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Daily State of the Markets Good morning. With the end of the year now in sight, I’m guessing that more than a few investors and/or fund managers have reviewed their efforts for the year and are likely frustrated with their overall performance thus far. The bottom line is that 2011 has been a very difficult year for investors seeking growth of capital as a great many methods of management are not working well. So, my question comes down to this: Is 2011 a one-off or the new normal Last week, I highlighted the fact that many popular trend-following methods of managing the market have simply stopped working due to the volatility in the market these days. Decimalization, the elimination of the uptick rule, HFT, and the proliferation of ETF’s are all to blame here. After doing some research on growth-oriented investment strategies this weekend, it is safe to say that a great many traditional investment methods have fallen flat this year. For example, the Lipper Growth Fund Index is off -2.92% so far in 2011 while the Smallcap growth index is down -5.33% and Midcap growth index has fallen -5.22%. To be sure, these are not great returns given that the S&P 500 is off -3.34%. Traditionally, diversifying one’s portfolio across the globe has been a good way to both enhance and smooth out returns. But this approach has also been problematic this year as Lipper’s Global Fund index sports a decline of -9.43% while and the International index is down -13.94%. Diversifying by region has been a loser as well as EAFE (as measured by the EFA) is down -15.15%, Europe is off -13.68%, and the Emerging Markets ETF (EEM) has fallen -19.10%. Another approach that financial planners and investors like to use is diversification by sector, style and asset class. But this has not been a panacea either this year as the Lipper Value index has lost -5.99% and even the technology sector, which is dominated by market darlings such as Apple (AAPL) sports a decline of -6.03%. In addition, commodities (via the DBC) are down -0.94% and oil is off -3%. I then looked at those new Absolute Return Mutual Funds that are designed to make money no matter what the market does. While the returns are indeed better, a great many of these funds also sport red numbers as of Friday’s close. For example, Putnam’s Absolute Return 700 is down -0.71% year-to-date while Eaton Vance’s Global Macro fund is down -3.31%, and Hatteras Alternative is off -0.57%. Then there is the hedge fund category. By definition, a hedge fund is supposed to own longs and shorts which should “hedge” downside risk in the market. The thinking is the longs should outperform to the upside and the shorts should add value by gaining when the positions held short fall. But, in reality this approach has not worked either this year. According to Hedge Fund Research, the average hedge fund is down -3.5% this year. And digging into the specific hedge fund categories shows that finding positive returns for 2011 is tough. HFR’s Global Hedge Fund index is down -8.09% as of Thursday’s close. The Absolute Return index is down -3.45%. The Directional Index (long/short) is off -16.7% while Equity Hedge is down -17.98% and Fundamental Value is off an eye-opening -23.01%. So, what gives Why have growth-oriented strategies universally fallen flat this year Is this a trend that is likely to continue for years or simply a year to toss aside In my humble opinion, the difficulty can be tied to the “risk-on/risk-off” mentality that has developed in the market over the past two years. In short, the market has been held hostage by the news-flow with events in the Middle-East, Japan, and Europe causing traders to bounce in and out of the market (via computers, of course) at the drop of a hat. As such, traditional metrics such as trendlines, moving averages, support/resistance zones, breadth, and volume have been of little value when trying to determine which way the market will go next. But the bottom line is this too shall pass (eventually). While the returns of many growth-oriented strategies have not produced desired results thus far in 2011, the key question to ask yourself is if your strategy did its job. Did your approach protect capital during the big declines and then participate in the important uptrends seen over the past three years. Did you have a plan in place to protect you from the 2008-09 bear Was your strategy able to move back to the long side when the cyclical bull began And did you take any action during the severe corrections of 2010 and 2011 If your answer is yes, then it is a good idea to keep on keepin’ on with your strategy. It is decent bet that the recent volatility, which has wreaked havoc on the markets and many investment strategies, will likely subside at some point next year. However, if your strategy did not reduce exposure during the major declines seen in both 2010 and 2011 or catch the bulk of the big up-moves in 2009 and 2010, then you may want to rethink your approach going forward. Turning to this morning… It’s ugly out there again today. The apparent failure of the super-committee to agree on even $1.2 trillion in spending cuts (so much for “going big”) over the next ten years and word that France’s Aaa credit rating may be at risk at Moody’s has caused traders to hit the sell button early and often so far this morning both here in the states and across the Atlantic. On the Economic Front… There are no economic reports scheduled for release before the bell. But we will get the reading on Existing Home Sales at 10:00 am eastern. Thought for the day… Challenge yourself to think positive ALL day today! Pre-Game Indicators Here are the Pre-Market indicators we review each morning before the opening bell…
Wall Street Research Summary Upgrades:
Long positions in stocks mentioned: None For more of Mr. Moenning’s thoughts and research, visit StateoftheMarkets.com The opinions and forecasts expressed herein are those of Mr. David Moenning and may not actually come to pass. Mr. Moenning’s opinions and viewpoints regarding the future of the markets should not be construed as recommendations. The analysis and information in this report and on our website is for informational purposes only. No part of the material presented in this report or on our websites is intended as an investment recommendation or investment advice. Neither the information nor any opinion expressed nor any Portfolio constitutes a solicitation to purchase or sell securities or any investment program. The opinions and forecasts expressed are those of the editors of StateoftheMarkets.com and may not actually come to pass. The opinions and viewpoints regarding the future of the markets should not be construed as recommendations of any specific security nor specific investment advice. Stocks should always consult an investment professional before making any investment. Any investment decisions must in all cases be made by the reader or by his or her investment adviser. Do NOT ever purchase any security without doing sufficient research. There is no guarantee that the investment objectives outlined will actually come to pass. All opinions expressed herein are subject to change without notice. Neither the editor, employees, nor any of their affiliates shall have any liability for any loss sustained by anyone who has relied on the information provided. The analysis provided is based on both technical and fundamental research and is provided “as is” without warranty of any kind, either expressed or implied. Although the information contained is derived from sources which are believed to be reliable, they cannot be guaranteed. The information contained in this report is provided by Ridge Publishing Co. Inc. (Ridge). One of the principals of Ridge, Mr. David Moenning, is also President and majority shareholder of Heritage Capital Management, Inc. (HCM) a Chicago-based money management firm. HCM is registered with the U.S. Securities and Exchange Commission as an investment adviser. HCM also serves as a sub-advisor to other investment advisory firms. Ridge is a publisher and has not registered as an investment adviser. Neither HCM nor Ridge is registered as a broker-dealer. Employees and affiliates of HCM and Ridge may at times have positions in the securities referred to and may make purchases or sales of these securities while publications are in circulation. Editors will indicate whether they or HCM has a position in stocks or other securities mentioned in any publication. The disclosures will be accurate as of the time of publication and may change thereafter without notice. Investments in equities carry an inherent element of risk including the potential for significant loss of principal. Past performance is not an indication of future results. |
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