Cash cut for de-frisked markets still not de-risked

Far from de-risked on policy, politics, fundamentals or behavior, markets (S&P 500 at 1073 and MSCI World at 1063, U.S. 10 Year T-Bonds 3.2%, Gold 1199/oz., crude oil $69.4/Bbl wti) are nevertheless de-frisking in becoming more realistic on linkages. Still in looking in this cycle for measured opportunism, we have cut cash by 2% to bring it to 10% from 12% as of Q4/2008 and a high of 15% as of Q4/2007. In contrast, more precipitous action in the prior cycle brought our cash from 8% as of Q4/1999 to 2% as of Q4/2002. In equities, we have raised exposure to 63% from 61% on Q4/2008, versus 58% in Q3/2007 at low and 75% in Q4/2002 as high. Our positions of fixed income at 25% and other (mainly gold/precious metals) at 2% are unchanged with government bond yields low and deficits high.

Likely now and back in Q4/2008, we have appeared early. Other times, we have appeared plodding (as in the straight up move in the 12 months to April 2010). We underscore a rolling restructuring, not unknown in prior cycles albeit for different reasons as in the 1990s. Generically for capital markets we envisage similarities to the late 1940s/ 1950s cauldron for credit discrimination as espoused by Benjamin Graham. Many companies exist globally with financial and business strength in our favored energy, healthcare, industrials and information technology areas as well as elsewhere. On geographic realism, the Euro decline to $1.23 (close to our stable zone of $1.20) reduces currency risk to returns from Europe, angst notwithstanding. We favor raising European exposure from Japan where yen strength risks becoming onerous.

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