not to merge. Mariah Quish will continue to run Quish & Co. in Boulder, Colorado, with no connection to or affiliation with 5T. We wish Mariah the very best and lots of success with her company.

We all look forward to seeing Govinda meet all of our clients.

Those of you who know Hien, and would like to congratulate her on partnership can reach her at hien@5twealth.com.

We look forward to see you soon.

Paul Krsek, Jeff Roush and Govinda Quish


GOVINDA, PAUL, JEFF & PHILLIP
THE INVESTMENT POLICY COMMITTEE

5T Wealth Management, LLC
(707) 603-2672 Office
(707) 486-7333 Cell

Paul@5TWealth.com  

UPDATED LAST ON MAY 18, 2016 BY PAUL KRSEK:

ELLUMINATION is the proprietary newsletter written for clients, friends, and affiliates of 5T WEALTH MANAGEMENT.

SINCE 1998 Paul Krsek HAS BEEN the sole author of ELLUMINATION. While the views and representations found in the newsletter generally reflect the attitudes and opinions of the 5T WEALTH MANAGEMENT members and staff, Krsek wrote without editing was therefore is solely responsible for the content and opinions contained in ELLUMINATION.

AS OF JANUARY 2016 ELLUMINATION IS NOW A COLLABORATIVE EFFORT OF THE INVESTMENT POLICY COMMITTEE OF 5T WEALTH MANAGEMENT, LLC. THAT COMMITTEE IS CURRENTLY COMPRISED OF GOVINDA QUISH, PAUL KRSEK, JEFFREY ROUSH AND PHILLIP LAMPE.

ELLUMINATION does not represent the opinions of Fidelity, Fidelity Institutional Brokerage Group, NFS or anyone employed by Fidelity in any capacity. Neither Fidelity, Fidelity Institutional Brokerage Group, nor NFS, nor anyone employed by Fidelity in any capacity has participated in the creation of ELLUMINATION and they are not responsible for the contents or distribution of ELLUMINATION.

ELLUMINATION is written to provide general information to clients, friends, and affiliates. The contents of ELLUMINATION are not to be taken as individual investment advice. No investment decisions should be made based on the opinions or information offered in ELLUMINATION.

5T WEALTH MANAGEMENT does not represent that the information in ELLUMINATION is accurate or complete and it should not be relied upon as such. Opinions expressed herein are subject to change or modification without notice.

The investment portfolio models or management services mentioned in ELLUMINATION may or may not be available in some states, and they may not be suitable for all types of investors.

5T WEALTH MANAGEMENT manages accounts with various histories and investment objectives. Various accounts may be managed differently from time to time.

Paul Krsek is the acting CEO of 5T Wealth Management working with the investment committee in the establishment and selection of client portfolio strategies. Krsek may make reference to model portfolios and investment strategies including but not limited to Dividend Diamonds and Mendocino. Krsek is responsible for making all trading and management decisions for all client accounts being managed according to specific portfolio models and strategies. A description of the models and strategies can be obtained by contacting Paul Krsek at 5T Wealth Management’s Napa headquarters.

During 2016 Govinda Quish will take over as Chief Investment Officer. Krsek & Quish are currently collaborating, along with the other members of the Investment Policy Committee on strategy and portfolio construction.

Not all accounts managed by 5T WEALTH MANAGEMENT are "modeled" accounts. We strongly urge our clients to understand which model, if any, are being used to manage their accounts.

From time to time 5T WEALTH MANAGEMENT receives requests from clients to purchase securities that are not included in the model portfolio to which they are assigned. Effective May 24, 2006, 5T WEALTH MANAGEMENT has encouraged clients to hold such securities in a separate account for the client. Because 5T WEALTH MANAGEMENT is a "fee only" registered investment advisor" it charges its normal management fee for monitoring such securities in the separate accounts in which they are held.

5T WEALTH MANAGEMENT makes every effort to exclude securities that are 'requested by the client' from the modeled portfolio accounts.

The investment objectives of various accounts and models may be substantially different from one another. Therefore topics or investments mentioned in ELLUMINATION may or may not apply to specific managed accounts and/or models.

Trades or adjustments to accounts mentioned in ELLUMINATION may or may not happen in every account managed by portfolio managers at 5T WEALTH MANAGEMENT.

If you are not satisfied with the investment results in your account it is your responsibility to inform Krsek or Quish to discuss possible changes that can be made to the account to accommodate and satisfy your needs.

The assets held in managed accounts at 5T WEALTH MANAGEMENT may include stocks, bonds, cash, commodities, foreign exchange or mutual funds or exchange traded funds (ETF's), money market accounts or limited partnerships that represent the same. They are subject to market fluctuation and the potential for losses. The assets are not insured. The value and income produced by these investment products may fluctuate, so that an investor may get back less than they initially invested.

The portfolio managers at 5T WEALTH MANAGEMENT do not guarantee results.

Past performance should not be considered an indicator of potential future performance. If you do not consider yourself suitable, either emotionally or financially, to experience volatility and/or losses in financial markets, you should not invest.

Model accounts and strategy performance quoted in the ELLUMINATION Newsletter and elsewhere to clients do not represent actual results accruing to individual accounts.   Simple annual return does not represent “time weighted return” as reported individually to clients in their quarterly reports prepared using Orion and other performance report firms who are external service providers.  The reports provided via Orion and other providers are for informational purposes only and clients are urged to carefully review and compare it with the separately delivered custodian statement.   The information is based on pricing information provided by third party sources and is believed reliable, but its timeliness, accuracy and completeness are not guaranteed.

This document is for information purposes only and it should not be regarded as an offer to sell or as a solicitation of an offer to buy any securities or other instruments mentioned in it.

Comment

1 Comment

The Markets, The Merger and Annual Reviews

MARKET RECAP

Do you believe the first calendar quarter of 2016 is almost complete? Since the year started we have experienced significant volatility in almost all asset classes. As we approach the end of Q1 we have verification of one of our key assumptions about this year.

"Our base case is that 2016 is likely to be marked by a higher level of volatility and overall lower average market returns than we have seen in recent years."
Ellumination, January 7, 2016

We have prepared a little table so that you can see just how volatile markets have been. The table lists many major global stock market averages, 10-year U.S Treasury Yields, U.S. aggregate bond index, oil, broad commodities, copper, natural gas, the U.S. Dollar, gold and agricultural commodities.

The first thing that jumps out at us is every one of these assets is well below its post-2009 peak value. You can see that in the "% Change from Peak" column.

The second thing that is notable is that most assets have experienced a significant correction during 2016, with the exceptions of the Barclay's U.S. Aggregate Bond Index and Gold. Most of the corrections in 2016 have been double digit moves.

The third thing to note is that many of the asset classes have corrected, rebounded and are now up year-to-date. Given all the headlines about falling oil prices, would you have guessed that West Texas Intermediate Crude Oil is actually up year-to-date?

The Brazilian economy is an absolute basket case. But Brazilian stocks are up 26.65%.

Did you know that the price of gold is up over 17% in 2016? It is still 35.34% below its all time high, but it has started to make a nice recovery from the bottom.

U.S., European, Chinese and Japanese stocks are down on the year. The one exception is the Dow Jones Transportation Average. It is down 11.13% from its all time high. But it is up 8.07% in 2016.

