Look at how the time goes past.

Old man look at my life,
I'm a lot like you were.
Old man look at my life,

I'm a lot like you were.

I've been first and last
Look at how the time goes past.
But I'm all alone at last.

Rolling home to you.

"Old Man" by Neil Young

Time always seems to fly, but the speed of events in the last decade hardly gives us time to breathe. 

Ten years ago, as the world peered toward the uncertainty of Y2K and the fears of the impending technology crash, I was celebrating our second successful year at Rockhaven Asset Management, which saw our growth fund appreciate 50%. Little did we know at that time that the tech crash we needed to fear was not based in technology, but instead was a very real crash in equity values.  The markets peaked in the spring of 2000, and then took a sickening plunge with the NASDAQ  falling 74% by Sept. of 2002. 

I'll never forget that beautiful September morning in 2001, I was flying to Birmingham AL to meet with our partners at AmSouth Bank, only to be forced to land in Columbia, SC just in time to watch the collapse of the first World Trade Center tower. 

In 2002 AmSouth and I agreed to sell Rockhaven to Strong Capital Management. This was a great period for Rockhaven, our funds had performed very well during the collapse of the tech bubble, and we were happy to be working with one of the premier investment managers of our time, Dick Strong. In 2003 the markets rallied strongly, but as 2004 rolled along we got to see first hand how political ambitions can turn into abuse of power, with the witch hunts of then Attorney General Elliot Spitzer. Strong was forced to sell to Wells Fargo, Spitzer became Governor of New York, and then resigned in disgrace. 

In 2004 the old Rockhaven team agreed to take over the management of National City's large-cap growth and large-cap core equity assets. We participated in the growth of Allegiant Asset Management, only to witness the stunning disappearance of our parent, National City. As 2009 started we found ourselves employed by PNC Bank and reevaluating our future paths in this industry.

An amazing decade, the decade of the Naughts. Y2K proved to be an empty threat; but the tech/media/telecom crash, the 9/11 terrorist attacks, two wars, corporate and political scandals, a real estate bubble, the disappearance of nearly all investment banks and over 100 regular banks, countless Ponzi schemes, and one of the nastiest recessions of all time, were all to real.

As we enter the next decade (the Tweens?) we can take solace in the fact that we not only survived, but we actually learned numerous valuable lessons. We know to expect the unexpected, no matter how bizarre. That corporate greed and political ambition can never be satiated. That buy-and-hold is dead, and only a thoughtful disciplined active allocation approach can work in volatile markets.

As we enter the "Tweens" lets remember what Mark Twain so famously said, "The art of prophecy is very difficult, especially with respect to the future." 

Focus on what we do know, not what we think we know. We know the U.S. government has to work itself out from under a staggering fiscal deficit, while fighting two wars, and preparing for a chronic entitlements challenge. We know that while China is growing rapidly, that they still have many domestic challenges that could derail them from overtaking the U.S. in economic superiority.  We know that we will probably have to deal with a nuclear Iran. We know that long-term weather trends have been occurring since the earth started cooling, and that they will continue to occur long after humans are extinct.

I do not believe that our future is bleak. I am more often than not surprised at just how strong and adaptable we humans can be. Our goal as investors is to be aware and ready for whatever comes our way, in other words...adaptable. Will interest rates stay low due to a struggling economy? Will interest rates ratchet higher due to ever rising deficits? No one knows! But we must be prepared for either eventuality.

We are clearly seeing signs that the inflation hawks are winning the battle of late, with both Int'l Bonds and Int'l REITs moving to neutral territory recently. U.S. fixed income is also very close to moving from bullish to neutral territory.

Our current Asset Allocation Model:

U.S. Equity - Maximum Bullish

Int'l Equity - Maximum Bullish

U.S. REITs - Maximum Bullish

Int'l REITs - Neutral

Gold - Maximum Bullish

Commodities - Maximum Bullish

U.S. Fixed Income - Maximum Bullish

Int'l Fixed Income - Neutral

Cash - Near Minimum

Enjoy your New Year and your New Decade, 

Chris Wiles

Fah who for-aze! Dah who dor-aze! Welcome Christmas, come this way!

