Wednesday, November 7, 2012

Post Election Update

Now that the noise of the election is behind us, it's time to get down to business.  The fiscal cliff comes into full view now.  Most likely congress will make some minor concessions on each side of the party line that gets the ball rolling, and leave the bulk of the issues that need to be addressed for sometime in 2013.  This uncertainty will probably weigh heavily on the markets over the next several months.  That's not to mention what could happen in Europe.  That's also not to mention a business cycle that is getting long in the tooth.  We are in year 4 of the business cycle expansion.  Since 1950, only once has it expanded 6 years, never more.  Twice it has expanded for 5 years, with the majority of them being 1-3 years.

I concede that the market may well still move higher in the coming months ahead, or simply be range bound, but I am adamant in my belief that one should be in a very conservative stance going forward. The downside is much larger than the upside, in my opinion.  I'm not advocating being out of the market completely.

Suggestions for a basic model portfolio are as follows:

20% or higher cash position.

Little to no exposure to U.S. Small Cap Funds.

Low exposure to U.S. Mid-Cap Funds.

Overweight in value and dividend funds.

Standard exposure to Large Cap Funds.

Standard exposure to Bond Funds, but quick on the trigger with government bonds, and more weighted towards corporate bonds.

10% maximum exposure in emerging markets or international funds.

10-25% in a long/short equity fund.

MFADX(MFLDX)  Marketfield recently changes their structure.  They now have higher minimums.  Again, I really like this fund for a couple main reasons.  The manager was named manager of the decade in the 90's.  He has a thorough understanding of the debt super-cycle that we are in worldwide, and played the market better than anyone I know.  He greatly minimized downside risk in the crash of 08, AND greatly participated  and outperformed the rally of 09.  The manager can go long and short anything and everything.  I love that flexibility.

BPLEX-Another great fund in the long/short equity space.  Has a much lower minimum.  This one hasn't been as consistent through time, but has been outstanding over the last few years.

*I am not a registered investment advisor.  Please consult with a professional when making investment decisions.  This blog is strictly for educational purposes.

Tuesday, October 23, 2012

Broad Market Update;postID=3398735189229575124

As I type this, the Dow is at 13120, or about 300 points from my July suggestion to start getting conservative.

I am still of the opinion that the next bear market will take the market significantly below where the market is trading now.  I'm targeting the low 9000's, or around 30%.  I believe it will be beneficial to boost cash positions, and be conservatively allocated with the rest.

One idea is the mutual fund MainStay Marketfield (MFLDX).

They can go long and short. They short foreign debt, anything. He masterfully played the 2008 crises, AND participated in the 2009 rally. Very few people in the world pulled off what he did.®ion=USA&culture=en-US 

While under performing the SP500 this year some, I'm confident he can make some money if the market is good, and not lose nearly as much as most other long funds are going to lose. 

* I am not a registered financial advisor.  This blog is for entertainment purposes only.  Please consult your financial advisor before making any decision with your portfolio.

Tuesday, July 31, 2012

Can you feel the desperation?

The market has become a beggar.  Begging for more stimulus from the Federal Reserve.  You can smell the desperation in the air when the only thing that really gets the market excited is for more stimulus.

We all know what happens when a parent constantly sends their kid more money.  Sure, if they have a flat tire, or some emergency, then there is nothing wrong with helping out.  Provide the liquidity they need, but ask that they slowly pay it off.  If you keep giving them more money every time something goes wrong, then they'll never plan ahead and take care of things themselves.

I have no problem with the Federal Reserve stepping in for emergencies.  Their role should be to step in and provide liquidity when markets are bottle-necked for temporary reasons.  In and out and nobody gets hurt.  The problem now is that the Federal Reserve is being asked to help out over, and over, and over.  The market then becomes a huge manipulated mess.  The benefit of their role is being overdone, and will only start to create larger problems.  At some point, you have to let markets do what they are intended to do.  They are only delaying the inevitable if they are constantly needed to float markets.  Nobody makes the hard decisions, because they know more relief will come from the Fed.  They may be helping out the banks, but what about us?  I'm afraid one day, week, or month, we are going to have a rude awakening.

It's a bull market, until it isn't.   I won't be surprised if QE3 measures mark the top soon after in the market, and a long decline commences.

A few very interesting charts.

The first shows the components of return.  Notice that valuations(P/E) have the largest effect of return.  Not earnings or dividends.

Here is the PE through Q2 of 2012:

The third is my favorite.  It shows the long term cycles.  We are currently in a secular bear market, which is defined by long term sideways to down action.  We can go back and see past secular bull and bear markets, and this chart shows the P/E ratio during those cycles.  Notice, that we have bounced back into the area where the majority of bull cycles top out at.  We are coming down from levels never seen before, and it looks like we have a ways to go.  We can reach lower valuations by either the market declining, or earnings rising with the market going sideways, or a combination of these two.  This is why there is no long term value to buying equities, at this time.

Monday, July 23, 2012

Cash is King

I think we are in an environment that strongly argues for having at least 20% in cash, or higher, depending on your years left until retirement.  

It seems that everyone has an aversion to being heavily in cash in their retirement portfolio.  You hear people say,  well I have to make some money somewhere.  Then, you usually look at what they are invested in, and see that it has done terribly.  I'll never understand why more people don't see the beauty in losing nothing, over losing 15, 30, even 50% in something that is highly aggressive.

The other argument is that if you have 15, 20, 30 years, then why try and time the market?

