Bought RIG @ $132.04

Transocean Inc. [[RIG]] looks ready to make a run. Bought shares at $132.04 (10:37 ET).

Stop @ $128.

Allow me to share with you my current “top-down” allocation—for the wealthy. In this market environment, with all the uncertainty….

Cash 25%

Fixed income 20%

Equities 40%

Alternatives 15%

These allocations can change any day at any time. They are not static, but tactical bets.

Even though it may seem like I’m a market bull right now, I’m really not. I just invest when and where I see opportunity.

That said, there is still a lot of risk out there. Minefields and unresolved issues. That’s why I’ve only allocated about 40% of my total investment portfolio to stocks, of which I’ve outlined certain sectors and names I like and have bought here recently.

Keep in mind, that even though I’ve waded into some bank names, they are ticking time bombs. The problems in the banking industry will not be in a hurry to disappear anytime soon, so trade in and out of the banks as the opportunities arise. This is where the action is, no doubt.

In closing, don’t be so sure about the relationship (inverse correlation) right now between oil prices and the stock market, either. It’s possible that we could see oil prices and stocks start to move in tandem. Should they move down together, that would be signaling a much bigger problem for us all. So don’t gamble your future, which is uncertain.

Better to adopt the Rich Man’s Allocation….more on this later….

Yields on bonds continue on a downward trend, as oil continues to fall as well.

The 2-yr note sits at just under 2.4%, while the 5-yr note closed at 3.07% and the 10-yr at 3.82%. The fact that the bump upwards in the CPI last week has had no negative impact on the Treasury market, indicates a forward looking view of benign inflation.

The current trend of falling commodity prices is indicating the growing sentiment that inflation will fall, or at least be in check, going into the end of this year. This is also being reflected in the way the Fed Funds futures are trading, which are now predicting that the Fed will keep rates at 2% through the end of this year. In addition, the spread between the TIPS and the 10-yr note has narrowed to 2.18% from 2.56%. This is the smallest spread since January 2004.

All this is indicating that inflation is not as big a threat as it was 6 months ago.

Keep an eye on the meeting in Jackson Hole, WY this Friday, as Bernanke will be making opening comments on the financial stability of our nation and its banking system.

Part I: Avoid Diworsification

Part II:………….

In a March 26 article, the Wall Street Journal made reference to the past ten years as being the “lost decade”. This could not have been more true when you look at the S&P 500 Index. Investors who utilized passive index funds over that time frame have averaged 2.88% per year for the 10 years ended 06/30/08. This paltry pittance of a return didn’t even beat inflation.

Yet, we know that the past 10 years have not been a disaster for most of us who use an active approach to managing investments. Those who were looking to diversify away risk by owning an index fund have gotten slapped silly like Larry in a Three Stooges movie. Indexing does not work.

Instead of buy low, sell high, indexing guarantees that you will buy high and higher because the better companies and sectors perform, the greater the weighting in the index. As they peak in value, more money that goes into index funds goes into those stocks that are becoming overvalued. We saw this with financial stocks. Now, we have been seeing this happening with energy stocks. Index investing is counterproductive.

So, how many stocks do I need to have adequate diversification? Fifty? One hundred? Five hundred?

To me, the number seems to be between 20 to 25, assuming you have representation from more than just one industry sector. More than 20 or 25 stocks, doesn’t help you achieve much more of a benefit of diversifying. One can reduce risk through diversification, but only so far.

Warren Buffet, rather than spread risk over a large number of stocks, prefers to concentrate on a limited number of companies. In his words, “a policy of portfolio concentration may well decrease risk if it raises, as it should, both the intensity with which an investor thinks about a business and the comfort level he must feel with its economic characteristics before buying into it.”

I prefer this “rifle” approach to investing, rather than a “shotgun” approach of buying 100 – 200 stocks, or 20 different mutual funds.

What we’re talking about with diversification is really “risk management”. How do you defend against a market downturn? Well, using an index approach, which focuses on the conventional modern portfolio concept of diversification, is limited at best, and really inadequate when you think about it. With index investing, investors must be willing to accept what the market gives them. Average returns. Hey, that’s what we’ve always aspired in life to be: average. Yeah, right. 

To me, a better way to play defense is to recognize market excesses that are created, and simply avoid them. A sector rotation strategy, if you will. Excesses have been easy to identify in the past 10 years: tech, real estate, financials. Perhaps now, even energy and basic materials. Recognizing those excesses, extremes or “overbought” situations in the market, and staying away from them, is the other side of the investment performance coin.

You don’t need to own 100 stocks, or worse yet, 20 different mutual funds. Just focus on 20 – 25 names in the “right” sectors, and watch them closely. When the time comes when everybody is in love with those stocks, start to look for other areas to take positions in.

Currently, I continue to screen for stocks in the following sectors: tech, financials, biotech, drugs, forest products, business products/services, environmental services, banks, REITs and retail. Money has been rotating to these areas, out of energy, materials and industrials. Should the dollar show further signs of strength, I would expect this trend to continue. 

Sell it. It’s been going down, and will keep going down.

