Friday, October 28, 2011

Is The European Crisis Over?

Yesterday saw a massive stock rally on news of an agreement out of Europe. So are we out of the woods? Probably not. It looks like the deal still has a lot of holes in it and a lot to be worked out. It also looks like it doesn’t fix anything; instead it just takes the most drastic outcomes off the table for now. I wouldn’t be surprised if we hear more from Europe at some point this year, next year, and beyond. What does this mean for the markets? We purely follow the trend. The market had been in a trading range and this last rally took out the overhead resistance and it looks like we might now be in an uptrend. Adding fuel to the fire are the facts that a ton of money is on the sidelines and money managers have drastically underperformed their indexes. It is likely you will see a lot of performance chasing through the end of the year. That being said, it is also likely we will see a ton of volatility and any bad news out of Europe could shift the dynamics and move us back into a trading range or a downtrend.

Wednesday, October 26, 2011

Gold & Stocks Uncorrelated Again?

Yesterday was an interesting day for Gold. During most of the crisis Gold has been a safe haven, going up when stocks go down and going down when stocks go up. This changed in September and this month. Yesterday stocks were down around 2% and Gold was up around 3%. It will be interesting to see if this is just an anomaly or if Gold is returning to its safe haven status but from an investment standpoint it doesn't really matter. We have long maintained that Gold should be treated like every other asset and be managed tactically. Meaning you should be in it when it is in an uptrend and out of it when it is in a downtrend.

Monday, October 17, 2011

Great Article on the Risks of a 60/40 Portfolio But Adding Commodities is Not the Answer

'Buy-and-hope' is not good enough


The author of this article rightly points out the main problem with the typical 60% stock/40% bond portfolio. Stocks are much more volatile than bonds so you could have a period (like 2008) where stocks go down a lot and bonds go up a little. The bonds help some but the investor is still subjected to large, unacceptable losses. The solution the author proposes is to add commodities to the mix. This doesn't really help much and it can hurt. Commodities are more volatile than stocks at times. Adding them to a portfolio shifts the dominance away from the stocks more towards the commodities. That is fine if commodities are always uncorrelated with stocks, but they are not.

The real solution is to not get caught up in fixed allocations. There is no reason to have a 60/40 mix when stocks are in a downturn, the investor is taking way too much risk. On the other hand, when stocks are in an uptrend having 40% in bonds can be a real drag on returns. Market dynamics should always determine allocations.

Thursday, October 13, 2011

Risk vs. Reward---When to be on the sidelines and when to back up the truck

As I write this the market is in rally mode for October and we are hearing the talking heads comment about how the crisis is over. What is an individual investor to do? Markets have trends and countertrends. Trends are the dominant move and countertrends are shorter term moves in the opposite direction. The market has been going up but the overall trend is still down so for now this is just a countertrend up move in a longer term down trend. Unless you are a speculator you should pretty much ignore countertrend moves and focus on the major trend. When the trend is down then the risk of being in the market outweighs the potential rewards and when the trend is up the returns outweigh the risks.

Right now we are still in a downtrend, so even though you may be able to make money chasing this market upwards the risk is extremely high. Investors are much better off being cautious until the trend changes. There will be periods like 1995-9, 2003, and 2009 where the market is in an uptrend and the potential for returns are much higher and the risk is much lower. In these periods it pays to take more risk.

Tuesday, October 4, 2011

Better Late Than Never?

In a research report Deutsche Bank recently said the following:

"The next decade will likely be one where buy and hold will generally be a fairly poor option in developed markets," Deutsche Bank analysts write in a letter to clients, MarketWatch reports."

It would have been great, and saved investors a ton of money, if they figured this out last decade.

Buy and hold is always a bad option. During market upturns it appears to work well along with everything else (monkeys throwing darts at the Wall Street Journal, astrology, palm reading, etc) but the market doesn't go up forever and it makes no sense to ride it all the way down.