I’m writing today to update you about some defensive portfolio changes we’ve made recently and to give you our thoughts about the state of global and domestic economies and the impact higher oil prices are having on them.
About two months ago we sold our commodity position because prices had spiked to an alarming level and we knew speculation was the primary culprit. Since then our suspicions have been confirmed. Seventy percent of oil purchased in the futures market is coming from non-users.
While prices have retreated 10 to 15% they remain stubbornly high. This, while economic data in May points to a significantly slowing U.S. economy. While we know oil prices need to come down to prevent consumer spending and confidence from tanking even further, they remain stubborn. In fact, while the stock market declined in the face of poor jobs and housing data, oil prices firmed and even rebounded slightly. Fundamentally it makes no sense – unless you assume jobs, housing and consumer spending are not important to this relatively weak recovery and that a continuing U.S. recovery doesn’t matter to global growth.
Now I’ll concede that China has recently surpassed the U.S. in oil consumption per year – while producing only half the goods and services that we do. But, remember Alan Greenspan suggested that energy inefficiency is a prime characteristic of an emerging economy. I don’t believe that emerging economies can stand on their own yet. That time may be getting closer, but, it’s not here now.
So if higher oil and food prices persist . . . in the face of weak housing and job markets . . . and if consumers have no equity to borrow against or can’t afford to (or are afraid to) take on more debt . . . and if politicians shut down the State and Federal Governments . . . and if that causes a default on U.S. debt obligations . . . or if spending cuts are too large and lead to job losses . . .
Well, I think you can see why we are taking a little more defensive position.
Specifically we exchanged U.S. Domestic Equity positions specializing in mid-cap stocks and technology stocks for high-quality intermediate bond positions. Essentially we are taking profits from outperforming areas and are investing into positions that will likely go up if the economy struggles. We know this may create some capital gains, but many have capital loss carry forwards and most advisors believe that capital gains will likely be taxed at higher rates after 2012. Most of you know I feel that managing risk and seeking to protect capital trumps most other considerations.
What’s next? We’re monitoring things closely. We have a specific plan to deal with our portfolios – depending on whether fundamentals improve, stay the same, or get worse. We’ll keep you posted.
By the way, I believe oil prices will “give” before it’s too late and the global expansion will continue. I’m just not willing to bet the house on it. Thanks, once again, for your trust and confidence. As always, call with questions.
Donald J. Miller, CEO, CFP®
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values and yields will decline as interest rates rise and bonds are subject to availability and change in price
This entry was posted
on Thursday, June 16th, 2011 at 4:17 pm and is filed under Market Commentary.
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June 2011 Market Commentary
I’m writing today to update you about some defensive portfolio changes we’ve made recently and to give you our thoughts about the state of global and domestic economies and the impact higher oil prices are having on them.
About two months ago we sold our commodity position because prices had spiked to an alarming level and we knew speculation was the primary culprit. Since then our suspicions have been confirmed. Seventy percent of oil purchased in the futures market is coming from non-users.
While prices have retreated 10 to 15% they remain stubbornly high. This, while economic data in May points to a significantly slowing U.S. economy. While we know oil prices need to come down to prevent consumer spending and confidence from tanking even further, they remain stubborn. In fact, while the stock market declined in the face of poor jobs and housing data, oil prices firmed and even rebounded slightly. Fundamentally it makes no sense – unless you assume jobs, housing and consumer spending are not important to this relatively weak recovery and that a continuing U.S. recovery doesn’t matter to global growth.
Now I’ll concede that China has recently surpassed the U.S. in oil consumption per year – while producing only half the goods and services that we do. But, remember Alan Greenspan suggested that energy inefficiency is a prime characteristic of an emerging economy. I don’t believe that emerging economies can stand on their own yet. That time may be getting closer, but, it’s not here now.
So if higher oil and food prices persist . . . in the face of weak housing and job markets . . . and if consumers have no equity to borrow against or can’t afford to (or are afraid to) take on more debt . . . and if politicians shut down the State and Federal Governments . . . and if that causes a default on U.S. debt obligations . . . or if spending cuts are too large and lead to job losses . . .
Well, I think you can see why we are taking a little more defensive position.
Specifically we exchanged U.S. Domestic Equity positions specializing in mid-cap stocks and technology stocks for high-quality intermediate bond positions. Essentially we are taking profits from outperforming areas and are investing into positions that will likely go up if the economy struggles. We know this may create some capital gains, but many have capital loss carry forwards and most advisors believe that capital gains will likely be taxed at higher rates after 2012. Most of you know I feel that managing risk and seeking to protect capital trumps most other considerations.
What’s next? We’re monitoring things closely. We have a specific plan to deal with our portfolios – depending on whether fundamentals improve, stay the same, or get worse. We’ll keep you posted.
By the way, I believe oil prices will “give” before it’s too late and the global expansion will continue. I’m just not willing to bet the house on it. Thanks, once again, for your trust and confidence. As always, call with questions.
Donald J. Miller, CEO, CFP®
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values and yields will decline as interest rates rise and bonds are subject to availability and change in price
This entry was posted on Thursday, June 16th, 2011 at 4:17 pm and is filed under Market Commentary. You can follow any responses to this entry through the RSS 2.0 feed. Responses are currently closed, but you can trackback from your own site.