When the U.S. Federal Reserve Bank raised short term interest rates in December it was generally assumed that the Dollar would appreciate against many other major currencies. If you had actually bought dollars expecting appreciation you would have lost money year to date against a broad basket of currencies.  The U.S. Dollar Index is down in 2016.

Our partner, Jeff Roush, compares market moves like this to Mr. Toad's Wild Ride.

Frankly we aren't sure why Mr. Toad is smiling in this picture! Unlike Mr. Toad, we are certain our clients are not enjoying the markets wild ride!

We doubt very much that the volatility is over. Our investment policy committee met yesterday to review markets and strategies. We assign approximately 60% probability that U.S. and global equity markets will chop around all year finishing 2016 relatively unchanged. There could easily be individual markets or sectors that break that trend either way. But this is our base case for the broad equity market.

The fact that all asset classes in the table above are well below their post-2009 peak price leads us to suspect that many markets are in a long broad topping formation that will eventually lead to lower prices over the next 12-24 months.

We consider a break down in equity prices, following the pattern of this topping process, to be the second most likely outcome for U.S. equity markets. We place the odds at 20-25%.

The chart below is a look at the S&P 500 that shows you the broad topping formation that we are seeing in U.S equities. If this chart pattern actually plays out in text book fashion the Index could end 2016 back at the 1735-1750 level.

However, if the S&P 500 keeps moving higher through April-May, it will break above the parabola that is the resistance area above current price. That would be a strong technical sign that the long term correction is over and prices could move to new highs. We assign a 15% probability to this outcome.

We have shown you a lot of charts in Ellumination over many years. This one is among the most important you have seen. If the S&P 500 keeps moving up and breaks above that blue parabola resistance line everything changes for U.S. stocks. That could mark the beginning of a major new move up and a continuation of the "secular bull market".

How can there possibly be three dramatically different outcomes? We are living in the "age of central banks". They have never been more influential in financial markets than they are now. They have single handily supported "risk asset prices" since the 2008-2009 financial crisis. The Bank of Japan, the People's Bank of China, and the European Central Bank have all indicated that they are willing to buy corporate bonds and stocks in order to support markets. They have become the buyers of last resort.

Along with the U.S. Federal Reserve Bank, they have also kept interest rates at near record lows for over eight years. Corporations around the globe have been able to issue incredibly cheap debt, in the form of bonds. In many cases this money is being used to buy back company stock. "Stock buy back" plans have been among the biggest buyers of stock for years now.

Between central banks and corporate buybacks there is plenty of buying power to support stock prices. The obvious question is "what happens when these forms of market support are finally taken away"?

AND WHERE ARE INTEREST RATES HEADED?

If this was a chart of a stock would you buy it? The answer is that you should. This is a classic breakout to the upside after a multi-year consolidation. The only problem is that this is not a chart of a stock. This is "core U.S. inflation", and it is breaking out to the upside. The Fed has been targeting 2% inflation for years. We are finally approaching it.

Assuming this trend holds, it will give the Fed plenty of cover to raise interest rates in June or in the fall. We are monitoring this carefully. This could be the "game changer" the Fed has been nurturing all along.

If the Fed does raise rates for the second time, then U.S. monetary policy diverges further from that of other major central banks. They are all still easing.

"Divergent monetary policy relates to the reality that even as the US begins to tighten its money supply, the European Union (EU), United Kingdom (UK), Japan and China remain intent on looser monetary policy and more easing. Until December, US rates still hovered around 0% and the U.S. remained aligned with the rest of the developed world in a united front, flooding the globe with cash and nursing the global economy toward health. Now with the rate raise on December 15 - the first rate change since 2008 - U.S. policy is clearly diverging."
Ellumination, January 7, 2016

We are not expecting rates to rise dramatically, but the odds of additional increases appear to be rising.

WHAT WILL THIS MEAN FOR THE DOLLAR?

Assuming that other major central banks stay their course (easing) and the U.S. Fed stays its course (tightening) the U.S. dollar should rise against a basket of other major currencies. This was the expectation last December and continues to be our "base case".

MERGER RECAP!

The merger between 5T Wealth Management, LLC and Quish & Co. is right on course. Govinda Quish moved to Napa in early January and has been working full time as Chief Investment Officer of both firms. He will continue to live and work in Napa after the merger.

Mariah Quish continues to run the Boulder office and will do so after the merger is complete. Meghan Krsek, Jeff Roush and I are all preparing to accompany Mariah and Govinda to Vail, Colorado next week. We will spend several days getting to know their primary family office clients.

The merger is set to be completed on July 1, 2016. The name of the combined firm will be 5TQ Capital, LLC. (5TQ)

The Investment Policy Committee of 5TQ is Govinda, Mariah, Jeff, Phillip Lampe and Paul.

We will be meeting with Marina and Sterling Stevens the first week of April to start the process of updating our website, creating a new logo, and "branding" 5TQ.

ANNUAL REVIEWS WITH EACH CLIENT FAMILY

Over the course of April, May and June we plan to meet with every client family we work with. The meetings are for the purpose of reviewing 2015 investment results, meeting Govinda and Jeff (if you haven't already met him), updating financial plans, and recommending changes in investment portfolios based upon our changing views of markets for the next 12-24 months.

Paul will be sending everyone emails to schedule these meetings and Jessica Sartain will be following up by phone to set actual meeting times and dates.

We are really looking forward to seeing you.

All the best,

GOVINDA, PAUL, MARIAH, JEFF, & PHILLIP
THE INVESTMENT POLICY COMMITTEE
5T Wealth Management, LLC
(707) 603-2672 Office
(707) 486-7333 Cell
Paul@5TWealth.com

Disclosure and Disclaimer - Updated last on JANUARY 6, 2016 by Paul Krsek:
ELLUMINATION is the proprietary newsletter written for clients, friends, and affiliates of 5T WEALTH MANAGEMENT.

SINCE 1998 Paul Krsek HAS BEEN the sole author of ELLUMINATION. While the views and representations found in the newsletter generally reflect the attitudes and opinions of the 5T WEALTH MANAGEMENT members and staff, Krsek wrote without editing was therefore is solely responsible for the content and opinions contained in ELLUMINATION.

AS OF JANUARY 2016 ELLUMINATION IS NOW A COLLABORATIVE EFFORT OF THE INVESTMENT POLICY COMMITTEE OF 5T WEALTH MANAGEMENT, LLC. THAT COMMITTEE IS CURRENTLY COMPRISED OF GOVINDA QUISH, PAUL KRSEK, MARIAH QUISH, JEFFREY ROUSH AND PHILLIP LAMPE.

ELLUMINATION does not represent the opinions of Fidelity, Fidelity Institutional Brokerage Group, NFS or anyone employed by Fidelity in any capacity. Neither Fidelity, Fidelity Institutional Brokerage Group, nor NFS, nor anyone employed by Fidelity in any capacity has participated in the creation of ELLUMINATION and they are not responsible for the contents or distribution of ELLUMINATION.

ELLUMINATION is written to provide general information to clients, friends, and affiliates. The contents of ELLUMINATION are not to be taken as individual investment advice. No investment decisions should be made based on the opinions or information offered in ELLUMINATION.

5T WEALTH MANAGEMENT does not represent that the information in ELLUMINATION is accurate or complete and it should not be relied upon as such. Opinions expressed herein are subject to change or modification without notice.

The investment portfolio models or management services mentioned in ELLUMINATION may or may not be available in some states, and they may not be suitable for all types of investors.

