What's Workin'
I'll admit it, I'm a fair weather fisherman. I love going into the woods on a hot day, deep into the shade, with the cool water lapping around my wadders. The noon-day sun struggling to penetrate the thick foliage, and the cool, clean air. No cellphone coverage, no CNBC, just the sounds of the water trickling over the rocks and the occasional bird chirping in the trees. Snags and tangles are no bother, they're just an excuse to sit down and take in the surroundings. To me, this is what heaven would look like.
Some days, I'm a little more adventurous, or serious than others. On those days I might stop by the local fly shop and check the chalk board that shows the local water conditions, and more importantly what's workin' now. Almost every fly shop in the country has one of these boards. People always seem to gravitate towards it for some friendly conversation, to find out what's workin', and of course for the shop to sell some flies.
We have similar boards in finance, but usually the people aren't as friendly.
Here's what's workin' in the first half of 2012:
Real Estate - The housing market may or may not have bottomed, but the rental market is on fire. REITs have been the best performing asset class of 2012. A combination of a strong rental market, depressed prices, and high yields have made this the standout sector so far this year. US REITs are up 14.6% (VNQ), and International REITs are up 15.62% (IFGL). The high-yielding mortgage REITs are up an even more impressive 19.18% (REM).
US Stocks - It's been a wild ride, but US stocks are actually up 8.90% (S&P500) so far this year. The second quarter was down 3.34%, and we can gain or lose 2% on any given day (2.5% on Friday), but 9% for six months is still pretty good.
Bonds - How low can you go? Yields on Treasuries and most other bonds have fallen pretty dramatically this year as investors sought out safe havens, therefore the total returns were pretty positive. Longer-term US Treasuries (TLH) were up 7.59% in the 2nd quarter and are now up 3.84% year-to-date. High-yield bonds (HYG) were up 2.44% on the quarter, and are now up 5.11% YTD.
Here's whats NOT workin' in the first half of 2012:
Commodities - Real fears of a slowing US and global economy have lead to a pretty severe correction in energy and industrial metals. Grains, on the other hand, have been doing much better of late due to the severe drought throughout the Midwest. The CRB index fell 7.86% in the 2nd quarter and is now down 6.91% YTD. The crude oil index (OIL) is down 20.02% for the quarter.
International Stocks - After a very strong 1st quarter, International stocks had an abysmal 2nd Quarter. Developed market stocks EAFE (EFA) were down 6.81% on the quarter, but are still up 3.27% YTD. Emerging Market stocks (VWO) were down 8.14% for the quarter but are up 4.5% YTD. Of course Friday's rally really painted the tape; EFA was up 3.61%, and VWO was up 4.20% Friday alone.
Gold - Gold has been in a pretty tight range for most of this year and ended the quarter near its lows. For the quarter gold (GLD) was down 4.27%, and is now up 2.11% YTD. Again, Fridays strong rally saw GLD rise 2.74%!
International Bonds - The abysmal situation in Europe has lead to a pretty tough market for most international bonds. Of course Germany, Switzerland, and Japan have been stronger, while the peripheral country's have been weaker. Overall IGOV was down 1.20% for the 2nd quarter and is down o.90% YTD. Emerging market bonds have fared a bit better, ELD was down 1.69% in the 2nd quarter, but is still up 5.69% YTD.
What the second half of the year holds for us:
Anticipation is such a pleasurable part of fly fishing that it sometimes seems a shame to go out someplace, cast, and try to catch something. Whenever I daydream about fishing the weather is perfect, and the bugs hatching all around me are exactly like the flies I'm carrying. Sly brown trout the size of basset hounds hurl themselves at my flies, and then fight like demons. I have the stream entirely to myself, except for the nude sunbather or two. Ahhhh....
In the real world conditions on the water can change rapidly. You can be totally skunked using the flies recommended on the chalk board, switch to some absurd pattern and Bam, a strike. Every fisherman knows that you need to be flexible on the water. You need a diverse box of flies, because you just never know what will or won't work until your toes are wet.
Fly fishing is about reading your environment, and adapting to what the river is giving you. Investing is very similar, what has been working may or may not work in the future. Successful investors carry a diverse toolbox, and don't become wed to one specific style or strategy. Being flexible and adapting to what the market is giving you is the key to success.
Standing hip deep in the stream, looking into the second half of 2012 is pretty scary. The rocks are slippery and the current is a bit faster than we'd like; continued economic weakness in Europe and China, turmoil in the Middle East, and political intransigency and uncertainty. Clearly, fishing in the second half won't be dull. In fact, the treacherous waters continue to make me more of an observer than an active participant. I'm more than comfortable sitting on the bank, enjoying the weather, and choosing my opportunities carefully. We enter the second half with 40% cash in our Global Tactical Asset Allocation portfolios.
Here's where we stand today in our Global Tactical Asset Allocation Portfolios:
US Equities -- 15% Neutral,
The US equity markets have rolled over a bit (they are about 6% off their highs). At this point US equity markets are not showing any strongly bullish or bearish trends.
Int'l Equities -- 3% Bearish,
both developed and emerging equity markets are in bearish territories. We remain at our minimal weight.
US REITs -- 6%
Bullish, we are still at our full US REIT target of 6%, but even they are trending towards neutral. REITs continue to be a huge beneficiary of the Feds ZIRP.
Int'l REITs -- 2% Bearish, international REITs have moved to bearish territory. After remaining in bullish trends longer than their international equity brethren they've finally succumbed.
Gold -- 5% Bearish, Gold has moved into bearish territory. Gold's trading range has been very narrow, but also fairly volatile.
Commodities -- 5% Bearish, economic weakness has caused commodities to fall (DBC is down 14% since March)
. There are some signs of bottoming, especially in grains, but still in bearish territory.
US Fixed Income -- 22% Bullish, US Treasuries have rallied to near record low yields again. High-yield bonds & MLP's have moved into neutral territory.
Int'l Fixed Income -- 2% Bearish, Even emerging market bonds have moved to minimum weight. We continue to avoid all European bonds.
Cash Equivalents & Currencies -- 40%, cash levels have increased dramatically, and are divided between the US at 38%, and 2% in China.
In summary, this is not fair weather fishing, uncertainty levels are very high and there are very few visible trends. Markets are not operating in their natural state. We do not have free markets. Global interest rates and currencies are being manipulated by central bankers. These markets are very binary, they teeter on the whims of elected and unelected political figures. I'm remaining cautious until real trends are visible. This is my money, and I'm trying to keep as much of it as possible.
If you'd like to sit down and talk about the markets, or go drown a few flies, please give me a call.
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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