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October 2011 Outlook

This past quarter we’ve witnessed Europe’s fiscal issues finally metastasize into banking issues (Belgium’s Dexia)—long feared—as their politicians, like our own, have made an art form of “kicking the can down the road”.

Most would agree that our current locale is now “down the road”, both in Europe and here in the US; and we’re looking at that same “can” once again.  This metaphor perhaps best explains the severe volatility we’ve seen in the markets over the previous few months—and may continue to see in the future.

An unofficial survey of economic prognostications by CCR Wealth Management suggests a roughly 50/50 split as to whether the US is headed into another recession or not.  Opinion that we’re already in a recession is plentiful.  While such predictions are outside the sphere of CCR Wealth Management’s services, we think a few relevant, less negative points have been lost amid the doleful headline blitz of the last 90 days or so.

  • September manufacturing ISM (Institute for Supply Management) expanded for the 26th consecutive month, registering a PMI index of 51.6%.

This is a leading economic indicator, and not a pre-recessionary number!  (Below 50 would be)

  • September non-manufacturing (service industries) ISM expanded for the 22cnd consecutive month, registering 53%.

Again—not a pre-recessionary number! (Below 50 would be)

  • Weekly jobless claim numbers (4 week moving average) issued October 8 decreased 7,000, coupled with a statistically meaningful upward revision to the August non-farm payroll numbers suggest the recent downward pace of un-employment has at least slowed.
  • Constant comparisons to 2008 leave out the following:

-US manufacturing and non-manufacturing utilization rates are significantly higher than they were three years ago (i.e. there is much less “slack” in the business system)

-US corporate balance sheets, financial ratios, and cash-on-hand are far and away much improved from 2008 levels.

Something CCR WM has pointed out before in these pages

Of course none of these points presage another economic downturn—or even further market volatility.  However, we think they should be computed objectively along side the fact that we are considering current investment and market gyrations in the midst of the  statistically weak (and volatile) months of September/October.

To be sure, there are numerous sources of potential headline-volatility (positive or negative) immediately ahead; in addition to the current Q3 earnings releases happening now, and in addition to the normal economic employment releases in the first week of November, we’ll be digesting with interest the evolution of the so-called congressional “Super Committee” budget recommendations that are due out around November 26, and even more so the Sarkozy/Merkel “grand plan” to solve the European dilemma promised before the upcoming G-20 summit.


We’ve outlined what we think are important mitigating factors investors should consider when inundated with negativity regarding the markets and global economics.  That said, we eschew the un-deliberated policy of “hold and hope”, and recognize a few real changes in economic facts that should inform our strategy:

Small Caps

For several years CCR WM’s model portfolios have been overweight in small cap equities (12%-20% of equities), with the justification that small cap equities generally out-perform large cap stocks in early-cycle economies.  While it is currently unclear where we are in the business cycle (a source of much debate today), it is clear to us that we are unlikely in an early business cycle anymore.


Concurrent with a reduction in small cap equities is a recognition of very attractive dividend yields (and equally compelling fundamental valuations) in many US Large Cap “value” stocks.  These equities offer an additional source of return in what could remain “choppy” markets for the foreseeable future.  Examples of these yields include: AT&T (6.00%), Verizon (5.50%), Pfizer (4.30%), Altria (6.00%).  The yield on the 10-year Treasury note (at this writing) is roughly equal with the yield on the S&P 500.  Keep in mind; a 10-year T-Note likely has nothing but amortization ahead, while even modest stock gains in the next decade make this comparison a “no-brainer”.

Growth Markets

As referenced above, while we recognize adjustments should be made in shifting markets (and with shifting global economic outlooks), we remain steadfast in our longer term outlook for the world’s growth economies—particularly in comparison to the developed world.  For the past 12 months we’ve commented on the aggressive central bank actions in many of these countries—and over the previous quarter, we’ve been reminded of the higher volatility nature of this equity class.  The former (central bank tightening) is both healthy policy response to high inflation, and likely near completion.  The latter (higher betas) is to be expected.

