BCA Research: And The Band Plays On

I normally spend my mornings researching, analyzing data and building charts which then leads to a written work that I publish daily. This morning I got derailed doing some interviews, however, during my research process I received an email from BCA Research and 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 are already aware, 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. This is why I spend so much time pointing out the potential risks that exist. It is never the market rising that hurts us; it is when it stops that does.

This is 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.