Monthly Market Recap
The financial markets just get weirder and weirder! It cannot make up it's mind at all. First, it looked like the stock market might be going higher but that rally has failed and the S&P 500 is about where it was two months ago at the first of May. For two months it has gone nowhere.
Second, it appeared that inflation was taking hold. Commodities started a strong move and bond yields climbed rapidly. Then the markets got worried that deflation and recession were a problem and those have come down.
All in all, the markets are in negative territory for the year so 2009 has not proven to be very good at all.
All we can say is the cheerleaders must be disappointed. They believed that if the housing market dropped only 5% instead of 6% that the recession must be over. They postulated that if the number of first time unemployment check recipients dropped from 600,000 a week to 450,000 a week that the recession was over. And finally, a survey of 34 economists told us a few weeks ago that the recession ended in June so we should be having a grand old time in the stock market.
What they fail to realize is this: financial markets are not that predictable and 30 year old pundits who have MBAs from Yale and Harvard are actually very stupid people! We are not picking on them but truth be told, they have no experience. They have not lived through wars, and market crashes, and disasters and so forth and so on. They can only rely on an endless stream of nonsensical data that has no meaning. And furthermore, all you Yalies listening out there, financial markets exist to eat your lunch! In my 45 years of market experience, I have learned one thing well and that is do not hang your hat on numbers and statistics. Most of them can be, will be and are continually manipulated.
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 | How Have We Weathered the Storm? | | We have not done as well as we would like. We too have been disappointed that some of our signals have been false. It is not the worst few months that we have had but it has not been fun. We got hurt with commodities. We did great when we first bought them but then the bottom fell out again causing us to scramble. The market sniffed inflation and we made some trades. This too fell apart as inflation fears waned. Curiously enough, the best inflation number crunchers we know have pegged inflation at almost 6%. We really do have high inflation but the government statisticians have massaged the numbers to appear benign. Our trades were good but the faulty evidence swayed the masses. Such is the nature of working in the financial markets!
We also got hurt hedging our portfolios. We have been using a high yield bond strategy for about three months. High yield bonds have been one of the best categories this year but they are volatile. To mitigate the risks, we hedged our portfolios but this turned out to be too aggressive. In hindsight, we should have taken off the hedges but the risks seemed much too high to have done that. Hindsight is such a powerful tool. It allows Monday morning quarterbacks to criticize, condemn and complain and most of them do! Unfortunately, it does not give us any direction as to the future which is the thorniest problem of all.
When financial markets are shaky it is important to keep both eyeballs on risk. There is always the possibility and sometimes the probability of a very sharp and sudden sell-off. This is a dangerous thing that we must work hard to avoid.
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| What are We Invested In? | We have continued to reduce our positions in high yield bonds. There are two reasons: one is they are starting to stall and top out and the upside potential is limited compared to the risk. When markets get rough, high yield bonds can drop a lot so we don't want that kind of exposure right now. Our Moderate and Aggressive Strategies have 10% to 20% in high yields. The Conservative has none at this time.
We are also building our bond portfolio. Bonds have proven to be a place that many investors run to when things get rocky. Our Moderate and Aggressive Strategies have 10% to 20%.
All strategies have 10% to 30% in money markets / cash with the most holdings in Conservative and the least in Aggressive.
In our Conservative Strategy, we have 10% in corporate bonds, 30% in 20 year government bonds, 10% in treasury inflation bonds and 20% in short term bonds. There are no stocks, equities or stock mutual funds at this time.
The Moderate and Aggressive Strategies have 20% and 30% respectively in short term bonds and 20% each in long term government bonds.
The major difference in the Moderate and Aggressive Strategy is we hold inverse positions of 20% to 30% respectively. This is to hedge our portfolios and take advantage of our computer models which are telling us to expect some type of sell off in the stock market. We have been seeing this for the past week. We are leery of earnings season which kicked off today when Alcoa reported. The report was dismal. Sales were off 45% and they reported a sizeable loss. This could be a dismal omen of what the rest of the companies will report in the weeks to come. For that reason we are still cautious and are suspicious of any reports that the recession has ended.
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What is Our Outlook for the Future? In our previous letter we mentioned that finding the bottom for the stock market is not an event but rather a process. How true this has been! The markets have been in a trading range for several months. This simply means that the indexes simply drift aimlessly up and down without any direction. It also means there is no conviction either way. What is good is it is building what we call a base such that when things break out either up or down then a new trend will most likely be established. Trends are what we thrive on!
After a few months of fairy tales, there seems to be a sense that reality is setting in. Unemployment continues to rise and weakness in the labor market should continue for some time. We just don't know how long. Until the consumer has money, they just might not be spending very much. And, spending is what drives our economy and our financial markets.
Now that most states, counties, cities and municipalities have been hit between the eyes with the realization that things are dire, the financial markets are beginning to be nervous. California (where we are) is facing more layoffs, furloughs and spending cuts. This does not bode well as California is the 8th largest economy in the world. Quite simply, there will be more layoffs and unemployment which will hinder spending.
Another key factor is the housing market. Most folk's wealth is dependent on how they feel about their homes. If people are upside down (meaning they owe more than the home is worth) then they tend not to want to spend money. They also shy away from starting businesses or funding business ventures.
Currently the government is considering yet another stimulus plan for America. That itself is a danger sign. If things are as good as our Fed Chairman says and the recession is over as most economist have postulated then why in the world do we need more stimulus? Answer: we are still in deep horse pucky!
Trust Company of America
Dynamic Allocation Strategy
From:
(01-01-09 to 06-30-09)
Aggressive -10.57%
Moderate -12.86%
Conservative 01.94% S&P 500 1.75%
Nasdaq 16.36%
Dow -3.75% |
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