5T WEALTH MANAGEMENT manages accounts with various histories and investment objectives. Various accounts may be managed differently from time to time.

ELLUMINATION makes frequent reference to the model portfolios called Mendocino, Cape Lookout and Dividend Diamonds as well as our Fund of Funds Portfolio. During 2005 Paul Krsek was appointed Chief Investment Officer of 5T WEALTH MANAGEMENT, and as such was responsible to make all trading and management decisions for all client accounts which are being managed according to a specific portfolio model. A description of each of our models can be found on our website at http://www.5twealth.com/prd_port_signup.cfm.

During 2016 Govinda Quish will take over as Chief Investment Officer. Krsek & Quish are currenlty collaborating, along with the other members of the Investment Policy Committee on strategy and portfolio construction.

Not all accounts managed by 5T WEALTH MANAGEMENT are "modeled" accounts. We strongly urge our clients to understand which model, if any, are being used to manage their accounts.

From time to time 5T WEALTH MANAGEMENT receives requests from clients to purchase securities that are not included in the model portfolio to which they are assigned. Effective May 24, 2006, 5T WEALTH MANAGEMENT has encouraged clients to hold such securities in a separate account for the client. Because 5T WEALTH MANAGEMENT is a "fee only" registered investment advisor" it charges its normal management fee for monitoring such securities in the separate accounts in which they are held.

5T WEALTH MANAGEMENT makes every effort to exclude securities that are 'requested by the client' from the modeled portfolio accounts.

The investment objectives of various accounts and models may be substantially different from one another. Therefore topics or investments mentioned in E-Ellumination may or may not apply to specific managed accounts and/or models.

Trades or adjustments to accounts mentioned in ELLUMINATION may or may not happen in every account managed by portfolio managers at 5T WEALTH MANAGEMENT.

If you are not satisfied with the investment results in your account it is your responsibility to inform Krsek or Quish to discuss possible changes that can be made to the account to accommodate and satisfy your needs.

The assets held in managed accounts at 5T WEALTH MANAGEMENT may include stocks, bonds, cash, commodities, foreign exchange or mutual funds or exchange traded funds (ETF's), money market accounts or limited partnerships that represent the same. They are subject to market fluctuation and the potential for losses. The assets are not insured. The value and income produced by these investment products may fluctuate, so that an investor may get back less than they initially invested.

The portfolio managers at 5T WEALTH MANAGEMENT do not guarantee results.

Past performance should not be considered an indicator of potential future performance. If you do not consider yourself suitable, either emotionally or financially, to experience volatility and/or losses in financial markets, you should not invest.

From time to time the authors of Ellumination list the simple annual returns of the model accounts he tracks for this newsletter. These accounts are "models" and do not represent the actual results accruing to individual accounts. Simple annual return does not represent "time weighted return" as reported individually to clients. 5T Wealth Management, LLC no longer provides composite performance reporting for "model" groups. Individual clients should request performance reporting on their specific accounts. 5T uses EMoney Advisor to prepare those reports.

This document is for information purposes only and it should not be regarded as an offer to sell or as a solicitation of an offer to buy any securities or other instruments mentioned in it.

1 Comment

Comment

OUCH! We are off to a rough start.


A few weeks ago we wrote the following:

Our "base case" is that 2016 is likely to be marked by a higher level of volatility and overall lower average market returns than we have seen in recent years. We also feel the probabilities of currently unknown events shaping market behavior are higher than it has been in the past. Our underlying rationale for our "base case" has to do with two major themes: divergent monetary policy (The U.S. Fed raising rates while other central banks are still easing) and the China wildcard.

The S&P 500 and the Dow Jones Industrial Average just closed out their worst month since markets freaked out last August. The Nasdaq Composite had its worst month since May 2010.

The Dow was down 5.5% for the month.

Since January 1 the German DAX is down 8.8%, the Shanghai Composite is down 22.6%, the Japanese Nikkei is down 7.9%.

It was a very tough month for stockholders.

Clearly divergent monetary policy is influencing the market. The U.S. Fed tightened in December. The Bank of Japan eased today. That is what caused the Friday rally. But we are not confident it will be enough to continuing bolstering stocks.

China's economic growth rate is clearly slowing. It may be that the U.S. is slowing too. We are still not forecasting disaster or "hard-landings" for either economy. But we are monitoring the slowdown.

We also need to recognize that stocks were overvalued at the end of 2015. A correction was ripe to happen.

We need to understand that earnings growth is rapidly decelerating in many industries.

Some individual stocks have just been pummeled. One of my favorite companies is Textainer Corp (TGH). It is down over 23% in January. Even Amazon (AMZN) is down over 13%.

The rally today was huge, but could easily be part of a "bear market rally". We are not likely to know for sure for another few weeks.

Our current base case for U.S. equities is that the path of least resistance is likely to be lower. Rallies appear to be opportunities to sell stocks, raise cash, and/or short stocks.

The most likely outcome for the S&P 500 is a completion of this topping pattern which is called a "Head and Shoulders Top". If this pattern plays out this index will revisit its recent low in the 1860-1850 range. If that support does not hold this pattern suggests that the S&P 500 could eventually go as low as 1576-1604.

We shall see.

All the best,

 

GOVINDA, PAUL, MARIAH, JEFF, & PHILLIP
THE INVESTMENT POLICY COMMITTEE
5T Wealth Management, LLC
(707) 603-2672 Office
(707) 486-7333 Cell

Paul@5TWealth.com

Disclosure and Disclaimer - Updated last on JANUARY 6, 2016 by Paul Krsek:
ELLUMINATION is the proprietary newsletter written for clients, friends, and affiliates of 5T WEALTH MANAGEMENT .

SINCE 1998 Paul Krsek HAS BEEN the sole author of ELLUMINATION. While the views and representations found in the newsletter generally reflect the attitudes and opinions of the 5T WEALTH MANAGEMENT members and staff, Krsek wrote without editing was therefore is solely responsible for the content and opinions contained in ELLUMINATION.

AS OF JANUARY 2016 ELLUMINATION IS NOW A COLLABORATIVE EFFORT OF THE INVESTMENT POLICY COMMITTEE OF 5T WEALTH MANAGEMENT, LLC. THAT COMMITTEE IS CURRENTLY COMPRISED OF GOVINDA QUISH, PAUL KRSEK, MARIAH QUISH, JEFFREY ROUSH AND PHILLIP LAMPE.

ELLUMINATION does not represent the opinions of Fidelity, Fidelity Institutional Brokerage Group, NFS or anyone employed by Fidelity in any capacity. Neither Fidelity, Fidelity Institutional Brokerage Group, nor NFS, nor anyone employed by Fidelity in any capacity has participated in the creation of ELLUMINATION and they are not responsible for the contents or distribution of ELLUMINATION.

ELLUMINATION is written to provide general information to clients, friends, and affiliates. The contents of ELLUMINATION are not to be taken as individual investment advice. No investment decisions should be made based on the opinions or information offered in ELLUMINATION.

5T WEALTH MANAGEMENT does not represent that the information in ELLUMINATION is accurate or complete and it should not be relied upon as such. Opinions expressed herein are subject to change or modification without notice.

The investment portfolio models or management services mentioned in ELLUMINATION may or may not be available in some states, and they may not be suitable for all types of investors.

5T WEALTH MANAGEMENT manages accounts with various histories and investment objectives. Various accounts may be managed differently from time to time.

