Ascendere Associates LLC

It seems even more clear by now that there will be ongoing and perhaps rising headline risk.  Whether oil flows or not will be irrelevant as citizens take a “now or never” approach to seeking ways to leverage revolutionary momentum in the region.  The most important oil producer Saudi Arabia has not yet experienced headline grabbing reports on protests, but protests have reportedly been already planned and additionally, an increasing number of Saudis are signing petitions requesting national reform.

As The Guardian writes, “…all this petitioning and complaining may look like no big deal. But under an absolute monarchy, even petitioning can get you into serious trouble” including imprisonment by the secret police.  Saudi King Abdullah has promised raises for public employees and financial aid for unemployed and students, yet according to a few anecdotal statements by Saudi citizens this may not be enough — to paraphrase, they want real reform not handouts.  If this is accurate, it is almost certain that we will be reading some sensational headlines regarding the state of the Saudi kingdom in the days ahead.

Markets have shown it will sell off significantly based on headlines rather than facts.  This in our opinion tips the reward/risk ratio to the negative.  If we think there is a 75% chance of headline risk in Saudi Arabia and these headlines can lead to a market sell-off it almost certainly makes sense to avoid the markets for the time being, or for the more aggressive to add weight to some select energy related stocks.

We already own three large-cap integrated oil & gas companies and a small cap oil & gas equipment and services company.  But perhaps we should be adding to our exposure to North American energy related stocks that do not currently make our top rankings, but could very well do so later on in the year if geopolitical volatility continues for the rest of the year.  Additional potential energy weightings include include two oil sands companies, two natural gas producers and two additional ultra-large cap integrated oil & gas companies.

We have noted in our Weekly Ranking Update that our models are increasingly supporting the theory that technology stocks, particularly semiconductors, may be big movers this year as the number of “high-quality” tech stocks as we define them have exploded from just a few from about 2 months ago to more 20 today.  In this regard, reality is following the theoretical so far with a 16.6% MTD average gain of the six semiconductor stocks held in our model portfolio.

Separately, as we mentioned yesterday, on average over time we have found that closing our high-turnover long model portfolio positions once they reach a certain level improves the overall risk-adjusted return.  The idea is to only keep exposure to the market for the minimum amount of time necessary to avoid volatility and unforeseen risk. (Academics argue that it pays to be fully invested at all times because some of the best gains in any given year occur in just a few days.  That may be true for their models, but not for ours.)

Our theoretical Core Long Model Portfolio (no portfolio targets) was up another 0.52% on Thursday Feb 17 bringing the MTD return to 8.46%.  Meanwhile the theoretical Opportunistic Long Model (portfolio targets) stayed at 7.38% (assuming 100% cash since the close of Feb 14 has that effect).  The S&P 500 is up 4.14% for the MTD.  These are simple returns — no compounding — and these theoretical returns assume no costs.  The 100% cash position is not a market top call; in that strategy, we simply remove ourselves from the market once we reach a target any given month.