• Buffett doesn’t obsess over his wealth and purchasing power because he finds that many wealthy people end up being possessed by their possessions as opposed to possessing their possessions…..
• Investing is like baseball.  Wait for the right pitch….
• He’s successful if he has “one good idea per year”.
• The main mistake most investors make is trading on short-term news….
• He says the future of America is as bright as ever….

Via CBS:

“Warren Buffett is one of the richest men in the world. His company, Berkshire Hathaway, owns or has a stake in over 70 businesses such as Coca Cola, IBM, and American Express. But this is no ordinary billionaire. He’s giving 99 percent of his wealth to charity and he thinks rich people should pay higher taxes.

“Person to Person” take you to where Buffett’s mega deals are done. His private office in Omaha, Neb., is as unconventional as the man himself.

WARREN BUFFETT: Charlie, Lara — I’m glad to have you here at world headquarters. (LAUGHS)

CHARLIE ROSE: Why Omaha for you?

WARREN BUFFETT: Well, you know, I was born here. I’ve always been happy here. II’ve lived various other places — Washington D.C., New York. …It’s home. And I live five minutes from here. I’ve lived in the same house for 53 years. I’ve been in this building for 50 years. My car just automatically drives back and forth (LAUGHS). If I try to take it anyplace else, it won’t go.”

The full interview is here:

Source: CBS News

- The Greece bailout negotiations ground on again this week, although markets are displaying a certain amount of numbness to developments in Athens and Brussels. The central issue has been the passage of another round of austerity measures demanded by the IMF and EU as a condition of the next tranche of bailout payments. As Greece’s fiscal position has deteriorated and the Greek populace becomes more enraged, extracting another round of cuts has been incredibly contentious. Negotiations among the three main parties in Greece’s coalition government continued all week long, and on Friday the right-wing LAOS party withdrew its ministers from the government to protest the package. LAOS party leader Karatzaferis commented that “clearly Greece can’t and shouldn’t do without the European Union but it could do without the German boot.” The parliament will vote on the measures on Sunday, and next week the Eurogroup is expected to make a “final decision” on whether or not to release funds (keep in mind that deadlines such as these have often turned out to have very short shelf lives). In other news, Chinese data out this week were concerning. The January CPI report saw the first rise in official inflation levels in six months, while China’s imports and exports declined for the first time in two years in January. The ECB kept rates on hold at its policy meeting this week, and ECB President Draghi took pains to emphasize the success of the LTRO in helping avoid a credit crunch and that there is no stigma for banks taking LTRO funds ahead of the second operation on February 29. In the UK, the BoE increased its asset purchase target by £50B to protect the nascent UK economic recovery from the threat posed by the European debt crisis. In the US, state attorneys general finally agreed to a blanket €25B mortgage fraud settlement with big banks. For the week the DJIA lost 0.5%, the S&P 500 dropped 0.2%, and the NASDAQ slipped 0.1% (ending a five week streak of gains on the tech index), while the VIX volatility index rose 22%, its biggest weekly increase since November.

- Coca-Cola and PepsiCo both met expectations in Q4 reports, on somewhat subdued volume growth. The only real standout area for Coke’s business was China, where volumes grew 10% y/y. Shares of Pepsi suffered after the CEO also took the opportunity to reiterate that the company would not be spinning off its snacks business. Fast food giant Yum Brands kept its shares at lofty levels with another successful quarter, slightly exceeding consensus views. Yum executives noted that over half of the company’s operating profit is now generated in China as emerging markets continue to drive growth.

- Entertainment giant Disney topped profit expectations in its Q1 report, as margins at its profitable parks business continue to offset big revenue declines in the studio arm. Time Warner topped expectations and generated solid revenue growth. Sprint’s quarterly losses steepened after a few quarters of better performance, although executives insisted that FY12 would be the year Sprint returns to consistent profitability.

- Cisco continued its comeback with solid second quarter results. The firm beat expectations and its quarterly guidance was satisfactory. Executives even bragged that the guidance was conservative, and many competitors’ revenue growth outlook has been much flatter than Cisco’s. Tech darling Groupon offered its first quarterly report as a publically traded company, and the picture is not pretty. Groupon missed Q4 earnings targets citing the cost of foreign taxes, although its Q1 revenue guidance was stronger than expected.

- Global energy giants BP, Petrobras, and Total reported quarterly results this week. BP and Total had incremental profit gains, and BP also authorized a big dividend hike. Production was down to flat, with little improvement expected in FY12. Petrobras’s profit declined by more than half in the quarter and production in the quarter was a bit lower y/y.

