• Market Overview

2007 1st Quarter Overview

2007 1st QuarterOvercoming Scare Tactics

“Just waiting for spring.” That is what the market has been doing this past quarter. Everything got off to a strong start for 2007 thanks to the growing momentum from the year end rally. Then on February 26th, the stock market dropped suddenly with the DOW falling by 416 points. This decline was largely attributed to a sharp decline in the Chinese stock market. In the ensuing days, our market drifted lower. The decline in the S&P 500 ended up being 7% between the high on February 22nd to the bottom on March 14th. Subsequently, in the last two weeks of March, the market made a turn and clawed its way back to close the first quarter at about the same level that it started 2007.

It is interesting that the market had a similar correction last year. Last May, the S&P also fell 7% just like last month. Maybe it is safe to assume a pattern that can help us manage investments. If there is a hypothetical floor of support for the stock market somewhere around 7% off the highpoint, then this can help our market timing and our decisions on when to buy or sell stocks.

Last year, the market’s decline was due to inflation fears and concerns that the Fed would continue to hike interest rates. This year, the market’s weakness has stemmed from grave concerns over sub prime lending in the mortgage market. An increase in mortgage defaults could cause property values to fall. The logic is that falling home values will hurt consumer spending and consumer spending has been the key engine propelling the economy for much of the past four years.

Intense economic worries, such as inflation and the deterioration of the housing market can have a positive affect. They serve to keep the market in check and to prevent “bubble” valuations that come from being overly optimistic. Economic concerns should be regarded as scare tactics that give the market healthy corrections. It is constructive that valuations do not run away on the upside. Investment portfolios carry the most risk when prices are most inflated. The theory is that the “higher they are, the further they fall.” We need these scare tactics to keep the market solid and to ensure safe levels at which to invest. Unless something changes and the landscape is severely altered, the declines in prices should be viewed as a buying opportunity and not a reason to sell stocks in order to preserve capital.

Peregrine Returns and Strategy

Returns for the Peregrine composites were slightly better than the overall market for the first quarter of 2007. For this period, the Peregrine Equity Composite rose 1.34% and the Balanced Composite was up 1.52%. By comparison, the S&P 500 was up a scant .60%. It is conservative to assume that the broad market averages will remain in a tight trading range for the remainder of 2007. This does not imply low returns, however, as stock selection and market timing will be more crucial for portfolio returns.

The strongest case for investing in equities is the large number of public companies being taken private or merged into other companies. The total supply of public stock declined last year by the greatest margin ever in a 12 month period. Effectively, these mergers eliminated a great deal of available stock out of the system. If this trend continues, we will have fewer shares in circulation and this will, in general, push values of existing companies higher. For now, this trend is in tact since each week seems to produce a handful of sizeable buyouts and mergers. This trend is THE friendliest news to investors.

Buyouts mean higher prices for stocks. News of one merger actually causes stocks in the same industry to rise, albeit, sometimes only temporarily. An example of this is the recent news of Warren Buffet’s investment into Burlington Northern. Following this news, all railroad stocks jumped. We aim to invest in companies that would be attractive acquisition targets. Our investments will be made for numerous reasons but we would like to see our portfolios affected by this takeover activity. In addition, we want to own companies whose fundamentals are believed to be superior to the rest of the market.

Dan Botti
Portfolio Manager
4/11/07

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.