Rumour Has It

All these words whispered in my ear

Tell a story that I cannot bear to hear

Just 'cause I said it, it don't mean that I meant it

People say crazy things

Adele - Rumour Has It

Lately I've struggled with writing this note. I'm at one of those points where there is just so much to comment on, that I am having trouble deciding where to start. I'm also grappling with the fact that so much of what is being "whispered in my ear, tell a story that I cannot bear to hear."  

First, I've been wrestling with how to describe my feelings concerning what I see as the "real" divide in America. I don't think it is a democrat/republican or conservative/liberal split. And I don't even believe that it is a 99% vs 1% battle. No, to me the country has become more and more divided into those that have "skin-in-the-game" and those that don't, the "elites". This is the divide in the Western world today, not rich versus poor. The "elites" are generally made up of politicians, some Wall Street executives, many in the mainstream media, the powerful heads of labor unions, and the CEO's of many large state-connected and protected multi-national corporations. They have created a world in which they can reap most of the upside and suffer none of the downside, they have no skin-in-the-game. 

The other 99% of us with "skin-in-the-game" are the unconnected wealthy, the middle class, and the poor. The elites would like us to think its class warfare, rich versus middle class and poor, but it's not. We don't begrudge those that have taken risks with their own money, and either failed or become wealthy. We begrudge those who take risk with other peoples money, and never personally fail. The Occupy Wall Streeters were on the right track, but they failed to differentiate between true capitalism and crony-capitalism or fascism. Capitalism, as it used to be practiced, lifted millions out of poverty. Today's bastardized crony capitalism, robs from the successful risk takers, and keeps millions from pursuing their dreams. The battle is not against wealth, it is against power and the abuse of power. Certainly wealth can and does, buy power, but wealth, in and of itself, is not evil. 

Speaking of those with skin-in-the-game, is there any group with more skin-in-the-game than our military. They risk it all for little or no upside. They represent the citizens, and fight for an ideal of personal freedom and responsibility. What happens when they realize that they are fighting to protect the elites, and not the constitution. Why do you think Ron Paul has more military support than all the other candidates combined? 

This is not just a US issue, look at what's happening in Greece. Sure the Greek economy is a hopeless basket case, but when you have the Federation of Greek Police threaten to issue arrest warrants to EU/IMF officials accused of "...blackmail, covertly abolishing or eroding democracy and national sovereignty," there is something deeper going on here. People around the world are waking up to the fact that the system has been massively corrupted. Capitalism is not the problem, crony-capitalism is.

It's Halftime America 

Clint Eastwood has drawn a lot of criticism for his Super Bowl halftime commercial for Chrysler (oops, Fiat). The main objection to the ad is that Clint (an avowed Libertarian) touts the success of a company that deserved to fail, but was instead bailed out with other peoples money (yours), as the "new" American way. It is total propaganda from our current ruling elite. Not sure what Clint's motivation was, but it was sad. 

Here is a much better version of the commercial brought to us by Omid Melikan. Please take four minutes to watch them both, which do you prefer?

Clint's version: Halftime in America: OFFICIAL Chrysler Super Bowl 2012 Commercial

Omid's version: A Better Halftime In America Commercial

Here's where we stand today in our Global Tactical Asset Allocation Portfolios:

Surprisingly, while many big picture issues are quite troubling, stocks are nearing four year highs ( the media tries to make this sound great, but all it really means is that for the last four years you've made nothing). In spite of Washington's interference, corporate America is showing signs of growth. I'm taking this growth with a grain of salt (actually I've always liked a little salt on my apple). Apple has grown so large so fast, that it is distorting the growth figures being reported in the S&P 500. In the fourth quarter the S&P 500 is showing earnings growth of 6.6%, but excluding Apple's 116% earnings growth, the earnings growth for the other 499 companies drops to 2.8%!

We will continue to diversify and take what the markets are giving us: 

US Equities -- 20% Bullish,

 we are now at our full US equity weight.

Int'l Equities -- 12% Neutral,

 we have now moved to neutral in our International equity weight. 

US REITs --  6% 

Bullish, we are now at our full US REIT target of 6%.

Int'l REITs -- 2% Neutral, international REITs have moved out of bearish territory

.

Gold --6% Neutral, Gold is neutral but the gold miners have been acting poorly.

Commodities -- 6% Neutral, the appearance of economic stability has caused commodities to begin rising

.

US Fixed Income -- 29% Bullish, the stabilization in the economy is slowing the flight to safety, and US fixed income is showing signs of slipping into neutral territory.

Int'l Fixed Income -- 3% Neutral, We continue to have zero exposure to European & Japanese bonds, but we are at neutral exposure to Emerging Market bonds.

Cash Equivalents & Currencies -- 18%, cash levels fall and are divided between the US at 10%, 5% in China, and 3% Australia.

Is Bernanke Part Of Italian Mafia?

