SUMMER FORECAST:
clouds mixed with sun,
chance of scattered thunderstorms,
highs around 1100?
 

In our opinion, it has never been more important to invest for "grey" and not for "black and white" - that is, volatile times call for moderation in your approach, since market direction can change suddenly and violently.  Rather than compare oneself to what has done the best or even done very well over a short period of time, just try to deliver as consistent an investment experience as possible.  That is what we are trying to do always, but especially over the past year and in the near future. 
 
Clients in our portfolio strategies likely have noticed a reduced amount of activity.  We hinted at this in a couple of GreenThought$ issues recently, as we started to see a calming in the market versus the chaos that was the autumn and winter.  In May, a few changes occurred.  One was driven by the historical election in India, which sent that stock market into orbit, rising more than 20% that day.  We are not pigs, and a move like that, on top of an already strong move in Indian stocks, caused our holding in that theme to become vastly over-weighted in our Global Cycle portfolio.  We reduced it back to our original model percentage, which required a sale of ¼ of the position.
 
We reduced short exposure in our Global Cycle and Concentrated Equity portfolios at the beginning of May, and have generally let our core model positions ride since the market rally began in March. 
 
Now, let's look at the upcoming summer and what is potentially out there for investors.  As the title of this issue implies, there are good arguments on both the bullish and bearish sides of the ledger, with the possibility of some news item killing the rally at any time.  Again, a grey approach to investing today is healthier than a black-and-white approach.
 
As June began, the S&P 500 stock index broke up through a key "resistance" level and market volatility (read: level of investor fear) is near its lowest point since last September.  We feel we are positioned to ride the next leg up, but also react quickly to hedge our core positions if it turns out to be a fake-out. 
 
In particular, we note that one of the most experienced market-watchers around, Steve Leuthold, believes that there is now enormous pressure on institutional investors who have been underinvested in the nearly 40% S&P rally we've seen from March 9th through June 1st.  Do not underestimate the power of fear as a motivator for investors, even those who manage billions of dollars.  There were also many individual investors and advisors who took the black-or-white approach, exiting anything market-related during the first quarter of this year.  We now ask these people "does it look good to get back in now?"  This is the question we warn our clients against having to make, ever!  Yet many investors are faced with it now.  Don't ask us, we're "grey" investors. 
 
To us, it is always about gauging investment risk/reward across multiple markets and investment styles, at any point in time.  If you do that, you are far less likely to face the crossroads many find themselves at right now.  If Leuthold is right, a sunny summer is in store.  If technical signals, many of which point to a tired rally and overvalued market, are accurate, clouds and rain will interrupt the summer tanning season.  An exogenous news event of significance would add thunder and lightening to the forecast, but like summer here in South Florida, that is always an imminent risk. 
 
As summer arrived, we started to reduce our positions in mutual funds in which the manager actively shorts stocks (as opposed to our owning funds that simply short a stock index).  This is in sync with our belief that the market for capital growth is gradually transitioning from a period of successively lower price levels to one in which markets may rotate between frequent up and down cycles, driven by news events and continuous adjustments to the visibility of the economic recovery.   We said at the start of the year that S&P levels of 800 and 1100 (the market started the year at 903) were both very possible.  We saw 800 in January and at that time 1100 seemed like a dream.  The dream is closer to reality and while we don't make portfolio decisions based simply on pinpoint market forecasts, our investment team agrees that once-lofty market levels are realistic now.  One quick look at the past 100 years or so in market history (which we have done) indicates that what's happened since March not only has precedent, but it is actually normal following "Armageddon" markets like we've had recently.
 
As for a "real" sustained bull market cycle?  It is too early to discuss that, in our opinion.  Still, we share the general investor sentiment that while there is trouble today and trouble ahead economically and in the markets, there is reason for hope and growing evidence that the financial world is not coming to an end (we never thought it was, but market behavior disagreed with us for a while). 
 
Inflation is the big fear and like most investment questions we get, our answer is this: will we have inflation?  Yes.  Will it reach levels not seen since the early 1980s?  There's a very good chance of that.  However, our job is not to predict things like inflation.  Our job is to be ready in advance with a strategic arsenal to take advantage of it.  In the case of inflation, shorting Treasury securities, using Inflation-Protected Securities (TIPS) and incorporating commodities and commodity stocks into our portfolios are all possible ways to skin the inflation beast.  The key as always is to be positioned for what you think is most likely happening, while staying ready for anything.
 
For us, that means walking around in shorts and  T-shirts as much as we can this summer, but carrying a rain jacket and umbrella close-by at all times.  That's literally AND figuratively.  Enjoy the start of YOUR summer!
 
The information herein has been obtained from sources believed to be reliable, but Emerald Asset Advisors, LLC ("Emerald") does not warrant its completeness or accuracy. Prices, opinions and estimates reflect Emerald's judgment on the date hereof and are subject to change at any time without notice. Any statements nonfactual in nature constitute current opinions, which are subject to change. Projections are not guaranteed and may vary significantly. Further information on the firm and its advisory fees may be obtained from the firm's Form ADV Part II, which is available without charge upon request. Complete descriptions of all Emerald's products and benchmarks are available upon request.

(c) Emerald Asset Advisors

www.emerald-eas.com