7.0 Poseidon Perspective July 2010

8/9/2019 7.0 Poseidon Perspective July 2010

1/21

THE

POSEIDON

PERSPECTIVE

soundnavigationthroughperilouscrosscurrents

29July2010

DearInvestor,

Wehavelongbeenanadvocateofvalue

investingfollowingthepathofGraham,

Dodd,Buffet,

Klarman,

Dreman,

Whitman,

etal. However,overthepastdecadewe

havebecomemorecognizantofthegreat

influencetechnicalandmacroeconomic

factorshaveinthemovementofequity

markets. TheimpactofFedliquidity,

highfrequencytrading,darkpools,and

index/sector/ETFtradingishardto

measurebutimmenselyimportantinthe

pricingofpublicequitymarkets. Thus,

ourfundamentalanalysisisshadowed

withananalyticframeworkwhichwecan

bestdescribeasmosaicbuilding. Pieceby

pieceweseektoconstructavalid

representationforeachinvestmentthesis.

Inadditiontotherigorousadhesionto

traditionalquantitativemetrics,this

methodologydemandsadiscerning

qualitativeevaluationofriskforthe

preservationof

capital.

It

is

aprocess

of

distillationtomorebasicmetrics. Marty

Whitmanisfondofsayingabargainis

notabargainifitremainsabargain. We

agreeandhavealwaysbelievedthatyou

makeyourmoneyinthebuying. An

exampleofabargainthatmaywellremain

abargainorlessisCitigroup,Inc(C).

Welookatequitymarketreturns

displayedinTableA. Thepast3years

havebeenabonecrushingexperiencefor

equityinvestorsworldwide. Inthecaseof

USequitiestheexpectationsandoptimism

whichwereheldyearafteryearhave

yieldednaught. Thebuyandhold

publichasbeenexploitedwhiletheUS

Congress,Federalregulatoryagencies,and

theFederalReserveSystemhaverefused

toexercisetheirregulatorypowers.

TABLEAYTD10 3Year* 5Year* 10Year*

DJIA (6.27)% (10.0)% (0.99)% (0.67)%S&P500 (7.57)% (11.8)% (2.86)% (3.39)%Nasdaq (7.05)% (6.77)% 0.50% (6.12)%MSCIEAFE** (14.7)% (15.8)% (1.77)% (2.17)%MSCIEM** (7.22)% (4.67)% 10.2% 7.50%

SSEC

(26.8)%

(14.4)%

17.3%

2.21%

YTDisthruJune30,2010

*calculatedascompoundannualgrowthrate

**MSCIBarraIndexes

Thesegrimyeartodatefigureshave

improvedduringJuly;however,we

suspectthatequitymarketsaretreading


2/21

THEPOSEIDONPERSPECTIVE 29July2010

waterasaresultofeconomicuncertainty

andglobalturmoil. Theselloffhasbeen

particularlysevereinthecaseofChina

representedbySSEC. Thisisthetypeof

correctionwhichcreatesbuying

opportunities;however,wemustawaitthe

arrivalofstrongerfundamentals. Many

EmergingMarketsarepricedtogreat

expectationsratherthanrealistic

valuations. FundshaveflowedoutofUS

equitiesintointernationalbondsand

emergingmarketsecurities. Theriskof

overpayinghasbecomedominant. We

demandagreatermarginofsafetypriorto

investment.The

easy

money

has

been

madeoverthepastyear.

InChart1wepresentapictureofthe

biggestandbestofequityinAmerican

enterprise,thisistheDowJones

Composite(DJA)overthepastseven

years. TheDJAisanindexcompilingthe

Industrials,Transports,andUtilities,

conservative,safe,strong. Thisisachartof

weeklypriceswhichwelikebecauseitcuts

outmostofthedaytodaytradingnoise.

Withinthechartwehaveincludeda

volumebaracrossthebottomandmoving

average(MA)lines,bluerepresents10

weeksandred40weeks. Theseroughly

correspondtothetechnicalanalysts

notationof50and200dayMAindicators.

Webringyourattentiontotherecent

crossoverof

the

10

week

MA

below

the

40

weekMA. Intheparlanceoftechnical

tradersthisisknownastheDeathCross

duetheimpendingpossibilityofa

seriouslydecliningtrend.

CHART1 FOLLOWINGTHEDOWS

Page 2

Source:PSI;StockCharts


3/21


WhileJulyhasaddedsomenewsteamto

equitymarketswequestionthesubstance

ofamidsummerrallyinthefaceofastill

weakeningeconomy. Summeroptimismis

frequentlysubjecttotheharshnessof

autumnrealism.

ThenextthreechartslookattheUS

economythruthelensofmarketpricing

andmarketcapsofseveralcurrentand

formerleadershipcompanies. Webegin

withbasicmanufacturinginChart2.

Allowingfordifferenceswestillfindsome

basictruth

in

the

comparison

of

Apple

(AAPL)andGeneralElectric(GE). A

dominantleaderofbasicindustryforso

longGEisnowstrugglingunderthegross

financialburdenofGECapital. Nowthe

marketrewardstheconsumergadgetking

Applewhosemarketingprowessandout

sourcedmanufacturingcommandgrand

premiums. Wealsoviewtheseprice

changes

as

a

reflection

of

the

US

economy,

amajormovefrombasicmanufacturingto

consumption.

CHART2 TOYSVSMACHINES


AnothercurrentWallStreetdarlingis

Google(GOOG). Itsaneasysellwith

battalionsofengineerscreatingmoreand

morelogarithmicmethodsforslicingand

dicingsearchinformationaboutconsumers

foritsnewguardadvertisingmetrics. In

Chart3wecouplethischarmmachine

withaformerqueenofthevalley,Yahoo

(YHOO)whichhasneverrecoveredfrom

theMicrosofttakeoverattempt.Jerrys

pridelostalotofmoneyformanyYHOO

shareholders. Wedonotdemeanthe

qualityofthesecompanies;itisaquestion

ofprice

in

respect

to

their

current

value.

Theoldbuyersadageispriceiswhatyou

pay,valueiswhatyouget. Weuse

Googlefrequentlyandstill,after12years,

areregularusersofYahoo. Whilethe

lattermightbeslightlyovervaluedthe

formerspricedemandsevergreater

expectations. Givencurrentconsumer

fundamentalswefindthatthemarketing

queen

of

gadgets,

AAPL,

and

the

premier

advertisingmonolith,GOOG,areboth

overpriced.

