Pretty interesting quarter and year so far. Weren't many soothsayers predicting a 16% gain in the S&P 500 for the first nine months of this year! But of course the soothsaying business, always difficult, is even more unpredictable when the markets are openly manipulated by our Fed. Yes the Fed is guilty of price fixing, fixing the price of money. More on that in a second. The operative strategy was Risk-On!
Here is a quarterly and year-to-date performance chart of some major asset categories:
For the 3rd QTR Commodities were up 11.38%, Gold was up 10.76%, S&P 500 was up 6.34%, Int'l Stocks were up 6.08%, High-Yield Bonds were up 2.81%, Long-term Treasury Bonds were up 0.60%, and US REITs were up only 0.09%.
Year-to-date performance looks like this; S&P 500 up 16.43%, US REITs up 14.75%, Gold up 13.9%, Int'l Stocks up 9.57%, High-Yield Bonds up 8.06%, Commodities up 6.86%, and Long-term Treasury Bonds up 4.46%.
What's Going On?
"Tell me what you think about your sit-u-a-tion, complication, aggravation". The Fed's QEternity and ZIRP policies are driving investors out of zero yielding cash-like securities and into higher-risk securities. In addition to driving stock prices higher, the Fed's policies are clearly boosting inflationary expectations. As the following graphic shows, inflation expectations are dancing hand-in-hand with stock prices.
Another interesting graphic shows how the price of gold tracks the ever increasing debt ceiling. If the lame duck session of Congress passes legislation postponing the fiscal cliff for a few months, and raises the debt ceiling yet again, look for these trends to continue.
Where We Stand:
At Rockhaven our philosophy is to stay in harmony with the markets, and right now those markets are clearly moving into risk-on mode. The reason doesn't matter as much as the reality.
Here is how our three strategies were positioned as of October 1st:
Our more balanced Global Tactical Asset Allocation (GTAA) had about an 8.5% allocation to cash and a 9% allocation to Treasury bonds at the beginning of the month. Over the last two months we have significantly increased our exposure to inflation beneficiaries like stocks, commodities, real estate, and gold.
Our Focused Tactical Asset Allocation (FTAA) is already positioned to take advantage of the Fed's voyage into uncharted waters. The portfolio is ideally positioned for a yield hungry, inflationary environment. International REITs are now at a 40% weight, Master Limited Partnerships are at 20%, and US Stocks are at 20%. Gold has moved to a 10% weight and Bonds anchor the portfolio at 10%.
Our diversified Tactical High-Yield portfolio is weighted in all the areas where the Fed is chasing investors, yield and risk. The portfolios current yield is approximately 6.5%.
So this is where we stand today, livin' on the edge. Our heart and head tell us the Fed's strategy of open-ended easing will not be effective in substantially lowering unemployment, but it will be effective in inflating bubbles in risk assets. It is not an "All Clear" signal based on the long-term fundamental strength of the US economy, it is a "Temporary, Central Bank Orchestrated, All Clear" that may or may not lead to economic strength. The big risk is rapid inflation and currency devaluation. Participate, but be wary of the risks!
