Hello, hello, hello, hello, how low?

Hello, hello, hello, hello, how low?
Hello, hello, hello, hello, how low?
Hello, hello, hello, hello, how low?
Hello, hello, hello ,hello
With the Lights out it's less dangerous
Here we are now entertain us
I feel stupid and contagious
Here we are now entertain us
A mullato an albino
A mosquito my libido
yay 

Nirvana - Smells Like Teen Spirit

Hello, hello, hello, hello, how low? How low will bond prices go, and how high will yields climb? Today our fixed income indicators, both domestic and international, went from neutral to bearish, causing us to go to minimum weights in fixed income. Over the last several months of quantitative easing we've seen long-term yields climb over 50 basis points. As one of my old colleagues recently said, "You'd have to be stupid, or from Princeton (Ben Bernanke), to buy long-term US government bonds!" It's one of the few times I've found myself agreeing with him. 

Kurt Cobain was onto something when he said, "I feel stupid and contagious." I think a lot of those in power would like us all to be a little stupid and join them in their contagious behavior, hopefully you won't be one of them.   

While interest rates climb here in the US, as the Fed is the only buyer, they are also rising rather dramatically in Europe, especially in the PIIGS (Portugal, Ireland, Italy, Greece, & Spain). The Fed is battling the demon they see as the biggest threat, deflation, while the rest of us have to deal with a devaluing currency and rising inflation on everything we consume. Can we have both deflation and inflation at the same time? It appears so. In the grand scheme of things we have asset deflation (home prices and income falling), while at the same time we are having consumables inflation (oil, food, services, taxes, rising). It is very apparent in the steepness of the yield curve with three month treasuries yielding 0.15%, while 30 year treasuries yield 4.50%. I'm not sure how this ends, but our goal of "being in harmony with the markets" means that for the time being we will stand on the sidelines while this fixed income battle rages. We are now at 12.5% in cash equivalents and 17.5% in fixed income (very near our minimal weight of 15%, we still have neutral weights in TIPS and Emerging Market Bonds).

Off With Our Heads: 

Here is the latest from Bill Gross of PIMCO (aka Bond King) titled "Off With Our Heads" http://www.pimco.com/Pages/OffWithOurHeads.aspx#

In this missive Mr Gross, the manager of the worlds largest bond fund, tells us, "Don't go near those longer term bonds you fool." As he states, "Unequivocally, we have been playing the part of the female mantis, munching on the theoretical heads of future generations, while paying no mind to the wretches that will eventually be called upon to pay the bills."

It is another excellent piece from Mr. Gross. 

The Importance Of Being Open-minded:

I recently came across this great quote from Noah S. "Soggy" Sweat, Jr., a member of the Texas House of Representatives in 1952. It reminded me of how easy it is to take either side of an argument, and how important it is to stay flexible and open-minded. Here's his reply when asked about his position on whiskey:

“If you mean whiskey, the devil’s brew, the poison scourge, the bloody monster that defiles innocence, dethrones reason, destroys the home, creates misery and poverty, yea, literally takes the bread from the mouths of little children; if you mean that evil drink that topples Christian men and women from the pinnacles of righteous and gracious living into the bottomless pit of degradation, shame, despair, helplessness, and hopelessness, then, my friend, I am opposed to it with every fiber of my being.

However, if by whiskey you mean the oil of conversation, the philosophic wine, the elixir of life, the ale that is consumed when good fellows get together, that puts a song in their hearts and the warm glow of contentment in their eyes; if you mean Christmas cheer, the stimulating sip that puts a little spring in the step of an elderly gentleman on a frosty morning; if you mean that drink that enables man to magnify his joy, and to forget life’s great tragedies and heartbreaks and sorrow; if you mean that drink the sale of which pours into Texas treasuries untold millions of dollars each year, that provides tender care for our little crippled children, our blind, our deaf, our dumb, our pitifully aged and infirm, to build the finest highways, hospitals, universities, and community colleges in this nation, then my friend, I am absolutely, unequivocally in favor of it.

This is my position, and as always, I refuse to compromise on matters of principle.”

A funny look at our wired world by our friends across the pond:

My Blackberry Is Not Working! - The One Ronnie, Preview - BBC One

Be careful out there, and keep the light's on,

Chris Wiles, CFA

412-260-7917

www.rockhavencapital.com

For prior Rockhaven Views visit:

www.rockhavencapmgmt.blogspot.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.