Happily hedged, we’ll move to growth stocks on a rebound – Brad Pappas

Author: Brad Pappas, Rocky Mountain Humane Investing

Covestor model: RHMI Evergreen

Disclosure: Long GLD, SLV, FXF

In my opinion, Standard and Poor’s downgrade of U.S. debt was both well deserved and telegraphed far enough in advance that the actual downgrade can hardly be a shock. It took a great deal of cajones from S&P to pull the trigger on the rating, but they had the courage while other ratings services were blind or cowards.

Is there a silver lining, that this could finally be the wake up call to Congress to disregard politics and do what’s best for the country? I would hope so, but I’m not that optimistic. In my opinion, for across the aisle cooperation to occur the Tea Party would have to dilute their flawed, dogmatic view on tax income, which would allow Boehner greater flexibility in negotiations.

In the meantime, equity markets are extremely stretched on the downside. Our Gold, Silver and Swiss Franc hedges purchased in July have worked well so far in August (as of 8/22) while our equities have struggled, and while I still believe our hedges will continue to work well longer term, the market for commodities is too hot to handle right now. But I’m not a seller. The Swiss government has been stating its currency is wildly overvalued, but in reality it likely represents the most solid currency. Considering the plight of the Dollar and Euro, I don’t see any reason to reduce our Swiss Franc holding via FXF.

JP Morgan estimated gold could reach $2,500/oz by year end – a big jump from current levels. This bulletin has the air of a buying panic, which may indicate an intermediate term top. Should the S&P 500 rally, our hedges will likely decline. Keep in mind that equities have been in bull mode for awhile and I believe are likely to remain in this mode. Hence, I view any pullback as an opportunity to add to holdings.

This is not the end of the world. This is not even 2008. Very soon I believe we’ll likely make a volatile market bottom that will indicate a low water mark for equities. I don’t intend to increase equity exposure at this point, regardless of the selloff and the potential for a rebound. I believe that low water mark will be retested at least one more time, possibly more. Hence, we’ll view a rebound, which will likely be dramatic, as a chance to reposition our equity holdings from cyclical stocks into strong growth companies, and add further hedges.

Brad Pappas

 

Sources:

GLD – Yahoo Finance: http://finance.yahoo.com/q/bc?s=GLD+Basic+Chart&t=3m

SLV – Yahoo Finance: http://finance.yahoo.com/q/bc?s=SLV+Basic+Chart&t=3m

FXF – Yahoo Finance: http://finance.yahoo.com/q/bc?s=FXF+Basic+Chart&t=3m

“JPMorgan says gold may jump to $2,500/oz by yr-end” Reuters, 8/8/11 http://in.reuters.com/article/2011/08/08/idINIndia-58681020110808