"Risk On," "Risk Off," "Risk On," explains the first three quarters of 2010. After a very tough second quarter for equities the third quarter was one of the best on record, in fact the S&P 500 had its best September in 72 years (up 8.96%). While none of the serious structural problems the world faces have been fixed, our central bankers have temporarily succeeded in kicking the can down the road via aggressive monetary expansion. This aggressive monetary expansion is leading to lower interest rates, and higher prices for risk assets, especially commodities and equities. But it is not without a cost! Every action has consequences, and in this case the sacrificial lamb is the US Dollar. With rates at zero, and the Fed embarking on a new round of quantitative easing (printing money to buy assets), they have nearly exhausted their alternatives for stimulating the economy. We now need help on the fiscal front from Washington. Namely, lower and certain taxes, serious cuts to spending and entitlements, and less of an anti-business attitude. Unfortunately, with Novembers election upon us very little if anything will be accomplished this year.
Regarding specific year-to-date performance, US REITs (+19.52%) and Gold (+19.18%) lead the performance parade, followed closely by US Treasury Bonds (+17.57%). US and International equities continue to lag (up 3.5% and 1% respectively), but are at least positive for the year. In fact, all the major asset categories we follow are now showing positive returns for the year.
Our goal at Rockhaven is to preserve and increase purchasing power over time. We do not try and forecast the unknowable future. Instead we try and stay "In Harmony with the Markets." We want to be more defensive when the markets call for caution, and more aggressive when animal spirits take over. As can be seen from our returns we've been rather successful for a diversified investment manager. Our model GTAA portfolio performance shows a positive year-to-date return of 4.79%, and our volatility (as measured by standard deviation) was only 2.91% (the lower the number the better).
The Table below shows the performance of our model and our major asset categories:
Performance Comparison 2010 | ||||||||||||
Benchmarks Ranked Year-to-Date | Ticker | Jan | Feb | March | April | May | June | July | Aug | Sept | Year-to-Date June 2010 | Standard Deviation Monthly Returns |
Real Estate REIT US | VNQ | -5.52% | 5.58% | 10.20% | 7.15% | -5.33% | -5.16% | 9.59% | -1.28% | 4.46% | 19.52% | 6.54% |
Gold ETF | GLD | -1.26% | 3.27% | -0.44% | 5.88% | 3.05% | 2.35% | -5.09% | 5.71% | 4.78% | 19.18% | 3.64% |
Treasury Bonds 10-20 yr | TLH | 2.82% | 0.11% | -1.13% | 2.29% | 3.25% | 3.85% | 0.78% | 5.43% | -0.87% | 17.57% | 2.25% |
Real Estate REIT Int’l. | IFGL | -6.05% | 2.43% | 4.55% | -1.24% | -9.70% | -0.28% | 10.01% | -0.11% | 11.61% | 9.74% | 6.89% |
Rockhaven GTAA Model | -3.56% | 2.13% | 3.19% | 1.51% | -5.40% | -1.05% | 2.88% | 0.25% | 5.21% | 4.79% | 2.91% | |
International Treasuries | IGOV | -1.03% | -0.02% | -1.22% | -1.36% | -3.29% | 0.78% | 5.52% | 0.70% | 4.76% | 4.60% | 2.89% |
Rockhaven GTAA Client Composite (net of fees & expenses) | -3.42% | 2.02% | 3.28% | 1.09% | -5.42% | -0.72% | 2.61% | 0.08% | 5.02% | 4.18% | 2.83% | |
S&P 500 Index SPDRS | SPY | -3.63% | 3.12% | 6.00% | 1.55% | -7.95% | -5.41% | 6.80% | -4.50% | 8.96% | 3.51% | 6.10% |
Commodities CRB Index | CRY | -6.27% | 3.46% | -0.52% | 1.60% | -8.25% | 1.46% | 6.12% | -3.71% | 8.58% | 1.23% | 5.57% |
International Stocks EAFE | EFA | -5.07% | 0.27% | 6.39% | -2.80% | -11.19% | -1.98% | 11.61% | -3.80% | 9.97% | 1.17% | 7.51% |
Some thoughts on where we're at:
1) Cheap Money = Speculation - It doesn't get much cheaper than zero, except when the Fed is actually printing money to buy assets. Probable outcome, expect rabid speculation.
2) Inflation is the Fed's Destination - Of course the Fed would love to see its monetary largesse result in some wage inflation and job growth, maybe that will happen, maybe it won't. The problem arises because they can't control where that liquidity will flow. Maybe asset inflation will make certain companies feel better and hiring will accelerate, maybe not. We do know that this increased liquidity is already finding its way into the prices of numerous commodities, oil, grains, and the highest meat prices since the 1980's (MOO, one of our agriculture ETFs is up 35% in the last 3 months. $100 Porterhouse around the corner).
3) Revaluation of the Yuan = Watch What You Wish For - Yes, if the Chinese Yuan appreciates versus the dollar then American exports will be more affordable. But again, every action has a consequence, and in this case the days of Wal-Mart importing cheap Chinese goods to feed the American consumers appetite are numbered. Expect to pay higher prices for nearly everything, inflation again.
4) Corporate Profit Margins Have Reached a Peak - Corporate America has done an admirable job implementing technology to squeeze every ounce of productivity out of their remaining employees, but with rising input costs, rising taxes, and rising regulation, it is hard to see how margins can expand further.
As we head into the fourth quarter we are about as fully invested as we get, about 2% in cash equivalents. As I've said in the past, I'm not thrilled about this artificial Fed engineered rally, but I intend to participate for as long as it lasts. The Fed is playing with fire. Rarely, if ever, has a governments willing debasement of their currency and resulting inflation, ended well! Of course the future is always changing and our plan is to change right along with it ... to be "In Harmony with the Markets."
Be careful out there, and keep the light's on,
Chris Wiles, CFA
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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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