Superstitious

Very superstitious, writing's on the wall

Very superstitious, ladders bout' to fall

Thirteen month old baby, broke the lookin' glass

Seven years of bad luck, the good things in your past

When you believe in things that you don't understand

Then you suffer

Superstition ain't the way

Stevie Wonder ~ Superstition

Happy Friday the 13th, nothing scary here, just keep moving along. So far in 2012 the S&P 500 is up 2.2%, Emerging Market stocks are up 3.6%, and Gold is up 4.6%. A few scary happenings over in Europe as investors struggle with the term "voluntary haircuts". EAFE stocks down 0.02%, and International Bonds down 3.22%.

We've made some big changes to our allocations this year, here's an update:

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

The big change from the end of the year were the increases in US stocks (VTI) now bullish, US real estate (VNQ) now bullish, the total elimination of Developed Market International Bonds, and a swap out of the Total US Bond market (BND) into the US Long-Term Treasury Bonds (BLV). Cash was lowered slightly to 29.5%. Exposure is similar to a barbell; US Equities & US REITS on one end and US Long-Term Bonds on the other, with very little in the middle, other than cash. 

US Equities -- 20% Bullish,

 we are now at our full US equity weight.

Int'l Equities -- 5% 

Bearish, we are now at our minimum International equity weight. 

US REITs --  6% 

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

Int'l REITs -- 2% Bearish

. The sell-off in Europe has knocked these stocks down.

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

Commodities -- 5% Bearish, we are now at our minimum target of 5%

.

US Fixed Income -- 24.5% Bullish, a flight away from European debt continues to benefit US bonds, both Treasuries and High Yield.

Int'l Fixed Income -- 2% Bearish, We've totally eliminated our exposure to European & Japanese bonds. Still maintaining a minimum exposure to Emerging Market bonds.

Cash Equivalents & Currencies -- 29.5%, divided between the US at 30%, 5% in China, and 3% Australia.

President Hits Head On Ceiling:

In case you missed it we've hit our debt ceiling again, and President Obama is asking his colleagues in Congress to bless another increase. Here is an excellent video that puts the Debt Limit in perspective. Enjoy:

http://www.youtube.com/watch?v=Li0no7O9zmE&sns=em

Another nice graphic of just how volatile 2011 was compared to the prior decade. Even though the S&P 500 ended the year basically unchanged, it was a hell of a ride:

When it comes to investing I think  Stevie Wonder said it best, "When you believe in things that you don't understand, then you suffer."

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.

And I Think It's Going To Be A Long Long Time...

And I think it's going to be a long long time...

Elton John - Rocket Man

This is going to take a long long time. No quick fixes, no rabbits in the hat, no Mars to the rescue, no easy way out. "Mars ain't the kind of place to raise your kids, in fact it's cold as hell." 

Our problem started in earnest in 1971, when the US and the world abandoned the gold standard and adopted a debt-based credit standard. Some call it the dollar standard, but it is really a credit standard based on dollars. For the next 30+ years countries around the world learned how to grow through the expansion of credit. The creation of credit grew so rapidly that it significantly overtook the creation of real goods. Money has been printed, interest rates lowered to zero, assets have been securitized to the point of no return, but finally in 2008 the wheels began to fall off. The worlds central banks rode to the rescue with even more credit, substituting sovereign credit for private credit. Now it appears that this trend may also be nearing its end, at least in Europe. The financial markets are slowly imploding (delevering), because there is simply too much paper and very little trust. 

Some say the US will be OK because we have already started down this delevering path, unfortunately that couldn't be further from the truth. Sure corporate America has delevered, and US households have cut back a bit, but the US government is actually banging on the debt ceiling again. The following chart shows how debt exploded after 1970, and how recently the government has simply taken over the credit expansion reigns:

After 30 years of credit exploding, and with our built in entitlement promises, it is hard to see a rapid delevering ensuing. Not that a rapid delevering is something to wish for. Rapid delevering happens in depressions. No, this process we are entering will take time, a long long time. Economic growth will be muted at best, and interest rates will be held at extremely low levels. These facts have caused us to make some rather substantial changes to our Global Tactical Asset Allocation model. The first such changes we've made in two years. 

