Time to choose between gravity and greed «

    Time to choose between gravity and greed

    By Eric St-Cyr

    I have the best job in the world; there is no doubt about it. I get paid to manage other people’s money. It is stressful and humbling. It can also be energizing, as there is no better feeling than being thanked by someone who we helped build a better future for.

    However, recently I have been worried about the direction of the markets. There is no worse feeling for me than the possibility of losing my client’s money. The crash of 2008/09 was difficult. Although, we were bearish in 2008 and our portfolios performed really well in comparison to the market, the fear of another major pullback forces me to use prudence. Sometimes this prudence is against my client’s will.

    In March, I came to the conclusion that the recent returns we enjoyed in the U.S. were soon coming to an end. The time had come to raise cash, and for our more aggressive investors, look at shorting the S&P 500 and the European markets. Obviously, sitting at my desk today on May 15, I was too early.

    The second thing I hate the most is being too early for a long enough time period that my clients start demanding better return. Nobody tells you you’re doing a fine job when you’re up 8% and the market is up 15%. How can I explain to them that this is much more than a numbers game? Sometimes we are better to make less and be patient than to aggressively go for the home run and lose money. Better to be wrong and safe than sorry. Over the long term, avoiding an important loss of capital is much more important than beating an old bull market. Remember, when the market drops by 50%, you need to make 100% returns to go back to square one.

    Despite the pressure from some of our clients, we haven’t changed our strategy. There is nothing worst than going against your fundamental views and your instinct. It will always come back to bite you. Patience is a virtue and we intend to be virtuous.

    Why I am bearish

    There are some positive signs out there. Weekly unemployment numbers are getting better and it seems that the real estate bottom has been hit and we are rebounding rapidly. However, pretty much anything else is showing us a picture of worst things to come:

    Purchasing managers index

    We are now flirting with the 50 mark and data coming out continues to disappoint. Remember that when PMI falls below 50 this indicates a contraction in the economy.

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    Bond-price action

    The 10-year Treasurys continue to drop and this with a rising stock market. What are bonds telling us?

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    Gasoline prices

    The price of gasoline in the U.S. is close to a historical high, so we expect that the consumer will soon reduce its discretionary spending, contracting the economy and sending stocks lower.