4th Quarter Commentary 2009
4th Quarter Commentary 2009
2009 is a year some people will always remember and one that some people will want to forget. There was much more than the usual amount of “noise” mixed with the “signals” we were receiving relative to politics, economy and the future. It was more difficult than usual to filter out the noise. Yet, as the year closed, we found even new sources of worry replacing those of the previous year.
We started 2009 with many of our portfolios nearly fully invested. The 2008 late year declines had used up significant portions of the reserves of cash usually held. It wasn’t until around April of 2009 that we started to recover some of the reserves through sell signals. Market risk was extremely low at the beginning of the year and remained so into April. From April through June risk rose steadily as “reflex” buying showed heavy cash inflows into the stock and bond markets. All ships were rising.
Market risk continued to remain on the high side of average through September. As the market continued to rise, many of our portfolios continued to trim positions causing the cash reserve levels to rise to a more normal level. This was true in our income portfolios as well as the ones designed more for growth.
The last quarter of the year saw markets plateau or decline slightly before the yearend rally. Risk first moderated and then declined as the year came to a close. It took most of 2009 for the Financial and Utility sectors to recover enough to generate some selling activity. Most of the other business sectors had been more responsive to the general bullishness. Precious Metals as a sector did well through most of ’09 but flattened in November and December.
The Pacific Rim and Latin American geographical areas recovered nicely in 2009. The European markets lagged slightly and Japan was slower to respond and fell behind the other markets. Even so, moderate selling in those geographical areas has provided reasonable cash reserves again.
Historically the cash reserves our portfolios carry have paid their own way through interest accumulation. In 2009 this was not the case. The 13 Week Treasury coupon rate started the year at about .05%, peaked in summer near 0.2% only to slip back to around 0.07% by year’s end. As it turned out, this was a good year to be lean on cash reserves.
At year’s end we saw the longer end of the government bond funds lose some of their appeal for investors. While the value of bond funds was declining, the possible yield improved modestly. Anticipation of higher interest rates and fear of future inflation are the most suspect reasons. If we see interest rates rise in 2010, we would expect bond fund prices to decline further. With cash reserves available for those components downward averaging and yield improvement may be possible.
The U.S. Dollar generally declined against most currencies in 2009. Japan’s Yen and China’s Yuan both remained nearly unchanged against the U.S. dollar. Much of the speculation in currencies hinges on the large amount of government spending going on in the U.S. However, many of the foreign governments are also doing similar “stimulus” spending. This understanding has tempered the earlier speculation and the dollar stabilized during the last quarter of the year.
Tom Veale
Chief Investment Officer
SignalPoint Asset Management, LLC
