2010Aug25 Portfolio Update
"The best investors in the world do not target returns; they focus first on risk." -Seth Klarman
Seth Klarman founded Baupost in 1982. He's one of the best in the business. He's conservative. He likes cash and he has no problem moving to a cash position greater than 50% of his assets. We're not Seth Klarman, but we like cash, too. We currently hold plenty of cash in our asset allocation model.
On the second test of support in the month of August the trend chart of the S&P 500 [SPX] was unable to hold its long-term bullish support line. As a result of Tuesday's market action the trend chart of the SPX violated the positive trend line that dated back to the March 2009 lows, and which has been in tact since April of 2009. Trend is now negative for this market benchmark.
A number of Bullish Percent charts that have reversed back into a column of O's as a result of Tuesday's trading. One broad indicator in particular, is the NYSE Bullish Percent. This being the case and with the S&P now in a negative overall trend, we again face the scenario of having to switch back to defense. The weight of technical evidence for the domestic equity market has turned back into the negative camp.
When we last added U.S. equities to your portfolio, we under weighted the positions due to our concerns over consumer spending trends that had yet to be reported in mainstream media. Now, several of our domestic equity ETFs have violated lower price limits and have been sold.
Domestic equity mutual fund data remains mixed while bonds are retaining positive technical support.
The bond positions are all holding gains and contributing regular interest payments to accounts.
2010 has been a year without sustainable trends and has been frustrating not being able to hold positions for longer periods of time. 2004 was a similar year with the final two months, after the election, breaking free from a trading range and moving higher. We don't know if this year's elections will settle the uncertainties surrounding our country's complex economic situation. We do know that new data will arrive each day.
T.J. Moskowitz, Ph.D. at U. of Chicago published an article, "Momentum Investing." Among the possible explanations for momentum, Moskowitz says:
"Several possible behavioral explanations have been put forth, many based on the Nobel memorial prize-winning work of Daniel Kahneman and Amos Tversky. One explanation posits that investors may be slow to react to new information: different investors (e.g., a trader vs. a casual investor) receive news from different sources and react to news over different time horizons and in different ways. This "anchoring and adjustment" is a behavioral phenomenon in which individuals update their views only partially when faced with new information, slowly accepting its full impact. (Emphasis added) Ample evidence supports slow-reaction-to-information theories ranging from market response to earnings and dividend announcements to analysts' reluctance to update their forecasts."
We find this interesting in that it disclaims an essential foundation of the Efficient Market Theory: (paraphrased) "All information is known to all investors simultaneously and they will all make rational decisions upon receipt." Daily market prices and updated relative strength calculations force data into a decision process whether or not one's belief's can be justified.
Today's decision to sell assets is a response to market conditions and data that have changed from positive to negative from a month ago. We continually remind ourselves of this quote:
"When the facts change, I change my mind. What do you do, sir?" - John Maynard Keynes
Several international markets would be attractive at lower prices and lower risk profiles. Sovereign debt issues are not a burden for many smaller countries. We do not want to buy them when trends are turning negative and just hope for the best. Hope is a bet on the future without supporting facts.
Our plan is "the plan will change." It will adjust to new data.
If you have questions or want more detail regarding our process or relative strength in general, call us at 800-317-9119 begin_of_the_skype_highlighting 800-317-9119 end_of_the_skype_highlighting.
|
