...As for last week’s strength in equities, and concurrent weakness in commodities, we recently discussed a scenario that went something like this. What if the European Central Bank [ECB] has to cut interest rates because its economy is slowing? That in turn causes the U.S. dollar to rally, which weakens crude oil, thereby giving the U.S economy another HUGE dose of adrenaline in addition to the Herculean government-sponsored economic stimulus programs. If so, it would not be unexpected to see a pretty decent rally in the major market indices.
“Will it happen?”, we asked ourselves. “Well, it’s no lead pipe cinch,” asked and answered, “but we think the odds are tipped in favor of such a pattern.” And that, ladies and gentlemen, is why we recommended rebalancing ALL of your long-held “stuff stock” positions (energy, timber, cement, base/precious-metals, etc.) late last year.
Such a strategy of selling partial positions should have allowed some long-term capital gains to accrue to the portfolio, cash positions to build, gotten the stuff-stock portfolio weightings back inline with original objectives, and given the “cushion” to ride out declines like we saw last week. Granted, that strategy has looked pretty foolish in 2008 until last week, but then we have a history of looking foolish at short/intermediate-term inflection points.
So what do we do? Well, tactically our two largest trading positions remain the ProShares Ultra S&P 500 (NYSEARCA:SSO) and 5.5% yielding ProShares Ultra Real Estate (NYSEARCA:URE). In the investment account we were happy to see General Electric (NYSE:GE) catch an upgrade from a major Wall Street firm with an attendant rally. Likewise, participants were given yet another chance to purchase Strong Buy rated Schering-Plough’s (SGP) convertible preferred “B” shares below $190 where they were yielding nearly 8% (terms should be checked before purchase).
We have also been recommending Microsoft (NASDAQ:MSFT) since our early-March institutional conference, where we heard the story from a particularly bright portfolio manager. That story can be obtained from last Monday’s written missive (March 17, 2008).