CHART3 LEADINGTHESEARCH

Page 3



4/21


Finally,welookattwodynastiesof

finance,thehumbledandthecrushed. The

firstistheworldslargestgovernment

assistedhedgefundGoldmanSachs

(GS). Afteracceptingtaxpayermoneyto

continueitvasttradingoperationsthefirm

hasbeenhumiliatedbySECallegationsof

fraud. GShasrecoveredand,while

shareholdersmaynotreapthelongterm

benefits,thepartnerswillneversuffer.

Theygettheircuteveryyear,offthetop.

InChart4wecontrastthiscutthroat

moneymachinewiththenatteringnabobs

ofCitigroup

(C).

Citi

is

aquasi

governmententerprise,obtusebeyond

effectivemanagement. Wedeemit,much

likeAIGorGM,anextensionoftheUS

Treasury. Allaredestinedeventuallyfor

thedustbin. Fromahighof$51.01on

December27,2006Citigroupnow

commandsaround$4withhundredsof

billionsoftaxpayerdollarsinbackstopping

of

risk.

Many

thought

it

was

too

big,

too

importanttofailbutforequityinvestorsit

alreadyhas.

CHART4 FASTMONEYVSSAVINGS


OveralltheUSequitymarketsaresucha

shamblesofmanicdepressivemovements

thatweconjecturethegreatestreturnswill

accruetothosewhodisplaythepatienceto

refrainfromclimbingaboardthe

bandwagon. Currentmarketrisksare

beyondthekenofmanyinvestorsand

hopeforanimprovingeconomyfuels

meagermarketrises. Anysummerrally

mayfallquickpreytoautumnvolatility

andlateyearprofittakingwhichmaybe

exacerbatedbyfearofrisingtaxeson

capitalgains.

SOUNDINGS

Page 4

Wewouldliketoupdatesomethoughts,

reservations,andcommentaryonthe

continuinginflation/deflationdiscussion.

Ourfirstannouncementcomesbywayof

theJuly2010GMOQuarterlyLetter

fromJeremyGrantham. Hiscommentary

iscloselyfollowed,highlyrespected,and

astutely

accurate.

We

find

it

to

be

compulsoryreading. Itisavailableatthe

GMOwebsite,gmo.com. Inthefirstofsix

SummerEssaysGranthamfinallytakes

thesideofdeflation. Hisreasoningis

weakloansupplyandfairlyweak

demand,thevelocityofmoneyhasslowed,

andinflationseemsadistantprospect.

Thisexpectationisinlinewithhis

previousprognosticationforsevenlean

years.We

also

note

that

Grantham

believeswitha50%probability,as

outlinedinEssay3,TheFearful,

SpeculativeMarket,thatBernanke

wouldbecertaintokeepratesatrock

bottomforthenext18monthsorlonger.


5/21


Whilethereissubstantialprobabilityfor

correctionsinthecurrentfearful,

speculativemarket,Granthammakesa

strongandveritablecaseforhighquality

USstocks. Thisargumentispremisedon

thevaluecase;theyarecheap.

InEssay5SevenLeanYearsRevisited

Granthammakesseveralsalientpoints

worthrepeating. Theyare:

1. Inaworldgrowingnervousaboutthe

qualityofsovereigndebteventhatofthe

USdomesticsovereigndebtlevelshave

exploded. Thesedebtlevelsmustbe

loweredat

every

level,

especially

governmentalandthereisalmostno

waythatthisprocesswillbepleasantor

quick.

2. Dangerouslyexcessivefinancial

systemdebtwasmovedacross,with

additions,tobecomedangerously

excessivegovernmentdebt. Theresultis

asituationwhereinheseesIncreasingly,

the

cure

seems

more

like

a

stay

of

execution.

3. Nowconsumersarereadjustingtoa

greaterneedtosaveand,perhaps

unfortunately,agreaterneedtowork

longer. Unprecedentedly,theyarepaying

downsomeconsumerdebt. These

changedattitudeswillsurelylastfor

years.

4. theleverageinthesystemandthe

chancesof

further

write

downs

(yet

more

housingdefaultsandprivateequitywrite

downs,forexample)leavebanks

undercapitalizedandreluctanttolend.

5. Withmanyoftheartificialstimuliof

the90sand2000sgone,their[statesand

municipalities]revenuesareunlikelyto

bouncebackinoneortwoyears,anda

doubledipintheeconomyornewasset

pricedeclines[realestate]wouldmove

theirrecoveryfurtherback.

6. Unemploymentishighandwillalso

sufferfromthelossofthosekickersrelated

toassetbubbles.

7. TheU.S.inparticularcannotcontinue

torunlargetradeimbalances.

Imbalancesdestabilizethesystem.

8. Temporarybailouts[Greece]are

postponementsofanecessary

restructuring. Thus,theotherPIGS,

havebecomeanintrinsicpartoftheseven

leanyears,

more

or

less

guaranteeing

slowerthannormalGDPgrowthanda

longworkoutperiod.

9. Thegeneralrisinglevelsofsovereign

debtandtheparticularproblemsfacingthe

euroblocandJapanareleadingtothe

systematiclossofconfidenceinourfaith

basedcurrencies.

10. Finally,itispossiblethatmost

important

of

all,

on

a

long

horizon

there

is

averylongtermproblemwidespread

overcommitmentstopensionsandhealth

benefits.

Page 5

Weadmire,understand,andconcuralmost

entirelywithMr.Granthamstheses;

however,asisindicatedbyhispreference

forUShighquality,hisprognosisand

prophylacticarebothprettymainstream

amongastute

money

managers.

We

believethateconomiceventsmayunfold

muchmorerapidlyandwithwider

dispersionsthanmanyinvestorshave

considered. Weseeinflationasthe

inevitableendgametocentralbank

desperationtorestoreeconomicgrowth.


6/21


ChairmanBernankehasmadeit

adamantlyclearthatGreatDepressionII

willnotoccuronhiswatch. TheFeds

unprecedentedandsupersizedmonetary

stimulicontinuetoveiltheunpleasant

realitythattheU.S.haslostits

manufacturingbaseandthejobsthatare

attendanttoit. Thefinance,insurance,and

realestate,(FIRE)economyisnow

falteringandasMr.Granthamnoteswe

arenowlosingthekickerswhichwent

withthegoodtimes. Weagreethatseven

leanyearsisprobablywhatthenation

needs. However,politiciansmaydecide

thatis

not

what

the

nation

gets.