- FX markets seemed to be coming down with a case of Greek crisis fatigue, as EUR/USD maintained a relatively narrow range despite the back-and-forth in Athens. The greenback softened midweek as optimism about a deal picked up, however the declines on Friday seemed much less steep than they could have been, given the delicate state of play within Greece’s governing coalition. Overall euro downside has been limited despite the Greece situation. The 1.3220 January high provided some stiff resistance before giving way mid-week. However the events of Friday pulled the pair back below 1.3220, to test as low as 1.3156.

- The yen maintained a soft tone throughout most of the week, aided by some continued verbal intervention by Japanese officials. Japan Fin Min Azumi reiterated that Japan was prepared to intervene in its currency when required and that the October round of solo FX intervention was successful in curbing JPY currency strength. The EUR/JPY pair hit 7-week highs above 103.00 while USD/JPY held above the 77 handle. The question remained whether corporate hedging would take advantage of the recent JPY weakness ahead of the fiscal year-end in March.

- In Switzerland, the SNB’s Jordan reiterated that the bank would defend the EUR/CHF floor at 1.20 with unlimited quantities of foreign currency purchases. He warned once again that the current CHF currency rate posed challenges for the economy but also said he expects the franc to weaken over time. EUR/CHF tested the 1.21 level for its highest level in two weeks.

- The Reserve Bank of Australia surprised markets by holding its cash target rate at 4.25%, rather than implementing the third straight 25bps cut that had been expected. Policymakers heeded hotter than expected core inflation in the most recent quarterly data as well as improved trade balance data for December that showed a 3-month high. The RBA also noted borrowing rates having declined to historic average levels and observed “slowing but robust” growth in China. AUD/USD hit 6-month highs above the $1.08 figure but pared its gains on Friday after the quarterly RBA policy statement reduced targets for H1 GDP and inflation in Australia.

- In China, consumer inflation data was also surprisingly more bullish. January CPI came in at a 3-month high 4.5% y/y against consensus 4.0%, rising for the first time in 6 months. The trade surplus also came in well above estimates of $10.4B at $27.3B – likewise a 6 month high. Analysts have attributed counter-trend data to the altered seasonality of the Lunar New Year (Jan in 2012 vs Feb in 2011), however any short term expectations for another reserve requirement ratio (RRR) cut by the PBoC are now likely to be pushed back.

Kicking someone while they are down may end up backfiring. And Greece is now definitely on its back and being kicked.

Reuters: Suspicious Eurogroup ministers gave Athens six days to prove its commitment by passing key legislation, finding an extra 325 million euros in savings, and providing assurances that the program will remain in force after the election.

Is this really about 325 million euros in savings? Is this worth the risks associated with the disastrous  euro exit by Greece?

By Thanassis Stavrakis, AP

The pedantic Eurozone leadership is not helping their cause with statements like these:

Reuters: German Finance Minister Wolfgang Schaeuble told conservative lawmakers on Friday that existing Greek reform pledges would not bring its debt down to levels that are considered sustainable…
…
“Schaeuble said the current plans would leave Greece short of the goal of cutting debt to 120 percent of GDP by 2020,” one conservative source said.

The Greek response was swift.

Bloomberg: “What has particularly bothered me is the humiliation of the country,” Karatzaferis, whose Laos party has 16 members in the 300-seat parliament, said in televised comments. “Clearly Greece can’t and shouldn’t do without the European Union but it could do without the German boot.”

Asking for additional concessions, beyond the draconian proposal on the table (pledge to sell assets such as ports, airport, state oil firm, cut minimum wage by 20%, consolidate pensions, cut “medicare”, implement labor reforms, etc.), is equivalent to squeezing blood out of stone at this stage. It’s also insulting to the Greek people. The Eurozone leadership is playing dangerous politics without an understanding or a will to admit the full repercussions of a Greek exit from the euro.

In such an event the bulk of the nation’s banks and corporations – all with euro liabilities – will  default. Food and fuel will become scarce with hunger and social unrest reaching proportions unseen in Europe for generations. This is not going to be a bunch of anarchists marching on the Greek parliament building – the bulk of the population will join the unrest.

The Greek people may actually direct their anger at the EU institutions instead of their historically irresponsible and corrupt governments that over the years brought the nation to its knees. If such events were isolated to Greece, it could potentially be manageable, given the size of that nation. But the anti-Eurozone and particularly anti-Germany fervor could easily spread to other Eurozone periphery countries. And that will definitely not be about the additional 325 million euros in the Greek budget.