We’ve returned to this topic frequently this year, and at the current date, no-doubt this segment of one’s equity portfolio has seen the most down-side over the last 3, 6 and 12 months.  We continue to be confident that a “soft landing” will manifest in emerging market equities, and economically be of great benefit to the world’s largest economies in the months and quarters ahead.

Fixed Income

Perhaps our largest intra-year investment policy change is a reversal of our position on floating rate bond funds propounded on in our January Outlook this year.  Economic realities have forced us to re-think our assumptions about the immediate direction of interest rates, further solidified by the Fed Chairman’s mid-August validation that the current rate environment will likely be with us for at least another 18 months.


Gold has clearly backed off its most recent (August–September) highs, yet it remains significantly higher than it was at the beginning of the year (~+18%), and a year ago (~+28%).

We think it a good idea for investors (particularly heavy in gold) to begin to consider some (perhaps) counter-intuitive thought exercises.  We note the run-up in stocks over the last week was primarily due to a lack of bad news, rather than any identifiable positive developments out of Europe.  France and Germany have announced their intention to finally produce a comprehensive, “grand plan” to deal with Europe’s fiscal/banking/credibility issue on or before next month’s G-20 meeting.

The “thought exercise”, in our view, should be to consider how far, and how fast gold could fall, ifsuch a plan is widely accepted as a plausible solution.  A big “if”—we agree (given the prior three months of rancorous disagreement).  But we do not take gold’s march to $2,500/oz as a given at this point.

We continue to view oil (specifically Brent crude) as a better fundamental value at current levels.  As mentioned, capacity utilization in the US remains high, and we think most investors are pricing in a US (or “developed world”) supply/demand forecast without regard to potential Chinese influence in the next 6 months or so.

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Investment Experts On Debt Ceiling: Don’t Panic

With much of the U.S. media focused on the showdown in Washington over the debt ceiling, Central Massachusetts financial advisors are getting their share of calls from concerned investors. Their message: Don’t get too worried.

Read the article here

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July 2011 Outlook

We have made general market commentaries in many recent portfolio reviews on the seemingly déjà vu aspects to this Spring and Summer’s market movements, and accompanying economic and fiscal “narrative” as compared to those of a year ago.

To briefly recap; the current state of the US stock market is one that is down from its early April highs.  Along the way this year have been numerous hurdles for investor sentiment to clear, including (but not limited to) historic geo-political upheaval in the Middle East, a tragic and economically disruptive natural disaster in Japan, continuing fiscal uncertainties (and accompanying, sometimes riotous protests) regarding several European Union states, and, verydisheartening economic data here at home.  Of course, current attention is on the evolving debt-ceiling debates/negotiations/debacle unfolding in Washington—more on this later—and unemployment figures that seem to be creeping back up to their 2009 highs.

It was only a year ago when we remember watching weeks upon weeks of oil spilling into the Gulf of Mexico.  The inability to quickly and efficiently plug this leak added an intangible gloom to the unfolding debt crisis in Greece, and speculation of a Eurozone financial melt-down.  On top of all this, employment, housing and GDP data released in June of 2010 clearly depicted a slowing—if not stalling—US economic recovery from the 2008-2009 recession.

A year ago, the S&P 500 was in the midst of a roughly 16% correction from its April 2010 highs.  So far this year, the market has corrected (at worst) 7.11% from its April highs—though we are several percentage points above that at this writing.

Our point in this recap is to remind investors that while “current events” should seem to have a logical correlation with market movements (and often the media strains to imply this)—this is most often not the case.  Last year’s “current events” news stories depicted a dismal end to the nascent economic recovery—yet the S&P went on the close out the year over 15% higher than it began!  News stories focus on the past.  In today’s media-rich environment and rapid news cycles, this is quite often the very recent past—but it is the past none-the-less.  As we (and others) have repeatedly pointed out; stock markets are forward-looking discounting mechanisms, focused on the future.  In truth, we have no idea where the S&P 500 ends up this year—but we do not see any fundamental reasons why we should expect a retreat from current levels by year end.

