We’re bullish on energy, gold and Microsoft

The perfect combination of events came together at the best possible time for President Obama and allowed him to cruise to a much easier victory than any of the pundits expected – or at least this pundit.

We expected the employment numbers for October to include some significant revisions to the downside, and they didn’t. In fact they looked much better than expected. Add the east coast storm of the century, Hurricane Sandy, whose tidal surges knocked all tri-state low lying seaside towns for a loop that may be permanent, and the President got to control the airwaves.

The debate about whose economic “non-plan” plan was better than whose seemed stupid in the wake of all that devastation. The President appeared to be in control of the catastrophic situation, and was even cozied up to by New Jersey Governor Chris Christie. This of course calmed a few raw nerves and gave confidence to women and younger voters that they should pull, press, or write-in their votes for the President. This in turn delivered the ultimate swing state of Ohio to the President and then a second term. So now what?

The fiscal cliff is officially here. The mandatory programs have grown into monsters and the  politicos  now have to do some real work. On tap is a rumored 600 billion in taxes to be dealt with, not an easy job. The President in the past wanted anyone making more than $250,000 to be called rich enough to pay more, but that would seem to fit neither the east coast nor west coast cost of living profiles. So, some items like sending the top tax rate on dividends to that of ordinary income – 43.4% – would almost triple the current rate of 15%. How about a nice 290% tax increase for 2013?

Capital gains taxes would move to about 24% , an increase of just 60%.  This is before we figure out the Obama care health bill costs, and where the law of (2100 pages of) unintended consequences takes us. Given the lack of a tax deal earlier this year, and the low probability of these types of increases making it through a Republican-controlled congress, we are left with some real horse trading to be done. We suspect some people will be impaled on the 3rd rail of politics – entitlement spending, and the act of reducing same.

Earlier we did some adjusting, and have a bit more to do, and after that we will sit back knowing that outside of burying Gold Eagles in our backyard, we have done as much as we believe we can to ride out these type of storms, political or mother nature’s. Some of the portfolio changes made

- Swapping into the Energy Select Sector SPDR (XLE) and the Alerian MLP ETF (AMLP), thereby diversifying our Oil & Gas exposure

- Exchanging some (GLD), our gold position, for some (GDX), the Market Vectors Gold Miners ETF, which is focused on the major gold miners.

Microsoft (MSFT) had long been in our sights and we are glad to now own this category killer, which pays a 3+% yield (as of 11/14/12) and is trading below 10 times 2013 earnings estimates.

Its dividend growth of 14.85% over the last five years is certainly solid.

Finally, we added a little more commodity exposure using the Market Vectors Agribusiness ETF, (MOO). We like the growing demand for “things” from China and the continued movement into the middle class of various emerging and frontier markets.  We believe this change is a powerful driver for western-style consumption habits and should help offset any inflationary impact on our portfolio.

The rebalancing of our portfolios is meant to help stabilize returns by adding asset classes that we feel have been underweighted as a result of market movements, and trimming back those that have become significantly larger than originally intended. We believe this should, over time, keep us buying low and selling high.

Our diversification means we will not follow the general equity market up tick for tick, but rather offer protection when things like a major sell-off occur. These Black Swan events have really become far more frequent than we would like. They don’t announce their arrival, and usually show up at the worst time. They cannot be predicted, only prepared for. With our approach we aim to give some upside perhaps, but we seek to lose volatility and gain sleep better at night.

Diversification and proper asset allocation are to your portfolio what a full home natural gas powered generator is to your home. A powerful tool, helping stabilize your life – a bit expensive by some measures, but always welcome during a storm.

The investments discussed are held in client accounts as of 11/14/12. These investments may or may not be currently held in client accounts. The reader should not assume that any investments identified were or will be profitable or that any investment recommendations or investment decisions we make in the future will be profitable.

Certain information contained in this presentation is based upon forward-looking statements, information and opinions, including descriptions of anticipated market changes and expectations of future activity. The manager believes that such statements, information and opinions are based upon reasonable estimates and assumptions. However, forward-looking statements, information and opinions are inherently uncertain and actual events or results may differ materially from those reflected in the forward-looking statements. Therefore, undue reliance should not be placed on such forward-looking statements, information and opinions.