I’ve discussed this in the past in some detail.  Commodities are nothing more than speculative bets.  Gold is not unique in this way.  When an investor seeks long-term capital appreciation they should always seek productive assets.  In essence, you want to bet on the ingenuity of man.  The French philosopher Volney wrote about this in his classic Empire of Ruins.  He called man’s innate desire to improve “natural law”.  He said:

“And what is the natural law?” replied the simple men. “If that law is sufficient, why has he given any other? If it is not sufficient, why did he make it imperfect?”

“His judgments are mysteries,” said the doctors, “and his justice is not like that of men.”

“If his justice,” replied the simple men, “is not like ours, by what rule are we to judge of it? And, moreover, why all these laws, and what is the object proposed by them?”

“To render you more happy,” replied a doctor, “by rendering you better and more virtuous. It is to teach man to enjoy his benefits, and not injure his fellows, that God has manifested himself by so many oracles and prodigies.”

Humans have this innate desire to improve, to innovate, to create, to build and to generally demand a better standard of living for ourselves.  This is a powerful desire.  So powerful that betting against it is practically a guaranteed losing bet.  When you bet on an unproductive asset you are essentially betting against human innovation.  In fact, you are essentially betting that living standards will generally stagnate or decline.

Buffett puts the current gold outlook into perspective with an excellent analogy:

“Today the world’s gold stock is about 170,000 metric tons. If all of this gold were melded together, it would form a cube of about 68 feet per side. (Picture it fitting comfortably within a baseball infield.) At $1,750 per ounce — gold’s price as I write this — its value would be about $9.6 trillion. Call this cube pile A.

Let’s now create a pile B costing an equal amount. For that, we could buy all U.S. cropland (400 million acres with output of about $200 billion annually), plus 16 Exxon Mobils (the world’s most profitable company, one earning more than $40 billion annually). After these purchases, we would have about $1 trillion left over for walking-around money (no sense feeling strapped after this buying binge). Can you imagine an investor with $9.6 trillion selecting pile A over pile B?

Beyond the staggering valuation given the existing stock of gold, current prices make today’s annual production of gold command about $160 billion. Buyers — whether jewelry and industrial users, frightened individuals, or speculators — must continually absorb this additional supply to merely maintain an equilibrium at present prices.

A century from now the 400 million acres of farmland will have produced staggering amounts of corn, wheat, cotton, and other crops — and will continue to produce that valuable bounty, whatever the currency may be. Exxon Mobil (XOM) will probably have delivered trillions of dollars in dividends to its owners and will also hold assets worth many more trillions (and, remember, you get 16 Exxons). The 170,000 tons of gold will be unchanged in size and still incapable of producing anything. You can fondle the cube, but it will not respond.”

Now, as a hedging device, the first two categories can function as excellent buffers.  Capital appreciation, innovation and increasing living standards are no guarantee in the short-term.  And the last 10 years have certainly proven this to be accurate.  But over the very long-term the trend in improving living standards due to ingenuity is a trend you cannot fight and should not fight.   After all, it is not the pile of rocks that produces great things, but the man/woman who uses the pile of rocks to build something, that does great things.

This all feeds into my work on Modern Monetary Realism, understanding our monetary system and understanding the world we should seek to leave for our children.  After all, we do not leave our children this mythical burden of debt that so many pundits constantly discuss.  Rather, we leave them a certain living standard.  And as a society, we should not seek to invest in rocks or promote activity that is unproductive.  We should seek to give our ancestors the ultimate gift – the gift of time through innovation and maximizing human ingenuity.  This is the true path to prosperity.  And while investments in unproductive assets might benefit man in the short-term, over the long-term the desire to innovate, be better and be more virtuous will always prove a more fruitful investment.

* Mr. Roche maintains a small position in gold and invests the majority of his long-term portfolio holdings in bets on human ingenuity.

The BSRI uses more than 30 quantitative variables to track sovereign  credit risk, complemented by qualitative insights from third-party sources. The index breaks down the data into four main categories that each count toward a country’s final BSRI score and ranking: Fiscal Space (40%), Willingness to Pay (30%), External Finance Position (20%) and Financial Sector Health (10%).

