The times are tough now, just getting tougher
This old world is rough, it's just getting rougher
Cover me, come on baby, cover me
This old world is rough, it's just getting rougher
Cover me, come on baby, cover me
On a day like today, crank it... Cover Me - Bruce Springsteen - Paris 85
Where We Stand:
Policy: There are a lot of culprits to blame for the markets decline over the last couple of weeks; our dysfunctional Congress and the debt ceiling battle, the downgrade of US Treasury securities to AA+, and the continuing banking problems in Europe. While all of those ongoing events have played a role, the real underlying reason for the weakness is the continuing Great Contraction. As I've said many times before, we are in the early years of a great debt contraction, where the governments and citizens of the developed world are being forced to live within their means. This credit contraction results in slower economic growth, slower economic growth results in lower equity prices.
In a landmark announcement, the Fed said that they believe the economy is going to be growing at substandard levels (i.e. <2.5%) for the foreseeable future, and that they will keep interest rates at Zero until mid 2013 (ZIRP). Thats right, savers will continue to get negative real returns for the next two years! The Fed may implement a version of QE3 if deflationary risks increase.
Bonds: Treasuries have rallied to incredible levels. The two year treasury had it's biggest percentage gain since 1976 (a 36% move) as yields fell to 0.19%. Three month T-bills yield 0.02%, while the ten year is now at 2.1%. Clearly there is not much room left for the 2 year to decline, but if deflationary forces grow the 10 year could fall to a 1% yield. Lock in that mortgage re-fi, and don't rule out an adjustable rate.
It's hard to get excited about bonds with yields at these levels, the risk/reward just doesn't make much sense, but if a Japan like deflation is in our future bonds will do OK, not great but OK.
Equities: Stocks are oversold near-term and any kind of policy response from the Fed or the White House could lead to a sharp short-covering rally. The markets are being driven by High-Frequency Traders (HFT), not by fundamentals. This market is not for the faint of heart, but some opportunities will present themselves. Dividend paying stocks are looking more and more attractive versus fixed income yields.
Economy: The economy is in stall speed (sub 2%) growth. We simply can not add jobs with growth below 2%. The Fed is telling us that they will do what they can to help stimulate growth, but the economy really needs help from Congress, namely tax and regulatory relief.
Dollar: The Fed will continue to pursue a weak dollar policy, that is what ZIRP is. Gold is the clear winner, but other asset based currencies should also do well.
Our Global Tactical Asset Allocation Positioning:
In a nutshell, we are defensively positioned and getting more defensive every day. We've done significantly better than buy & hold, ride-it-out, strategies during this period, call me if you want specifics.
US Equities -- 12% Neutral,
but the recent sell-off is moving our indicators toward bearish territory.
Int'l Equities -- 9%
Bearish, Developed markets (EAFE) are bearish, and Emerging markets are quickly moving into that territory.
US REITs -- 6%
Bullish, but moving towards neutral. High relative yields are offering some support.
Int'l REITs -- 2% Bearish
. The sell-off in Europe has knocked these stocks down.
Gold --10% Bullish, clearly being viewed as a fiat currency substitute.
Commodities -- 8.5% Neutral, but indicators moving downward with economic weakness
.
US Fixed Income -- 18% Bullish, with the Fed all but guaranteeing that rates will be kept low for the next two years.
Int'l Fixed Income -- 12% Bullish, but risk has increased with the European bank problems.
Cash Equivalents & Currencies -- 22.5%, divided between US, China, Australia, and Brazil.
This whole world is out there just trying to score
I've seen enough I don't want to see any more,
Cover me, come on and cover me
I've seen enough I don't want to see any more,
Cover me, come on and cover me
I've always enjoyed the E-Trade Baby commercials, this one is particularly relevant...enjoy...
One of the things I've always liked to do is public speaking, sharing what I've seen and learned over the years. If you have a group that is in need of a speaker, please give me a call. This is not a sales pitch, this is an educational presentation on investing. I've found that public speaking helps me hone my beliefs, so it's hopefully a win-win for both of us.