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Strategy Update – April 2013Submitted by Stonebrook Capital Management on April 28th, 2013
“The Good, the Bad, and the Ugly”
In Sergio Leone’s classic 1967 spaghetti Western, three gunslingers search the American West for a buried fortune. “The Good” is Blondie, an honorable gunman played by Clint Eastwood. “The Bad” is Angel Eyes, a sadistic contract killer. “The Ugly” is Tuco, a Mexican bandit. The three men form unlikely alliances as they search a violent landscape amid the backdrop of the American Civil War. The film ends in a three way shootout to determine who gets the fortune. As investors searched for fortune last quarter, they too were confronted with good, bad, and ugly, though in this case the good, the bad, and the ugly were not gunslingers, but investment choices.
- The Good- Stocks rose steadily as global risks continued to subside and US economic data was surprisingly strong. Our increased allocations to equities paid off and investments in our favored sectors (energy & housing) performed very well.
- The Bad- Bond prices fell, as investors moved away from overpriced “safe haven” treasury bonds and into more attractively valued equities.
- The Ugly- Gold prices fell by 4.6% despite all major developed economies renewed efforts to “print money”. Despite its poor performance, we still think that holding gold in a diversified portfolio is prudent.
We have thought for some time that investors would rotate out of extremely overpriced and over-owned assets (bonds) and into more attractively priced and under owned assets (stocks). We believe that this has started to happen, but that the “great rotation” is in its early stages and may have years to go. We think this because investor sentiment toward stocks is still far from enthusiastic, which is associated with market tops. Furthermore, the US economic recovery appears to be solid, thanks to a continued rebound in housing prices and the North American energy renaissance, which is providing US manufacturers with a significant competitive advantage. While we are optimistic, we think that a pullback in stock prices is likely. We continue to find attractive investments, but are currently waiting for lower prices to make purchases.