Herb Morgan (Efficient Market Advisors, LLC) submits: Waiting for my firm to make tactical changes to its investment allocations is a lot like waiting for Sus Scrofa to sprout wings and fly. Actually, I tend to make slight tactical model changes three or for times per year, while airborne swine have yet to be spotted during this market cycle.
Lehman TIPs Bond Fund (TIP) has been a staple component of our portfolios for nearly two years. I feel the CPI delta is decelerating and that Fed actions will have their intended effect, albeit a lagged one. Somebody much wiser than I once mused, “Don’t Fight the Fed” and with that advice in mind, I intend to make the necessary portfolio adjustments.
Additionally, the ten year maturity of TIP is at the far end of my comfort area given the state of the yield curve. Better value vs. risk exists at the short end of the curve causing us to increase our weighting in Lehman 1-3 Year Treasury Bond Fund (SHY). Not only does SHY possess lower interest rate risk characteristics and offer a juicy coupon, it also hints at the potential for capital appreciation when Bernanke & Company decide the economy has slowed too much, and inflation is tamed.
The run in commodities has been solid since the launch of the Deutsche Bank Commodity Index Tracking Fund (DBC) but unfortunately the launch was late in the cycle. (Consistent with traditional mutual industry fund product launches.) While we still maintain our position here, we have trimmed our holdings.
Lastly, I have increased our model weighting in S&P500 Depository Receipts (SPY). I do this despite the fact that the economy is slowing, because I do not believe a slowing economy necessarily dictates declining stock prices. In fact, the recent pullback in equity prices has served as a leading indicator of the slowdown. The deceleration in economic activity, however, comes at a time when valuations for large cap equities remain very low in both absolute and relative (vs. 10 yr treasury yield) terms. I stand by my Dow 15,000 call published on this site 11/30/2005.
Broadly speaking, we publish our asset allocation models on the Efficient Market Advisors website. However, we do not show our exact weightings in specific ETFs in this or any other public forum. Information relating to specific holdings is reserved for clients of our firm.