You're a foul one, Mr. Grinch.
You're a nasty, wasty skunk.
Your heart is full of unwashed socks
Your soul is full of gunk.
Mr. Grinch.

The three words that best describe you,
are, and I quote: "Stink. Stank. Stunk."

You're A Mean One, Mr. Grinch by Dr. Seuss

What a year 2009 has been! Collapsing to the brink of the abyss in March and then rallying so strongly that people are actually sounding merry about investing. Yes, Mr. Market's 2009 personality reminds me of the complete 180 that the Grinch did..."with his grinch-feet ice-cold in the snow, he puzzled till his puzzler was sore, and the Grinch's small heart grew three sizes that day!" Even the frenetic sleigh rides up and down Mt. Crumpit remind me of the markets wild ride. The S&P 500 started the year falling an additional 24% from 2008's debacle only to rally 62% through today, for a year-to-date gain of about 24%. Before you start singing too loudly don't forget that Mr. Market is still down 28% from October 2007.

But lets not dwell on the negatives, we're up 24% YTD and that is much better than anyone expected 9 short months ago! 

If the wild rides of 2008 & 2009 taught us anything it was the validity of Tactical Asset Allocation versus the old gut-wrenching buy-and-hold. Our Global Tactical Asset Allocation Model (GTAA) has continued to outperform the 70% S&P500 30% US Treasury buy-and-hold model throughout this year. While the GTAA model has been fully invested for the last couple of months we have been seeing some asset classes showing signs of tiring, namely US Treasuries and International Treasuries.  In fact, we just got our first negative indicator in months and have taken International Treasuries from Bullish to Neutral. As the global recovery takes hold we are seeing inflation fears reenter investors minds and a sell-off in Global Treasuries is commencing. 

Of course anything could happen, but for now it appears that the inflation Grinch is rising from his cave.

We'll have a complete run down of the various asset classes performance in just a couple of weeks, so in the meantime rejoice in Mr. Markets change of heart, and enjoy your roast beast!

Merry Christmas,

Chris Wiles

Money - It's a Gas

"Money, it's a gas.
Grab that cash with both hands and make a stash.
New car, caviar, four star daydream,
Think I'll buy me a football team.

Money, get back.
I'm all right Jack keep your hands off of my stack.
Money, it's a hit.
Don't give me that do goody good bullshit."

"Money" by Pink Floyd

Money, it's a gas...it will flow to where it is wanted and stay where it is well treated. There is an excellent editorial in today's WSJ by David Malpass. David held various economic positions in the Reagan and Bush (the 1st) administrations, and then became chief economist at Bear Sterns until their untimely demise. He now runs his own economics firm (Encima Global) as well as writing a column in Forbes. I've had the pleasure of meeting David numerous times and have always found his economic analysis refreshing. He doesn't spend an inordinate amount of time trying to forecast the future but instead focuses on money flows. Todays Journal editorial highlights a rather contrarian view that near-zero interest rates are actually hurting the economy by pushing dollars abroad. The Fed's zero-rate policy and Washington's preference for a weak dollar has created a flood of capital flowing to Asia, into gold and into oil. Wall Street makes massive profits from trading unstable currencies, the carry trade (borrowing dollars at near-zero and buying longer-term assets abroad), and helping investors transfer capital off-shore. But this weak dollar policy does very little to help the small U.S. based businessmen grow.

Some interesting stats: Since 2001 U.S. GDP has fallen to 24% of global GDP from 32%. And U.S. equity market cap has fallen to 30% from 45%. Again, U.S. capital flees the weak dollar and high tax rates. 

As an aside, while our Global Tactical Asset Allocation model is currently fully invested, our U.S. equity exposure is only 30%.

Another interesting quote from St. Louis Fed President James Bullard, "If we were a developing-world country and we tried to run the policies we're running now, we wouldn't be able to get away with it. A breakdown is possible, people think we're the U.S. and it couldn't happen to us, but it could."

