2011Sep27 Portfolio Update

Following trends in the markets requires patience to observe the development of what is happening rather than guessing about what will happen. For years we have referred to Japan as an example of an economy that is deleveraging with government attempts to change economic reality. The U.S.A. is in the early stages of a deleveraging cycle with the government trying to change reality. The markets are schizophrenic reacting to rapidly changing stories about current events.

It is normal for the market to have some choppiness in prices. That is the give and take between buyers and sellers. Recently, the greater awareness of the European problems has been disruptive for investors as sustainable trends have not developed. This is illustrated in the following chart:

Greece is in trouble. That is not news. Instead of dealing with Greece’s problems, the politicians have been using a public relations policy of floating one trial balloon after another hoping the market would be receptive to each new proposal. It has not worked.

Theoretically, the European Investment Bank (EIB) would provide a source of funding to resolve the sovereign debt crisis. With that news release, the market rallied. HOWEVER, EIB denies any discussion has occurred and states its mission does not include participation in such a scheme.

Germany is the economic powerhouse of Europe. Without Germany’s funding, the European Central Bank has no hope of addressing Greece, “too small to fail” much less the other problems nearby, i.e. Italy, Portugal and Spain. HOWEVER, Germany apparently needs a new constitution and a public vote to bail out any other country. As of today, investors are ignoring the mounting opposition and refusals to save Greece.

Investors are trading on news and rumors of news. The emotional cycle of investing is in full swing. Days of euphoria are quickly followed by days of depression.

The good news here is that this is the type of environment from which major upward moves occur in the market. Our risk evaluation retains a defensive stance in the IRI Global Portfolio and the IRI Select Portfolio as indicated by the next chart where Os are indicative of a negative trend. The data is as of the market close on September 26^th.

Generally, percentages below 30% present attractive investment opportunity. Unfortunately, indicators can stay below 30% for a while and even decline further. Lower indicator levels generally indicate stronger gains when a positive trend finally develops.

When we observe large up-days in the market, we must ask if the time has come for a switch to offense. While investors are often hopeful the current turmoil will end, it is the turmoil that builds the foundation for a sustainable advance.

With below average volume, trading to clean up quarter end reports and increasing uncertainty in Europe, we are ignoring the Greek Sirens who led so many to destruction in ages past.

If you have questions or would like to schedule a meeting, call us at  800-317-9119.