  • Speaking strictly of fundamentals, we can say that we do think the market is reasonably valued; consensus estimates for the S&P 500 for 2011 are $98 in earnings.  This implies a current valuation of about 13.39%, or ~2% below historical averages.  Factoring in general domestic economic growth rates, this number makes sense to us.  We may see this estimate revised up as the year progresses.
  • As we write, earnings season is underway.  Less important to us are 2Q results, as many will report the (expected) dampening effects of the Japanese tsunami, and higher oil and materials prices in Q2.  More important to us (and here, we admit to being a bit optimistic) will be forward-looking revisions, including subsequent analyst revisions (again, we are assuming an upward bias, on average).

Our cautious optimism stems from the Power of Zero Interest Rates theme we expounded upon in our April OUTLOOK, coupled with generally strong balance sheets and to-date negative downward revisions (likely too negative).

  • We expect increased demand and economic activity in Q4 and beyond from China and other major growth-market players to boost economic activity here and in the EU.
  • Lastly; as mentioned, much of the news and indeed most economic indicators are reporting history.  Non-Farm Payroll figures (released the first Friday of every month) have generally been the source of angst regarding economic recovery for much of the last three months.  As we reminded in our September 2009 OUTLOOK, payroll numbers are the most lagging of lagging economic numbers.  We are as revolted as anyone at the percentage of willing workers without jobs in this country….but we will not look at these figures as indicative of imminent economic trends.

Growth Markets:

Did anyone hear the news last week?  “China GDP Hints at ‘Soft Landing’”; headline, WSJ China Real Time, July 13, 2011.

This is especially encouraging to us and should be to our clients, as China and other major Growth-Market economies play an important role in our overall equity allocations.  Recall our April, and indeed January commentaries about BRIC and other Growth-Market equity performance essentially treading water—due largely to the aggressive central bank tendencies of these countries in combating inflation.

China’s GDP was reported at a growth rate of 9.50% in Q2, slightly better than expectations of 9.4%.  Most encouraging though, was the surprising 15.1% manufacturing production growth figure as compared to 13.1% estimate (growth of 13.5% from May vs. expected contraction of 1.50%).

By definition, and now by consensus, Chinese efforts to curb inflation are seen as largely successful in engineering a “soft landing”.  We also view this positively as supporting CCR WM’s thesis that continued (and expanded) US and EU economic growth depends on BRIC and growth-market consumption to an increasing degree.  This consumption now seems safe-guarded for the time-being.

US Debt Ceiling:

And now on to the Dark Side:

We’re fairly certain that 100% of our clients understand the downside here.  Quite obviously, the failure of the U.S. Government to meet its financial obligations not only renders every mildly optimistic statement made in the preceding paragraphs moot, but will quite likely have a major impact on every aspect of every American’s day-to-day quality of life.

We’re a bit reluctant to comment too specifically here, as the likelihood of the political realities changing between this writing and the time this document reaches your inbox is very high….but here goes:

1)   Imagine:  You’re a high-ranking politician (President, Speaker, Leader, whatever).  On your watch the United States not only defaults on its financial obligations, but looses its AAA credit rating.

We think this is the easiest way to put aside the “tennis match” aspect of this debate process in the near term.  We can think of 535+1 people who likely know that no amount of finger-pointing will evade most unflattering entries into history books.

2)   If “certain death” in terms of US Credit is so imminent (days—if not weeks away, as would seem as you have your morning cup of coffee and read through the gory details), then why is the US stock market up ~6% for the year, up 25% from a year ago, and why is the ten year Treasury yield back under 3%?

As mentioned…markets are in fact discounting mechanisms, and hundreds of millions of investors are choosing not to believe the doomsday scenarios being painted daily by politicians and pundits.  In fact—with every recent piece of negative news, the time-tested flight of (billions) of skittish dollars continues to flow into US Treasuries—purportedly in jeopardy of default!  For us, this simply enforces our conviction that a deal will probably be struck (at the 11th hour, and 59th minute, perhaps).  Surely, such a deal will please no one—but we’ll then be on to worrying about other things.


Oil is once again trading below $100 per barrel.  We attribute this to our most recent series of tepid economic reports (since our April OUTLOOK).  We refer back to our commentary of China (as also look at China as a proxy for most of the rest of the growth-market universe).  China is the largest importer of petroleum in the world.  All indications seem to be a pick-up of growth in Q4 and beyond.

