Lighten Up Baby

Lighten up baby, I'm in love with you
Lighten up baby, I'm in love with you
Lighten up baby, I'm in love with you
I'm so tall and you're so cute,
Let's play wild like wildcats do

"Tall Cool One" by Robert Plant

Robert Plant-Tall Cool One

As we enter this long Memorial Day weekend, with temperatures in the mid 80's, I can't help but smile. It's been a tough month. Actually it's the markets worst May since 1962, with the S&P 500 down about 8%, and EAFE down 11%. How can you not smile? If you're reading this, you're probably vertical, and vertical is a great way to be heading into the weekend. 

We don't have to worry about another oil well disaster in the Gulf, since our President has assured us that the government will not let this happen again. I'm not sure how the government can assure that the cement casing around a wellhead 40 miles off the coast and 5,000 feet below the surface is properly sealed, but I know I won't worry about it this weekend. 

We also don't need to worry about Europe and the PIIGS. All the little PIIGS have announced austerity programs that will get their deficit spending under control. The Chinese have said that they aren't planning to sell their European bond holdings (yet). Not sure that the Chinese would tell us that they were dumping their bonds before they actually sold them, but hey. The Euro has bounced from 1.22 all the way up to 1.23. No worries here.

The Chinese are also flexing a little diplomatic muscle telling their North Korean buddies, to cool it off. No worries here either.

Our government regulators are still searching for a cause of the May 6 "flash crash," which I'm pretty confident they won't find this weekend, since they've never found a cause for the one-day 20% plunge back in 1987. 

No, this weekend is all about "Lightening up," enjoying the company of loved ones, and remembering all those who paid the ultimate price so we would have the freedom to not worry about so many things. Oh yeah, don't forget to have a "Tall Cool One."

Recently I was reading an interview with comedian Dave Barry and he was asked about his fascination with death, he summed it up as a coping mechanism.  "The truth is if you're a conscious human being, you are conscious more and more of two things. First, you're going to die. Second, while you're alive, bad things are going to happen to you and people around you, and there's nothing you can do about it. I formed a theory a long time ago that there are two reactions to that. One: religion. You create an afterlife. Now I think it's a good idea, it makes people calmer. And then there's humor. At its basis humor is a strange, nervous reaction to, you know, death."

This got me thinking. When people aren't worried about dying, they're often worried about their money. They don't want to obsess about it constantly, so like death, they look for a coping mechanism. One: instead of religion they have a myriad of financial "experts" telling them that everything is going to be OK. It's a nice idea because it makes people calmer and allows the financial "experts" to make a good living. Then there's humor. A way to laugh about your insecurities and the knowledge that nobody really knows what is going to happen. I remember way back when I was a young trust investment officer at Mellon Bank during the dark days of October 1987. My cubicle mate and I were making morose jokes about the markets collapse, and I remember saying, "Lighten up, it's only money, and it's not ours!"  At the time, we found that hilarious. And to this day, I constantly prefer to cope with the unknowns of the markets via humor instead the calming wisdom of the financial "experts."

If you do find yourself with a little time on your hands this weekend I would recommend the following;

This link is to today's WSJ Editorial by Mark Spitznagel, the Founder and Chief Investment Officer of Universa (this is Nassim Taleb of "Black Swan" fame's hedge fund). It is by far the best explanation I have read about what is happening today, and its cause is the Fed's zero interest rate policy, not some fat fingered trader. 

The Fed and the May 6 'Flash Crash'

This is a short interesting video of the demand for Gold in China.

Chinese dumping worthless currency for gold (17May10)

Another very good video from Hugh Hendry, another outspoken and often right hedge fund manager.

