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