ELLUMINATION makes frequent reference to the model portfolios called Mendocino, Cape Lookout and Dividend Diamonds as well as our Fund of Funds Portfolio. During 2005 Paul Krsek was appointed Chief Investment Officer of 5T WEALTH MANAGEMENT, and as such was responsible to make all trading and management decisions for all client accounts which are being managed according to a specific portfolio model. A description of each of our models can be found on our website at http://www.5twealth.com/prd_port_signup.cfm.

During 2016 Govinda Quish will take over as Chief Investment Officer. Krsek & Quish are currenlty collaborating, along with the other members of the Investment Policy Committee on strategy and portfolio construction.

Not all accounts managed by 5T WEALTH MANAGEMENT are "modeled" accounts. We strongly urge our clients to understand which model, if any, are being used to manage their accounts.

From time to time 5T WEALTH MANAGEMENT receives requests from clients to purchase securities that are not included in the model portfolio to which they are assigned. Effective May 24, 2006, 5T WEALTH MANAGEMENT has encouraged clients to hold such securities in a separate account for the client. Because 5T WEALTH MANAGEMENT is a "fee only" registered investment advisor" it charges its normal management fee for monitoring such securities in the separate accounts in which they are held.

5T WEALTH MANAGEMENT makes every effort to exclude securities that are 'requested by the client' from the modeled portfolio accounts.

The investment objectives of various accounts and models may be substantially different from one another. Therefore topics or investments mentioned in E-Ellumination may or may not apply to specific managed accounts and/or models.

Trades or adjustments to accounts mentioned in ELLUMINATION may or may not happen in every account managed by portfolio managers at 5T WEALTH MANAGEMENT.

If you are not satisfied with the investment results in your account it is your responsibility to inform Krsek or Quish to discuss possible changes that can be made to the account to accommodate and satisfy your needs.

The assets held in managed accounts at 5T WEALTH MANAGEMENT may include stocks, bonds, cash, commodities, foreign exchange or mutual funds or exchange traded funds (ETF's), money market accounts or limited partnerships that represent the same. They are subject to market fluctuation and the potential for losses. The assets are not insured. The value and income produced by these investment products may fluctuate, so that an investor may get back less than they initially invested.

The portfolio managers at 5T WEALTH MANAGEMENT do not guarantee results.

Past performance should not be considered an indicator of potential future performance. If you do not consider yourself suitable, either emotionally or financially, to experience volatility and/or losses in financial markets, you should not invest.

From time to time the authors of Ellumination list the simple annual returns of the model accounts he tracks for this newsletter. These accounts are "models" and do not represent the actual results accruing to individual accounts. Simple annual return does not represent "time weighted return" as reported individually to clients. 5T Wealth Management, LLC no longer provides composite performance reporting for "model" groups. Individual clients should request performance reporting on their specific accounts. 5T uses EMoney Advisor to prepare those reports.

This document is for information purposes only and it should not be regarded as an offer to sell or as a solicitation of an offer to buy any securities or other instruments mentioned in it.

Comment

Comment

2016 is going to be quite a year. Here is our Outlook.


OVERVIEW

While we write in a predictive spirit, our views are necessarily malleable and we look forward to revisiting them with you throughout the year. Events will inevitably challenge us and influence the investment strategies that are in place for our clients as we start the New Year.

Since 1998, we have entered each year with a "base case" forecast outlining our views on the coming year. Yet, we are experienced enough to know that things do not always turn out the way we expect.

We are foremost in the wealth preservation business. Our theorizing and scenario planning is aimed first at inoculating our investment strategies against losses and providing stability for our clients regardless of whether our "base case" is correct.

Our second goal is to focus on trends we think will prevail during the next 12-24 months in order to profit from them.

Our "base case" is that 2016 is likely to be marked by a higher level of volatility and overall lower average market returns than we have seen in recent years. We also feel the probabilities of currently unknown events shaping market behavior are higher than it has been in the past. Our underlying rationale for our "base case" has to do with two major themes: divergent monetary policy and the China wildcard. We started drafting regarding these themes before the January 4 China-sparked draw down in markets around the world.

Divergent monetary policy relates to the reality that even as the US begins to tighten its money supply, the European Union (EU), United Kingdom (UK), Japan and China remain intent on looser monetary policy and more easing. Until December, US rates still hovered around 0% and the U.S. remained aligned with the rest of the developed world in a united front, flooding the globe with cash and nursing the global economy toward health. Now with the rate raise on December 15 - the first rate change since 2008 - U.S. policy is clearly diverging.

Bluntly put, there are good reasons other major central banks continue to be in an easing mode - they really need it! Japan is still facing recession. The EU is struggling with deflation and seems to flirt with recession on a near quarterly basis. China continues to fall short of its - ambitious - growth targets. Emerging markets are likely in a secular decline.

Prudent investors must consider the possibility that monetary policy could converge again later in 2016 or 2017. If the global economy falters in 2016, as some fear, the U.S. Federal Reserve Bank may have to alter its course and go back to a more dovish policy.

However, our "base case" is that the opposite is more likely. Most global economists are currently forecasting a moderate increase in global GDP growth rates. We believe that is a reasonable assumption. Consensus from the most recent Bloomberg economic survey is 3.6% global GDP growth in 2016.

Another major theme we foresee is China as the pivotal player for emerging markets and perhaps for all markets in 2016. Our "base case" is that China continues with a moderate level of growth in the 5-6% range. This is lower than their reported historical average, but still remarkable considering China is the world's second largest economy.

We do not believe there will be a "Chinese meltdown." As we have recently covered in Ellumination, given their foreign currency reserves and near 5% interest rates, China has leeway to pursue a range of monetary and fiscal policies to keep its growth rate at or near target. In 2009, China's credit expansion significantly helped the global economy as well as the Chinese. However, going forward, how China props up its own growth could well have destabilizing effects on other economies, especially emerging markets.

For example, in its effort to remain competitive, China may well continue to devalue the Yuan. Such devaluation could lead to contagion, further weakening already fragile emerging market economies and quickly spreading to developed markets. Lest we forget, in 1997, devaluation sparked the Asian financial crisis.

THOUGHTS ON THE RECENT RATE HIKE BY THE U.S. FED AND INTEREST RATE CHANGES IN 2016

With the rate-hike announced on December 15, the Fed embarked on what many - ourselves included - believe to be a poorly timed decision. The recent headline reduction to the US unemployment rate masks a number of delicate data points that hardly point to robust recovery. Our hope - although at this time not necessarily our conviction - is that it will be a "one and done" and we won't see more rate raises in the US in 2016; or at least not in the first half of the year.

According to a broad survey of economists by Bloomberg most seem to be expecting at least two more increases in 2016. A few are expecting a total of four.

THOUGHTS ON U.S. AND GLOBAL EQUITY MARKETS FOR 2016

Looking forward, we are likely to take an even more cautious stance than we did last year.That is particularly true as we move into Q1 of 2016. U.S. stocks, in particular, were priced for perfection as of December 31, 2015. We would be a lot more comfortable being an aggressive buyer of stocks if major U.S. averages were at least 10-15% below those levels.

In our 2015 Investment Outlook, our foremost predictions were that equity markets would prove more volatile than they did in the prior year and that we'd see only modest gains in US equity returns. Indeed, while the VIX (US market's implied volatility) averaged just 14 in 2014 it jumped up to 17 in 2015. The higher number represents a higher level of market volatility. There are a number of reasons we foresee further increased volatility and only continued modest growth in US markets during 2016.