Newsnight 26th May, Hugh Hendry 'I would recommend you panic'

This has absolutely nothing to do with the markets, it's just a feel good Pittsburgh song:

"Dahntahn Song" Comedian Mark Eddie Sings about Pittsburgh. (lyrics listed)

Be careful out there,

Chris Wiles

www.rockhavencapital.com

This article contains the current opinions of the author but not necessarily those of the Rockhaven Capital Management.  The author’s opinions are subject to change without notice. This article is distributed for informational purposes only. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

    

Just A Little Of That Human Touch

Oh girl that feeling of safety you prize
Well it comes with a hard hard price
You can't shut off the risk and the pain
Without losin' the love that remains
We're all riders on this train

"Human Touch" By Bruce Springsteen

Bruce Springsteen - Human Touch

The Two Main Risks in Investing:

The two main risks in the investment world are: 1) The risk of losing money, and 2) The risk of missing opportunity. As investors we constantly struggle with these opposing risks. You can completely avoid one or the other, or you can compromise between the two, but you can't eliminate both. One of the reasons investing is so challenging (in a good way) is the balancing act between these two risks. When do you emphasize one risk over the other, and by how much? During bull markets the risk of loss rises, but the lure of missing opportunity is very seductive. During bear markets the risk of loss is low, but the pain of losing more is powerful. With all of our sophisticated computers and models, it still requires a "human touch".

At Rockhaven, our philosophy is to be "in harmony with the markets". Through broad asset diversification we seek to be exposed to what is working, and under exposed to what isn't. The last two weeks have seen a massive increase in volatility and we have seen a decided shift in the markets risk preferences. There has been a dramatic shift out of european equities and fixed income, and a flight to "perceived" lower risk US fixed income and gold.

Where do we stand?

US Equities -- Bullish, but rolling over

Int'l Equities -- Neutral for EAFE and Bullish for emerging markets, but weakening

US REITs -- Bullish

Int'l REITs -- Bearish

Gold -- Bullish

Commodities -- Neutral

US Fixed Income -- Bullish

Int'l Fixed Income -- Bearish, except for emerging markets

Cash -- Increases to 13%

Bloomberg TV Interview with Nassim Taleb:

I am a big fan of Nassim Taleb author of Black Swan and Fooled By Randomness. Nassim is not your conventional investment professional, he calls them like he sees them regardless of who gets hurt.

In this interview on Bloomberg TV, he cuts no corners. He dislikes Geithner, Summers, anyone in the OMB, and Bernanke. He thinks the euro bailout is a disaster. He thinks the structural problems in the EU and the US haven’t changed since the crash. You don't cure a debt problem with more debt! He thinks schools teach all the wrong stuff about economics and investing. His biggest worry, as is mine, is a failed treasury auction. He thinks that long-term Treasurys should be avoided. He is worried about hyperinflation.

One of the funny things he mentions in the interview is that Geithner’s house is very near his and that he is way under water, and we shouldn’t have guys like that running our treasury. I've also posted a “Daily Show” skit on Geithner’s house.

There’s some really good stuff here.

Taleb Says Focus on Specific Trades in Sell off Misguided

Geithner's House -- Home Crisis Investigation

OK so our Treasury Secretary bought the house at the top of the market on 8/16/2004 for $1,601,700. He initially listed it for $1,635,000 and lowered the price to $1,575,000 on 5/22/2009, Zillow puts the current value at $1,273,500. So Geithner is down about 20%, if he can sell it. It appears that the house is currently off the market, and is being rented. The funny part is that he bought the house from Goldman Sachs Vice President Michael Millette, and the day he bought it he took out an additional $250,000 home equity line of credit (hopefully not to buy that bathroom tile)! 

I love the internet. If you want to check it out yourself on Zillow the address is 32 Maple Hill Dr., Larchmont, NY 10538-1614. 

Attack of the 50ft Pelosi:

This is one of the funniest political ads I can remember, enjoy!

Attack of the 50ft Pelosi -- Share This!

Be careful out there,

Chris Wiles

www.rockhavencapital.com

This article contains the current opinions of the author but not necessarily those of the Rockhaven Capital Management.  The author’s opinions are subject to change without notice. This article is distributed for informational purposes only. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

    

Welcome Back My Friends to the Show That Never Ends

Welcome back my friends to the show that never ends
We're so glad you could attend
Come inside! Come inside!
There behind a glass is a real blade of grass
be careful as you pass.
Move along! Move along!