We've been getting some new accounts of late, and I'm often asked if we should get them fully invested immediately or if we should average them in over the next several months. While dollar cost averaging makes some intuitive sense, it is really just a way for advisors to save face if the markets were to correct shortly after they opened a new account. People argue that with the markets having run so far so fast, wouldn't it be prudent to ease in. My argument is really quite simple, people hire me to following my model and my experience, and since my model says fully invested, and I and all my existing clients are fully invested, then why shouldn't new clients be fully invested? The fact is, we don't know what the future holds, markets could sell-off tomorrow, or they could continue to climb for the next several months and then sell-off. The best that we can do is what we tell every client, we'll manage your money just like we're managing our own and our other clients, following our models and our experience.

Chris Wiles

412-260-7917

Thanksgiving, Finance & Poverty

Finance can defeat poverty

As we get ready to celebrate all that we have to be thankful for this year (and yes I have a lot to be thankful for) lets not forget those less fortunate. And lets not forget why most of them are so unfortunate...most of the world's billion hungry people live in countries where they have little incentive to prosper. For centuries economists have tried to figure out why certain countries prosper and others don't, you've probably heard some of these explanations. People in hot places don't work as hard. Wealthy countries have that old Protestant work ethic. Former British colonies are the richest countries. Nations with the largest populations of European descent do better. Geography, weather, tropical diseases, and nutrient starved soil doom certain areas to poverty . The lack of education and technology lead to poverty. While all of these theories  may have instances of relevance they just don't hold up to real world analysis. Take communist North Korea, with the same weather, geography and culture of its capitalist neighbor to the south, yet ten times poorer. Or the stark contrast twenty years ago between East and West Berlin. Or the stark contrast between those on one side of the Mexican boarder living in Arizona and those on the other side in Mexico. Or look at the difference between Cuba and Miami. Or look at China, where decades of stagnation and famine were reversed after they began introducing private-property rights.

Poverty happens where people have no incentive to prosper. Poverty happens where people believe that no matter how hard they work someone else will prosper before their children do. Poverty is all about incentives, or more appropriately the lack thereof.

People need incentives to prosper, they have to know that if they work hard and make money they can actually keep some of that money to improve their families future. The key to ensuring that those incentives are in place are strong rules of law and a government that believes in it. The government has to offer its citizens opportunities to achieve and innovate, and to keep most of the fruits of their labors. 

Fix incentives and you will fix poverty.

So this Thanksgiving lets not forget how fortunate we are to live in a country that was built on the rights of the individual, and let us continue to work to defend those rights here in the U.S. and help spread them throughout the world so we can truly put an end to poverty.

