The following is a Sizemore Capital Management client memo and is intended for informational purposes only; it should not be viewed as a solicitation to buy or sell securities.
The following changes will be made to the Tactical ETF Portfolio:
Utilities Select SPDR (XLU) -10%
iShares MSCI Spain (EWP) +5%
Proshares UltraShort Gold (GLL) +5%
The Tactical ETF Portfolio allocation is now as follows:
Comments
It has been a rough summer for investors, but the Tactical ETF Portfolio has weathered the storm comparatively well. Our heavy allocation to steady dividend-paying stocks and to defensive sectors such as utilities, telecom, and health care took less damage that the overall market averages. During a panic-fueled rout—such as the one that followed Standard & Poor’s downgrade of the United States from AAA to AA+—you win by not losing.
Though it is always difficult to remain calm when surrounded by hysteria, it is much easier when you understand your portfolio holdings and are comfortable with the prices paid. Investors need not be scared when they are holding quality, conservatively-finance companies at reasonable prices. Volatility—even violent volatility like we saw in August—can be viewed as a buying opportunity.
The decline in stock prices that began in May could be finished—or not. Only time will tell. But the acute crisis phase following the debt ceiling and downgrade fiasco does appear to be over.
We initially moved the portfolio into its current defensive position—high concentrations in large, conservatively-financed, dividend-paying stocks—because we saw the bull market that started in March of 2009 maturing. After hitting bottom in March, virtually all risky assets rose in lockstep—all sizes and sectors of stocks, commodities and, in particular, gold. It was a rally in everything, and the more speculative and junky the better.
We believed that this “snap back” rally from the panic lows of 2009 would be replaced by a mature bull market that favored higher quality issues, and we positioned the portfolio accordingly in late 2010 and early 2011. It was the right thing to do.
Today, however, we believe the time is right to get more aggressive. Our allocation to utilities served us well during the crisis, but we now believe there are more attractive opportunities elsewhere—most notably in Spain, the epicenter of the European sovereign debt crisis. Spain is the cheapest major developed market in the world and is some to several world-class companies—including long-time Sizemore Investment Letter recommendation Telefónica (TEF). We have initiated a 5% position in the iShares MSCI Spain ETF and may increase the allocation if market conditions warrant.
We have also initiated short sell of gold via the Proshares UltraShort Gold Fund (GLL). The price of gold soared during the run-up to the S&P downgrade announcement, as investors were truly desperate to get into something “safe.” Gold rose from less than $1,500 per ounce to over $1,800 per ounce in a matter of weeks, and the most popular gold ETF, the Gold SPDR (GLD) came within a hair’s breadth of eclipsing the S&P 500 SPRD (SPY) becoming the largest ETF in the world by assets under management.
In a volatile commodity like gold, there are numerous opportunities to make short-term tactical trades, both long and short. We believe this is one of those opportunities.
Now with the markets settling down to something resembling normal, we expect the price of gold to fall, at least in the short term. We have had a negative view of gold for nearly a year now, though we know from experience it can be financial suicide to bet against an asset bubble—whether it be in tech stocks, Miami condos, or gold. For this reason, we are going to keep a close eye on this trade. Should gold rise above its recent all-time highs, we will close out the short position. Gold may be in an irrational bubble, but that doesn’t mean that the bubble has to burst today. On balance, we see downside of less than 10% and upside of 30% or more, making it a trade worth making.
Respectfully,
Charles Lewis Sizemore, CFA