We reiterate that within the commodity universe, OIL should be the focus in searching for any discernable “value”.

Gold has recently punched through several technical resistance levels, and we are fairly certain we will see higher prices ahead.  We attribute most of Gold’s current allure to the Euro fiasco—and much prefer gold investments to any attempt to “short the Euro”—which has almost always been a loosing trade of late.

As previously mentioned, CCR WM, previously overweight Silver vs. Gold, has now inverted this relationship in our models.  Given Silver’s ~36% run-up ytd (far beyond anything explainable from a fundamental standpoint), we prefer gold’s higher volume trading structure and closer (inverse) correlation to major currencies.

We expect base-metals to eventually correlate with energy prices given certain evidence of China and BRIC’s economic turnaround in Q4 and 2012.

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April 2011 Outlook

A client of ours called about 5 or 6 weeks ago in a bit of a panic.  In fairness, it wasn’t just this client—there were several—but for some reason this particular conversation comes to mind.  In short, the client’s question seemed to be when (not if) to get out of the market.  Of course the Dow and the S&P 500 at the time had fallen 6.7% & 7.0% respectively from their recent highs, and all cables and airwaves were filled (as they are today) with non-stop chatter regarding the series of Middle East revolutions and violence, soaring oil prices, domestic budget battles, and of course the triple whammy of Japan’s earthquake, tsunami and nuclear catastrophe.

Given the highly charged emotions of the moment, we recall our advice seeming rather simplistic; “focus on the economics”.  To be sure—economic implications run through all of these events, but with regard to the macro economic indicators we outlined in our January Outlook, the trend remained positive despite these eruptions, as it does today.

Since the geo-political and natural disasters of the first quarter, we have witnessed remarkableresilience in the equity markets.  At this writing, the Dow Jones Industrial Average is up 6.0%, and the S&P 500 is positive by 4.5% year-to-date.  CCR Wealth Management attributes much (if not all) of this resilience to The Power of Zero Interest Rates.  Understanding the flow of money from one asset class to another (cash to stocks, stocks to bonds or bonds to cash) requires a general acknowledgement that money will ultimately find its way to the better return.  This is not to say it makes prediction of future flows any easier—but at times it can “stay the hand” when emotion is recalling recent market disasters.  Zero interest rates, in our view, continue to have the most profound influence on where capital is flowing—and it has just been tested by a series of otherwise extremely negative global events.

We also take a moment to reiterate a “tag line” that has been in all of our Outlook communications since January of 2010; we remain in an early-cycle economy.  At the time, we recommended a higher weighting in Small Cap equities, and since Jan. 1 2010, the Russell 2000 Small Cap Index has outperformed the S&P 500 by an annualized rate of about 9.50%.  But this is looking in the rear-view mirror.  Our conviction about where we are in the economic cycle today is bolstered by the evident Power of Zero Interest Rates, manifested as a significant increase in risk appetite.  Year-to-date, there has been an abundance of M&A (mergers & acquisition) activity both in the US and around the globe, encompassing major players in the Telecom (AT&T/T-Mobile), Utility (Duke/Progress Energy), Biotech (Genzyme/Sanofi) and chemical (DuPont/Dansico) sectors, not to mention the NSYE/ Deutsche Borse takeover.  Current interest rates make these deals particularly attractive relative to the risk they represent; in a zero interest rate environment—it’s cheaper to buy than to build.

Looking Ahead:

  • “Earnings Season” is getting into full swing as we write.  CCR WM expects earnings, as a whole, to be good (though perhaps not great).  We expect to see cross currents at play in Q1 reports showing the positive effects of the Power of Zero Interest Rates, as well as negative pressure inflicted by higher oil and raw materials prices.  Obviously, these forces will have uneven effects across various sectors.
  • Additional external effects that will pressure/benefit earnings on a global scale will be growing currency disparities due to the fact that many central banks around the world have become hawkish on inflation, while others (notably the US) have not.  Currency is a more complex and inter-related subject than a single paragraph can adequately clarify.  It is, however, important to make note of the numerous variables which influence currencies, as well as the numerous currency denominations at play in the global economy.  We often hear people reflect that the “Dollar is weak”—but this statement may only be true when modified by a specific comparable (i.e. “relative to the Swiss Franc”).

