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Roger Nusbaum is an Arizona-based financial advisor at Your Source Financial who builds and manages client portfolios using a mix of individual stocks and ETFs. Roger writes a popular blog, which focuses on 'top down' asset allocation. Roger is particularly focused on exchange-traded funds, risk management in portfolio building and investing in international markets.

As a follow-up to his portfolio positioning interview at the start of the year, Seeking Alpha's Jonathan Liss recently spoke with Mr. Nusbaum to find out how he planned to position clients in the second quarter.

Seeking Alpha (SA): Welcome back Roger. This has been an extremely eventful quarter with many geopolitical events driving global markets. Before we get down to specifics, how would you characterize your general approach to portfolio building and asset allocation strategies in your client accounts?

Roger Nusbaum (RN): We build diversified stock and bond portfolios from the top down using mostly individual issues as well as some funds such as ETFs. We focus on trying to add value over the entire stock market cycle, attempting to avoid the full brunt of major sell-offs by taking defensive action if the S&P 500 breaches its 200 day moving average. We focus heavily on foreign exposure as the macro picture for the US market has been eroding slowly for quite a few years now.

SA: Where would you plot U.S. equities as an asset class on the risk curve right now?

RN: I think I would frame my answer a little differently versus the question. The fundamentals in the US are not good and I cannot envision how the Fed’s targeting of asset prices and equity markets won’t end up causing more pain. That said, right here and now, for whatever reason, these things don’t matter to the market. It is important to realize that the market seems inclined to go higher for some period of time and as malignant as the environment might be, the right trade is more long than not with some sort of defensive trigger point in place if there ever turns out to be a consequence for what the Fed has been doing. In theory, there could be no consequence but planning for a theoretical one is very important.

SA: In the last interview we did before the start of the new year, you had mentioned that you had gradually been upping your foreign and emerging equities exposure in client accounts, "from 30% 5 or 6 years ago to upwards of 40%." Did that trend continue during Q1?

RN: We did one trade in the first quarter, adding Ecopetrol (EC) which is the big oil company in Colombia. For some clients this was a swap out of part of a position in DKA in order to increase volatility and for other clients it was a straight addition. We will continue to add more foreign exposure in small increments.

SA: In the wake of the triple disaster there, are Japanese equities undervalued right now?

RN: We want no part of Japan, period. I’ve never owned Japan for clients and have no plans to. I don’t believe they can right their ship and they have a serious demographic problem. Whatever snapback there might be, I am quite certain we can get the same big move up from another part of the market where the fundamentals are far more favorable. I don’t want to put client money into something where I think the fundies stink.

SA: The situation in Libya and general unrest we've seen throughout the Middle East during the first quarter demonstrate the inherent risks involved in frontier and emerging market investing. Have you been underweighting these markets as a result of the regional situation or have you put more money to work in client portfolios on the assumption that the push towards democracy will ultimately be beneficial for these markets?

RN: The closest geographic exposure we have is Israel which not surprisingly has fared relatively well. We have exposure in Latin America for a lot of our emerging markets exposure and a little Asia by virtue of a couple of thematic ETFs. The MENA country I would be most interested in would be Qatar for the natural gas [exposure], which seems to be faring well also, but the country is not easily accessible and I’m not sure if we’ll ever be in there. If we increase emerging exposure I think it might be South Africa or India, with a greater probability of adding South Africa.

SA: Oil - how high is it heading and how are you planning to play? Will rising crude prices significantly impede the economic recovery, or will it not be as bad as feared?

RN: I’m not sure how high it will go but as mentioned above we increased our volatility and our allocation (depending on the client) in the sector. Over the last year or so we’ve done a couple of trades to increase our volatility in the sector in the expectation of better things for the price of oil. A rise big enough to hurt the U.S. economy is plausible and WTI does not need to go to $150 for that to happen. This possibility contributes to our slowly decreasing exposure to U.S. equities.

SA: Moving to another commodity that had a big quarter, silver has been on a tear lately. Have you had any exposure in client portfolios? Are you expecting mean reversion to start creeping in?

RN: We don’t have exposure to silver and in hindsight maybe we should have, as it has certainly done well. I’m not a huge believer in mean reversion, not that it can’t happen of course, but given that silver has industrial uses that gold does not, it can probably continue to do well as long as the market continues to remain positive on the economy. Whenever the economy starts to slow down I would expect gold to outperform then, maybe sooner.

SA: Any direct exposure to commodities? What percent allocation to commodities do you think is appropriate in this current, possibly risky environment for equities?

RN: We only have gold right now through GLD targeted at 2-3% of the portfolio depending on the client. We've had more before via DBA. Generally I don't want more than 5%. I view commodities (as opposed to equities in commodity businesses) as diversifiers for an equity based portfolio. Over long periods of time I still believe equities are the way to go (when the correct country is selected or the correct segment is avoided) and so we want to diversify our equity exposure with diversifiers like commodities and absolute return, both in moderation. We do not want to have a portfolio full of diversifiers that we hedge with a little bit of equity exposure.

SA: How are you positioning with regard to the situation in the EU? Do "Big Europe" equities continue to remain a bad bet right now, as you had stated last time we spoke? How much are we in the U.S. at risk of contagion from the situation in the eurozone?

RN: Similar to Japan, we want no part of Big Western Europe and have no exposure to the [fiscal] crisis on the continent. The closest we get is Norway, Sweden, Denmark, Switzerland and the U.K.; we own one stock from each country. I’d be willing to add Finland too despite being part of the euro, but have not done so.

SA: Moving over to fixed income, you mentioned you were avoiding muni bonds and longer dated maturities in general in your last interview. Is that still the case? Do you feel the fundamental case for muni bonds has changed at all, or that you may have overstated the concerns three months ago when we last spoke?

RN: Anyone taking my comments as pertaining to three months, then yes, I overstated the concerns or was just just plain wrong. We don’t own munis because just about all of the states have budget deficits, and almost as many have underfunded pensions. Combine that with the likelihood of lower property taxes for the counties, lower sales tax collected and lower income tax collected (people who are out of work pay less tax and spend less money) and the fundamental backdrop is very unattractive. This may end in absolute calamity, or there could be no consequences whatsoever but I would not confuse no consequences with no risk taken. The risks are obvious and so I choose to avoid them, but of course, it may never matter.

SA: Name one investment that worked out particularly well during Q1 and one that did not.

RN: Our best performer through March 25 was Suncor (SU) and our worst performer was Nike (NKE) which got hit hard when it announced earnings.

SA: And you're still holding Nike?

RN: We still own Nike. Longer term I believe they will continue to benefit from the aspirational purchase in emerging markets.

Disclosure: Roger Nusbaum holds EC, DKA, GLD, SU and NKE in client accounts.

Source: Nusbaum Positions for Q2: Bullish on Energy Producers, Avoiding Japan, EU, Munis