NextwereferencethepresentationbyVan

Hoisington,HoisingtonInvestment

ManagementCompanyfromtheFixed

IncomeManagement2009Conferenceon

12October2009inBostonanddistributed

intheCFAInstituteConference

ProceedingsQuarterlyMarch2010. Inhis

presentation,

The

Debt

Deflation/Inflation

Debate,Hoisingtonposesasimple

question,whetherthepricelevelisgoing

uporgoingdown. Hisanswerisalso

simpleandstraightforward. Inaccordance

withthedebtdeflationtheorypositedby

IrvingFisherin1933,deflationfollows

deeprecessions,regardlessofthefiscalor

monetarypolicyusedtoaddressthe

nationseconomicwoes. Hearguesthat

theUnited

States

is

in

the

midst

of

adebt

bubblethathappensonlyonceevery70

80years. Hoisingtonbelievesthatthe

currentlevelofdebt/GDPis3.75andto

reducethislevelwillrequirealongtime.

ForsupportheinvokesTheFinancial

InstabilityHypothesisofHymanMinsky

whichoutlinesthethreestagesof

financingasaneconomyprogresses

throughgreaterandgreaterspeculative

pressures. Thissoundsfamiliaraswe

reflectonthestock,junkbond,commodity,

andrealestatebubblesoverthepasttwo

decades. Thestagesbeginwithhedge

financing,inwhichthelenderfullyexpects

thereturnofbothprincipalandinterest.

Thesecondstageisspeculativefinancing,

inwhichlendersbelievetheywillreceive

theirinterestpaymentsandare

comfortablewiththefactthattheprincipal

canalwaysberefinanced. Andthethird

stageis

Ponzi

financing,

in

which

lenders

havelittleexpectationofreceivingeither

theirprincipalorinterestpaymentsbut

looktorapidlyrisingassetvaluesfor

security. Intheendtheoverleveraged

assetslosevaluebutthedebtremains.

Repaymentbecomesaseriousproblem. In

accordancewithFisherstheorythe

distressedsellingtorepaydebtbeginsto

overwhelm

the

system

as

increasing

repaymentsshrinkthemoneysupply

resultinginfallingprices,unemployment,

andgeneralpessimism. Duetothe

unprecedenteddebtlevelsrelativetoGDP

theU.S.isclosetoadebtdeflation

experience.

Page 6

Hoisingtonreviewsindetailthethree

requirementsforagrowthinthemonetary

baseto

translate

into

higher

prices.

The

firstrequirementisanupwardsloping

supplycurve. However,duetothe

overcapacityinthesystemandhigh

unemploymentthesupplycurveis

actuallyflatordownwardsloping. Thisis

thetypicalresultofrecessions,over


7/21


Page 7

capacityandintensecompetitioncause

pricestodrop. Withoutresurgencein

capacityutilizationandgrowthinweekly

hoursofproductiontherewillnotbearise

inthesupplycurve. Thesecond

requirementisstableorrisingvelocityof

money. Whilenotinherentlystablethe

velocityofmoneyisusuallydrivenbytwo

factors,financialinnovationand/or

leverage. Whilethevelocityofmoneyrose

rapidlyinthe1990sithasfallen

significantlysince2000withonestrong

surgeinmiddecade. Chart5indicatesthe

risingvelocityduringtheultraleverage

thruconduits

and

securitization

from

1990

2000andtheresurgenceofassetvalues

duetofinancialinnovationforconsumers

andhousingduring20042007. So,evenin

thefaceofincreasingmoneysupply,M2,

therecanbeasubstantialslowdownin

GDPgrowthwithcontractingvelocityof

money. Hoisingtonprovidestheexample

duringperiod4Q20082Q2009whenM2

increased

10.3%,

Velocity

decreased

(12.6)%andGDPwasdown(3.6)%.

Thethirdfactornecessaryforrisingprices

isastableorrisingvalueforthemoney

multiplier,m. ThemultiplieristheratioofawelldefinedmoneysupplysuchasM2

tothemonetarybasewhichwouldresult

intheM2multiplier. AsevidencetheM2

multiplierdroppedfrom9in2008to3in

2009while

during

the

same

period

excess

reservesgrewbyalmost$800billion.

ForthesereasonsHoisingtonopinesthat

monetarypolicy,theZIRP,isbroken

whichleavesonlyfiscalpolicytosupport

theeconomyandenhancegrowth.

However,byitsnaturethepublicsector

hasaproductivitylevelofzerobecause

municipalinfrastructuresandpublic

serviceprovidersdonotproducea

quantifiablegood. Heseesnopositive

impactasaresultoftheunprecedented

amountofgovernmentspending. A

nationcannotborrowitswayto

prosperity. Healsopositsthatgovernment

debtisnotbyitselfinflationary,pointing

totheperiods19291941intheUnited

Statesand19892008inJapan.

Additionally,heciteslowinterestrates,

highunemployment,

and

the

decline

in

the

S&P500asevidenceofdebtdeflation.

Sinceabouttwothirdsoftheeconomy

dependsuponconsumerspending,

Hoisingtonprojectsaseriousdecreasein

USimportdemandduetoconsumernet

worthlossesinhousingandequitymarket

declines. Hespeculatesthatinthe15

largestGDPcountries,notincluding

China,

it

is

unlikely

that

any

country

will

experiencepositivegrowthindomestic

demanduntiltheUnitedStatesdoes.

HoisingtonconcludedthattheUShas

enteredadeflationaryenvironmentdueto

thelevelsofdebtespeciallyhousehold.

Hisexpectationisthatthiswillcontinue

forseveralyearsasthedemandforUS

exportsisdim. However,heseesthis

situationasgoodforlongtermTreasury

bondswhich

results

in

the

now

4percent

ratetodroptoabout2percentandbonds

continuingtooutperformstocks.


8/21


CHART5 THEENDOFFASTMONEY?

Source:HoisingtonInvestmentManagement

Wesurmise

that

Hoisington

has

been

quite

prescientinhisforecastingofdebt

deflation. Atthetimeofhispresentation

therewerestillhopesforastrongrecovery,

robustFedpolicyinducements,and

politicaloptimism. Tenmonthslaterwe

arefacingamuchharsherreality. We

grantthatthedeflationarytrendsmay

continue,yetweforeseearenewedeffort

by

government

to

accelerate

economic

activity. Timingisimportant;however,we

cannotpredictthepathoroutcomes. We

waitwithrespectfortheoldadageDont

fighttheFed.

Weunderstand

the

deflation

argument.

Thecurrentsituationisdrivenbyan

unwindingofleverage. Wesubmitthe

followingthreechartsfromtheSt.Louis

Fedwhichclearlydetaildebtdeflation

overthepasttwoyears.

Chart6revealsthe40%dropofover$300

billioninFinancialCommercialPaper

Outstanding.

This

is

short

term

(less

than

270days)lendingwithoutcollateral.

