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June 4, 2015, 2:54 p.m. EDT

TED spread suggests correction may be coming

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About Michael A. Gayed

Michael A. Gayed, CFA, winner of the 2014 Dow Award, is chief investment strategist and co-portfolio manager at Pension Partners, LLC., an investment advisor which manages mutual funds and separate accounts according to its ATAC (Accelerated Time and Capital) strategies focused on inflation rotation. Prior to this role, Gayed served as a portfolio manager for a large international investment group, trading long/short investment ideas in an effort to capture excess returns. From 2004 to 2008, Gayed was a strategist at AmeriCap Advisers LLC, a registered investment advisory firm that managed equity portfolios for large institutional clients. In 2007, he launched his own long/short hedge fund, using various trading strategies focused on taking advantage of stock market anomalies. Follow him on Twitter @pensionpartners and YouTube youtube.com/pensionpartners.

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By Michael A. Gayed

In recent writings, I have been aggressively attacking the notion that we live in a world of little risk. As a matter of fact, I penned a column titled "America, You Can Do Better" for Marc Faber of the Gloom, Boom, and Doom Report in which I went after the complete disregard of all fundamental, technical, macro and quant analysis by the majority of the Street who worship at the alter of the Fed.

Yet, as shown in all three summary versions of the award winning papers I co-authored, over long cycles, it is not faith in the Fed that builds wealth, but rather respect for risk and minimizing portfolio downside during periods of heightened volatility. It is easy for people to forget the math of losses when in an environment like the last few years. Oh, how easy it is to believe that the small sample of time we live in is representative of the way markets work, when in fact, living in the outlier is not normal.

"In any moment of decision, the best thing you can do is the right thing, the next best thing is the wrong thing, and the worst thing you can do is nothing."

—Theodore Roosevelt

Something is severely off between the narrative and the reality, and those looking purely at a stock chart are missing it. Take a look below at the TED Spread which is at a multi-year high. The TED Spread is the difference between three-month LIBOR and three-month Treasury bills, and was an indicator my father referenced in his 1990 book “Intermarket Analysis and Investing” as an important indicator of underlying market risk. LIBOR represents the interbank-lending rate. When it rises relative to risk-free Treasury bills, the implication is that perceived credit risk is increasing among counterparties. Historically, a rising (followed by spiking) TED Spread preceded major liquidity events in financial markets.

Why is this happening now when every talking head keeps pushing the idea that stocks will continue to go up purely because of central-bank actions? The fact that perceived credit risk and distrust is rising as evidenced in the chart above is completely at odds with the narrative of the strength in the economy and robustness of credit. No one seems to be talking about this underlying trend which unequivocally is negative.

Does this guarantee that something very ugly is coming for stocks? Certainly not, but to ignore every and all leading indicators of risk because of Fed leadership can be damaging to one's wealth and health.

Let us assume then that a period of volatility is to come, a Summer Correction (as mentioned in my last writing) may be at our door, and finally risk matters more than return. How can one adjust his or her portfolios in advance?

For us, in our ATAC Inflation Rotation Fund /zigman2/quotes/202546180/realtime ATACX -1.94% , defense comes by being in Treasurys which have tended to benefit when stock-market declines occur. If you prefer to be in equities but want to be defensive, it may make sense to be positioned in utilities, consumer staples and health care, as our ATAC Beta Rotation Fund  does when our risk trigger suggests the time is right. We have entered in June both funds defensively on our indicators, which confirm the same message the TED spread is giving: Something is wrong, and the probabilities for a surprise move are rising.

This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.

The Fund's investment objectives, risks, charges, expenses and other information are described in the statutory or summary prospectus, which must be read and considered carefully before investing. You may download the statutory or summary prospectus or obtain a hard copy by calling 855-ATACFUND or visiting www.atacfund.com. Please read the Prospectuses carefully before you invest.

Mutual fund investing involves risk. Principal loss is possible. Because the Funds invest primarily in ETFs, they may invest a greater percentage of its assets in the securities of a single issuer and therefore is considered non-diversified. If a Fund invests a greater percentage of its assets in the securities of a single issuer, its value may decline to a greater degree than if the fund held were a more diversified mutual fund. The Funds are expected to have a high portfolio turnover ratio which has the potential to result in the realization by the Fund and distribution to shareholders of a greater amount of capital gains. This means that investors will be likely to have a higher tax liability. Because the Funds invest in Underlying ETFs an investor will indirectly bear the principal risks of the Underlying ETFs, including but not limited to, risks associated with investments in ETFs, large and smaller companies, real estate investment trusts, foreign securities, non-diversification, high yield bonds, fixed income investments, derivatives, leverage, short sales and commodities. The Fund will bear its share of the fees and expenses of the underlying funds. Shareholders will pay higher expenses than would be the case if making direct investments in the underlying funds. The Beta Rotation Fund is new with no operating history and there can be no assurances that the fund will grow or maintain an economically viable size.

All investing involves risks.

Beta is a measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole.

The 2014 Charles H. Dow Award was open to anyone with an interest in technical analysis who submitted a paper prior to the deadline. The Papers were judged on the following standards; the paper is based upon the concepts of technical analysis, the topic is substantive, the research is thorough, include the results of applying the technique to a sufficient quantity of data that covers at least one full market cycle and preferably longer, shows the application of accepted standards of testing (including but not limited to, statistical significance, Chi Square, Monte Carlo simulations, and statistical correlation), the writing meets generally accepted standards of style for publications and college level writing, the analysis and conclusions are useful and enhance the understanding of market action, a paper shall not have been previously published in any media made available for public dissemination, and a paper should be written for an audience of knowledgeable technical analysts. The judging panel reserves the right to not select a winner if it deems that there are no submissions that are worthy of being given the award. The NAAIM Wagner Award was open to all investment practitioners, academic faculty and doctoral candidates in the field. The papers were judged on the following criteria; practical significance to practitioners of active investing (which NAAIM broadly defines as investment strategies and techniques that improve upon the risk-adjusted return obtainable from a passive, buy-and-hold, investment strategy), quality of exposition, analytical rigor, and novelty of results. An ideal paper would provide evidence of the validity of an active investing approach via an example of a trading system that outperforms the market by some well accepted metric such as risk adjusted return, annual return, drawdowns, etc. Examples of supporting evidence sought include backtesting details and parameter sensitivity analysis. A jury of scholars and investment professionals reviewed and awarded the prizes. The National Association of Active Investment Managers or NAAIM was formed in 1989 as a non-profit association of registered investment advisors who provide active money management services to their clients, in order to produce favorable risk-adjusted returns as an alternative to more passive, buy and hold strategies.

MA(4) = 4 week moving average

ATAC Beta Rotation Fund and ATAC Inflation Rotation Fund are distributed by Quasar Distributors, LLC.

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Jan. 21, 2022

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