Author: CJ Brott, Capital Ideas
Disclaimer: CJ Brott owns VXX, EWZ, BRF and CHIQ in his Covestor ETF Only model and BMY, BRF, CHIQ, EWZ, NRGY, and VXX in his Covestor Macro Plus Income Model.
October 7, 2010: Our approach to this summer’s range bound market proved far too defensive for the record setting advance in September. Early in the month we sold most of our fully priced momentum based securities in the Income Plus account. This included Sirona Dental (SIRO: NASDAQ), Maidenform Brands (MFB: NYSE). We also sold potentially underperforming securities such as Powershares CEF Income Fund (PCEF: NYSE). In the ETF only account we sold the balance of US based holdings including the Rydex S&P Equal Weight 500 (RSP: NYSE), the SPDR Midcap (MDY: NYSE) and the IShares S&P Small Cap (IJR: NYSE).
We reduced US exposure in the ETF account following our conviction that the US dollar would continue to decline. The dollar’s decline did continue. However, so did the US stock market’s advance. Sales in the Income Plus account were made on a bottom up valuation basis. This proved to be a more accurate call as there was no further meaningful advance in those securities.
Both accounts deployed part of the cash raised into the Global X China Consumer Fund (CHIQ: NYSE) and the IPath S&P 500 VIX Short Term (VXX: NYSE). The China Consumer Fund follows our continuing theme of growth in China. The VXX was bought as a hedge, in anticipation of a volatile pre-election market. Each account holds the Market Vectors Brazil Small Cap (BRF: NYSE) and the IShares MSCI Brazil Index Fund (EWZ: NYSE). We continue to like both Brazil and China. We note the election in Brazil is now more certain and hope this leads to continuing growth for that economy.
The income account also added Inergy MLP (NRGY: NYSE). We like the solid cash flow generated by propane distribution. But the real reason to own the shares is the prospects for growth in natural gas storage. We also bought Bristol Meyers Squibb (BMY: NYSE). We found both the dividend yield and smaller market capitalization attractive.
We still have a large cash position in both accounts. If the market continues higher our defensive position will prove a drag on short term performance. Longer term we hope to make up for this caution with superior security selection. Although more commentators are turning bullish we are taking note of extended valuations and extremely low institutional cash levels. Given this environment we expect to remain cautious and defensive for a while longer.
