I hope everyone had a nice Thanksgiving and plenty to be thankful for. As some of you know, my wife is Australian. She likes Thanksgiving because it involves huge quantities of food (all Australian celebrations start from this point as well). However, she remains suspicious to this day about the lack of Thanksgiving presents. Many friends and family members have tried to convince her over the years that presents are not exchanged on Thanksgiving but she remains skeptical.

The markets were in a pretty foul (or is that fowl) mood on Friday, despite initial indications that the 88% of the people who are employed in the US are actually shopping in line with expectations. The real news is that things are coming unglued in Korea and Europe and that has taken some of the enthusiasm out of the “risk trade”.

Although it is inexcusable to shell civilians these days, I suspect that the Korean issues will be largely forgotten in a few weeks. The North Koreans are certainly trying to send some sort of message. But if neither the Chinese, who provide the lion’s share of economic support, nor the South Koreans, who bear the brunt of any miscalculations, can figure out what that message is, the markets are unlikely to dwell upon it for any great length of time. Sadly, nothing has changed in Korea except for those who had the misfortune of being on the wrong island at the wrong time.

The bigger issue is in Europe where the sovereign debt wound has reopened near the heart of the financial system. The patient is not well. Although the press and financial officials have gone to great lengths to concentrate attention on the failings of governments in Ireland, Portugal and Spain, the real problem is the health of Europe’s largest commercial banks, who bought up all these IOUs when they were supposed to be nearly as good as German Bunds. Who’s to blame? It depends on how far one wants to go back. I am sure there is someone in Brussels who can lay this all at the feet of the first Holy Roman Emperor.

Exposure of EU Banks
From: John Mauldin’s Frontline Thoughts Newsletter

Europe’s banks are going to take a long time to work through this load of debt. And these figures do not include the assets on the insurance company books which, in the light of new regulations being proposed, could prove to be another source of pressure. Spain, which has an economy the size of Ireland, Portugal and Greece combined, is the one that has everyone worried. The good news for investors is that the ECB is not going to let the European banking system sink beneath the waves. The bad news is that the bailouts and subsidies will be a long term drag on the European economy which, taken as a whole, is slightly bigger than the US economy.

So, with just over half the world’s GDP tied up in systems (US and EU) with banks that are not making fresh loans to spur growth, we are still not out of the woods yet. Recoveries from financial crises take longer and are slower than the regular manufacturing/inventory type. The reasons are covered in depth in the book “This Time Is Different” (but it is not an “easy read”).

So where does the System tell us to focus?

In our international mutual fund section, it still recommends India, Metals and Emerging Markets. From our ETF portfolios, Silver, Emerging Markets and Soft Commodities are still hanging in at the top of the tables despite a pullback over the last two weeks. In US domestic sectors, Materials and Consumer Discretionary are still strong although it should be noted that Energy has started to make a move upwards in the rankings. This is shadowed by an improvement in the readings for UGA on our shorter term commodity ETF portfolio where Gasoline has moved into the #2 spot behind Silver.

Switching from EPI to DBA

Ranking for SA Portfolio

In this week’s Seeking Alpha blog, we go through the switching mechanism as DBA has replaced EPI in the top 3 on Friday’s reading.

We delve into some of the reasoning behind separating the Asset Selection (Research) part of the process from the Trading (Ranking and Switching) part.

Despite getting off to a rocky down 7% start (we should have waited a few weeks for “January Effect”, oh well) we still think that removing emotions from our investing is the key to achieving good compoundable returns without adding anymore stress to our lives.

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