The "cheap money" resulting from post-crisis easing policies helped stoke developed world stock prices. It is for this reason that since 2012 equity returns can be explained mostly by multiple expansion and not earnings growth. That is to say it is the prices of shares that have risen (the numerator of the P/E ratio) and not earnings (that equation's denominator). Even a whiff of possible tightening - as we've seen in the back half of 2015 - sends a shiver of sobriety. Shareholders ask "Are these prices worth it? Will we see these companies we have been investing in actually grow?" Without clarity as to the answer, many choose to press the "sell" button now and ask questions later.

The graph that follows portrays the ups and downs of the S&P 500 throughout 2015. There was a lot of volatility in the second half of the year. This index opened 2015 at 2056 and closed the year at 2044. In August it got as low as 1861. The difference between the high and the low during the year was 12.84%. In the end there was no return for the year.

We think that 2016 could be just as volatile, if not more so.

SEE CHART BELOW

The coming year is only likely to bring more uncertainty. Firstly, rising rates in the US will begin to reign in how much US investors' have available to shovel into stocks. Higher rates will also curb companies' ability to grow earnings. With the US unilaterally starting to pursue more hawkish monetary policies, the dollar will continue to strengthen. One of our highest conviction trades for Q1 and Q2 of 2016 is a rising U.S. Dollar.

Such dollar strength can be devastating to American firms. Imports become more attractive to consumers (as they become relatively cheaper) and at the same time US goods and services sold abroad become less competitive (as they become relatively more expensive). Besides the impact of a strengthening dollar, companies' costs to borrow increases, so investments in plants and production become less viable, further dampening earnings (albeit more in the long run than immediately).

Considering the gloomy scenarios we've presented, why are we not even more pessimistic? Why are we not predicting that US stock prices will drop in 2016? As we've mentioned, the rest of the developed world continues with unprecedented monetary easing. For many international investors, the US may continue to be "the cleanest dirty shirt" (as Bill Gross famously said in 2012 referring to the US bond market). Compared with what is going on in the rest of the world, there is a modicum of confidence the US is on a slightly upward trajectory.

Bloomberg surveys show earnings forecasts for the S&P 500 to range between $120 and $130 for 2016. Consensus seems to be closer to $125. The mean Shiller P/E for the entire history of the index is 16.7. If the S&P 500 were to end 2016 at the mean (16.7 x $125) it would end the year at 2087. It closed on December 31, 2015 at 2044. If the S&P 500 closed 2016 at its average "forward annual P/E" of 14.3 it would close at 1787.

In other words, for the S&P 500 to close significantly higher at the end of 2016 one of a couple of things has to happen. Either earnings have to increase much faster than currently expected. Or, investors must be willing to pay even higher premiums to own stocks than is currently the case. We are not expecting either to happen.

One of the reasons we see limited upside for equities all-around is that valuation levels are elevated everywhere, not just in the US. In the US current forward PEs are about 16.5 (compared with 14.3 ten-year average). However, in Europe forward PEs average 15.5 (compared with a 12.2 ten-year average). Japan is the only developed country where the forward PE is lower than the 10-year average. Forward PEs in Japan average 14.6, compared with a 16.2 ten-year average.

Emerging market forward PEs are low, just 11.1 (compared with 11.9 ten-year historical average). However, we feel these low valuations are justified. China has shown its willingness to de-peg from the US dollar and pursue additional currency devaluation. Further Yuan devaluation could send other less robust emerging economies into a tailspin. Most emerging economies businesses have US Dollar and Euro-denominated debts.

More than anything this hodgepodge of good news - continued dovish monetary policy in Europe, Japan and China - and bad news - US rate hike and Emerging Market secular slump - sprinkled liberally with uncertainty presages volatility.

Charlie Tian of Gurufocus.com, one of our favorite value investors, is predicting a 0.5% increase in the US stock market over the next one year. This prediction sits well with us, yet, rest assured, we will work hard to take advantage of volatility and thereby do our best to earn higher returns for our investors.

MORE THOUGHTS ON FIXED INCOME MARKETS

It is easy to forget that the global bond market is about twice the size of the global equity market. US Treasury debt alone comprises about 30% of this $100+ trillion market. So, even as we remain less than sanguine on the prospects for a traditional buy-and-hold fixed income portfolio, we feel there are certainly pockets within the enormous fixed income market that will present opportunities.

In the near-term, we are likely to see defaults on the bonds of companies that can't survive prolonged low energy prices and/or a continued strong dollar. That said, in the longer term, with the prospect of clarity about the trajectory of US Fed rate hikes, we could see US fixed income, especially US sovereign debt, as the "cleanest dirty shirt" for US institutional investors who are still required to hold a certain amount of fixed income as a percentage of their overall portfolio. Indeed, the certainty of bonds' increasing fixed cash-flow may become increasingly attractive for those who rely on yield for income.

Yields on US securities, including treasuries and corporates, will rise along with the Fed's hikes (even as the prices of such bonds trade down, as a bond's price and yield always move in opposite directions). Already, the prospect of hikes is factored into the yield on the 10-year treasury, currently hovering around 2%. For comparison, the yield on the equivalent German government bond is a mere 0.50%.

Ultimately, not unlike our outlook for equities, although the overall picture is uncertain and to some extent bleak, we do foresee volatility as an opportunity, and the main reason an active approach to investing will make the difference between flat and up-trending returns.

WHAT ABOUT COMMODITIES AS AN INVESTMENT IN 2016?

Commodities were slammed 2015. The CRB Commodity Index is currently near its 43-year low.

Despite these low valuations, we do not currently see commodities as a buying opportunity and fear commodities (and many of the emerging market economies that rely on them for export) may have entered a prolonged bearish cycle.

While prices may come up somewhat from these all-time lows, we currently do not see a rationale for the increased demand that would drive price appreciation. Global growth remains sluggish. According to the IMF, 2015 had the slowest level of growth since 2009. Going forward as well, the IMF has warned of continued slow growth.

Moreover, China's deliberate move away from a manufacturing to a services-driven economy will continue to take a toll on commodity demand. As one economist said, "trees don't grow to the sky." For many commodities, prices had been based on assumptions that Chinese manufacturing growth would continue at unusually high rates. Simply put, supply will likely to continue to outpace demand, resulting in little upward price pressure.

SEE CHART BELOW

From the technical perspective as well, commodities do not present a buying opportunity, despite low valuations. As this chart shows, commodity prices only continue to collapse and there is no sign (yet) of stability. This index is comprised of 19 commodities: Aluminum, Cocoa, Coffee, Copper, Corn, Cotton, Crude Oil, Gold, Heating Oil, Lean Hogs, Live Cattle, Natural Gas, Nickel, Orange Juice, Silver, Soybeans, Sugar, Unleaded Gas and Wheat.

CONCLUSIONS

What does this all mean for our clients? Firstly, back to basics.... Our top priority is your ongoing financial well-being. In Q1 of 2016 we will be contacting you to talk about how volatility and this market environment may affect you and your family's portfolio in the coming year and what we are doing in terms of portfolio inoculation. It is also an opportunity to review and perhaps update your financial plan as well as your estate plan. We are here to help you develop and sustain your long-term financial goals.

