A few hours ago I sold off our Bearish ETF’s which were our portfolio hedges for either a very small loss or no gain. Accounts preserved their value in the decline and now my best guess is that we could rally into the month of March.
The decline of the last month has thrown a bucket of ice water on investors who were quite overheated in mid January. I would have liked to have seen a greater decline in the market but it appears I’m not going to get it.
Brad
Long: none
I’ve received questions relating to account volatility so this post is probably well timed.
The purpose of our hedging strategy is to take a position in securities in the accounts we manage that will rise in value should the stock market fall. The value of the assets that increase in value should the market decline will offset the decline in the value of stocks, thus buffering the decline so you don’t take as big of a hit had you done nothing.
Essentially, we’re taking a much more aggressive approach to preserving account value by reducing downside volatility. Our hedging strategy does not include the use of Option or Futures. The value of the portfolio could still decline in value, especially on days where the stock market falls significantly but the decline would be a fraction of the loss had the account not had the hedges.
Should the market rise while the hedges are in place, the account would appreciate at a slower relative pace as well, since the hedges would act as a drag to upside returns.
I do not expect that hedging will be a frequent practice. Hedges are expected to be utilized with the Intermediate or Long Term market values are at risk.
This is our way of addressing account volatility in what I believe is the most effective way possible and I must admit, my response to doing our best to never allow a situation like our experience in 2008 to happen again.
My goal is to aggressively attempt to maintain account values near their highs by keeping declines to a modest level. We don’t need to be too concerned about making money when the market is moving higher, our proprietary model has done an excellent job of that. My motivation is to see that clients have some downside protection which also feels great when the market falls.
Be Careful Out There
Brad
2009 net returns which include all fees and expenses associated with RMHI accounts are soon to be posted on our primary website.
RMHI Growth: 43.8%
RMHI Moderate Growth: 24.6%
S&P 500: 26.5%
In an effort to provide some additional color on how RMHI is approaching the first three quarters of 2010:
Be careful out there
Brad
2010
A year ago, markets and economies were largely in chaos mired in the worst selling since 1932. However, since that time world central banks have initiated massive monetary stimulation and markets have, for the most part returned to normal. Thanks to the monetary stimulus we’ve experienced the birth of cyclical stock market rally since the March bottom within the larger context of a bear market.
Tom Dorsey, a stock market technical analyst commonly refers to his posture in the stock market with football metaphors. When Tom states that it’s time for the “Offense to be on the field” it means it’s time to get aggressive in the stock market, inversely Tom will state “the Defense is on the field” when it’s time to pare back holdings and, well……..be defensive.
In 2008, the Defense should have been on the field the whole year and the opposite was true in 2009 where Offense won the game and then some. It’s my belief that 2010 will be a year where both Offense and Defense will be required at one time or another to prosper. Consider it a year with not a great deal of net yardage but a saw-tooth environment in a cloud of dust and little net gain.
In 2009 markets followed the script I laid out with great accuracy but this year should not have quite the peaks and valleys and volatility should be lower. January 2010 found complacency amongst investors was the norm with almost uniform belief that the short term was good and our long term prospects horrid. I took the opposite tact and was willing to miss some upside potential to be in position for a market pullback. By January 19th I had jettisoned most of our high flyers and raised cash to the highest levels in almost a year or purchased Inverse Exchange Traded Funds for the first time since early ’09.
I do not believe this current market weakness is the start of a new major bear market. Credit spreads have come to their narrowest margin since the fall of 2007 which is indicative of future economic growth in the U.S. The current sell-off is being driven by Europe and Emerging markets of which U.S. appears to be collateral damage. The credit issues that have affected Greece, Dubai, Portugal, Spain and Ireland are significant to the extent that “this time it is different” and notions of smooth and uninterrupted expansion from Recession are not to be trusted. Does this mean we’ll revisit the 2009 market lows? Very unlikely, but it could mean a prolonged trading range which we’re currently geared for.
People might jump to the conclusion that as an investment manager my highest ideal is to provide a stellar return in a good year as was the case in 2009, but for me that’s really not the case at all. My ideal is to provide a good rate of return in flat to down year. That’s what I’m striving for since the start of the year since I believe 2010 will frustrate both inflexible bulls and bears alike by bouncing along a trading range with 1030 on the downside and 1150 on the upside. In the trading range I expect, market exposure will have to be culled at the top of the range (the defense takes the field) in an effort to reduce the downside on pullbacks, while increasing exposure (the offense takes over) at the bottom of the range when fear is rampant. This is the strategy in place at present.
The contrast between 2009 and 2010 are significant enough to warrant a cautious position.
To summarize my thoughts on the coming year: I believe 2010 will be a sideways trend year with perhaps 1150 or so the top side of the range and 1030 on the downside, an extended period of digestion and frustration for bulls and bears alike. This saw-tooth trading range would be fairly normal considering the run in ’09 and in keeping with past trends in the second year of an economic expansion. The range could be broken to the upside in the 4th Q of 2010. My best guess is that a breakout will require at least minimal inflation and no meaningful spike in interest rates. Adding to the potential breakout in the 4th Q will be the return of October weakness which could create a high degree of negative sentiment to enable a strong rally. In the meantime in the February-March time frame we could see a market bottom leading to a decent market rally. The current pullback has been extraordinarily swift with resulting sharp rise is fear and loathing….a very good thing. But this expected February-March rally will likely be short in duration and could peak by April.
Gold: It’s my view that Gold is in a long term bull market and has been for several years. However a few months ago we cashed out of our holding which turned to be within a few days of the peak. Since that time Gold has pulled back approximately 14% and investor sentiment has turned extremely pessimistic. It would appear that the present time would be opportunistic to reallocate to Gold. Adding to the opportunity created by significant negative sentiment is that the “Real Yield” (adjusted for inflation) on T-Bills is negative. Historically when the “Real Yield” is negative as was the case in the mid to late 1970’s, the return on Gold has been very good. In addition, if the Federal Reserve extends its quantitative easing or we see another stimulus package this could ignite another serious rally.
Short Term: Accounts have either hedges against long positions or have their equity allocations in cash as we’re in a neutral position for the time being. Typically, when we see extremes in enthusiasm or pessimism and swing of the pendulum in the opposite direction looms ahead. There has been a significant reversal of over exuberant investor sentiment since January 19th but not enough to warrant a more bullish investment stance at this time. If bad news beckons and the markets make another leg down our potential losses should be muffled by our hedge positions and hopefully sentiment will become extreme enough (pessimism) to take a bullish market stance. This could lead to a pretty good month of March and April.
For short term updates please visit the RMHI blog at: www.greeninvestment.com/blog. On an unrelated note, for many years I’ve been involved in the rescue and providing homes for Great Pyrenees and especially Akbash dogs at our ranch here in the high Rockies. We’ve decided to perpetuate this purpose by naming the ranch “The White Dog” since we’re always being asking “Are you the guys with the white dogs?” Pyr’s and the Akbash have special needs and require a great deal of land to patrol and protect and it just so happens the ranch is perfectly suited for them, including the very long Winters. The white dog pictured on our home page at www.greeninvestment.com is our first male Akbash rescue we renamed “Vasi” which is Turkish for “great”, and he is all of that.
All the best,
Brad Pappas
President, RMHI