(I) Canary in a Coal Mine investment model

In a word, this model was designed to help adjust to the future potential of a 1970’s like stagflation (slow/no growth with inflation).  This model is by no means a foolproof method of investing in all environments.  However it was one of the indicators we found that first signaled a shift out of bonds after a period of market turbulence in the mid- to late-1970s.  We know that as the 1970’s wore on, interest rates increased driving down bond prices.  The result was a period of stock out performance.  The indicator has added support as today’s fair valuations of investments suggest stocks may outperform bonds on a real basis over the next market cycle.

At the time of this post, the indicator suggests investing in stocks.

Here is a graphic depiction of the indicator from 1970-1981 compared to stock and bond index prices.

(II) Sector Selector investment model

After the canary in a coal mine indicator would suggest an investment move, look next to the sector selector.  This indicator compares different sectors of the market in order to determine whether to invest.

The three blue arrows on the chart below highlight time frames where the sector selector suggested slow growth or recessionary conditions.  Again it is not fool proof but has a respectable record of cautioning for a future recession.  The two most recent recessions are depicted on the graph as well as a current indicator that suggests slow growth/recession could be ahead.

At the time of this post, the indicator suggests recessionary conditions ahead.

(III) Flying Under the Radar investment model

A final model aims to add additional growth to the previous models when warranted.  The flying under the radar model is more volatile and therefore requires gauges to suggest when to buy and sell.  The gauge we employ is: investor confidence.

The graph depicts modeled hypothetical portfolio growth over time.  More importantly, entry and exits points are noted with an “O” when investors are believed to have maximum optimism and a “U” when they display minimum confidence (or under confidence).

At the time of this post, the model suggests holding investments; the gauge is neither at a peak nor a trough.  A trough developed on August 24, 2011 [designated by the rightmost black-colored "U" in the graph below]; a suggested date to “buy” the portfolio.  More specifically as the red investor confidence line approaches a peak, long term investors should wait to invest new funds or hold funds until a new confidence trough materializes and aggressive investors may consider selling positions until a new confidence trough appears.

Again, not perfect timing necessarily.  However by combining more than one market gauge, we submit investors are better suited to navigate whatever climate our economy should deliver.

The aforementioned material is not meant to be construed as specific investment advice for a specific investment portfolio.  That would be a foolish interpretation.  Instead, each investor should consult his/her investment advisor for advice as to how to invest based on their specific investment profile.

Moreover as each graph title implies, these results are not meant to guarantee future returns.  Rather they are the fruits of many hours of research in which we discarded over 100 other investment models/indicators as either unsuitable and/or ineffective in the present market.  The presentation of this material is a research opinion not unmistakable proof.

In the final blog of a five part series we emphasize the sports reporter did not think to use the term The One Horseman, The Two Horsemen nor The Three Horsemen.  All four players were integral to the team’s overall success.  The four together possessed the speed, defensive skill, acceleration, passing skill and brains to win many football games.

This series examines our “four horsemen” portfolio strategies for use in a troubled economy:

Buy yield – fixed income

Forward valuation – growth plus fixed income

Joe DiMaggio streak – market timing

Flying under the Radar – growth for larger portfolios

A troubling trend has been the increasing number of investors asking our opinion on “all or nothing” “one horse” investments (e.g. high surrender indexed annuities, non-liquid real estate partnerships, etc.).  One must go back to the zany tax-shelters last seen in the 1970s to find such a willingness on the part of these investors to voluntarily surrender their investment maneuverability in order to be sold the peace of mind found on glossy advertising brochures.

In an effort to preserve investment maneuverability, an investor should urge their advisor to consider using multiple investment vehicles such as these “four horsemen” to match their risk-return profile to a suitable mixture of portfolio management strategies.

