Risk Tweaking the Market’s Tale

In many ways, the tale of the market for 2009 was of tremendous momentum, first down for economies and capital markets followed from March 2009 by closely correlated upside in capital markets generally but selectively in economies. In an ongoing continuum of budgets from Japan in December 2009 with its eye-popping potential for debt close to twice GDP, that released by the administration on February 1, 2010 for the United States makes for somber reading at $3.8 trillion but with $ 1.6 trillion in deficits for 2010 and $ 700 billion even in 2013. It is somber in that notwithstanding their ideologically commitment to smaller government, in their time, even U.S. President Reagan and British Prime Minister Thatcher were constrained to slowing the rate of growth of government We have been focusing on the aspect of risk tweaking the market’s tale that appears resting on government largesse. In raising the theme of re-evaluation of a different type of risk from securitization hubris that proved to be the undoing of 2006/7, we refer to our notes as recent as that of December 19, 2009 (Miles to Go and Promises to keep, still) and January 24, 2010 ( Reset amidst Yin and Yang of Flows and Fundamentals) as well as our start- of -year January 4, 2010 note with but one resolution (Wary of Socialization of Capitalism) over laundry lists favored by others.

Portfolio mix needs to be less concerned about price and more focused on value. Even as economies and operations recover, we believe markets in early 2010 are already changing away from momentum and towards discrimination based on quality of delivery for companies and governments alike. In fixed income for instance, the issue with Greece is less about breast beating over the European Union and more whether the sharp rise in bond yields of Greece (now 6.6% up 75 basis points since year end 2009) are anomalous or instead harbinger of things to come even for advanced economies. Similarly in equities while much is being made about individual stocks not responding to strong Q4/2009 earnings momentum, the tweak may now lie with the appropriate level for their valuation. As benchmarks, we maintain neutrality to be 5% yield for U.S. 10 year T-Notes and 15-18x P/E for the S&P 500. We elaborate.

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