Letter to Investors: April, 2012 Model Portfolio Results
For the 5 week period from March 30, 2012 to May 4, 2012, the SP500 posted a (-2.76%) loss. This reversed the prior reporting period’s 2.86% gain. For the year through May 4, 2012, the SP500 is up 8.87%.
Last month, it was all good as investors seem to extrapolate the market’s gains into nothing but clear sailing ahead. This month, investors aren’t so sure as the prior reporting period’s gains have vaporized. But from this perspective, very little has changed fundamentally as the problems that were with us last month remain with us this month. The only thing that has changed are the perceptions of investors.
In any case, my patience not to chase the market has paid off. And guess what? I will remain even more patient waiting for our next pitch. We should get about 2-3 buying opportunities per year in equities, and we are nowhere near that juncture as these usually occur when investors are fearful and perceive the risks to be high. Investors are only beginning to realize that these liquidity fueled rallies tend to vaporize rather quickly. The all clear was sounded and oops!, it looks like the rug is going to pulled out from under them again. The unemployment problem in the US is not solved and getting worse. The sovereign debt problem in Europe is not solved and getting worse. Fiscal issues in the US have not been addressed and there is little political will to do so. Investors have put their faith in Ben Bernanke and the Federal Reserve. “Don’t bet against the Fed” is market dogma that needs to be put in the rubbish can of market axioms that don’t work. For whatever reason, investors seem to have forgotten 2010′s “flash crash” and 2011′s 20% down draft over a 4 week period.
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 Federal Reserve can justify new easing measures. I suspect this is Bernanke’s conundrum. How can we have more QE with equity prices near cyclical highs? The answer: make a case that new easing measures are to attack the unemployment problem. This would be QE #4. 2 real QE’s plus a Twist have been tried already and have done little to solve the problem. Why continue to do the same thing over and over again when it doesn’t work? I am just asking! The market wants more liquidity, and by all accounts, most market observers believe that Bernanke will continue with the pedal to the metal. This is his grand experiment to avoid the mistakes of 1937.
Our Dollar model remains bearish and this will be supportive of equity prices. Our Treasury bond model has turned bullish. Falling yields should be good for equity prices and some of the best multi-month rallies (1995, 1998, 2003, and 2009) coincided with falling Treasury yields. However, the Fed’s intervention in the markets has distorted market signals. I believe strength in the bond model is a sign of economic weakness and in anticipation of more bond purchases by the Fed. This is not a Fed being accommodative during an economic expansion like seen in periods past. Last year’s economic weakness coincided with stagnating equity prices and falling yields. That was a market top that lasted nearly 6 months. For the record, our models were bullish on equities up until 2 weeks ago; we are currently neutral and we will become bullish once again when the current price cycle unwinds.
What should we expect going forward? In equities, be patient and wait for our pitch. In commodities, crude oil has broken down, and I would guess that this is a sign of future economic weakness and slack demand. Gold will remain attractive as long as interest rate pressures persist. Currency debasement is the only tool that central bankers have at their disposal, and with economies around the world crumbling, it is only a matter of when not if they will use these tools.
- 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 30, 2012 to May 4, 2012, the Conservative Portfolio loss (-0.05%). Over the same time period, the SP500 loss (-2.76%). For 2012, the Conservative Portfolio has gained 4.04% and the SP500 has gained 8.87%. The portfolio has positions in GLD, SPY (remember neutral rating), XLU and BND. 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 12.18%. Buy and hold S&P500 has returned 8.86%. Results are through May 4, 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 30, 2012 to May 4, 2012, the Broad Market Portfolio loss (-1..34%). Over the same time period, the SP500 loss (-2.76%). For 2012, the Broad Market Portfolio has gained 8.36% and the SP500 has gained 8.87%. Results are through May 4, 2012. Owing to the sell signal in our equity model, we start the month with positions in the following sectors: XLU and BND. This portfolio also has about a 40% cash position.
Since its inception on January 1, 2011, the Broad Market Portfolio has returned 2.03%. Buy and hold S&P500 has returned 8.87%. 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 30, 2012 to May 4, 2012, the Aggressive Portfolio loss (-1.92%). Over the same time period, the SP500 loss (-2.76%). For 2012, the Aggressive Portfolio has gained 2.11% and the SP500 has gained 8.87%. Results are through May 4, 2012. Like March, April seems to be a transition month for this portfolio. Equities were sold and positions in bonds and gold were initiated. As we start this reporting period, portfolio positions include: GLD, OIL, BND, and XLU.
Since its inception on January 1, 2011, the Aggressive Portfolio has returned 14.81%. Buy and hold S&P500 has returned 8.86%. Results are through May 4, 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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