Investing Will Make a Comeback
Where will all of the money go? When the financial problems finally settle down, where will people invest? We know there are problems. The economy is in a recession. The financial system is being restructured. The dollar is declining. People are defaulting on their mortgages. Home values are falling. Financial institutions hold too many mortgages. Oil prices keep going up. Care to add anything?
What should an investor do? This is not just a rhetorical question. There actually is an answer. We know this for certain. There is, and always has been an answer. There have always been good investments. There have always been good stocks to buy. We know this for certain with the benefit of hindsight. Someplace, right in our kitchen, lurk lucrative investment opportunities to gobble up. One year from now, there will be many stocks that are markedly higher than they are today. Investment opportunities existed during other crummy economic circumstances and they exist today just as well. We just have to solve this puzzle.
Let’s take inventory of the big picture. The current interest rate on money market funds is less than 2%. Long term treasuries yield 3.45% which is actually a negative real return because inflation is running above 4%. Real estate investments of all kinds seem to hold dubious investment potential in the short term. So, what are people going to do to in order to earn an adequate return on capital?
At some point in time, money will have to come back to stocks. The financial economy is made up of a veritable huge, global, ball of money that seeks a return. Where this money ends up is determined by large institutions like retirement plans, mutual funds, hedge funds, sovereign wealth funds, and insurance companies. It is mandatory for these enterprises to achieve an acceptable rate of return. Current riskless investments do not offer a sufficient return. Therefore, this monetary creature will begin to seek investments again. That is why the stock market should see a meaningful advance in the near future.
If this advance happens soon, it stands to reason that it will be very sharp and short lived. Once capital begins to be rewarded for taking risk, a tidal wave of cash should follow that will find a home in stocks. People responsible for investing money will not want to be left behind. Just as we saw a precipitous decline in stocks in January, we should also see just as sharp a rebound.
1st Quarter losses
Behavior of investors over the past quarter has concentrated on the return of capital and not the return on capital. It has been a migration to a “money under the mattress” mentality. Investment capital has panicked away from investments with risk and into safe securities which pay very low returns.
As a result, the S&P 500 has fallen over 15% from the high in early October 2007 to the end of the first quarter. This index declined almost 10% for the most recent first quarter. Even a small recovery during March couldn’t prevent the worst quarterly return for the market since 2002.
This price decline was accompanied by daily volatility in stock prices. During the past quarter, the S&P 500 had 12 sessions in which share prices rose or fell more than 2% in a single day! Not once did this happen during all of 2004 and 2005!1 The measured S&P gain for the single day of April 1 was 3.6%. This one day gain increased the S&P value by $480 billion which exceeds most estimates for writedowns in the entire, well publicized, mortgage industry debacle.2
Peregrine Returns and Strategy
Peregrine clients suffered along with other investors during the first quarter. Our equity composite declined 14.11% for the quarter while our balanced accounts declined 4.29% for the period. These composite declines are somewhat softened by the sharp increases in our composites in 2007.
We stress the importance of identifying the lucrative investment opportunities that exist amidst every economic malaise. There are lucrative investment opportunities in the stock market. Our challenge is to root-out and invest in companies with the brightest prospects for this changing economy. In the meantime, we will also try to be tactical and use short term trading strategies to realize profits and minimize risk in the event that we have to wait longer for a significant stock market advance.
1 Source: New York times 3/27/08
2 Source: Financial Times 4/7/08
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.