We have made it clear recently that we fear more weakness is U.S. stocks and therefore we have been raising cash in ORCA and Mendocino. Today and tomorrow Cape Lookout takes its turn in the rebalancing barrel.
For those who can't remember which model they are in, Cape Lookout is a balanced portfolio that relies totally on mutual funds and ETF's as its investment vehicles.
We will be selling mutual funds in sufficient amounts to raise the cash (money market) allocation from about 12% to about 30%.
Cape Lookout has approximately a 5% allocation in a "rising dividend" Asian stock fund. It has a small allocation dedicated to Japanese stocks.
It owns a Blackrock Global Allocation fund that holds stock, bond, and alternative investments around the world.
It has a relatively new allocation to a very defensive long/short equity fund.
The allocation to "long only" U.S. equity funds will be down to about 32% after the rebalance.
We are also swapping out some "old favorite" mutual funds into much lower cost Vanguard Funds. Since this is the first major rebalance of Cape Lookout in a long time, we wanted to use the opportunity to lower the "cost of carry" of many of funds in the model. We are removing several funds that had operating expenses between .72% and 1% and replacing them with funds that have operating expenses of .08% or less.
If all else is equal the new lower cost funds will contribute to added performance for our clients. We have been careful to select Vanguard funds that have performed as well or better than the funds they are replacing.
If you missed our last letter this excerpt might help explain why we are getting more defensive.
"At this time we are seeing some of our favorite analysts lining up in the bearish camp. Several are growing extremely bearish and feel that we are on the verge of a major sell-off like 2008-2009. John Murphy, Stockcharts.com, thinks we may be in store for a correction of 10-12% that should be followed by a push to new highs in U.S. stocks. He is using Elliott Wave Theory to derive this view of the market.
We are still not in the camp that a 2000-2002 or 2008-2009 50% +/- correction is in store. We have written many times since mid-2013 that our base case is that U.S. equities are probably in a new secular bull market that could last many years. But whether a major collapse is in store for us, or simply a garden variety correction, we set the odds at "high" that markets go lower before they go higher again.
We have told individual clients many times that if we ever saw the warning signs of another major market downturn that we would act on them. They are starting to appear and we are trying to respond.
Here is a version of a chart of the S&P 500 that has been circulating among analysts. This chart spans 1996 through present day. The first two vertical blue lines mark the beginning of the collapses of 2000-2002 and 2007-2009. The point of the chart is to show that several technical indicators are lining up just as they did on those two previous occasions.
Several of our favorite technical analysts are creeping into the camp that the market is about to roll over again and that it may retrench by up to 50%. That theory is represented by the red arrow on the right.
John Murphy's "Elliott Wave" projection is portrayed by the blue and white dotted lines. He thinks the market is in a bullish formation represented by 5 Elliott Waves. In this theory the market moves from its low to its ultimate high in 5 waves. Waves 1-3 and 5 are advancing waves. Waves 2 and 4 are corrective waves. Whether it makes sense to you or not, advances usually work that way for stock indexes and individual stocks alike.
John thinks we may be about to enter into corrective Wave 4 which could be a 10-12% correction. Elliott Wave theory also allows for the possibility that Wave 4 can simply be a sideways correction. The odds of that increase if Wave 2 was a steeply declining wave--which is was. Therefore Wave 4 may cause the market to trend sideways for a couple of months.
From our point of view it doesn't matter if we are about to get a 50% correction or a 10-12% correction, or a sideways correction. All signs are pointing to a correction. The odds are simply higher than they have been in quite some time and we are getting defensive in the models in which we are supposed to do that."
All the best,
MANAGING MEMBER & CHIEF INVESTMENT OFFICER
5T Wealth Management
(707) 603-2672 Office
(707) 486-7333 Cell
Disclosure and Disclaimer - Updated last on July 23, 2012 by Paul Krsek:
ELLUMINATION is the proprietary newsletter written for clients, friends, and affiliates of 5T WEALTH MANAGEMENT .
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