Excelsia Investment Advisors

On Thursday, July 31st, the market had a one-day sell-off of 2%, the most negative day since June, 2012. You heard the market pundits and the talking heads of CNBC opine that the reason for the selloff was the convergence of geopolitical risks.

Greetings from a thawed out Savannah! Q1 of 2014 will be remembered for a number of things, but the most prominent were the erratic weather patterns and arctic-blast temperatures that most of the country experienced. I missed writing my Q1 letter for the first time in ten years due to a nasty bout with pneumonia in mid-January. For those of you who have never had pneumonia, I do not recommend it!

The difficulty since 2012 has been that if you are not significantly overweight US equities, then your returns are less than stellar. Employing a diversified, risk-averse investment strategy in 2013 has in hindsight been the wrong thing to do, given that every other asset class is negative year-to-date, while US stocks are up double digits. The combination of the Feds Zero Interest Rate Policy and the artificial bubble in Treasury bonds has forced conservative investors into riskier positions in order to find risk-adjusted returns.

The enthusiasm of our culture for Zombies is estimated to contribute a tidy $5 billion dollar a year to GDP, and that doesnt even include the too-big-to-die zombie banks. In my opinion, the acute interest in zombies and horror (and escapism in general) says something about our countrys mental health.

I predict the Ides of March will find us in a continued sequestration, and Congress will use the time between now and the debt ceiling deadline on March 27th to debate the merits of true tax reform as opposed to governing by crisis. In the end, though, the reform conversation will revert to governance by crisis, with another stop-gap measure to avoid government shutdown during Holy Week and Easter, which will tide us over to the elections of 2014. Do you expect any different?

The Ben Bernanke and Mario Draghi concert gave the markets a double shot of their love in the month of September by promising to print as much money as needed to finance the debts of their respective countries. Ever since the financial fraternity party ended in 2008 and the world began deleveraging its massive credit hangover, the global markets have been hooked on the next shot of love from the central bankers.

An economy consists of a gazillion simple transactions, all working together; and our economy used to be grounded is such factors such as supply and demand, growth, and imports and exports. But today the economy is driven by the political rhetoric of our elected officials as it relates to regulations, taxes, and anticipation of QE3. We are in global slowdown mode, and to understand how we should invest we need to better understand what deleveraging will mean over the coming couple years.

Somehow, this is about the only time of year when most people reflect on the past, ponder the present, and plan/predict the future. There are several themes we have identified that will affect our asset-allocation discipline for 2012. As I commented in November, the market risks are geopolitical and the sentiment is driven by government policies. Our themes for 2012: Germanys Euro, Inflation versus Deflation, Election Year and It Isnt All Bad . For the year 2011, stocks basically broke even, although the 37 days where the Dow was plus or minus 200 points certainly made for a wild ride.

For the past 22 months the question has lingered: when will Greece default? The markets are beginning to learn from the prior three Euro-crises what to expect from European policymakers. In the end it will be what Germany wants, as they are seemingly content to amputate the leg of Greece six inches at a time. Even prior to this past weekends summit, German Chancellor Merkel complimented now former Prime Minister Papandreou for stepping down but implored the new Greek policymakers to carry out the Brussels decisions completely and immediately.

America is being palinized by total lack of leadership and responsibility from both political parties on Capitol Hill. The discussion of whether the US should default on our government debt if Congress is unable to pass a budget compromise and raise the debt ceiling by August 2nd, 2011 is absurd. The result of the impasse is a gradual erosion of trust by individuals, corporations, and foreign debt holders. How did we arrive at this point of lunacy, where our leaders are actually talking about the USA defaulting on our debts? Luke 23:34: Father, forgive them for they know not what they do.

I never did particularly care for Alice in Wonderland, watching her go down rabbit holes and discover the characters of the White King and Queen, Humpty Dumpty, Cheshire Cat, and the Mad Hatter. But when watching the ongoing budget debates I feel as if the American people are Alice and we are being subjected to a world of budgetary nonsense, spoken in a language that is incomprehensible. The American people know they are being held hostage in a strange place where our Congress orchestrates a Mad Hatter tea party for which the entertainment is kicking the can of debt down the road.

Since mid-January we have found ourselves in a quandary over ?jumping in? or ?diving in? to the strongly flowing bullish current of the developed markets. The warning signs have been the Mideast riots, unemployment, commodity inflation, and the US percentage of debt relative to GDP. The positives are corporate earnings, an accommodative Fed, cash-rich balance sheets, and no new taxes for now. Therefore we wanted to share with you a number of charts and statistics that are part of our process.

In the world of investing there is no substitute for taking action. Therefore, as your advisor, I seek to understand our bias and attempt to make rational and prudent decisions. Savvy investors understand the risks inherent in their assumptions and adopt a more businesslike approach to investing by reducing and hedging risk. Investors are typically surprised when facing a loss, and the psychological power of losses far outweighs the power of gains. Therefore remember the critical rule of compounding: Don?t lose money

The huge drop in bond yields is the driving force in the equity markets and the decline of the dollar. The old adage 'don't fight the Fed' still applies, and Excelsia's allocations will be shifted more towards equities and alternatives as interest rates get driven lower and lower. Emerging market debt, commodity and natural resource companies, gold, and large-cap stocks all offer favorable prospects.

Asset allocation is an art involving quantitative analysis of financial markets combined with common sense. A buy-and-hold strategy is a dead decision during markets such as these. We have had the worst May in stocks since 1940. No credit still equals no jobs, China is destined for turmoil as its real estate market unwinds, and the Consumer Confidence Index is down to 52.9 in June from 62.7 in May. Fair value on the S&P is 950, which would indicate another 7 percent decline in stock prices from here.