Right before your eyes, we pull laughter from the skies
And he laughs until he cries, then he dies, then he dies
Come inside the show's about to start, guaranteed to blow your head apart
You've got to see the show, it's a dynamo
You've got to see the show, it's rock and roll...

"Karn Evil 9 First Impression" by Emerson, Lake & Palmer

Emerson, Lake & Palmer - Karn Evil 9

Act One:

American's living large; new cars, flat screen TV's, and everyone deserves to own a house.

Interest rates will be held at historically low levels, and everyone qualifies. Life is good, in fact you can even buy hats and shirts that remind you "Life is Good".

Act Two: 

American's discover that house prices don't always go up, especially when a huge segment of the population can't make their mortgage payments.

It appears that the banks who made all those mortgages spread their risk to so many other banks that everyone was exposed...spreading the risk meant that they all went down together.

Act Three:

The markets swoon as fear runs through the land. A few astute investors profit from the collapse of Lehman Brothers, American International Group, and Fannie and Freddie Mac. 

Will our financial system survive?

Act Four:

Fed Chairman Bernake, our Treasury Secretary, and Congress ride to the rescue. Congress gives the banks $700 billion, and the Federal Reserve prints $1 trillion to bail out all those to big to fail.

Newly elected President Obama enters stage left (far left) with $787 billion in fiscal stimulus.

Intermission:

The audience wonders if the numerous rescue packages will be enough to allow them to return to their prolific ways, or if there are other plot twists that may "blow their head apart."

Act Five:

Amazingly, with the ability to borrow at zero, the banks are posting record profits. Bonuses are back, some real estate is stabilizing, and corporate America is showing its resilience.

Things are looking brighter, especially if you are not part of that 17% unemployed crowd.

Act Six:

A twist, it seems that America was not alone in living the good life. Other countries around the globe also went through their boom's, bust's, and bailout's. 

But it appears that some minor characters (call them the PIIGS), are struggling with the debt they took on to bail out their citizens and banks.

Unbelievably, some nasty bond vigilantes are actually tiring, of buying debt being issued to pay off debt...something about the debt never dying.

The citizens riot when they begin to realize that their promises of the good life were just promises.

Act Seven:

The markets swoon as fear runs through the land. But again the white knight rides to the rescue with his $1 trillion rescue package, put together at the last moment by the European governments and the International Monetary Fund.

The rescue package has bought time, but was there enough fear to force the citizens into austerity, and how can a country grow when its citizens are being forced into austerity?

Act Eight:

Still working on the ending...happy or sad? Do competitive devaluations lead to scary inflation? Can governments forced to cut deficits and renege on promises grow their economies? 

The markets know that when governments can't cut spending or raise taxes or grow their economies fast enough to pay their debts, they don't pay them.

To paraphrase Maggie Thatcher,"Socialism dies when it runs out of other peoples money."

"And he laughs until he cries, then he dies, then he dies."

Be careful out there,

Chris Wiles

www.rockhavencapital.com

This article contains the current opinions of the author but not necessarily those of the Rockhaven Capital Management.  The author’s opinions are subject to change without notice. This article is distributed for informational purposes only. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

    

"Livin' On A Prayer"

We've got to hold on to what we've got
'Cause it doesn't make a difference
If we make it or not
We've got each other and that's a lot
For love - we'll give it a shot

We're half way there
Livin' on a prayer
Take my hand and we'll make it - I swear
Livin' on a prayer

We've got to hold on ready or not
You live for the fight when it's all that you've got 

"Livin' On A Prayer" by Bon Jovi

Bon Jovi - Livin' On A Prayer

The first time I found myself humming along to "Livin' On A Prayer" was back in 1987, when it was the number one song in the land. You remember 1987 don't you? Big hair bands and the largest one day loss in the S&P 500 on October 19 of 20.4%. Intraday today the S&P 500 was down 8.72%! That is the largest intraday decline since 1987! Now it finished down only 3.24%, but during that brief 30 minute period, I couldn't help thinking back to those dark days in 1987.

