Bullish in a Flat Market
“If bullish is wrong, I don’t want to be right.”
Since the financial crisis in 2008, the TINA principle (ThereIs No Alternative to stocks ) has been a supporting case for the stock market. The idea was born from the fact that interest rates were unacceptably low and real estate returns were spotty and illiquid. People had to invest in stocks to get a decent return. This is still true but at some point last year, the face of TINA began to change. Today, the market has evolved into a trading arena. Investors are making money from selecting the right stocks or nimbly buying and subsequently selling an index. No longer is it good enough to simply own the market as a whole. Progress for the overall market has stalled. Today, TINA means making profits from trading.
Essentially, the US stock market is flat since Thanksgiving. This means almost six months with no material gain. A casual outlier in the first quarter of 2015 was the NASDAQ which gained 3.5%. This is a tenuous gain for such a volatile index. We don’t expect further headway beyond the much publicized NASDAQ 5000. During the first quarter, the NASDAQ eclipsed this milestone for the first time since the year 2000.
Currently, no trend seems to have long term durability. Major stories at the start of the year, such as the decline in oil prices and the strength of the US dollar, are now in full fledged reverse modes. Oil prices are actually up 5% for 2015.
Trading is choppy. Esteemed investment advisor Michael Liou, principal of Anvil Capital Advisors, points out that the S&P 500 had a one day change of more than 1% on 18 of 53 business days in the first quarter. There were only 38 such days for all of 2014. This shows the elevated volatility from last year. This volatility results from money moving, almost frantically, in order to find a home. This is the new TINA… A lot of movement resulting in very little change.
Warning signs threaten the strong economy that we saw at the beginning of 2015. First, non-farm jobs for March came in at only 125k, far below estimates. In addition, the previously estimated job gains in January and February were revised downward. We had been averaging well over 200k new jobs per month and it looks like this trend has come to a close.
Second, and adding to concerns, are corporate earnings. These are expected to decline 8% in the first quarter (according to Factset). Much of this decline is attributed to the energy sector which is reeling from the steep descent in the price of oil. Nevertheless, other industry groups are expected to have only muted earnings gains for the first quarter and throughout 2015.
Although the TINA principle has evolved, it does not imply a significant drop in the market. TINA now implies a benign US stock market that lives in a trading range. Investors should still be buying stocks. The condition for 2015 to be a good year is for advisers to be more creative and diligent about what they buy and hold.
Profits, Monuments, Set-ups
Anticipating a poor first quarter, we took a lot of profits for client accounts. We sold major holdings in Apple, Alibaba, Union Pacific, Pharmacyclics, Cummins, and Raytheon. Numerous reasons emerged that would drive down these share values.
We continue to hold Gilead Sciences and Netflix. These investments could be called our monuments, which is Peregrine-speak for companies that are either shaping our culture or simply have a product that cannot be ignored.
Recently, we added Accenture to our client accounts. This company is positioned throughout the world to help business and industry become more efficient and improve cyber security. The April 12 airing by 60 Minutes of the cyber attack on Sony highlights the increasing danger to communication networks. Accenture is a leader in organizing a defense against this threat.
In the fourth quarter of last year, it seemed impossible to consider off-shore investments since these markets were sharply deteriorating. Yet since October, many European markets are up more than 20%. Japan is up 24% and the Shanghai composite is up 70%. We are monitoring these international markets and will use these markets if we think their progress will continue.
This month, most companies will report first quarter earnings. This offers us a long list of potential trading opportunities for our clients. Expectations can be low for corporate earnings reports. Deciphering positive surprises can offer big rewards.
Peregrine Returns and Strategy
The Peregrine Equity Composite managed a 1.45% gain in the first quarter. Our Balanced Composite gained 2.37%. Though our gains beat the S&P 500 for the most recent quarter, they are admittedly small. These results conceal substantial potential for 2015. The market can be slow to recognize and appreciate a business strategy that yields accelerating growth. A stock may appear to be treading water with no sign of an advance. Then, news breaks on earnings and suddenly, the stock leaps and emerges from its previous trading range. Many of our current holdings have these latent favorable characteristics that can lead to sizeable gains in this new quarter.
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.