Underlying Problems
Nothing of fundamental nature has changed since the autumn of 2011. The risks still abound. Euro crisis is still a clear and present danger-- albeit European banks are enjoying the vast liquidity injection in form of the ECB LTRO action. It is important to note that Euro zone has a solvency problem, of which a symptom is lack of liquidity.
Providing liquidity brings temporary relief, but this only removes the symptoms until they present themselves again. This is because the underlying problem isn't addressed. The underlying problem is large amounts of debt and an incomplete political union structure.
I believe that it is just a matter of time before the symptoms of the problem are visible again.
As for other risks, there are too many to explain here, but I will just run down my list:
- Unsustainable debt levels in Japan
- Unsustainable debt level at the U.S.
- Chinese economy slowdown
- Immense scale-back of Chinese infrastructure spending
- Housing at very high valuations in many of the developed economies
- S&P 500 CAPE over 23
What is an intelligent investor to do in this scenario? With so many dangers on the horizon and the market valuation at relatively high levels, the best thing to do is wait it out. The portfolio strategy I am following is to sell my fully priced positions now to raise cash, which is about 30% of the portfolio.
My particular problem is that the market rise that started late 2011 and into Q1 2012 has raised market value of my positions significantly, but most of them are still not close to my [conservative] fair value measures. Unfortunately, my portfolio businesses have not received any buyout bids in the recent M&A activity.
This is almost exactly the same position I found myself back in 2011 when I posted these two posts.
That tactical move to build up cash in early 2011 helped me deploy it to build sizable position in Bank of America (BAC) when the pessimism enveloped it. I intend to continue to own BAC even after the recent 90% rise, since I believe the real value of this structurally crucial institution is much higher than the market is realizing. That move to cash also helped me average down on some of my other positions.
