Having been glued to the websites of Reuters and several others this weekend, several tactical plans were developed and disseminated to clients before Asian markets opened last night. Again, these were tactical tweaking, not strategic in nature. As of late morning, our portfolios were solidly in the green (up nearly 1%) while the Dow flirted with a 400 point drop. No tactical tweaking needed to be done.
That said, there should be a mini rally (in equities) based on oversold conditions reversing sometime soon. An opportunity to buy a little more of the investments Wall St despises and ridicules as boring. It should also present an opportunity to buy a little more inverse equity positions. That’s right. Someone has to profit while the Dow drops from 13000 to the 5000s next year.
For several years Triangle Wealth Management (TWM) has invested with the premise that Europe (& Japan) will blunder into financial system contagion. This gradual decline will be spiked with perilous and violent faith-based short term stock market rallies along the way. Having a wildly interventionist Federal Reserve hasn’t helped either.
Two weeks ago (Dow was not far from 13000) TWM ran a quarter page ad in the venerable Wall St Journal warning the Dow would eventually drop to 5000, and laid out the case for the fall. This was followed up with a half page ad in the local Raleigh newspaper last Friday. We hope some heed the warning and move towards boring.
Last Friday, the ECB claimed it would begin buying Italian and Spanish bonds — at some point. That stopped Friday’s repeat performance of Thursday’s bloodbath and caused an 800 point boomerang swing in the Dow: 400 points down in 2 hours, then the ECB announcement caused 400 points up in 1 hour. Bond markets will buy this for a short while before they then again begin attacking when they become impatient. It will take 2 months to get a new bailout deal and ram it through 17 EU parliaments. That’s provided they actually can ram it through Germany, Finland and The Netherlands. Low odds on that happening. Regardless, bond market vigilantes won’t wait anywhere near that long.
Judging by the fact that CDS rates on Italian & Spanish sovereigns are dropping this morning, I’d say the bond market bought it. So far. The existing EFSF remains nowhere near large enough for bailing out Italy & Spain. This story is not over, and it will end in tears.
The US losing its AAA rating poses a minor challenge. So far. Let’s be honest, US sovereign debt should have been downgraded months if not 1-2 years ago. Provided the US Congress produces a credible plan ($4T+ in cuts) soon – prior to November 2012 — we’ll avoid a collapse in the US Treasury bonds market.
BUT! At this point in time, we have a manic partisan US Congress. There’s zero chance of a $4T deficit reduction plan in the next year. In fact, I doubt we’ll get one until well after the 2012 election. Honestly, do you see either party running with an election platform of: Elect me so I can cut $4T from the deficit and guarantee a long recession, even if it is the right thing to do for the long term health of the country. ??? By the time the next President is sworn in, US debt will have been downgraded further and we’ll be well into a deep recession again.
So the next year affords little opportunity to sit on your hands if you’re an investor. It will pay to be boring, cheap, liquid, and adaptable — despite what the talking heads in the financial press say. Their agenda is usually to push a product (their fund).
2011 has been profitable and boring for TWM clients so far. Here’s to more of the same.