Weekly Risk Report 06/01/2009
Isn’t it amazing how the markets can change fixations so quickly? Recently we’ve seen a complete turnaround from worries of “deflation” to worries of “inflation.” While neither is pleasant, they are part of the bigger picture of modern economics.
In the late ‘70s and much of the ‘80s we were paying for the huge spending effort related to the Cold War and Viet Nam. How did we pay? We paid with a tremendous increase in money supply and the resultant inflation. I’m not attempting to pass judgment here, just stating the facts. We are again involved in skirmishes and a terrorist “cold war” that are proving to be expensive. We are again spending money not currently being collected by the IRS. So, how will it be paid for this time? My guess is the M.O. won’t have changed.
What happens after such periods? Usually there are attempts to get inflation under control via increased interest rates. This increase will spread up and down the yield curve once the effort is under way. High interest rates are very hard on commerce. Usually business growth slows during high interest rate times.
The next phase is to “stimulate” by reducing interest rates. This is when we start to see expansion of commerce and usually a bullish period in Stocks.
Stocks and bonds react differently to the cycle of interest rates (which are driven by inflation). Each works its own way through such times. At SignalPoint our process keeps both our Equity and our Income portfolios moving in appropriate manner for the conditions. Long bond funds will be weaker as interest rates rise. SignalPoint will accumulate more of such bond funds during their weakness (average down in Price and average up in effective Yield). Later when interest rates start to decline, the long bond funds usually appreciate nicely – all the while with handsome payouts.
Stock prices initially fall as interest rates rise based upon a slowing economy. Lower stock prices usually equate to better dividend yield. At SignalPoint if the discount on share prices is big enough, we’ll start the accumulation of shares during this initial phase of the inflationary cycle. Then as interest rates start to recede, the markets respond and we start to liberate some of the inventory accumulated earlier.
So, while such times can be uncomfortable, proper management of investments helps to lessen the impact. The SignalPoint process is less concerned with Inflation and more concerned with controlling risk, seeking value when making purchases and realizing profits when selling. In doing so it responds appropriately to whatever the markets’ latest concern might be.
This week our Market Risk Indicator rose closer to the middle of its Average Risk range. This is again being driven by the apparent speculative activity at the stock exchanges. The SignalPoint portfolios have been quite busy on the Sell side in Basic Materials, Consumer Cyclical, Corporate Convertible Bonds funds, Global Government bond funds, Industrials, Energy, Consumer Staples, Info Tech and Real Estate. Not many stones were left unturned. Portfolio Cash Reserves have been rising slowly with the rise in the apparent market risk. Our other three components remain moderately bullish.
