There has been little change in the low volatility US stock market walkup in progress since last summer. Everything seems balanced so that nothing gets terribly ahead of itself for very long. Sentiment gets reset each time it gets a bit too frothy. Buyers emerge whenever modest price pullbacks occur.
Minor indecision shows in the frequent alternation of "inflation days" and "deflation days", and they are rapidly reversed. Much of this appeaers to be based upon the daily betting line on the possibilities of a rate cut or rate increase by the Federal Reserve. Even FED spokesmen out on the speaking circuit give off different signals, sometimes in the same day. Bernanke has not put his mark on the Fed yet so positions are sufficiently fluid for the participants to speak their minds.
The primary indicators or systems I follow are still pointing upwards. After being cautious for a lot of last year, as you know, I cut loose some hedges in November/December. My quest has been guided in large part by re-positioning from an investment lifetime of accumulation and re-investment to one of post-retirement consumption via income vehicles. I am very eager to reduce volatility, but that also means reducing total returns. I saw too many people lose large portions of their assets early in retirement on several occasions over my lifetime, and I have an aversion to doing that to myself.
Therefore I am continually researching balanced funds and more exotic modern income funds. There are only a few of the exotics which have been through at least one full bull-bear-bull cycle (or more). I am not a derivatives crash freak by any means, but we don't really know what the current derivatives environment could do in a bear market, so I am sticking to funds at firms like Loomis Sayles who are "new era" bond specialists whose firm has been around since the 1920's. T Rowe Price is another nidus of modern bond experts as well as PIMCO. I am ending up with funds which have done well at least since the late 1980's and which have depth (or breadth) both in stock and fixed income.
Dodge and Cox, Wellington Management (Vanguard), T Rowe Price, and tiny Berwyn Funds consistently come out ahead of the pack in total returns and low volatility with their well-seasoned balanced funds. PIMCO's PTTRX and Loomis Sayles' LSBDX are my favorites for new era bond funds. PTTRX seems largely to be in eurodollar futures now which is a huge market that can accomodate this nearly $200 billion fund and simulate an unleveraged intermediate bond fund.
Sentiment of investors remains rather bullishly configured (they are bearish) even after this run up. I think this is due to the political warmup for the US presidential elections. The media and the opposition (is that redundant?) are magnifying the civil disruption in Baghdad into a much larger importance than it really has. Despite all the hype, it isn't really a war as much as a continuous civilian and criminal riot in Baghdad. Most of the rest of the country is fairly quiet.
However, much of the populace of the US (and elsewhere) is terrorized and wants the pain in their stomachs to stop at all cost. My fear is that al Qaeda will want to keep the terror level high ahead of the elections. That appears to me the greatest risk to the markets for the next two years.
I keep being drawn back to biography and fiction about William Randolph Hearst who modernized and institutionalized "yellow journalism" which persists to this day. His goal was to influence and control the direction of governement for his own political advantage and wealth. He became governor of New York and had visions of the presidency. But for FDR, Hearst might well have been president. The Hearst family owned Homestake Mining, founded by George Hearst after his Viginia City NV glory days, in addition to many, many newspapers, and it is clear in my mind that FDR raised the price of gold in 1934 partly to benefit and partly to silence Hearst. That move alone created enormous wealth in the 1930's when very few investments did as well as Homestake Mining.
So we must always ask ourselves who stands to gain when the media are braying loudly. I'm not quite sure I know yet in any detail, but the braying is keeping me awake some nights.
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