Elevator or the Stairs??

Small caps have been our roadmap as we continue to assess the risk/reward conundrum that investing in a central bank dominated world presents. Small caps led us to see the shortcomings in the market before its brief fall in mid October which allowed us to use some dry powder and positively influence our returns this quarter. While the selloff was brief and somewhat violent the aftermath has been anything but. A long slow grind higher has all those who missed the selloff regretting their reticence. This bull market has been built on low volatility interspersed with infrequent violent selloffs. The market has a way of taking the stairs up and the elevator down. Our vigilance to any signs of volatility is of paramount importance and will continue to portend downside moves.

Our antenna is raised to any talk of increased bands of volatility in markets, of letting markets run. In the Federal Open Market Committee (FOMC) October minutes there is one paragraph that stands out for us and that is its mention of volatility. When markets began to rally in mid October its rally can traced to a Federal Reserve official commenting that it would be possible to delay the end of its Quantitative Easing (QE) program. It is evident in the committee minutes that it does not want markets to get used to officials jawboning markets when they become volatile. The emphasis is ours in the following statement but it does appear that the committee is willing to expand the bands of volatility. Stairs up and elevator down.

…members considered the advantages and disadvantages of adding language to the statement to acknowledge recent developments in financial markets. On the one hand, including a reference would show that the Committee was monitoring financial developments while also providing an opportunity to note that financial conditions remained highly supportive of growth. On the other hand, including a reference risked the possibility of suggesting greater concern on the part of the Committee than was actually the case, perhaps leading to the misimpression that monetary policy was likely to respond to increases in volatility. In the end, the Committee decided not to include such a reference. 

Minutes of the Federal Open Market Committee October 28-29, 2014


Bill Gross of Janus is out with his latest missive and in it he complains of Central Banks trying to cure this debt crisis with more debt and the consequences of such. He is one of several high profile investors calling for low future investing returns and the need for investors to have cash on hand.

Markets are reaching the point of low return and diminishing liquidity. Investors may want to begin to take some chips off the table: raise asset quality, reduce duration, and prepare for at least a halt of asset appreciation engineered upon a false central bank premise of artificial yields, QE and the trickling down of faux wealth to the working class. If the nursery rhyme theme is apropos to the future, as well as the past, investors should remember that while “Jack and Jill went up the hill,” that “Jack fell down, broke his crown, and Jill came tumbling after.

Bill Gross Janus 12/04/2014


One of our favorite investment letters to read is Jeremy Grantham as he takes a quantitative approach to value investing. His study of bubbles in markets has led him and his team to conclude that bubble territory is 2250 on the S&P 500. Here are his comments from his latest letter.

Nevertheless, despite my nervousness I am still a believer that the Fed will engineer a fully-fledged bubble (S&P 500 over 2250) before a very serious decline.

My personal fond hope and expectation is still for a market that runs deep into bubble territory (which starts, as mentioned earlier, at 2250 on the S&P 500 on our data) before crashing as it always does. Hopefully by then, but depending on what the rest of the world’s equities do, our holdings of global equities will be down to 20% or less. Usually the bubble excitement – which seems inevitably to be led by U.S. markets – starts about now, entering the sweet spot of the Presidential Cycle’s year three, but occasionally, as you have probably discovered the hard way already, history can be a snare and not a help.


Investors have reason to be excited. From a seasonal perspective this period of time from November 2014 to March of 2015 would represent, historically, the best period of returns. Market players may have a hard time resisting a rise in stock prices as the stars are aligned for further gains in this cycle if history and seasonality is any guide. It could however lead to a buying panic as equity valuations become further stretched and investor’s party like its 1999.

For the last few years the time to take profits has been when volatility shows up. When volatility calms down it is time to ride markets slow grind higher. Keep both hands on the wheel. When volatility rises take cover. When the storm passes you can advance. Volatility is the key. Higher volatility equals lower stocks.

Watch the Russell 2000 for clues to equity prices. Lower oil. Is it a supply issue or a demand issue? We think it both. It could lead to more geopolitical issues.

I think we aspire less to foresee the future and more to be a great contingency planner… you can respond very fast to what’s happening because you thought through all the possibilities, – Lloyd  Blankfein

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

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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