I think that this is precisely the situation we have going on here in the US. Unexplicitly the stock market has been in rally mode for most of the summer while most economic data released has not been good. You also have an upcoming presidential election and the ultimate fiscal cliff. So is the market trying to tell us something that we don't know? Or are we blindly speeding down the road without seeing the sign that the bridge is out?
At DWCM we are leaning more towards the bridge being out than trying to figure out why the markets are rallying right now. This may put us into the larger camp with most people but we see it as being the most conservative while trying to protect clients' capital.
As we pointed out in last week's summary, this does not mean that we are either all in or all out of the market. Rather we are taking a balanced approached which means having some risk on the table but having more than enough capital on the sidelines in case the brakes don't work as we head towards the cliff.
Back in early July we had put out a post, Anyone Can Be An Economist. While getting groceries at my local super market last night I decided to do a little research. Over the past few weeks I had seen a subtle rise in food prices. Things like fruits, vegetables, and grains. I also noticed that store advertisements on sale items haven't been as beneficial to consumers as they had been in previous week. For example, a grain item that had been consistently advertised for months at 2 for $1 was now 2 for $1.50. Something about last nights trip around the isles caused me great concern.
It has been discussed previously how manipulated some of our government statistics can be such as inflation. Strip out food and energy prices and costs look tame or in some cases even lower. But the two items that most American depend upon every day aren't seeing a decline in prices but rather steep increases. Gas in MI where I reside jumped over $.30 in one week due to refinery issues in the Midwest. Californians are likely to be in the same boat as a major refinery fire there has limited capacity. We can already see where the impact of the drought is having an impact on food prices.
These are both headwinds that we did not expect and if something does not get resolved with the fiscal cliff issues at the end of the year it will drag the economy down even more. This is why we do not see the need to take on extra risk. We are positioning portfolios to take advantage of some opportunities that may present themselves if we are wrong. However we have portfolios, including the DWCM Fund, tilted more towards the conservative side in strong balance sheet stocks that pay good dividends and in agriculture companies.
In saying that, we cut back on two positions this week in the DWCM Fund in order to bolster our cash position. We would have either reduced or closed a few other positions but our price targets had not been met. We reduced the size of our second largest holding, The CME Group by 50% and educational software company K12 by almost 50% as well.
Overall the DWCM Fund has produced consistent returns over the summer months which is a feat in and of itself. Although we have trailed the major indices the past few weeks, we attribute this to our conservative management approach that we pointed out in the above commentary. Not to worry as we are still beating all four major benchmarks for the year.
The Week Ahead
Last week was extremely light with economic data but this week will provide a little more insight into the performance of the economy. We believe that retail sales, housing results, and the sentiment survey on Friday could be the real market drivers.
- Mon - N/A
- Tue - NFIB Small Business Optimism Index, Producer Price Index, Retail Sales, Business Inventories
- Wed - Consumer Price Index, Empire State Mfg Survey, Industrial Production, Housing Market Index
- Thu - Housing Starts, Jobless Claims, Philadelphia Fed Survey
- Fri - Consumer Sentiment, Leading Indicators
Have a great week!
DreamWorks Capital Management
FREE LECTURE: Our next finance lecture will be on Tuesday September 18th at the The Community House. The topic will be Balancing Your Changing Investment Needs: Emergency Fund, Investments, Retirement, Education, and Philanthropy. We will cover significant points regarding creating, developing, and executing on your wealth management plan. We hope to have another interactive group, so be sure to sign up by emailing me directly at pfenner@dwcmllc.com or by contacting The Community House at 248-644-5832. There is no charge and light refreshments will be served.
FREE LECTURE: Our next finance lecture will be on Tuesday September 18th at the The Community House. The topic will be Balancing Your Changing Investment Needs: Emergency Fund, Investments, Retirement, Education, and Philanthropy. We will cover significant points regarding creating, developing, and executing on your wealth management plan. We hope to have another interactive group, so be sure to sign up by emailing me directly at pfenner@dwcmllc.com or by contacting The Community House at 248-644-5832. There is no charge and light refreshments will be served.
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