Last month we covered the old saying “As January goes, the year goes” – so far through February the saying seems to be holding water. February added to the declines experienced in January with the Market (S&P500) declining another 10% making the year to date decline for 2009 to -20%. As a Quiver client you have the luxury in using the word “witness” the market’s decline as we have been able to avoid these declines by sitting on the sidelines throughout most of January and February.
We will first address our account performance then discuss what is happening in the markets and where we may find some benefits over the next few months. In last month’s letter you will recall we referenced the risk that the market could break the lows created Nov. 20th and therefore were moving the small amount of exposure to the markets we had to money market. For our managed equity accounts we were trading SDS (bear market fund) as a way to make our accounts flat to the exposure of the markets as opposed to selling some of our longer term dividend payers.
In the last week of February the Markets first attempted to bounce off the lows which made us a buyer of the S&P500 with a very tight stop loss. There are some transactions which have high historical returns with lower than average risk and buying the first test of previous lows is one of those transactions. However, since everything is probability the rule is to buy on the first test and place a strict stop loss because if the low eventually breaks you want to be out of the way. Our stop losses were triggered keeping our declines for the month to approximately 1% (depending on the account you are in you could have experienced a decline of between .25% to 1.25%).
Currently we sit 90 to 95% cash/money market and the remaining balance in some bonds and a rising rates fund **.
Moving forward things get very interesting. With the break of the lows there is the potential that the markets are breaking a long term (30 year) up trend which leaves two options. A continued decline similar to the 1930’s or a long choppy sideways market similar to the 70’s. Either market means investors will need to abandon the old theory of buy and hold investing if they haven’t already.
We at Quiver are still amazed at how many people send us portfolios for review from firms like Merrill, Smith Barney, Wachovia and Morgan Stanley that are still attempting to stay invested in mutual funds as they lose more than 50% of their value. If you have any friends or family experiencing this please have them call us so we can help them.
As unappealing as the above 2 options sound there are some positive signs beginning to form for the future. First, we have continued to see improvement in the credit markets even as the stock markets have declined. This is very important as the problems started in the credit markets and will end in the credit markets. Second, we are not seeing forced liquidations as we saw in October and November. This takes a little explaining. In the last quarter of 2008 we saw massive selling due to hedge funds needing to raise cash for margin calls as well as other reasons. This causes even good quality stocks to get sold off even if their fundamentals were sound. In the recent declines of the market the stocks which have poor fundamentals are being taken out to the woodshed and the stocks with good fundamentals are not seeing mass sell offs. This is a good sign as it gives the impression that there isn’t indiscrement selling and we are seeing buyers move into certain sectors of the market. This is how bottoms begin to get created.
In addition to credit market improvements and the reduction of indiscrement selling there are trends beginning to develop in certain markets. This is the most important part of this letter. The first rule in investing should be to invest with the trend. For all of 2008 there was only one trend and that was down, down, down for all assets. So far in 2009 we are seeing strength in rising rates funds, gold (we could see some profit taking in gold in the near term) and corporate bonds. This provides investors a couple outlets to possibly benefit from.
Lastly, over the past two months we have seen a small improvement in the Leading Economic Indicators. The improvements have been centered on money supply which is something we discussed in our “How the Fed Works” letter from a couple months back. Improvement in money supply is due to the lowering of rates and the amount of money the Fed has flooded the markets with. The typical process is we see an improvement in leading economic indicators first in money supply which then eventually trickles through to manufacturing orders etc. The amount of time for that trickle through is the tough part to predict and is dependent upon future economic news centered on employment so continued monitoring are needed before any hard opinions can be formed.
Here is the bottom line. Regardless of bailouts and stress tests the market is headed lower, although this time in a more organized fashion which means a buying opportunity is around the corner and anyone sitting in money market with the ability and knowledge as to when to put that money to work is going to be able to benefit.
We know it is hard to stay optimistic in this environment, our job as your advisor is to separate the emotion from the facts and allow the facts to guide us in the placement of your funds. We will continue to hold large sums of money market while buying small amounts of Gold, Rising Rates Funds and Corporate Bonds to help create some income for our accounts.
In closing we would like to express our concerns for other investors out in the world. As we mentioned earlier in this letter we are still seeing a large number of investors still fully invested in this market in mutual funds which have little to no hope of returning to their previous prices. The investors who own these investments keep thinking (which seems to come from the advice of their brokers) if they sell now they will be selling at the bottom. If you are aware of someone in a similar situation encourage them to contact us so we can give them the proper guidance not rhetoric based on hope.
Until next month we wish you and your family healthy days.
**References to account performance or allocations are generalities of Quiver’s client base and may not be accurate for your account. You should always review your statement for more detailed information.
The opinions expressed are those of Colby McFadden and Quiver Asset Management as of 3/2/09 and are subject to change to due market and other conditions.