It's not about timing the market exactly, but noticing larger cyclical trends that you can capture the bulk of the move, but not trying to time the exact bottoms or tops.   There are obvious times when the environment is not conducive to strong returns.  I think now is an obvious time, and I'll lay that out more as time passes.

Major bottoms in any market are made when VERY few have the cash to buy it.  Great investors have cash available for opportunity.   Most everyone else is stuck in a losing trade, just hoping it comes back.

With all the landmines that are going off, and the many that are fast approaching, with the increased chance of a domino effect, why is everyone so complacent?  Check the volatility index, which measures complacency and fear.$VIX&p=W&yr=3&mn=0&dy=0&id=p78854099798

Sorry, can't get the above link to work properly.  If it goes to the Dow, type in $VIX in the symbol area.

It's been bouncing near the bottom end of the range, showing massive complacency.  The spikes into the 40's are when there is massive amounts of fear.  Notice they do occur on some regular basis.  See what the markets did during those times.

I believe you will see a large wave of fear show up in the next 12-18 months.  There are many issues ahead. What political party will run the next several years?  Will they ever make the tough decisions?  The debt ceiling is fast approaching again, and will become a major topic.  So will the Bush tax cuts that expire at the end of this year.  The Federal Reserve is trying to float the market so that over a long period of time everyone can heal their massive wounds.  To do that, prudent managers have to take advantage of the up cycle.  The following chart is updated through June of 2012.

That's a large rally, and one that needs a breather, in my opinion.

I am not trying to say for sure that the drop will start soon, but I do see the possibility of a move to 10,700-11,000 before the end of the year.  My long term target for getting aggressive in equities again is around 8800.  It may come in 2013, it may not come until 2015, but I believe it is very likely to occur.  When the Dow is back in the 10,000's, I think one can start looking for more opportunities.  You'll need some cash if you wish to take advantage of that opportunity.  Don't be the person that is merely moving money out of a bad place, to a better place, after the plunge.  

In the meantime, we need to search for alternative places to place our money.  Short the yen, short French bonds, corporate bonds(after a fall), managed futures are coming to mind.  Stay tuned for possible ideas in these areas.  

* I am not a registered financial advisor.  This blog is for entertainment purposes only.  Please consult your financial advisor before making any decision with your portfolio. 

Thursday, July 19, 2012

No long term value at these levels.

It's not about timing the market exactly, but knowing when the tide is more favorable.  The tide is not at the bulls back, in my opinion.  It may go higher over the next several months, but it's better to be out too early than too late.  There will come a time when it is far more favorable to be in equities in the next couple years.

Mauldin lays it out very well here.

Thursday, July 12, 2012


Gold is at a large inflection point here.  There are convincing arguments on both sides on what direction it is about to go.  The European crisis and possible contagion along with possible QE3 out of the Federal Reserve could fuel gold higher.  A deflationary wave could knock gold down, and the insatiable demand for gold may well have peaked for a while with an increased supply of gold hitting the market.

There are a number of technical signs that point to a major decline being imminent.  Some technical breaking events are occurring for the the first time in many years.  There is a lot of built up energy here to be released, but that can lend itself to either direction.  This is a large inflection point that could go either way.

In my opinion, gold has a higher likelihood of going to $1000-1200/oz in the next 6-12 months than reaching new highs at $2000/oz.  Currently, gold is trading at about $1560/oz.  If it were to rise over $1630, then the bulls may well have won the battle, so that will be the key number to watch on the upside.  $1540-1550 is the key level to watch for a downside break.  Break that, and it will probably be headed to $1400 quickly.

I was a strong advocate for holding 5-10% of your portfolio in gold for the past decade.  Over the last couple years, I think it has grown into a bubble, much like the technology bubble in 1999.  I am not sure that the demand for gold can reach the same levels it has reached the last couple of years.  I imagine a glut of supply has and will be hitting the markets from people searching to bring gold to market at these high prices.

If you have gold in your portfolio, it might be prudent to scale it back now, or at the very least re-balance it to the original percentage(assuming you have gained from it over the past several years.)

* I am not a registered financial advisor.  This blog is for entertainment purposes only.  Please consult your financial advisor before making any decision with your portfolio.

Monday, July 2, 2012

Broad Market

I believe the bull market of the past few years is getting long in the tooth.  While it could certainly go on for another year, the risk of a large and swift downside move is building stronger each day.  Stocks are certainly not deeply overvalued, but they are trading at a rich valuation.  Investor apathy appears high when considering all the challenges that Europe faces, and the tightening in lending domestically.  The velocity of money is slowing, even as rates decline.  Fewer people qualify, the hoops to jump through are huge, and the banks are apprehensive in lending the money.  In my opinion, it would be prudent to retool your portfolio to a more conservative balance at this time.  Raise additional cash, and shave off some of the aggressive allotments in your portfolio.  Again, the market may move higher still for several months, but I strongly believe a 30% to 50% decline will occur in the next 18 months from a deflationary wave.  The de-leveraging process is still underway, and the bounce has to be used to fix balance sheets by prudent managers.  The bear market from this process of reverting to a mean after the booming 90's has still been relatively tame.  That is probably mostly due to an aggressive Federal Reserve here and abroad.  They really don't have much left in the chamber to have a strong effect, except Q3.  It's probably best to fire that after being tested by a deflation wave, but they may choose to be preemptive.

Today the Dow Jones is at 12827, currently.  Even if it were to rise another 1000 points, I think it will fall 3000 or more, making it a risky prospect to be aggressively long.

* I am not a registered financial advisor.  This blog is for entertainment purposes only.  Please consult your financial advisor before making any decision with your portfolio.