The Search for a New Bull Market
“There is always a bull market somewhere and I promise to find it for you.”
No question, this should be the goal of any self respecting money manager. The problem is that the cost of this search can sometimes be so dear. Indeed, a brutal bear market engulfed stocks in the final quarter of the year. In November, a bull market did emerge, however, in LONG TERM TREASURY BONDS. These securities rose in price in response to news of depressed economic activity and deflation. These bonds staged a record rally the week of November 17th and continued to rise into year end. Meanwhile, the stock market made a low mark and actually staged a rally that coincided with the rally in bond prices.
Rising long term bond prices means lower long term interest rates. Low long term interest rates are the crucial fuel for an economic recovery. Long term interest rates determine mortgage rates and the true cost of capital for any business venture. These interest rates had been stubbornly high throughout the year prior to that November breakout. The decline in these rates is the fodder that the stock market needs to stage its first meaningful advance since last April. This is the best and most durable economic element that we have seen emerge over the past year.
Did government intervention really help?
The failure of national financial institutions prompted major government and Federal Reserve responses. TARP, the congressional Troubled Asset Relief Program did very little to provide stability for investors. Each instance of government assistance was greeted with skepticism. The public perception grew that more was needed.
The stock market made a low on November 24 and was down almost 50% for the year at that point. What ultimately arrested the market decline? It was a rational response by the free markets and not government intervention. The new bull market in bonds and the corresponding affect of lower long term interest rates caused the stock market to recover and stop its steep descent. Isn’t it ironic that all of the government intervention provided little relief and the real economy provided its own salve?
Generally, the most decisive actions to sell stocks proved to be the best way to protect investment accounts and retirement plans. The best investment decision in the quarter was to sell. It didn’t matter how diversified investment accounts were; if they had investments, they all lost value.
Renowned investor Warren Buffett’s Berkshire Hathaway fell over 40% to erase all of its gains since 2004. The average stock market mutual fund was down 38.6% for the year. Municipal bonds dropped in value over 10% and many corporate bond funds fell over 50%.
Minimizing losses (Continued)
The S&P lost 37% for 2008 and was down 21.9% in the fourth quarter. It was the worst yearly performance since 1931 and the worst quarterly performance since the 1987 crash. It is interesting to note that the S&P averaged 11.7% per year for the next 20 years following both 1931 and 1987. (Source: BTN Research)
Staying ahead of the curve
For the past several months, we have been drastically reducing our client exposure to the stock market. Our holdings in stocks have been stripped to a bare minimum. We have been trying to stay ahead of the curve by selling stocks before they suffer further declines. At some point, however, it will be necessary to reverse this process and begin building and holding longer term investments. Determining when is a more delicate question.
If the Dow Jones average stays above 8500, up from the 7500 low point in November, investors will gain confidence and stock prices will improve slowly as we get further into 2009. I believe this will be the most likely scenario.
Peregrine Returns and Strategy
Peregrine client portfolios suffered declines in the fourth quarter despite our relatively light exposure to stocks. Our defensive position will enable our clients to recover from these losses in the upcoming quarters. The Peregrine Equity Composite finished down 6.53% for the quarter and was down 21.80% for the year. Our Balanced Composite finished down just .92% for the fourth quarter and was down 6.24% for 2008.
We do have reasons to be more optimistic about the market. The economy is in a much better position to accommodate a stock market rally now than back in October. Low interest rates are one catalyst I described earlier. Lower oil prices should provide a needed assist to the financial results of many companies. The mortgage crisis has matured further into a slow mend.
Our strategy is to continue to trade for short term profits. We intend to stay conservative and cautiously invest with a guarded eye to the surrounding economic environment. In the quarter ahead, it is my intent to slowly institute more long term holdings in client portfolios.
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.