Portfolio Management Musings

Absolute Return Fund by Horse Cove Partners

Many of our accredited investor clients have been allocating approximately 10 to 15% of their investment portfolio to this new strategy.  I personally like the addition of this option for clients, because it adds a new strategy that is completely uncorrelated to stocks and bonds.  It gives our clients a strategy that is trying to make an absolute return every week, month and quarter.

The performance has been outstanding, especially on a risk adjusted basis.  To learn more about this fund, visit:  www.collarcapital.info

 

 

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2016 1099s Available Wednesday February 15th, 2017

Tomorrow, Wednesday February 15th all clients will be able to log into their accounts and pull down their 1099s for 2016. If you are having any difficulty, please call our offices.

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Value Investors Are About To Finally Out Perform the Market

As a style of investing, Value has NOT been the way to go in 2015 – just ask Warren Buffet and a host of hedge fund and institutional money managers who regularly look to buy stocks at a discount. 2015 has not been kind to Buffet’s Berkshire Hathaway as the company’s year to date performance has fallen behind the market by double digits. In fact, Value (as an asset class) has not underperformed Growth (as an asset class) by this wide of a margin since just before the dot com bubble broke in March of 2000.
As most of you know, I like to invest and put our clients’ money to work in stocks that offer a good measure of downside protection by not overpaying for the shares of a business. Our fundamental analysis points us towards companies that are trading for at least a 20% discount to their intrinsic value.
In 2015, so far this “value” approach to investing has caused many of our clients’ portfolios to underperform the S&P and other dynamic benchmarks that we compare to. Although this underperformance is not what we seek, in the long run, the current underperformance may lead to even greater outperformance as the market unleashes the value of our holdings.
A catalyst that should start to create some positive momentum for value stocks is a potential rate hike by the Federal Reserve, which could come as early as December 15th of this year. In the past, when rates have been low for an extended period of time, and a tightening cycle begins, value stocks have produced outperformance vs. growth stocks.
In a recent Bloomberg article, a team of analysts led by Ian Scott of Barclays London office had this to say:
U.S. interest rates have been a key driver of style and sector performance within global equities. If, as expected, the Fed starts raising rates in December, this could have profound implications for style and sector leadership. We think the most robust conclusion is a market driven more by value than either quality or growth. Sectorally we think this favors financials, late-cycle cyclicals, and energy. On the other hand, staples and healthcare as well as utilities and telecoms could struggle globally.
There is no doubt that I have been setting up our clients’ portfolios since late last year for this exact move up in rates; however, we were a bit early as the Fed has delayed an interest rate hike and did not move this past spring.
I believe that your patience will be rewarded as we enter into a new stock market regime of value stock leadership!
Best regards,
Patrick Collar

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Stock Market Correction 2015

Dear Clients,

When the Capital Markets around the world become extremely volatile, it is only natural to feel nervous or down right fearful about your investments.  If you are feeling this way, please don’t hesitate to call or email me.  I would be more than happy to review your portfolio with you and discuss our outlook and plan for your portfolio.

STOCK MARKET CORRECTION?

From everything that I have read, listened to, and discussed with colleagues and fellow industry pros; We are currently experiencing a standard stock market correction.  As most of you know, the US stock market is in the midst of a Secular Bull Market that began in March of 2009.  Since it began, the S&P 500 Index has moved from approximately 667 to a recent closing high of 2,126 on May 18th, 2015.  During this six-year rise in equity prices, there have been several corrections.  From May 2nd through October 3rd of 2011, the market corrected approximately 21% from it’s high.  The next correction occurred between April 2 and June 4th of 2012.  This correction saw the market drop by almost 11% in a matter of two months.  Following this second correction, the market went on a little more than a 2 year up move that only saw a couple 5% pull backs in that time frame.  This was primarily due to the quantitative easing program of the US Federal Reserve Bank.  Eventually the QE party ended and the market decided to correct one more time beginning on September 19th, 2014.  A very fast correction that saw the market drop about 10% in just four weeks.  We are now about three months into a correction that has seen the S&P drop from 2,134 on May 18th of this year to a recent low of about 1820 – a 15% pull back in the major average.

A chart of the S&P 500 Index (from 2009 to Present)

In each of the 3 previous corrections that we have seen during this Bull Market, there were “reasons” cited as to why these corrections occurred; However, in each instance, none of the doomsday scenarios being hypothesized came to pass.  No, in the end, company earnings continued to rise and the true value of these businesses were realized at much higher values.

COULD THIS BE THE BEGINNING OF A NEW BEAR MARKET & THE START OF A RECESSION?

In my opinion, this is NOT the beginning of a new Bear Market.  When I look at all of the data:  Interest rates near all time lows, the Fed contemplating a raise in rates, durable goods orders continuing to rise, consumer sentiment on the rise, and commodity prices at 6 year lows; this data backdrop is not signaling a looming recession.

WHAT ABOUT CHINA?

The Chinese economy is in the midst of a multi-year move from being a strictly export driven economy to more a consumer based economy (this will take many years to happen).  As this change occurs, the GDP of China will flow, ebb, and flow again.  China has moved from a double digit growth economy to about a 6-8% growth economy.  This rate of change is causing many businesses and countries that do a lot of business with China to slow as well.  The good news is that the US does NOT export a lot to China.  US exports to China only make up about 3 to 4% of our total US GDP.  Therefore, the US economy will not be greatly effected by a slowing of China’s economy.

