• Market Overview

2011 2nd Quarter Overview

2011 2nd QuarterThe Disguise of the Stock Market

Can there be a better place to invest outside of the stock market? For seven out of eight weeks, the stock market declined for all of the right reasons. Significant problems abound. For the better part of the second quarter, the stock market had real reasons to take a big hit.

Economies worldwide are slowing. This and other factors contributed to the stock market falling for seven out of eight weeks leading up to the final week of June. Then, in the face of all of these concerns, stocks surged with a vengeance in the final week of the quarter and posted their best weekly gain in over two years. The S&P 500 gained 5.6%. The DOW rose nearly 600 points. What other investment has the juice to gain 5% in a week?

Stocks present terrific investment opportunities for the simple reason that they have the capability to make explosive moves. Further surges appear likely. Some sort of return is both required and expected on the vast pools of investment capital that is in cash. Since interest rates remain at rock bottom, this money has to be invested somewhere. I have been writing about this for some time. The further down the road we go with very low interest rates, the more pressure is placed on cash to be invested. Even though the overall news may not be favorable for the general economy, stocks can still rise. My expectation is that our stocks will do even better.

For the better part of two years, this disguise has fooled investors. Even with significant negative forces blowing, stocks can continue to edge higher.
2nd Quarter Overview

For the entire quarter, we would have all preferred better performance. Despite the fireworks at the end of June and early this month, stocks fell for most of the second quarter. The stock market was awful in May and for most of June. The S&P 500 and the Dow finished flat for the quarter. In fact, at one point in June, the major stock indices had basically given up all of their gains for the year, down almost 6%.

Many events conspire to raise doubts about the outlook for business. During February and March we had the political upheaval in Northern Africa. The effect on the stock market of the catastrophic tsunami in Japan is still being felt. A slackening economy is being felt throughout the world. Just like last year, financial contagion in Europe also continues to threaten our economy. If you thought QE2 was the elixir for the economy �well, that just ended June 30th. Lastly, not exhaustively, the debt ceiling ends August 1st and the government faces a technical shutdown.

Earlier in the year, the picture was somewhat different. In April, there were aspects of the economy that actually looked like they might be overheating. Crude oil climbed beyond $112 per barrel and wholesale inflation registered a 7% annual rate of change. Prices of agricultural commodities climbed to all time highs. Just as quickly, this trend was dashed and almost every commodity has since dropped precipitously.

Interest rates, meanwhile, surprised most investment professionals by falling during the quarter. The 10 year US Treasury note, which is a benchmark for mortgages, is currently under 3%. I am constantly amused by the radio ads by mortgage companies urging people to lock in on “rates not seen again in our lifetime.” We have heard these same words for over five years yet these same voices keep barking out their sales pitches. These guys must assume that eventually they will be right just as a broken clock is right twice a day.
Peregrine Returns and Strategy

We made many profitable short term trades during the quarter. The markets presented opportunities where we were able to buy or short stocks with a high level of confidence. Our longer term holdings suffered with the general market and this accounted for the 1.47% decline in our Equity Composite for the quarter. Our Balanced Composite gained .88% for the second quarter. Both of our composites are up about 3% for the first half of 2011.

Our outlook for the 3rd quarter is sanguine since the fallout in May and June provides us with a necessary “pause that refreshes”. Our recent stock investments have promising characteristics. Our view for the third quarter could be described as cautiously bullish given a likely agreement on raising the debt ceiling.

Dan Botti
Portfolio Manager
7/15/11

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.