ARL Advisers Letter to Investors: December, 2011 Results
For the 4 week period from December 2, 2011 to December 30, 2011, the SP500 posted a 1.18% gain. For the year, the SP500 was essentially flat having loss 0.0032%.
So there you have it! 2011 is in the books. There was a lot of nail biting and a lot of volatility, and in the end, investors got nothing for their efforts — a big fat goose egg. A year like this highlights why having an active approach is preferable to buy and hold. We use data to make decisions, which helps us to navigate the markets. We invest in multiple asset classes. Our strategic and balanced approach has served us well this year helping to weed out the noise.
Throughout the year, there were opportunities in Treasury bonds, gold, equities and crude oil. Gold and crude oil outperformed Treasury bonds with equities picking up the rear. We had a position in gold all year; a position in Treasury bonds since March; a position in crude oil at the beginning and end of the year. To make money in equities, we had to be more opportunistic as the market was in a topping formation for the first 6 to 7 months of the year.
Looking ahead, the market remains on recession watch. The ECRI’s leading economic indicator and the Chicago Fed’s National Activity Index continue to deteriorate. Market sentiment is neither overwhelmingly bullish nor bearish, and this is a problem if you are a bull. If there are no bears, then short covering fuel to propel a rally is non-existent. If there are no bulls to embrace a rally, then the market simply won’t go higher. At best, the price action remains range bound, and as we approach the new year, prices are at the upper end of that price range.
Other factors weighing on equities continue to be strength in the Dollar and in Treasury bonds. I have also contended that stocks won’t go higher until the bullish trends in these assets turn bearish. As stated above, my bond model has been bullish for the past 9 months. My Dollar model remains bullish, and it is likely to do so for at least another 3 months. These are the anti-risk trades, and both of these assets outperformed equities in the past year.
The leading story of the year has been Europe, and it is my impression that many investors believe that if it wasn’t for Europe, the USA would be on the track to a bull market. Of course, you would also have to believe that US economy is also immune from what appears to be a global slowdown. My data shows that the USA is at risk for recession, so I just view the Europe story as a sideshow and a diversion. Yes, it is another chance for a bailout, and lord knows, market participants like bailouts, and maybe that is what this market needs — another bailout.
- ARL Advisers has 3 portfolios: Conservative, Broad Market, and Aggressive
- Use of proprietary models and a research driven methodology to determine those factors that lead to sustainable market moves
- Diversification across equities, bonds, real assets, and currency
- Personalized service
ARL Advisers: Strategic. Balanced. Targeted.
And with bailouts in mind, it is worth repeating what I said last month: “While my thesis remains that the market is vulnerable, I remain open to the idea that the Fed can avert another recession, and the only way we will know this is to have higher prices. I really think it is that simple. Last year’s QE2 rally really started in early November with the Fed announcement of how extensive QE2 would be, and it went on until mid- February at which time the market struggled its way into a top. If the same were to happen again, there should be enough time to capture a sizable portion of the gains. Remember, these actions won’t solve any problems.”
Last year’s problems have not been solved, and if you call papering over our problems as a solution, well you might be in luck here. This seems to be the only solution ever offered — spend your way to prosperity. To this observer, it seems like the market is living on more hope than normal. Hope that there will be a bailout. Hope that Santa Claus will show up. Hope that investors will favor the USA only because we are less bad than the rest of the world. Yes, there is a lot of hope. I don’t invest on hope. The data has a bearish tilt, and as we start the new year, our portfolios are positioned accordingly. If wrong, I am confident our models and strategies will steer us in the right direction.
For the 4 week period from December 2, 2011 to December 30, 2011, the Conservative Portfolio lost (1.73%). Over the same time period, the SP500 gained 1.18%. Poor relative performance was due to gold’s 10% loss last month. We end the reporting period, like we started, with positions in: GLD and BND.
Since January 1, 2011, the Conservative Portfolio has returned 7.83%. Buy and hold S&P500 has returned a negative (0.0032%). Results are through December 31, 2011. The 2011 Conservative Portfolio equity curve v. buy and hold SP500 is shown in the next figure.
Conservative Portfolio v. Buy and Hold SP500/ 2011 return
The goal of the Conservative Portfolio is to generate a return equivalent to the long term returns (8.78%) annualized total return since 1871 of the SP500. Capital preservation is a hallmark of this strategy.
For the 4 week period from December 2, 2011 to December 30, 2011, the Broad Market Portfolio gained 0.68%. Over the same time period, the SP500 gained 1.18%. The Broad Market Portfolio continues to trail the index by a handful of percentage points as few sectors had the “proper” relative strength to participate in October’s snapback rally. This portfolio has been out of equities for 7 straight weeks now. Current positions include: BND.
Since January 1, 2011, the Broad Market Portfolio has returned a negative (5.84%). Buy and hold S&P500 has returned a negative (0.0032%). Results are through December 31, 2011. The 2011 Broad Market Portfolio equity curve v. buy and hold SP500 is shown in the next figure.
Broad Market Portfolio v. Buy and Hold SP500/ 2011 return
The goal of the Broad Market Portfolio is to generate a return that exceeds the long term returns (8.78% annualized total return since 1871) of the SP500 with significantly less risk than buy and hold S&P500.
For the 4 week period from December 2, 2011 to December 30, 2011, the Aggressive Portfolio lost 2.9%. Over the same time period, the SP500 gained 1.18%. The majority of the portfolio’s losses were from the 10% down draft in gold. As we start this reporting period, last month’ s positions are this month’s and they include: GLD, BND , OIL, and SH.
Since January 1, 2011, the Aggressive Portfolio has returned 12.44%. Buy and hold S&P500 has returned a negative (0.0032%). Results are through December 31, 2011. The 2011 Aggressive Portfolio equity curve v. buy and hold SP500 is shown in the next figure.
Aggressive Portfolio v. Buy and Hold SP500/ 2011 return
The goal of the Aggressive Portfolio is to generate a return that exceeds the long term returns (8.78% annualized total return since 1871) of the SP500 by 2-3 times.
Historical returns and portfolio examples shown on this website are not presented net of investment advisory fees or other transaction costs. Actual performance results will vary from these examples. Past performance is not indicative of future results. This material should not be considered a recommendation to purchase or sell any particular security or an offer to sell any product. ARL Advisers, LLC reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.
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