Some say that history repeats itself. Can Ben Bernanke draw some insight into policy by looking back at an 18th century financial crisis in Amsterdam? I would say, yes, I hope so, isn’t that his job. The FED also thinks this, or they wouldn’t be budgeting money for such studies which can be found on their websites. So it would be considered prudent to take a look back, draw some parallels and derive some insight.
Others say this time it’s different. Could hedging instruments and technology make a difference? Even make things worse? Can pitfalls be avoided from lessons learned? Are American demographics, animal spirits and philosophies different from those of the Japanese? Yes, yes, yes and yes.
So we’ve seen it all before, but not quite like this.
Some say ignore everything, eliminate psychological biases, invest blind, and US stocks offer the best return over time. Ok, yes, with an asterisk because time is everything here.
Others say the time horizon and the current environment are everything. Just think if you could have avoided being invested during Hoover’s entire presidency, from 1973-1974, in 2008, or just that one Monday in October 1987. Would that have been nice?
And we now have these high frequency traders who say, never “invest,” just act over minutes and seconds on the expected return of minor inefficiencies in the market which seem to have some statistical validity. Yes, play the odds; especially if you are fortunate enough to be the house and have unlimited access to leverage between opening and closing hours.
Some investment funds embrace just one particular view, we just buy stocks never sell them; they leave it to you or your advisor to assess the appropriateness of the strategy, for you, at any given time. But as a portfolio manager and advisor, I think all these things must be taken into consideration. I like to call it a holistic view.
We’ve constructed our investment team with experienced and passionate professionals who have very distinct specialties. The broad set of information and perspective I derive from discussions with the team is priceless. At the end of the horizon, it all matters.
Here are a few topics worth noting:
Short term: Sentiment is very poor and market technicals are surprisingly positive. Volatility is near 5 year lows.
Long term: I determine the market to be a good value based upon historic valuation metrics and today’s company fundamentals.
There appears to be an extremely strong will to use common, national and regional wealth to back stop the potential crisis areas in the world. There is a large amount of debt at the sovereign level, their ability to enhance credit is constrained. Stimulus talk has taken a back seat to crisis prevention and liquidity.
Regulation, social benefits, tax reform, tax hikes, a fiscal cliff and the debt ceiling are the primary points to hit. We feel markets will react positively to a change in the Oval Office and polls indicate that there is momentum toward this possibility.
We hit a soft patch in the economy, this merits watching. Recent bounces in some economic indicators give less urgency to the risks.
Recent dollar strength coupled with past money creation is a positive for the domestic and global economies. The ECB and BOJ would seem to have strong reasons to devalue currency. There is a shortage of low risk assets and large supply of newly created money. Central banks are communicating their willingness to be lender of last resort.
The recent crisis is not a distant memory. The legacy of the crisis resides on the balance sheets of banks. These impaired holdings have made it impossible for many banks to access unsecured lending. This need for collateral has elevated the demand for low risk bonds of a select group of sovereigns. In the recent past we have seen forced selling of assets to obtain funds to purchase collateral. A repeat of this scenario is a very real risk to markets. It also means the liquidity situation of certain banks especially in Europe is precarious. These banks all extend credit and insurance to each other; so, bankruptcies mean default and present the possibility of placing more financial institutions in harm’s way. Questions of dishonesty abound.
I find the current trend in 5 of these 7categories to be currently swaying positive for equity markets.
The glaring pitfall is the potential for bankruptcies, forced asset selling, and systemic implications stemming from current funding issues in banks currently concentrated in Europe.
The market seems to me to continue to present long term value, based upon historic risk premiums, potentially as much as 15% undervalued relative to history. And the potential for inflationary pressures is elevated. But one cannot ignore the downside, a real, but in my mind, lower probability scenario.
Our portfolios were adjusted last week, purchases were made in both upside and downside instruments, taking advantage of low volatility in a seemingly high potential volatility world.
Global Opportunities Portfolio:
Add Devon Energy:
Add Itau Unibanco:
Add Mitsubishi Financial:
Add : S&P 500 Short Term Volatility
Add Convertible Bonds:
Add Natural Gas:
Add VXX: see above
Add CWB: see above
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For information on Alhambra Investment Partners’ money management services and global portfolio approach to capital preservation, Douglas R. Terry, CFA is reachable at firstname.lastname@example.org