Email Newsletter icon, E-mail Newsletter icon, Email List icon, E-mail List icon Enter Email For Newsletter Updates

12/31/2008 Equities Likely to Face Rocky Start in 2009 BUT Finish Strong

ARS

A Message for Absolute Return Portfolio Management clients:

I am happy to report that our managed model portfolios had no equity exposure during the market collapse of the past 3+ months which have witnessed 30%losses in both the domestic S&P 500 of large capitalization stocks and the Dow Jones World Indexes and a nearly 40% in the Russell 2000 index of small capitalization stocks.

Our equity allocation was defensive for the vast majority of the year. As a result, portfolios should finish 2008 with only very small losses. We believe this is further evidence that active management, rather than fully-invested "buy-and-hope" advocated by academics, mutual funds companies and most professional investors, is a superior approach to risk management.


Global Equity Markets
Though early 2009 may have a rough start for equities, there are indications that it will be a year of opportunity. Bullish sentiment remains elevated and has now climbed to levels that, on some indicators, are the highest of the entire bear market. Near-term, this dictates caution and hints at the possibility of a re-test of the November 20th lows early in 2009.

However, Main Street psychology surrounding the economy and markets as portrayed by the media, economists and Everyman is uniform in its opinion that the recession has "just begun", will "last longer than most expect "and "will be deeper than most expect" to paraphrase. Extrapolation is the default behavioral human response and the undoing of most investors. All of these opinions are simple extrapolations of recent trends and have little or no analytical framework as a foundation. Such highly polarized opinion must be questioned and leads me to believe that the worst, if not entirely behind us, has largely been realized.

While equity valuations aren't cheap, they are significantly better than just one year ago and 40-50% declines are historic and significantly shift the probabilities towards at least an intermediate-term rally of significance for 2009.


International Equity Regions
Our portfolios remain in a defensive position due to the near-term outlook. However, our International Equity model is signaling strength in Asia, Japan and Latin America that bears careful watching. We remain 100% in short-term government bonds.

ASIA (ex-Japan) -

EMERGING MARKETS -

EURO -

JAPAN -

LATIN AMERICA (LatAm) -

USA -
(see Equity Style section for specifics)



Equity Style & Sector Trends
Our Domestic Equity Model continue in a defensive position at this time and our allocation to domestic equities remains 100% in short-term government bonds.


Investment Grade Bonds
Our Investment Grade Bond model remains on a BUY for International Bonds.


High Yield Bonds
Our model is signaling strength in Emerging Market Debt. Our aforementioned near-term analysis suggests caution but, like International Equities, this area bears watching. We are invested 100% in short-term government bonds.


Inflation Hedge / Real Assets
Our Real Assets/Inflation Hedge model remains 100% invested in short-term government bonds but GOLD Bullion has moved to the top of the ranks and could soon move to a BUY signal.

GOLD Bullion - (GLD) - On a SELL but that could change soon.

Goldman Sachs Commodity Index (GSG) (largely energy ) and DB Commodity Index Tracking Fund (DBC) on a SELL .

Real Estate - Our models rank REITs as a SELL.

These reports express our opinions and suggestions, provided only as a supplement to your own further research and decisions. We take care to assure accuracy of contents but accuracy is not guaranteed. Past performance does not imply future results. The publisher shall have no liability of whatever nature in respect of any claim, damages, loss or expense arising out of or in connection with the reliance by you on the contents of our website, any promotion, published material, alert or update. ALL RIGHTS RESERVED.