Letter to Investors: June, 2012 Model Portfolio Results
For the 4 week period from June 1, 2012 to June 29, 2012, the SP500 gained 6.47%. This period’s gain equaled the last reporting period’s (-6.72%) loss. For the year through June 29, 2012, the SP500 is up 8.31%. From January 1, 2011, the SP500 has gained 8.31%.
In last month’s missive, I pointed out that investors had gained exactly nothing over the prior 17 months. Ben Bernanke’s great experiment to inflate asset prices in hopes of jump starting the economy has been a failure. Even if we include this reporting period’s huge gains, the SP500 has gained only 8.31% since January, 2011. In contrast, the i-Shares Lehman 20 + Year Treasury Bond Fund (symbol: TLT) has gained nearly 40%. And stocks have been twice as volatile as bonds over that period.
So what gives? First, demographics are changing. With baby boomers looking for safety of principle, bonds despite their low yields, are preferred. Investors are asking not what is the return on my principle but will I get my principle back. Second reason has to do with front running the actions of the Federal Reserve. The Fed’s main tool to stimulate the economy has been to lower interest rates via asset purchases particularly in the long end of the curve. These actions have been favorable to bonds. The third reason why bonds are outperforming has been economic weakness. Whether it be an imminent economic downtown or the fact that we have an economy that has been propped up by easy money, the simple fact remains that the current economy is built on a poor foundation and is vulnerable. So demographics, front running Fed policies, and economic weakness continue to support bond prices.
But what about equities? It is true, that after multiple quantitative easings and bailouts by central bankers around the world, investors have learned to front run the actions of our policy makers as well, but beyond this reason, there seems to be little investment merit to be in equities. The only thing that matters is what the next bail out will be. In the prior two reporting periods, the SP500 lost nearly 10% over a 9 week period. A scary drop to say the least, and a drop that normally would see a preponderance of bears. But the bears never surfaced. Why? Investors have come to believe in the “Bernanke put” which essentially means that lower asset prices equals more quantitative easing and bailouts. Why sell when Ben has your back? But overtime, the bailouts have become less effective at producing economic gains, and from this perspective, the only remaining benefit to monetary easing is to provide speculative price gains in the markets.
And that is how we ended this reporting period. European leaders promised to work together to provide another bank bailout, buy sovereign debt, and support growth. A tall order especially when you have to create more debt to pay off the debt you already have. Despite the plan that was short on specifics and long on hope, the markets took the bait hook, line and sinker and were in rally mode. Investors, who front ran the central bankers, were served well. This is what moves the equity markets these days.
Gold and crude oil also responded in kind. These are your hedges to the lunacy of the central bankers, and the fact that they are well off their highs makes them more attractive than equities. Equities appear to be in a topping process. The lack of bears at the recent lows and the willingness of investors to front run the Federal Reserve and European leaders at those lows is more suggestive of a market top than a launching pad to a new bull market. The equity market need to clear itself of the current speculative excesses before a strong rally can develop.
Our asset models continue to align themselves correctly with prevailing trends. However, from a portfolio perspective there was little movement. Relative to the SP500, it was hard for the portfolios to match a 6.47% gain – most which was had in the last 2 days of the reporting period. That being said the story of this market environment isn’t being written over 1 or 2 days or even 1 or 2 weeks. Over the long haul, I am confident our models and portfolios will position themselves with the prevailing market winds.
- 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 June 1, 2012 to June 29, 2012, the Conservative Portfolio gained 2.76%. Over the same time period, the SP500 gained 6.47%. For 2012, the Conservative Portfolio has gained 4.5% and the SP500 has gained 8.31%. 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 12.68%. Buy and hold S&P500 has returned 8.31%. Results are through June 29, 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 June 1, 2012 to June 29, 2012, the Broad Market Portfolio gained 0.73%. Over the same time period, the SP500 gained 6.47%. For 2012, the Broad Market Portfolio has gained 9.24% and the SP500 has gained 8.31%. Results are through June 29, 2012. 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 2.85%. Buy and hold S&P500 has returned 8.31%. 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 June 1, 2012 to June 29, 2012, the Aggressive Portfolio loss (-0.61%). Over the same time period, the SP500 gained 6.47%. For 2012, the Aggressive Portfolio has loss (-4.14%) and the SP500 has gained 8.31%. Results are through June 1, 2012. 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 7.78%. Buy and hold S&P500 has returned 8.31%. Results are through June 1, 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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