Weekly Risk Report 08/13/2009
In recent months we have seen our stock portfolios selling shares into the strong market rally that has taken over since the March lows. Different from a Sector Rotation type of activity, we’ve seen selling in across most of the business sectors - both domestic and international. Likewise, our income portfolios have been very active.
This week there has been talk in the media about the U.S. Dollar possibly reaching a near term low point against many major foreign currencies. Some expect a rebound over the next year or two. The SignalPoint process has been active with our CurrencyPoint portfolio (a new portfolio introduced recently) registering sales in foreign currency components. Last Fall and Winter as the British Pound Sterling was falling against the Dollar we used the relatively stronger USD to buy more of this currency fund. This example from the portfolio helps to describe the Process’s activity:
Recently SignalPoint reversed the effort by selling higher value foreign currency components and “buying” more inexpensive U.S. Dollar money market funds. Should the dollar strengthen from here, the SignalPoint process will again deploy the “stronger” U.S. dollars to repurchase weaker nonU.S. currency components.
With one of our Market Risk components bearish, two bullish and one neutral, we’re getting a bit of a mixed message. However, the overall Indicator is still mildly optimistic at this time showing a cash reserve goal in the lower 85% of our database since 1982. Market Price/Earnings ratios continue to push upward with the assumption that short term interest rates will remain low for some time to come. Recently polled, a large number of economists feel short term rates will start to rise slowly around the end of 2009 and will rise steadily for about 18 months thereafter. It is my view that we’ve seen about all the rise in P/E we should see with such a future for interest rates. Our Relative Valuation component combines the P/E with short term interest rates to come to a value that helps benchmark the combination against market moves. While currently bullish, if interest rates rise to around 3.5% for the 13 Week Treasury coupon, this component will be back in the Neutral range and showing little upside potential for the stock market. Coming out of recession, we should expect earnings to start to look better, year over year. That sort of comparison won’t show up until some time in 2010. So, as interest rates rise, we could see the P/E plateau or even decline slightly. This would tend to help keep a market rally alive.
