May Market Review

WHAT WE DO

Dark Horse Wealth provides investment management services to individuals and businesses. We service IRA, 401 (k) and taxable accounts.

MARKET RECAP

  • Safety and income strategies paying off.
  • Boring old US Treasury bonds outperform.
  • The Dow Jones Industrial Average fell 6% in May.
  • Oil plunged $18 a barrel to end month at $86.
  • Gold fell 6% and copper fell 12% on the month.
  • Face IPO is considered a flop by market pundits.

AWAITING OPPORTUNITIES

Dark Horse Wealth (DHW) was able to mitigate the large declines in stocks and gold by positioning defensively in bonds, utility sector funds and other dividend paying stocks. Bonds rallied with the 10 year and 30 year US Treasury’s returning 2.5% and 5.5% respectively in the month of May. Staying heavily allocated in safe haven assets such as cash, gold and high quality bonds is strategy worth sticking with in short term.

Retail investors will not be able to stomach these types of losses. I expect to see them lower equity allocations even further in the coming weeks. This rush into safety then drives up the prices of bonds and pushes interest rates down. If you were positioned in bonds ahead of the recent stock market downturn you were well positioned to benefit from the recent “flight to safety”.

Eventually, this “flight to safety”, will lead to an opportunity to exchange some low yielding bonds exposure for the dividend yielding stocks.

DHW believes this is not a buy hold market! It’s a buy and row. It is our view that in this volatile market, investors need to understand how the old market dynamics are changing. Subsequently, asset allocations need to be reviewed frequently and tweaked occasionally. DHW likes to think of it as “semi-active management” style. In order for investors to be in this semi-active model they need to limit what they are paying in commissions and go with a fee-based adviser.

WHAT’S HAPPENING IN THIS CRAZY MARKET

The market is realizing that the balance sheet problems of banks in Greece, Spain, Portugal and perhaps Italy and France are far too big to be solved by the current emergency liquidity facilities in place in Europe. Saving the Euro would take a German bailout of the Spanish banking system, which is unlikely to happen. Capital is flowing out of these insolvent banks into supposed “safe heaven” currencies such as U.S. Dollars and Swiss Francs. Bank runs and talk of a possible breakup of the Euro are rampant.

US manufacturing, housing and employment data has softened in last couple months. The Federal Reserve is not yet in a position where they can implement another round of Quantitative Easing (money printing) to support the market. HOWEVER, the poor economic data combined with the possibility of banking crisis in Europe spilling over to US banks may force the Federal Reserve to ramp up the printing presses once again.

FOOD FOR THOUGHT

No one is smart enough to have control of the money tree (creation of money) because money is organic. Its value is determined by individuals collectively and not by governments. Currency on the other hand, is what governments say you can exchange for goods and services. The amount of faith in that currency determines the degree to which the currency shall be considered money.

WHAT HAPPENED WITH THE FACEBOOK IPO

It’s not all that complicated. First, you have a company “everyone” knows, change from a private company to a public company.  Next, increase the IPO price as well as the amounts of shares offered, and then sell them into a risk adverse market.

Remember, the stock market is value discovery mechanism. Facebook has strong brand recognition but may not have strong enough profits to justify the $38 IPO price. The market looked at the above facts and is now merely establishing the proper risk versus reward price. Facebook closed the month of May down 22%.

Conclusion

Caution is the order of the day. Investors should focus on liquidity, income and preservation of capital until this crisis in the European Union has passed. Remember, it is in crises such as these are where the value of your adviser is determined.

 

Disclaimer: This publication contains the current opinions of the manager and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Such opinions are subject to change without notice. This publication is distributed for education purposes only. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. Forecasts are based on propriety research and should not be interpreted as an offer or solicitation, nor the purchase or sale of any financial instrument. No part of this publication may be reproduced in any form, or referred to in any publication, without the express written permission of DARK HORSE WEALTH LLC