WhiletheFedhasbeenabletosupport

shorttermlendingtobanksthruseveral

mechanisms,thisstaggeringdropincredit

availabilityreflectsdeteriorationinthe

Page 8


9/21


financialsystem. Unfortunately,we

suspectthatthelevelofFINCPNcorrelates

withtheriseandfallofsecuritiesmarkets.

CHART

6

THE

DROP

OF

PAPER

Source:StLouisFed

Chart7discloses

amore

severe

drop

of

67%or$800billionofAssetbacked

CommercialPaper. Thiscollapsereveals

bothadeclineinthecontinuingneedfor

newcreditandthelackofavailabilityof

substantialcollateral. Inasystem

dependentuponcreditgrowthforGNP

growtheitherthediminishingmeansfor

lendingortherecedingdemandforcredit

mustresult

in

much

slower

economic

growth. Towhatdegreeofrobustness

mustcurrentmonetaryandfiscalpolicybe

takeninordertoreversethesedeflationary

trends?

CHART7 THEDROPINASSETVALUES

Source:StLouisFed

CHART8 THEDROPINSECURITY

Source:StLouisFed

Page 9

Chart8reflectsatruemilestonein

financialinnovation. Themarketfor


10/21


consumerloansecuritizationbeganin1989

androserapidlyuntil2007,almost20years

ofcontinuingcreditextensiontosupport

theconsumerspendingwhichisaround

70%oftheeconomy. Thesuddenendin

2008whichproducedadropofover$500

billionofpotentialGNPisareflectionof

consumerdesireormandatetobegin

saving. Whattypeofrecoverycan

accommodatethislevelofretrenchment?

AsGranthampointsoutabovethisisan

attitudechangewhichwillsurelylast

foryears. Weconjecturethatthese

reversionsfromborrowingtodeleveraging

willcontinue

until

there

is

arenewal

of

spiritwhichcreatesnewjobs,drives

demandforcredit,andproducesgreatnew

productsand/orservices. Theresolutionof

thedeflation/inflationissueisyes. Asthe

deflationaryspiralcontinuesthecentral

bankwillcontinuetounleashitsmonetary

magic. Theseverityofthisdebtproblemis

maskedbylowinterestrates;however,

when

rates

rise,

and

one

day

they

must,

theUSwillfaceunrulyforeigninvestors

who,knowingtheymanyneverreceivea

returnofprincipal,demandacurrent

returnbywayofrealinterest.

Ourcurrentsupportofthedeflationary

thesisistemperedovertimewitharueful

estimationfortheunconventionalpolicy

machinationsofChairmanBernankes

FOMC.They

will

undertake

extraordinary

measurestopreventtheUSfromsliding

intoanotherGreatDepression. Weare

inthemidstofseriousmonetary

inflationwhilesufferingfromtheprice

deflationfromovercapacity,

underemployment,andcompetition.

Coincidently,wesuspectthatinflationist

thinkingisfocuseduponalineargrowth

linethatwillslowlyriseandthencanbe

containedbyrisinginterestrates. Our

contentionisthatwewillexperiencea

novelandunprecedentedperiodof

sharplyrisingpricesinsomeareassuchas

agriculturalcommoditiesandmetalswhile

otherpartsoftheeconomycontinueto

exhibitpricedeflation. Weareaboutto

enteranewrealmofeconomiccentral

planningasgovernmentinvolvement

increases.

WEATHERWATCHAnendeavortofollowthemoneyisa

worthwhileexercise. Inthisinstancewe

wouldliketoexaminetherecentflowof

investmentfundsintotheworldof

internationalandemergingmarkets. Let

usbeginwithTableBwhichwas

constructedfrominformationprovidedin

theJuly2010MorningstarDirectFund

Flows

Update.

TABLEB FOLLOWTHEFUNDSMORNINGSTAR YTD TOTAL YOY

RANK CATEGORY FLOW ASSETS CHANGE3 LargeGrowth (18,669) $673 7.3%

7 WorldStock (4,112) $238 8.7%

9 ShrtTerm Bond 27,255 $171 69.5%

12 DivEmrgMkt 10,232 $144 44.0%

17 WorldBond 19,974 $115 79.7%

28 HiYieldMuni 3,267 $53 43.2%

38 EmrgMktBond 6,958 $28 100%

Notes: 1.RankisMorningstaraccordingtoTotalAssets2.YTDFlowthru6/30/10inUS$millions

3.TotalAssetsinUS$billions

Page 10

Wechosecategorieswhichmostclosely

reflectinternationalandemergingmarket

stockandbondfunds. Wehaveincluded


11/21


theUSHighYieldMuniassome

analystsequatethesecreditswith

sovereigndebtissuedbylesserdeveloped

countries. However,manyinvestorshave

foregonethetaxadvantagesasthey

embraceoverseasrisk.

Weprofferthefollowingconclusionsfrom

TableB. First,therehasbeenamajormove

outofdevelopedcountryequitiesinfavor

ofbonds. ThelargeflowintoShortterm

Bondfundsindicatesarunawayfrom

perceivedrisk. Partofthisflowisalso

frommoneymarketswithnearzero

return.However,

the

demand

for

some

return,areachforyield,isreflectedinthe

flowtoWorldBondandEmergingMarket

Bondfunds. Thecombinedtotalisan

amazing$26,932million. Investorshave

broadenedtheirinvestmenthorizonsfor

bothbondsandequitiesinsearchof

greateryieldandcapitalappreciation. The

yearoveryearchangesarestunning.

Finally,

experience

tells

us

that

when

everyoneispilingontoforeignshoresit

maybeagoodtimetoremaincloserto

homeandavoidthecrowds.

However,thereisgoodreasonwhy

investorsaremovingstronglyintoforeign

equities. WepresentTableCwhich

outlinestheannualizedreturnsofseveral

internationalequitymarketsasmeasured

inUS$s

by

MSCI

Barra.

While

some

of

thereturnsareoutstandingsuchas

Indonesia,othersaredebilitatingsuchas

Taiwan. OnthepromotionbyGoldman

Sachsmanyinstitutionsareheavily

weightedintheBRICcountriesandhave

doneverywell. Also,manyofthe

secondary,tagoncountrieshavebeen

doingverywell,albeitwithsubstantial

volatility.

Itbehoovesustorememberthatwherever

thesmartmoneyisinvestingonecanbe

assured,duringthisperiodofsustained

andheightenedvolatility,itisinvested

closetotheexits.