THEN WHY THE CORRECTION?

I will offer you three reasons for the correction:

1)  Anticipation of a coming rate hike (possibly in September) had primed many investors  and short-sellers to begin selling as the market moved above 2100 on the S&P.  Each time the market moved above this level it was sold off.  This began happening back in February of this year.  From a technical perspective, the market was beginning to look “toppy” and ready for a correction.

2) Fear of a debt/currency event in Greece and the Eurozone had moved many investors to the sidelines beginning in March of this year.  Even though the Greek debt situation seems to be abating, many investors were positioned for a crisis.

3) Fear of a severe slow-down in China.  The recent (surprise) move by the People’s Bank of China to cut interest rates further and devalue their currency vs. the Dollar by about 6% signaled to many investors that China was reacting to a major slow-down in its economy.

FINAL CONCLUSIONS – Valuations, Capital Flows, and Interest Rate Rise

Whether it be a slow-down in China, a technical correction based on psychology, or anticipation of an interest rate hike;  I am not compelled to sell stocks out of concern for a Bear Market or Recession.  On the contrary, the fundamental fair value of stocks in our clients portfolios are very attractive at this time.  On a fundamental basis, we see outstanding upside in each these businesses over the next three to five years.  In addition, the majority of our holdings pay dividends with most portfolios producing an average yield between 3 and 5% depending on the holdings.

Furthermore, capital flows should tend to favor stocks over bonds in the next 18 to 24 months.  In my opinion, bonds will begin to lose value due to the rise in interest rates, and a Secular Bear Market will begin for the bond market – causing some of the current $4.5 Trillion currently invested in bond funds to flow out of the bond market and into equity funds.

Finally, a rise of interest rates due to an improving economy should prove to stimulate (not slow our economy).  This is contrary to the consensus theory that rising interest rates help to slow down an economy when inflationary pressure abounds.  Under a “normalized” interest rate scenario, I would not disagree with the consensus; however, US interest rates are at zero and are being kept low as if the US economy were in recession.  In my opinion, the transition from a zero Fed Funds rate to a more normalized rate over the next 3 years will actually act as a catalyst to increase the velocity of money and investment.

As many of you know, it is my goal to always place your capital where it will be treated well.  At this time, high quality stocks that pay dividends offer the best risk/reward treatment of an investor’s capital in my opinion.

As we make it through this 4th correction in the last six years, I expect that we will continue to meet our clients growth and income needs,  and as always, try and offer our Signature Service in helping you plan for the future.

Sincerely,

Patrick Collar

 

 

 

 

 

 

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Why I AM working at Collar Capital Management (as opposed to Greg Smith’s, “Why I’m Leaving Goldman Sachs”)

am sure all of you have either read or at the very least heard of former Goldman Sachs employee, Greg Smithʼs, scathing resignation letter denouncing the culture that he feels is now permeating one of the largest investment banks on Wall Street. This is why, we at Collar Capital Management, have always taken great strides to build trust and earn your business. I want to take this time to highlight how we have set up our business

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How Do I Invest Right Now

     After reviewing a chart of the CBOE Volatility Index (VIX) this morning, I noticed that we recently hit an important pivot point with regard to fear in the markets.  August 9th, 2011 saw the index hit an intraday high of 47.56, while at the same time the S&P 500 index hit a year to date low, intraday of 1101.17.  Tuesday, this week, the VIX touched 46.88 before heading lower at this writing.  If we had hit a new high in the VIX this week, this event would have signaled to the markets that stocks can make a leg down to lower support levels around 1020.  http://finance.yahoo.com/q/bc?s=IVV&t=6m&l=on&z=l&q=l&c=

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Unleashing Risk Capital is Key to Stock Market Appreciation

     Stocks may be cheap, and bonds may be expensive according to most fundamental models, but it just doesn’t seem to matter to “Mr. Market” right now.  There are a lot of hypotheses out there as to why stocks are trading at such a discount by historical standards.  Some of the reasons center on US politics, Europe’s deleveraging, consumer confidence, geopolitical risks, and unemployment.  These are all legitimate risks that need to be factored, yet I believe there may be a more basic theme that ties all of these reasons together.

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US Economy Battered by Global Headlines

Let’s face it, since the Spring of this year there has been a steady drum beat of negativity that is eerily similar to last spring and summer.  What should we make of this season of ugly headlines?
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What the US Economy Needs…

Have you ever bit into a cake you just made and you know something is missing.  You think to yourself, this is not what I expected.  The cake is still edible, but it just sits there and gets stale, because no one in your family really likes the taste.  Like the the cake sitting on the counter in the kitchen, the US economy is not what investors expected coming out of a recession, and may be getting a little stale at this point.

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Monitoring the World’s Debt

     Yesterday the volatility index spiked and equity markets around the world sold off.  This decline was between 1.5% and 2.0% depending on which market index you reviewed.  The primary driver of this “fear” and “risk off” trade was due to concerns that were raised by investors in Italy’s government bonds. 

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