The winning streak for the stock market stumbled in October. This is the first time in several months that there are signs of weakness emerging. We expected this back in the early summer but the vast amounts of money created by the Federal Reserve Board and the member banks has proven to be the impetus for a long rally.
We continue to break records. This rally is now the most dramatic in 100 years. The only thing close was in 1930 during the Great Depression. So far, we are tracking the Great Depression very closely. We hope that this stops because the depression years wreaked havoc on America. The concern is so many things that the politicians are doing today is in concert with how things were dealt with in the 1930's.
While most Americans are concerned about their jobs and homes, Capitol Hill is focused on health care and cap-and-trade legislation. These are not the things that jobs are made of and our fear is they are ignoring the warning signs that could very likely cause us to go back into the recession. We were told the recession ended in July but so far, the signs are not quite as rosy.
Some of the government stimulus programs have ended and some are ending soon. When the government accountants total up the data, we are not creating the kind of jobs that are necessary to sustain growth. We need to create almost 2 million jobs per year just to handle the new bodies coming into the workforce. The auto programs and the homebuyer tax credits have proven to only add to the vast amount of debt with little to show for it other than borrowing from the future.
On a global basis, some countries appear to be strengthening. Australia is leading the way and is actually raising interest rates to tamp down inflationary pressures. China claims they are doing fine but the old joke is you can only believe half of what they say. The key is to figure out which half is accurate! Other parts of Asia may be gradually improving but again, data is not always reliable. Europe, while getting better, is hampered by a stronger Euro which hurts their exports.
All in all, the world economies are fragile and no one is really out of the woods yet. Stock markets around the world have rallied in expectation of numbers that are simply too hard to meet. To expect the economy is as strong as it was in 2006-2007 is simply not realistic and as a result, the recent market rally has faltered. The only surprise to us is how long it has taken for reality and common sense to set in.
Risk is a funny thing! When everything is going up, risk is largely ignored; when everything is going down, then risk increases and investor anxiety goes up. We have believed all year long that there is still a huge amount of risk and have been very conservative in our approach. |
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| It was appearing that our conservatism was coming back in favor after being out of favor for about four months of this year. April through July were the tough months for us. Since that time, we have just been inching along waiting for the correction that may be starting. We have had several significant corrections that proved to be false and the rally resumed quickly. After a few days into November, this may actually be happening again. Meanwhile, the bubble may be getting fatter. So far, there is no evidence that this is going to be permanent any more than it was the last time it happened which was 1930.
During most of the late summer and fall, we have been operating with our hedges very tight. In recent weeks, we have eased up the hedges to take advantage of the markets drifting around. The weakness of the U.S. dollar is the catalyst that has caused stocks and commodities to rise during the past three months or so. This is simply unsustainable. We have never witnessed such a strong correlation between markets and the dollar. No longer have corporate earnings mattered so little. Never has a weak dollar caused so much volatility and never has the weak dollar been traded for the purpose of "playing" the stock market. The very thing that could destroy our economy has caused the stock market to go up!
Because of our concerns regarding the economy, we are using signals that are shorter term than we normally use. The reason is the market has gone up and to confirm the signals that we normally use would imply that the market needs to drop considerably before giving us a signal to change. We are concerned about portfolio returns like everyone else and would like to minimize any drops or losses. Typically when using signals to make changes in the portfolios, it takes time for a trend to develop. By using shorter term signals, we hope to minimize any drops as the markets begin to turn down.
Last week, our short term signals changed and we made considerable changes. We have gone from having few hedges in place to having more hedges and we are now weighted and positioned correctly for further market drops, which has been happening in recent days. Right now, it is difficult to know how long this might last. It could be a short term correction or investors may be coming to their senses and realizing that the economy is stilled very stressed.
