Monthly Market Recap
Stock markets can be strange indeed! Just a few short months after the financial world threatened to collapse into a cataclysmic depression of unprecedented proportions, the stock market now believes that life is good once more. During the month of May, you would not have known how bad things had been but only how good things are. Things are definitely good, right?
Not so fast. Homebuilders, toxic banks, insurance companies, luxury retailers and all the uglies of the financial world have rallied like we are in a boom era. The very stocks that everyone avoided became the darlings of Wall Street. The typical defensive stocks like utilities, health care and consumer goods which have always been strong performers in bad markets did not perform nearly as well. In other words, almost all money managers were caught flat footed leaving most of us scratching our heads in amazement.
This is normal though in lousy markets. As I have written before, the financial markets can act very irrationally during times of uncertainty, even to the point that the most shunned sectors suddenly become the favorites. In the Great Depression of the 1930's, there were seven very strong rallies that also caught investors by surprise. When this was occurring, there were many experts and government officials who continually advised the public that everything was fine. Below are some notable quotes from the depression years. Note that most of them could have (and may have) come from our current politicos.
"While the crash only took place six months ago, I am convinced we have now passed through the worst - and with continued unity of effort we shall rapidly recover. There has been no significant bank or industrial failure. That danger, too, is safely behind us."
- Herbert Hoover, President of the United States, May 1, 1930
"...by May or June the spring recovery forecast in our letters of last December and November should clearly be apparent..."
- HES (Harvard Economic Society) May 17, 1930
"[1930 will be] a splendid employment year."
- U.S. Dept. of Labor, New Year's Forecast, December 1929
"For the immediate future, at least, the outlook (stocks) is bright."
- Irving Fisher, Ph.D. (best known economist in America) in Economics, in early 1930
"...there are indications that the severest phase of the recession is over..."
- Harvard Economic Society (HES) Jan 18, 1930
"There is nothing in the situation to be disturbed about."
- Secretary of the Treasury Andrew Mellon, Feb 1930
"The spring of 1930 marks the end of a period of grave concern...American business is steadily coming back to a normal level of prosperity."
- Julius Barnes, head of Hoover's National Business Survey Conference, Mar 16, 1930
"... the outlook continues favorable..."
- HES Mar 29, 1930
"... the outlook is favorable..."
- HES Apr 19, 1930
"Gentleman, you have come sixty days too late. The depression is over."
- Herbert Hoover, responding to a delegation requesting a public works program to help speed the recovery, June 1930
Investors really glob on to this type of hype. They love it when the public relations campaigns are in full force as they are expecting suckers to jump back in. At some point, they do and it appears that many are starting to return. When they all jump in (that want to) then the smart money pulls the rug out from under the dumb money and the markets correct again. |
 | How Have We Weathered the Storm? | | May was a flat month for our portfolios. Since we know that the markets are still very weak, we have been hedging our portfolios. Keep in mind that hedging does two things: It limits losses and it also limits returns. We cannot have both! We cannot protect money as a main priority but make lots of money at the same time if the risks are too high. Since we have to decide one way or the other, we opted for safety.
We maintained our exposure to high yield bonds. They did outperform the general stock market. By hedging our risk, we gave up those returns but will collect dividend payments as we go along. Keep in mind that some of the dividends will not come in until the end of the year while some come in monthly and some quarterly.
I have had some people ask if we have lost our touch. During the past year we have protected our client's wealth but have not participated as much in the rally of the past few months. There are several things to keep in mind. First of all, this is a marathon and not the hundred yard dash. A few months does not mean much in the grand scheme of things. The second thing to realize is every manager has good days and bad days, good weeks and bad weeks and simply cannot capture every market move. So the answer is no. We have not lost our touch! We are simply being cautious. Clients who have been with us and missed the downturn last year are still way ahead. Those investors who got slaughtered still need almost a 100% return (depending on the day) to catch up with us! The marathon continues and patience is still the most valuable trait for any successful investor. |
| What are We Invested In? | We trimmed our high yield bonds only because they have done well and the spreads have narrowed. Also we wanted to add a few other positions to the portfolio. What we are seeing now is inflation. We think inflation is back despite what the Fed is telling us. The Fed has been trying to drive down interest rates but instead rates are rising. In fact, the 10 year Treasury auctions have been faring poorly which is causing rates to go up. Because of this we have been allocating some money to commodities which generally respond well during inflationary times. They also can do poorly in a recession so we have to be somewhat cautious.
We added consumer staples but closed our positions recently for a small gain. We also added China and emerging markets but they appear to have topped out and we took a loss of just over 1%. During this time, we added semiconductors but closed those out with a nice gain of over 7%. These were all things that were short term trades.
In the commodity space, we now own gold mining stocks, base metals (copper, aluminum, nickel, etc), agriculture, precious metals and a commodity index which is heavily weighted with oil and energy. I continue to warn people that inflation is picking up and can be deadly to an economy. While we have added precious metals, I still believe that everyone should be buying gold and silver coins and storing them at home. No, gold and silver are not investments but rather are a store of value. They are a diversification from holding U.S. dollars which are losing value every year. Precious metals hold their value and track inflation well.
Our conservative portfolios are still mostly a combination of bonds but we did add a 19% position in commodities. In our moderate and aggressive strategies we added a fund that makes money as interest rates go up. In the international space, we own some Brazil which is shaping up to be one of the most stable economies right now. At the present time, we have no hedges but we are prepared to put them in place at a moments notice. |
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What is Our Outlook for the Future? As I said last month, finding a bottom for the stock market is not an event but rather a process. Since I wrote those words, we still have not seen the markets search for a bottom. Instead it is reacting to all the news that is now "not as bad as expected." There is only so long that investors will put up with bad news that is just not as bad as depression news before they start expecting companies to turn around. We have seen some companies start to perform better since they did so poorly in the past but this is not the trend.
Currently the markets are reacting as though we are in flush times. The fundamentals are very, very weak but any signs of life have been greeted with enthusiastic buying. At some point, the markets will not put up with crummy earnings and poor sales. The P/E (price to earnings ratio) is about what it has been in good years. This will correct at some point. Either the prices will drop or the companies will report stronger earnings.
Despite encouragement from our President to spend money, it is not happening. Consumers are saving and reducing debt, exactly the wrong thing at the wrong time. We could not ask for a worse scenario right now. Since our economy is consumption driven, it remains to be seen if consumers will do their patriotic duty and spend, spend, spend! We don't think they will and we don't think they have the ability to do it. Fear is starting to spread to government employees. Government jobs have always been seen as stable and for the most part, recession proof. Tax revenues have been disappointing and government is having to scramble to cut back and balance their budgets. We should know more in the next few months but it is likely that it will strain the financial markets in a big way.
June is the last month that we will be keeping our fees down for new clients. Starting July 1, our management fees for new clients will double. We are not raising fees (and never have) for any of our Trust Company of America clients. If you have any friends who still have money after being butchered by their current broker, suggest they talk to us. If they contact us before July 1st, we will give them the same fee rate you have. Spread the word and help your friends by referring them to the local SPCA agency. By the way, we are the local SPCA agency. It stands for: the "Society for the Prevention of Cruelty to Assets"! Trust Company of America
Dynamic Allocation Strategy
From:
(01-01-09 to 05-31-09)
Aggressive -6.00%
Moderate -9.10%
Conservative 0.33% S&P 500 1.76%
Nasdaq 12.51%
Dow -3.15% |
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