It’s interesting to note that people are still asking, “should I buy gold here, or wait?”. I’ve also heard, “I’m going to average down on my gold”….”Gold is a buy on this pullback”…The fact that gold has dropped over 20% from it’s highs, hasn’t phased a lot of investors. The assumption in all this, is that gold prices will be going back up. Dangerous assumption.

Anybody asking, “should I be getting out of gold?”.

As a contrarian, this has to start me thinking that now is the time to sell it. Do it while you still have a profit (or a manageable loss). When a fairly recent 20% loss emboldens the herd to buy more, you have to start thinking in Costanza terms. Now, this is simply from my observations of the “herd” of people I talk to, mind you. But unbeknownst to them, they are my contrary indicator. They lose, I win.  And this wonderful money making indicator is free of charge!

As a wise man once said, “if the herd is long, the herd is wrong.” You can profit from those words, if you act on them.

Look people, unbeknownst to many of you, the dollar is rebounding. Gold and the dollar are negatively correlated, meaning in layman’s terms, as the dollar strengthens, gold prices weaken.

I now expect the dollar will rally through this year and into next. Here’s why:

1.) It’s cheap relative to the other major currencies. Keep in  mind, it’s been in a bear market for over 7 years now. People have been shorting the dollar for so long now, it’s like a habit—as familiar as a cup of coffee in the morning.

2.) Strength in U.S. exports, due to a weak dollar, has helped to reduce the current account deficit. Things move in cycles. What goes around, comes around.

3.) Surprise: the lack of growth going forward will not be in the U.S., but in Euroland.

4.) Money pent up in international stocks and funds will re-patriate back onshore, once investors see the relative strength and better returns in the U.S. market vs. Europe. It’s estimated that U.S. investors have more than doubled their allocation to international stocks from 2003, where the average portfolio allocation to foreign stocks was only about 9%.

5.) U.S. assets, including real estate, are cheap right now.

Update: I just took a peek at Ibbotson Associates asset allocation model. They recommend a 24% allocation to foreign stocks for growth oriented investors. Aggressive growth investors: 31%.

As always,

God Bless America. 

I initially encountered the word “diworsification”, in Peter Lynch’s book, “One Up on Wall Street“. As you may surmise, this is a play on the word, “diversification”. Is it possible that you can be “too diversified” to the pont that your investment account is actually worse off? Let’s talk about this…

Diversification is standard verbage for the investment community. “You need to lower your risk through diversification“. “Have you diversified your portfolio, Mr. Client/Investor”? And every brokers favorite, “I think if you need to add a fourteenth mutual fund to your portfolio—you know, for more diversification“.

This time honored idea of diversification, on the surface, seems quite prudent. “Don’t put all your eggs in one basket”, grandpa used to always say. Sound advice….. Or, is it?

All this focus on diversification stems from the idea of staying with conventional investment wisdom, much of which is based on the “efficient market hypothesis“. In addition, the concept of diversification also helps Wall Street firms sell more mutual funds. The more asset classes, the more mutual funds needed. Great marketing.

But let’s get back to this “efficient markets hypothesis” thing. For those of you who are unfamiliar, this theory argues that investment performance will generally track the market. It doesn’t matter how you invest, how you pick stocks, etc…over the long haul, you will achieve market-like returns. So why beat your head against the wall trying to come up with great stock ideas? And all those charts and graphs? Technical analysis? Rubbish. Throw it all in the dumpster. You are relegated to the returns of the market. Sorry. So, why even bother with iBC?

Proponents of this theory (mainly academics and John Bogle), will always cite statistics like, “In any given year, 80% of mutual fund managers fail to outperform the market”, blah, blah, blah. This is how the Vanguard Funds became so popular with Joe “Asshat” Investor.

The reason managers fail to outperform the market, we are so kindly told, is that all information is already “priced in” the value of company stocks. Therefore, in the (misguided) opinion of the efficient market “asshats”, it’s difficult to outperform the market. Nearly impossible. Can’t be done.

What they don’t tell us is that the theory also presumes that investors act rationally and make logical decisions based on all the information that is already out there. Supposedly. Uh-huh.

If you are one to subscribe to this idea, then you only need to invest in asset classes — stocks, bonds, cash,  and lately, commodities, and the market will take care of the rest. Cancel your expensive subscription to iBankCoin.

They’ve even made it fancier for us by adding in sub-asset classes like “large cap growth”, “large cap value”, “mid cap blend”, etc. ,etc. etc. More mutual funds to create and sell.

Remember, you are being prudent. You are diversifying, right?

Question: Why only have ten or twelve stocks when you can be more diversified via an S&P Index fund that has over 500 stocks in it?  Isn’t it better to be more diversified? Answer: Case in point…. March 2000 – July 2008. How’s that S&P index fund treatin’ ya? What? You’re still underwater? Egregious.

Here’s my take on all this:

The broad, conventional acceptance of diversification, spawned by the efficient market theory, has been overpromoted, sliced, diced, and fed to the masses by Wall Street. And it is erroneous.

More on this, later……………