7 March 2017
As featured in these pages in the past, a firm with a distinctive approach to thinking about markets and investment is US-headquartered Charles Nenner Research, a firm founded by its eponymous creator, Dr Charles Nenner. He brings an unusual perspective that looks for cycles and patterns, avoiding the need for the investor to take a judgement on say, what he or she thinks of the monetary policy view of central banks, presidents of countries or company chief executives. After a year full of supposedly unexpected events such as Brexit and the rise of Donald Trump, Family Wealth Report thought it would be an opportune moment to talk to the firm about how it sees the market landscape in the early part of 2017. We spoke with David Gurwitz, managing director. Gurwiz is also a musician – having played in public on numerous occasions – as well as being a philathropist, investor and motivational speaker.
Let’s recapitulate on the history of this business. How did Dr Nenner come to found this firm?
When he was in medical school, he also studied psychiatry for a couple years, and was involved in research when they wanted to know if people become more psychotic all over the world at the same time or it was local influences. Charles had done a couple of years of psychiatry study in Medical School in Amsterdam, and had studied some interesting cases when they were doing all kinds of unusual tests of unexplained patterns of behavior. In one case, they were looking into psychotic patients and wanted to know if there were environmental problems with being psychotic or not, so they compared it to different places in the world. They needed to research other countries, from Tokyo to Los Angeles, and Amsterdam, and indeed, in the same period, found a big influx of psychotic patients all over the world. They started plotting, looking to see when it happened/ They found a cycle – every six months, every nine months, etc. – when a lot of patients became psychotic. That was his first recognition of cycles.
He used that recognition to develop a system that analyzes past patterns that enabled him to predict movements – direction, level, and duration – in stocks, bonds, commodities, currencies, and economic indicators. He wound up using the system while working for Goldman, Sachs for almost two decades. I met him, and as trained athlete and talent scout, I recognized his brilliance and unique perspective. I joined him as Managing Director over 15 years ago. I’m a JD, MBA, CPA – so with him being a doctor, we have everything covered!
What are the main forecasts that you see with your cycles?
The system is based on the assumption that there is no free choice and that past patterns repeat. How? It looks for top to tops in any data series, forming sine curves. If all the top to tops coincide, that means they are all lining up and there must be a top. Samwe holds tru for bottoms. Why – we don’t know or care why. That’s the basic assumption of direction. It seems to work quite well.
Charles added a target algorithm, which is based on quantum physics. Those are the two main aspects of a very, very complicated computer system, that are used to predict all traded stocks, bonds, currencies, commodities and economic indicators.
The firm services clients such as wealth managers, family offices, endowments, foundations, sustainability funds, sovereign wealth funds, individual trader and brokers. They all need to know what and when and how much and how far, and we are able to do that pretty accurately.
Let’s go through the big picture of the four main areas of stocks, bonds, currencies and commodities.
Stocks: Up until the 3rd quarter, after a correction we’ve been looking for, soon, and then down for years. This major top is towards the end of the year, and then down more or less until the end of the decade, with a substantial cut in the DOW. In the 20’s, things should go way up again, for a decade. That’s the big stock picture.
Bonds: We called for people to lock in at 4 per cent bond yields several year ago, because we knew rates would still keep coming down, even though nobody could believe it. The last 30 years have been a bond rally, while 60 years ago began a bond bear market, meaning rates kept going up, so bond prices went down. That was from the 50’s to the 80’s. Now the last 35 years, rates have come down and bonds have gone up, we think it’s going to reverse over the next 30 years. People who are long bonds are going to lose a lot of value – and many already have. If you hold bonds to maturity, that’s one thing, but bond funds will cause a lot of principle loss.
Commodities: Crude oil. Short term down, longer term up. We called the tops when crude reached 147, then 6 months later was down to 49 bucks and when it was at 100 for three years, we eventually called it down in the high 20’s. We think crude will be back up again, but short them there will be a correction.
NatGas. Longer term down.
Gold. We think it will go back above its highs of $1,900 in the $2,500 range, several years from now. Gold had a run up for 11 years, been down more or less for four, and then up recently, all of which we called.
What would you say are the most pronounced cycles of any market in terms of the amplitude and why?
Amplitude doesn’t really mean anything to us because, in terms of cycles, it only shows direction and lining up of cycles. Level and target analysis is a whole other aspect. You could have what looks like a very high amplitude IBM move, but in fact, it’s only a 1 per cent move. When you say pronounced cycles, we don’t look at it that way. We look at the confluence of many cycles, all topping at the same time, or bottoming, in whatever asset class. That’s the most important thing.
Where do you see the most dramatic cycles and in what markets? Do you see any cycles becoming less pronounced, and if so, why would that be?
We don’t look at it in terms of dramatic cycles. Every asset class, every stock, every bond, every commodity, every currency, every ETF, has their own times of clarity of action long or short and times to stay out. That to us is the drama, and times to be in or out. So it’s not so much where are going to be the greatest moves. They all have moves – it depends when and how to play them and when to not play. Bigger money can’t move so fast. There will certainly be these large stock and bond moves that I described earlier, largely down , and those are dramatic. Hopefully, that’s the answer to the question.
