The table below includes both Short Term (S - T) and Intermediate Term (I - T) Rating results of our technical analysis of the price direction for the Styles and Sectors we follow. The intention is to give you insight into the time frames that are involved in our portfolio management process. Short Term ratings capture more of the wiggles in the market while the Intermediate Term ratings capture more of the trending aspects of the market. If we are in a period where the market is in a trading range with little trend direction, the Short Term ratings are more useful. On the other hand, if the market is in a longer term trending mode, we put more emphasis on the Intermediate Term Rating results. Note that signals can change in between reporting periods which may be confusing at times. For example, a Green light may have changed to Red and back to Green since the last report. The Rating Table would still be Green but the signal date would have changed from that shown on the prevous report..
Last week I mentioned that a drop in the Federal Discount Rate or the Federal Funds Rate or both, coupled with a continued surge in M2 and MZM, would signal that the anti-deflation battle is on with abandon. I use anti-deflation and anti-recession terms interchangeably. On September 18, the Fed dropped both rates 1/2%, somewhat more than was anticipated by the market. Consequently, the stock market rallied sharply, but long term Treasury bond prices declined somewhat (rising long term interest rates). The bond market apparently perceives this anti-recession battle as causing deflationary pressure on the Dollar and consequently pressure on longer term bond prices. Short Term rates moved down as expected.
As I have noted in the past, there are two aspects of monetary policy, the level of interest rates and the level of monetary growth. Short Term interest rates are obviously headed lower for now. A look at monetary growth statistics indicates that monetary growth is exploding upward. For example, weekly reported four week moving average of M2 Year-over-Year growth looks like this since the end of July: 3.9%, 4.2%, 4.2%, 4.8%, 6.7%, 8.2% and 9.4% for the September 10 data reported on Thursday. The MZM growth over the same period was as follows: 8.6%, 9.0%, 9.6%, 11.9%, 15.3%, 18.4% and 21.2%! If that is not an explosion of liquidity, I don’t know what is.
Until these strong monetary growth trends change direction, the stock market will likely be biased to the upside. At least, that is the response of the stock market over the recent past as I have discussed in previous reports. However, overbought conditions will undoubtedly cause corrections along the way. My expectation is that this general bullish bias may continue until we get closer to the 2008 elections, or until the liquidity pump turns off again. Nevertheless, we will continue to pay attention to what our Rating Table is indicating as an important aspect of our risk management philosophy.
“Opinions” are never in short supply! This is especially true when it comes to economic and financial matters. One of the things that I learned early on in this business is that you must have your own opinion and march to your own drummer. Otherwise, you tend to be confused and disoriented at critical times. You read one expert’s advise and it sounds reasonable. You listen to another expert’s comments and they also sound reasonable. Pretty soon, you don’t know who to believe or what to do. To be a successful professional in the investment management world, in my opinion, you must have a methodology that you believe in, a broad understanding of economic and financial fundamentals, and a sense of the geopolitical issues in a global context. Most of all, you need to know your own limitations and strengths and how best to utilize them to your advantage.
I read and listen to a variety of thoughts and opinions, but in the end, I draw my own conclusions and act accordingly. The opinion that I put at the top of my listening list is the Market’s opinion. The technical analysis approach that I use helps to identify the market’s opinion. However, there are several other members of my Opinions Board of Directors (OBD). These are several market players that I like to read or listen to what they have to say to add perspective to my own analysis. I have chosen them based on their diversity of thought and broad experience even though they rarely have a consensus opinion. There is the ‘Scientist’, the ‘Academic’, the ‘Trader’, the ‘Technician’, the ‘Geopolitico’ and the ‘Old Man’. As chairman of the OBD, I consider myself the ‘Pragmatic Realist’, as that is my genetic nature. The key ingredient of these OBD members is that they all put their own money on the line along with their opinions.
The only Red lights on the Equity portion of the Rating Table are in the Transportation Sector. The rally out of the August 16 panic low has been dramatic. Aided of course, by the prospect and reality of a Fed monetary easing policy. The financial markets like lower short term interest rates and plenty of liquidity. They are getting both for now. The Growth style continues to lead Value so far this year. I believe that Growth is perceived as being the biggest beneficiary of globalization. For instance, the Wilshire Large Cap Growth index is up 10.0% Vs. Large Cap Value up 5.9%. The Wilshire Mid Cap Growth index is up 13.9% Vs. the Mid Cap Value index up 2.0%, and the Wilshire Small Cap Growth index is up 12.0% Vs. the Small Cap Value index up 1.7%. These seem like unusually large differences in performance for a year that has seen quite a variety in economic activity, monetary policy and the risk of recession in the news.