Strange news story coming out of Switzerland today ( Italy Police Seize $6 Trillion of Fake U.S. Treasury Bonds in ... ) . It appears that the Italian anti-mafia police have seized $6 trillion (yes trillion with a T), of counterfeit  US Treasury bonds from Swiss safety deposit boxes. The strange thing is that they were dated 1934 and had a nominal value of $1 billion apiece. Now $1 billion in 1934 was bigger than our GDP, and the US has never issued a $1 billion note. Why would you go through the effort of making sophisticated, high quality, counterfeit treasury bonds that are clearly counterfeit? And they were going to use these clearly fake, but painstakingly realistic bonds to buy plutonium from Nigerians? Only one 15 second mention of this the entire day on CNBC. The cases the bonds were in appear to be genuine or very good counterfeits. Very weird!

The problem with fiat money is that it's only as good as the paper it's printed on. Head scratcher.

Here is what the bonds and the boxes look like:

  

NOTA Way Ahead In Polls:

In the race for the Presidency of The United States NOTA (None 0f the Above) is still way ahead in the polls. I'm starting a Super Pac for NOTA. I'm sure the kid would get the recognition he deserves if he was only able to get his message out. If you would like to contribute give me a call.

Be careful out there, and keep the lights 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.

Something For Nothing

You can't get something for nothing

You can't have freedom for free

You won't get wise

With the sleep still in your eyes

No matter what your dreams might be

Rush Something For Nothing

On this first day of February 2012 (2/1/12), I thought I'd offer up a little tribute to Rush and their 2112 album. 

As January Goes, So Goes the Year -

January was a pretty special month for the "Risk-on" crowd. The S&P 500 was up 4.61%, this was the best January since 1997, 15 years ago. Developed market international stocks were up 5.27%, and Emerging Market stocks were up 10.78%. The yellow metal, Gold, was up a glittering 11.40%. Most "Risk-off" assets, like US Treasuries were flat, long-term US treasury bonds were up 0.57%. All in all a great way to start the New Year.

There's an old Wall Street adage, "As January goes, so goes the year". Many talking heads have been rolling this out over the last week, and on its face the numbers look impressive. In the 82 years since 1926, this metric worked 70% of the time. But in those 82 years the market was actually up 76% of the time. When January is a down year, however, the probability that the rest of the year is down is just 35%. In fact a statistician will tell you that only 1% of the variation in yearly performance is explained by January's performance.

Don't get me wrong, I love an up market, it makes me look smart. Just don't believe that the rest of the year is clear sailing. 

ZIRP May Not Be Good For Stocks - 

Another common refrain, is that the Fed's zero interest rate policy (ZIRP), will force investors into higher risk assets, especially dividend paying stocks. While this makes intuitive sense, in the real world it doesn't always work that way. There was a period in the late 1940's and early 1950's when the Fed forced rates to very low levels to try and stimulate the economy. There are some interesting similarities between that time period and today. The Fed was saddled with a very high debt to GDP, which was caused by the cumulative effects of WWI and WWII. Even with an extraordinarily accommodative monetary policy and negative real rates P/E multiples on the S&P 500 fell below 7x. Investors didn't care, they were risk averse. The world was an uncertain place, another war was on the horizon (Korea), and the country was cautious.

Today we have a similar scenario. We are faced with a monstrous mountain of debt (built up by decades of overconsumption), and we are limping out of one financial crisis facing the prospect of more (Europe & Here). The Fed is doing its best to stimulate demand (encourage inflation), but Americans just aren't buying it. As mentioned above, we had the best January in 15 years, but January's volume on the NYSE was down 26% year-over-year, and down a whopping 59% from January of 2008. A Wall Street trader was quoted as saying, "Our desk is dead!" 

The Fed is pushing, and pushing hard, to get investors to take on more risk, but maybe investors just aren't that stupid. With total ineptitude in Washington (both parties), a mountain of debt that neither party is addressing, a tenuous global situation (both economic & political), is it any wonder that investors are sitting on their hands channeling Mark Twain ... "It's not the return on my principal, it's the return of my principal." 

If interest rates are pegged at zero for six years, its inevitable that the volatility of inflationary expectations will rise (witness gold). If the volatility of inflationary expectations rise P/E multiples decline. Stocks can head higher, just don't believe that it is a given, just because interest rates are at zero.

Below is a graph that shows Price to Earnings multiples over time. By this metric, stocks aren't exactly cheap.

Average holding period for a stock increased 10% last year -

Another interesting factoid. The average holding period for a stock increased by 10% in 2011, from 20 seconds to 22 seconds. Computer generated high frequency trades (HFT) accounted for 70% of all volume!

Life - and Death Proposition -

Please enjoy Bill Gross of PIMCO's recent piece, some excellent food for thought.

http://www.pimco.com/EN/insights/pages/life-and-death-proposition.aspx

Be careful out there, and keep the lights 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.