Clouds of myst'ry pouring Confusion on the ground.
Good men through the ages, Tryin' to find the sun;
And I wonder, Still I wonder, Who'll stop the rain.
Last weeks market activity felt like "clouds of myst'ry pouring confusion on the ground." Rarely have we seen such manic and frenzied activity. Trading activity was dominated by the machines (high-frequency trading (HFT), and algorithmic trading), how else do you explain a 600 point move in the Dow in under 60 minutes on Tuesday afternoon. Even with the massive volatility, the S&P 500 was only down by 1.64% on the week.
The bear market, since July 7, has been a great test for our Global Tactical Asset Allocation Model (GTAA). The S&P 500 is down 12.96% from July 7 through August 12, while our model was down just 2.7%. Last week our model was actually up 0.55% versus the markets 1.64% decline. And year-to-date the S&P 500 is down 5.14%, while our model is up 0.40%.
While a 0.40% year-to-date return may not be something to write home about, our first goal is to preserve capital, and secondly we want to increase purchasing power over time. Our model seeks to allow us to participate in the markets upside while protecting on the downside. We want to be in harmony with the markets, we don't try and forecast the unknowable future, we just try and get the present environment correct. The question we're faced with today is, how do you get in "harmony" with such a manic market?
For each asset we own, we have a bullish, neutral, and bearish weight. Currently we have about 22% in cash equivalents, but many of our indicators are turning bearish, which would cause cash holdings to increase dramatically. The problem with this market decline is that its descent was so rapid and steep the market may have already bottomed by the time our indicators fully move to bearish territory. In other words, we may be moving to our maximum defensive position after "the horse has left the barn".
All technical indicators give false signals at times, on both the buy and sell side. But if you're using the right indicators, they should still allow you to be on the right side of significant moves. Again, our investment objective is to protect our portfolios from significant drawdowns. If we do that, our long-term returns should be greatly improved. While we may get whipsawed a bit at times, the cost of being wrong is small, while the reward for being correct is quite large. So, we will continue to listen to the market, and our indicators, and get more defensive.
Five year plans and new deals, Wrapped in golden chains.
And I wonder, Still I wonder, Who'll stop the rain.
The markets have been pummeled with negative data for weeks;
- The divisive debt ceiling debate
- The US debt downgrade
- The absence of a pro-growth strategy
- The sovereign European debt problems leading to a new banking crisis
- But mostly the widening disillusionment of many of the worlds young and unemployed
It is no surprise that Consumer Confidence is at its lowest level in 31 years. With over 25 million Americans unable to find a job, and an existing workforce (outside of government employees) whose real incomes have stagnated for years, its clear we live in trying times.
The riots in England and other European countries have many of us wondering if the US is next? These riots are an outgrowth of worldwide inequality and the growing schism between the haves and the have-nots.
Speaking to Reuters late on Tuesday, looters and other local people in east London pointed to the wealth gap as the underlying cause, also blaming what they saw as police prejudice and a host of recent scandals. Spending cuts were now hitting the poorest hardest, they said, and after tales of politicians claiming excessive expenses, alleged police corruption and bankers getting rich it was their turn to take what they wanted. "They set the example," said one youth after riots in the London district of Hackney. "It's time to loot."
I hope that this unrest will not find our shores, but hope is a lousy investment strategy. The continued deleveraging of our excessive debt loads, both private and public, has put a decidedly negative tilt to global growth. And unfortunately more austerity in both Europe and the US means that we are in for a few years of tough times. Corporate profits have been very strong over the last two years, but how much longer can they continue to grow when faced with a contracting economy?
The developed world is in dire need of leaders who can put our economies back on a growth track, while still shrinking overall government, and keeping the peace. A tall order..."Who'll stop the rain."