Ron Miller Portfolio Action Update


We are in “uncharted waters” is an old cliché that is often expressed when one is faced with frustrating and perilous circumstances. I would expand this cliché a little by saying that the US financial/economic system is in “uncharted deep waters” in my judgment.

Ron Miller's Portfolio Action Update is a periodic update of his technical analysis viewpoint of the financial market environment and the current portfolio management posture for his precious metals portfolio strategies. Ron Miller and Martin Truax, Managing Directors at Morgan Keegan & Co., lead the Investment Planning & Management Group (IPMG) in Atlanta . Martin and Ron moved their group from Salomon Smith Barney, where they had been for 29 years, to Morgan Keegan at the beginning of 2001.

The table below includes both Short Term (S - T) and Intermediate Term (I - T) Rating results of our technical analysis of the price direction for the Styles and Sectors we follow. The intention is to give you insight into the time frames that are involved in our portfolio management process. Short Term ratings capture more of the wiggles in the market while the Intermediate Term ratings capture more of the trending aspects of the market. If we are in a period where the market is in a trading range with little trend direction, the Short Term ratings are more useful. On the other hand, if the market is in a longer term trending mode, we put more emphasis on the Intermediate Term Rating results. Note that signals can change in between reporting periods which may be confusing at times. For example, a Green light may have changed to Red and back to Green since the last report. The Rating Table would still be Green but the signal date would have changed from that shown on the previous report.


We are in “uncharted waters” is an old cliché that is often expressed when one is faced with frustrating and perilous circumstances. I would expand this cliché a little by saying that the US financial/economic system is in “uncharted deep waters” in my judgment. There is a difference in that if the waters are shallow, then it may be relative easy to swim or walk to shore if there is a mishap. If the waters are deep and far from shore, then the rescue process or the swim to shore (no chance of walking) is more difficult. For essentially all of the post WWII history, the US financial/economic troubled waters, when they occurred, have been in relative shallow waters, in my opinion. I believe that we are now in troubled “uncharted deep credit waters”, far from shore, that has not occurred, with this magnitude, since the post WWII era.

In my viewpoint, monetary and fiscal policy changes should have been acted upon while the water was still shallow as late as last summer, or even better, a few years ago when the Fed kept short term interest rates too low, for too long. Now that the credit market ship has drifted out into deep water, the rescue is going to be more difficult.

Fed Chairman, Ben Bernanke, in a speech March 4 to the Independent Community Bankers of America Annual Convention, suggested that lenders should consider writing down the principal on loans that are in default rather go the foreclosure route. He stated that the loan recovery from defaults at auction was only around 50% and that reducing principal could be a better economic solution for everyone. The problem is, how do you differentiate between borrowers that are deserving and those that are not, in any rational fashion. What about borrowers that have been current on their loans that could see there neighbors loan written down and consequently lower the value of their home further. It is a mess in my opinion.

The lesson being learned (again and again) by the financial markets is that it is best to deal with problems while they are still minor, not when they have grown to massive size. A cardinal rule in the brokerage business is that when you discover you have made an error in a client’s account, correct it immediately, don’t see if you can work out of it. I remember an episode many years ago in another office when a short option position was not closed out as the customer requested but was inadvertently doubled up. It was an out of the money call option trading at 1/8 of a point and the expiration was only a few days away. The branch manager elected to ride it out rather than close it out for a modest loss to the broker. The next day, the company that the short call option was written received a buy out and the stock soared. The branch lost about $500,000 while the branch manager and the broker lost their jobs shortly thereafter, as I recall. Recent problems with rogue traders trying to work out of their mistakes at major financial institutions also comes to mind.

I am sure the Fed is working on ways to try and unfreeze the credit markets. Whatever they do will likely involve increasing liquidity and the monetization of debt in some form. That is, since the depression of the 1930s, inflating out of economic problems with cheaper Dollars has been the solution of choice, in the final analysis, many times. The alternative choice, when the situation is really bad, is to let market forces play out with the strong potential of a deflationary economic collapse like in the 1930s. Bottom line, with today’s social/political reality, that is not a viable ‘elective’ alternative, in my judgment.

U.S. Dollar Index & Foreign Exchange Trends

The US Dollar remains weak. In my judgment, the US Dollar is predicting that the Fed’s actions will eventually end up monetizing a good deal of bad debt (the inflation option) as the only viable choice out of the current credit crunch debacle.