Buy yield – fixed income

Pros:

Known return (if held to maturity)

Historically, less principal volatility

Cons:

Lower investment yield

Many yields are less than projected inflation rates

Forward valuation – growth plus fixed income

Pros:

Higher return over past five years than fixed income alone

Zero trading friction with $0 commission on many ETF investments

Cons:

Over 20% principal drop in 2008-09

Popularity of ETFs means investments must be closely monitored by your advisor

Joe DiMaggio streak – market timing

Pros:

Market timing strategies beat return for popular S&P 500 index buy-and-hold strategies

Demonstrates record of avoiding brunt of big market selloffs

Cons:

Growing popularity may lead to diminishing relative advantage

Flying under the Radar – growth for larger portfolios

Pros:

Superior long-term returns over 2005-2010 test period

Reduced correlation to institution induced broad market swings over test period

Cons:

Trading commissions means best results appear for larger portfolios

Can be volatile at the individual security level; greater loss than fixed income during 2008-09

Concluding remarks:

If there is one word that will find its way into the description of what proves to be the winning investment strategy for 2011, we would suggest the word:

…Flexibility

The investment market of 2010 reacts to federal government intervention with unexpected swings.  Intervention of this sort has a track record of resulting in unexpected consequences.  Hume wrote: “All plans of government, which suppose great reformation in the manners of mankind, are plainly imaginary.”  Stay flexible; adapt to the unexpected.

However before an investor ducks and covers their investment portfolio in our Atomic Rome with “safe” bonds, we caution that a “One Horseman” of fixed income might lose money on an inflation-adjusted basis; albeit at perhaps lowered principal volatility.

Add some growth at least until it hurts

Work with your advisor to add potential growth investments until your risk-return profile is fully utilized.

For owners of larger portfolio, consider direct security ownership to complement low-cost Exchange Traded Funds (ETFs) in an effort to lower dependence on institutional traders’ behavior and their sometimes unpredictable computer-guided trading patterns.

If you have questions or comments on how to prepare your investments in our Atomic Rome , let us know.  Reply to this blog or email us at arlingtonhall@comcast.net

“Flying under the Radar” – The sinking of the German ship Bismarck seventy years ago illustrates how low technology action can sometimes triumph over state-of-the-art technology that conventional wisdom believed to be “unsinkable”

Investment managers of 2010 trade millions of shares of stock in milliseconds many using state-of-the-art technology to predict how human thinking will react based on past trading experience.

As investment managers hire more smart people to quicken their programs to add profit, an undeniable change in the investment markets has befallen us since 2008.

Computer-driven trading applications, such as High Frequency Trading (HFT) render unprofitable a breathtaking number of investment strategies that had been profitable in the past.

While investors’ fear of such technology-based changes in the investment markets has led to their inaction, we exploit the notion that perhaps the physics-trained PhD’s may be misguided in their technological hubris.  We suggest while they are basking in the brilliance of their complex calculations imbedded in their algorithms they may be neglecting one item: focus improving risk-adjusted portfolio return.

A Eureka moment?

So as institutional money managers employing state-of-the-art trading programs and dark pools are contesting each other for multi-continental bragging rights, is it possible we could make money for our clients by sidestepping the maelstrom?  Only time will tell.  In the meantime, we use a 3-step approach.

First, out of sight out of mind

We sought investments with low trading volume.  If a security trades 100,000 trades per day, it is less likely to be traded by an institution’s algorithm’s appetite that requires, say, 1 million shares to be traded per second.

Second, try to stay safe by demonstrating uselessness to those that may do you harm.

We scouted for investments that performed horribly using standard mathematically-based timing systems.  Institutional investors should find these investments undesirable.  For example, we smiled upon finding an all-weather investment which performed better as a buy-and-hold versus being traded according to market timing system.

Third, cut them off at the pass.

Acknowledging investors are presently enamored with dividend stocks, we searched for investments that dividend-paying companies might eventually purchase to strengthen and/or boost their dividend paying potential: buying a company to use their cash flow as an immediate boost to its dividend-paying potential.

Drawbacks?  The cost of regular trading activity used in a “Flying under the radar” portfolio to minimize tax liability is negligible on larger portfolios.  However the trading costs can become punitive on smaller-sized portfolios.

