September 1, 2011
Here are some thoughts as to what we believe this market seems to be reflecting.
1. Mighty Machines. Volatility*, up and down, in our opinion can be traced to the high frequency buy and sell programs being used in the markets. They have little or nothing to do with a stabilizing Europe or improving U. S. economic data (especially as neither are actually happening). These programs have little interest in last week’s prices or last month’s prices. They are machine based, and they are destroying the integrity of the market place. As such, we are very hesitant to “play in this sandbox” which is characterized by outside, (up or down) non fundamental moves in either direction.
2. “No Place to run, No place to hide”. The markets look broken. Something funny is going on. The markets seem to be trading on “hope”, speculation, and whatever else “stimulates” the market – but not on Reality. We should be seeing “FEAR.” We want FEAR. We want to buy securities when people are afraid of owning anything not when they think it is a gift from heaven, ie. cheap. Again, we don’t want to “play in this sandbox.” Suffice it to say that we are not yet ready to embrace a specific asset class other than cash.
3. Flashing Red. All of our indicators continue to flash Red. De-risking continues to be our mantra. In our opinion, “hope” is not an effective investment strategy. Even so, hope continues unabated in this market. We do not agree and will continue to remain on the sidelines. We expect a hard landing for the U. S. and European economies. The empirical evidence is overwhelming to us, and we recognize that a deterioration in financial and economic conditions (US and Europe) not to mention China is upon us. This does not mean that the U.S. and European economies cannot avoid a recession but to expect that outcome relies on the “hope that this time is different.”
*In the four week period ending August 19th the S&P 500 declined 16.5%. Last week the S&P 500 recouped 4.7% of that amount.
Sailors are always complaining about no wind or praying for more wind. But the critical element in making forward progress is continuously adjusting and trimming your sails. This is exactly what we are continuously working on doing.
4. Our Mood. We remain fearful of economic and political event risks as it continues
to cast a pall over all risk asset markets. We still think we are trading in a minefield of data points, and the data points are all, without exception, flashing red. We know that many of you are itching to get reinvested, but, unfortunately we fear we are still in for a fairly tumultuous period in the near term. This is the time to be patient and extra careful. Patience should bring rewards and, in the interim keep our anxiety and risk levels low. We have had the luxury of sleeping well these last several months, and most investors cannot say that. Keep in mind that cash is an asset class like any other asset class. At this time of dysfunctional markets, it is the most appropriate asset class to be in, in our opinion, especially given the risk level we are prepared to accept. It is that judgment that our clients pay us for.
We want to repeat what we said in our last letter. For most of our clients, the money they have invested with us represents a significant portion of their investable assets. It is our opinion that this is not a time for taking on significant risks. It is a time for reflection without the burden of volatility and the fear of a significant loss. At this moment, we feel that the risks far outweigh the rewards in the markets and there will be plenty of time and opportunity to capture market appreciation. Be assured that we will be there to participate when we believe that the investment climate has the potential to properly reward our participation.
Past performance is no guarantee of future results. The information contained herein is based on internal research derived from various sources and does not purport to be statements of all material facts relating to the securities, markets or issues mentioned. The information contained herein, while not guaranteed as to accuracy or completeness, has been obtained from sources we believe to be reliable. Opinions expressed herein are subject to change without notice.