TABLEC POPULARDESTINATIONS1Year 3Year* 5Year* 10Year*

BRIC 17.0% (2.82)% 16.1% 10.2%Indonesia 62.4% 12.7% 22.9% 19.8%Korea

30.6%

(8.30)%

7.58%

7.42%

Mexico 28.9% (8.30)% 11.3% 11.1%Poland 19.4% (20.9)% 0.14% 3.22%Taiwan 12.8% (9.04)% (0.46)% (3.81)%Thailand 30.5% 2.85% 8.94% 11.0%Turkey 40.3% (3.39)% 8.87% 2.32%*calculatedascompoundannualgrowthratethru6/30/10

Wewillreservecommentaryonthe

GoldmanSachsBRICphenomenonfor

anothertimeandlookmorecloselyata

fewof

the

ancillary

equity

markets.

We

includefourchartswhichportraytherise,

fall,andresurrectioninemergingmarkets.

CHART9 BACKINACTION

Page 11



12/21


Chart9showsthatIndonesiacontinuesto

beahavenforhotmoney. Politicalchange

andresourcescontinuetofuelstrong

equityinvestment.

ThereturnsfromMexico,Chart12,exceed

itsnorthernneighbor.

CHART10 BACKWITHVENGEANCE


TaiwanequitiesappearinChart11and

closelyresemble

the

US

S&P

500

not

only

initsdropbutalsotheirrecoveryand10

yearreturn.

CHART11 STRUGGLINGBACK


Finally,welookattheEurofringe. Greek

banksmentionedTurkeyasoneoftheir

greatstrengthsgoingforward. Perhaps,

theyviewequityreturns,Chart12,as

indicativeoftheirloanrepayment

capacity.

CHART12 MORETHANBACK


Page 12

Yet,wewouldliketopointoutthateachof

thesecountriesisintimatelyconnectedto

thedevelopedworld. Somearedirectly

respondentto

the

US

and

Europe,

others

aredependentupontheChinatrade. This

interconnectednesswillnotquickly

dissipate. Thestrengthofmany

developingmarketswasprecipitatedupon

theconsumptionoftheadvanced

economies. WithoutincreasingUSand

Euroconsumptionemergingmarketsare

vulnerabletodistress. Theconceptofde

coupling

is

a

nice

working

theory;

however,inpractice,itwillrequirea

periodofadjustment. Aretheseexuberant

economiesnowabletowalkalone? World

equitymarketsarepricedlikeits2007;yet,

muchhaschangedoverthepast3years.


13/21


Aswepondertheopportunitieswhich

maybefoundinforeignmarkets,wemust

becarefulnottooverlooktheincreased

risk. Wewouldliketoshareinsightsfrom

arecentpublication,Reflectionsonthe

SovereignDebtCrisisbyEdward

Chancellor,GMOWhitePaper,July2010.

InthiscommentaryChancellorprovidesa

succinctandcogentanalysisofthecurrent

turmoilinglobalsovereigndebt. Henotes

thatGreeceistheharbingerofasovereign

debtcrisisthatthreatenstoengulfseveral

leadingeconomies. Ingeneral,high

levelsofpublicdebtareassociatedwith

pooreconomic

growth

and

higher

rates

of

inflation. Chancellorenumeratesthe

severalfactorswhichhavehistoricallyled

togovernmentdefault.

1)Areversalofglobalcapitalflows.

Anyseriousdeclineinexportearnings

whichmayspringfrominterruptionof

tradeorfallincommoditypricesleadsto

vulnerability.

2)

Unwise

lending.

Bankingprosperityandlowinterestrates

usuallyresultinastretchforyield,larger

fees,andthedeteriorationoflending

standards. Hereportsthatnearly90%of

theforeignbondssoldinUnitedStatesin

1929subsequentlydefaulted.

3)Excessiveforeigndebts.

Thissituationindicateslowdomestic

savingsratesandresultsinhostilityto

foreignlenders.

When

debt

is

denominatedinaforeigncurrency,a

declineintherealvalueofhomecurrency

raisestheburdenofexternaldebt. Hence,

therepudiationofexternaldebtsisfar

morecommonthandomesticdefault.

4)Poorcredithistory.

Unlikedeepfinancialmarketsandsocio

economicstability,weakpolitical

institutions,pooreconomicgrowth,and

publiccorruptionhavebeenhallmarksof

futuredebtproblems. Thesefactors

becomeselfreinforcing,Since1800,Spain

andPortugalhavedefaulted,respectively,

onthirteenandfiveoccasions. Asaside

note,accordingtotheBISEurobanksat

theendof2009heldUS$193billionof

Greekdebt,US$240billionofPortuguese

debt,andUS$832billionofSpanishdebt.

5)Unproductivelending.

Whenborrowed

money

is

not

spent

wisely,theprofligacyprecipitates

revolutionarychangeingovernment

underminingpoliticalstability.

6)Rolloverrisk.

Sincemanysovereigndebtsareneverpaid

theyarerolledover. Termsand

durationoftherollproduceincreased

risk.

7)

Weak

revenues.

Historically,bankingcrisisinduce

prolongedperiodsofbelowaverage

economicgrowth. Theoutgrowthis

austeritymeasurewithlowerexpenditures

andlowertaxrevenues.

8)Risinginterestrates.

Higherdebtserviceisthespiraling

outcomefromperceivedexpectationof

increasedinflationordefaultrisk.

Especiallyharmful

to

short

term

issuance

ofdebt,risingratesmayquicklyleadto

sovereignbankruptcy.

Page 13

Inmanycasestheseconsequencesaredue

tocircumstanceswhichareoutsideofthe

directcontroloftheborrower,an


14/21


exogenousevent. Atthatpointthereisa

negativeconvergenceofbothabilitytopay

andwillingnesstopay. However,there

areseveraldenominatorswhichmay

precludedefaultasacountrystruggles

witharisingdebtburden.Theseinclude

debtthatisdomesticallyfinanced,high

levelsofdomesticsavings,asteady

growingeconomy,andgovernment

expenditureswhichcanbeeasilyor

rapidlydecreased. Thebasicremedyis

governmentcontrolthrougha

combinationoftaxhikesandtightcontrol

ofgovernmentspending. Thiswas

achievedby

Sweden,

Finland,

and

Canada

duringthe1990s. However,mostcasesof

governmentrecoveryfromonerousdebt

areduetostableregimesandexcellent

credithistory. Themoreimportantissueis

whenagovernmentprefersinflationto

default. Thishasbeenthemorelikelypath

forseveralemergingcountrieswherelarge

fiscaldeficitshavebeenpartofthe

problem.

