This week, I made several changes in the Core Asset Allocation model, adding several new names and increasing our exposure to equities. And, we did that by reducing our cash position significantly, rather than selling bonds.

Recall back on August 1, we sold emerging markets, technology and small cap positions. There were a variety of reasons why, detailed in There’s Something Happening Here.

Since then, I have been patiently waiting for an opportunity to redeploy that capital. The trader in me wanted to get long for a quick pop (9/15), but . . . there is a huge difference between managing people’s retirement money, and swinging cash around for short term P&L.

I insist on something beyond a mere gut feel (i.e., blink-like recognition). I need some hard data to confirm that the buys are a high probability trade, and by last Friday, we received it. Monday’s whackage gave us the opportunity to put money to work after a 2% drop. So we legged into a few positions Tuesday (and the rest of the week); Josh discusses our buys here on Oct 18th.

There were three major factors that went into this decision. The first is simply based on seasonality. November and December are the best months of the year, and kick off the best half of the year for market gains (October-April). If you want to stay in cash, statistically that is the worst time to do so.

The second factor was sentiment. Short interest was at record highs. By our measures, too many investors were bearish, and too many hedge fund managers were caught leaning the wrong way. (The counter argument was mutual fund managers cash levels are low, but they seem to be a non-factor lately).

The last reason is market history. The 11.4% gain we saw for the S&P500 in only 5 trading sessions was unusual to say the least. Since 1950, there have been only 16 occasions when we saw “buying panics” like that. There was 1 loss (2001) 2 break-evens (‘01 and ‘02) and the rest saw healthy gains. (Source: Laszlo Birinyi)

Thus, we have redeployed into Technology, and added Berkshire Hathaway and Visa for our managed accounts. More aggressive accounts purchased Small Cap Growth index as well.

An important caveat: Note that this does not reflect a shift in my economic expectations, and we still believe a recession is more likely than most economists expect. Nor does it change our longer term secular market view, which remain negative. Before all is said and done, i expect maroets will go lower than where they are right now.

However, this is merely a recognition that markets can and do run on factors beyond the fundamental: Sentiment, liquidity, seasonality and internals suggest to us that cash will be an under-performing asset class for the next quarter or two.

Hence, we are reducing our cash exposure, and making selective tactical buys, raising our equity position significantly from 50% to 75-80%.

Category: Investing, Markets, Technical Analysis, Trading

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

21 Responses to “Tactical Shift in Portfolios: Reducing Cash”

  1. BR,

    with the, recent, high volatility, and the ‘excessive’ “Bearishness”, why not Short Puts (get Paid to go (Synthetically) Long), in addition to the ‘Equity’ buys ?

    some of those Put premiums are, quite, Dear..

    http://www.thefreedictionary.com/Dear (#3 a.)

    these..

    http://finance.yahoo.com/q/op?s=S&m=2011-11

    may prove some examples..
    ~~

    also, tangentially, *Many are heard, bemoaning, .. “1/2% 5-year CD rates” ‘at the Bank’…

    what is your POV on “Covered-Call Writing”, for Income-generation?

    here.. http://finance.yahoo.com/q/op?s=CTL&m=2011-11 ..as, merely, an ex., wouldn’t one think that 1-3%/Month is achievable?

    also.. http://search.yippy.com/search?query=covered+call+writing+for+income&tb=sitesearch-all&v%3Aproject=clusty

  2. VennData says:

    Good to have some more of your cash occupying Wall Street.

  3. pintelho says:

    that’s probably a good move BR

    Don’t forget the fed…QE2 was $600 billion…that led to some rally…

    Twist is $400 billion….it may not be branded as QE3 but its $400 billion in extra help…

    I got long GWW (why is an industrial supplier doing so well in this environment?)

    Anyway BR good move and I am sure we will see new highs before the big monster bear crapola takes us to bread line status.

  4. machinehead says:

    Today Ms. Market seems unconcerned about Europe.

    But I see widening sovereign spreads, a leadership transition at the ECB, and political chaos — a perfect recipe for panic.

    Watch the weekend euro summit turn into a food fight. None of these clowns has got any money.

  5. Ted Kavadas says:

    Despite the strong stock market performance of late, I still think the stock market looks “unsettled” – which to me represents a risk.

    For those interested, on Monday I wrote of other building risk factors at this post:

    http://economicgreenfield.blogspot.com/2011/10/danger-signs-in-stock-market-financial.html

  6. KmanNYC says:

    Is seasonality really a good reason to alter your allocation?

    ~~~

    BR: All by itself, no.

  7. Greg0658 says:

    if I were POTUS (of the world tho) I would put corporate stocks back into print them, sign them (w/ink), and mail them out MODE .. real investment speed

  8. Concerned Neighbour says:

    If I were Europe, I would never resolve this mess (assuming that it’s even possible in the first place). I would just keep having high level meetings in perpetuity, and occasionally leak rumors of progress. The DOW would be at 36K in short order (we’re headed there now, being up .5-1% on a daily basis). Seriously.

