Liquefying the World
The great worldwide liquidation enters its fifth year since the financial crisis of 2008. Throughout the world, assets being are sold in order to meet obligations, real or perceived. There is plenty of evidence. Residential and commercial properties are being liquidated. Banks that own government bonds from European countries are forced to liquidate those bonds. Companies are finding ways to shed workers and most forecasts are for weak economic growth in the year ahead. Last year, between May and August, our stock market fell almost 20%. All of this liquidation is happening for the sake of raising cash to meet obligations.
Any person or organization that owes money may be forced to sell assets to meet demands. Assets are also sold if people believe that there will be further demands or if they believe that their economic circumstances will become harsher. Often times manufacturing companies will cancel orders to buy important equipment if they have a dimming view of upcoming business conditions.
As we enter this Happy New Year of 2012, “liquefying” is the marching order for economic enterprises. According to a recent Financial Times article1, business consultant Lowell Bryan issued the principle management directive for today, “Companies should prepare for the high probability of future financial shocks by erring on the side of being overcapitalized, over-liquid, and over-prepared, while also engaging in serious scenario planning about ‘unthinkable’ events.” While this seems to be sensible given the current scope of news events, it could backfire. The trouble with this cautious approach is that it inspires a wait and see attitude. Meanwhile an opportunistic company, or better yet, a smart investor, could capture significant gains while everyone else is caught battening down the hatches.
We’ve been writing about the consequences of the world liquidity. The product of all of this liquidation is a growing mountain of cash. Eventually, this liquidity will need to be invested. How long will this cash sit earning zero instead of getting invested?Steadily, this cash promises to filter into the US stock market and that will make investment gains easier to achieve.
4th Quarter Overview
It was not a good year for a stock market. The final quarter reversed a disastrous trend. The S&P 500 ended 2011 basically flat for the year. What a relief! In the final quarter, the S&P 500 gained 11.2% to give all investors a new sense of optimism going into the New Year 2012. There were some very disturbing stretches last year. The most unstable period was August through September. Back then, it looked like the market would continue to slide. Some of our clients had fears about being “in” the stock market. Fortunately, the stock market began a recovery which we are enjoying today.
Fed chairman, Ben Bernanke, began the fourth quarter warning of a faltering US economy. Last fall, there was continued contagion in Europe as the financial worries concerning Italy mounted. Economic data was mixed during the fourth quarter but, incidentally, seems to be improving according to the information that we have received so far this year.
Money managers, like us, had a tough year in 2011. Warren Buffett’s Berkshire Hathaway was down 4.7%. The average equity mutual fund sagged 2.90% during the year. Essentially, trying to outperform the stock market through stock picking proved to be a tall order. On the other hand, long term treasury bonds gained over 20% for the year.
Peregrine Returns and Strategy
Our Balanced Composite finished up 4.93% for the year. We were pleased with these results. Obviously, this return far exceeded the stock market’s return. Bonds had such a good year that the gains posted on our bond holdings were enough to eclipse our stock market losses. Our Balanced Composite was up 4.68% for the quarter which trailed the S&P 500. This would be natural since our Balanced Composite is generally less sensitive to stock market volatility.
Our Equity Composite was disappointing, but given the context of what 2011 was like, we probably couldn’t have expected much better. Our clients in this composite should be well positioned for 2012. Our Equity Composite registered a 7.51% gain for the fourth quarter and finished flat for the full year 2011.
Opportunities in the biotech sector appear to offer investors the best returns in this economy. Major drug breakthroughs enjoy high profit margins and can catapult a growth company. Drugs slated to address such widespread afflictions like Alzheimer’s, Hepatitis C, MS, Parkinson’s, and cancer detection, have growing worldwide markets. Biotech companies engaged in producing these treatments can also become targets for acquisitions, some of which we have seen lately. Our goal is to trade these companies for a profit as well as holding some for a longer duration.
1 Financial Times 1/2/2012 “Three Cheers for new year trepidation” by Andrew Hill
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.