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,

 

Paul Krsek
MANAGING MEMBER & CHIEF INVESTMENT OFFICER  
5T Wealth Management
(707) 603-2672 Office
(707) 486-7333 Cell

Paul@5TWealth.com  

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 .

Paul Krsek is the sole author of ELLUMINATION. While the views and representations found in the newsletter generally reflect the attitudes and opinions of the 5T WEALTH MANAGEMENT members and staff, Krsek writes without editing and therefore is solely responsible for the content and opinions contained in ELLUMINATION.

ELLUMINATION does not represent the opinions of Fidelity, Fidelity Institutional Brokerage Group, NFS or anyone employed by Fidelity in any capacity. Neither Fidelity, Fidelity Institutional Brokerage Group, nor NFS, nor anyone employed by Fidelity in any capacity has participated in the creation of ELLUMINATION and they are not responsible for the contents or distribution of ELLUMINATION.

ELLUMINATION is written to provide general information to clients, friends, and affiliates. The contents of ELLUMINATION are not to be taken as individual investment advice. No investment decisions should be made based on the opinions or information offered in ELLUMINATION.

5T WEALTH MANAGEMENT does not represent that the information in ELLUMINATION is accurate or complete and it should not be relied upon as such. Opinions expressed herein are subject to change or modification without notice.

The investment portfolio models or management services mentioned in ELLUMINATION may or may not be available in some states, and they may not be suitable for all types of investors.

5T WEALTH MANAGEMENT manages accounts with various histories and investment objectives. Various accounts may be managed differently from time to time.

Krsek makes frequent reference to the model portfolios called Hatteras, Mendocino, Point Reyes, Diamond Head, Cape Lookout and Dividend Diamonds as well as our Fund of Funds Portfolio. During 2005 Paul Krsek was appointed Chief Investment Officer of 5T WEALTH MANAGEMENT, and as such is responsible to make all trading and management decisions for all client accounts which are being managed according to a specific portfolio model. A description of each of our models can be found on our website at http://www.5twealth.com/prd_port_signup.cfm.

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From time to time 5T WEALTH MANAGEMENT receives requests from clients to purchase securities that are not included in the model portfolio to which they are assigned. Effective May 24, 2006, 5T WEALTH MANAGEMENT has encouraged clients to hold such securities in a separate account for the client. Because 5T WEALTH MANAGEMENT is a "fee only" registered investment advisor" it charges its normal management fee for monitoring such securities in the separate accounts in which they are held.

5T WEALTH MANAGEMENT makes every effort to exclude securities that are 'requested by the client' from the modeled portfolio accounts.

The investment objectives of various accounts and models may be substantially different from one another. Therefore topics or investments mentioned in E-Ellumination may or may not apply to specific managed accounts and/or models.

Trades or adjustments to accounts mentioned in ELLUMINATION may or may not happen in every account managed by portfolio managers at 5T WEALTH MANAGEMENT.

If you are not satisfied with the investment results in your account it is your responsibility to inform Krsek to discuss possible changes that can be made to the account to accommodate and satisfy your needs.

The assets held in managed accounts at 5T WEALTH MANAGEMENT may include stocks, bonds, cash, commodities, foreign exchange or mutual funds or exchange traded funds (ETF's), money market accounts or limited partnerships that represent the same. They are subject to market fluctuation and the potential for losses. The assets are not insured. The value and income produced by these investment products may fluctuate, so that an investor may get back less than they initially invested.

The portfolio managers at 5T WEALTH MANAGEMENT do not guarantee results.

Past performance should not be considered an indicator of potential future performance. If you do not consider yourself suitable, either emotionally or financially, to experience volatility and/or losses in financial markets, you should not invest.

From time to time Krsek lists the simple annual returns of the six model accounts in this newsletter. These accounts are "models" and do not represent the actual results accruing to individual accounts. Simple annual return does not represent "time weighted return" as reported individually to clients in their quarterly reports prepared using Centerpiece.

This document is for information purposes only and it should not be regarded as an offer to sell or as a solicitation of an offer to buy any securities or other instruments mentioned in it.

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