Trap door.

There is one certainty about today’s financial markets:  nothing is certain.  Traversing the economic landscape is akin to walking across a room with a trap door looming unseen.

It is not just equities which pose this risk.  Austerity programs worldwide are forcing interest rates down, and bid prices to fall as well.  In effect, waiting until maturity is one’s greatest hope for financial recapture in a bond portfolio.  As strongly as capital gains drove bond investing during a period of declining rates, strategic options don’t exist anymore as long as interest rates remain pegged to these low levels.

It’s an interesting juxtaposition.  As stock prices fall, so too do bond prices, losing the “alternative investment scenario” portfolio managers have come to rely upon for risk diversification.

The reasons for this are many, not the least of which is a deterioration of fundamentals and psychology (conviction) about investing in the first place.  Natural resources, industrial production, hiring, and debt levels are trends with negative direction.  An increasing focus upon the lack of conviction has drawn an imaginary line between what is possible and what is necessary to revitalize an economy stalled, or in reverse.  Wild swings in valuation during the previous two months confirm that volatility and inertia are going to sustain for awhile longer.

As we look for alternatives, our aperture must widen to include demographic themes which resonate counter cyclically.  That is, irrespective of the direction of stocks or bonds, we must find those things which need to be done and hope to make capital gains probabilities from them.

Downs.

I’ve had some clients ask me why we “lost” some money from portfolio valuation during the previous quarter.  It’s a question that is not so much seeking a market hypothesis or written text.  Rather, it speaks to portfolio methodology, in which case our “losses” were less than the benchmarks because we don’t use the benchmarks as our axis.

Instead, through asset allocation and risk diversification amongst sectors, we didn’t “lose” anything, we simply followed, to a lesser degree, the ebb and flow of the broader financial markets.

Investing is not static.  One’s high water mark in April is not the apex of valuation, nor is October the nadir.  The trend is significant, and my clients know that we have outperformed the trend by a significant amount over time because we know how to avoid risk, and to balance asset allocation probabilities.

It is vital not to throw all one’s eggs in one basket.  If you owned only gold, or timber, or IBM, your fortunes vacillated from undue risk-taking.  Growth prospects heighten when a portfolio is structurally diversified.  As downtrends continue to widen, by asset class and sector, bottoms look more tenuous and likely to “break.”  Weeks of downside uncertainty and market volatility heighten the probability that the trap door might drop into a hard fall.

Such is not what I wish for, but get nervous about nonetheless.

Temporarily, I will focus on correlating asset balance to risk parameters, avoiding the possibility of seismic underperformance or dislocation.  If that means shortening investment durations, my hope would be to yield positive alpha during manic upside feeding frenzies.

 

                                                                            

The information contained herein has been obtained from sources believed to be reliable but is not necessarily complete and it accuracy cannot be guaranteed. It is intended for private informational purposes only. Any opinions expressed are subject to change without notice. Du Pasquier Asset Management and its affiliated companies and/or individuals may from time to time own or have positions in the securities or contrary to the recommendation discussed herein.

 

 

 

(c) du Pasquier Asset Management

www.dupasco.com