Parts of this post have been redacted due to the author’s wish to remain anonymous.
What may this mean for asset allocation? As money managers, how can we make money for our clients?
1. Certain, and we wholeheartedly mean only a limited few, hedge funds. There is a strong need for hedge funds which can predict and exploit two growing trends:
a. Global macroeconomic imbalances. Global macro funds are most likely the prime candidates to do this.
b. Corporate debt crises. Distressed debt/event driven funds would be well positioned here.
However, we caution readers that most hedge funds do not really hedge anything and fall into the category of what we refer to as “beta funds.” Please refer to “Maybe There Shouldn’t Be 6,000 Hedge Funds” for elaboration. Adept manager selection is acutely critical in this space.
2. Commodities which are less US Dollar sensitive, such as timber, rubber, and possibly even natural gas if the supply bubble abates. Timber, for example, may also function as an inflation hedge. This could be useful to holders of US assets considering the Fed will likely try to inflate away our onerous debt burden. The more QE-sensitive commodities such as gold, crude oil, and metals may not be as attractive.
3.International Equities. The year 2008 was the turning point, and the US has become eclipsed by burgeoning overseas nations. Foreign companies are seizing the opportunities to buy up damaged businesses in cross-border fire sales. Witness the upping of Banco Santander’s (NYSE: STD) stake in Sovereign Bancorp a few years ago. It’s hitting home. Household names such as Morgan Stanley and Merrill Lynch have sold stakes to Asian and Middle Eastern investors. A Belgian group bought Anheuser-Bush on Euro dollar strength. A Chinese investor group attempted to buy part of the Cleveland Cavaliers. I am a Celtics fan, so I’m glad that Paul Pierce was spared.
a. Not China. Ironically, I’m not a big fan of China because I think the US economy is going down in flames, and by the same reasoning, its major trade partners are likely to feel pain. My crystal ball portends a crisis on the greenback and if I squint I can make out the harbinger of a few nasty events in Europe on the way as well.
b. Tudo bem pra Brazil! If I had to put my money anywhere in the world I would say Brazil, which made a big ticket loan to the IMF last year. The 2009 IPO of Banco Santander Brazil’s ($8 BB) was the largest the world had seen in a year and a half.  This is one country in the world that may have a leg to stand on: the banks are well capitalised and middle class is growing.
4. Value style, high dividend stocks placed in tax-deferred accounts. At some point over the next 10 years, interest rates will likely cycle up again. Rising interest rates and inflation spell danger for bonds.
In this extended malaise, value stocks are likely to turn out better than growth stocks due to the long term, sustainable, cash flow rich nature of their businesses. I’d go for the boring electric utility companies yielding 3-5% over the trendy shoe companies, and compound the dividends in a tax deferred account. The exception is the tech industry which is a great buy right now as it is undervalued by historical standards.
5. Convertibles. These hybrid securities do well in times of market uncertainty. It seems that even the most experienced and sophisticated investors are shell shocked. Converts may have some life in them for a while.
6. Preferred stock. For the same reasoning as high dividend stocks, preferred’s may be an attractive alternative to bonds. However, these instruments do tend to exhibit interest rate sensitivity more than common stocks would.
7. AMT free Municipal bonds. Just being exempt from Federal income tax may not go the distance anymore. Retail investors looking to preserve capital may need all the help they can get given the onslaught of creative and aggressive tax regimes that are likely in the pipeline.
8. REIT’s. Although real estate is by no measure the apple of anyone’s eye, there are bargain buying opportunities in some industries. Healthcare REIT’s, for example, may benefit from favourable demographics and could be worthy of consideration.
The information contained in this presentation contains confidential information regarding Diamond Oak Capital Advisors, LLC (“Diamond Oak”) and may contain information regarding hedge funds and other investments recommended or otherwise analysed by Diamond Oak. This document is not an offer to sell, nor the solicitation of an offer to purchase, any interest in Diamond Oak or any hedge funds or other investments discussed herein. An investment in any hedge fund or other investment discussed herein may be undertaken only through such fund or investment, may be speculative, and may involve a high degree of risk. An investor in hedge funds could lose all or a substantial amount of his or her investment.
Certain information contained in this presentation has been obtained from sources outside of Diamond Oak and its affiliates. While such information is believed to be reliable for purposes used herein, no representations are made as to the accuracy or completeness thereof and neither Diamond Oak nor its affiliates takes responsibility for such information. Past, pro forma, hypothetical, projected, or suggested performance of any investment or portfolio of investments is not necessarily indicative of future performance.
This document is neither advice nor a recommendation to enter into any transaction with Diamond Oak or any hedge fund or other investment. This presentation and its contents are proprietary information of Diamond Oak and may not be reproduced or otherwise disseminated in whole or in part without Diamond Oak’s consent.
 Lindmark, Tom: “China’s U.S. Asset Buying Portends a Replay of Japan’s 1970s Spree?” May 25, 2009.
 Kennedy, Simon, and Gelsi, Steve. MarketWatch, October 7, 2009.
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