With risk still elevated, there is the chance that the markets will continue to rally while America suffers. The Federal Reserve Board is helping the major banks but has failed to help Joe and Mary Citizen. Until our signals reverse, we are continuing to stay the course and remain hedged expecting a correction which is a long time coming. There may be some of you who are getting anxious and would like to know what to do. Here are some suggestions since we may be in for a long haul.
1) Continue to save money vigorously. We recommended this well over a year ago and those who are doing this are doing quite well.
2) Continue to pay down debt. It is very important that any leverage you have be paid down aggressively. Again, we have been recommending this for a long time. Also be working on paying down your mortgage for those who still have one. The days of leverage are over for a few years.
3) Keep adding to your gold. Take money out of checking, savings or money market accounts and buy gold. It is not too late even though gold is up about 45% since we started recommending it. With the dollar declining, you will want to have some of your cash holdings to hold steady with inflation and the dollar.
4) Use our Fixed Income Strategy if you are taking money out of your portfolio or anticipate needing money in the next 1-5 years.
5) Treat your investments for what they are. They are 3-5 year investments and when the economy is being buffeted, your stock portfolios are subject to being hurt.
6) Stay the course for money that you are not going to use for five years. Money you are going to use during that time should first come from your cash reserves and secondly from your fixed income and bond portfolios.
7) Talk to us about weaving in financial planning into your life so you have a game plan that you can live with. There is much uncertainty in the air and a good plan will help us to evaluate all the options for you. We will be releasing our new financial planning options at our fall luncheons. In the past, many people did not want to do planning since the costs were prohibitive. We have designed much more affordable options.
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Some clients have expressed concern that our hedge style portfolios are not working because we have been hurt this year. We are doing what we did last year and being conservative but the markets have been selling conservative things to invest in risky assets. We see bubbles forming and are concerned at the amount of risk people are taking.
On the other hand, some clients may feel that we are wrong and that the recovery will continue to strengthen and that the economies around the world have nipped the problems in the bud. We still have our traditional buy-and-hold portfolios that have done very well this year. Below are the returns. Note that the first number is the percentage of stocks and the second number is the percentage of bonds. Ex: 80/20 means that the portfolio is 80% stocks and 20% bonds.
A) Aggressive: 100/0 - up + 28.08%
B) Moderately Aggressive: 80/20 - up + 29.31%
C) "Balanced Portfolio": 60/40 - up + 26.47%
D) Moderately Conservative: 40/60 - up + 24.50%
E) Conservative: 20/80 - up 23.43%
As noted above, we made some changes to the portfolios. Currently they are invested in the Dynamic Allocation Strategies as follows:
Conservative Strategy:
1) Cash: 50%
2) Short Russell 2000: 10%
3) Short S&P 500: 10%
4) Short Term Bonds: 30%
Moderate Strategy:
1) Cash: 30%
2) Commodities: 10%
3) Short Russell 2000: 15%
4) Short S&P 500: 15%
5) Short Term Bonds: 30%
Aggressive Strategy:
1) Cash: 20%
2) Commodities: 15%
3) Short Russell 2000: 20%
4) Short S&P 500: 20%
5) Short Term Bonds: 25%
Fixed Income Strategy: No Changes
Finally, no strategy is fool proof. If it was, then everyone would be doing it and it would never work again. Instead all strategies work. But they don't work 100% of the time. Sometimes they do very well like last year, sometimes they don't like this year and sometimes they are flat. The key is having a game plan based on your goals and objectives, monitoring those goals and sticking with the game plan. People have asked us where our money is. The answer is 98% of my family assets are in Trust Company of America. I have 2% in an outside brokerage firm so we can get some specialized research reports. Of the 98% invested, we have money in all four Dynamic Allocation Strategies with most of it in the Aggressive Strategy. We do not have any in the traditional buy-and-hold strategies. We share in our client's success and we share in our client's struggles. Believe me, we don't like it any more than anyone else but one thing we have learned over 45 years of investing is to stay the course. We encourage you to do the same but also encourage you to come in and make sure that you are working toward your goals. |
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