Happy Thanksgiving,

Chris Wiles

News on Rockhaven

Investment manager aims to lower risk

Sunday, November 22, 2009

By Len Boselovic, Pittsburgh Post-Gazette

As long and strange of a trip the past dozen years have been for investors, it's been equally long and strange for Mt. Lebanon investment manager Chris Wiles.
A year after Barron's named him the best equity-income managed based on his five-year performance, Mr. Wiles left Federated Investors in 1997 to launch his own investment firm, Rockhaven Asset Management. A dozen years and two detours later, he's flying solo at age 50, relaunching Rockhaven at a time when market behavior has even such professionals as Mr. Wiles stumped.
"It has very little to do with valuation and fundamentals. It has everything to do with where money is going to be treated the best," he said.
For the time being, that means just about anyplace but low-yielding U.S. Treasuries and the debilitated U.S. dollar, Mr. Wiles says.
"Almost everything else is more attractive," he said. As long as yields stay low and the dollar depreciates, investors will buy stocks, higher-yielding corporate bonds, [real estate investment trusts], commodities and gold."
However, once the unemployment rate drops, allowing the Federal Reserve to stave off inflation by raising interest rates, the party will end and it "won't be pretty," Mr. Wiles warns.
"I know it's setting up for something, but I don't know what it is," Mr. Wiles said. "When it changes, I'm going to be more defensive and protect on the downside."
The Sharon, Mercer County, native made a name for himself managing several Federated mutual funds, then did the same at Rockhaven. But the small firm's equity-income and dividend funds had a hard time drawing new money once the tech stock bubble burst in 2000. Hoping to attract more investors, he and co-owner AmSouth Investment Management sold Rockhaven in 2002 to Strong Financial, a Menomenee Falls, Wis., mutual fund operator.
A year later, Strong was one of several fund companies targeted by then New York Attorney General Eliot Spitzer and the Securities and Exchange Commission for improper trading. Strong was sold to Wells Fargo & Co. but Mr. Wiles didn't go along. He stayed in Pittsburgh, managing more than $2 billion in large cap portfolios for National City's investment management arm.
That lasted until the Cleveland bank's credit problems ended with its sale to PNC Financial Services Group last year. PNC already had large cap managers in Philadelphia, so Mr. Wiles restarted Rockhaven from his home. He was approved last week as a registered investment adviser by the Pennsylvania Securities Commission.
Investors looking for a "buy-and-hold" strategy won't find it at Rockhaven. Mr. Wiles says the strategy, recommended for many small investors, is dead. Here's why:
While stocks have returned about 9.5 percent annually since 1927, Mr. Wiles says that's misleading because it doesn't reflect the sharp swings Wall Street takes, movements that can produce dramatically different returns based on an investor's time frame for buying and selling. He cites the last decade as proof: the tech stock bull market and subsequent bear market, Sept. 11, the real estate and credit bubbles and the deluge that followed, and the market's rocketlike rise since March.
Mr. Wiles says he's developed a globally diversified strategy that will allow investors to get in and out of U.S. stocks, U.S. Treasuries, commodities, real estate and five other asset classes at appropriate times. What he came up with is a tactical asset allocation that won't squeeze the last penny out of bull markets but will minimize losses in bear markets. As a momentum investor, Mr. Wiles takes his buy and sell cues from swings in the prices of stocks, bonds and the other assets in his portfolio. He tested how those signals would have worked since 1999 and found that using them would have turned a $1,000 investment into $2,340 vs. $1,310 for the buy-and-hold investor.
"The key to the market timing I am doing is to participate in up trends and protect during downdrafts. It is really about lowering overall risk," Mr. Wiles said. "I have very firm buy and sell disciplines. Discipline and humility are the keys."
The knock on market timing is that, even if a manager makes the right moves at the right time, trading costs can eat up whatever advantage he has over a buy-and-hold manager. Mr. Wiles is curbing those costs by using exchange-traded funds. ETFs are baskets of securities built around indexes for stocks, bonds and other asset classes. Unlike mutual funds, which are bought and sold based on their price at the end of a trading day, ETFs trade like stocks. Their prices fluctuate throughout the day.
Mr. Wiles currently manages about $5 million. He is targeting investors with $500,000 or more, as well as charities and foundations with $1 million to $10 million.
While the last decade tested the mettle of even seasoned investors such as Mr. Wiles, it's been even harder on retail investors struggling to determine the best way to manage their retirement savings. Mr. Wiles doesn't think it's going to get any easier for them.
"They'll have to have a tougher stomach," he said. "I think markets are going to be volatile for a long time."

Len Boselovic can be reached at lboselovic@post-gazette.com or 412-263-1941.

Read more: http://www.post-gazette.com/pg/09326/1015180-435.stm#ixzz0XdA4PYKp

"Come senators, congressmen
Please heed the call
Don't stand in the doorway
Don't block up the hall
For he that gets hurt
Will be he who has stalled
There's a battle outside
And it is ragin'
It'll soon shake your windows
And rattle your walls
For the times they are a-changin'."

"The Times They Are A-Changin'"- by Bob Dylan

All chronic borrowers know how critical it is to keep a good working relationship with your banker. So it is no surprise that President Obama, winner of the Nobel Peace Prize, spent nary a moment letting pesky human rights issues get in the way of securing our next round of deficit financing, from our lead banker China. President Obama's first trip to China was a clear sign that "the times they are a-changin". We are at a turning point in relations between a weakening U.S. power and a China that senses its time has come. Unlike his trips to Europe where he was wildly embraced by the populace the Chinese authorities detained dissidents and stopped the wide broadcast of a town-hall meeting with students in Shanghai. Mr. Obama tried to argue that the Chinese need to allow the Yuan to strengthen, which would make China's exports more expensive, hence U.S. exports would be more affordable. This was met with a barrage of criticism from the Chinese that the U.S. was threatening the global recovery with its zero interest rate policy, which was leading to speculative bubbles around the world. He was also scolded to get his fiscal house in order and bring down the massive deficits. 

