The Song Remains the Same
The stock market has fallen over 20% from its high mark in October of last year. Accompanying this decline has been the persistent surge in oil prices and the unwinding of the mortgage market. Any good news on these fronts has been practically non-existent except for a consideration of, “It could be worse.” Relief from surging oil prices or a resolution of the financial woes from mortgages does not seem imminent.
This two headed monster has wreaked havoc for the markets over the past eight months. Since October, with barely any relief, crude oil prices have risen and the mortgage crisis has intensified. As an investment manager in charge of directing portfolios to where they will thrive, it has been disturbing to me that our portfolios have been disrupted by the same factors during this entire time frame. Certainly I have missed using investment opportunities that would have benefited from higher energy prices. Shorting financial stocks would have also yielded substantial gains. Essentially, this “Song remains the same” as these woeful trends have continued over the past eight months.
What is the remedy for oil and mortgages?
Most investment managers have underestimated the negative impact brought about by these problems. While oil prices could go higher and the mortgage crisis could deteriorate further, eventually market forces will bring a resolution. Higher oil prices will be the exact medicine that the market needs for oil prices to eventually come down. This is the theory of supply and demand. This same theory of supply and demand also rules stock prices and real estate values. Cycles affect everything. As for the mortgage crisis, banks will complete their loan write-offs. Mortgages will be distributed to new investors. This will be tough medicine but banks will then be able to begin to rebuild their balance sheets.
In the meantime, investment managers face a really hard problem. The current economic landscape holds that in order for oil prices to retreat, it appears as though the Fed will need to raise interest rates. Higher interest rates would strengthen the dollar. A stronger dollar could buy more oil. Higher interest rates would further slow the economy and consequently dampen the demand for energy. The downside of this policy is that hiking interest rates would kick the economy when it is down. This would be a painful solution, since by many indicators, the economy is already in a recession.
For the second quarter of 2008, the S&P 500 index closed down 2.7%. It was the stock market’s third consecutive quarterly loss. There was an impressive recovery in April and May from the depressed levels at the end of March. June turned out to be a treacherous month, however, as the S&P fell over 8% for the month which took back all of the recovery gains during April and May.
The S&P 500 was down almost 12% for the first half of 2008. Going back to the beginning of 2006, the S&P has only provided a 2.8% annualized total return. This is an extremely low return for that period. Long term bonds managed only a small gain of 1.18% for the first half of this year. Returns have been muted in this asset class also. Money market and safe cash equivalents are only averaging about 2%. Investment returns have been snatched away. Internationally, the picture has been even bleaker. The Chinese market fell over 65% year to date and India declined 25%. The prescription of global diversification has not worked. For the most part, markets world-wide have suffered through 2008.
Peregrine Returns and Strategy
I am cautious about the stock market for the upcoming quarter. There is too much economic repair that needs to be completed. It also appears that there is no quick fix to our current economic malaise. The market could enjoy a short term jolt just because it has fallen so much in such a short time. This rally would be unlikely to have very much endurance.
For the second quarter, our Peregrine Equity Composite rose 3.7% and our Balanced Composite rose .58%. For the year, these composites are down 14.11% and 4.29% respectively.
Currently, many short term trading opportunities exist. It is difficult to project a healthy long term picture from which to build investment portfolios. We may have to wait a while for the problems to be resolved. We will continue to trade for short term gains and remain in a preservation of capital mode.
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.