Unemployment Friday was an important day at Astor last week, just as it is every month. We review these numbers and aggregate them with other economic data at to get a fresh perspective on what the economy is doing. So what do we see now? Is the worst behind us?
Equities have rallied 30%+ since the lows of March on prospects of a recovery, and that sure feels good. Commodity prices have rallied 22% on the same prospects. However, it is interesting to note that the market is trading at about the same level as late December/early January. The market is still down a good 35% from 2007 levels, and that is after a significant rally the past two months. The US economy has lost over 2 million jobs this year alone and GDP contracted for the highly unusual 3rd quarter in a row. (That has only happened twice before…ever.) Banks appear to still need to raise capital, and while credit spreads have eased, interest rates have moved higher, which will make borrowing more of a challenge, and of great interest is the lack of increase in M levels even after tremendous government stimulus. If they still calculated M3 it would have contracted for the year. The commercial real estate market appears to be another looming problem as firms are unable to restructure debt covenants while losing tenants, and may be a land mine in waiting.
Here is how we see it. That extreme 25% drop in the market this year tells me something. It tells me the amount one needs to pay (the premium if you will) to get cash now. With liquidity virtually gone and credit non existent the only place left to get immediate cash (in two days) was the stock market. With the fear (unfounded I might add) of nationalization of financial related companies, there was nowhere else to turn for cash but to sell stocks. It was true fear and panic. The recovery from those lows has nothing to do with an economic recovery. This has been just a reversion back to where we were before the panic. The only difference is the actual economic statistics have deteriorated since the beginning of the year. Since it is very difficult to equate any current level of the stock market with the current economy, I’d rather just identify the direction of the market and the direction of the economy, and only make a move when it changes.
While the pace of deterioration has slowed recently, this does not mean growth has resumed. The market declines earlier this year reflected poor fundamentals as well as a panic of liquidity. I believe the lows are in. To make "new lows" something new will need to happen and we are watching for that. But that is not enough to say we are heading back to a bull market and economic expansion. It will most likely be a bit of a consolidation from levels somewhere around here plus or minus 10% (more likely minus). I think this is about it for the broad markets.
Time to Change
To that point, we firmly believe the current bounce is an opportunity to rebalance portfolios. For example, when the tech bubble peaked and declined some 70% in 2000-2003, it had a wonderful rally afterwards, but it never fully recovered. The losers did not become the winners during the next expansion. Many companies at the root of the collapse never recovered. That will happen again this time as well.
If you are not utilizing an active management strategy in your portfolio to manage risk and volatility, you must consider this now and stop leaving your portfolio to chance. While it is obviously too late to protect your portfolio against the massive declines of the past 18 months, this rally has created a real opportunity to re-adjust your investment approach.
Astor Asset Management has specialized in this approach since 2001. We utilize the data the economy and market is giving us to tell us how and where to position our clients. We constantly assess the data and our analytical tools to stay ahead of curve. This approach has served us well over the decades as employment trends turned down in 2000 followed by a contraction and bear market and again in late 2007 early 2008. Our flagship L/S Balanced portfolio was down a mere 4.5% in 2008, and as of last Friday, was up over 4.5% for the year and making new profits for clients.
If you’re not using active management now for one reason or another, please click here to visit us online or call us at 800-899-8230. You owe it to yourself to investigate the benefits of a strategy like this to your financial situation. Let us talk you through it. You’ll be glad you did.