As we look forward to 2016, volatility and unpredictability underscore our "base cases" for all major market classes, both domestically and internationally. The markets are an amazingly dynamic organism and so too is your 5T investment team. We are consistently incorporating new information and challenging our views.

As we have discussed, with the US rate hike on December 15, we officially entered the uncharted territory of global divergent monetary policy. Concurrently, more than ever, how China decides to foster its economic growth will have repercussions both for developing and developed markets. We will almost certainly acclimate to a "new normal" in terms of the levels of uncertainty and volatility we'll see in the markets.

In such an environment, more than ever, active management should be the key to out performance. Your long-term prosperity and happiness is what has always been most important to us and we are thrilled an honored to be working with you again this year.

Our entire team wishes you a happy and prosperous 2016.

All the best,

GOVINDA, PAUL, MARIAH, JEFF, & PHILLIP
THE INVESTMENT POLICY COMMITTEE

5T Wealth Management, LLC
(707) 603-2672 Office
(707) 486-7333 Cell

Paul@5TWealth.com  

Disclosure and Disclaimer - Updated last on JANUARY 6, 2016 by Paul Krsek:
ELLUMINATION is the proprietary newsletter written for clients, friends, and affiliates of 5T WEALTH MANAGEMENT .

SINCE 1998 Paul Krsek HAS BEEN the sole author of ELLUMINATION. While the views and representations found in the newsletter generally reflect the attitudes and opinions of the 5T WEALTH MANAGEMENT members and staff, Krsek wrote without editing was therefore is solely responsible for the content and opinions contained in ELLUMINATION.

AS OF JANUARY 2016 ELLUMINATION IS NOW A COLLABORATIVE EFFORT OF THE INVESTMENT POLICY COMMITTEE OF 5T WEALTH MANAGEMENT, LLC. THAT COMMITTEE IS CURRENTLY COMPRISED OF GOVINDA QUISH, PAUL KRSEK, MARIAH QUISH, JEFFREY ROUSH AND PHILLIP LAMPE.

ELLUMINATION does not represent the opinions of Fidelity, Fidelity Institutional Brokerage Group, NFS or anyone employed by Fidelity in any capacity. Neither Fidelity, Fidelity Institutional Brokerage Group, nor NFS, nor anyone employed by Fidelity in any capacity has participated in the creation of ELLUMINATION and they are not responsible for the contents or distribution of ELLUMINATION.

ELLUMINATION is written to provide general information to clients, friends, and affiliates. The contents of ELLUMINATION are not to be taken as individual investment advice. No investment decisions should be made based on the opinions or information offered in ELLUMINATION.

5T WEALTH MANAGEMENT does not represent that the information in ELLUMINATION is accurate or complete and it should not be relied upon as such. Opinions expressed herein are subject to change or modification without notice.

The investment portfolio models or management services mentioned in ELLUMINATION may or may not be available in some states, and they may not be suitable for all types of investors.

5T WEALTH MANAGEMENT manages accounts with various histories and investment objectives. Various accounts may be managed differently from time to time.

ELLUMINATION makes frequent reference to the model portfolios called Mendocino, Cape Lookout and Dividend Diamonds as well as our Fund of Funds Portfolio. During 2005 Paul Krsek was appointed Chief Investment Officer of 5T WEALTH MANAGEMENT, and as such was responsible to make all trading and management decisions for all client accounts which are being managed according to a specific portfolio model. A description of each of our models can be found on our website at http://www.5twealth.com/prd_port_signup.cfm.

During 2016 Govinda Quish will take over as Chief Investment Officer. Krsek & Quish are currenlty collaborating, along with the other members of the Investment Policy Committee on strategy and portfolio construction.

Not all accounts managed by 5T WEALTH MANAGEMENT are "modeled" accounts. We strongly urge our clients to understand which model, if any, are being used to manage their accounts.

From time to time 5T WEALTH MANAGEMENT receives requests from clients to purchase securities that are not included in the model portfolio to which they are assigned. Effective May 24, 2006, 5T WEALTH MANAGEMENT has encouraged clients to hold such securities in a separate account for the client. Because 5T WEALTH MANAGEMENT is a "fee only" registered investment advisor" it charges its normal management fee for monitoring such securities in the separate accounts in which they are held.

5T WEALTH MANAGEMENT makes every effort to exclude securities that are 'requested by the client' from the modeled portfolio accounts.

The investment objectives of various accounts and models may be substantially different from one another. Therefore topics or investments mentioned in E-Ellumination may or may not apply to specific managed accounts and/or models.

Trades or adjustments to accounts mentioned in ELLUMINATION may or may not happen in every account managed by portfolio managers at 5T WEALTH MANAGEMENT.

If you are not satisfied with the investment results in your account it is your responsibility to inform Krsek or Quish to discuss possible changes that can be made to the account to accommodate and satisfy your needs.

The assets held in managed accounts at 5T WEALTH MANAGEMENT may include stocks, bonds, cash, commodities, foreign exchange or mutual funds or exchange traded funds (ETF's), money market accounts or limited partnerships that represent the same. They are subject to market fluctuation and the potential for losses. The assets are not insured. The value and income produced by these investment products may fluctuate, so that an investor may get back less than they initially invested.

The portfolio managers at 5T WEALTH MANAGEMENT do not guarantee results.

Past performance should not be considered an indicator of potential future performance. If you do not consider yourself suitable, either emotionally or financially, to experience volatility and/or losses in financial markets, you should not invest.

From time to time the authors of Ellumination list the simple annual returns of the model accounts he tracks for this newsletter. These accounts are "models" and do not represent the actual results accruing to individual accounts. Simple annual return does not represent "time weighted return" as reported individually to clients. 5T Wealth Management, LLC no longer provides composite performance reporting for "model" groups. Individual clients should request performance reporting on their specific accounts. 5T uses EMoney Advisor to prepare those reports.

This document is for information purposes only and it should not be regarded as an offer to sell or as a solicitation of an offer to buy any securities or other instruments mentioned in it.

Comment

Comment

Merger News from 5T Wealth Management, LLC

This newsletter contains some of the most important and exciting news regarding 5T since we founded the company in 1998.

We are pleased to announce a merger between 5T Wealth Management, LLC (5T) and Quish & Co LLC (QCo), which will take effect on July 1, 2016. QCo is merging into 5T and the combined companies will be known as 5TQ Capital, LLC. (5TQ Capital).

This merger represents a pooling of the expertise of two highly regarded private wealth management firms.  They serve high net worth and ultra-high net worth families through the day to day administration and management of family affairs as well as sophisticated, comprehensive wealth management and problem solving for multiple generations of families.

The merger of 5T and QCo will bring additional financial, retirement, business and succession planning expertise to the combined firm (5TQ Capital). It will also allow us to enhance current wealth management strategies and introduce new strategies for all of our clients.

5T is based in Napa, Ca. and operates as an independent Registered Investment Advisor (RIA), founded in 1998, and regulated by the Securities Exchange Commission (SEC).

QCo is a Boulder, CO based RIA which was founded in 2008.

The headquarters of 5TQ Capital will remain at 595 Coombs Street, Napa, CA, 94559, 707-224-1340.

5TQ Capital will also continue to operate the office at 1123 Spruce Street, Suite 303, Boulder, CO, 90302, 303-589-8475.

