Managing the TINA Principle
Since early 2009, it is no longer possible to earn interest on money market funds. Zero interest has created a significant evolution in the investment ecosystem. From 1975 until 2009, investors received a rate of interest on their cash holdings ranging from 2% to 12%. They could always rely on making something on their non-risk investments. Since the financial crisis in 2008, this source of return vanished, possibly for a long time to come.
The zero interest rate environment was accompanied by a growing and desperate need for satisfactory investment returns. Investment returns are sorely necessary so public retirement funds can meet pension obligations, unions can pay their benefits, and individuals can plan for a comfortable retirement. The deficit crisis in our state’s PERS program could be solved if the return on their investments was higher. As for private investors, they need a satisfactory return to meet their own retirement needs and income from their investments to live on. To overcome the setback from the financial crisis in 2008, along with low interest rates, investors have no alternative but to turn to stocks as a remedy.
This means the stock market is supported by an irrepressible force comprised of investors that need to achieve a return. This vast supply of investment capital is big enough to lift stocks regardless of the condition of the economy. Historically, if the economy was good, so was the stock market. If the economy faltered, stocks would go down. Now, it’s different. The economy can actually struggle but the stock market can still go up. Born out of this condition is the circulated concept of There Is NoAlternative, or the TINA Principle. The implication of TINA is that regardless of the economy, investors will use our stock market as an arena from which to derive profits.
We need to be careful about making assumptions, however. TINA doesn’t mean that stocks can’t go down. Veiled in the TINA Principle is a truism. If b represents shares bought and s represents shares sold, the equation b = s must be true. The TINA Principle doesn’t mean that stock prices will always rise. In fact, investors are just as likely to sell as buy. Remember that investors urgently need profits and are likely to sell at the slightest signal. That is why we see these relatively short periods when stocks drop. In each of the past three years, for example, the market has swooned during the spring months.
Consequently, the TINA Principle holds that stocks won’t decline very far or very long. When selling occurs and the market drops, it is likely that buying will follow and will lift stocks within a short time. It is this TINA Principle that we see playing out right now in the stock market.
1st Quarter Overview
Stocks enjoyed their finest first quarter since 1998 posting a 10% gain for the S&P 500 and an 11% gain for the DOW. The best story in our economy proved to be our housing market. For the first time since the financial crisis, housing starts crossed the 1 million in new home starts. This sector remains in a strong recovery mode.
Other bright spots for the economy do appear limited. Our labor market seems to be slowing through the first quarter. Only 88,000 new non-farm jobs were created in March. This was the lowest monthly gain since June 2011. Unemployment seems locked at 7.6%. No one sees this rate as acceptable. The Institute for Supply Manangement reported its manufacturing index at 51.3. This number has been on the decline since December. (IBD 4/19/13, Destar) Over the past year, corporate earnings growth has been a bright spot for our economy but this rate of growth promises to slow in the months ahead. Very few companies are able to achieve significant sales gains. Companies are able to boost their bottom lines mostly from cost cutting and productivity gains. The problem is that these gains may not be sustainable and are already discharged.
The US economic weakness is already recognized by most analysts. Inventory stocking contributed to the 3% GDP growth estimates for the first quarter of 2013. Without this restocking, economic growth promises to slow in the next two quarters. This frail and anemic growth should create a lot of white noise as people worry about another recession. Stocks could see a temporary drop as a reaction to these developments. Hugging to the TINA Principle, however, the economic weakness should have only a minimal and shallow affect on the stock market. Boldly speaking for investors, any market downturn should be used as a buying opportunity.
Peregrine Returns and Strategy
In the first quarter of 2013, our Equity Composite gained 6.96% while our Balanced Composite gained 3.38%. These returns trailed the S&P 500 but, naturally, our clients are not fully invested in stocks. Interest rates look to be muted in the months ahead so we are not positioning portfolios for interest rates to rise like many other investment pros. To the contrary, we would look to add to our bonds if a good opportunity presents itself.
We favor stocks to hold for the long term. Admittedly, the shocking decline in Apple has meant a high dose of skepticism that any stock can stage a long term climb without a sharp correction. Naturally, we try to avoid these corrections. It always seems stocks take the stairs up and the elevator down.
Through the course of our rising market, we always harvest profits from trading. These opportunities are a consistent source of income for our clients. Chiefly, trading profits are like receiving interest income.
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.