Result: During the very unique market path from 2005 to 2010, the “Flying under the Radar” growth portfolio outperforms all major indexes over the timeframe tested; though the post-tax returns are somewhat less.    

This chart is not meant to suggest similar outperformance is guaranteed in the future.  Instead, it is a road-test of a portfolio during severe market turbulence measured against major market indexes (and with the benefit of hindsight’s 20/20 vision) the top-performing index over that timeframe – emerging markets.

One can almost gauge their appetite for risk from this illustration; more specifically the “Flying under the Radar” growth portfolio suffers a 34% setback during the 2007-2008 peak-to-trough.  Allocate accordingly.

Expanded Commentary:

“Sink the Bismarck” was a term coined seventy years ago after the German battleship Bismarck was unleashed against British vessels in the Atlantic Ocean.  The world watched in fear as the Bismarck, only five days into its voyage, needed only five shots to sink the 41,000 ton British flagship H.M.S. Hood in three minutes.

A fortnight later with nearly the entire British navy in pursuit, the Bismarck prepared for its next fight, a fight it was prepared to win using state-of-the-art science and technology incorporated into the ship by German designers and scientists; technology more advanced than anything any navy had ever possessed.

Still jubilant over the sinking the British Hood is it any wonder that as German naval officers anxiously prepared their war machine to send the rest of the British navy to the bottom of the Atlantic Ocean.  Yet the German designers’ forecasts were doomed.  The Bismarck design was prepared based on forecasts to fight British aircraft flying at 400 miles per hour at 5,000 feet in the air; only the fastest aircraft would dare attack the Bismarck.  The German designers obedient to the planning forecasts dutifully protected the Bismarck with weapons to obliterate such an aerial foe.

Conventional wisdom proves inaccurate

Bismarck’s advanced design allowed for it to make quick work of destroying the best British aircraft during an attack.  But the German did not expect to fight the “worst” British aircraft.  For the aircraft attacking the Bismarck on that fateful day flew too slow to be destroyed by the German guns which fired at a rate to hit enemy planes flying at 400 mph.  Moreover, the Bismarck’s guns were unable to depress to fire on planes flying at wave-top levels, the forecasts assumed the attacking aircraft would descend from several thousand feet.

So it was.  One torpedo dropped from a slow, low-flying British “Swordfish” aircraft paralyzed the mighty Bismarck by disabling its rudder and thus sealing Bismarck’s fate.

With his record 56 game hitting streak on the line, New York Yankee slugger Joe DiMaggio hailed a taxi to his 57^th game at the Cleveland Municipal Stadium.  While enroute to the stadium, the cabbie told DiMaggio he predicted DiMaggio would go hitless that afternoon thus ending his streak.  Upon hearing this, DiMaggio pulled himself out of the cab and walked the rest of the way to the stadium.  But the damage was done; the cabbie’s prediction came true.  DiMaggio went hitless that afternoon and one of baseball’s greatest winning streaks came to an end.

Today’s winning streak in the investment markets – ten years and running – is currently held by market timing.  Since 2000, investors who employ market timing strategies have enjoyed returns trouncing buy-and-hold, rebalance and momentum investors’ returns. (see http://arlingtonhall.com/and-the-winnah-is%e2%80%a6). 

In the third part of a series, we examine the question for investors entering 2011:

Will market timing’s win streak continue or will the “predictions” of another crash end the streak?

We are inclined to believe market timing’s performance from 2010-2020 may not crumble but instead may be blunted for the following reasons:

First, the “taxi cab driver predictions” abound.  Investment pundits regularly trumpet the imminent end of the market rebound.  We wonder if their predictions may become a self fulfilling prophesy. At times over the past six months, we find ourselves unable to find a single positive news story for the stock market; we scan several hundred daily.

Second, market timing’s growing popularity among investors may undermine its strength.  That is, market timing permitted investors to sidestep the devastating blow of that crippled many other investors’ portfolios during the 2008-09 financial crisis.  Consequently, investors, swayed by this past decade of success, increasingly implement market timing and too many disciples of one investment strategy tend to lead to disappointing outcomes based on our research.

