Hi. Welcome to our November 2012 newsletter. I hope everyone had a great Thanksgiving we want to extend our best wishes for a safe and happy holiday season.
Looking back at the market activity for the month of November, the S&P ended with a loss .8% while the Dow was lower by .1%. Of course, that doesn’t tell the whole story for November as the market dropped just over 5% from the start of the month to mid-month before recovering the second half of the month. Since the election, the market has been laser focused on the Fiscal Cliff issue. It seemed to jump from headline to headline as the two parties attempted to negotiate a solution which certainly was not resolved by the end of the month.
The major concerns for the market and the economy are the proposed approaches to addressing this issue: raise taxes, cut government spending or both. While most economists (and all of the media) expect any outcome to result in a dip back into a recession, the only debate is for how long. Currently, the government spends $3 for each $2 it takes in so you would think that something has to be done. Based on the present posturing of both parties, I expect there will be a combination of higher taxes and some reduction of spending. Keep in mind that cutting government spending is not defined the way you or I would define cutting; when they talk about cuts, they are referring to the increase in spending, not cutting into the amount that was spent last year, like normal, logical people would think about cutting. The government uses what they call Base Line Accounting that never reduces the amount of spending, only the increase in spending. A year and a half ago, when their backs were to the wall, faced with possibly defaulting on their obligations, they resolved to “cut” less than 10% of the spending increase scheduled over the next ten years. Considering that, my hope is that the hype over that Fiscal Cliff is overblown and that a reduced increase in spending does not hit the economy as much as feared and that increases in taxes do not cause as much immediate harm as feared. Like most crisis’s, I boldly predict that we will survive this one, too.
The great thing about our management style is that we don’t have to know how these things will play out. Trend following watches asset price movement and responds to that only; not my opinion or attitude or experience or ability to read the tea leaves. It’s a discipline. And, especially now, I sleep a lot better knowing it is working in the background and you should too. I the first week of November, we sold the last of our equity holdings and moved completely into bonds and remain there. This is not a market that I’m regretting being out of. As we sit in bonds, the combination we are using has a current yield of about 4.25% so we are making some money while we wait, but keep in mind, that the purpose of going to bonds is not necessarily to make money in bonds, it’s to preserve capital and protect if for a catastrophic equity loss, which is absolutely not outside the realm of possibility.
I also wanted to let you know that I’ll be interviewed on a national internet radio program this upcoming Thurs the 13th on December at 8:30PM EST. It will be recorded and you can listen to at your convenience at a later time. We’ve provided a link in the cover letter. That’s it for this month. Thanks for listening. As always, please share this video with friends or family. Talk with you next month.