Generally, large exporting concerns (whether domestic or non US) will be influenced by the value of their local currency as revenue is repatriated.  For example; Nestle (Switzerland) just announced a disappointing quarter due to (among other things) that fact that the Swiss Franc has been quite strong relative to their major trading partners; the EU and the US.

We are generally bullish on US exporters for this reason—but again, exported manufactured goods are costing more to make (higher commodity prices), and it remains to be seen whether this economy will allow for a full pass-through of these higher costs to consumers.

  • In the weeks and months ahead, we expect to hear and read more frequent stories about the scheduled end of the Fed’s second round of quantitative easing (QE2).  In January we attributed much of the market’s second-half performance last year to both the announcement and implementation of QE2.  There is already speculation that the end of this Fed action (June 1) will have a negative effect on both the market and the economy.  We are not convinced this is true:

1)      The fact that QE2 ends in June is a known fact.  While expectations to the contrary are speculation, there is too much economic data due out between this writing and June to form a firm opinion in our view.  As we’ve pointed out, economic trends remain positive, if tepid.

2)      Ben Bernanke, Chairman of the Federal Reserve (and architect of QE1 and QE2) wrote a white paper in 1997 entitled Systematic Monetary Policy and the Effects of Oil Price Shocks, which can easily be found by typing this title into Google.  The general thesis of this paper is that oil prices alone do not have an outsized negative influence on economies, but rather it is the combination of rising oil prices and tightening monetary policy that engenders recession.

We have no way of knowing how Bernanke’s views have evolved over the last 14 years, but this paper suggests to us that the Fed is looking at rising oil prices as a license for continued easy monetary policy (and not necessarily an effect of these policies).  In this view, oil acts as a “tax” on the economy—preventing a tendency of core inflation from becoming a problem (“core” inflation strips out food and energy from the headline CPI).

Our guess is that QE2 ends in June, but zero interest rates stick around at least through the end of the year.  Either way, we are living in a bit of a Petri-dish; as the Federal Reserve’s policy is the exact opposite from the EU’s and other major central banks’ focus.  Getting it wrong will have consequences.


  • We retain our emphasized weighting in smaller companies–our models continue to hold at least a weighting of 12% (of equities) in small cap stocks, and higher for longer term horizons.  As mentioned, we are in an early-cycle economic environment, and smaller companies tend to out-perform.
  • CCW Wealth Management continues to hold an equal weighting of growth and value style equities in our models.  Notably, while the S&P 500 is up 4.50% year-to-date (at this writing), the energy sector within the S&P turned in a 16.29% Q1 performance.  Energy only has a ~13% weighting in the S&P 500—and as we pointed out in our January Outlook, most of these stocks fall within the “value” universe.
  • Emerging Markets:  Regular readers of these pages know that CCR WM has been “harping” on Emerging Markets for the last 24 months—imploring an equity weighting of at least 16% (to match the MSCI ACWI weighting).  Yet these stocks largely underperformed most developed indices since last October.  In January we identified inflation in China, Brazil and other EM powerhouses as a concern—and certainly inflation has manifested in these economies.  Yet we believe investors should take heart in the almost universally aggressive central bank actions taken across the emerging market economies.  While this attempt to check runaway growth by hiking interest rates has (predictably) checked their spectacular market advances over the short term, we’ve seen an encouraging resurgence in EM equity indices over the last 60 days.  Furthermore—as we’ve stated in many client reviews, EM growth dynamics are virtually as immutable as their favorable demographics and technological advancement trends.


We have little to add to our fairly extensive (and oft repeated) commentary on the interest rate and fixed income markets over the last 9 months or so;

  • Avoid Government and government-backed securities, particularly longer durations.
  • Keep bond portfolios weighted in the high-end of high-yield, or the low-end of high-grade credit qualities (BB+ to BBB).
  • Embrace “satellite” bond strategies, to include high-yield, emerging markets debt (local currency) and floating rate bond funds.

