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“Nowhere to Run” -  Martha Reeves & The Vandellas (1965)

 

Cash… an asset class to consider; but first, a quick review.

Three weeks ago the ’Jo’  discussed the allusive nature of risk, just as the market surpassed 15% YTD return, and overlaid the Fed’s balance sheet with the S&P 500 showing an 88% correlation.  The piece circulated just after USA Today headlined “Bull Run Gets Solid Footing”; a behavioral finance contrarian warning shot if there ever was one.   The ‘Jo’ two weeks ago  outlined four increasingly bullish trends (A-D) stretching from the longest cyclical (4+ years) to the latest and shortest (mid-April to late May), called a ‘Buying Climax.’  And finally, last week’s ‘Jo’ pontificated on the increase in volatility of late (Average True Range – ATR) and illustrated how some of the momentum indicators (MACD) are showing their first signs of weakening since November of 2012.

So why the review?  Addition.  Over the years our firm, TAM (Tesseract Asset Management), has been authoring pieces to not only inform on our market stance, but to educate on the prevailing risks inherent within the current markets’ landscape.  Both of which are based on fusion analysis: the unification of fundamental, technical, behavioral and quantitative analysis; simply put, a weight of evidence.  These metrics, since last April, have been indicating an unusually heightened risk profile of the market.

With the markets exceedingly tumultuous last ½ of the week, there are now a plethora of investors begging the question of “Where to go?”, and not in reference to Disney World.  But here in lies the unique dilemma.  Is anything “Safe?”  As illustrated below, not last week.  Of the 12 ETF’s we report on, there wasn’t one showing any sign of becoming a safe-haven for investors.

062113-ETF-Watch

Breaking it down even more simply we illustrate three charts which typically represent alternatives to the domestic equity space and provide an area for investors to take refuge.   We’ll let the visuals speak for themselves.

The first is the Vanguard Total Bond Market Index ETF (BND).

062113 Vanguard Total Bond Index

The second is the CRB (Commodity Research Bureau) Index.

062113 CRB Index

The third is MSCI (Morgan Stanley Capital International) Emerging Market Index

062113 MSCI EM Index

 

“Nowhere to run, nowhere to hide…”   Years ago when working at Wachovia Securities as a branch manager and PIM (Private Investment Manager), there was a newly hired corporate-level compliance officer which felt it his responsibility to tell money managers what they can and cannot do.  During the 2001-2003 tech bubble, the portfolios I managed were 50% allocated to cash, for various reasons. The newly hired, 26 year old, 2 year experienced, law school wanna be, informed me that it was inappropriate to have clients allocated to this amount of cash as they were  in managed portfolios and needed to be invested.  After weeks of boisterous debate… well, let’s just say he was no longer employed at Wachovia.

Cash, for all intents and purposes, is an investment.

Investment: “The allocation of an asset refrained from consumption”

Cash may be the most boring of assets, it may be the least lucrative in relation to growth, but what it lacks in return, makes up for in ‘Real’ safety.   Truth be told, it’s not a place to hang ones hat for an extended period simply due to a decreasing nominal value (inflation).  Yet, when all other alternatives have heightened risk and deteriorating principal, sometimes the prettiest pig is the cow.

I hope this helps and finds you well

TAM-KAT

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