Author: Tom Yorke, Oceanic Capital
Covestor models: Global Diversified Conservative, Global Diversified Moderate, Global Diversified Aggressive
Wow, what a month October was! Who would have thought the least interesting news of the month would have come out of a FOMC meeting? Boy, do we long for the days when they generated the most fireworks.
The runner up for the next least interesting event were the U.S. October employment numbers. Relative to the expectations, they were as close to “spot on” as we ever see. However, yet again, the previous month’s payroll numbers were subject to revisions of 40 to 50% . This is getting ridiculous. It’s absolutely amazing the amount of money riding on a number adjusted by an “estimate” of something called a “birth-to-death” ratio of new (read: small) businesses created or killed during the period. This type of a “miss” in the estimates is hardly uncommon and I am sure the boys and girls at BLS are doing their level best, but seriously, a 40-50% revision? Raise your hands out there if your boss would just say “no worries, we’ll just adjust it next month” if you missed your numbers by that much. How about telling your wife and kids you will be home on Tuesday, but coming home Friday instead, or “I’ll be home at 7pm” and not showing up until 9:30? Acceptable? I think not.
Enough fun in the US. Europe was the source of the real fireworks. The new ECB chief Mario Draghi finally took the bear by the ears and cut interest rates, and this seemed to be the first concrete action coming from the region. Greece’s call for a referendum nearly shook the world to its financial core. It may have been a stroke of political genius or just dumb luck, but Greek Prime Minister Papandreou brought the hot white light on the situation and finally forced a few hands, whether intentionally or not. Seriously, what brain surgeon came up with the idea of letting the populace vote on financial austerity?
Had enough of Greece’s newly discovered austerity? Let’s visit Italy. The momentary respite we got from the Greek Prime Minister’s resignation and the austerity vote was soon interrupted by the “gapping” Italian 10-year note; it was making new lows with yields reaching 7.5%. Remember that Italy has something like $2.5 trillion dollars in debt outstanding, which, according to the folks at The Chart of the Day, is more than all of the other troubled European nations [PIIGS] combined. Ouch!
Many bond mavens have viewed the 7.0% level as the point at which things would start hitting the fan, as the Italian economy simply could not generate enough cash to service outstanding debt that rolled into bonds paying 7% or higher interest rates. Additionally, interest rates at these higher levels begin to challenge traditional investor beliefs, as they wrestle with the fact of taking on real credit risk and not just interest rate risk.
Italy’s senate has now approved debt reduction measures and a new government led by Mario Monti is forming; hopefully some adults have taken over. As a result, Italy’s 10-year notes have eased and yields have gone down to 6.45% as of 11/11.
Stocks markets in the USA and Europe have all rallied somewhat in early November. The volatility continues, but Italy and Greece appear to be waking up, making some better sounding noises and some constructive political moves.
Now if we can just get the good German bankers to recognize how important the Euro is to Germany. They need to step up to the plate and create a line in the sand similar to the line drawn by the Swiss National Bank in its defense of the euro versus the Swiss franc, i.e., an unfettered, full scale commitment to defend it no matter the cost.
The upshot is we are seeing some “green shoots” of a resolution beginning in Europe, which should start to move them off the front page of news. This would be a real boon to the markets. All of this commotion has us thinking about a few moves before year end.
As OCM clients know, our investment models place primary emphasis on proper asset allocation. This strategy has a long history of providing value, and we have no plans to alter things by becoming market timers or small stock pickers, or to find the next true “value” play. It wasn’t too terribly long ago that Citibank was thought of as a value play, but even after a reverse 1 for 10 stock split, they still can’t top $35. That said, we are likely to make some adjustments going into year end and are leaning towards the following actions.
In our equity allocation, we have some names we like and have been watching and will look to add along the way, among them Microsoft (MSFT), Altria (MO), Intel (INTC), and DuPont (DD). All of them dominate their respective industries, have good growth prospects, produce lots of cash, and pay nice dividends. That weighting may sound heavy, with two of the four being “tech” stocks, but we view MSFT (for sure) and even INTL as economic underpinnings. Both are so intertwined into the world’s economic activities that their days of being a “tech play” are well behind them.
In the commodity sector, we are looking at Freeport-McMoran (FCX) and Monsanto (MON), which we expect to add as we look for commodity-driven companies to protect us for any potential inflation.
In the precious metals sphere, we’re looking to swap out of any remaining silver plays and look seriously at adding some exposure to platinum, as it appears undervalued relative to gold. We may use the ETF PPLT or another trust type vehicle.
So far, our fixed income exposure has helped us during the days of extreme downdrafts and we like that performance, but have been watching UUP as a possible alternative as it also tends to rally sharply during any flight to quality. We may just fine tune the mix of those two asset classes some.
REITs are unloved, and we are watching them closely. Check back with us in a month or two and we may have more thoughts on the sector.