It's still to early to determine the exact causes of the rapid sell-off, and we may never really know, but it does appear that as in 1987, today was another case of "computers gone wild". We were down about 1.5% at 2:30 and by 2:45 we were down another 6.30%. By 2:49 we retraced 5% of that mysterious 6% plummet. Rumors ranged from the fat finger hitting the B key instead of the M key (B as in billions vs. M as in millions), to simply erroneous pricing. An example was big old Procter & Gamble trading at $61.50 at 2:47, and $39.37 one minute later at 2:48, then closing at $60.75. What was real was the fact that trading volume spiked to 19 billion shares, the most since October 7, 2008. It appears that electronic trades started cascading after each other on the downside before reason set in. The exchanges are working to find the cause, and will unwind many of those erroneous trades.

Outside of today's crazy computer trading, we really have seen a precipitous decline over the last three days, here are some numbers:

S&P 500 -6%

Europe,Australasia,FarEast (EAFE) -10.3%

Emerging Market Equities (VWO) -11.5%

Int'l REIT's (IFGL) -8.2%

Emerging Market Bonds (EMB) -6%

Int'l Sovereign Bonds (IGOV) -3%

On the plus side you have:

US Treasury Bonds (TLH) +3%

Gold (GLD) +3.7%

Clearly, beyond today's computer generated theatrics, we have seen a flight to safety and an unwinding of several risk trades. The troubles in Greece, and the fear that the debt default contagion may spread throughout Europe, are enough to make investors run for cover. 

Investment Considerations: While most of our indicators have been firmly in the bullish range, after the last three days we are seeing some serious downward divergences in several market indicators. Over the next several days we will be watching and acting if need be. The beauty of Global Tactical Asset Allocation really shows itself during periods like this. Our broad diversification resulted in our model portfolio being down only 1.75% today, and if these bearish trends persist we will continue to raise cash and ride out the storm. 

As Bon Jovi so elegantly put way back in 1987, "We've got to hold on to what we've got".

Be careful out there,

Chris Wiles

www.rockhavencapital.com

This article contains the current opinions of the author but not necessarily those of the Rockhaven Capital Management.  The author’s opinions are subject to change without notice. This article is distributed for informational purposes only. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

  

I May Be Going To Hell In A Bucket, Babe

You imagine me sipping champagne from your boot
For a taste of your elegant pride
I may be going to hell in a bucket, babe
But at least I'm enjoyin' the ride
at least I'm enjoyin' the ride
Yeah, at least I'm enjoyin' the ride

"Hell in a Bucket" by The Grateful Dead

Grateful Dead - Hell In A Bucket - 06-26-94

I've gotten a lot of questions lately that go something like this, "With the world going to "hell in a bucket", why on earth is the stock market going up almost every day?" Well the simple answer my friend is that with zero interest rates where else do you expect the money to flow. Corporate earnings have been stellar (especially large corporations), and profit margins are near record highs. It's really not that difficult to see why. If you are a large corporation your cost of capital is low single digits, and your remaining work force is working overtime to keep their jobs. Of course banks are showing the most remarkable earnings as they continue to borrow at 0% and then turn around and buy treasuries yielding 3%, why hire anyone or loan money to anyone when you can get a risk free return of 3%? Yes we are having a tax-payer subsidized, risk-free melt-up, enjoy the ride. There really are only three losers: savers earning 0%, small businesses not able to borrow at 0%, and future tax-payers saddled with paying off the debt when interest rates soar. Not to worry unless you fall in one of those three categories...oh shit, I fall in all three. 

