• Market Overview

2006 4th Quarter Overview

2006 4th QuarterA Stock Market Versus a Market of Stocks

It was a stock market more than a market of stocks. That is an assessment of the investment environment for 2006. The bulls had the upper hand. Stock selection was not as important as just being invested in the market. Generally, any index, which represents a broad basket of stocks, performed better than carefully crafted, diversified, portfolios. Indeed, every major stock market index at home and abroad delivered an impressive gain for 2006. Despite suffering market corrections in May and again in July, all major U.S. stock indices finished 2006 with double digit gains. The S&P 500 notched a gain of 15.80%.

Investment managers didn’t keep pace with these indices for 2006. The average stock market mutual fund was up only 12.6%. This suggests that investors would have beaten the pros by simply using index funds or some sort of non-managed basket of securities. Our own Equity Composite was up 9.02% for 2006. The Peregrine Balanced Composite was up 6.05% for the year. We fell short of the averages along with most other managers.

For the past few years, I have maintained that active investment management would outperform an index like the S&P 500. The S&P 500 index, and others like it historically outperformed most portfolio managers for a twenty year period which ended in 2000. Since 2000, however, active portfolio managers have been successful in outperforming the market averages at the same time as reducing risk in portfolios.

This past year marked a deviation from the recent investment performance results. The indices scored a win over managers like me. This should be viewed as an aberration. Stock selection will return to be the determining factor in generating good portfolio returns.

Impact of Real Estate

Late in 2005, the collective escalation of the values of real estate came to an end. This marked an economic change that will serve to shape the flow of investment dollars and the consequent return on asset classes in the years ahead. Real estate activity began to slow following Hurricane Katrina and investment capital began to shift away from real estate and into the economy in search of a better return. We’ve seen proof of this over the past twelve months. Home prices and home values have declined nationally. Unsold inventories have risen and sales numbers have dropped sharply. These figures point to the beginning of a trend. As a result, speculative money which had been previously invested in real estate is likely to flow into the stock market. This reallocation of capital was indiscriminate last year. Money poured into the stock market and settled in the largest capitalized companies. This accounts for the large gains in the indices in 2006.

For 2007, we should continue to see investment capital shifting from real estate into the equity markets. Naturally, this will benefit stocks. Buyouts will also serve to lift stock prices. The supply of private equity capital, which is money that is used for taking public companies private, will continue to bulge. Many analysts believe that takeovers will continue to proliferate in 2007.

Despite this positive outlook, the markets might be more discriminating than they were in 2006. The ride is almost certain to be bumpy. Individual sectors are sure to weaken collectively. We should expect these corrections along the way. We also need to consider that these corrections will be temporary and fairly short lived. Money flows from real estate investments should continue and serve to check declines. Companies whose shares are modestly valued become takeover candidates if their shares fall significantly. Lastly, sharp drops in market momentum stocks are often viewed as buying opportunities by new investors.

Peregrine Investment Strategy

Many stocks in a variety of sectors have exciting growth potential. Last year General Motors was the top performer on the DOW with a gain of about 72%. If this can happen to GM, think of what the share prices of more dynamic companies can do if their business prospects gain favor. Good news on companies can cause sudden price jumps. It is easy to buy stocks at extended levels and end up paying too much. Usually, we do not want to chase these stories of the moment. It seems plausible that these rapidly rising stocks could suffer the sharpest setbacks. Following a share price decline, these companies could present excellent investment prospects as long as their financial prospects remain bright.

As an ongoing process we continue to harvest gains from short term stock advances and from strategic trading. In addition, our aim is always to build core positions that will be held over a longer period.

Dan Botti
Portfolio Manager
10/5/06

Past performance is no guarantee of future results. Investment management involves the possibility of losses. Significant general stock market moves up and down can influence the performance of client portfolios. Composite returns are based on client portfolios of over $100,000. Not all clients are included in the composites. All returns include the reinvestment of dividends. All returns are net of fees. Composite returns are derived from aggregated, time-weighted returns for clients of Peregrine Asset Advisers. Individual client returns can deviate from the composite returns. While Peregrine uses the S&P 500 as a benchmark, Peregrine does not attempt to mimic the structure of this index. Individual client portfolios vary. The number of securities held also varies per client.

Do you have questions or would you like to know more, contact Dan Botti.

Overview Archive

 
*Past Performance is no guarantee of future results. Investment management involves the possibility of losses. Significant general stock market moves up and down can influence the performance of client portfolios. Composite returns are based on client portfolios of over $100,000. Not all clients are included in the composites. All returns include the reinvestment of dividends. All returns are net of fees. Composite returns are derived from aggregated, time weighted returns for clients of Peregrine Asset Advisers. Individual client returns can deviate from the composite returns. While Peregrine uses the S&P 500 as a benchmark, Peregrine does not attempt to mimic the structure of this index. Individual client portfolios vary. The number of stock positions also varies per client.