  9. Petey Wheatstraw says:

    The dollar is dropping like a rock, everything else is up big. Good move, BR. Unfortunately it’s more bad karma, systemically. QE by another name.

  10. Jim67545 says:

    BR: couldn’t get the “our buys here” link to work.
    Otherwise, appreciate the heads up.

    ~~~

    BR: Doh! Fixed it

    One errant space is all it takes to ruin a UL

  11. RothcoUDipthtick says:

    Hi Barry,

    Having talked with a few US managers recently, my sense is that they are more optimistic than us Brits!

    To what extent have you analysed the European situation and potential solutions?

    Our take on it, is that there is not enough money to bail out both the banks AND the sovereigns. So whilst we understand the valuation, seasonality and sentiment factors – we are still reticent because of the political risk.

    If we take aside the fact that any potential leveraged plan technically breaks the lisbon treaty and german law – the figures still don’t add up in our opinion.

    The leaked document for the 23rd summit (which admittedly may or may not be a plant), indicates that banks will have to racap first on private markets, then by national governments if they are unable to, then and only then will they be able to use the EFSF if systemically important – as the more cash they take the less is available for sovereigns.

    The EBA stress tests are therefore trying to lower the amounts the banks need (to leave more for the EFSF) – the figure comes out at 80bn. (On our calcs they will need between 275-375bn )

    As banks will not want to do rights issues at current stock prices, this means they will reduce the size of their balance sheets. Estimated figures are 770bn or 2trn of credit in 2 yrs. To us, this will create a credit crunch just as Europe is slipping in to a recession… which of course in turn will affect debt/GDP dynamics further. S&P only this morning indicated that they would downgrade countries on this basis e.g. France’s AAA rating. So by itself, this would blow the EFSF plan out of the water…

    Taking aside the above, we have calculated that the proposed insurance based leveraged EFSF plan won’t work either (assuming it gets passed the German govt & central bank) – there isn’t enough cash at the appropriate credit; 20% is too optimistic; and it assumes no worsening of conditions (when all the push is for yet more austerity)

    I guess what is next is the IMF -looks like the US, UK and Ozzies don’t want to blow anymore cash. Perhaps they could create an SPV and buy more of the crap – but as you say, at the end of the day someone has to take the loss! and it is circular to the above point…

    The proposed collateral route in the WSJ yesterday – a version of the brady bond, makes the initial cost more expensive to borrow which reduces the firepower needed to cover PIIGS – plus then you would still have to contend with the issue of extended maturities, which would again break the no bailout clause and the Germans wouldn’t buy a permanent transfer of wealth…

    The credit markets don’t look like they are buying it – with record & widening France spreads, Euribor deteriorating once more etc..contagion is increasing whilst equities seem sanguine..meh

    Unless they put the ECB as lender of last resort and it monetises (along with a raft of structural changes) – I just don’t see a positive outcome. Will the Germans succumb to that pressure?? To go long is to take a view on this point.

    Bloody difficult to manage money on a binary outcome.

    On that basis, given how far the market had priced in a positive outcome – disappointment looks more likely. I think the Germans will only ‘get it’ when it is too late….recession is in the bag.

    If I am right, then the US sense of optimism and that it is a European problem will be sorely misplaced.

    That said, I could be doubly wrong if the Germans succumb this weekend and Bernanke buys MBS as his next move in Nov (Pimco seem to be loading up on).

    We are neutral as we think it could go either way – we await the rumour mill i mean news on the weekend & next week

  12. 4whatitsworth says:

    Well, I hope you are right. I bought on the dips during this crazy thing and reified my house at 3.3%/15 years. So my bet is that we don’t turn into Japan. I think that the US is in decent shape lots of liquidity and housing looks like it has stabilized. As far as the S&P goes balance sheets are cleaner than they have been in a long time thanks to Sarbanes Oxley. I don’t think Europe is the factor everyone thinks it is I think emerging markets and the muslim world are the wildcards.

  13. Pantmaker says:

    I have to chuckle…I am always zigging when you guys are zagging. I guess that’s what makes a market. I added shorts this morning very aggressively on this pop. I think this is one of the last times we will be able to reduce long risk for quite some time. Discl. still short gold…discl. and no one is giving me crap about it any more…ha!

    Thanks for your transparency as always.

  14. znmeb says:

    I think you’re somewhat right about seasonality but wrong about recession. I think Q4 will be great but Q1 2012 is going to go to heck in a handbasket, unless you live somewhere where hockey’s a big deal. Seriously, the NBA season is a big deal for advertisers and brands, and not having that there overlapping with the NFL just plain sucks.

    Recession? Not likely. Slow growth and continued unemployment at POTUS-removal levels? Absolutely.

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