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Tactical Update

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As we’ve been reporting, the economic data has been showing weak performance.  But, the market hasn’t seemed to mind.  QE is in high gear.  It is supporting asset prices as the over-leveraged sectors of the economy heal themselves.  The banking and household sector received bailouts and a slow healing process puts them in a better place today.  The government sector is currently stepping away from their supporting role, perhaps a path to get their own fiscal house in order.  But, the market started trending down in the middle of last month.  What gives?  

The goal for the Fed and the economy is to provide support, undergo structural repairs and then slowly remove the support.  The past month has been filled with speculation of when the Fed will begin tapering off bond buying, with an eye toward the day when markets again determine the cost of capital.  This has sent interest rates higher, enter volatility.  Yes, the unwinding of Fed extraordinary policy results in a re-pricing of assets and risk.  What does it look like if the gravy train ceases to exist?

10 year Treasury rates have jumped from 1.65% to 2.15%.

The stock market dropped from 1675 to 1607.

The debate begins.  Is the economy really healed?  Will it function safely without outside support?  Even with a healthy economy, will the market go down as the Fed removes accommodation?  What is the real required return for investors?  What do others think?

Joe, Jeff and I have been debating these questions.  And the debate became acute as the market dropped toward important technical support on Wednesday, following a disappoint ADP employment release and the release of the Fed Beige Book.  Thursday, support levels held, following a fairly positive initial unemployment claims number, tame international data and an indication of overly bearish sentiment from the AAII.  Friday’s employment number was perhaps the perfect number for markets.  Too few jobs would indicate a very poor economy.  Too many jobs might compel the Fed to remove stimulus sooner and perhaps more quickly.  175,000 new jobs, slightly above consensus, and a slightly lower revision of last months number. Ahh, just right, the market rallied over 1.25%.

The employment number allayed some fears and the market rallied.  Removal of the Fed’s support is in sight, but it should be orderly.  The economy is tepid.  I concur, for now, and we, thus, removed or pared our volatility position and added a few stocks from our watch list in our equity strategy.

World Allocation

On Wednesday, sell UNL.  This is a position that has a small gain. We have not received the follow through we anticipated and it is an expensive vehicle.

On Friday, sell VXX.  This is a fairly expensive downside insurance policy.  We have this moderate strategy positioned fairly conservatively already and, following Friday’s employment data, felt no need for the insurance at this time.

Global Opportunities

Friday, pare 1/2 of the VXX position.  Add Aegon, Sony and Leap Frog.

Aegon–A Dutch diversified insurance company deriving 70% of revenue from its US Transamerica brand.  Price/Book on this company is .3.  They are selling non-core businesses and have reduced their leverage 35% since taking a bailout from the Dutch government.  With only 5% portfolio exposure to the Piigs, we think this company has reformed and gains will emerge as European fears continue to slowly subside.

Sony–a very cheap large cap value sock.  Most think of Sony as an electronics company, but it is much more.  Sony is essentially a comprehensive technology solutions company and entertainment conglomerate.  Yes, currency devaluation can make their TV’s, games and medical devices more competitive in the marketplace.  But the real value may be in the structural and cultural reforms that we hope follow.  The idea is that there is massive value locked up inside companies like Sony and the sum of the parts is worth more the whole.  Trading at only 5x forward earnings expectations, we feel the return potential here is well worth the risk.

Leap Frog–A small cap company that is a technology and education solution for early childhood learning.  Tablets, readers, apps and toys for kids, all geared toward supplementing learning.  We feel there is a mandate for this type of product in the marketplace.  Leap Frog has an established brand.  Margins have returned, revenue is growing and there is room to lever the balance sheet and take advantage of the momentum.

We’re watching, so you don’t have to.

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For information on Alhambra Investment Partners’ money management services and global portfolio approach, Douglas R. Terry, CFA is reachable at: dterry@alhambrapartners.com

Disclaimer: The information, data, analyses and opinions contained herein (1) include the confidential and proprietary information of Alhambra Investment Partners LLC, do not constitute investment advice offered by Alhambra,  are provided solely for informational purposes and therefore are not an offer to buy or sell a security, and are not warranted to be correct, complete or accurate. Except as otherwise required by law, Alhambra shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, this information, data, analyses or opinions or their use.


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