Fiscal Space includes metrics such as debt to GDP, the debt’s term structure, tax revenues and demographic trends such as dependency ratios. Willingness to Pay measures a government’s perceived effectiveness and stability as well as factors such as corruption. External Finance Position includes exposure to foreign currency debt and the state of the current account balance. Financial Sector Health gauges the strength of the banking system and the risk of credit bubbles. For complete descriptions, please see “Introducing the BlackRock Sovereign Risk Index.”

There’s a reason the EU settlement with Greece is taking two years to work out—–the necessary fiscal, monetary and economic measures are just too painful for both sides to bear.  And the alternative is a disorderly default that would be even worse. Today’s outline of an agreement among the various Greek political parties to accept some harsh austerity measures has been presented to the EU, which is meeting in Brussels tonight. EU officials have already indicated that there will be no final approval today, and we think the negotiations may still drag on until close to the March 20^th deadline for repayment of 14.5 Euros of coming due.  Although a settlement by that time is more likely than not, the results will further weaken an already deteriorating European economy, and ensure slow growth for years to come. With the global economic growth slowing down as well, the fragile U.S. recovery is also in jeopardy.

The Greek governing coalition had an exceedingly difficult time coming to an agreement as they were pulled in a tug of war from two different sides.  On the one hand they realized the necessity of getting the funds they needed to avoid default.  On the other hand they are facing elections within two months and have to ensure that their successors would not renege on the agreement that is certain to enrage the majority of the population that has already undergone major government spending cuts, layoffs, wage decreases and tax hikes.

For its part the EU wants assurances that Greece, which already failed to meet the conditions of its first bailout, will comply with this one.  One high official of the EU said “It’s up to the Greek government by concrete actions through legislation and other actions to convince its European partners that the second proposal can be made to work.”  Another stated that “We want to see real implementation of the measures needed by the Greek government and also full commitment of all leaders in Greece for further measures.”

Even after a final agreement is reached the Greek government may have trouble implementing its provisions.  The nation has already made sharp cuts in government spending, jobs and wages while increasing taxes.  All of this has devastated the economy.  The November unemployment rate was 20.9% and December production dived 11.3% from a year earlier.  Another dose of austerity can make this even worse and actually increase deficits rather than reducing them.  So even with a debt agreement in place, we probably have not seen the end of the problem.

While European markets generally have calmed down lately, we’ve seen this movie before.  Portuguese bond yields have soared and the economy has weakened significantly.  ECB bond buying has helped to lower yields on Spanish and Italian bonds, and, as a result, both nations have been able to place new debt. However, the calendar of upcoming financing remains quite heavy, and economic deterioration caused by austerity can cause rates to rise again.  Overall, much of Europe is either in a recession or about to enter one.  In this connection we note that the OECD leading indicator is below a year earlier, a condition that has always led to recession.

At the same time the global economy appears to be weakening. Chinese electric production in January was down 7.5% year-to-year.  Japan has entered a recession and its trade balance has turned negative.  Deteriorating economies in Europe, China and Japan means lower purchases of commodities, the key to growth for most emerging nations.

The U.S. will not be immune to the downward pressures.  In the weakening global environment, exports will drop.  Consumers have increased spending by reducing their savings rate as wages continue to stagnate.  Since the 2007 economic peak most of the increase in consumer disposable income (DPI) has come from higher transfer payments, while wages, as a percentage of DPI, has dropped off a cliff.  And unlike the period of 2003 to 2007, consumers cannot make up for the shortfall it by converting rising house prices to ready cash.  Corporate earnings, too, are becoming less positive.  Only 59% of companies exceeded their 4^th quarter estimates, the lowest since early 2008.  Last June year-to-year 1^st quarter earnings for 2012 were estimated to be up 12.7%.   Now the estimate is for an increase of only 1.9%.

All in all, both the U.S. and global economies are likely to encounter rough sledding in 2012, a factor not discounted at current stock market prices.

Staying on the subject of China’s economy, signs of a slowdown are now quite visible in vehicle sales. Auto sales are down almost 27% year-over-year and 7.6% quarter-over-quarter according to China Association of Automobile Manufacturers.

# of units and % YoY (Source: JPMorgan)

At least a portion of this decline is due to the gradual phasing out of tax breaks on car purchases implemented after the 08 crisis. In addition there is a seasonal impact of this year’s timing of Chinese New Year holidays that distorts the results. There are also some restrictions on auto purchases in several larger cities. Nevertheless the trend may be pointing to a pause in consumer spending and a potential slowdown in economic growth.

