"Uncertainty is killing me
And I'm certainly not asleep
Maybe I've gone far too deep
Maybe I'm just far too weak
And that's the last place I want to be, the last place"
And I'm certainly not asleep
Maybe I've gone far too deep
Maybe I'm just far too weak
And that's the last place I want to be, the last place"
July saw the stock market rally on the back of strong corporate earnings, and the bond market rally on fear of economic collapse. Can this dichotomy continue? Can corporate earnings continue to strengthen if the economy falls? What an unusual time, in fact you may call it "unusually unusual." In his recent testimony to Congress our esteemed Federal Reserve President, Ben Bernanke, called the economic outlook "unusually uncertain." While non-voting Fed President Richard Fisher said businesses are not committing to growth due to "unmanageable uncertainty." And just yesterday voting Fed President James Bullard (a noted inflation hawk) stated that the Fed, "Must be prepared for a negative shock and be ready to expand the quantitative easing program through the purchases of Treasury securities." So the Fed, whose main job is to keep us all calm, is stating as calmly as possible, we're pretty certain that we are uncertain about this economic recovery, and since interest rates are already at zero we will probably seek to debase our currency again by buying a trillion or so of Treasury securities.
Yes, uncertainty is rampant, but the future is always uncertain. We live in a world where change is the norm. Our job is not to dwell in the past, but to live for today, and adapt for whatever tomorrow throws at us.
Investment management is really risk management, as the world changes the nature of risk changes. And since no one really knows what the outcomes of these changes may bring it is important to keep some powder dry for protection, as well as for those eventual opportunities. We may see protectionism emerge, or an increase in global unrest borne out of high unemployment, or even sovereign defaults on debt. We may also see none of the above. Good things can happen too. Whenever there are periods of high risk and uncertainty the performance correlation of most asset classes moves towards one, diversification becomes less useful, but opportunities arise. During periods of high risk, when nearly all asset classes move in tandem, we usually see the most lucrative opportunities emerge. We all must remain vigilant, but not blind to the opportunities.
All of this uncertainty is not without a bright spot or two. First, we have record low 30 year mortgage rates of 4.59%, which is great if you are certain of your continued employment prospects. Second, the Fed has made it pretty clear that one of the causes of their uncertainty is the uncertain future of taxes, and that it would make a lot of sense to allow the Bush tax cuts to stay in place for at least another year.
"Thousands were lost and maybe more
The question remains, "What is this for?"
Maybe it came unexpected
Maybe I'm left unprotected
And that's the last place I want to be, the last place"
The question remains, "What is this for?"
Maybe it came unexpected
Maybe I'm left unprotected
And that's the last place I want to be, the last place"
Things were looking pretty bleak for equities in the first couple of days of July as the media and nearly all technicians pontificated on the "Death Cross". In technical speak the "Death Cross," or as I prefer the "Dark Cross," happens when a securities 50 day moving average crosses below it's 200 day moving average, signaling that the uptrend is broken and a new downtrend is on the way. It is said that Mr. Market has a very perverse sense of humor, and that any time the majority of investors believe something is going to happen he makes sure that it doesn't. That is exactly what happened in July, since as soon as the S&P 500's 50 day MA broke below it's 200 day MA, it reversed and rallied strongly, ending the month up 6.80%. Fortunately our indicators for the US equity market never quite broke down so we stayed invested and participated in the rally. For the year the S&P 500 is now down -0.17%. This rally was not the exclusive domaine of US equities, we also saw strong moves in international equities with EAFE up 11.61%, emerging markets up 10.21%, and international REITs up 10.01%. Most commodity indexes were up about 6%, but gold fell about -5.0%.
The real story continues to be the Treasury market and it's rapidly disappearing yield. 2-Year Treasuries ended the month at a yield of 0.55%, while the 10-Year now yields 2.91%. You can get a 90 day jumbo CD to yield all of 40 basis points! Not only have yields plummeted in the treasury market, they have plunged in the corporate bond market (lowest in six years) and international fixed income markets as well. Our holdings in emerging market sovereign debt (EMB), and International developed market sovereign debt (IGOV) were up 4.05% and 5.52% respectively. The fixed income loser of the month was TIPS down -0.24%.
Investment Considerations:
This week we had a couple of trades that reflect this dichotomy in the markets. First we went from neutral in emerging market equities back to bullish, and second we went from bearish in international developed market sovereign debt to neutral. This reduced our holdings in cash equivalents to 27.5%.
Where do we stand?
US Equities -- Neutral, but moving towards Bearish
Int'l Equities -- Bearish for EAFE and Bullish for emerging markets
US REITs -- Neutral
Int'l REITs -- Bearish, but moving towards neutral
Gold -- Bullish, but moving towards neutral
Commodities -- Bearish, but moving towards neutral
US Fixed Income -- Bullish, record highs and overbought
Int'l Fixed Income -- Neutral, but emerging market debt bullish
Cash Equivalents -- At 27.5%. Our 5% in Chinese Yuan getting a little lift.
Be careful out there,
Chris Wiles
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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.
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