Rockhaven Views

Saturday, December 3, 2011

Never Mind The Darkness

"So never mind the darkness we still can find a way

Nothin' lasts forever, even cold November rain."

Never mind the darkness, we still can find a way. Wow, we go from the worst Thanksgiving week in history with the S&P 500 down -4.65%, to the best week since the rally out of the abyss of March 2009 with a massive gain of 7.32%! Of course the two week gain is only 2.32%. All we needed was a helping hand from the worlds central bankers/planners!

Do you think the market is trading on fundamentals or something else? A trader expressed it best, "Trying to do ANY sort of fundamental analysis in this market is like bringing a #2 pencil to a gunfight." The story of both weeks continues to be Europe, and its various states of solvency/insolvency. With the Fed and its central bank peers willing to print currency to prop up the US and European banks all is well, for now. "And when your fears subside and shadows still remain, oh yeah." Fears may have subsided, but the shadows of the global debt deflation still loom.

Clearly I have been in the glass half empty camp for some time. Mostly due to my stubborn belief that printing money to devalue the amount of existing debt is not a viable long-term solution. We are simply too afraid to let anything fail, and are unwilling to take short-term pain, even though we know deep down that we are creating bigger problems for the future. And that future is getting closer and closer.

How do we manage money in this type of environment? Carefully, very carefully. Lets look at some facts. Global markets have reacted very positively to more than 35 easing moves from around the world. Merkel, Sarkozy, and Draghi are ready to introduce a tighter fiscal integration in Europe and cut ECB rates. While this is clearly a long-term positive, and may save the Euro, it also will exacerbate the current European recession. The US economy is clearly strengthening, employment is improving and housing is stabilizing. Maybe its just a case of "been down so long it looks like up". Whatever the reason, my indicators are starting to tilt more towards risk-on. Nothing dramatic, but some important changes.

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

The big change from the end of October to the end of November are the increases in US stocks (VTI), US real estate (VNQ), and energy MLP's (AMJ), and the subsequent reduction in cash from 40% to 30%.

US Equities -- 12% Neutral,

we are now at our neutral US equity weight.

Int'l Equities -- 5%

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

US REITs -- 4%

Neutral, we are now at our neutral target of 4%.

Int'l REITs -- 2% Bearish

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

Gold --10% Bullish, with the currency presses running full out, gold and gold miners are acting better.

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

US Fixed Income -- 18% Bullish, but fixed income securities are showing some signs of weakness, neutral is on the horizon.

Int'l Fixed Income -- 6.5% Bearish, European banking problems have spread to emerging markets.

Cash Equivalents & Currencies --38%, divided between the US at 30%, 5% in China, and 3% Australia.

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.

Losing My Religon

"That's me in the corner

That's me in the spotlight

Losing my religion

Trying to keep up with you"

REM - Losing My Religion (Video)

Are we losing our "religion"? What is religion? Faith, a belief. Here in the United States, and most of the world, our religion is our faith in the almighty dollar. How else can we measure our worth? A movie is judged by the size of its weekend box office take, a book by the size of the authors advance, a musician by the number of albums sold, an athlete by the size of his contract, a CEO by the size of his bonus. Even our religions believe that the dollar is our religion. (The pastor of the country's largest church, Joel Osteen of Lakewood Church, declares outright: "God wants to increase you financially.")

Our worship of the "almighty dollar" is centuries old, "as sound as a dollar" was once a proverbial quote. But lately our faith is being weakened. How will we know our worth if we don't know the worth of a dollar? In 1971, after Nixon ended the gold standard, Milton Friedman wrote, "Money has become a fiction that veils fictionality."

Earlier this year it was entertaining to watch libertarian Presidential candidate Ron Paul, who is also chairman of the House subcommittee on monetary policy, question Fed Chairman Ben Bernanke on the dollar. Paul asked, "What is your definition of the dollar?" Bernanke gave the non-answer, "It is the buying power of the dollar...that is what is important." Again Paul asked, "Do you think gold is money?" To which Bernanke replied, "No. It's a precious metal."

If the US dollar is our religion, then Ben Bernanke is its high priest. Bernanke believes that he can create dollars out of thin air; which he can, since they are not backed by anything other than the dollar disciples faith. This week we saw our chief alchemist conjure up enough dollars to prop up Europe's banks for a while (we don't know the amount because it is "open-ended"). At least one major European bank was on the brink of insolvency. It seems that money market funds were no longer willing to buy european bank paper at a "reasonable" price, liquidity was drying up...fast. The Fed and other major central banks agreed to open up dollar liquidity swap lines and foreign currency liquidity swap lines. While other countries signed on to print their currencies too, the "almighty dollar" will be the primary currency used. This is our church after all.

While all risk assets soared (remember the dollar bible passage, "When the Fed floods the market with dollars, all risk assets ascend"), none of Europe's (or the US's) fundamental problems were solved, or even addressed. The Fed bought the banks more time (yes, another bank bailout), but the real issues (the global debt deflation) grind on.

"Oh no I've said too much, I haven't said enough"

The almighty dollar is supposed to comfort us with its certainty, but when the high priest can print trillions at any time, how can we be certain about anything? This religion of ours is fraying at the seams. Why aren't the "Occupy Wall Streeters" occupying the Fed? The Fed does more to ratchet up the wealth-gap than any other organization in the world. Each and every new dollar printed is worth a tiny bit less than the previous dollar. That means that every day the Bernanke is at the printing presses propping up banks, the dollars we use for things like food and gas buy a little bit less. Every day interest rates are kept at zero, savers see their wealth transferred to borrowers. The wealth gap grows.

Losing our faith in the dollar will be painful, but it can also be liberating. The invention of coins and paper currency was originally done to make it easy to trade goods and services. God didn't love you because of the size of your bank account, personal worth meant something other than currency. There's more to life than a little money, isn't there?

"I thought I heard you laughing"

Wednesday, November 23, 2011

Happy Thanksgiving

Happy Thanksgiving,

This is by far my favorite holiday of the year, a time to briefly reflect on how blessed I've been.

For all the doom, and gloom I often write about it's nice to step back and remember how much we have to be thankful for.

America, for all of its detractors, is still the most productive economy in the world even in the middle of the worst recession since the Great Depression; its crime rate is the lowest in four decades; it has the world's strongest, most battle-tested military; and it remains the source of the best ideas, both technological and cultural, in the world.

Personally, I'm thankful for my wonderful family, and all the friends that give me strength and laughter.

And lastly, I'm thankful that the worst pre-Thanksgiving trading week in history is over. Here's to Friday.

Wishing you and yours a wonderful Thanksgiving holiday.