Mid-Month Update - May 20, 2009
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It is becoming increasingly more difficult to really know what the financial markets are doing these days. What we do know is this market is becoming very risky and very scary and all of this is happening as the markets are going up!
All around the world, we are seeing emotional responses to "hopeful news." Today, a report that Lowe's did not lose as much as they thought sent the market up. In India, a new leader was elected so the demand was so strong they had to close the stock market not once but twice as investors battled to get into the market before it soared 17% in one day! Finally, Goldman Sachs upgraded Bank of America (anyone smell conflict of interest?) which helped the financial sector.
We are continuing a path of caution. The markets are still 80% below the 2007 returns and have a very long way to go. On the other hand, we may be seeing a Great Depression style stock market where it rallies strongly on false hope for several years before ultimately losing 90%. Some investors believe that this is the track we are on.
I have not seen one piece of news that gives any indication that things are getting better. It does seem that things are stabilizing for now but stabilizing in this environment certainly would not spark a major rally of this type. Housing is abysmal, jobs are hard to come by, worldwide economies are slipping into recession one-by-one and the swine flu is still not over.
Until that happens, it is very likely to see the markets trade in a range and playing a wait-and-see game until a definite signal shows a clearer path. Until then we may see some traders taking profits.
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How Have We Weathered the Storm?
The month of May has been interesting. The first week was an up week and the second week was a down week for the general markets. We have adjusted our hedges several times. We have elected to be more conservative simply because most of our clients prefer stability rather than the roller coaster rides the general market has experienced.
For the month, our conservative has done the best and is up +0.36%. The aggressive strategy was next with a -2.64% decrease followed by the moderate strategy at -4.45%.
Keep in mind that we have not seen many of the dividends yet for our high yield bonds. The annual return is about 16% but almost none of that has hit as of yet with the biggest checks coming in the fall. This makes it very difficult to know exactly what the real returns are since we are six months away from our largest dividend checks.
What Are We Invested In?
The largest holdings are a combination of five different high yield or corporate bond funds. We are hedging 40% of the exposure so that we are protected on the downside. Of course in retrospect we wish those hedges were not there but who would have guessed that the greatest meltdown in 80 years would get investors so excited.
The final 10% for the moderate and the aggressive strategy is in commodity products spread equally between agriculture and base metals (ex: aluminum, copper and nickel). Having commodities does two things: 1) it protects us in an inflationary climate and commodities will be the leaders when things really start to pick up. Currently China is sparking some demand in commodities. It remains to be seen if other countries pick up the pace as well.
What Is Our Outlook For the Future?
I still see danger for now. The markets seem like they have gone up too far and too fast for a rotten economy on the verge of a huge recession. We call this condition "overbought" when prices go up faster than the values of companies. With P/E (price to earnings) at levels they were when the markets were steaming to all time highs in 2007, these numbers seem unsustainable. However, markets can do whatever they please just like in the late 90's when technology prices were frothy indeed.
We have never seen a recovery in stocks in this type of climate where prices went straight up without testing the lows. It is reasonable then to expect the market to settle back again and test the lows before going up in a real bull market rally.
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Working for your wealth and peace of mind,
The Vance Capital Management Team |
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