June 16, 2009
Once in a Lifetime?
I have been saying my “gratefuls” recently as both our Careful Growth* and Flexible Income strategies* have posted prodigious gains over the past 3 months.
I expect great runs to occur from time to time on the growth side, but I also expect the income side to be more laid back and a little slower to post gains due to its very low-risk style. Yet the income side of my work, heavily in high yield bonds, has been giving the stock market a run for its money since late March.
The high yield bonds funds have had such a strong run I decided to compare the past 3 months returns in high yield bonds to previous runs of some of the older high yield bond funds, and the comparison is really quite startling.
Several times during the depths of the market declines last winter I said we were setting up for a rebound in the markets and with all the money the government was injecting into the system I said it would be spectacular when the markets took off. “Rocket fuel” was the term I used for all that money and a rocket-like liftoff is exactly the effect we have had since the market’s lows of March 9th.
The gains that high yield bonds have generated since March 12, 2009 show this to be the most powerful 90 day run reported for most high yield funds in Morningstar’s database. In fact, it appears to be more than twice as powerful as the next strongest 3 month period for one of the biggest high yield funds, and that occurred way back in 1980.
So, we are seeing a truly once-in-a-lifetime run in high yield bonds, and money has certainly been easy to make the past few months. How long will it last? No one knows, of course, but I intend to hold on and enjoy the upward ride as long as it continues.
But the worst thing we could do right now is fall in love with what has been working so well and cling to it too long, because as surely as the sun will rise in the east tomorrow, things in the financial markets will change again at some point. Change is the only thing that is certain about investing and my trading style’s ability to adapt to changing markets is what has allowed us to skate through the rough times of the past two years.
When the change does happen I will recognize it as quickly as I can and make the changes in your portfolio necessary to take advantage of the changes in the markets.
Are We Done Yet?
In 2007, I began warning of an impending recession, and last Spring I declared the recession to be underway even though it took the government another nine months to announce the fact.
Last summer, about 9 months after the October 2007 peak in the stock market, the most common comment I received from friends and clients when discussing the economy was that they thought since the market had already declined by 20% at that point, the worst must already be over and we should get back to investing as usual.
My standard reply was that the average recession lasted 14 months and involved a 38% drop in the stock markets. And we were not anywhere close to those averages yet.
To really make my point, I would often follow up by asking “So, do you think this downturn will be worse than average or milder than average?”
By official estimates we are now about 20 months into the recession and have endured a whopping 56% drop in the stock market. Is the recession about over yet so that we can get back to investing as usual? I can’t really say for sure and I would not trust anyone who said they have it all figured out. However, the stock market is saying the worst may be over by going up for 3 months straight. And we are certainly due for it to end since this is the longest recession since the one in 1929-33.
Incidentally, even that recession did end after about 3 ½ years. And just like now, a strong stock market rally off the 1932 bottom was the first signal that the worst was over.
I do believe the banking crisis has passed – if you look around we have had no big banks fail for 8 months or so, just a lot of small banks being absorbed in an orderly manner – but this downturn has also been like no other I have witnessed, and the problems we are dealing with will take a lot of time to correct. So I expect “aftershocks” of the 2008-09 crash as we go along.
We also will have to go through the healing process without all of the cash generated by the debt creation of the past 25 years, which will make the process proceed much more slowly. There is not much home equity left to borrow against even if you can find a bank to lend money to you. And many investors are still staring at investment statements showing only half as much money as in years past. Both of those things will slow down spending and economic recovery.
I think when the realization sinks in that we will be muddling through economically a lot longer that most of us expect, a disillusionment may set in that could create an aftershock in the stock market. What I don’t know is whether that will begin next week or next year or when.
I think I’ll recognize it when I see it, though.
Family and Friends Discount
Have you heard people around you complain that their investments suffered greatly last year? Or that their investment adviser is clinging to the same failed ideas from last year? Or that they are simply scared by all the financial unknowns? If so, please consider mentioning my work to them. That is the single nicest thing you could do for me – and for them.
And if you refer a new client to me you may be able to earn a reduced management fee for yourself through my Families and Friends discount program. Call the office at (928) 778-4000 if you’d like details on this.
A simple, easy way to introduce someone to my work is to forward my newsletter to them.
Who do you know that might be interested in these newsletters?
Introducing a New Strategy
I have been holding off the unveiling of this new strategy during the stock market volatility of the past year because it seemed like every two or three weeks we were in a whole new world investing-wise.
Now that market trends are lengthening again, I have begun using my new Long/Short Strategy* in some smaller growth accounts.
Smaller accounts cannot hold the same number of investments as larger accounts without having transaction costs weigh them down. This has limited what I have been able to do for you in smaller accounts. It has been a little frustrating.
The Long/Short strategy* functions just fine owning a single index fund which provides a lot of diversification in one investment.
When that fund cycles out of favor, I will use one of the new “inverse” index funds which can make money as the index goes down. These are the same inverse funds I often use for hedging away risk.
Using one index fund at a time will help hold down the costs of investing for growth and open up a new world of potential performance for our smaller “accommodation” accounts.
Stay tuned . . .
Riddle of the Week
What is it called when you have 1,000,000 aches?
What are we investing in?
As mentioned above, Flexible Income* accounts are heavily invested in high yield bonds, sometimes called junk bonds. As you can see from your statements, they might have a terrible name, but can be terrific investments. You just don’t want to own them all the time.
Careful Growth* accounts have investments in emerging markets, International stock funds, commodities and a Nasdaq index fund to participate in the technology holdings it is noted for. And our growth accounts* also hold a good chunk of high yield bonds funds, too.
Despite the strong markets of the past 3 months, the S&P 500 index** still needs a 65% gain from current prices to get back to its old high (1565) last seen in October 2007. In contrast, our Growth accounts* are generally within single digits of being at new all time highs.
Our Flexible Income* and Balanced* accounts (50/50 income and growth) are already enjoying all time high values, so sit back and enjoy the ride.
On a Personal Note
Many of you know my son, Matt, some of you even remember when he came to live with us in 1990. This week is Matt’s 19th birthday.
Matt has just finished his first year at Yavapai College, got straight A’s for the first time and anchored the College’s Big Band with his percussion skills. He plays in two different rock bands and is even planning to tour with one band for a short time this summer. Matt has had both a steady job (cashier at New Frontiers) and a steady girlfriend (Katie whom we really like) for the past year.
Matt is growing into a fine young man. He must get that from his mother’s side of the family.
* The model accounts mentioned in this article are hypothetical examples of how the strategy may work as designed. Activity in client accounts may be different from that in the model in amount of each investment, specific timing of trades, and actual security used, which may vary from account to account. Not all trades are profitable. It should not be assumed that current or future holdings will be profitable. Use of inverse investments for hedging introduces the risk of loss in both up or down markets. A list of all trades in these accounts for the past 12 months will be provided upon written request.
** The S&P 500 and Nasdaq Indexes are unmanaged lists of stocks considered representative of the broad stock market. Investors cannot invest directly in the S&P 500 Index.
Information in this newsletter is derived from sources deemed to be reliable, however we cannot guarantee its accuracy. Please discuss any legal or tax matters with your advisors in those areas. Neither the information presented nor any opinions expressed herein constitutes a solicitation for the purchase or sale of any security.