Posts filed under “Asset Allocation”

Reducing Energy Weighting

Reducing Energy Weight
David R. Kotok
Cumberland Advisors, July 29, 2013



Last week we reduced our energy exposure to underweight. It had been overweight for a while, and we successfully participated in the rebound in natural gas prices and the narrowing of the spread between Brent and WTI (West Texas Intermediate) oil.

It now looks as if prices for oil, natural gas, and related products may fall. A confluence of events suggests that can happen, to wit:

1) Worldwide economic growth is slow and appears to be continuing at a very low rate.
2) Inventories seem to be balanced, and China’s inventory seems to be up.
3) Geopolitical risks are apparent, including in Egypt and Syria. There is also energy-related turmoil in northern Nigeria and the usual tensions in the Persian Gulf and Iran.
4) The weather is taking pressure off energy pricing.

With permission, we have posted Jim Roemer’s discussion of colder-than-normal weather in the US and its impact on natural gas prices in the “Special Reports” section of our website. Here is the link:
Our energy-specific ETFs (exchange-traded funds) have been sold. We anticipate there will be some reduction in pricing power in the oil and natural gas sector.

Another variable that exerts lower energy-pricing pressure is the ongoing possible strengthening of the US dollar. As monetary policies unfold out of the United Kingdom and Japan, the likelihood for the dollar to strengthen is rising. The unknown in the monetary equation is the ECB (European Central Bank).

The ECB awaits decisions to be made by the German Constitutional Court in a matter of months. The court could dismember the ability of the ECB to participate in sovereign debt purchases and the expansion of monetary stimulus. Most observers believe, however, that an extreme decision is not likely and that some middle-of-the-road guidance will probably be delivered by the court instead.

If the ECB can begin a process of QE, this move will change the game radically in favor of a stronger US dollar. The euro continues to emerge as the strongest of the G4 currencies because its central bank balance sheet has not been expanding, while others’ balance sheets have been. In a world where the Fed (Federal Reserve) may soon be reducing QE by “tapering” even as the rest of the G4 central banks are expanding their balance sheets through various forms of QE, it is likely that the US dollar will strengthen.

We also see signs of a stronger dollar in the buildup and the stability of world reserves, of which the US dollar is the largest single component. We see growing crossover buying originating from abroad in our state and local government bonds sector, simply because the highest-grade US municipals are nonsensically cheap relative to Treasuries and are attracting the attention of foreigners. Even as Americans are missing this great opportunity, astute investors from abroad are seizing it.

A stronger dollar with incoming flows from abroad suggests that the Treasury bond market could rally. Yields could fall once the Fed dispels uncertainty over QE by clarifying its policy direction. We expect that is coming as well.

Falling energy prices relieve any inflationary pressures arising from the energy patch, which constitutes a large input component in pricing. Think about what it means when the prices of oil and natural gas and all their derivative products are poised to fall instead of rise. The inflation rate in the US could approach zero. In such an environment, it is highly unlikely that interest rates on bonds will rise further – and possibly, with economic slowing, they could fall.

We have gone from overweight to underweight in energy. We have realigned our ETF portfolios accordingly and do not expect inflationary pressures to come from the energy patch for some time.


David R. Kotok, Chairman and Chief Investment Officer, Cumberland Advisors

Category: Asset Allocation, Energy, Think Tank

The Purgatory of Low Returns

Click to enlarge GMO 7-Year Asset Class Real Return Forecasts: 2007     Have a look at the charts above and below. They are from James Montier’s GMO Quarterly Letter, July 2013, titled The Purgatory of Low Returns; you can download the full PDF here (registration may be req’d). (Note to Josh: This quarter, Ben…Read More

Category: Asset Allocation, Cycles, Investing

Asset Classes

We have all seen the standard depiction of asset allocations — I thought this version — via UBS — was a more interesting depiction of the usual chart.   Click for ginormous graphic     Source: UBS House View, July 2013 Mike Ryan Monthly Investment Guide CIO Wealth Management Research

Category: Asset Allocation

Missing the big stocks rally: Readers push back Barry Ritholtz, Washington Post June 28 2013     Last time, I talked about what investors should do if they sat out the big market rally in recent years. In brief, I advised making changes of both a behavioral and investing nature. The behavioral issues included admitting…Read More

Category: Apprenticed Investor, Asset Allocation, Investing

Unsexy Finance vs Cat Food Tacos

Yeah, this time it was my fault — in the midst of a long conversation about taking the emotions out of investing and making finance boring, I dropped a line about cat food tacos. So once again I am in the click bait headline machinery.

