"Analysis Without An Agenda"
Pentonomics

The Passive Management Bubble

We have happened upon that time in the investment cycle when investors vastly eschew active management of their assets in favor of a more passive management style. In fact, I read recently 461 Hedge Funds, a hallmark of active investment management, shut their doors in the first half of this year alone.

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Technical Research

Updated on US Dollar Index
Strong $ Trend Continues

One of the more important trends within the capital markets, both in absolute and relative terms, continues to be that of the US Dollar. The US Dollar Index [DX/Y] bottomed in May 2011, now more than a year ago, and has since rallied about 14% from those lows, making it one of the best performing assets in any asset class since May 4th of last year. At present, we see little evidence of the current trend waning and would like to provide a quick update to part of a study we first published years ago that looks at the relationship of other assets to historic rising and falling trends for the US Dollar.

In short, having experienced 11 rising, and 11 falling, trends in the US Dollar since 1985, there are a few notable tendencies among other asset classes that are evident. The most visible is that of Commodities, which tend to return quite nicely in falling dollar periods, while producing negative absolute returns in rising dollar circumstances. While that trend has certainly held true over the past year, so too has another, that of Domestic Equities tending to outperform Non-US Equities. Both of these outcomes are things we expect from a rising US Dollar, and both have certainly taken place once again during the past year as the US Dollar continues to trend higher. The Continuous Commodity Index [UV/Y] has fallen 17% since the Dollar bottomed last May, while US Stocks [SPX] have outperformed Non-US Benchmarks [EFA] by 22% during the same time! There are many investments that have shown no discernible bias toward Dollar trends, but those that historically do, have held true to those long-term trends this time around.

 

Here is a quick scan of the market sectors we follow. A few observations stick out to us.

Focused Sector Performance
01/01/2012 - 03/31/2012

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Our research shows the dramatic impact the direction and movement of the US dollar has on asset classes and market sectors. At Pento Portfolio Strategies we studied this from 2000 to 2001, and identified both strong $ periods and weak $ periods.

Historical Market Sector Performance Data

The above historical market sector performance data is used here solely for illustrative purposes, and not intended to represent Pento Portfolio Strategies holdings or imply Pento Portfolio Strategies’ performance history. DWA indices are representative of an unmanaged sector portfolio and used courtesy of Dorsey Wright & Associates. Dividend and interest payments are not included in total return calculations. Past investment performance is not indicative of future results. Advisory services offered through Pento Portfolio Strategies, LLC, a registered investment advisor. Securities are cleared and assets are held through Charles Schwab Institutional, a division of Charles Schwab & Co., Inc. For more information visit: www.pentoport.com or contact an Investment Advisor at:

Pento Portfolio Strategies 32 Court Street, 3rd Floor
Plymouth, MA 02360
Phone: MA: 508-746-4228 or NJ: 732-203-1333


Fundamental Research

Gold Prediction for 2012

With gold selling off about 20 percent in the last few weeks, there appears to be much confusion as to what, if anything, has changed for the bullish scenario. But the truth is not much. Gold is now and always has been a hedge against a falling dollar, which is the result of an inflationary monetary policy on the part of our central bank.

However, despite the fact that Ben Bernanke's best friend is a crumbling currency, the U.S. dollar is currently increasing as measured by the Dollar Index. And so, in knee jerk fashion, investors have dumped gold. But this is sophomoric and egregious reasoning.

The domestic purchasing power of the dollar isn't increasing and there has been no change in the intrinsic fundamentals of the currency either. The dollar is only increasing when measured against the Euro-a currency that is used by several insolvent and imminently bankrupt nations. The reasons for a secular decline in the purchasing power of the U.S. dollar remain well intact. The Federal Reserve continues to delay the commencement of lifting their target interest rate above zero until years to come. As a result, real interest rates remain well into negative territory and have no sign of increasing. Money supply growth rates remain positive, with M2 rising nearly 10% in the last 12 months. And U.S. debt and deficits push inexorably out of control with the only hope of resolution being default-mostly likely through inflation.

It is for those reasons that the cyclical pull back in gold should be viewed as a buying opportunity delivered to us as the sole benefit of Europe's debt and currency crisis. Once the crisis in Europe lands on U.S. shores, the true decline in the dollar will no longer have the benefit of being masked behind a more faulty currency. The truth is that both currencies are in decline and while the dollar is falling off the cliff at 90 mph, the Euro is tumbling to towards earth at 110 mph. So it only appears like the dollar is flying if you are looking at the Euro. However, they both are destined to crash into the ground and the only reserve chute to be deployed is made of gold.

Therefore, the dollar price of gold may struggle in the first two quarters of 2012 as Euro weakness sends the dollar higher and commodity prices lower. However, a stubbornly high unemployment rate should bring Bernanke back into the QE game in the second half of this year. The likelihood of yet more dollar creation from the Fed, a continuation of negative real interest rates and a national debt that is most likely to be monetized should send gold to at least $1,800 per ounce by year's end.

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