Tuesday, June 29, 2010


I spoke with senior portfolio analyst, Carl Noble, this morning and he informed me that we are moving portfolio trader, Tim Mascari, to “Defcon 2.” Defcon is a term usually used to describe the readiness condition of the U.S. armed forces, and getting to Defcon 2 is a very rare occurrence (Defcon 2 is the highest confirmed level ever reached). For us, this morning’s news that China’s economic growth forecasts are being revised downward has moved the S&P 500 futures lower, indicating that the stock market will open lower today. As the market (once again) drifts down to our stop-loss point of 1,040 on the S&P, we are (once again) spending significant time analyzing what moves to make in order to have the portfolio properly reflect our view of market risks and possible rewards. Having Tim at Defcon 2 means we are completely ready to execute transactions across our many managed accounts if necessary.

In yesterday’s investment team meeting we noted that we have several choices in terms of how to marginally reduce portfolio risk and volatility if we hit the stop. One choice would be to significantly reduce our U.S. equity holdings but keep some very high octane industry sectors that should be the market leaders if we get a bounce off of the lows. Another choice is to significantly restructure the risk in the fixed income side of our portfolios and make a much larger bet on duration versus credit. Basically, that means that we would sell corporate bonds and buy U.S. Treasury bonds. Notably, this morning the U.S. Ten Year Treasury is trading to yield of less then 3%. This once again reinforces my belief that our ability to do this job is often constrained by our lack of imagination. It‘s pretty amazing to see the yield fall this far. Back to Monday’s conversation, we decided to reduce our equity holdings by picking and choosing targeted securities among the cyclical sectors of the portfolio without completely restructuring our U.S. positions. This seems appropriate as, at least for us, the jury is still out regarding how slow the economy will be in the second half of the year. If this is a precursor to a typical mid-cycle correction (a term you are going to be hearing a lot more about), then we shouldn’t get too far out of the market.

The last agenda item yesterday was to discuss the themes for our end of quarter market review. Surprisingly, the time has passed and we are already at the end of the calendar quarter. The guys in the Pit will do their usual excellent job pulling it together, and I don’t want to give it away, but I can say I was happy with our portfolio results for the last quarter. One of the inputs to our asset allocation decisions is how our portfolios are “working” in the current market environment. Unofficially, the numbers appear to be confirming what we already knew, which is that portfolio correlations have been very low, which means that downside volatility has been contained. I’m guessing Pinnacle Moderate portfolios only caught about 25% of the second quarter market decline. That news has an impact on the changes we will make to asset allocation if we hit our stop. I’m very comfortable that risk is being properly managed here.