July, 2012 Model Portfolio Results
For the 5 week period from June 29, 2012 to August 3, 2012, the SP500 gained 2.11%. Over the last 3 reporting periods, the SP500 is up 1.86%. There have been a lot of ups and downs, but we are going nowhere fast. For the year through June 29, 2012, the SP500 is up 10.61%. From January 1, 2011, the SP500 has gained 10.60%.
The majority of this year’s gains in the equity markets were made in the first 3 months of the year. Since the early April highs, the SP500 has done little but provide investors with a nice roller coaster ride. As we enter August, the recent cyclical highs are fast approaching, and the equity markets are sucking a lot of investors into the notion that they are bullet proof. Despite all the scary headlines, the SP500 has clawed its way back, and this must mean only one thing: it’s sunny skies ahead. I say, “not so fast”.
We know about the existence of the “Bernanke put”, and with the deepest pockets and buyers of last resort standing by, investors don’t appear to be too concerned. Global recession? No worries. Weakening macro fundamentals in the US? No worries. Poor earnings? No problemo. The worse, the better. In today’s market, bad is good as bad means more market intervention. But market participants aren’t stupid, and they have learned to front run the actions of the central bankers. So today’s exuberance is predicated not on fundamentals and investment merit, but on this notion that Ben has your back. Prices have run up in expectation that the Fed is going to act.
And that is the rub here. The higher the market goes the less likely we will see QE. The Fed initiated QE2 and Operation Twist only after the Sp500 had fallen about 20%. Through talk and carefully placed speeches and meetings on the calendar, the Fed has managed to support the market without expending its few precious bullets whatever they may be. The bailouts and QE’s 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 with that, I don’t see this time being different, and I expect the current speculative environment to run its course like it always does.
From my data centric perspective, this looks more like a market top than a launching pad to a new bull market. Let’s consider the price cycle, which is the path prices take from low to high and back to low again. I utilize investor sentiment to define the price cycle, and we already had a sell signal back in late March. In the price cycle, buy signals follow sell signals. But despite the market selling off rather aggressively back in April, we have yet to have a buy signal where investors became excessively bearish. Market bounces that start without the proper buy signal generally are failure prone, and that is my expectation in this instance. The equity market needs to clear itself of the current speculative excesses before a strong rally can develop.
The biggest winning asset for the reporting period was crude oil. Gold was range bound, but it held above recent lows as investors continue to believe that QE is on the table. Gold and crude oil are you hedges against the lunacy of central bankers. Bonds were choppy. The fundamental bond model has been bullish for the most part, but the technicals have been mixed as the recent price action is beginning to fatigue.
Looking ahead, equities will have difficulty blasting through the nearby cyclical highs. In addition, we are starting to see the return of inflationary pressures as the trends in gold, commodities, and yields on the 10 year Treasury are starting to strengthen. Collectively, this is a major headwind for equities. Treasury bonds remain neutral as the technical picture is poor but the fundamental model is bullish. After 2 years in which gold nearly did a double, the precious metal has spent the better part of 12 months consolidating those gains. Crude oil seems to have found a floor at $80, and it remains a great hedge against the lunacy of central bankers.
- 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
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For the 5 week period from June 29, 2012 to August 3, 2012, the Conservative Portfolio gained 1.31%. Over the same time period, the SP500 gained 2.11%. For 2012, the Conservative Portfolio has gained 5.87% and the SP500 has gained 10.60%. 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 14.16%. Buy and hold S&P500 has returned 10.60%. Results are through August 3, 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 5 week period from June 29, 2012 to August 3, 2012, the Broad Market Portfolio gained 0.83%. Over the same time period, the SP500 gained 2.11%. For 2012, the Broad Market Portfolio has gained 10.14% and the SP500 has gained 10.61%. Results are through August 3, 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 3.71%. Buy and hold S&P500 has returned 10.60%. 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 5 week period from June 29, 2012 to August 3, 2012, the Aggressive Portfolio gained 4.11%. Over the same time period, the SP500 gained 2.11%. For 2012, the Aggressive Portfolio has loss (-0.20%) and the SP500 has gained 10.60%. Results are through August 3, 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 12.21%. Buy and hold S&P500 has returned 10.60%. Results are through August 3, 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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