Brighton Perspective

Weekly Update

Financial markets rallied over the last week reversing a two week decline. The Dow was able to hold on to gains and close over 10,000 returning to levels not seen since October 22. Economic news continued to be mixed but was well received by investors looking for any signs of economic recovery strong enough to maintain the equity rally we’ve seen since late March. Yields increased as fixed income investors continue to remain concerned about the decline of the dollar and continued interest among some foreign governments to swap dollars for gold as their currency reserve. Market/Index 2008 Close Prior Week As of 11/06/09 Week Change YTD Change DJIA 8776.39 9712.73 10023.42 3.20% 14.21% S&P 500 903.25 1036.19 1069.30 3.20% 18.38% MSCI World 920.226 1106.170 1132.192 2.35% 23.03% Russell 2000 499.45 562.77 580.35 3.12% 17.71% Fed. Funds .25% .25% .25% 0 bps 0 bps 10-year Treasuries 2.24% 3.39% 3.54% 15 bps 130 bps Last Week's Headlines · Commercial property prices increased for the first time in more than a year based on the latest report from the MIT Center for Real Estate ·  Planned lay-offs fell for the third consecutive month in October according to Chancellor, Gray & Christmas ·  The Fed indicated that it is unlikely to raise rates for an “extended period” ·  Mortgage rates dropped below 5% for the first time in three weeks according to Freddie Mac   Upcoming Items of Interest Markets will be focused on news released over the weekend by the G20 indicating their intentions to continue to support the stimulus measures boosting the global economy. Thursday brings the latest employment news – initial and continuing claims (market consensus is for a slight decline in both), and Friday brings the latest U of Michigan Sentiment Index measuring consumer sentiment (market forecast is for a slight increase). Data source: All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Headlines and upcoming items of interest are pulled from published reports of Briefing.com and Reuters. Past performance is no guarantee of future results. The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2000 U.S. small-cap common stocks. The MSCI World Index is a free-float adjusted market capitalization weighted index that is designed to measure the equity market performance of developed markets.

A Case for Risk Management

One Way to Dig Out of a Hole - WSJ.com.

Ms. Damato makes a strong case for lower volatility strategies but does miss a few additional points worthy of consideration.

The math is clear - the 37% decline in the S&P 500 in 2008 requires a subsequent gain of more than 58% to return to "even". An investor focused on returning to even, is going to assume more risk in an effort to gain back what he/she lost. Sort of like doubling down when gambling. It's not a good bet.

I believe, for the individual investor, the key risks to manage are downside risk and inflation risk. The investor (or advisor to the investor) should be focusing on constructing portfolios that will generate an absolute positive return that exceeds inflation plus a reasonable "risk" premium AND attempt to hedge the possibility of real losses such as witnessed in 2008. One approach is to emphasis low volatility funds within a portfolio. That's a good start, but correlations must be considered as well. A portfolio of low volatility bond funds may look attractive but if they all have a correlation of 1, they'll all move in the same direction. That can still produce larger than desired losses.

I believe in constructing portfolios that incorporate both low volatility strategies and higher volatility strategies. For me, the key is consider poorly correlated strategies. This can be accomplished by using strategies that actively "hedge" their long exposures. These hedges can reduce correlations and can improve downside risk management. There is a premium paid for this "insurance" and that is in the form of potentially lower positive returns when market performance is good. I also add higher volatility strategies, typically un-hedged, tactically, to provide greater potential upside.

It is prudent to consider low volatility strategies as part of the risk management of investments. Capital preservation is often overlooked in good times and lamented in bad times, as in " I wish I had paid more attention to risk". As I've started before, I believe it is always valuable to view the markets skeptically.

FinancialAdvisorMatch :An Alternative to Traditional Asset Allocation

FinancialAdvisorMatch :An Alternative to Traditional Asset Allocation.

Article written by me published yesterday.

What Should a Financial Advisor Do for You?

I've seen a number of articles lately on the role of the financial advisor. I've also been asked lately where do I think the markets are headed. Both thoughts dovetail nicely I think.

The financial advisor's role is to help protect and build your asset base. You have worked hard over the years to build up a 401k balance, own a nice home and build, hopefully, a taxable investment portfolio as well. You have also tried to save money for college, for retirement and for future generations. You want to retire earlier than your parents did and enjoy the "fruits of your labor". This is where the advisor comes in.

Most of us do not have the ability to forecast the future with precision. Thus, our objective is to forecast as best as possible and hedge the potential risks we expect to encounter along the way. We will attempt to protect your assets via financial and estate planning techniques so that you keep as much as possible of what you have earned and have the best opportunities to pass on a legacy to future generations of your family. A number of risks are encountered in this process - legal and regulatory changes, economic cycles, etc. Not all can be forecast with certainty and the advisor should account for that uncertainty.

