Sunday, March 28, 2010

Are We at a Turning Point
or at a Vantage Point?

Shortly we will be receiving first quarter reports from various funds, investment managers and the media. Most will mark that we have passed the one year anniversary of the agreed bottom on March 9th, 2009. The reports will boast of the 40-70% gains off the bottom. Few will focus on the fact that most accounts have not shown a positive return for the last two or three years unless they were significantly in domestic fixed income securities. Almost none will reference their performance high water mark that was reached often in the fall of 2007. As we receive this happy news, the critical question before us is, “So what?”

Does the recovery mean that we can go back to investing as we did in the middle of the “aught,” the philosophies of 2005? Or does the recovery give us the opportunities to modify our investment approaches? In other words, have we reached a turning point to embark on a new strategy? Or are we at a vantage point, able to look both backwards and forwards to make slight mid-point corrections to our trajectories?

I recognize that most of us have difficulty identifying turning points as they occur. With that in mind, I do not see that we are at a turning point. However, I see we are at a vantage point; that a number of trends are changing within the markets. For this kind of analysis, price charts are of value. The following briefs summarize what I see:

1. The near term weakness in the Euro is probably over for awhile. (The structural weaknesses will probably not be addressed until the political will becomes stronger.) In effect I am covering the bet of my view earlier in the year that the dollar would rally.

2. A number of national stock market indexes appear to be ready to change direction. The most prescient of these is the Hang Seng. Perhaps in sympathy, Brazil’s Bovespa is also looking like it is having trouble making progress. Surprisingly, and in contradiction to those trends, the Jakarta Composite is breaking out on the upside. The two major Japanese stock indexes, the Nikkei 225 and the Tokyo Stock Price Index, (commonly known as TOPIX), seem ready to follow suit.

3. In our US market, the industrial group which has led the stock price recovery is the financials. For sometime, further attempts to rally these prices have failed in spite of the recent strength in both Citi and JP Morgan. I find it difficult to believe that a sustained economic recovery won’t be good for the financials. The structure of financial markets is rapidly changing, which may make past history less relevant in thinking about the future. For example the venerable New York Stock Exchange, where I was a member, will produce more revenues from derivatives than the cash markets this year. Leading firms are also making more money out of trading these derivatives, commodities and currencies, suggesting that we are in a different world.

I am not paid to be an observer, but an investment advisor. Each of our accounts has significant differences in terms of its time horizons and ability to assume market price risk of loss. Due to these differences, I find that I am executing different accounts in very different ways. For the first time in a number of years, I have taken a little off the equity allocation of the most aggressive of the accounts. For those more conservative accounts with a low tolerance for yields close to zero, I am selectively adding to their long term equity positions with the belief that over the next several years they will benefit from increasing dividends.

These different tactics are an example of what I believe to be different horses for different courses. The clients’ needs should dictate how an account is managed, not the same house opinion for all accounts.

What do you think?


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