• Market Overview

2011 1st Quarter Overview

2011 1st QuarterThe Threat of Inflation

Inflation ranks as a premier threat to our investments. If it happens, as feared by many, it means that our investment portfolio will lose future purchasing power. Inflation is insidious. We can make 10% on our investment portfolio but if prices for goods and services rise by 10%, our gains are meaningless. My clients need their money to work for them so inflation is definitely a threat.

Current tangible price increases on all kinds of goods and services also stand as a severe threat to our family budgets. Inflation is now the topic “du jour” amongst financial concerns.

Numerous visionaries and luminaries are weighing in on the topic. Federal Reserve Board governor William Dudley voiced his concern in a widely followed speech last week. St Louis Fed Board Chief James Bullard has been citing inflation effects as a major concern. Renowned investor George Soros has issued a clarion call warning about the fallout from inflation. The famous bond manager, Bill Gross, of Pimco, is now shorting US Treasury bonds as reported by the press. Ostensibly, this position by Mr. Gross is in anticipation of higher inflation in the days ahead.

Just because the threat of inflation is sounding a loud voice doesn’t mean that inflation is inevitable or even that prices can’t come down. Real estate came down in value. Gas prices rose sharply in 2008 only to fall sharply later that year. I remain skeptical on the trend of inflation. In recent congressional testimony on February 24th, Fed Chairman Bernanke was asked if he feared inflation emanating from Quantitative Easing and he said flatly, “No.” No policy maker or investment expert has a crystal ball, but evidence points to Mr. Bernanke knowing his job.

It is also important to examine the counterintuitive effects inflation has on goods and services. Take any commodity, for example. Its price rises to a point at which demand subsides. We don’t know when demand will subside but eventually, it will. Then prices fall. It’s basic supply and demand. Therefore higher prices are in some ways a cure for higher prices and a precursor to lower prices. My guess is that oil prices and agriculture prices will peak between now and this summer.

It is estimated that private sector wage growth will be 2% this year. Last year the figure was 1.8%. Both of these figures were taken from the Bureau of Labor Statistics. These are the lowest on record. Low wage growth is foremost evidence against an inflationary spiral.
Can We Have Inflation Without Wage Growth?

During the rapid ascent of real estate prices, I used to muse, “How can people ever afford houses at that price?” The same principle applies to inflation today. If wages aren’t growing, how will people be able to withstand price increases of a necessity like fuel or food? Certainly, if everyone is paying more for gas, it will depress spending for other things. Correspondingly, these cutbacks in spending that families will make will just circle around and reduce the demand for fuel. People need to remember that upward price pressures always need time to work their way through the system. Most often these price hikes are temporary and transitional.
1st Quarter Overview

Stocks finished with decent gains in the first quarter. However, it wasn’t easy. The S&P 500 peaked on February 22nd at 1343. This marked an 8% gain since the beginning of the year. The Middle East unrest and the earthquake in the Sendai Province created an unraveling and stocks lost all of their 2011 gains. Stock indices made a low on March 16th. From that point the market rose eleven straight days to establish its gains for the quarter, up 5.9% for the S&P.

Overall performance by the stock market points to further gains in the months ahead. The factors that I have outlined in previous Market Overviews are still in force. Quantitative Easing is scheduled to end at the end of June but this policy has been somewhat controversial so I doubt that its culmination would have a prolonged negative influence.
Peregrine Returns and Strategy

Our equity composite drove ahead 4.32% for the quarter. This slightly trailed the S&P 500. The average equity mutual fund gained 6.2% for the quarter. Our Balanced Composite weathered a bad quarter for bonds and finished up 1.77%. The gains for both of our Composites are decent on an absolute and annualized basis. Should stocks stage a short term retreat such as what happened in February, I’m confident that our portfolios will hold an edge over the S&P 500 index.

Dan Botti
Portfolio Manager
4/19/11

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.