The Amgen Tour of California concluded yesterday with Levi Leipheimer closing out the event with his third straight title. The picture shows Levi getting help along the way from Lance Armstrong and Chechu Rubiera. A cyclist cannot win a stage race without a lot of help from teammates. Teams are typically built in such a way as to have cyclists with of different strengths to help the team leader win the event.Over the weekend I had an email exchange with a client and he said something in passing about two healthcare stocks we own having done pretty well. The two he mentioned, one is up about 12% in the last year and the other is down about 6% in the last year compared to iShares Healthcare (IYH) being down 21% and the S&P 500 being down forty something percent. While the two have down well I would venture to say that in any reasonably constructed portfolio of stocks holding 40 or 50 names there would be at least couple of stocks that have done well. After such a hideous year for the market I would attribute owning a couple of "winners" to be far more about diversification than stock picking.
If you add in a little gold, absolute return, inverse funds, cash (things I have been writing about) and treasuries (which I have not written much about) you probably created some zig to the stock market zag. Even as correlations in most asset classes increased during the decline gold lived up to role of going up in the face of a meltdown.
The magnitude of the declines on this go around have skewed a lot of things but I would submit that IYH going down in the neighborhood of half the amount of the market is a pretty reasonable result. Staples as measured by the Staples Sector SPDR (XLP) has also been down 21-ish percent in the last 12 months which again I would say is reasonable. Energy and Industrials were each down close to what the market was down which is not a surprise. Financials obviously were the worst performers and although many people made bad calls in buying too early I can't imagine that too many investors were surprised that financials have been the worst performers.
With proper expectations I would say most sectors did what they were supposed to in the bear. Where the surprise came was the magnitude of it all. Down 50% from the peak for the market, down 70-80% for the financial sector, 75% in oil, 70% for China and whatever else you care to throw in and it is easy to lose focus on the concepts that have held to form. Relative performance has generally worked but the magnitude of it all has been far worse.
Top down portfolio construction's first priority is defense or not. The second priority (as I see it) are sector and country decisions. The proper expectations for sector and country decisions should, IMO, focus on relative performance for sectors and the right countries turning up a little sooner when a new bull starts.
The idea that most sectors filled their respective roles and that a couple of countries might be starting to do the same will fall deaf for some folks. Many believe that it is all collapsing and headed much lower. I do not believe that is the case but as mentioned over the weekend I continue to be very defensively positioned.
10 comments:
Roger, good morning. Would you be willing to expand a little on the role of cash in your portfolio?
I understand that you want more when you're defensive and less when you're not, but do you have a specific percentage that you target in each case? Do you see cash as having a specific role to play in a diversified portfolio (like gold insurance) or is it simply a holding place for money that will be deployed again into another sector/country?
Thanks very much.
Thanks for another level-headed post in these trying times Roger,
Fwiw, some interesting stuff here on trend regression and long-term moving averages. His charts illustrate the merits of your discipline in reducing exposure below 200dma:
http://dshort.com/articles/2009/regression-to-trend.html
http://dshort.com/articles/SP500-monthly-moving-averages.html
I don't set specific targets for cash as I would not expect every bear market to be the same. i raised some cash early, changes then made along way were more about not expecting things to go up soon as opposed to thinking they would go this low.
Faber on Bloomberg says we're near the bottom on the CRB Index and will probably see a rally in equities soon enough.
Are there any sellers left?
The 2nd dshort.com article is an interesting expansion on the moving average idea. THanks.
If you want to get your blood boiling this morning, click on the video link of Stuart Varney's interview with an ACORN representative. The is symptomatic of the biggest redistribution of wealth in the history of the US (no thanks to Barack, Nancy, and Harry).
http://limitedpartnerships.blogspot.com/
Hmm, interesting question. I wonder how this "redistribution of wealth" compared to the one going on on Wall Street the last few years.
Steven,
Today's local Los Angeles paper reported that 20% of all Angelenos are on some form of welfare. I gotta sign off before I start screaming again. As for the ACORN rep, she's a corporate extortionist not unlike Jesse Jackson and Al Sharpton.
From prior comments concerning "responsibility". Look around, everywhere, and the lesson is that you do not have to accept responsibility.....from politicians to pro athletes to manufacturers to the board room of most companies. Last week, a Japanese official resigned in disgrace because he was under the influence.........would that ever happen in the US. No way! In the US, a person in a similar situation would get a book deal, television appearances, get voted-in again, get a high contract offer, etc, etc, ad naseum.
If this downturn teaches us anything, I hope we can focus on our true roots (at least, what I was brought up to believe and strive for)
Anonymous 7:20AM
Dow 200dma 1978 to 1988
http://ih.fotothing.com/81326.gif
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