2013 Q2 – Report

 

Caution has not been a profitable investment tactic for a long time now.  I strongly believe it is about to make a comeback.” – Seth Klarman

 

money

(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 6/30/2013. My market level valuations are based on historic PE ratios, profit margins and Q-Ratio among other criteria.


 

Current Market View:

The big question on investors’ minds is; will Ben Bernanke slow the bond purchase program or will he continue to provide liquidity? While most everyone looks at it from an economic perspective, I chose to take a more psychological look at the issue which very few are discussing. With Ben Bernanke’s term coming to the end I suspect the big question on his mind is what kind of legacy will he leave to the world? I suspect, consciously or subconsciously, that plays a much larger part in his decision making process than most realize. Slowing of the bond purchase program will most likely cause a big market drop which he would prefer to avoid on his watch. I would think Ben’s biggest concern now is to run out the clock on his term without “breaking anything”.

So, just like Alan Greenspan before him, I suspect that Ben Bernanke’s big goal is to leave on a high note and hopefully a market top and have the next Fed Chairman clean up his mess and deal with the consequences. For this reason I think the tapering might not happen till later than most realize.

There’s no doubt that the US market is tremendously overvalued. A crash or a series of crashes are coming and they will be worse than most are anticipating. It is possible that the stock market will continue to go up and up and that “this time it is different”, but I highly doubt that the two main drivers of the market, greed and fear, have changed very much so I am not holding my breath.

It’s been a bit frustrating watching an overvalued market continue to climb higher and higher over the last year while being mostly out of the market but I am happier staying on the sidelines in cash instead of trying to pick up nickels in front of a steam roller (even though over the last year there have been a lot of nickels to pickup). True bargains will come; it’s just a matter of being patient and waiting for your fat pitch to arrive.


 

Things I am watching:

There are a few countries which are becoming a bargain including Brazil, Russia and a few European countries which are starting to look very attractive. Hopefully further drops will allow me to put more money to work. Emerging Markets as a whole are also trading at a slight discount and would be a true bargain on a drop of 15% or so.


 

Current Market Valuations:

International Markets: International markets are overpriced by about 20% and need to drop about 40% to be a true bargain.

Emerging Markets: Emerging Markets are trading at a slight discount.

US Large Caps (S&P500): S&P500 is overpriced by about 50% to fair value. If we use Shiller P/E ratios the S&P is valued roughly at the same levels as before the great crash of 1929 and 2007.

US Small Caps (Russell 2000): US Small Caps continue to be tremendously overpriced and need to drop over 60% just to be fairly valued.


 

Current Portfolio as of 06/30/2013:

Name

Symbol

% of Portfolio

Cash and (Cash like Instruments)

60.04%

Berkshire Hathaway

BRK.A

19.26%

ProShares Short Russell 2000

RWM

9.29%

Asian and Emerging Market Currencies

8.31%

Gold Short ETN

DGZ

0.90%

Gold Miners

RING

0.78%

ProShares Short 20+ Year Treasury

TBF

0.52%

iShares MSCI Brazil Capped Index

EWZ

0.45%

iShares MSCI Brazil Small Cap Index

EWZS

0.45%


 

My Current Positions:

Cash and cash like Instruments – 60.04 %
I continue to hold cash while waiting for fat pitches.

Berkshire Hathaway – 19.26%
Berkshire Hathaway continues to be my core equity holding. It is also a play on quality by shorting Russell 2000 stocks.

Russell 2000 Short – 9.29%
US small cap stocks have been grossly overpriced for over a year now. I have added to my position as we hit new highs.

Asian Currencies – 8.31 %
My Asian Currency position is an insurance policy against the falling dollar. However in the short term I suspect the dollar will continue to go up as it is the main stable currency in times of trouble.

Gold Short /Long Gold Miners – 1.68%
Last year I wrote about the bubble I saw in the gold market. Since then gold has dropped over 25%. I took a small position on gold miners while shorting gold itself as XAU to Gold ratio dropped to a record low.

Companies that mine gold derive their value mainly on the price of gold that they are mining. Over the years there has been a historic pattern and a correlation between the price of gold and gold stocks. Over the last quarter the ratio of XAU (gold mining stocks) to the price of gold has reached the lowest levels on record. I decided to take a small position assuming that over time the ratio will get back in line. From my perspective it is really irrelevant if the price of gold goes up or down but only that the ratio of gold prices to gold producers will normalize. (I have to admit that I am not totally comfortable holding a gold short position in an ETN (Exchange Traded Note) since they are not as secure as ETF (Exchange Traded Funds))

Long Treasury Short – .52%
I took a small position to capitalize on any large drop in US Treasuries.

Brazil Equities – .9%
I took a small position in Brazilian equities as they became attractive. I will be glad to add to my position if the prices continue to fall.


 

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 2013 Performance

1 Year Performance

Performance since tracking (1/1/2012)

My Portfolio

.5%

2.47%

1.66%*

S&P 500 (IVV)

2.24%

12.68%

19.28%

Total World Stock (VT)

-1.47%

 17.64%

27.71%

     
       
       
       

* My performance was actually a bit better but for simplification I am not counting the return on my cash which was around 1%

Did you like this article? Share it!
 

Leave a Comment

*