With regard to investments, I believe advisors should be focused on constructing portfolios that attempt to meet basic goals - generate an absolute return that exceeds inflation plus a spending percentage and hedge against potential downside risks. These are competing goals and thus require constant examination. Asset allocation is not dead but does need to be revisited conceptually. I believe that rather than regarding asset allocation as an equity/fixed/other combination, advisors should be viewing asset allocation as core-satellite or on a risk basis. The allocation decision is driven by risk targets first, then by return. So the objective is to properly allocate risk among various assets. In this assessment, lower risk strategies are considered core strategies and can be fixed income, equity or other assets. Same goes for riskier assets (satellite). This does involve a degree of tactical asset allocation which involves trading more the riskier assets more frequently. I'm not trying to time the perfect entry and exit, rather, I'm trying to take advantage of volatility to provide excess return when assets are moving up and hedge downside risk when assets are declining. It's not perfect but I think better addresses my primary objectives than the traditional asset allocation approach.

So the financial advisor is attempting to preserve and grow what you've acquired. We should be more conservative than you most of the time and should be the "voice inside your head" attempting to reason you out of more aggressive decisions. We're not perfect, but if we successful one more time than we're not, we should do well for you.

As to where the markets are going, I don't know. I'm always skeptical (never truly a bull or a bear) and always more comfortable with a portfolio that has some "insurance" against a market decline. I think the "premium" paid to hedge some of the downside volatility is worthwhile.

Weekly Update

The Markets   Financial markets were mostly flat for the week as investors took advantage of continued better than expected earnings reports to take profits built up over the past 6 months. Treasury yields moved higher ahead of record note sales planned for the coming week. Economic data was uneventful as chain store sales were slightly positive, consumer sentiment fell slightly, the Fed suggested the economy was stabilizing in some areas and recovering in others and the index of leading indicators improved. Market/Index 2008 Close Prior Week As of 10/18/09 Week Change YTD Change DJIA 8776.39 9995.91 9972.18 -0.24% 13.63% S&P 500 903.25 1087.68 1079.60 -0.11% 19.52% MSCI World 920.226 1170.638 1153.422 -0.02% 26.65% Russell 2000 499.45 616.18 600.86 -2.49% 20.30% Fed. Funds .25% .25% .25% 0 bps 0 bps 10-year Treasuries 2.24% 3.42% 3.48% 6 bps 124 bps Last Week's Headlines ·      Consumer confidence fell suggesting consumer spending will not lead the nascent recovery ·       The index of leading indicators rose for the sixth consecutive month to a 2 year high ·       Sales of previously owned homes improved to a 2 year high     Upcoming Items of Interest Earnings season has ended and investors will now focus on holiday retail sales for evidence that consumers will be contributing to the economic recovery via holiday spending. Investors will also note the 10 year note sales, durable goods orders, GDP growth, jobless claims and personal income and outlays reports. Data source: All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results. The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2000 U.S. small-cap common stocks. The MSCI World Index is a free-float adjusted market capitalization weighted index that is designed to measure the equity market performance of developed markets.

The 60% Rally In Perspective | zero hedge

The 60% Rally In Perspective | zero hedge.

The stats in the this post clearly show that this rally isn't as well supported by fundamentals as past rallies have been. The bond market appears to agree as pricing in that market seems to indicate much less enthusiasm for the strength of the economic recovery.

Investors, particularly equity, can be irrational for much longer than a rational investor would expect. Hence, hedging equity exposure rather than moving to all cash could make sense. Eventually, fundamentals will catch up with prices, which I believe, means prices will need to correct. Yet, given past irrationality, one can't forecast with any precision, when that will happen. I still have a target of 950 on the S&P 500 (roughly a 16% correction from current levels). I can't say when it'll happen however, as reasonably good news seems to continue to feed the monster. Let's see what the Christmas retail shopping season delivers.

Weekly Update

The Markets   Equity markets moved sharply higher during the week thanks to several rounds of positive news including continued better than expected earnings. The weight of the evidence continued to suggest to market participants that the rate of recovery for the economy could support higher equity prices. Market/Index 2008 Close Prior Week As of 10/9/09 Week Change YTD Change DJIA 8776.39 9864.94 9995.91 1.33% 13.90% S&P 500 903.25 1071.49 1087.68 1.51% 20.42% MSCI World 920.226 1139.844 1170.638 2.70% 27.21% Russell 2000 499.45 614.92 616.18 0.20% 23.37% Fed. Funds .25% .25% .25% 0 bps 0 bps 10-year Treasuries 2.24% 3.38% 3.42% 4 bps 118 bps Last Week's Headlines ·       Inflation remained sanguine, up 0.2% in September but down 1.3% from last year. ·       Oil and gold continue to rise while the dollar continued to fall suggesting investors are looking for a dollar alternative. ·       The ISM index rose above 50% for the first time in a year. An index reading over 50 suggests the economy is growing.     Upcoming Items of Interest Earnings reports continue this week along with updates on housing starts, wholesale inflation, leading economic indicators and existing home sales. Earnings will continue to be of particular importance as investors look for top-line growth to improve. Top line improvement could be seen as strong evidence that the economic recovery is sustainable.   Data source: All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results. The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2000 U.S. small-cap common stocks. The MSCI World Index is a free-float adjusted market capitalization weighted index that is designed to measure the equity market performance of developed markets.