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P.O. Box 2049
Wimberley, TX 78676
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Arrowhead Asset Management investment Update (August 21, 2016)

After nearly a decade of financial crisis-era central bank monetary policy, coupled with a political inaction austerity mindset across the developed markets, we have witnessed underwhelming economic performance the world over.

And yet amid underwhelming economic growth and frustrating central-bank action, stock prices (at least in the US) are at record highs and bond yields are at record lows. To many in the financial markets, none of this makes sense.

In a note to clients out over the weekend, the head of Citibank’s global credit strategy outlined seven reasons markets are "dysfunctional." Yet all seven of the reasons comes down to global central bank monetary policy.

Central Bank Lives Matter

Monetary policy has flattened the dividend markets and forced investors to seek “boring” growth. As a result, everyone is making the same investments because the market's dominant force — central banks — are all going the same way: looser credit, low interest rates and a focus on stock market performance rather than inflation and market diversity.

This has made financial markets, which are by historical measures “multifaceted”, one-sided affairs.

A properly functioning market is a heterogeneous one

A diverse market is one where some investors are top-down (macro-economic), yet others are bottom-up (individual analysis); some invest long-term, others invest short-term; some look at fundamentals, others look at technical or quantitative analysis. Such market diversity makes for a two-way, continuous market.

On the other hand, a market where all investors are forced to look at the same few factors will inevitably be dysfunctional – grinding tighter today, yet prone to sudden reversals tomorrow when the inflows dry up. And yet anyone trying to hedge against such an eventuality inevitably underperforms.

Yet despite calls from investing luminaries, markets are showing signs of being out of whack. It seems only central bankers are okay with the current state of play. This, however, might be changing. There do seem to be some cracks appearing.

Central bank liquidity no longer works like it used to.

Most doctors – and even patients – know that when a course of drugs seems not to be working, you don’t simply keep on doubling the dosage. This applies particularly when the patient, if no longer as sprightly as they used to be, is nevertheless doing more or less fine. The side effects of such a course are more likely to harm than to cure. Yet this is what central banks now seem intent on doing.

In other words, global central banks seem to have too much invested in their own neoliberal economic models to consider adapting them to modern conditions.

If all goes well, this should produce more of the same: more hand-wringing over a stagnating global economy and a continuation of a homogeneous investment environment.

The problem, of course, is that forecasts for more market stagnation and more bull-headedness from central banks that think pumping markets with easy credit and low interest rates, is not the best environment to make money.

Bill Gross, bond investor guru of the past thirty years, has been recently advocating that investors view short-term bond income as a mindset of getting a return of capital rather than a return on capital. He believes more cash is a viable option inside of a sensible investment portfolio.

Our Investment Portfolios

In the last few weeks, I have been adding new individual stocks to an IRA or brokerage portfolio with over $150,000 in assets (this does not apply to our ORP/403b pension portfolios, which do not allow individual stock positions). And regarding stocks, any portfolio with less than $150K would assume too much risk with individual stocks.

That said, with stock indexes and mutual fund equivalents (ETFs) recently again hitting all time highs (last seen in 2007), there are now better opportunities investing in some individual stocks. However, in most cases we will not own more than 25% of a total portfolio in individual stocks. Nor will I continue to hold any new individual stock position if it starts to break down and shows losses. In other words, I will use tight "stop loss" triggers to protect our asset base from losses.

Finally, if you are interested in talking with me re: any Update comments over the telephone (I am working in Michigan until after Labor Day), please call me at 512-751-7363 (or email me) and I will gladly discuss your concerns or questions with you. Thank you.

Below are our current holdings and related percentages of our total account values as of today, July 27, 2016:

Fidelity IRA / Brokerage Portfolio holdings

S&P 500 Equal Weight (RSP) 5%
Technology (XLK) 5%
Industrials (XLI) 5%
US Dividend Stock (SDY) 5%
HIgh Yield Bond (HYG) 5%
Bed Bath and Beyond (BBBY) 3%
Ecolabs (ECL) 3%
PayPal (PYPL) 3%Qorvo (QRVO) 3%
Red Hat (RHT) 3%
Tesla (TSLA) 3%
Whole Foods Market 3%
Unilever (UN) 3%
Money Market cash (50%)

Fidelity ORP/403b Portfolio holdings

Select Environmental Services fund 10%
Select Multimedia fund 10%
Select Software fund 10%
Contra Fund 10%
S&P 500 10%
Goverment Money Market fund 50%

Thank You.

Rocky Boschert and Anne Dobbs

 

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