However,

this

combating

of

deficitswithinflationwasastratagemof

theUSduringthe1970s. Whenfacedwith

intractablefiscalproblemsgovernments

tendtorevert,ifpossible,toinflation.

Chancellorsitesthefollowingreasons:

1) Inflationismoreconvenientthandefault.

Inflationisactuallycovertdefault.

However,toachievethisoutcomethe

governmentmust

have

central

bank

controlorbeinapositiontoforcethe

domesticbankstoacquireitsbonds.

Underafiatmoneysystem,inflationwillalwaysbepreferredtodefaultwhendomesticdebtspredominate.(Hisitalics)

2) Inflationresolvespoliticalconflicts.

Sinceserviceandresolutionof

unsustainabledebtdemandsatransferof

resources,usuallyfromtheproductiveand

poorerrealm,inflation,surreptitiously

resolvestheredistribution.

3) Avoidinginflationisalowpriority.Thisisfrequentlythecasewhenthetrade

offisinflationorunemployment. Thishas

alsobeenthecasewhencentralbankshave

beenfacedwithpotentialdeflationary

spiral. TheexamplesJapanandUSare

given.

4) Flameout.Thismaybetheonlyoptionwhenpublic

credithas

evaporated.

Often

accompaniedbycurrencycollapse,the

governmentisforcedtomonetizethedebt

sincetherearenowillingprovidersof

publicloans. Thiswasthecasewith

Argentinain2001andIndonesiain1997.

Page 14

Wheredoesthatleaveustoday?

Chancellornotesthatconcernsover

sovereign

default

since

the

Lehman

collapseextendfromIcelandtoDubaito

Hungaryandnowtheperipheryofthe

Eurozone. Thisisnotaproblemconfined

tosmallemergingeconomies. Heliststhe

followingcountriesandtheirgrossdebtas

percentageofGDP:Japan(227%),Greece

(133%),Italy(120%),Belgium(100%),US

(93%),France(84%),Portugal(87%),UK

(78%),andIreland(78%). Theamountof

thesedebts

is

not

cyclically

or

crisis

driven;

theyarestructuralandongoing. Making

mattersworseisthatthesefiguresdonot

includemanycontingentliabilitiessuchas

healthcareandpension(SocialSecurity)in

theUS. Theweaknessofthissovereign

creditstructureisthatinmanycasesthe


15/21


debtisheldbyforeignentities. Inthecase

oftheUSNearlyhalfofoutstandingUS

Treasuriesareheldabroad.

Chancellorfinisheswithseveral

observationsonthecurrentdebtconcerns

withahistoricalperspective. These

include:

1. Thiscrisisisdifferentbecausewhile

previousdefaultcycleshaveprimarily

engagedemergingeconomies,thiscycle

hasenvelopedtheadvancedeconomies.

Developingeconomieshavebeenrunning

surplusesandrecyclingthesefundsinto

developedmarket

debt.

Coincidently,

one

mustgivesomevaliditytotheJapanese

experiencewherethereseemstobeno

limittonationaldebtlevels. Inspiteof

deleveraging,inflationwillalsoremain

lowdespitezerointerestratesandthe

expansionofcentralbankbalancesheets.

However,Japansdebthasbeeninternally

fundedbyaveryhighdomesticsavings

rate

and

the

crisis

was

local

not

global.

Yet,nowweareinthemidstofaglobal

andmuchmorecomplexarenaofdebtand

derivativeswhichfarexceednational

incomes.

2. Whilethereareseriousproblems

involvingperipheralEuroeconomies,itis

unwisetoextrapolatetheGreek(and

others,Spain,Portugal,Italy,Ireland)

experiencetomorehighlydeveloped

economies.The

level

of

corruption

and

tax

evasionarehigh. Lendingwas

unproductive. Mostimportantly,thedebt

oftheseeconomiesisnotdenominatedin

localcurrencies. Thislastpointmeansthat

devaluationorinflationisnotavailable

solutionstothecurrentmorass.

3. TheUSisnotonthevergeofdefault.

Theauthornotesthatitisaseriousfallacy

toextrapolatecurrentconditionswellinto

thefuture. Conditionsaresuchthatlarge

industrialeconomiescancarrylargedebt

burdensastheyhaveattimesinthepast

andlowbondyieldsandminimalinflation

meansthatdebtservicingismanageable.

Also,theUSandUKhaverobustbanking

systemswhichcanabsorbvastamounts

ofgovernmentdebt. Finally,thedebtis

issuedintheirowncurrenciesandthe

governmentsmaintainstrictcontrolover

theircentralbanksandforeignexchanges.

4.Inflation

is

more

likely

than

default.

EventualinflationintheUS,UK,and

Japanwouldresolvebothprivatesector

andgovernmentliabilitiesinarelatively

painlessfashion. However,inboththese

countriesthecurrentpolicyofquantitative

easingandmonetizationofthedebtis

fraughtwithdanger. Historyrecords

thatallgreatinflationshaveoriginated

with

the

monetization

of

debt.

5. Thetippingpointcamerecentlyto

GreeceasmostpublicfinanceisaPonzi

scheme. Theimportanceofpublicfinance

iscredibilityinordertorollforwardthe

publicdebt. InthecaseofJapanthe

diminishingsavingsrateandaging

populationspellafuturecrisis. Withmuch

ofitsdebtofarelativelyshortterm,Japan

isstuckinadebttrap.

Page 15

Thus,havingsurvivedthefinancialcrisis

wehaveenteredtheprovinceof

uncertaintywheretheprobabilitiesof

gainsandlossescannotbedirectly

measured. Whateverroutegovernments

takeandtheglobaleconomytraverses,


16/21


Page 16

increasedglobalriskwilleventually

demandgreatercompensation. While

continuingdeflationasseeninJapanover

thepast20yearsisoneroute,this

staggeringlowgrowth,lowinterestmodel

isnottheonlypossiblefuture. Chancellor

concludesthatForotheroutcomes,long

datedgovernmentbondsofferalimited

upsidewithapotentiallyuncapped

downside. Asinvestors,suchasymmetric

payoffprofilesdontappealtous. Well

spoken,theydontappealtouseither!

Wemovefromthegeneraltotheparticular

aswe

look

at

aselection

of

Emerging

MarketBondFunds,onceagainusing

Morningstardata. ThereturnsinTableC

speakforthemselves. Substantial5year

gainswithintermittentvolatility. Asnoted

bytheirsalesloadparticipationin

severalofthesefundsisnotcheap.