The municipal bond market underwent significant volatility in December and January, and in our view certain segments hold good value at these levels.  Volatility generated by media hype tends to be short lived.  Ironically, the negative attention received by municipal debt markets of late will likely prove to be the biggest catalyst for fundamental improvement.  When have so many politicians (at all levels of government) displayed so much fiscal concern?  The spotlight is on municipal and state debt issues—and they know it.

From a value perspective, we look for the same durations and credit weightings in the municipal market as we do in the taxable market.

We continue to view emerging markets bonds as very attractive.  Of late, we have gravitated more toward local currency issues (vs. a prior equal weight with US denominated).


  • In January we wrote; “We believe we are once again in a bull-market for crude oil…it may be wise to consider rebalancing commodity allocations into oil at this time”.

At the time, oil was trading at $91/barrell.  Oil is up almost 20% since January, however no one (including us) was forecasting the Tunisian uprising would affect an overthrow in Egypt, civil war (with US involvement) in Libya, and further violence across North Africa and the Middle East.

We continue to look at the fundamentals of global energy consumption rather than the supply bottleneck that is the Gulf States and surrounding region.  We are not experts in the geopolitical tensions in the region, but we suspect there exists a ~$10 premium in the current price of oil as a result.  That said, we remain bullish on oil for fundamental reasons, and where appropriate we have expanded our commodity allocations to include Brent crude and US Gasoline futures ETFs.

  • Precious Metals:  we continue to hold meaningful allocations to Gold and especially Silver.  In many cases, we have recommended removing some profits (which generally have been considerable) in our rebalancing efforts into oil in Dec ’10, Jan ’11.  We continue to believe these holdings are an important component in efforts to balance portfolio risk in a rising interest rate environment.
  • Base metals round out our basic commodity allocation model, and to-date the broad index (Deutsche Bank Commodity Index, Base Metals Sub-index) is relatively flat.  Internally, this index is driven largely by the price of copper and aluminum, which are both “hyper-sensitive” to short-term economic data (as well as rumors of “hoarding”).
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January 2011 Outlook

CCR Wealth Management greets the New Year with more sanguine market and economic reflections for our clients’ consideration—at last!  We view the confluence of several events over the last few months as constructive in nurturing an anemic US economic growth rate to more robust recovery in the next 12 to 24 months.

1)  Quantitative easing announced by Ben Bernanke in September, begun in earnest in November, and scheduled to continue through the spring of 2011, will buy approximately $600 billion in US Treasuries in an effort to maintain the current low-interest rate environment.  This is the second-round of this program (hence the “QE2” moniker), and while legitimate questions arise with regard to its effect on the Dollar, we trace the most recent market optimism to the announcement of QE2 shortly after Labor Day.  Given the forward-looking nature of equity markets, we’re more impressed with the expectations of growth this policy has engendered than the actual (quantifiable) results achieved from QE1.

2) Election Day 2010 has returned us to a divided government.  Historically, the markets have tended to view checks on singular political agendas positively.  We see neither the resurgence of the Republican party (or policies), nor the decline of the Democratic party (or policies) as specific reasons for optimism.  We do, however, regard Washington “gridlock” much more positively than most political punditry does.  As we pointed out in our November Outlook—the greatest bull market in history was likely helped by so-called gridlock; affording decision makers a modicum of policy visibility which they can adapt to.

3) Fiscal compromise—born out of the 2010 election cycle—gives this rally legs, in our opinion.  We’ve alluded to the expiration of the Bush-era tax-cuts more than once in our written communications as a point of some concern—or a potential catalyst for further market advancement.  It appears the latter scenario has taken root (at the eleventh hour!), and a significant tax-hike is one less item for investors to be concerned about in the near-term.

There are of course many potential hazards ahead in 2011—a stubbornly elusive housing recovery, a stubbornly high unemployment rate, potential inflation, inflation in Emerging Markets, and continuing confidence erosion in the European economic zone.  As always, we will endeavor to navigate this turbulence through diversification strategies.

One cautionary theme from 2010 which we bring forward to 2011 pertains to rising market interest rates—and their impact on the bond market.  We have more to say on this in the Fixed Income section of this Outlook.


