2012 Q2 – Report

“In investing, what is comfortable is rarely profitable.” – Robert Arnott

(Photo: 401K)

This is not a recommendation to buy or sell any security; this is simply how I am managing my money and how I see the market. It is also a record to track my performance.

 All commentary is based on market levels at 6/30/2012. My market level valuations are based on historic PE ratios, profit margins and Q-Ratio among other criteria.


Current Market Valuations:

International Markets:

Currently International Markets are trading about 10% above historic averages and would need to drop about 25% to be true bargain. There are a few European countries (Spain, Italy, Greece and a few others) which are trading at historically low CAPE valuations but overall the International Market is still overvalued. I suspect things will continue to deteriorate in Europe regardless of the positive headlines which seem to boost the market in a predictable fashion if only for a short time. But bargains are starting to appear.

Emerging Markets:

Emerging markets fairly priced, and would need to drop by around 25% or so from these levels to be a true bargain.

US Large Caps (S&P500)

The S&P500 is overvalued by about 30% and would need to drop to close to 45% to be a true bargain.

US Small Caps (Russell 2000)

US Small Caps are still tremendously over priced by about 40% and would need to drop by close to a half to be a true bargain. Once again it does not mean that they will do so in a near future, since they can go nowhere for a long time and allow evaluations to catch up. Overall I don’t see the US market trading a lot higher from today’s levels 5 to 7 years from now. And I see very little reason to venture into the broad US market at these levels.


 

Current Portfolio as of 6/30/2012:

Name

Symbol

% of Portfolio

Cash and (Cash like Instruments)

66.82%

Berkshire Hathaway

BRK.A

14.61%

ProShares Short Russell2000

RWM

9.77%

Asian and Emerging Market Currencies

8.44%

ProShares Short 20+ Year Treasury

TBF

0.38%


My Current Positions:

Cash and Cash Like Instruments – 66.82 %

With a large cash holding it’s easy to be tempted to chase yields but unfortunately there are very few bargains to be had and with current evaluations risk outweighs rewards.

Berkshire Hathaway – 14.61%

Berkshire Hathaway is trading slightly above its book value. I suspect if things begin to look bad in the US, Berkshire Hathaway might be caught in the undertow and trade at a true bargain. Even though Warren Buffett has stated that he plans on buying back the stock if the prices are within 10% of book value thus putting a floor on the stock price. I suspect in a true bear market crash the floor would be broken regardless of the buy back.

Russell 2000 Short – 9.77%

To me, the US market looks riskier than ever. Especially over the next 12 months and post elections (regardless of who wins). If stocks rise roughly 10% from these levels I would feel comfortable adding to my short position.

Asian Currencies – 8.44 %

I added slightly to my Asian Currency position over the last quarter, which is a hedge against the falling dollar.

Long Treasury Short – .38%

I added slightly to my position shorting the Long Treasury over the last quarter. I suspect a bear market will drag the yields even lower allowing me to add to my position.


Things I am Watching:

Currently a great number of people expect that the likely outcome in Europe would be for weaker countries (Greece, Spain or Italy) to exit the Euro. But very few people are talking about the possibility of the stronger countries (Germany, Finland) exiting the Euro to avoid being dragged under, which I think is just as likely a scenario. But overall things in Europe are starting to look cheap, specially if your holding period will be years not months or days.


My Performance:

I consider myself a buy and hold investor and judge the success of my investing over a full market cycle. The performance over a quarter or even a year is pretty irrelevant in the long run. But I am including it just for reference and record keeping.

Portfolio

2Q 2012 Performance

YTD Performance (till 6/30/2012)

My Portfolio

0.45%

0.03%

S&P 500 (IVV)

-3.15%

8.57%

Total World Stock (VT)

-5.29%

5.86%

 

Michael Page

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