Actually, the heart of the advice was from the asset allocation articles in the WaPo (here and here) essentially ” Invest Boringly.”

It looks something like this:

Have a plan.
Execute it faithfully.
Be diversified.
Contribute regularly.
Max out tax-deferred accounts.
Be an asset allocator.
Think long-term.

Not exactly radical, but “Cat Food Tacos” will generate a lot more clicks than “invest boringly.”

Here’s the video:

click to start video
cat food tacos


Source: Ritholtz: You Can “Eat Cat Food Tacos In Retirement,” Or You Can Do This… (Yahoo Finance)

Category: Asset Allocation, Investing, Media, Video

Pushing Back Against the Big Rally Miss

>   Two weeks ago, I managed to anger quite a few people with a Washington Post column titled: Missed the big market rally? Here’s what to do now. There were a variety of perturbed commenters both here and at WaPo as well as angry emails and assorted bemused tweets. While lots of readers, commenters…Read More

Category: Apprenticed Investor, Asset Allocation, Cognitive Foibles

The Cost of Cash

I am not sure I fully agree with this BlackRock chart — there are times when cash makes sense. However, I cannot disagree with the takeaway that you cannot sit in cash for very long stretches of time (years) and expect any sort of return above inflation.   Click to enlarge Source: BlackRock

Category: Asset Allocation, Investing

Time, Time, Time Is On Your Side (Yes it is)

Source: Motley Fool


Morgan Housel has a very insightful column this morning, driven by one of my favorite topics: Taking yourself out of the minute-to-minute, day-to-day time frame and rethinking your investing parameters in terms of years and decades.

That longer time frame is an enormous luxury, a monstrous advantage amateurs at home have over the pros.

Here’s Housel:

“You’re trying to fund your retirement over the next 20 years. Hedge fund managers have to woo their clients every month. You’re saving for your kids’ education next decade. Mutual fund managers have to fret about the next quarter. You can look years down the road. Traders have to worry about the next ten milliseconds.

Most professional investors can’t focus on the long run even if they want to.”

Or to be even more succinct, Henry Blodget observes that professional managers are “thinking about the next week, possibly the next month or quarter. There isn’t a time horizon; it’s how are you doing now, relative to your competitors. You really only have ninety days to be right, and if you’re wrong within ninety days, your clients begin to fire you.

That is the beauty of the chart above showing (inflation-adjusted) S&P500 returns going back to 1871 relative to various holding periods.

Short term is more or less random; longer term, the odds move in your favor. And very long term approaches 100% positive returns, even after inflation.

“Hold stocks for a year (Wall Street’s territory) and you’re at the mercy of the market’s madness — maybe a huge up year, or maybe a devastating loss. Five years, and you’re doing better. Ten years, and there’s a good chance you’ll be sitting on positive annual returns. Hold them for 20, 30, or 50 years, and there has never been a period in history when stocks produced an average annual loss. In fact, the worst you’ve done over any 30-year period in history is increased your money two-and-a-half fold after inflation. Wall Street would love to think about those numbers. Alas, it’s busy chasing its monthly benchmarks.”

Go read the full piece + see the rest of the charts. Its great stuff . . .


Your Last Remaining Edge on Wall Street
Morgan Housel
Motley Fool, June 18, 2013


Read More

Category: Asset Allocation, Investing

Looking at Asset Class Returns by Year

The pushback from the weekend’s WaPo column was surprisingly fierce. If you can tell me what asset classes will perform best each year in advance, than by all means over-weight that sector. But if you are like the other 99.99% of investors, you are probably better off saying to yourself “Why should I guess when…Read More

Category: Asset Allocation, Fixed Income/Interest Rates, Investing

What Should Investors Do If They Miss Big Moves?

>   My Sunday Washington Post Business Section column is out: Missed the big market rally? Here’s what to do now. In the office, we have been getting lots of calls from people who missed the big move off of the 2009 lows. What should they do in those circumstances? Here’s an excerpt from the…Read More

Category: Asset Allocation, Investing, Psychology