Stand Your Ground?

Howard Marks from Oaktree is out with another investor letter and as you know we read anything that comes across our desk from Howard Marks. Here is the money quote from his letter. Middle Ground.

If the economy continues to recover and the Fed’s bond buying eases off, interest rates are likely to go further on the upside. But given the modest level of confidence at play, the markets should not turn out to be perilous. Most assets are neither dangerously elevated (with the possible exception of long-term Treasury bonds and high grades) nor compellingly cheap. Its easier to know what to do at the extremes than it is in the middle ground, where I believe we are today. As I wrote in my book, when theres nothing clever to do, the mistake lies in trying to be clever. Today it seems the best we can do is invest prudently in the coming months, avoiding aggressiveness and remembering to apply caution.

Keep your eye on bond yields. While the stock market tends to gyrate wildly bonds have a steadier hand. The critical level is between 2.7% and 2.8% on the 10 year. The 2.7-2.8% level is important because stocks have started to struggle above those bond yields. Watch the 10 year. A soaring 10 year is a huge headwind for the housing market.

Fed officials were out and about and were pressing for a need to taper back on QE in September. Even Charles Evans from Chicago, a noted dove, is now seated in the hawk’s camp. There is some speculation afloat that Fed officials may be willing to have some bumps in the road for the stock market in order to engender some political support from Congress and make the next Fed chairperson’s job a bit easier. A new Fed Chairperson might be better off with the stock market a bit lower rather than trying to implement new policy (QE Taper) at all time highs. Will Bernanke do them the good favor? Remember new Fed Chairs tend to get tested in their resolve by markets.

July and August tend to be positive months for the stock market historically. Now that the first week of August has passed and new pension money has entered the market investors may be getting a bit more cautious ahead of September. September has a long history of volatility and the calendar holds a much anticipated FOMC meeting and a key German election. Japan has markets on edge this morning as the Nikkei is down 4% overnight. Geopolitics are also on the rise as Obama snubs Putin. Will the snub increase tension in the Middle East and Syria? It certainly won’t help.

Go left? Go right? Stand your ground? We think that Marks is right and now is not the time to get too clever. Opportunity may come soon enough.

To learn more about us and Blackthorn Asset Management LLC visit our website at .

A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty. – Winston Churchill

Disclosure: This blog is informational and is not a recommendation to buy or sell anything. If you are thinking about investing consider the risk. Everyone’s financial situation is different. Consult your financial advisor.


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