I received an email from BCA Research along with their new report entitled, And The Band Plays On.
The report immediately grabbed my attention with the following quote, which sets the tone for the entire document.
“When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing.” Charles Prince, CEO Citigroup, July 9, 2007
As BCA Research notes:
"The dance has been going on for a long time and many participants are getting exhausted. Yet, it is hard for investors to be seated when the music is so good. Those choosing to move to the sidelines for fear of losing their balance (or worse) have had to watch their more energetic and fun-seeking peers continue to have a great time. But, it remains to be seen who will have the last laugh because the feverish playing of the band is distracting attention from the many problems lurking outside the dance hall. And as Chuck Prince discovered in 2007, the music can stop suddenly."
As you already know, I agree with the premise that as long as the markets are in a positive trend, portfolios should remain near full allocations. However, being fully allocated currently does not mean that it should always be the case. That's why I spend so much time pointing out the potential risks that exist. To point out the obvious: It never hurts when the market rises; but when it stops, that's when the pain sets in.
That's a point that BCA makes:
"There is no shortage of economic and geopolitical challenges, yet equities continue to power ahead and risk premia are close to historic lows."
Currently, there is no denying that the markets are well within the grips of a bullish market cycle. However, as I stated above, there is little use on focusing on what could go right. In order to protect our investment capital, we must be aware of what could go wrong and have a plan to deal with such outcomes accordingly.
The entire report is worth reading, but it is especially important to note the economic realities of both Japan and the Eurozone. As I said yesterday, there is little likelihood that the U.S. can escape the rising global deflationary pressures. Such an outcome would put the Federal Reserve on the wrong side of increasing interest rates in the short term and tighten overall policy accommodation.