I'LL SAVE THE WORLD... AND MELT WITH YOU I'll stop the world and melt with you
You've seen the difference and
It's getting better all the time
There's nothing you and I won't do
I'll stop the world and melt with you - From the song "Melt With You," by Modern English (1982) (www.stlyrics.com, www.wikipedia.com)
Just when we were getting used to the idea that we could view the world with bullish-colored glasses again, it happened. Following one of the sharpest stock market rallies in history from early March through early August, in which the S&P 500 gained over 50%, my colleague Michael Kahn and I have started to rejoin our grizzly colleague Keith Stoloff in thinking that this is simply too far, too fast...as it seems to always be in this decade's investment climate. And, despite the fact that it came on the heels of the near "end of the financial world" as some would have you believe, as risk managers we must pay attention...to the mounting risks, that is.
WHAT WE STAND FOR - A QUICK REVIEW
We at Emerald are less about predicting near-term market direction, which is what draws way to much attention in our industry. We are all about balancing risk and reward, simultaneously, all the time, with every decision we make. Naturally, we'd suggest you do the same, and not get too caught up in what you may not be getting in this rally, or what happened to you last year, or anything else you no longer have control over as an investment advisor or investor. To be clear, we believe that stock prices will be noticeably higher around the globe in a few years than they are today. We also believe that investment approaches that include hedged investments (what we call "21st Century Asset Allocation") will rule the house for years to come. Still, the investment world has changed, we feel in large part, because investors' expectations have changed. Have you seen any "10-year time horizon investors" lately? Those patient folks are much harder to find than in years past. It all leads to more information to process each day, more opinions to sort out, deeper analysis of what really works in growing and preserving wealth, and more decisions to make in short time periods than in the past.
As we saw in our portfolios last year, the turnover activity was at an all-time high. This year it has been more moderate. That doesn't mean there is less thought and evaluation going on so far this year; rather it is just that the need to act has not been as frequent. This is why we are fans of "tactical" investing, but as a tool in an investment process, not as the process itself. If the end-client digs down deep enough into one's investment process, we are confident they will see it the same way. That has not stopped the tactical buzz from dominating the investment advisory business this year. Now that we've refreshed our view on where we stand in general, let's get specific.
MELT-DOWN? MELT- UP? HOW ABOUT BOTH? The title of today's "GreenThought$" is a twist on a headline from today's Marketwatch.com. It was in reaction to Federal Reserve Chairman Ben Bernanke speaking today on the past year's financial crisis. The event received tremendous media coverage, and after reading the speech I want to emphasize that it was not Mr. Bernanke who said the words "we saved the world" - but that's how one very popular news service interpreted it. We twisted this with some lyrics from the hit song from the British Punk Rock band "Modern English," which as I recall was very popular on college radio stations around the time I started my amateur disc-jockey career at mighty WCDB in Albany, NY. The song has resurfaced numerous times as a jingle in commercials for Burger King, Hershey, Taco Bell, M&Ms and TV shows (source: Wikipedia.com). It seems fitting here at a moment where the financial world is judged to be saved (by some) and we are looking at conditions from which, like a hurricane in the Atlantic, much damage can be done, and quickly. I don't know if the good people of Michigan and the other 14 states with unemployment rates over 10% and the millions who are in foreclosure feel "saved" at the moment; but I'll leave the socioeconomic commentary there for now.
What the Fed-Head says prompts emotional market reactions, but we at Emerald are responsible for adding that to the piles of info and data we consume each day and then making decisions taking it all into account. Our opinion: the stock markets of the world may suffer a melt-down, or may muster a "melt-up" to levels not seen since the crisis went from bad to worse at the end of last September. But in our view, the growing possibility is that we will see BOTH, and maybe very soon.
THE RISK-REWARD TRADEOFF NOW
What do you do now when, like the background singers sing during the chorus of that song, your clients are looking at you saying "you should know better?"
For that, we highlight and summarize just some of the information that has caught our eye this week:
· Technically speaking (charts, that is), we feel there is a good case for being bullish, then even more bearish (i.e. there's another market shock coming, but more investors need to be suckered in first, so the market can do what it always does - upset and surprise the most investors possible).
· Merrill Lynch came out with their Monthly Global Investment Manager Survey. As summarized by market commentator Barry Ritzholtz.... Interesting results of Merrill's Monthly Manager Survey: "It seems that most managers are very upbeat about the economy and the state of corporate health."
- Cash balances plunge to 3.5%, lowest since July'07;
- Highest equity allocation (34% from 7%) since Oct'07;
- Bond allocation (-28% from -12%) lowest since April'07.
- Confidence about corporate health is at its highest since January 2004
While I keep hearing about cash on the sidelines, the professionals seem to be "All In."
PORTFOLIO POSITIONING: OUR VIEW While we have positioned our portfolios for a variety of outcomes, we have drifted back (temporarily) to the belief that while the stock markets of the world may fly higher for a bit longer, the seasonally frightening period of September-October is approaching. Translation: don't be jealous of lagging the rally, and have a plan in place for if/when panic replaces relief and euphoria. It's Hurricane Season in the tropics and in the market, and just because we haven't had an awful one lately, it doesn't mean you shouldn't check your supplies of batteries and drinking water. Our job and yours is not to guess whether the rest of this year will bring melt-up or meltdown for investors and the economy. It is to navigate through both if they occur, and to deliver as smooth a ride as possible on the path to long-term success.
Rex Nutting, the Marketwatch DC bureau chief who wrote the article on today's Bernanke speech (we don't know who came up with the headline), did add this:
Bernanke made almost no comments about the future course of the U.S. or global economies, other than repeating phrases from the latest communiqué from the Federal Open Market Committee that the economy seems to be leveling out. He cautioned that any recovery is likely to be gradual at first with high unemployment...He said nothing about how the Fed would unwind its support for the banking system. That day seems to be in the distant future, however. "Although we have avoided the worst, difficult challenges still lie ahead, including securing a sustainable economic recovery and rebuilding the institutional framework to make sure a similar crisis can be averted." Is the worst over? Very possible. Is all the bad stuff over? We doubt it. It also remains for economic historians to figure out how literally the words from that Modern English song "there's nothing you and I won't do" apply to what Bernanke and Goldman...er...Paulson crafted last year at the peak of the crisis. That's it for now, let us know what you think about our new Green Thought$ format.
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