  • Our increased confidence in US economic growth also translates into a reduced expectation of a double-dip recession.  We still believe we are in the early part of the economic cycle and reiterate our recommendation that clients ensure a meaningful allocation to small-cap equities—generally the best performers in this environment.
  • CCR Wealth Management’s investment models continue to maintain parity between growth and value equity allocations.  While the status of the current economic cycle generally bodes well for growth stocks (and particularly B2B technology companies), we also expect a comparatively positive environment for energy stocks—which are generally found on the “value” side of the ledger.
  • We continue to recommend a “baseline” weighting in diversified emerging markets equities of at least 16% of the total equity allocation.  We note that while emerging markets equities “paused” their advance in the 4th quarter this year, the MSCI Emerging Markets Index still outpaces the S&P 500 for 2010—and far-outpaces US and other developed markets over the long term.

We continue to have confidence this dynamic will persist—and we also believe we are witnessing the transition from largely export-driven economies to markets where consumption has an increasingly important impact not only on domestic growth—but internationally.  As an example; in 2011 it is quite possible we could see Germany’s exports to China equal their trade with France!


The Investment Committee at CCR Wealth Management sees the current interest rate and bond yield environment as perhaps one of the biggest challenges we face in 2011.  Of course the issue is never whether to own bonds or not (we do not apply absolutes to any asset class)—but how to manage an asset class that most certainly is due for a decline in value?

  • As we began, we are more optimistic in higher economic growth rates in the next two years.  While evidence may not present itself in the very near term—it most likely will drive bond prices lower (and interest rates higher) when it does.  Throughout 2010, our communication to clients regarding bond allocations has consistently stressed moving asset weightings “down the credit curve”, which primarily has entailed selling or reducing Treasury, government-backed, and higher credit rating bonds in favor of diversification into high-yield and emerging market bonds.  We continue to recommend this strategy.

Our expectation is that while money leaving low-paying bonds will have a broad-based effect in the short term (all boats dropping lower as the tide goes out) we feel strongly that this money will not necessarily be leaving the bond market, but will find its way into higher yielding bonds (often economically sensitive), finding both value and opportunity as credit spreads tighten.  Again, we see these opportunities in the low-grade corporate, emerging market (particularly local-currency based), and high-yield municipal bond markets.  Higher coupons should serve to offset some of the expected volatility.

Additional strategies being employed (where appropriate) to offset a rising interest rate environment:

  • Addition of Floating Rate funds:       These funds invest in the generally un-rated very short-term debt of corporations.  Because the debt continually is coming due and being rolled-over, interest rates (and the fund’s distribution) generally reflect the current rate environment, and will go up as the rate trend rises.
  • Inverse ETF’s:             In some instances it may be appropriate to offset higher interest rate trends with ETFs (index funds) that track major bond indexes in reverse.  For example, an ETF that goes up in price in mirror image to the daily downward move in the 20 year Treasury index can offset the reduction in bond prices within a portfolio.

We use this strategy sparingly, and always in conjunction with the others mentioned above. 


  • We believe we are once again in a bull market for crude oil.  We are echoing statements made here almost 12 months ago, but oil then stumbled in the first half of 2010 along with US and European economic data.  Currently at $91/barrel, it would seem the crude oil futures market also predicts an economic pick-up on a global scale.

It may be wise to consider rebalancing commodity allocations into oil at this time, as many gold and silver positions have advanced into triple digit returns over the preceding 12 to 18 months.

  • Along with oil, base metals (primarily copper and aluminum) continue to advance apace.  As with oil, these commodities are economically sensitive (in addition to being Dollar-sensitive), and may see higher prices ahead as things improve.  Rebalancing into base metals from highly-appreciated precious metals positions may make sense.
  • Precious metals (Gold and Silver) have shown spectacular returns over the last 12 months, with our preferred gold holding nearing 27% (at this writing), and our preferred silver holding nearing 73% over the same period!

Unlike other commodities, silver, and especially gold have limited industrial application, though they have historically represented special reserves of value by themselves.  We are thinking aloud here—nothing more—but we see profit-taking opportunity as interest rates rise, and investors become motivated more by improving economic fundamentals.  Neither silver nor gold pay a dividend, of course.