Dear Mr. Market:

You don’t have to be a professional money manager to be aware that the swift decline in oil prices has been one of the most impactful financial headlines in years. As a matter of fact if you didn’t own a computer, read a newspaper, or have basic access to media, you would still know that oil has dropped like a rock. All you had to do was go to the gas station and see that it costs far less to fill up your tank today than it did last year.

What you may not have noticed, however, is the huge appreciation in the U.S. dollar. The U.S. dollar index compares the dollar with a basket of other currencies and it spiked up 50% in the first couple weeks of March. It has already risen almost 8% year to date and this has impacted the stock market in ways that many are unprepared for. With any situation like this there are silver linings and opportunities that we’ll discuss later in this article.

First let’s review where we’re currently at and what we did last month:

Here’s the current summary of the MPG Core Tactical 60/40 portfolio mix, which is updated as of this writing (April 1, 2015).

Click here to compare our portfolio against the benchmark

What adjustments did we make?

The following moves were made during the month of March:

3/13/15:  Bought 200 more shares of VO (Vanguard Mid Cap Index) @ $126.19 ~$2 worth

3/25/15:  Bought 75,000 final shares of MONIF (Monitise) @ $0.191 ~$14k worth

The month of March frustrated many investors. After a record-setting February the markets turned in a volatile and negative month. In one sense it was tempting to sit tight and not make any adjustments as the long awaited correction that never seems to materialize sure began to show increased signs of an arrival. If a correction ever develops, your primary allocation adjustments should already be made but your shopping list needs to be ready for action, not reaction.

We added a bit to Mid Cap since we were a bit light in that asset class and it continues to perform amidst a lot of negative sentiment. We also made our final purchase in a stock that quite frankly has been the ‘performance anchor’ of this portfolio. That being said, we bought a final block of shares in struggling Monitise after they announced they would not sell the company (at least not in the near-term). This news rattled the stock after it was propped up over 20% on continued rumors of potentially being acquired. Park this company in your long-term basement and wait patiently as they now have new management with an eye on what counts; improving fundamentals and operational efficiencies. It will likely take time but if a suitor comes into play earlier you will see this stock possibly triple on the news.

With our standard and passively managed 60/40 Benchmark we made the monthly and automated adjustment to the allocation. On the first trading day of the month we bought equities and sold bonds.

4/1/15:  Bought 38 shares of IVV (S&P 500 Index) @ $207.18 ~$8k

Sold 93 shares of BND (Vanguard Total Bond Index) @ $83.51 ~$8k

Once again the automated adjustments that this exercise forces us to make dictated that we sell some of what did well for the month (bonds) and buy with those proceeds what dipped (stocks). The S&P 500 lost about -1.7% in March and as of this writing it is just in the black again at +1.18% YTD. The passively managed 60/40 Benchmark is up +1.38% YTD and the MPG Core Tactical Portfolio is still up about +0.64% YTD.

Both Small and Mid Caps beat Large Caps again coming in at +4.83% YTD and 4.65% YTD respectively. REITs cooled off a bit the last quarter but it should be noted that their compounded returns have outperformed the stock market over 1-year, 5-year, 10-year, 20-year and 40-year periods! (this is partly why each and every portfolio we manage has at least 5% exposure to that asset class)

One area that continues to make the “smart money” look dumb…is International equities. Right now the International (VEU) and Emerging Markets (VWO) component of our portfolio is trashing domestic equities +7.54% YTD and +8.34% YTD respectively. We continue to believe that this trend will persist and make a case for it to be especially so in Emerging Markets. (continue reading below)

Where are we going from here?

Let’s get right into why we think Emerging Markets could be one of the best plays you can make this coming year (aside from bolstering your allocation with a hedge of Alternative investments as we’ve noted consistently over the past few months).

First and foremost, we bring up Emerging Markets because they are typically very “under-owned” in most portfolios we see. Secondly, the headlines of oil dropping and the dollar rising seem to have almost fully played out. Both of these issues have created headwinds to Emerging Markets but if they’re currently pausing or eventually reverse course, there could be considerable upside in this asset class.

Going back to our earlier note about the “smart money” and what they’re thinking… In our opinion most everyone is reading the same things and regurgitating it like sheep. The writing on the wall now is that the Fed will raise rates. You already knew that, right? What you shouldn’t buy into, however, is that rates will rise in lock-step fashion as the media is leading you to believe… it is never that simple. Here’s a challenge or guarantee of sorts: If the Fed raises rates three times before year-end as so many experts are suggesting, email us with a reference to this article and we’ll print it and post a video of “Dear Mr. Market” literally eating his words. As funny as that might be if it were to happen, wouldn’t it be great if all the other financial gurus would offer similar promises behind their statements?

Since we obviously believe firmly in the stance that rates will go up but in a much more prolonged and deliberate manner than in times past, there is an investment opportunity to be had. Sudden rate increases would negatively impact Emerging Markets but if you are in our camp what do you think the opposite effect might be?

Emerging Markets also are considerably cheaper than developed equities. Even with the recent outperformance over domestic stocks they are still available at much more attractive valuations. Unless commodity prices continue to crash this is only more of a catalyst to see a ‘changing of the guard’ in which equity asset class leads in 2015. We’ve continuously mentioned that it won’t be the U.S. this year, so expect more adjustments in the MPG Core Tactical Portfolio to line up with this conviction.

See you next month!