Monday, December 5, 2011

Models say: Go bonds!

This morning talking to three money managers -- they work exclusively with very wealthy individuals.  They get paid a flat commission and have no reasons to churn their clients' books.  All three this morning told me that they ran their models over the weekend, all three came to the same conclusion, move clients money from 100% equity to 100% bond.

The metrics they use a relatively common, nothing mysterious, all three note that the year has been flat (all Americans) so that clients are not worse off. Their trading strategy means that their clients are actually up a little, these are not buy and hold managers, the actively manage their clients' money.  Anyway, all three had the same perspective; the economic risk is very high, all those who plead that the banks (in America) are fine are not only talking their books (which is fine) but also hoping that the derivatives books will not blow up (because of a counterparty failure) -- BTW there were rumors of a big European bank having an almost "Lehman moment" last week.  However, the political risk is off the chart.

Also, and more importantly, following the MF Global "moment" (don't underestimate the importance of this), they've all reviewed their custodian accounts and have specifically prohibited their custodians from "borrowing" clients' security or cash for investing in "no risk" instruments.  The implications here are serious, these guys are "white shoe firms" they are highly regarded, if they are doing it other are following their move, collectively this may be seriously impacting market liquidity (this may explain the Fed's actions last week...).  They don't control that much money (together these three account for less than $500 million), but they pack a punch on the credibility scale.

Bottom line they don't care for the rally, it's artificial, they are looking for sovereign bonds of medium duration (3/4 years) in the U.S. and Canada (Ausis too but liquidity is limited).  They've cut all their all their short positions (liquidity squeeze and unlimited downside), and their derivative positions (excluding currency hedging) bottom line they've buttoned down the hatched and are ready for the storm.

These guys will be rewarded for not loosing their client's cash, not forging a 2or 3% additional yield.  There's an old saying in money management, the first rule to making money for your clients is not to loose any money!

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