Investment Considerations: We are at maximum weight in US and International equities, US and International REIT's, Gold and most commodities. Inflation oriented and risk oriented assets are all in positive trends. Also restocking the wine cellar.

How do people go bankrupt? "Slowly, then all at once."

One of my favorite Ernest Hemingway quotes, that perfectly sums up what is going on in Greece and many other sovereigns. As I've said for several months the situation in Greece wasn't pretty, and the solutions were even less so. This week started to remind me of 2008/Bear Stearns/Lehman Brothers, all over again; it was a great reminder of just how fast things can unwind. Last Thursday April 22, Greek 2 year notes were yielding 10%, on Monday they were yielding 13%, and on Wednesday they peaked at 26%, and they are now back to 13%! 

Now it appears that Greece has agreed to a 24bn euro austerity package in order to get a 120bn euro loan package. Some of these austerity measures are extreme. It appears that Greece's public workers will have to endure a three year wage freeze, and they will lose their 13th and 14th month salaries. Now I thought the Greeks were on the same calendar as us, but it appears that they used to get paid an extra month for Christmas and an extra month for Easter. The pensioners will face the harshest cuts as the average retirement age will rise from 53 to 67. The head of the private sector union warned of confrontation ahead. I honestly believe that the Germans are throwing good money after bad, and that eventually default will be the only solution for Greece. 

Greece is known as the birthplace of democracy, will it also become known as the gravesite of social democracy? 

The biggest issue now is what happens to the European Union and the Euro. One way to view the Euro is like a club, there are rules for inclusion and rules to stay in. The reason there are rules is because the members want consistency, they want to know what to expect, no surprises. The Euro started out that way, and one of the rules for inclusion was that each member country had to have their fiscal house in order, and had to keep it that way. One of the rules was that a countries deficit-to-GDP ratio had to be below 3%, Greece's ratio is 13.6%. The problem with the European Union, like all clubs, is that if you don't enforce the rules, then why bother having a club. If Germany does not refuse to bail out Greece they will be known as the world's biggest "patsies". All of their hard earned wealth, success, and competitiveness will be used as a "cash cow" to bail out those countries that decided to go the easy money/debt/don't pay your taxes route. While it would be painful, especially for the european banks who loaned them money, the eurozone would be greatly enhanced if they allowed Greece to default.

Investment Considerations: We continue to be at a minimal weight in non-US sovereign debt, and as I mentioned earlier we are at a maximum weight in gold. 

Your House Priced in Gold

Here's a really interesting chart I found comparing the value of US housing versus gold. Specifically it shows how many ounces of gold it takes to buy the average American house.

This ratio peaked back in 2001 at about 825 ounces, when gold was trading at about $276/ounce and houses were at about $227,700. It is currently at 253 ounces to buy the average house. That works out to gold trading at $1,166/ounce and the average house at $295,000. So even though the average house (priced in dollars) is up 30% since 2001 (3% per year), it is actually down 70% when priced in gold. Remember that gold was fixed at $35/ounce until 1971, it quickly rose to $180/ounce in 1975, and then shot up to $700/ounce in 1980.

Is this chart reflecting the volatility of gold, the volatility of housing, or the volatility of the US currency that they are both priced in? Good question, that I am not even going to begin to try and address in this short note. Suffice it to say that whenever people begin to distrust the promises backing their fiat currencies, gold tends to do rather well. What do you think this chart would look like for Greek housing, especially if Greece defaults?

Investment Considerations:  We have been at a maximum weight in gold for over a year now, and that trend has not broken.

Red Skelton - Pledge Allegiance to the Flag

When I was growing up we never missed an episode of "The Red Skelton Show". I had forgotten just how special he was until a friend sent me this link...priceless!

http://media.causes.com/604250?p_id=42563578

Be careful out there,

Chris Wiles

www.rockhavencapital.com

This article contains the current opinions of the author but not necessarily those of the Rockhaven Capital Management.  The author’s opinions are subject to change without notice. This article is distributed for informational purposes only. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.