First, when it comes to fixed income investing, investors need to worry about credit risk (will I get my principal back) and interest rate risk (will interest rates change dramatically by maturity). In the old days we could check our credit risk worries at the door when buying sovereign bonds (developed nations don't default, they don't even get downgraded), that's not the case any longer. No, today we have to worry about both credit risk and interest rate risk. Just look at those wonderful Greek government bonds that were trading near parity with German bonds just a few years ago, now they are 80% lower. The same scenario is unfolding in Italy, Spain, Portugal, and even France, credit risk is front and center. It's one thing to loan money to a relative and not expect to get paid back, it's entirely different thing to loan money to a government and worry about getting paid back. The perverse part of ZIRP is that with rates at zero there is no incentive to loan governments money and take on the credit risk. Liquidity dries up. 

That being the case we see no reason to allocate assets to European or Japanese government bonds, and are therefore eliminating our exposure to International Government bonds (IGOV). We still have some exposure to emerging market fixed income since their balance sheets are much better than the developed worlds. Those holdings were reallocated to our other fixed income holdings.

The second big change we made was to eliminate our US Total Bond market exposure (BND), which buys bonds all along the yield curve, and replace it with a purely Long-Term US Government Bond holding (BLV). If deflation continues to be a risk then these bonds should continue to do well. Alternatively, if inflation becomes a risk our holdings in TIPS and higher yielding bonds should do well. This is much more of a barbell strategy, to take advantage of what appears to be fatter and fatter tail risk.

 

Finally, we did a little house cleaning by eliminating one of our redundant commodity holdings (CRBQ), and reallocating the proceeds between (DBC) & (MOO). Overall we are still fairly defensively positioned with 37.5% in cash equivalents, and a total portfolio correlation to the S&P 500 of 0.38.

Investing is not rocket science, its about understanding and managing risk, "It's my job five days a week. A rocket man, a rocket man." 

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.

The More Things Change - Year in Review

The more things change the more the stay the same

Ah, is it just me or does anybody see

The new improved tomorrow isn't what it used to be

Yesterday keeps comin' round, it's just reality

It's the same damn song with a different melody

The market keeps on crashin'

The More Things Change - Bon Jovi *NEW 2010* (FULL VERSION)

If you weren't paying attention you'd say 2011 was a pretty uneventful year in the markets. The S&P 500 started the year at 1257.64, and finished the year at 1257.60, the smallest annual change ever. For those of you who were paying attention, you are well aware that 2011 was a hell of a ride. In fact, it was the 17th most volatile year in history (at least since 1928). Sort of like getting on a roller coaster, screaming wildly as you are thrown upward and downward at dizzying speeds, only to get off at exactly the same spot you got on. The following table highlights the magnitude of 2011's volatility:

All eleven years from 1929 to 1939 are in the top 16, as well as 1987, 2000, 2002, 2008, and 2009. 2011 comes in at number 17.

The following graph is our depiction of Risk-On and Risk-Off. The horizontal axis is the securities correlation to the S&P 500, a correlation of 1.00 means the security moves in tandem with the S&P 500. A negative correlation means the security moves in the opposite direction as the S&P 500. The vertical axis shows each securities total return for the year 2011. In our portfolio the best performing asset was US TIPS, up 13.28%. The worst performing asset was Emerging Market Equities, down 18.73%. The size of each bubble reflects our year-end allocation to each security. Obviously we ended the year in a fairly defensive position with 33.5% in cash.

The following table is sorted by correlation to the S&P 500, with the Vanguard Total Stock Market ETF (VTI) at a perfect 1.00 correlation. 

Some interesting observations:

While quite a few assets had correlations greater than 0.80 (pretty correlated to S&P 500), their performance was very divergent. Equity commodities and international equities did horribly, while higher yielding securities like REITs, High Yield Bonds, and energy MLPs, did relatively well.

More defensive securities like gold and fixed income did relatively well.

Huge divergence in performance between the yellow metal Gold (GLD up 9.57%) and Gold Mining stocks (GDX down -16.09%)! 

Thoughts on 2012:

As I said in my last email, I'm not in the prediction game, I'm in the observation game. Here are my big observations as we head into 2012:

The US and most of the developed world spent 60 years leveraging up, and promising more than they could deliver.

We have hit a tipping point and a massive global de-leveraging is upon us. This will take years, maybe decades, as we go through fits and starts.

The most likely outcome is very moderate economic growth, and very low interest rates. Savers will continue to be penalized in favor of debtors. (Remember the government is the biggest debtor).

Currencies will be devalued as a way of devaluing sovereign debt loads. 

Political manipulation of the markets will remain at high levels as governments continue to renege on their promises.

Volatility should remain at relatively high levels.

We will remain defensive, diversified, and willing to reallocate assets to securities/assets that can rally. I'm not bearish, I'm not bullish, I'm agnostic. I'll take what the market gods give us, and step to the side when they give us nothing. The more things change the more they stay the same. 

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.