Third, the proliferation of high-speed computer trading shortens the time window of opportunity in which market timers may react.  History suggests that when a manual activity meets new technology designed to replace that manual activity it is the manual activity that tends to succumb to the new technology.

In conclusion, we suggest investors may consider using a market timing strategy according to his or her risk profile prepared by their advisor.  However, those wishing to allocate 100% of their assets to market timing should beware the consequences of “buying high.”  Ask your investment advisor about complementing market timing with other investment strategies some of which we write of in this blog.

The idea to compare The Roman Empire to the United States is credited to our grandmother.  As early as 1960, she began calling the United States “Atomic Rome.”  Decades later, her clever observation grows in importance.

In this second part of a five part series, fixed income and growth strategies are tested amidst economic decline.

After reading of the decline of Rome, it would not be unexpected for an investor to instruct his or her investment advisor to act with the utmost caution until further notice in the “Atomic Rome” economy; duck and cover as it were.  Naturally, bond investments would be at the top of the cautionary wish list.

The picture is worth the proverbial thousand words.

Ah, the tranquility of that purple-colored line’s trajectory from 2005 through 2010!  Bond investments (depicted as the purple “buy yield” line) anchored an investment portfolio that thrashed most other investment indexes about over the past five years.  For an investor who must avoid any or all volatility for any reason, bonds and other fixed income investments are integral portfolio ingredients. 

At the same time we believe in the likelihood that bond investors may have less principal in five or six years hence as inflation whittles away the bond’s principal.  If an investor is interested in shooting for any capital gains in their portfolio, other investments must be considered.

Adding growth investments to the mix leaves us with the “forward valuation” thick lime green-colored line below.  Although the growth investor suffers to the tune of being down ~22% in 2008-09 vis-à-vis the “buy yield” portfolio, the growth portfolio outperforms over a longer timeframe.

During the test period, the forward valuation outperforms most indexes save emerging markets.  Recall we inserted the best performing index – emerging markets index – with the benefit of 20/20 hindsight vision.  The purpose was to compare our trial balloons against the best investment available.

Our next blog will examine some less conventional portfolio strategies for “Atomic Rome” investors.

 In this analysis, the first in a series, we look back to learn how economic decline plays out.

It has been said excessive taxation, inflation and over-regulation felled the Roman Empire’s economy.  Understandably these same economic maladies cause today’s U.S. investors to worry about investment prospects for their investable funds.  Naturally, in an effort to direct advertising dollars their way, media outlets should be expected to play on these worries and run stories suggesting that the end is near. 

However the fact that will not be found in a headline title is:  Empires do not just vanish.  Instead empires tend to crumble over a very long period of time; decades, centuries.  The Roman Empire, for example, endured three centuries of economic deterioration before being finally overrun by Barbarians in 476 A.D. 

Our point is: If the U.S. Economic Empire were to follow the Roman path and last another three centuries, many investment opportunities will come and go.  Investors would have to contend with the Roman experience

• Tax avoidance & evasion schemes multiply
• Debasing the currency does not induce growth
• Austerity measures lead to financial crisis only to be relieved when the state made large loans at zero interest in order to provide liquidity
• Frustrated government officials combat failed regulation with new regulation
• Higher and higher taxes failed to raise additional revenues because wealthier taxpayers could evade such taxes while the middle class – and its taxpaying capacity – were exterminated

Our investment strategies which will write of in the coming weeks pay consideration to this sequence of decline.  We attempt to find profit in such an environment.

Extended commentary – a chronology of decline:

In order to shape an investment theme to adopt in a declining economy, let’s visit events that played out in the Roman decline so that we may consider what the effect might be on our investments.  We are not suggesting the U.S. will necessarily follow this path.  We are suggesting economic decline is not the end of the world and investment opportunities will arise.