It is not an overstatement to say that we see this as a "golden opportunity" for our clients and the the future of 5TQ. Jeff Roush and I were discussing the merger Tuesday morning and agreed that we now have the deepest, most experienced, most committed team that 5T (soon to be 5TQ Capital) has ever experienced. All of the partners are industry veterans, blessed to have made our careers doing what we love, which is working to help our clients achieve their life goals.

We share common values both professionally and personally. We have come to value each other and just as importantly, we enjoy each other's company. Taking in a new business partner is just as serious a commitment as getting married. It should not be done lightly and only when you are certain it will last a lifetime.

We are now working with up to four generations in particular families. That means we may have clients in a family that are 88, 68, 48, 21, and 18, all within the same family. With the age range of the partners in 5TQ, we are building a firm that will be here to serve generations for decades to come.

Paul Krsek is not retiring

Recently we have begun to introduce the concept of the merger to clients as we had the opportunity to meet with them personally. These meetings have also been an opportunity to introduce Govinda Quish, one of the founders of QCo.   The impressions have been extremely positive and we look forward to the time when every one of you has the opportunity to meet both Govinda and Mariah Quish as we move forward together in serving you.

Govinda will be taking over as Chief Investment Officer of 5TQ. Upon hearing that there has been some inclination from a few of 5T's clients to suspect I am planning to retire, that is not the case. If anything my personal energy, spirit and commitment has been boosted even further by events of the past couple of years and I intend to continue to serve all of our clients for years to come.

Bringing Jeffrey Roush into 5T as a partner has been a total blessing. He is so experienced in many facets of our industry that he brings enormous assets to our clients and the team. We quickly found a kinship which has deepened through the process of building the firm together.

We have also brought some wonderful young talent to 5T in the past year. We have staff in their 20's and 30's who are not yet partners, but could easily be in the future.

This year Hien Scozzafava became a partner because she is invaluable to our clients and to us. She is intensely devoted to serving our clients. She has a caring and joyful style that everyone values and enjoys.

I have been blessed to work with my wonderful wife since we started 5T. That is rare and it inspires me every day.

I am looking forward to my role evolving as I take the title of CEO at 5TQ. I will not have to spend all day, every day dealing with investment decisions because of this new experienced team. Therefore, I will have a lot more time to spend with all of you, our clients.

Our continued mission is to enhance and deepen our relationship with each one of you as we advise and guide you in achieving your family goals.

We look forward to continuing to provide you with further details as we progress on this path together. We welcome all your communications, questions and inquiries, should you have any on this announcement.

How will 5T and QCo Clients Benefit from the Merger?

By combining 5T and QCo clients of both firms instantly have access to more talent, expertise and depth in the management team of 5TQ Capital. This is true in every discipline including investment strategy, financial, retirement, business and succession planning; as well as client service and care and compliance.

All clients will be seeing much more emphasis on customized long term planning for each family we work with. This will include stronger collaborations between 5TQ and all of your other trusted advisors including legal, accounting and insurance. The combined 5TQ staffs are already hard at work improving and expanding services and results in every discipline.

Another benefit is that each firm will have a more impactful "succession strategy" in place, should something unforeseen happen to the principals of either firm.  However, let's be clear that no one is planning to retire any time soon. That includes Paul Krsek who will be the CEO of 5TQ Capital.

Govinda Quish and Paul Krsek are working hand in hand to expand the investment strategies of the combined firms. By the end of Q1 of 2016, the goal is to introduce at least three new strategies that are rooted in their combined vision of global market conditions over the next 12 to 24 months.

All of the new strategies will feature expert managers, well known to Govinda, from outside 5TQ. In each case 5TQ will enter into agreements with the managers to provide specific expertise within the proposed strategies.

The new strategies are all designed to enhance returns and reduce risk over time. 5T and QCo will be publishing their combined "Investment & Economic Outlook for 2016" in January. It will reveal further details of the new strategies and our outlook for the coming year.

The Principals of 5TQ Capital and their roles

The founders of 5T are Paul and Meghan Krsek, age 67 and 51, husband and wife.

The founders of QCo are Mariah and Govinda Quish, age 43 and age 42, sister and brother.

Jeffrey Roush, age 59, joined 5T as a member (partner) in 2014.

Hien Scozzafava, age 47, joined 5T in 2010 and became a member (partner) in 2015.

The Krseks, Quishs, Roush and Scozzafava will all be members (partners) in 5TQ Capital.

Paul Krsek will be Chief Executive Officer, (CEO) and Managing Member.

Meghan Krsek will be Chief Financial Officer (CFO) and Director of Family Office Services.

Govinda Quish will be Chief Investment Officer (CIO) and Chair of the Investment Policy Committee.

Mariah Quish, CFP, will be Director of Financial Planning Services, Portfolio Manager and Director of the Boulder office.

Jeffrey Roush will be Chief Operating Officer and Chief Compliance Officer.

Hien Scozzafava will be Manager of Family Office Services and Wealth Management Client Services.

The Krseks, Govinda Quish, Jeffrey Roush and Hien Scozzafava will all continue to work primarily from the Napa office.

Mariah Quish will maintain the operations of the Boulder office.

Govinda Quish, Paul Krsek, Mariah Quish and Jeffrey Roush will serve as members of the Investment Policy Committee.

Phillip Lampe, age 28, joined 5T in 2014. He will also serve as a member of the Investment Policy Committee.

2016 is going to be a really good year!
 
All the best,

 

Paul Krsek
MANAGING MEMBER & CHIEF INVESTMENT OFFICER  
5T Wealth Management
(707) 603-2672 Office
(707) 486-7333 Cell

Paul@5TWealth.com  

Disclosure and Disclaimer - Updated last on July 23, 2012 by Paul Krsek:
ELLUMINATION is the proprietary newsletter written for clients, friends, and affiliates of 5T WEALTH MANAGEMENT .

Paul Krsek is the sole author of ELLUMINATION. While the views and representations found in the newsletter generally reflect the attitudes and opinions of the 5T WEALTH MANAGEMENT members and staff, Krsek writes without editing and therefore is solely responsible for the content and opinions contained in ELLUMINATION.

ELLUMINATION does not represent the opinions of Fidelity, Fidelity Institutional Brokerage Group, NFS or anyone employed by Fidelity in any capacity. Neither Fidelity, Fidelity Institutional Brokerage Group, nor NFS, nor anyone employed by Fidelity in any capacity has participated in the creation of ELLUMINATION and they are not responsible for the contents or distribution of ELLUMINATION.

ELLUMINATION is written to provide general information to clients, friends, and affiliates. The contents of ELLUMINATION are not to be taken as individual investment advice. No investment decisions should be made based on the opinions or information offered in ELLUMINATION.

5T WEALTH MANAGEMENT does not represent that the information in ELLUMINATION is accurate or complete and it should not be relied upon as such. Opinions expressed herein are subject to change or modification without notice.

The investment portfolio models or management services mentioned in ELLUMINATION may or may not be available in some states, and they may not be suitable for all types of investors.

5T WEALTH MANAGEMENT manages accounts with various histories and investment objectives. Various accounts may be managed differently from time to time.

Krsek makes frequent reference to the model portfolios called Hatteras, Mendocino, Point Reyes, Diamond Head, Cape Lookout and Dividend Diamonds as well as our Fund of Funds Portfolio. During 2005 Paul Krsek was appointed Chief Investment Officer of 5T WEALTH MANAGEMENT, and as such is responsible to make all trading and management decisions for all client accounts which are being managed according to a specific portfolio model. A description of each of our models can be found on our website at http://www.5twealth.com/prd_port_signup.cfm.

