Friday, October 28, 2011

Market Comment 10 28 2011

For the last few weeks I have scaled back into "risk on" style positions. My first move was to become fully invested in our Flexible Income folio, taking positions in junk bonds (JNK), preferred stocks (PFF), Corporate Bond LQD, and convertible bonds (CWB). Next, I took a position in the S&P 500 (SPY) in the Discretionary Folios. And finally, I went 100% long in the Sector Rotation Folio. I took 25% positions in each of Energy (XLE), Materials (XLB), Industrials (XLI) and Consumer Discretionary (XLY) sectors.

FOLIOfn accounts were well positioned for yesterday's huge rally. At this point the market is overbought and due for a pullback. I will add more equity postions on any meaningful pullback.

The returns in October have been historically high. Extreme volatility kept most sensible people out of the market earlier in the month. This rally, while attributed to European  news headlines, was really due to extremes in fear and bearishness on the part of investors and fund managers alike. When investor sentiment reaches extremes a reversal can be forthcoming.

Wednesday, October 19, 2011

Palos Verdes Investment Conference

I will be attending a three day investment conference in Palos Verdes, CA this weekend. We will be discussing the current market environment and the best investment strategies to employ at the moment.

Gil Morales, a prominent advisor that I respect a great deal, will be having lunch with us on Sunday.

I will be checking my messages every day, so don't hesitate to call if you need to. My motorhome is my office away from home; it is fully equipped with wireless internet connections, printers and anything I might need to for my normal business operations.

Friday, October 14, 2011

Market Comment 10 14 2011

The past few months have been marked by extreme volatility. The chart of the S&P 500 (below) clearly illustrates these wild gyrations. The market has experienced a remarkable and rather unexpected rise this last week. The market is now very over-bought and the next downleg could be forthcoming.

Volatility is beginning to ratchet down a little with the recent steady rise in stocks. All the moves have definitely been headline driven. Good news sends the market higher and, conversely, bad news sends the averages south in quick order.

Alpha Trend's Brian Shannon calculated the follow percentage moves in the S&P 500. I try to highlight the ups and down just as in his original illustration. Red shading is down and green is up. The moves are rapid and very big.

(Click on chart for easier viewing)
(Click your Window back button to return to this blog post)

In addition to the crazy stock market, the higher quality bond market has been steadily declining. Junk bonds have been advancing as US Treasuries have been sinking.

If you have been tracking your account closely you are aware that we are close to 100% cash at the moment.

In August most US and world markets slipped into bear market territory. Huge rallies, such as the one we just experienced, are indicative of bear markets. Bulls markets see steady gains, periodically interrupted by minor corrections that generally recover rather quickly. In a bull market you can buy each dip with impunity. In bear markets you are best advised to sell the rallies.

Since August the market has established a new 100 point trading range at these new lower levels. In each of the last two attempts to breakout to the upside, the market advance has been thwarted by the S&P 1220 area of resistance. We will shortly see if a breakout is in the cards or if we merely head lower again. An upside breakout would suggest the beginning of a new cyclical bull market.

It is tough to sit in cash as the market is moving higher. After having shielded accounts from the recent large bear market sized declines, I don't feel the necessity to chase returns at this juncture. I prefer to wait for more clarity.

If the market moves decisively one way or another I am prepared to prudently begin re-deploying our cash.


Tuesday, October 4, 2011

Client Question on Model Porfolio Selection

The following is a great question submitted by one of my clients. I have omitted the client's name.


I see that the Golden Years portfolio has outperformed Go-Getters. Why did you let me chose Go Getters?  In either case both are doing a lot better than the market, so congrats. Is Go-Getters ever going to catch up? Should I switch?

GWM Investor

My Answer:

Dear GWM Investor,

All model portfolios have the same investment components or folios as I call them. They differ only in the percentage allocation to the various folios. Golden years has a 70% allocation to Flexible Income (mostly bonds currently), whereas, the Go-Getter model has a 25% allocation to Flexible Income. Bonds have outperformed stocks this year; so, Golden Years has outperformed. Will bonds continue to outperform stocks (both long and short positions) going forward? I don’t know.

My investment style is not predictive. It is reactive. Trying to predict the future is a task beyond my pay grade. Economist, analysts and the talking heads on CNBC always try to predict the future and have a very poor track record. No one knows the future. I always let the markets guide me; never the other way around. I believe this is the key to my success. The markets are huge and the markets couldn’t care less about what I think.

In general, investments that have an income component are inherently less volatile and risky than investments that rely solely upon capital appreciation. I have created a cadre of Model Portfolios that offer varying degrees of risk. One size does not fit all. In order, from lowest risk to highest risk, I offer the following Model Portfolios:

Golden Years, The In-Betweener, The Go-Getter and The Director.

GWM clients can always change their chosen model by submitting a new Risk Tolerance Questionnaire. Select the Risk Tolerance Questionnaire from the bullet list under the Clients Tab on the GWM Website.

Investor emotions often vacillate with changing market conditions. This is inescapable, it is human nature. Changing your investment objectives required thoughtful consideration and should be done only after careful consideration of pertinent facts. Your time horizon, your liquidity needs and your tolerance to potential drawdowns in your account are some of the important factors that should be assessed. I can help guide you in choosing a model, but the decision is ultimately yours alone.

The investing public in general is guilty of chasing returns. They always invest in last year’s winners, expecting a continuation. I might caution you against such behavior.


Feel free to call any time you need some input on Model Portfolio selection and suitability.