Portfolio Update - 04/30/08
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Dear Clients,
The following is my Performance Update and Outlook for April. All prices and returns are as of 4/30/08.
The last two months have not been kind to my model portfolios but we are still well ahead of all the equity and bond market averages for the year. Even though the recent activity in your account might be discouraging, I am growing increasingly confident in my long-term strategy and the opportunities for your portfolio. While the current trends could last a little while longer, by Q3 I should be generating returns similar to those we realized in the first part of the year.
The fundamental case for my strategy is stronger than ever. I can’t find any evidence that the economy is improving or that inflation is cooling which are the trends I’m seeking to capitalize on. Stagflation, a unique economic condition that only occurs every several decades, will prevail as long as the Fed can keep the credit markets from crashing – a scenario far worse than what I’m expecting. We are currently experiencing a bear market rally in stocks and a bull market correction in commodities (except energy) but these trends should reverse themselves within the next couple of months. I think we are far closer to the end of the countertrend than the beginning.
The following essentially describes the action in your accounts over the past 15 months. Last year, every asset class (bonds, equities and commodities) was highly correlated which is not the historical norm. I’ve mentioned on numerous occasions over the past year that the historical correlations would be reestablished and now it is finally taking place. Furthermore, I have stated that the normal correlations between these assets classes must be reestablished for my strategy to truly provide significant returns.
Since every asset class was correlated for the first 10-11 months of last year, my long/short strategy was not very volatile as my long and short positions worked against each other. If my long positions appreciated, then my shorts fell and visa-versa. We made money on the margin but that was about it.
Starting in Q4 of last year, the commodity markets, specifically the Precious Metals (PMs), began decoupling from equities. While this decoupling took place, my long/short strategy became far more volatile as my long and short positions started moving in lockstep with one another. From December ’07 through February ’08, everything in the portfolio made money as equity prices fell. Conversely, equity prices started rising in mid-March and all of my positions started to fall in unison. The net result is still a fairly nice gain YTD but far from where we were at a couple of months ago.
I went through a similar rough patch in Q2 of last year but I stuck to the fundamentals and we outperformed the market handsomely in the second half of the year. I believe that the second half this year will be even better as we’ll make money both in falling equities and rising commodities rather than just on the margin as we did in ’07.
Here is how my performance measured up to the averages for the first four months of 2008:
| PORTFOLIO | ||
| The MAC’s Core Portfolio | ||
| The MAC’s Focus Portfolio | ||
| S&P 500 (VFINX) | ||
| NASDAQ 100 (QQQQ) | ||
| Benchmark |
As I said in the Introduction, everything went our way in January and February and practically everything went against my strategy in March and April. I did foresee the countertrend emerging so I liquidated some of our positions which served to partially mute the impact of the current countertrend. Unfortunately, I didn’t think the reversal would be so severe nor did I think the decoupling between the PMs and equities would be so significant. In addition to these errors in judgment, I added some equity exposure to uranium stocks that have historically rallied with other equities but failed to so this time around.
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