Note: We refer to a report Bartlett wrote in 1994 compiling research gathered for the previous one hundred years.  Bartlett’s entire report can be found at:

http://www.cato.org/pubs/journal/cjv14n2-7.html

1. Expansion of social services:

‘The distribution of free grain in Rome remained in effect until the end of the Empire, although baked bread replaced corn in the 3rd century. Under Septimius Severus (193-211 A.D.) free oil was also distributed. Subsequent emperors added, on occasion, free pork and wine’

2. The expansion of the dole is an important reason for the rise of Roman taxes.

‘[Initially] expansion of the money supply did not lead to higher prices. Interest rates also fell to the lowest levels in Roman history in the early part of Augustus’s reign.’ (Sound familiar?)

3. Inflation ensues (a.k.a. the tax on cash balances):

‘Revenue was needed to pay the increasing costs of defense and a growing bureaucracy. However, rather than raise taxes, Nero and subsequent emperors preferred to debase the currency by reducing the precious metal content of coins.’

In the absence of printing presses, Romans reduced precious metals in their coins to inflate their currency.   The silver content in Roman coins was reduced from 90% to 5% by the third century.

4. Government induced Inflation fails to grow tax revenues:

‘Interestingly, the continual debasements did not improve the Empire’s fiscal position. This is because of Gresham’s Law (“bad money drives out good”). People would hoard older, high silver content coins and pay their taxes in those with the least silver. Thus the government’s “real” revenues may have actually fallen.’

5. Government taxes a greater number of citizens in an effort to avoid having to raise the overall tax rate percentage:

‘Although taxes on ordinary Romans were not raised, citizenship was greatly expanded in order to bring more people into the tax net. Taxes on the wealthy, however, were sharply increased, especially those on inheritances and manumissions (freeing of slaves).’

6. Tax evasion stays one step ahead of tax collections:

‘…once the wealthy were no longer able to pay the state’s bills, the burden inexorably fell onto the lower classes, so that average people suffered as well from the deteriorating economic conditions.’

7. Money economy breaks down but the military required funding:

‘The army’s needs required satisfaction above all else, regardless of the consequences to the private economy’

8. The government increases its reach through more regulation

‘Despite the fact that the death penalty applied to violations of the price controls, they were a total failure.’

9. Goods and services are confiscated for taxes as money becomes worthless:

Tax burden exceeds a farmer’s production.  Next, fields became deserted and cultivated land was turned into forest

10. Small landowners, crushed into bankruptcy by the heavy burden of taxation, threw themselves at the mercy of the large landowners, signing on as tenants or even as slaves. (Slaves, of course, paid no taxes.)

The decline was complete.  Yet Bartlett writes: “for the bulk of Roman citizens [the fall of Rome] had little impact on their way of life.”

A Blue outlined graph indicates Bond are trending higher.

A Dark Brown outlined graph indicates Stocks are trending higher.

Currently, the stocks uptrend remains intact.

This chart is not viewed as foolproof and intelligent people can debate the merits of technical analysis.  At the same time, many ascribe to technical-based investing and as such could be view as being bullish on stock momentum.  This aforementioned chart is based on simple moving averages stretching back to 1990 and continues to present.  The trend signal is rather impressive in its simplicity.

Author Charles Adams suggests a hike in capital gains tax was the silver bullet that slew the mighty Japanese economy of the 1980s.  Many know our interest in analyzing today’s debt-laden economy to Japan circa 1989-1990.  Adams makes his remarks at 30:03 minutes on the embedded video.

Let those of us investors who files taxes in the United States pay particular attention to the capital gains tax rate come January 2011 when the Bush tax cuts expire. Adams claims to have taken two decades to research and write his book.  We will not be hasty to dismiss his capital gains tax warning.

Incidentally, his other remarks on Japan are fascinating for anyone who has not filed taxes in Japan. (26:23 to 30:29 minutes)

For anyone who consider the Tea Partiers of 2010 to be taking anti-government rhetoric to excessive levels,  have a listen to Adam’s recollection of the extent taken by the French populace to “express” their government dissatisfaction. (5:40 minutes)

According to LeCompte’s analysis, the strategy bested buy-and-hold, rebalancing and one momentum strategy.

Click here for a concise overview of the different strategies’ returns and variation.

