Model Portfolio Results: August, 2012

For the 4 week period from August 3, 2012 to August 31, 2012, the SP500 gained 1.13%. For the year through August 31, 2012, the SP500 is up 11.84%. From January 1, 2011, the SP500 has gained 11.85%.

Last month, the market was focused on whether Ben Bernanke would launch another around of QE. His Jackson Hole speech confirms the Federal Reserve’s commitment to do whatever it takes to jump start a sluggish US economy. This seems like old news as the market has been anticipating QE3 for about 3 months now. Bernanke told us QE was coming, but he has not committed to any time frame or factors that might cause him to play his hand. “We are still monitoring the situation and ready to act” is the common refrain. Got it!

But there is a problem. The markets are likely to grow tired of all this jawboning. The markets have advanced rather nicely over the last 3 months. Of course, this rally has been built on nothing more than hope and vapors (i.e., substandard volume). One has to wonder if the markets aren’t set up for a “buy the rumor, sell the news” type reaction. This is how we ended the month of August. Last month’s problems are still ever present. The economy remains moribund. China is imploding. Europe is imploding. Politics has stalemated any hope of a fiscal resolution to our economic problems. The only positive development (if you can call stimulus that) is that Ben Bernanke just guaranteed more QE, yet everyone knows it is coming anyways.

But when?

Great question and one that Bernanke did not attempt to answer. Nor did he suggest what might the trigger be.

So what might trigger more QE? Certainly, a weaker economy as manifested by a weaker employment report. And I think Bernanke has been laying out the case over the past 6 months to act based upon the employment numbers. The first Friday of the month should be interesting.

The most obvious trigger for more QE is the one the market doesn’t want or seemingly cannot tolerate — lower prices. But this seems impossible as the market has had difficulty of clearing itself of weak hands for over 5 months now. This a sign of a market top by the way, and without that big sell off or scary market moment when the world is looking really grim, it is unlikely that this market will move appreciably higher over the next several months. And this has become the real paradox for those investors who have pinned their hopes on Ben Bernanke and the Federal Reserve to deliver more QE.

Remember, Bernanke has yet to show us the money. It has been all jawboning for now. Yet there is a price for all this jawboning, and it is inflation. Gold and crude oil are on the rise, and these were the biggest winning assets in our portfolios over the last month. Gasoline is hitting $4 a gallon, and not a single new Dollar has been committed to QE yet. Can you imagine what will happen when Bernanke really does pull the trigger? And let us not forget that the next QE cannot just be any old run of the mill liquidity operation. It will likely have to be pretty meaningful as prior QE’s have had less of an impact on the economy over time, and Bernanke knows this.

The equity markets are at one of those moments. From my data centric perspective, this looks more like a market top than a launching pad to a new bull market. To push higher, the bullish extremes that we are currently seeing in investor sentiment are going to have become more bullish as it in the extremes where new trends are born. The markets will need to ignore the inflationary expectations that rising prices in gold and crude oil entail. These are real headwinds especially for the equity market. I don’t see this time being different, and I expect the current speculative environment to run its course like it always does.

Last month I stated: “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.”

Looking ahead, it should be the same theme. It will be hard assets over paper.

 

 

For the 4 week period from August3 , 2012 to August 31, 2012, the Conservative Portfolio gained 0.34%. Over the same time period, the SP500 gained 1.13%. For 2012, the Conservative Portfolio has gained 6.23% and the SP500 has gained 11.85%. The portfolio has positions in GLD, and currently has a cash position exceeding 50%. 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 14.55%. Buy and hold S&P500 has returned 11.84%. Results are through August 31, 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 August 3, 2012 to August 31, 2012, the Broad Market Portfolio loss (0.99%). Over the same time period, the SP500 gained 1.13%. For 2012, the Broad Market Portfolio has gained 9.05% and the SP500 has gained 11.85%. Results are through August 31, 2012. We start the month with no positions; the portfolio is on 100% cash.

Since its inception on January 1, 2011, the Broad Market Portfolio has returned 2.68%. Buy and hold S&P500 has returned 11.84%. 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 August 3, 2012 to August 31, 2012, the Aggressive Portfolio gained 2.98%. Over the same time period, the SP500 gained 1.13%. For 2012, the Aggressive Portfolio has gained 2.78% and the SP500 has gained 11.85%. Results are through August 31, 2012. As we start this reporting period, portfolio positions include: GLD, OIL, and SH. The portfolio has been short the SP500 (position SH) since mid August.

Since its inception on January 1, 2011, the Aggressive Portfolio has returned 15.56%. Buy and hold S&P500 has returned 11.84%. Results are through August 31, 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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