This has truly been an unusual year! First the year started on a high note and then after that the market fell apart and now things are just so rosy once more.
When markets go up in times like these you have to ask yourself why? Here are the answers that I came up with: 1) things are better than expected, 2) the worst is over, 3) the Fed, the Treasury Secretary and the President have all said that they see signs of recovery, 4) the banks are making a bucket load of money, 5) Intel sees the bottom of the technology market, 6) interest rates are low, 7) housing has picked up, 8) the unemployment has slowed down a bit and there are probably more.
When I look at all of this, it appears very shaky. The market has experienced its biggest rally in over 70 years with a very dismal outlook. Is this rally real and will it continue? In the Great Depression, the stock market went up 50% during a time like this. There were about five such upturns although not as strong but ultimately things dropped 90% before the bleeding stopped.
The flavor of the market has changed dramatically. For almost 18 months, the financial markets were very volatile. Up one day and down the next. Up two days and down three. Now we are seeing five weeks of gains with not much rest. The banks are on fire as are the emerging markets. This seems to be a market that is manic depressive and it is definitely swinging from depressed to ebullient. Almost all pundits have called the end to this recession and are expecting that we will start to emerge by September but some think it will be the end of the year.
Somehow this seems very premature. We have been told that this is the worst era since the Great Depression. Banks were collapsing but now all of a sudden they are healthy, thriving and prospering? The consumer comprises 72% of our GDP (gross domestic product) but now that unemployment is still rising (but slowing just barely) we all have money to spend? And finally, there are many countries around the world in various stages of crisis but they are all doing well now and commerce is escalating? The signals seem very strange indeed.
This is most likely a bear market rally which can be bear traps that clean out the unsuspecting investor. All of it has been driven by rumors, speculation and conjecture. It all started when our Fed Chairman, Ben Bernanke told 60 Minutes that he saw "green shoots." That set it off. Now the Fed is considering regular press conferences presumably because when he talks the market goes up. The more he is on television, the more things should go up, right?
The reality is we almost had a meltdown in September and things came to a grinding halt. Now things have stopped being in free fall which is being interpreted as things are getting better. I think we are in the middle of a lull before the next shoes drop. I also see 5-10 years of this kind of market activity. In the meantime, we should see a series of ups and downs as the financial systems around the world stabilize.
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This month has not been a good month. Being the suspicious folks that we are has been what kept our clients from losing oodles of money this year and last but this month did not work as well. Our accounts were down this month. The aggressive and moderate strategies were down over 5% but the conservative was up for this month. The flavor of trading has changed dramatically which has made it harder to work with. Unfortunately, good investment managers are never 100% right! In fact, if a good manager is right 40% to 60% and cut losses quickly then they are usually top notch managers. We continue to strive for perfection but realize that we will be flummoxed from time to time.
There is some manipulation that is causing problems for all investors. The biggest one is the ETFs (exchange traded funds) are being rebalanced at the end of the day. Before that happens, according to Jason Zweig of the Wall Street Journal (4/18/09), "Every day, trading desks at big banks and brokerage firms blast out customized spreadsheets to favored clients. These tools, linked to live data feeds, predict whether the leveraged ETFs will be buying or selling as 4 pm approaches. That enables hedge funds and other big investors to trade ahead of the ETFs." We can only hope that the regulators put a stop to this soon.
The best opportunities that we see right now are in high yield bonds. We think that it might be time to take a breather and see how things develop with the other financial markets. High yield bonds are paying between 13% and 24%. We started buying these last week so we have not had time to see how this strategy is shaping up. High yields will drop when the market drops so we are working on getting our hedges to neutralize any market drops. Once we do then we can collect dividends until the stock markets show signs of stability. As long as manipulation is going on then we have to be extremely cautious. When the economy really does pick up then high yield bonds can do very well and may very well outpace any gains in the stock market.
These are difficult times for all Americans and all investors. The game changes constantly, the government continues to send a false sense of security and people are getting edgy as we move into the 19th month of this debacle. This recession is lasting longer than any we have had in recent memory. Americans are still losing their homes, they are defaulting on credit cards and they are facing turmoil at home when they lose jobs.
I am still working crazy hours to manage your money. It is tough and I am the first to admit it. It is also tough on a daily basis when clients want to know why they aren't making money. Unfortunately that is the season of life that we are in. Finding things that make money is hard. The only thing making money on a regular or guaranteed basis is CDs, but only if you consider 2% making money. I don't. Taxes and inflation eat up all returns and more. Clearly, if we don't make 8% year in and year out, we are losing money after inflation and taxes. Will we finish at 8% this year? I think the possibilities are very good. Recessions and unemployment typically retreat after the stock market goes up. Those who look to economic data to bet on the stock market get killed every time.
When things turn around (this recent rally is not a turnaround), we will see good solid gains. In addition, because of our style, we will not be buying weak sectors but will be investing in the sectors trending up the best. Just keep in mind, when everyone is ready to give up, the market will take off! Inevitably, the longer this goes on, the more antsy people will get which leads people to throw in the towel just in time to miss the big rally. This market requires patience. This market requires discipline. And, this market requires that you not lose your nerve or you will miss perhaps the biggest market gains in 80 years. While we cannot be right all the time, we have been right enough that we have outperformed the past eighteen months by over 40%. Most investors will need to see almost a 100% gain before they catch up with our portfolio strategies. By keeping an eye on capital preservation, we have avoided the worst so far and we will continue to make risk management the number one objective at this time.
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