Fortunately, timing was near and dear to our efforts.   Yet while market timers everywhere congratulate each other, we behold a troubling bit of data.  And while it is true that the market performed with the same variation & records positive returns over half the time throughout the past six decades, the mean return for investors vanished in the past decade.  Some call this the market’s “lost decade” as investors have lost money since the turn of the century (-0.12% per mean monthly return) (ibid)

Our focus for the past six months and the foreseeable future is to concoct an approach for our client’s that will take advantage of our research.  Our goal is simply to post analysis at the dusk of the next market cycle claiming we fingered the winner of the next decade.

In 1951, Louis Armstrong joined Bing Crosby on television’s popular “The Chesterfield Show” to sing a duet. Of all the chart topping songs each singer made, the song they chose to sing was a tune called “Gone Fishing”. We thought about that song fifty five years later as we perused volumes of new market data and graphs and realized Louis and Bing were singing about an investment strategy custom made for the summer. We began to shop for ‘fishing pole’ stocks – stocks whose trajectory resembled the silhouette of a fishing pole with its line immersed in water.

An investment shift to the “fishing pole” sector?

Sensing opportunity after the market pullback of May 2006, we began tenaciously reviewing pricing patterns and recent financial reports for clues of the “next best thing.” We expected a “next best thing” candidate to emerge from our work as in the past – for example “Japanese stocks”, “oil stocks”, “consumer cyclicals.” Instead what we found (with the lyrical assistance of Mssrs. Armstrong and Crosby) was “fishing pole stocks.” Stocks of all sectors and sizes were being subject to what we will term the “fishing pole” effect. That is to say, the severe drop in the growth of the economy in the second quarter had resulted in a growing number of stocks falling rapidly in one day so that the appearance of the stock’s price chart loosely resembles the silhouette of a fishing pole with its line immersed in water. (Find attached a number of examples below for your visual inspection. A picture IS worth a thousand words in understanding this phenomenon).

CHARTS

Stock prices whose trajectory somewhat resemble the silhouette of a fishing pole with its line immersed in water…

Our point? Some stocks that have already fallen in such a “fishing pole” manner have shown notable relative resilience to a new downturn when one is presented. If this stable behavior continues, we would consider looking into new positions from stocks that showed ‘fishing pole’ behavior.

We made two observations [observations not research findings] on the “fishing pole” effect:

a. The severe one day drop of the stock prices of so many well-known, profitable companies’ stock prices may represent speculators or hedge funds getting flushed out of a position in those stocks. Consider, is UPS really worth $10 billion less in market capitalization on Tuesday simply because its earnings fell on the lower half of its previously stated earnings guidance on Monday? Speculators may be folding as we write.

b. Admit it or not, if an increasing number of stocks are subject to a 10, 15 or 20% one-day price drop, would THAT not be considered “the crash”? That is, if, say, each of the 30 stocks in the Dow Jones Industrial Index fall 15 or 20% in one-day BUT those falls are scattered over 30 to 60 days, the index should be “down 15 to 20%” in total. We are not suggesting that the Dow will fall by such a magnitude necessarily.

What we are suggesting is a 20% crash could occur on one fateful day and garner the moniker of “Black Tuesday” or the fall could occur more slowly over a longer period of time. We submit we may be witnessing the latter. Either way a stronger case for a firmer market bottom can be made once double digit drops are in place.

As we proceed through 2006, we look with great interest on the possibility of catching a ride on the bottom of the line descending from the fishing pole on many a stock.

Let the Data Do the Talking

Are Hedge Funds Making the Healthcare Investment Sector Unstable?

Proposition #1: The first-world’s population is aging and requires incremental increases in healthcare spending to address ailments which afflict the aging.

Proposition #2: The first-world enjoys unprecedented prosperity, wealth and standard of living.

…Proposition #3: If a population is wealthy, they will spend their wealth on something. If that population is elderly, they may be obliged to spend their wealth on products and services to improve their health and extend their lives.