Asia, and China in particular are rapidly changing. Asia has accounted for about 50% of world GDP for most of human history. It dipped down to only 10% over the last couple of hundred years but has been rising quickly of late. China has grown recently via exports, (intra Asian trade actually exceeds trade with the West), but it is working rapidly on creating a domestic demand driven economy. The result will be 900 million Asians joining the global middle class, moving to big cities, eating more protein, and buying everything from cell phones to cars to computers. There are now 310,000 households in China with investible assets of at least $1 million. That ranks China just behind the top four — U.S., Japan, Britain and Germany. What’s startling, though, is the growth: China’s millionaire population has more than doubled since 2001. The Boston Consulting Group expects the number to double again in four years. China also has 106 billionaires, second only to the U.S. 
Demographically Asia has a huge edge over the West with it's much younger population (excluding Japan of course). This growth will continue to drive demand for nearly all commodities (energy, metals, and grains). China is growing weary of having most of it's currency holdings denominated in dollars. They're not about to make any big changes, but we should all expect them to gradually, incrementally, move away from the dollar. 

Of course they will have issues arise as they grow; pollution, protectionism, food and water shortages, and income inequality, just to name the obvious. But this is a society that is hell bent on improving the welfare of their citizens at any cost. This is a country that is spending $2 trillion on infrastructure, and building a new 75 story skyscraper every 3 hours! They will not be denied. 

The biggest threat to the United States is not military but economic. As we go begging, head bowed, for continued deficit funding, we lose control of our future and we lose some dignity. 

From an investment perspective we continue to have rather heavy exposure to emerging markets, commodities, and gold.

Brand New Day

"You can turn the clock to zero, honey
I'll sell the stock, we'll spend all the money
We're starting up a brand new day

Turn the clock all the way back
I wonder if she'll take me back
I'm thinking in a brand new way

Turn the clock to zero, sister
You'll never know how much I missed her
Starting up a brand new day

Turn the clock to zero, boss
The river's wide, we'll swim across
Started up a brand new day"

"Brand New Day" by Sting

Today I'm starting up a "brand new day"!

I’ve been a professional money manager for the last 25 years and have seen a lot, but the events of the last two years have truly illuminated for me a real weakness in the advice being given to many individual and institutional investors – “buy and hold”. Buying and holding the Standard & Poor’s 500 over the last ten years would have gotten you a nice 0% return, and a few ulcers.  Over my career, I have seen up years and down years. I have come to understand that being in the right global asset classes at the right time is far more important to total returns than picking individual stocks or bonds. Fortunately, with the advent and proliferation of ETFs the task of investing in exactly the asset class of choice is reasonably easy and inexpensive.

Last year, our global economy neared a complete financial meltdown, and governments and central banks around the world have spent trillions of dollars fighting Great Depression II. We may have won that battle, but the future holds much uncertainty as we figure out how to pay the piper with money we don’t have.

Rockhaven is really an outgrowth of what I am doing for my family and myself. Most investors I’ve met have the same long-term goal…to preserve and increase their purchasing power. I believe that this can only be done by continuously evolving with the markets, to be in harmony with what is working.  The future is always unknown, but one thing we can be sure of is that “buy and hold” is dead; instead risk management via disciplined asset allocation, or, if you prefer a Global Tactical Asset Allocation strategy is the way of the future.

I have prepared all my working life to implement this strategy, and I am now at a personal and professional place to be able to implement it for my family and others. I am very excited for both my future and that of my investors. If you would like to discuss this further please call me at 412-260-7917.

Chris Wiles, CFA

cwiles@rockhavencapital.com

www.rockhavencapital.com

“It is not the strongest of the species that survives, nor the most intelligent that survives. It is the one that is the most adaptable to change.”       - Charles Darwin

A Good Place to Start - Not Losing Money!

One of the guiding principals of Rockhaven is to cut losses short. Nothing makes me more ill than to see a continual decline in an investment. Some like minded quotes:

“The first rule is not to lose. The second rule is not to forget the first rule.” – Warren Buffett

“Whenever I buy or sell something , I always try and make sure I’m not going to lose any money first … my basic advice is don’t lose money. ” – Jim Rogers

“A loss never bothers me after I take it. I forget it overnight. But being wrong – not taking the loss – that is what does damage to the pocketbook and to the soul.”
-Jessie Livermore in “Reminiscences of a Stock Operator”

“I am always thinking about losing money rather than making money.” -Paul Tudor Jones

Capital--will go where it's wanted.