“The Association of American Railroads (AAR) today reported an increase in weekly rail traffic for the week ending February 4, 2012, with U.S. railroads originating 284,546 carloads, up 6.2 percent compared with the same week last year. Intermodal volume for the week totaled 232,590 trailers and containers, up 16.8 percent compared with the same week last year. Note that the comparison week five in 2011 was affected by significant winter weather events.

Sixteen of the 20 carload commodity groups posted increases compared with the same week in 2011, with metallic ores, up 63.2 percent; motor vehicles and equipment, up 42 percent, and petroleum products, up 40.5. The group showing a significant decrease in weekly traffic included grain, down 9.7 percent.

Weekly carload volume on Eastern railroads was up 3.1 percent compared with the same week last year. In the West, weekly carload volume was up 8.3 percent compared with the same week in 2011.

For the first five weeks of 2012, U.S. railroads reported cumulative volume of 1,429,346 carloads, up 1.3 percent from last year, and 1,110,227 trailers and containers, up 4.5 percent from last year.”

Bullish sentiment jumped to its highest level since January 13, 2011, in the latest AAII Sentiment Survey.

Bullish sentiment, expectations that stock prices will rise over the next six months, reached 51.6%. The 7.8-percentage-point increase drove optimism to an unusually high level, but not an extraordinarily high level. Bullish sentiment is now above its historical average of 39% for eight out of the past nine weeks.

Neutral sentiment, expectations that stock prices will stay essentially flat over the next six months, declined 2.9 percentage points to 28.2%. This is just the second time in six weeks that neutral sentiment has been below its historical average of 31%.

Bearish sentiment, expectations that stock prices will fall over the next six months, fell 4.9 percentage points to 20.2%. This the seventh time in the past eight weeks that bearish sentiment has been below its historical average of 30%.

Bullish sentiment is now more than one standard deviation above its historical average, placing it above the typical range that has been registered over the course of the survey. The difference between bullish and bearish sentiment (the bull-bear spread) is also unusually high at 31.5%, but not so high as to create caution that individual investors are too optimistic.

Driving the bullish sentiment is the belief that both the economy and corporate earnings are improving. Europe’s sovereign debt problems and slow domestic economic growth still concern many individual investors, however.

This week’s special question asked AAII members for their thoughts on Facebook’s initial public offering (IPO) and whether they will consider buying shares of the stock. The overwhelming majority of respondents said they wouldn’t invest in Facebook, especially during or right after the IPO. Many think there is already too much excitement for the offering.  Others were worried that the company is a fad or said that they didn’t fully understand the industry.

Here is a sampling of the responses:

• “I will pass. When so many people are excited, the best thing to do is turn away.”
• “Many are buying shares on the basis of pure speculation. At a P/E of 150, the prudent investor would wait.”
• “The IPO will be in great demand, so I would expect the initial trading to be characterized by irrational exuberance.”
• “I wouldn’t touch that IPO with a ten-foot pole.”
• “I will buy it. It’s Google (GOOG) all over, with no one knowing how they’ll make money yet the company will continue to grow.”

This week’s AAII Sentiment Survey results:

• Bullish: 51.6%, up 7.8 percentage points
• Neutral: 28.2%, down 2.9 percentage points
• Bearish: 20.2%, down 4.9 percentage points

Historical averages:

• Bullish: 39%
• Neutral: 31%
• Bearish: 30%

Individual investors are getting restless.  After a tumultuous 2011, which was racked with volatility, it is understandable that investors are somewhat skittish about plunging back into the markets today.  However, the rally that began in late December has continued almost unabated over the last several weeks and the lure to chase the market is getting hard for many individuals to resist.  But is this the time to jump back in?

Everyday I am bombarded with emails from individuals about various investing topics which I gladly answer each and every one of.   The questions are also a great contrarian indicator.  What do I mean by that?  Remember as investors our job is to effectively do the opposite of whatever everyone else is doing – if they are all selling, we want to be buying.   If they are all buying, we should gladly be selling to them.   That is how real money is made in the markets - “buy low and sell high”.   Yet, as we have discussed many times in the past, this is exactly the opposite of what individuals do.

As an example this is the email I received this morning:

“With the S&P having just formed a ‘golden cross’, an upbeat employment report last Friday, a compelling article by Michael A. Gayed on the MarketWatch site, StreetTalk on a buy signal, and even the Super Bowl Indicator all pointing to the next great bull market, isn’t time to go ‘all-in’ to stocks?”

