• Market Overview

2014 3rd Quarter Overview

2014 3rd QuarterThe Ebola Scare

The egregious drop in the stock market in the first several weeks of this month is principally due to the Ebola virus concern. Stocks suffered a frightful 10% drop from the peak in September to the trough so far this month.

It is important to know the reason the market declined. Financial reporters and pundits will point to other factors, but please, don’t be fooled. Ebola is the real reason behind the destruction in the markets. Other concerns such as a moribund economic climate in Europe, a China slowdown, lower oil prices, ISIS, and Russia, were chiefly already happening before this knockdown punch. Since Ebola can be identified as the cause for the decline, it is reasonable to assume that once Ebola is contained, the market should recover.

Norman Epstein, a premier adviser at Credit Suisse in San Francisco said “Ebola has supercharged all of the other negatives.”

Most reliable financial advisers also agree the market will recover relatively quickly once the Ebola scare winds down. For example, last March, the market fell 6% on the high frequency trading controversy. Subsequently, it took the market about two months to recover.

Regaining the record highs set in September might take longer this time since this correction was deeper and the market always “takes the stairs up and the elevator down”. Nevertheless, recovery to the levels at the end of September appear attainable. This recovery would stretch to about 6% . For this to happen inside this fourth quarter would mean good things for the assets of Peregrine clients.

Michael Liou, a long-time Goldman veteran and current principal with Anvil Capital Advisors in San Francisco, said, “The market is focusing on the negative because of Ebola.”

Liou is quick to concede the Ebola shadow on the market is temporary. He points to the urgency of investing in good companies with substantial earnings and to riding out the recent volatility. He also points out that corporate buybacks will happen once quarterly earnings are released this month. This will drive stocks to recovery through year end.

A few days of volatility does not spell a departure from the established path of the market. Since we began the “Long Dry Road” in January , (See 1st quarter 2014 Overview) we have been calmed by low volatility in the stock market. Outside of this time, we should resume the low volatility market that has occurred most of 2014. Just like the recovery in April and the recovery from the SARS virus scare in 2003, the market should be able to regain much of its recent losses in short order.
Finding a Treat Amidst a Scare

Any decline in the stock market should be examined for bargain opportunities. For example, if Google were to retreat 50 points and its business forecast was not altered, this company would present a favorable investment set-up. Furthermore, if Google’s prospects actually improved, this would raise the probability of success even further. Recently, there are many examples where the busienss conditions of companies are improving and their stock prices have fallen sharply.

If business prospects remain favorable, short term market declines actually portend good things. Intervals like these provide the best profit making opportunities.
Peregrine Returns and Strategy

The overall market finished flat in the third quarter. The S&P 500 was up 6.73% through nine months in 2014 but the Dow is only up 2.90% and the Russell 2000 is down 2%. Our Equity Composite gained 1.68% for the quarter and is up 5.17% for the year. Our Balanced Composite gained 1.65% for the quarter and is up 5.80% for the year.

Mutual funds are facing substantial difficulties even before the most recent turmoil this month. The average equity mutual fund lost 1.9%, for the third quarter and is only up 2.8% for the full year. These results trail the S&P by a wide margin, which has rarely been the case. Large fund managers are having difficulty managing flat market conditions like we have seen this year. Furthermore, international funds got knocked to the floor in the quarter with a 5.7% hit. This category of funds is down 1.8% for the year. The third quarter marked the first in nine quarters that mutual funds have actually lost money.

Peregrine is always seeking to profit from economic trends. Current representation of this is our bearish position on gold and our long term bonds. In this scenario, we feel worldwide trends favor lower gold prices and lower long term interest rates.

Peregrine has a renewed commitment to making the “painting on the canvas” look more “beautiful.” We are devoting resources to new sources of research. We expect this research will reveal standout investment performers that can be cornerstone holdings in our client portfolios. We agree it is essential that our clients develop more substantial long term profits from the stocks in their accounts compared to accumulating trading profits. In this manner, clients will be able admire a stock much like they would a masterpiece work of art.

Dan Botti
Portfolio Manager
10/20/14

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.