"Capital, both money and ideas, will go where it is wanted and stay where it is well treated."--Walter Wriston

Walter Wriston was the last great CEO of Citibank, where he served from 1967-1984, he understood capital. I've always thought that this business of money management was really rather simple. Sure we try and make it seem very complex and mysterious at times, but the simple fact is that if you follow the money you will probably be successful. Follow the capital and the talent and you will be able to predict the fortunes of companies, cities, states, and countries.
Just ask this simple question, do organizations attract money and talent, or do they repel them?
Why do our brightest want to work for Google or Apple, and not Xerox or Kodak?
In the early days of America we attracted talent from all over the globe. Why? Because we gave them freedom to pursue their dreams, we treated them fairly and we welcomed all kinds. Today we still attract the worlds brightest to our university's but then we turn them away after graduation.
Luckily in the 1930's the Nazi's initially rejected nuclear physics as "Jewish science".
Is our country striving to attract capital, or are our tax policies driving more and more of it to friendlier foreign shores?
Is your local community attracting new businesses or driving them away?
Is the firm you work for attracting the best and brightest?
Keep things simple; when you vote, vote for capital friendly politicians. And when you invest, invest where the capital is being welcomed and well treated.

Dark Vision for Muni Bond Holders

Sometimes I feel like all I do is find reasons to worry, (it's not usually that tough to do), and as I'm often reminded, "that's what I'm paid to do." Anyway, the following article is an excellent piece on the totally dire outlook for many municipalities. With shrinking revenue streams, and ballooning expenditures, we are in for a rather stressful period as bond holders of Municipal debt. I know it caused me to take a harder look at my personal holdings and start to think about potential exit strategies if the proverbial (you-know-what) hits the fan.
Read it and think.


Dark Vision
The Coming Collapse of the Municipal Bond Market
PDF  

By Frederick J. Sheehan

Municipal bondholder can weave a case supporting a personal municipal portfolio or municipal bond fund today. At what gain? At what risk?

The gains are well known. Municipal bonds pay a steady, known income. It is known because municipal bonds are presumed never to default. Municipal bonds pay out yields that may exceed the inflation rate.  Even if the yield is short of inflation, it is better than 1-2%, about what one can expect to receive on the most popular safe, fixed-income investment: a money-market fund. There is very little gain by an income-conscious bondholder: Betting against the odds and being right does not pay.

The central risk is the assumption of safety. Top rated municipal bonds offer little chance for a capital gain. (The most plausible possibility for gains today is if taxes are raised. The value of a tax-exempt security would rise.) Therefore, the best case is no negative developments.  If municipal bonds default, stop paying coupon obligations or simply delay payments, the premises upon which they are owned are shattered.

Today, the balance between gain and risk is tilted towards risk. The probabilities weigh against the bondholder. Municipal bondholders should satisfy themselves with answers to the following questions:

Will revenues - assessed house values, incomes, personal spending (sales tax) - recover quickly to previous levels?

Will municipalities refuse to pay for federally mandated programs? (There is hope here. Several towns in California have announced they will stop funding federal mandates.)

Will police, teachers, etc., accept lower retirement benefits without going to court?

Will courts force municipalities to "levy taxes sufficient to pay debt." 

For a municipality that has no other means to acquire revenue, will the federal government offer a blank check?

If the federal government lends money, will bondholders be paid in full?

Gloom, Boom, and Doom

I've been a long time subscriber and fan of Marc Faber's "Gloom, Boom, and Doom Report", and while I don't always believe in what he has to say he usually makes you think and he is often right. Please check out the following video interview.

Marc Faber is gloomy

Back to Work...Back to Play

Welcome to my first blog. Over the years I've probably written over a hundred newsletters, shareholder letters and other missives, but never a blog. I'm really looking forward to sharing my views on the markets, investing, and just about anything else that trips my trigger. And I'm really looking forward to the interactive nature of blogging, and the freedom to share my thoughts without big brothers censorship.
Hopefully you'll enjoy it as much as me.