Not all accounts managed by 5T WEALTH MANAGEMENT are "modeled" accounts. We strongly urge our clients to understand which model, if any, are being used to manage their accounts.

From time to time 5T WEALTH MANAGEMENT receives requests from clients to purchase securities that are not included in the model portfolio to which they are assigned. Effective May 24, 2006, 5T WEALTH MANAGEMENT has encouraged clients to hold such securities in a separate account for the client. Because 5T WEALTH MANAGEMENT is a "fee only" registered investment advisor" it charges its normal management fee for monitoring such securities in the separate accounts in which they are held.

5T WEALTH MANAGEMENT makes every effort to exclude securities that are 'requested by the client' from the modeled portfolio accounts.

The investment objectives of various accounts and models may be substantially different from one another. Therefore topics or investments mentioned in E-Ellumination may or may not apply to specific managed accounts and/or models.

Trades or adjustments to accounts mentioned in ELLUMINATION may or may not happen in every account managed by portfolio managers at 5T WEALTH MANAGEMENT.

If you are not satisfied with the investment results in your account it is your responsibility to inform Krsek to discuss possible changes that can be made to the account to accommodate and satisfy your needs.

The assets held in managed accounts at 5T WEALTH MANAGEMENT may include stocks, bonds, cash, commodities, foreign exchange or mutual funds or exchange traded funds (ETF's), money market accounts or limited partnerships that represent the same. They are subject to market fluctuation and the potential for losses. The assets are not insured. The value and income produced by these investment products may fluctuate, so that an investor may get back less than they initially invested.

The portfolio managers at 5T WEALTH MANAGEMENT do not guarantee results.

Past performance should not be considered an indicator of potential future performance. If you do not consider yourself suitable, either emotionally or financially, to experience volatility and/or losses in financial markets, you should not invest.

From time to time Krsek lists the simple annual returns of the six model accounts in this newsletter. These accounts are "models" and do not represent the actual results accruing to individual accounts. Simple annual return does not represent "time weighted return" as reported individually to clients in their quarterly reports prepared using Centerpiece.

This document is for information purposes only and it should not be regarded as an offer to sell or as a solicitation of an offer to buy any securities or other instruments mentioned in it.

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Holiday Schedule for 5T Wealth Management Office

Meghan and I are off to Tahoe to watch Audrey as she races down the mountain, kicking off the start of the 2015-2016 Racing Season. We will be celebrating Thanksgiving in the snow and will return to work on Monday, November 30th.

As always I am available by cell phone or email, but will be working a limited schedule. The rest of the team will be at the office.

5T will be closed on Thursday, November 26 (Thanksgiving Day) and Friday, November 27.

We will be closed December 24 through December 27 and January 1, 2016.

If you have year end needs please contact us so that we can call you or set up an appointment for you to take care of any business that must be completed in 2015.

2016 is going to be a GREAT year to be a client of 5T. Stay tuned for exciting announcements in the coming months.

All the best,

 

Paul Krsek
MANAGING MEMBER & CHIEF INVESTMENT OFFICER  
5T Wealth Management
(707) 603-2672 Office
(707) 486-7333 Cell
Paul@5TWealth.com  

Disclosure and Disclaimer - Updated last on July 23, 2012 by Paul Krsek:
ELLUMINATION is the proprietary newsletter written for clients, friends, and affiliates of 5T WEALTH MANAGEMENT .

Paul Krsek is the sole author of ELLUMINATION. While the views and representations found in the newsletter generally reflect the attitudes and opinions of the 5T WEALTH MANAGEMENT members and staff, Krsek writes without editing and therefore is solely responsible for the content and opinions contained in ELLUMINATION.

ELLUMINATION does not represent the opinions of Fidelity, Fidelity Institutional Brokerage Group, NFS or anyone employed by Fidelity in any capacity. Neither Fidelity, Fidelity Institutional Brokerage Group, nor NFS, nor anyone employed by Fidelity in any capacity has participated in the creation of ELLUMINATION and they are not responsible for the contents or distribution of ELLUMINATION.

ELLUMINATION is written to provide general information to clients, friends, and affiliates. The contents of ELLUMINATION are not to be taken as individual investment advice. No investment decisions should be made based on the opinions or information offered in ELLUMINATION.

5T WEALTH MANAGEMENT does not represent that the information in ELLUMINATION is accurate or complete and it should not be relied upon as such. Opinions expressed herein are subject to change or modification without notice.

The investment portfolio models or management services mentioned in ELLUMINATION may or may not be available in some states, and they may not be suitable for all types of investors.

5T WEALTH MANAGEMENT manages accounts with various histories and investment objectives. Various accounts may be managed differently from time to time.

Krsek makes frequent reference to the model portfolios called Hatteras, Mendocino, Point Reyes, Diamond Head, Cape Lookout and Dividend Diamonds as well as our Fund of Funds Portfolio. During 2005 Paul Krsek was appointed Chief Investment Officer of 5T WEALTH MANAGEMENT, and as such is responsible to make all trading and management decisions for all client accounts which are being managed according to a specific portfolio model. A description of each of our models can be found on our website at http://www.5twealth.com/prd_port_signup.cfm.

Not all accounts managed by 5T WEALTH MANAGEMENT are "modeled" accounts. We strongly urge our clients to understand which model, if any, are being used to manage their accounts.

From time to time 5T WEALTH MANAGEMENT receives requests from clients to purchase securities that are not included in the model portfolio to which they are assigned. Effective May 24, 2006, 5T WEALTH MANAGEMENT has encouraged clients to hold such securities in a separate account for the client. Because 5T WEALTH MANAGEMENT is a "fee only" registered investment advisor" it charges its normal management fee for monitoring such securities in the separate accounts in which they are held.

5T WEALTH MANAGEMENT makes every effort to exclude securities that are 'requested by the client' from the modeled portfolio accounts.

The investment objectives of various accounts and models may be substantially different from one another. Therefore topics or investments mentioned in E-Ellumination may or may not apply to specific managed accounts and/or models.

Trades or adjustments to accounts mentioned in ELLUMINATION may or may not happen in every account managed by portfolio managers at 5T WEALTH MANAGEMENT.

If you are not satisfied with the investment results in your account it is your responsibility to inform Krsek to discuss possible changes that can be made to the account to accommodate and satisfy your needs.

The assets held in managed accounts at 5T WEALTH MANAGEMENT may include stocks, bonds, cash, commodities, foreign exchange or mutual funds or exchange traded funds (ETF's), money market accounts or limited partnerships that represent the same. They are subject to market fluctuation and the potential for losses. The assets are not insured. The value and income produced by these investment products may fluctuate, so that an investor may get back less than they initially invested.

The portfolio managers at 5T WEALTH MANAGEMENT do not guarantee results.

Past performance should not be considered an indicator of potential future performance. If you do not consider yourself suitable, either emotionally or financially, to experience volatility and/or losses in financial markets, you should not invest.

From time to time Krsek lists the simple annual returns of the six model accounts in this newsletter. These accounts are "models" and do not represent the actual results accruing to individual accounts. Simple annual return does not represent "time weighted return" as reported individually to clients in their quarterly reports prepared using Centerpiece.

This document is for information purposes only and it should not be regarded as an offer to sell or as a solicitation of an offer to buy any securities or other instruments mentioned in it.

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