Today I’m excited to present insightful commentary from Glenn Cohen, Founder and CEO of Cohen Investment Strategies. Glenn has developed a very cool proprietary formula for gauging the current risk in the financial markets, his own Global Risk Index. Pretty neat concept – it uses all of the top tools that hedge funds use and over 350 data points to create a simple and practical risk index on a 1 to 5 scale. 1 indicates advancing markets and a fully invested portfolio while 5 warns of crisis and creates an asset protection plan.
Since 2007, we’ve seen how the markets have really been “all the same trade” – risk on, or risk off. So this is particularly timely in my opinion – and we’ll try to get him on the horn next month for an interview to discuss the details and thinking behind his Global Risk Index.
For now, here’s Glenn’s current take on the markets, which he’s been kind enough to allow me to republish for you here.
Market Commentary: Headline Driven Markets
by Glenn Cohen, Founder and CEO, The Cohen Investment Plan
Global Risk Index: 4.06
Central banks provide US dollar liquidity, the market rallies; markets indicate Greece will default, the market sells off; European leaders announce they will not let Greece default; the market rallies; Greek Prime Minister Papandreou turns his plane around and cancels US visit, the markets sell off; Greece has phone call with the Troika, the markets rallies; Italy’s debt is downgraded, the markets shrug it off. The Federal Reserve is meeting and markets are getting excited for the possibility of more easy money. What will the next headline be? Fed disappoints or Uncle Ben comes to the rescue once again.
At CohenPlan.com we detest headline driven markets. We view them as dangerous and no better than a trip to Las Vegas. Since mid-July, we have instructed our subscribers to have an 84% cash position and to focus on global macro long-short investments and gold. We believe the current and upcoming market conditions are best served by experienced and successful global macro managers. As a matter of fact, we will be dedicating a substantial portion of the October issue to the benefits of global macro investing and may increase our allocation to MCRNX at that time. MCRNX is comprised of 4 very experienced global macro hedge funds with tremendous track records. With our proprietary Global Risk Index at 4.06, for now we are happy to watch from the sidelines as most investors get seasick from the waves of headlines.
The most worrisome aspect of this headline driven market is that fact that none of the headlines are focused on solving the fundamental problems facing developed countries, such as structural unemployment and massive government debts. Until Greece and other peripheral countries are allowed to default they will never recover. Until the US deals with entitlements we will never be able to grow at a pace necessary to create meaningful job growth. The real fundamental problems remain unaddressed and leaders continue to focus on easy money solutions that make the long term problems worse.
Let’s discuss what the Federal Reserve will likely announce tomorrow after their two day meeting. First of all we should never underestimate Bernanke’s capacity for doing more than the market expects. Frankly, that is what he has done time and time again and this time may be no different. The market already expects the Twist (selling short term and buying long term bonds) and others believe he will add a reduction of interest paid to banks, in an effort to promote lending. We must remember that Bernanke once wrote a paper that the only way to impact the stock market positively is to do more than is expected. If the Fed exceeds expectations or hints at more concerted central action expect a rally.
The problem is that Bernanke has never been faced with rising inflation and a dissenting Federal Reserve Board. As reported on September 15th, year over year CPI rose 3.8%. This may impact Bernanke’s ability to persuade Fed members that QE3 or other massive monetary easing measures should begin right now. In addition, the Fed recently announced that rates will stay near zero until mid-2013 and the Fed has been providing dollar liquidity for European banks. While we never underestimate Bernanke’s pension to shock and awe the markets with easy money, it is for the above reasons that we are happy to wait and listen before committing more risk exposure to our model portfolio.
Eventually, we believe what is most likely to happen is that central banks around the world will coordinate and ultimately announce further concerted action to fund the global banking system and agree upon some reductions (default) of European periphery country government debt. If this happens it is likely to put a short term floor under stocks and set the stage for a short but meaningful rally. This potential rally caused by further concerted central bank action would be more likely to occur if markets were to retest or exceed their recent lows.
Glenn Cohen, Founder and CEO of Cohen Investment Strategies Inc. is a student of the financial markets and is extremely passionate about understanding how global risk, global macro economics, and fiscal and monetary policy can affect the prices of a variety of asset classes including equities, commodities, precious metals, and currencies.
As a result of his study, Mr. Cohen has created the proprietary Cohen Global Risk Index.
The Cohen Global Risk Index uses all of the top tools that hedge funds use, the thinking of top financial minds, and over 350 data points to create a simple and practical risk index on a 1 to 5 scale. 1 indicates advancing markets and a fully invested portfolio while 5 warns of crisis and creates an asset protection plan.