The writer is correct – we are on multiple buy signals with our intermediate and longer term indicators that we follow.  However, the issue at the moment is not whether you should increase equity risk in portfolios – it is simply a function of when.  Risk is the key word in the last sentence.   Risk is a function of how much money you will lose if any action taken turns out to be wrong.  The goal of portfolio management is to reduce the negative impact to portfolios by limiting the amount of potential damage a wrong decision will make.

Currently there are plenty of risks that could derail the markets from a resurgence of the Eurozone crisis (Greece will likely default soon), weakening corporate earnings, a stalling of the economy or a resurgence of financial stress.   Any of these issues could cause a near term set back for investors.  However, even with those risks prevalent, with multiple buy signals in place we must adhere to the technical discipline that we follow and increasing equity risk in portfolios.  Worrying about the events that might happen are emotional biases and, when it comes to investing, emotions must be checked at the door.

With that bit of portfolio management diatribe let’s get back to the question at hand.  Is this the time to get in?  Probably not.

I have to qualify that statement somewhat because markets have a tendancy to go further in one direction than you can possibly imagine particularly when there is artifical intervention thrown into the mix.  However, as we showed in last weekend’s newsletterthe current buying stampede is very long in the tooth.   As we discussed, historically speaking, buying and selling stampedes generally last between 17 to 25 trading sessions.  With the current buying stampede, which has occurred on exceptionally light volume, running at more than 33 days currently – the only question really is just “when” will the market correct and by“how much“.

These periods, where the markets move relentlessly higher, work to draw investors off the sidelines.  Previously conservative investors that were concerned about protecting their principal finally “throw in the towel” as their emotional bias, stoked by the mainstream media bullish parade, overwhelmes their “greed” factor.  Of course, this is the action that consistently leads investors to “buy high” - only to turn around and panic sell during the next decline.

If we look at the market since the March 2009 market bottom we can see that with the Fed instituting QE 1 the markets lifted off into a strong initial rally.  Most investors were so badly beaten during the previous decline they paid no attention to our end of February 2009 newsletter entitled ”8 Reasons For A Bull Market”.   However, as the market gained steam, and the media was repleat with calls that the rally was leaving investors behind, the ”need” to get in rose sharply.   Investors began chasing every“trash” stock in the market ignoring the mounting risk.

The chart  shows the market compared to 2 and 3 standard deviations from the 60-day moving average.  The idea here is that market prices are like rubber bands and they can only move so far in one direction until they snap back in the other.   A move of 3 standard deviations from the 60-day moving average is an extreme push that generally corrects sooner rather than later.  Just like today, when the markets have historically hit these extreme levels – corrections occurred that generally to the markets back to the 60 dma.  This back and forth action gave investors multiple opportunities to buy dips and increase equity risk exposure in portfolios during the ensuing rally.

However, even those were not the last chances to get in.  If market participants had been patient, and waited as QE-1 expired, the markets corrected by nearly 20% giving investors the opportunity to buy into the market at levels not seen in the previous twelve months.  However, as is to be expected, by that time investors were convinced the market would plunge to new lows.  So, instead of buying the lows in 2010 – they sold.  The same thing occured in 2011 – exactly.  Emotions led to “buying high and selling low” versus what the analysis said should have been done.

Today the market is again trading at 3-standard deviations above the 60-dma and investors are now clamboring to jump back in.  Don’t.  The market will correct at some point back to at least the 60-dma giving investors a much better point to add additional risk exposure back into portfolios.  At some point the market will give way to a much bigger correction.  However, before that happens our trading signals will inform us, just as they did last April, to reduce portfolio risk and raise capital.

Managing risk is the key to long term investment success.  Markets do not rise indefinitely nor do they fall to zero.  The vasciallate up and down within a given trend.  The only real question is what direction the trend is moving in.  As we have stated many times in regards to portfolio management – the rules are the rules.   In a rising, bullish, trending market the rule is to buy dips that pull the markets back to previous levels of support.  In a declining, bearish, trending market the rule is to sell rallies to raise cash and protect the portfolio. The market will move in cycles between these bullish and bearish trends.  We just have to pay attention to what is happening and follow the rules accordingly.

For now – our buy signals are in, the trend is bullish and we need to add more risk to portfolios.  That is the discipline that we follow.  Am I worried about the economy? You bet.  Am I concerned about the political fiasco in Washington? Absolutely.  However, the reality is that economics and politics are very poor bedfellows for investors.  Eventually equity prices will reflect the true underlying strength of the economy is far weaker than it should be.  However, that could be quite some time into the future and we will have ample warning when it begins to occur.