PORTFLIO ACTIONS FOR THE MARKET WEEK ENDING 9/21/07
Diversified Growth Plus - DGP: We added both Small Cap Blend and Mid-Cap Blend index positions after the Fed reduced both the Fed Discount and Fed Funds rate last week. The full court press is now in play by the Fed to try and prevent a recession from occurring. This tends to be bullish for the stock market based on the stock market premise that it doesn’t pay to fight the Fed when it is in a very anti-recession mode. We did have a very short term hedge position going into the Fed meeting that was removed as the market reacted positively to the Fed action. We will likely increase our exposure going into the last week of the 3rd Quarter. Core allocations are: 15% Multi Cap, 10% Mid Cap Growth, 20% Mid Cap Blend, 10% Small Cap Growth and 5% Emerging Markets. The Swing position are a 5% Small Cap Blend (2.5% invested) and a 5% Mid Cap Blend (2.5% invested), 10% Technology and a 3% Natural Resource Asset Management position. The net market exposure is currently 83% with cash reserves at 22%.
Energy/Defense/Resources Plus - EDRP: No changes last week. However, we will likely increase our exposure some more going into the last week of the 3rd Quarter, especially with the Fed in anti-recession mode. The current sub-sector allocations for the EDRP portfolio are 5% Energy Services, 16% Energy Exploration & Production, 5% Alternative Energy, 14% Defense-Major, 7% Defense-Components, 6% Security Systems, 17.5% Precious Metals, 8% Natural Resources and 3% Agricultural Resources. The net market exposure is 81.5% with Money Market reserves of 18.5%.
Natural Resource Plus - NRP: No changes last week. However, with the Fed in full anti-recession mode, we expect that the natural resource sectors will continue to respond in a bullish fashion. Consequently, we will likely increase our exposure in these sectors going into the last week of the 3rd Quarter. The current allocations are 8% Gold Bullion, 27.5% Precious Metals Mining, 12.5% Energy Exploration and Production and 18% Natural Resources. Net market exposure is currently 68% with Money Market Reserves at about 31%.
Gold Portfolio - GLD: No changes last week. The Gold Mining sector remains on double Green lights. The Fed action on Tuesday helped Gold bullion prices soar as lower interest rates and increased liquidity are polka music to the precious metals market. Gold bullion closed Friday at $731, the highest close in 26 years. Gold has been in a strong bull market since early 2001 with only one sizeable correction in 2006. With the Fed on an anti-recession crusade, gold is likely to remain in a bullish trend. Monetary growth as measured by MZM continues to soar with the four week average of the year-over-year growth rate reported for 9/10/07 at 21.2%! Since the beginning of 2007, total MZM (Money with Zero Maturity) has risen $983 Billion. That is an increase of 14.4% or an annualized increase of approximately 19.2%. Surprise, Gold bullion started the year at $636 and closed Friday at $731. That is a rise of 14.9% so far this year. Could there be any cause and effect here? The current allocation is a 15% gold bullion position and 70% precious metals mining securities, which includes a 10% specific silver mining allocation. Money Market reserves are about 15%..
Tactical Asset Allocation Style & Sector Signals:
Ratings 60% and Above are a Green Light
Ratings 40% and Below are a Red Light
Ratings 41% to 59% are Neutral
Light Green indicates going from Green to Neutral since last Signal Date
Pink indicates going from Red to Neutral since last Signal Date
This is a reduced version of Ron Miller's Tactical Asset Allocation Style & Sector Signals table. Ron's portfolio management process includes the technical analysis of over 400 mutual funds that have been selected to represent forty four different styles and sectors that are tracked daily for both Short Term and Intermediate Term direction signals. These include the 9 Morningstar portfolio management style boxes plus 16 equity sectors, 10 international styles/sectors and 9 bond sectors. Ratings are based on the percentage of securities followed in each category that are on buy signals. Short Term (S - T) signals are based on daily price data and may be different and change more frequently than the Intermediate Term (I - T) signals that are based on price action for a trailing 5 day period. These ratings are subject to change at any time and obviously their accuracy is not guaranteed. Individual securities may perform differently from these signals. These direction signals are a useful tool in the portfolio management process but are not the sole determinate of actual portfolio style or sector weightings. They should not be interpreted as a buy or sell recommendation for any specific financial securities and do not reflect positions of Morgan Keegan. Market data used in this analysis is believed to be from reliable sources but its accuracy can not be guaranteed. Past performance is not indicative of future results.
Portfolio Action Update Explanation: I try to confine my comments to a discussion of what recent action has occurred in these portfolios and my current technical analysis posture. In general, my portfolio management approach is to determine current market conditions through technical analysis and to position the various portfolios strategies to participate in the current environment. Although I usually have an opinion of the future direction of the market, I don’t rely heavily on my opinion in the portfolio management process. Neither opinions, technical analysis or fundamental security analysis produce perfect results. There is always a degree of risk present.
These comments will usually be written on the Weekend. However, a few days may transpire from when they are written and when they are posted on the web site. Obviously, the technical analysis signals and portfolio positions could have changed in that timeframe. Therefore, this technical information and related comments should only be read from a historical perspective, and may not reflect what the current analysis and portfolio positions actually are when you read this update. You can call us for the most current update if you wish.
Although the Technical Analysis Ratings illustrated in the table below are a very useful tool in our portfolio management process, these ratings are not the sole determinate of the asset allocation positions held in our various portfolio management strategies. This information is not intended to be a solicitation of a buy or sell of any financial security. The opinions expressed herein are my own and do not reflect the position of Morgan Keegan & Co., Inc. Past performance is not a guarantee of future results.