However,wewouldliketoaddressthe

issueofrisk. Itisnotuncommonfora

countrytodefaultonlyonitslocal

currencydebtandnotitsexternaldebt

whichmaybepricedinUS$s. However,

theoppositecanalsoholdtrueas

Chancellorpointsout. Politiciansmay

defaultonforeigndebtwhile

maintaininglocaldebttoappeasetheir

constituency. Anotherriskisthehowthis

assetclassreactsinglobalturbulence. Its

sizeisrelativelysmallinrelationtoUS

debtmarkets. TheexamplesinTableC

carryasubstantialamountofthebonds

whichareratedBB,morelikeUShigh

yieldand

many

which

are

not

rated.

In

thecaseofMEDAX,19%ofcreditquality

isBBB/BBwithacoupon510%. Duration

rangesfrom4.76to6.13. However,when

pricedinlocalcurrencythegreatestriskin

emergingmarketgovernmentbonds

accordingtoJPMorganiscurrencyor

exchangerisk.

TABLE

C

EMERGING

MARKET

MUTUAL

BOND

FUNDS

FUND

1Year 3Year 5Year MornStar

Rating/AUM

Sales

Load

NationalBaseforTop6Holdings

2.TCWEMIncome

(TGINX)17.0% 13.5% 16.1% *****

$567

NA Brazil,Korea,Russia,Indonesia,

Mexico,Kazakhstan4.EatonVanceEM

Local(EEIAX)62.4% 12.7% 22.9% *****

$116

4.75% US,Turkey,Malaysia,Thailand,

Hungary,SouthAfrica6.FidelityNewMkts

Income(FNMIX)30.6% (8.30)% 7.58% ****

$3,414

NA Russia,US,Ivory,Coast,Mexico,

Argentina,Philippines10.MFSEMDebt

(MEDAX)28.9% (8.30)% 11.3% ***

$2,618

4.75% Russia,Argentina,Mexico,

Philippines,Turkey,China

23.

Goldman

Sachs

EMDebtA(GSDAX) 19.4%

(20.9)%

0.14%

***

$4774.50%

Russia,

Indonesia,

Turkey,

Kazakhstan,Philippines,Brazil*MorningstarTop25EmergingMarketBondFundsratedby3yearreturns;effective27July2010. Fundsarenumberedby

standinginthe25fundsevaluated;AUM,AssetsunderManagementinUS$million.

Finally,thereisthecostofmitigatingthese

risks. Currencyriskcanbehedgedand

marketriskcanbeoffsetwithCredit

DefaultSwapsbutwhatisthenet. US

Treasuriesarelowandthespreadstoother

creditshascontracted. Isthereanyfurther


17/21


caseexceptthedeflationfrightforfurther

ratedecline? Istheinvestoradequately

compensated? Wesensemuchmorerisk

thanthosecrowdingthesemarkets. How

doesonepricetheriskofdefaultwith

muchdiminishedfaithincreditrating

agencies? Onemustexercisegreatcare

andattentiontodetail,sothefund

managerbecomesthearbiterofrisk.

Whilecurrencyvolatilitywouldnormally

beseenasamajorriskwesupplyChart13

asthebasisforthequestionwhether

currencycanprovidesupport. Chart13

trackspricingfortheUS$overthepast

eightyears. Asbackgroundwehave

includedtwoofthebondfundsfromTable

C. Overaperiodoffiveyearsemerging

marketbondsflourishedastheUS$was

manageddownward. Theycrateredinthe

midstoftheUScreditcrisisandhavenow

surgedduringaperiodofextremeUS$

volatility.

.

CHART13CURRENCYSUPPORT

Source:

PSI;

StockCharts

Page 17

Emergingmarketsforbothequitiesand

sovereigndebthavelosttheauraofhigh

riskinvestmentsandarenowridingin

theslipstreamofthepricesurgeforall

riskyassets. Theyarenowpromotedasa

coreholdingformanyportfolios. There

areseveralreasonsforthismigration.

Decreasedriskaversion,diversification

withstronglyperceivedreturns,andETF

vehiclesasacheap,easymeansfor


18/21


implementationareafewexamples. Those

whoarebullishonemergingmarketspoint

tothelowallocationsamongpension

funds,individuals,andlargeinstitutionsin

theUS. Wearereticenttoinvestatthese

levelswhentheunknownsfarsurpassthe

expectedorpotentialreturns.

Whileimprovingcreditqualityandrecent

upgradeshavesupportedmarket

valuations,onemustalwaysremainaware

ofthefragilityofmanyofthesestill

emergingmarkets. Theunderlying

politicalregimesstillfaceseveresocio

economichurdles

which

include

ethnic

clashesinWesternChina,Maoistterrorism

inIndia,andweatherinducedcalamity

globally. Threeyearsagowhocouldhave

imaginedthatanenfeebledruralmob

fundedbyanexpatriaterenegadewould

createhavocandinsurrectioninaworld

classmegapolis,downtownBangkok. In

thatinstanceallwasresolvedwithout

economicchaosbutthismaynotalwaysbe

thecase. Whoknowshowthenarcowars

onthesouthernborderoftheUnitedStates

willplayoutforMexicanpoliticsandthe

overalleconomy? Thequestioniswhether

yieldsonemergingdebtcanremainlowin

thefaceofsovereignrisksinthedeveloped

nations. IfG7yieldsbegintoclimbthen

theyields

in

emerging

markets

will

have

to

climbevenfastertocompensateforother

risks.

CHART14 DEVALUATIONALLOWSRISINGASSETVALUES


Page 18


19/21


PROVISIONING

Theinterpretationandimpactofmyriad

globaleventsareveryhardtodiscern

giventhemassiveamountsofinformation

and

data

available.

The

advent

of

computersimulationarraysand

econometricmegamodelssupportthe

searchforgreatercertainty. Yet,evenwith

theseaidsforcondensationandresolution

themixtureremainsopaque. Simple

measuresofriskareignoredinfavorof

aggressivetacticsandcomplexalgorithms

laboringforgreaterreturns. However,we

alwaysbeginwithafewfundamentalsfor

someguidance.

As

mentioned

above

currencyriskisamajorhurdle.

Movementsinthecurrencymarketsare

thetelltalesforsuddenanddramatic

economicchange. Chart14revealsthe

macroimpactofaUS$devaluationupon

financialassetsmeasuredbytheS&P500

andcommodities,representedbyoil,

WTIC. ForalmostadecadetheUS$has

beenmanageddownwardinsupportofUS

economicexpansion.

Thebalancingactcameapartin2008and

therisksgoingforwardareenormousand

hardtomeasure. Therefore,weremain

skepticalofstabilityintheemerging

markets. Therehasbeenglobal

exuberanceinequityandbondpricesfor

thepast16monthswithincreasing

volatility. Wefindthatfutureexpectations

aremisplacedinrecognitionofcurrency

andmarketrisks. RecoveriesintheUSand

globaleconomies

is

weakening.

