Letter to Investors: March, 2012 Model Portfolio Results
For the 4 week period from March 2, 2012 to March 30, 2012, the SP500 posted a 2.83% gain. For the year through March 30, 2012, the SP500 is up 12.0%.
It’s all good! The record quarter has investors extrapolating future gains, and whether this is appropriate or not is yet to be determined. I am more of the ilk that the market isn’t as forward looking as others want to believe. I always wonder what the market was thinking at the 2008 top before it went on to lose about 50%. I tend to be a buyer on weakness – not strength – and I am bit uncomfortable chasing prices especially in a market that is overbought, overly bullish, and over valued and that has risen on poor volume and breadth. When it comes to equities, we should get about 2 to 3 buying opportunities per year. These usually occur when investors are fearful and perceive the risks to be high. So, I will just have to be patient.
Over the past month, I was surprised by the market’s strength. However, these liquidity induced rallies seem to have a way of going further than most of us believe is possible. But there will be a limit, and I suspect when the music stops you will need a parachute to get out of this market safely. 2010′s liquidity induced rally ended in May’s “flash crash”, and the 2011 version ended with the SP500 losing 20% in 4 weeks. Although the market should remain buoyant as long as investors embrace this rally, predicting the end is somewhat difficult. Right now, investors are bullish, and this a good sign as it does take bulls to make a bull market.
Our Dollar model is bearish and this will be supportive of equity prices. Our Treasury bond model has turned bullish again. Falling yields should be good for equity prices as well, and some of the best multi-month rallies (1995, 1998, 2003, and 2009) coincided with falling Treasury yields. Last year’s economic weakness coincided with stagnating equity prices and falling yields. That was a market top that lasted nearly 6 months. Will 2012 be a repeat of 2011? Or will the Federal Reserve be able to keep the balls in the air for another 7 months leading up to the US Presidential election? There appears to be a disconnect between the economy and the markets. The economy is much weaker. The market is clearly dependent upon “cheap money” or the perception that “cheap money” is coming. But without market weakness, it is difficult to see how the Fed Reserve can justify new easing measures. I suspect this is Bernanke’s conundrum. How can we have more QE with equity prices at cyclical highs? The answer: make a case that new easing measures are to attack the unemployment problem.
What should we expect going forward? From this perspective it is rocks over paper. Commodities have yet to take off and they generally do in these liquidity induced rallies. Gold looks positive, and it now has the tailwinds of falling yield pressures. Crude oil has pulled back to a prior break out point. With Europe in recession and the Chinese economy looking glum, the US is going to have to go at it alone. This will require further monetary intervention as demand and growth appear to be waning. This will only flame inflation pressures.
- 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.
For the 4 week period from March 2, 2012 to March 30, 2012, the Conservative Portfolio gained 0.02%. Over the same time period, the SP500 gained 2.83%. For 2012, the Conservative Portfolio has gained 4.09% and the SP500 has gained 12%. The portfolio had high cash levels (>50%) this month. We end the reporting period with positions in: SPY and cash. As an aside, I am looking to add a currency pair to this portfolio.
Since its inception on January 1, 2011, the Conservative Portfolio has returned 12.24%. Buy and hold S&P500 has returned 11.99%. Results are through March 30, 2012. The Conservative Portfolio equity curve v. buy and hold SP500 (since inception) is shown in the next figure.
Conservative Portfolio v. Buy and Hold SP500/ since inception
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 March 2, 2012 to March 30, 2012, the Broad Market Portfolio gained 0.82%. Over the same time period, the SP500 gained 2.83%. For 2012, the Broad Market Portfolio has gained 9.83% and the SP500 has gained 12.00%. Results are through March 30, 2012. The Broad Market Portfolio trailed the SP500 over the past month. Gains in the SP500 were concentrated primarily in the financial and technology sectors. Emerging markets underperformed noticeably. We start the month with positions in the following sectors: XLB, XLE, XLF, XLI, XLK, XLY, IYR, EEM, and EFA.
Since its inception on January 1, 2011, the Broad Market Portfolio has returned 3.41%. Buy and hold S&P500 has returned 11.99%. The Broad Market Portfolio equity curve v. buy and hold SP500 (since inception) is shown in the next figure.
Broad Market Portfolio v. Buy and Hold SP500/ since inception
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 March 2, 2012 to March 30, 2012, the Aggressive Portfolio gained 0.06%. Over the same time period, the SP500 gained 2.83%. For 2012, the Aggressive Portfolio has gained 4.11% and the SP500 has gained 12.00%. March seem to be a transition month for this portfolio. Gains in equities were cancelled out by losses in crude oil, Treasury bonds and gold. As we start this reporting period, portfolio positions include: GLD, OIL, SPY and QQQ.
Since its inception on January 1, 2011, the Aggressive Portfolio has returned 17.06%. Buy and hold S&P500 has returned 11.99%. Results are through March 30, 2012. The Aggressive Portfolio equity curve v. buy and hold SP500 (since inception) is shown in the next figure.
Aggressive Portfolio v. Buy and Hold SP500/ since inception
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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