Capitalization Styles

We remain with double Red lights. The major averages are approaching their January closing lows or have dropped a little below. However, the intraday lows in January were substantially lower for most indices. For example, the DJIA closing low on January 22 was at 11971.19, and the close Friday was at 11893.69. However, the intraday low on January 22 was 11634.82. So, there is still some further technical risk to the downside in my judgment. The McClellan Oscillator closed Friday at - 207.22. That is an oversold reading, but the McClellan Oscillator was down over - 250 points at the January lows and down close to - 350 points at the July, 2007 lows. In our domestic growth strategies we have been in a defensive posture since last fall. With the rally out of the January lows failing, we substantially increased the Bear hedge allocation in the DGP, EGP and FLP portfolio strategies.

If the market is down sharply next week, the internal technical metrics will likely reach extreme oversold levels that could precipitate another rally phase. That will likely be attractive enough for short term bullish positions, but until the trend of lower lows and lower highs is reversed, the path or least resistance is likely to continue downward in my opinion.


Energy/Defense/Resources Plus - EDRP: We reduced the Precious Metals Mining allocation somewhat last week as this markets appears overextended. Energy sector now has a Short Term Red light and the Gold Mining sector is on a Neutral light. Natural Resources sector has remained on double Green lights but has a reduced Rating number from last week. The allocations for the EDRP portfolio are 10% Energy Services, 15% Energy Exploration & Production, 6% Alternative Energy, 14% Defense-Major, 7% Defense-Components, 6% Security Systems, 17.5% Precious Metals, 6% Natural Resources and 3% Agricultural Resources. The Bear hedge is 8% (4% invested) Energy index. The net market exposure is 76.5% with Money Market reserves of 11.5%.

Natural Resource Plus - NRP: We reduced the Gold bullion and Gold Mining allocations last week. We have remained cautious in response to general stock market weakness. There now is a Short Term Red light for Energy and a Neutral Light for the Gold Mining sector. However, there remain double Green lights for the Natural Resource sector. The current allocations are 4% Gold bullion, 3% Silver bullion, 30% Precious Metals Mining (including a 5% direct silver mining position), 5% Energy Services, 10% Energy Exploration and Production 7% Alternative Energy, 8% Agriculture and 16% Natural Resources. The Bear Energy index hedge is a 8% (4% invested). Net market exposure is currently 75% with Money Market Reserves at about 13%.

Gold Portfolio - GLD: The Gold Mining and Gold bullion allocation were reduced last week as the Gold sector now has a Neutral light, plus these markets appear overextended on a short term basis and have stalled approaching the $1000 psychological resistance level overhead. The previous Friday Gold bullion closed at $974.30 per ounce Vs. last Friday’s close at $972.4, for just a small loss for the week. We remain bullish for the major trend as the Fed’s response to the ongoing credit crunch continues to put pressure on the US Dollar. The current GLD allocation is a 10% gold bullion position, a 5% silver bullion position and 61.5% precious metals mining securities, which includes a 10% specific silver mining allocation. Money Market reserves are 23.5%.

Tactical Asset Allocation Style & Sector Signals:

Ratings 60% and Above are a Green Light

Ratings 40% and Below are a Red Light

Ratings 41% to 59% are Neutral

Light Green indicates going from Green to Neutral since last Signal Date

Pink indicates going from Red to Neutral since last Signal Date

This is a reduced version of Ron Miller's Tactical Asset Allocation Style & Sector Signals table. Ron's portfolio management process includes the technical analysis of over 400 mutual funds that have been selected to represent forty four different styles and sectors that are tracked daily for both Short Term and Intermediate Term direction signals. These include the 9 Morningstar portfolio management style boxes plus 16 equity sectors, 10 international styles/sectors and 9 bond sectors. Ratings are based on the percentage of securities followed in each category that are on buy signals. Short Term (S - T) signals are based on daily price data and may be different and change more frequently than the Intermediate Term (I - T) signals that are based on price action for a trailing 5-day period. These ratings are subject to change at any time and obviously their accuracy is not guaranteed. Individual securities may perform differently from these signals. These direction signals are a useful tool in the portfolio management process but are not the sole determinate of actual portfolio style or sector weightings. They should not be interpreted as a buy or sell recommendation for any specific financial securities and do not reflect positions of Morgan Keegan. Market data used in this analysis is believed to be from reliable sources but its accuracy can not be guaranteed.

Portfolio Action Update Explanation: I try to confine my comments to a discussion of what recent action has occurred in these portfolios and my current technical analysis posture. In general, my portfolio management approach is to determine current market conditions through technical analysis and to position the various portfolios strategies to participate in the current environment. Although I usually have an opinion of the future direction of the market, I don’t rely heavily on my opinion in the portfolio management process. Neither opinions, technical analysis or fundamental security analysis produce

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