Cyprus Who?

“Opportunity is not a lengthy visitor.” – Anonymous

Headlines announced a shocking development in Europe in mid-March, “unsecured depositors and unsecured debtors of Cyprus-based banks were going to lose a lot of their money”.  Granted that the first round of the “troika” (ECB, IMF, and EU)¹  foolishly demanded that depositors under the Euro 100,000 level would also lose money but cooler heads prevailed.  Yet many still rebelled against bank investors losing any money.  (more…)

Look Out Below

“It is not prudent to sacrifice principle for the sake of yield” – Anonymous

Muni bonds can be hazardous to your financial health.  After providing good income and even better total returns, intermediate and long maturity municipal bond investors are at risk to losing value.  Almost $2 trillion of municipal bonds are directly owned by individual investors today.   The income from these bonds has been exempt from Federal taxes.

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Fiscal Prudence

“Common Sense is Not so Common” – Voltaire

Investors started 2013 visibly exuberant with US politicians’ last minute crafting of a tax compromise a day after the U.S. technically went over the “Fiscal Cliff”. Equity markets reversed their late December weakness and rallied hard. After the S&P 500 lost 2% in the second half of December 2012, it rose 2.5% on January 2, 2013 to 1462. Characteristically, Congress claimed “victory” in “reducing” taxes (after they let them rise). You just can’t make this stuff up. Negotiations now turn to the unfinished business of expense reductions and expanding the debt ceiling a couple of months from now.

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Keep Calm and Carry On

“We can have facts without thinking but we cannot have thinking without facts.” – John Dewey

Keep calm and carry on; so read the UK government posters printed during WWII and meant to be posted in the event that Nazi Germany invaded England. Fortunately, the posters went unused. The world around us always has risks, hopefully none as dire as those faced by the Allies. Europe is an economic mess, the U.S. is heading to a possible “fiscal cliff”, the economy remains weak, middle eastern tension continues, and U.S. elections are around the corner. We highlighted most of these rather obvious risks in our last quarterly letter and noted that a low cost hedging strategy was increasingly attractive to protect against a market downdraft. Our subsequent modest purchase of “out of the money” VIX Index (a measure of the implied volatility in the S&P 500 index) call options allowed us to maintain portfolio positions and thereby capture the recent stock market rally.

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Brussels Sprouts

“Plans are nothing; planning is everything.” – Dwight D. Eisenhower

Europe happens to be one of the largest producers of Brussels sprouts. Is it just coincidence that the latest market moving directive from the European Summit for unifying bank regulation across Europe emanated from Brussels, the capital of the European Union? While short on details, the plan aims to give the ECB (European Central Bank) supervisory powers over European banks. This, in turn, would enable the ECB to directly inject capital to viable banks. We hope that the plan resembles the vegetable in its rapid germination and favorable health impact (Brussels sprouts, as with broccoli and other brassicas, contains sulforaphane, a chemical believed to have potent anticancer properties) . However, we would be remiss if we didn’t keep a healthy dose of skepticism in the ability of the 17 Euro countries’ ability to negotiate a smooth solution. The fiscal imbalances are huge and the solution will take years not months. Headline risk surrounding European countries’ negotiations over support for weaker countries (Spain and Italy) will continue through year end. A slowing Europe can only dampen global growth and the systemic fallout from a breakup of the Euro currency, while a small probability, would be messy at best.

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