We

believethatdefensivepositioningis

necessaryforsoundinvestmentdecisions.

Ourportfolioremainsfocusedoncash,

preciousmetals(goldandsilver),and

bondfundswithawelldiversified

positionspanningalowmidduration.

Wheninneedofarealitycheckfromtheemotivespeculationsandoverwhelming

disinformationcirculatingamidstthefinancialmedia,wefrequentlyturntoTheWriters

Almanacfordiversion. Thus,wewereintriguedwhenwereadoneoftheentriesforJuly

20,2010. Ratherthanparaphrase,wequoteinmajorpart,thepassagevoicedbyGarrison

Keillor:

Itwasonthisday[July20]in1875thatthelargestrecordedswarmoflocusts

inAmericanhistorydescendedupontheGreatPlains. Anestimated3.5trillion

locustsmadeuptheswarm. Itwasabout1,800mileslongand110mileswide,

rangingfromCanadadowntoTexas.

Swarmswould

occur

once

every

seven

to

12

years,

emerging

from

river

valleys

intheRockyMountainsandsweepingeastacrossmuchofthecountry.Thesizeofthe

swarmstendedtogrowwhentherewaslessrain,andin1873,theAmericanWest

begantogothroughoneofitsdriestperiodsonrecord.

Page 19


20/21


Page 20

LOCUSTSWARMINAFRICA,2009

Thelandwasstillrelativelydryonthisdayin

1875whenfarmersjusteastoftheRocky

Mountains

began

to

see

a

cloud

approaching

fromthewest.Somefarmersnoticedthe

distinctivecolorofthecloud,glintingaround

theedgeswherethelocustwingscaughtthe

lightofthesun.

Peopletherethatdaysaidthatthelocusts

descendedlikeadrivingsnowinwinter,

coveringeverythingintheirpath.Somepeople

describedthesoundoftheswarmlandingas

likethunderoratrain.Thelocustsblanketedthe

ground,nearly

afoot

deep.

Trees

bent

over

with

theweightoftheinsects,andlargetreelimbsSource:GoogleImages

brokeoffunderthepressure.

Theyatenearlyeverylivingpieceofvegetationintheirpath,aswellas

harnessesonhorses,thebarkoftrees,curtains,andclothinghungonlaundrylines.

Theygnawedonfencepostsandrailings,andtheyespeciallylovedthehandlesof

farmtools,whichwereleftbehindpolished,asifbyfinesandpaper.Somefarmers

triedtoscareawaythelocustsbyrunningintotheswarm,andtheyhadtheirclothes

eatenrightofftheirbodies.

Inthewakeoftheswarm,settlersonhalfamillionsquaremilesoftheWest

facedstarvation.Similarlocustswarmsoccurredinthefollowingyears,andfarmers

becamedesperate.Butbythemid1880s,therainshadreturned,andtheswarmsdied

down.Mostscientistspredictedthatthelocustswouldreturnwiththenextdrought.

Mysteriously,theydidnot.Withinafewdecadestheywerebelievedtobeextinct.

ThisisclearlyaBlackSwanorfattaileventinaccordancewithNassimNicholasTalebs

praiseworthyworkTheBlackSwan,TheImpactoftheHighlyImprobable. Fromthebook

welearn

that

aBlack

Swan

event

has

three

attributes:

it

is

an

outlier

as

it

lies

outside

the

realmofregularexpectations,itcarriesanextremeimpact,andhumannaturemakesus

concoctexplanationsforitsconcurrence,afterthefact,makingitexplainableand

predictable. Here,wedigressforamoment. Talebbringstolightmanyflashesofbrilliance.

OneistheludicfallacywhichTalebdefinesasthinkingthattheattributesofthe

uncertaintywefaceinreallifehavelittleconnectiontothesterilizedonesweencounterin

examsandgames. Weinterpretthisinthecontextofcomputermodelsandmarketactivity.


21/21


Thebestlaidschemesandexpectationsfrequentlyrunafouloftherealitiesofcomplex

humaninteractions. Manytradingpairs,correlativeparadigms,andderivativecurrency

overlaysfailwhentherubbermeetstheroad.

So,whatsthepoint? First,truthisstrangerthanfictionandonceananomalyhaspresented

itselfitcanhappenoverandoverinashortperiodoftime. ArecentcaseisthefallofBear

Stearns,thenLehman,WashingtonMutual,CountrywideFinancial,andthecontinuing

dominoesofsmallbanksbeingclosedweeklybytheFDIC. Nobodyknowstheendpoint.

Next,beinginthewrongplaceorwronginvestmentatthewrongtimecanbedevastating.

TowitinvestinginCitigroupat$51inDecember2006,buyingrealestateSEAsiain1997,or

Russiandebtin1998. Financialstocksaremuchmoreriskythaniswidelyknownor

acknowledged. Ifnotforgovernmentbailoutsandtaxpayersubsidiesmanyfinancial

institutionswouldnotexist. Thisistruertodaythaneverbefore. Thebalancesheetsof

financialinstitutionsincludingtheFederalReserveareholdingtanksforseverelydamaged

andtoxic

securities.

Lastly,

financial

and

econometric

models

are

complex

illusions

premised

uponunwieldyassumptionsoflackingemotions. Donotacceptlightlyanyones

prognosticationforthefuture. Thefutureisasecret. Manypeoplerefusetoacknowledge

thatmostoutstandingaccomplishmentsareduetogoodluckortakingoutsizedrisks.

Sincereregards,

BrianE.Shean,CFAPRINCIPAL

POSEIDONSTRATEGICINVESTMENTS

_________________________________________________________________________________

Theviewsexpressedinthiscommentaryarethoseoftheauthoratthetimeofcomposition. Theassumptions,analysis,and

conclusionsaresubjecttochangeinconjunctionwithchangesinthesecuritiesmarketsordiscoveryofadditionalor

conflictinginformation. Allinformationconveyedhereinhasbeendeduced,compiledorquantifiedfromsourcesthoughtto

beconsistentlyreliable. Thisinformationalreportisproducedforgeneralcirculationandisnottobeconstruedasa

solicitationtobuyorsellsecurities,financialinstruments,orinvestmentproducts. Priortoenteringanytransactionsfor

investmentproductspleaseconsultacompetentfinancialadviserandundertakeproperduediligence. AMDG

7.0 Poseidon Perspective July 2010

Documents

Transcript of 7.0 Poseidon Perspective July 2010