The propositional logic contained above is compelling and arguably has become conventional wisdom among investors. Yet the healthcare investment sector has displayed similar volatility as other investment sectors (see third quarter 2005 and second quarter 2006). Why? If one searches for clues as to why this volatility appears in a sector believed to be demographic dependant and not financially dependent, the counter intuitive aspect of this phenomenon emerges. That is to say, the unexpected volatility of the sector might have less to do with the demographics or the financial viability of companies selling in the healthcare sector as it has to do with who is invested in the sector: hedge funds. Topol and Blumenthal considered hedge funds and their influence on healthcare investments:

“There are more than 7000 hedge funds operating in the United States, with assets approximating $1 trillion.   More than 425 hedge funds were started in 2004. The numbers are imprecise because these funds are not currently required to register with the Securities and
Exchange Commission, but this will change in 2006 [still uncertain at press time].

Since 1990, the assets in worldwide hedge funds have increased 100-fold, from less than $10 billion in 1990 to nearly $1 trillion in 2004.   Hedge funds have a long history beginning in 1949 and typically use higher-risk strategies for investing, such as betting on a stock to fall or borrowing capital to make investments. Nonetheless, pension funds invest as much as 20% of their assets in these funds, and universities and charitable foundations, more than 10% of their endowments. For example, Harvard University invested $500 million, or 2.5% of its $22 billion endowment, in a single hedge fund. In 2004, individuals invested more in hedge funds than all institutional investors combined.

A typical hedge fund charges a 2% fee plus 20% of any gains, which is a considerably higher investment fee than that charged by most alternative investment vehicles.

Approximately one third of hedge fund investments relate to life sciences, particularly publicly traded stocks and derivatives of pharmaceutical, medical device, medical diagnostic, and biotechnology companies”.

Conclusion: We will watch attentively if hedge fund exposure to the healthcare investment sector (~ 33% exposure to healthcare) begins to regress to a percentage found in a broader market index. For example, healthcare companies compile only ~12% of the S&P 500 Index.

Source: JAMA “Physicians and the Investment Industry,” Eric J. Topol, MD and David Blumenthal MD MPP,
JAMA. 2005;293:2654-2657.
Source: moneycentral.msn.com

The Jeweler’s Eye

Whatever one’s political persuasion it would be difficult to dispute the observation that after living through the 1990s with an administration that could not stop daily adjustments of its core policies to suit the latest polls; since 2000, the American voter has lived with an administration that seemingly does not acknowledge the latest polls.

Our political sources estimate the popularity poll ratings of the sitting president to rival those of Richard Nixon during the Watergate hearings. But the problems do not stop in the Oval Office.

- Over 22% of U.S. respondents to the latest ACNielsen Online Consumer Confidence Study said they are short on cash after they cover their basic living expenses, per marketwatch.

- Outflows of cash from [U.S.] stock funds in July and inflow into foreign funds are big and the Commitment of Traders (CoT) report shows small speculators have given up on US stock ownership, per Salamone September 1, 2006

If the President is under pressure, the US consumer shows signs of being strapped for cash, investors are selling US stocks to buy foreign stocks and the small speculator is betting against US stocks, what’s an investor to do?

May we suggest one consider U.S. stocks?

The decision to ‘go American’ is a vexing one. To begin with, the domestic economy is either in a recession or one shade this side of a recession – we will find out in next month’s data release. Additionally, the US Consumer represents approximately 70% percent of GDP and does not show signs of strengthening (per Nielsen above). Thus we break our present mindset into two parts: (a) the other side of the economy and (b) happy days will come again.

‘The other side of the economy’ has to do with the 30% of the GDP not represented by the US consumer – e.g. industry, infrastructure, et al. Some companies which are in decent financial shape may gather steam whilst the consumer struggles to boost spending.

‘Happy days will come again’ deals directly with how fast the Federal Reserve will come to the rescue of the Indebted US Consumer in the way of reduced interest rates. The housing woes facing the over-leveraged are well covered in the press and do not require re-hashing here. However, the Fed can boost rates to save the dollar or cut them to save the consumer. You can make your bet on which one will play out. But before you do, recall mid-term elections are just around the corner; something that might sway our guess.