Thursday, August 4, 2011

It’s a Dog Fight: a comment on recent volatility

I am an officer at the investment firm CastleMoore Inc. My partner and I wrote the following report to our clients: CastleMoore Special Midsummer Report
"Commentators sometimes refer to “the dog days of summer,” because the hot weather makes market participants behave like dogs in a heat wave: they just want to go and lie down in the shade. Not this summer. Financial commentators agree – there are no lazy slow moving dogs in the investment world.
European governments have been fighting with their citizens to implement constraint and reduce deficits. American Republicans have been fighting the same fight with the Democrats. And all this is set against a
backdrop of faltering economic news: western economies are not as strong as expected. Bond markets have been sharply higher and stock markets sharply lower. The price of gold went straight up, but oil went down. And the financial media loves to fan the flames of the financial fires.
Rather than participate in the excitement, let’s sit back and observe the action from an intellectual distance. Let’s be objective.
Three things are happening this summer: investment volatility, weakening economies and a continuation of debt/banking instability. The volatility is new, but the other two problems have been around for a long time. How are your investments positioned for the new part: the resumption of financial volatility?
CastleMoore accounts currently hold a large percentage of assets (40-70%) in the bond markets. This past two weeks, when volatility heated up, both the Canadian and the US bond markets surged up. Our preplanned strategy worked.
CastleMoore accounts currently hold gold (8-14%). This past week, gold also went up sharply. Again, we were well positioned.
But the stock market dropped like a stone. How were we positioned for that? We had been shifting out of resource stocks into health care, consumer and utility stocks. Of the nine stocks or equity ETFs held in our Focus (Tandem Active) or Class accounts, five were the same or higher during the steep decline of this past week. During that week, the S&P 500 Index dropped approximately 450 points. Only four of our nine picks declined with the market.
In addition to picking the right stocks, we had been cautious about increasing our exposure to equities,using a “go slow” strategy to increase our holdings of stocks while also maintaining cash reserves (5 – 23.5%).
Our message to our clients has been one of over caution for quite some time. Now it’s starting to pay off."

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