Nothing really matters, Anyone can see
Nothing really matters
Nothing really matters to me
Nothing really matters
Nothing really matters to me
Watch the classic here: Queen - Bohemian Rhapsody
Lately, Mr. Market has been doing it's best imitation of Freddie Mercury..."Nothing really matters to me." The relentless march higher in the face of rising inflation, oil over $105/barrel, another strong leg down in housing, a new war with Libya, growing unrest in the Middle East, Portugal joining its fellow PIIGS Greece and Ireland at the bailout trough, continued nuclear fallout in Japan, and runaway deficits here in the good ole USA. I know bull markets like to climb a wall of worry, but this wall does appear a bit steep. Nevertheless, the S&P 500 is up about 4.5% from its March 16 low.
It's true that the worst thing for the market is surprises, so maybe all of the above worries are just old news that Mr. Market can ignore. Makes me wonder what kind of surprise would actually take the market lower?
One explanation for the upward grinding equity market, is that it is still the best game in town. With zero returns on cash (actually negative after inflation), the threat of rising interest rates, falling home prices, and the decline of the dollar, equities are relatively attractive. Corporate earnings continue to be rather robust, especially in those companies with pricing power.
So while I may have worries about that wall of worry, all of my equity and commodity indicators still have me fully invested and participating in the rally.
I recently prepared this Asset Allocation Chart for a client to show how our weightings have changed since last May. As you can see, we've been at maximum weight in equities and commodities since last August (coinciding with the Feds QE2). Cash and currencies have grown to 17.5% of holdings, mostly at the expense of fixed income.
Is this the real life? Is this just fantasy?
Caught in a landslide, No escape from reality
Caught in a landslide, No escape from reality
To many of us, the stock market and Washington seem far removed from reality. Reality for us is rather simple. We know what we pay for things we consume, and we know that amount is increasing. We know that nuclear fallout is dangerous. We know that fake economic growth created by printing money is illusory. We know that massive deficits are paid for with a lower standard of living. And we know that war is counterproductive to peace and stability.
Unfortunately, those in power seem to be living in a fantasy.
War
What is it good for
I was fortunate that I grew up just a tad too young to be drafted into the Vietnam War, but I do remember how war was on TV every night. Last week when we attacked Libya, I had my 11 year old daughter Rachel come over and watch the news with me. She was acting a bit callous, even for her, and I said, "This is important." She looked at me and asked, "What's so different about this war?" That's when it hit me, she's now grown up with war on the nightly news for her entire life...Iraq, Afghanistan, and now Libya. I didn't have a good answer for her.
I've clearly gotten more cynical as I've aged. I used to believe that it is OK to use our military power for good, for humanitarian efforts, for the spread of freedom, and I guess I still would if I ever saw an instance of it happening. We go to war only if it is to our economic benefit. Sure we try and wrap those wars in the cloak of humanitarian aid, but the reality is we only send troops into harms way if it will have a positive economic impact. Not that there's anything wrong with that, but let's just call a spade a spade.
Why would we attack Libya when an even larger humanitarian travesty is playing out just south of there in the Ivory Coast. A democratically elected leader is not being allowed to take office, and the defeated leader is killing freedom fighters at will, resulting in 300,000 - 400,000 refugees fleeing the country. Could it be that Libya has far more oil reserves than the Ivory Coast?
The only reason we are involved in Libya is that we need oil, they have oil, and hopefully a newly installed government will be sympathetic to our interests. Just a few short months ago we thought that crazy Colonel Gaddafi was coming around to our way of thinking, allowing western oil companies to drill off of his coastline, but those pesky freedom fighters got in the way. Now its time for Gaddafi to go.
Hypocrites? Not really. We and our Western allies will support any regime, when it is in our economic interest to do so, see Egypt, Saudi Arabia, and Bahrain. And unfortunately we will mostly ignore humanitarian crimes when there is little economic benefit, see Ivory Coast, Somalia, Darfur, China, etc.
I guess I'll have to have Rachel listen to some Springsteen.
A "Real" Look At Housing:
I believe it is critically important to look at "real" (inflation adjusted) returns instead of nominal returns. Real returns actually let you know if your standard of living is increasing or falling behind. This great chart, by VisualizingEconomics.com, shows 120 years of home prices here in the US. As you can see, a $10,000 house in 1890 would be worth just about the same amount in 2010, when adjusted for inflation. In other words, a house is a place to live, it is not a productive asset. Just because that $10,000 house in 1890 would be worth $350,000 today doesn't mean your standard of living has increased, it only means the value of a dollar has decreased.
Be careful out there, and keep the lights on,
Chris Wiles, CFA
412-260-7917
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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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