When you ask do you see any cycles becoming less pronounced, it’s not a question of less pronounced. As King Solomon said, there are times for war and times for peace, etc. Twenty eight different categories, in fact. Cycles indicate the timing of such big moves in all sets of data series. For instance, the VIX has been mostly stuck for quite a while. We try to predict when it the clearest time to invest long or short based on these past patterns, and certainly not based on the news. Our system in essence analyzes the past interpretation of events, not the events themselves. We cannot know what will cause a move, only that one is coming and when. The media then likes to say why a move happened. We are not that smart!
In a world of zero interest rates and massive central bank action many mainstream markets are highly correlated. How does your approach to understanding investment address the issue of how to find low-correlated markets?
By definition, when we are taking individual information on every stock, ETF, bond ETF, etcetera, we don’t look for correlations, since we don’t want to make incorrect interpretations of so-called correlations. We are looking at that individual set of data points in each category to guide us. For example, crude and crude companies. Just because crude is doing something, doesn’t mean the companies will move the same way, as an example. We are more negative on ConocoPhilips than Crude oil now, as an example. This helps our clients allocate and size positions accordingly.
So we are agnostic in regard to correlations. Now let’s return to your question: How does your approach to understanding investment address the issue of how to find low-correlated markets?
In our case, the cycle moves determine that. So if there’s a very strong cycle up, for example we think Apple is going to be topping soon and then down, then we don’t care what else is happening anywhere, in terms of correlation on prices of chips, or other companies in the space. We are only focusing on the internal mechanism governing Apple. So by definition, our system rules out correlation because it’s only focusing on the data for each particular asset. We try and approach correlation by looking at cycles, target, waves, trend-lines, stochastics, etc. In medical analogy terms, we take a lot of different x-rays to see if it’s a fracture, a sprain, a contusion, a break, etc.
To what degree can your approach help investors achieve real diversification over time?
Great question. Generally, diversification has meant 60 per cent bonds, 40 per cent stocks, or 60 per cent stocks, 40 per cent bonds, and within stocks, allocate into 10 different areas, such as food and consumer and cyclical and defense, whatever. Add some private equity, real estate, etc. Managed in house or given to outside managers. Since we look at everything, we can really eliminate having to throw the dart at the board thinking, based on the assumption that you don’t really know what’s going to be, so you must diversify and generally stay long. We can actually completely eliminate choosing certain areas within stocks, within bonds, within commodities, etc. So diversification, means, to us, making plywood – let’s have so many positions and so many things offsetting. We think with our strict stop system for targets that you can get a greater move in certain areas without the restriction of offsetting, than by being diversified.
So I think the answer to the question, diversification by cycle work is, we think, really the best way to do things. It may be an oxymoron, but cycles allow you to focus on what is moving. Diversification assumes you don’t know where things are going to go, so you have to be spread and since we tend think we do know what’s going to go, you don’t have to spread so much. Most of the great investors, such as Stanley Druckenmiller, they don’t have 80 positions, they have five or six.
What sort of trends are you seeing in terms of the type of clients that you have that are getting interested in your research?
Charles started at Goldman when I met him. We only had hedge fund clients afterwards. Family offices were starting, they were around, but that has become a huge area for us. Sovereign wealth funds, some of the people that were managers at funds prior, knew us and they became involved with Sovereign wealth funds, so that became an area of clients that have really taken a tremendous interest in the research. Sustainability funds, which are relatively new, they are actually bigger than ETF’s and hedge funds, we have several of those now. They give us a list of the 50 companies they are looking at and we will do custom work for them. The hedge fund world has changed so much with regulation that many hedge funds have moved overseas, are closed down. So while we starting primarily with the hedge fund space, it’s not an area that we’ve grown in. Individuals has been an area that has grown tremendously. International diversification as well. We have a newsletter for India, Australia, and Canada. We have clients all over there, so we have grown in terms of category of client and geographical location of the clients.
How do you typically get going in attracting people to your approach? How much of what you do is client education?
Education is a tremendous need. Attracting people is usually by media and referral. People are looking for new and off beat ideas. We have many, many clients already that recommend the research. We let people watch the research for at least a month, so they get an idea of how we cover things. We try to educate clients on our site, but watching it is best. I have a Bloomberg presentation, in an hour, that I gave at an institutional analysts meeting maybe 10 years ago. We have an interactive service, so that helps. The main thing is the media and recommendation.
Are you finding there are times when people lose interest or confidence in your approach? How do you encourage people to stay on board?
We have a very high retention rate. Close to 90 per cent, so it’s not that often they lose interest. As a matter of fact, if we ship the research a little bit late, we get hundreds of emails, so obviously they don’t lose interest. A lot of times we are saying don’t do anything, and that’s hard for people, because that’s what our system is saying, if cycles don’t line up, or the targets don’t line up.
Besides economic/financial cycles, what are the main trends you look at and why?
We have war cycles. We encourage all readers here to write to the site, www.charlesnenner.com, and we will send them a war cycle chart, showing that there has been a major war in the second decade of every century, for the last 20 centuries. We will send that to people.
Politics we don’t really cover.
Technology we cover via the technology ETF’s, individual stocks. We just did for instance on Sunday, we did Adobe, Facebook, Zynga. Readers should write in for those reports.
Demography other people focus on, we don’t.
Culture, we don’t do, but don’t send it out.
We do a lot of analysis of trend line and a lot of analysis of economic indicators, non-farm payrolls, industrial production. These areas also follow cycles and targets, very interestingly. One might think that they don’t follow cycles, but they do.