Financial Market in Turmoil - Again

Financial Markets are moving so fast nowadays it is not surprising for disillusion to set in among even the most seasoned of observers.  When dealing with mutual funds only, this pace is becoming hazardous on many levels, especially the reaction and preparation time of bringing portfolios in line with moving markets.

What's Happening To Markets?
If you believe the talking heads, it's all about Europe, Greece and now Italy that are scaring away punters.  Pardon me for sounding terribly naive, but was it not to be expected that after a run up of nearly 20% in many markets profit taking would set in?

There may well be a different dimension to the story: America's super financial institutions are on a war path to drive yields up in Italy now, with the same ferocity as they have done with Greek bonds, Portugal, Ireland, Spain and even France. Why only those and NOT the UK, which in % terms of GDP has a much larger debt than Italy?

Let's look at a fictitious large US finance house, 'Saxy Silverwoman' or SSW for short.  It has a not so fictitious list of 10 pages in google, outlining the definitely not fictitious fines it had to pay in recent months for mis-selling, misrepresenting, on top of losses due to bankruptcy of cousin MF Global (whose boss will probably now try to get back to his old position in SSW, if he does not end up in jail instead).

Suppose you had been the fly on the wall in the offices of SSW when the latest news broke of yet another fine of $550 million to pay. "Where can we go and get that kind of money, pronto?" from the board room desperation screams.

So they decide to go the market, - as they always do, using their skills and tools and achieve their objective, as you can see from the chart on the right! The fact that they indavertendly set up a bull trap for many ordinary punters is just part of the 'game', I suppose.

Greece
There is another little story, hardly worth telling may be. It could fall into the category 'serendipity', or something: Greece is facing existential fears at present that probably very few can fathom.  It looks as though their old gods have lost their skills.

Then there is this Japanese company being shoved into the limelight, - Olympus, living with fraud and corruption for many years.  Just now - having been found out, they are facing existential fears of similar magnitude, caused by pretty much the same sort human short comings.  Olympus, the mountain, is the legendary residence of Zeus and his Deities.  If even Olympus is in trouble, what hope is left for the country?  And yet, attention temporarily shifts to Italy,  - may be it dawned on the strategists that Greece is hardly 'BIG' enough for Europe to stumble and fall... Or maybe it's just the Euro that is being targeted? Conspiracies abound...

Pro-ActiveManagement Activity
There are of course many who dispute that we, advisors to our esteemed investors, can do any good with mutual funds in such a phase.  I beg to differ.  This is how we responded to the twist and turns in recent months:

1. we switched to safety - 100% cash and similar on August 5th, 2011.  Markets turned down some 20% after that.
2. September 21th, we bought equity funds across global regions using 25% of the portfolio, with special emphasis on China, Korea, Germany, tech stocks and US small caps.  The special focus resulted in double digit returns as of Friday last week. 
3. On September 24th, we purchased gold future funds, about 12-18% of portfolio value, depending on the risk profile. Gold prices since then appreciated from about USD1600 to about USD1800, and in fund terms we garnered some 7%.
4. October 13th, we used another 25% tranche of the portfolio to increase our exposure in equities.  
5. November 9th, we sold off all gold funds., gold prices have fallen ever since.
6. November 10th, we sold off almost all equity funds, markets are expected to continue to see volatility for a while.
7. According to Tuesday prices, portfolios achieved some 2.5% (cautious risk) to 4% (high risk) in less than a month using only 50% of normal allocation in equity and some 15% in gold futures.  

The result: portfolios are only a few % points below their all time highs in June 2011, while markets are some 20% below their peak. I will be updating the model portfolio charts in a few days when the trades have completed (7-day turnaround).

Keep at it...