Thursday, September 1, 2011

Avondale September Investment Letter

I write this letter monthly for the benefit of Avondale Asset Management's clients.  It is reproduced here for informational purposes for the readers of this blog.

Dear Investors,

There’s an old adage on Wall Street, which goes “sell in May and go away.”  Certainly this year the adage proved to be true.  Since May 1 markets have had a rough go.  The S&P 500 is down over 10% since that date, and for the month of August alone, the average was down 5.68%.  At one point during the month, the S&P 500 was down as much as 14%, so we have actually rallied quite a bit since that point. 

Although I remain optimistic that the economy will continue to show slow but steady progress, the economic tone turned decidedly more negative in August.  We started the month with uncertainty over debt talks and a downgrade by S&P.  However, the true culprit for the stock market decline was increasing fear of a double dip recession.  A declining stock market can create a self-fulfilling prophecy of recession on its own, but in addition there were a number of negative economic indicators reported during the month.  Notably, two indicators highlighting consumer and business sentiment hit their lowest levels since 2009.  Additionally, continued concerns over European government indebtedness added fuel to the fire.

Just because sentiment retreated doesn’t mean that the real economy had to though.   Early hard numbers for August seem to point toward stability.  In particular monthly sales figures reported by national retailers were strong, and ISM, an important gauge of national manufacturing activity, indicated economic expansion.  Most CEOs of companies reporting earnings in August tended to agree that activity is slow but unchanged.  In this market, that’s a good thing.  Much of the relevant data for August has yet to be reported though and will trickle out throughout September.  This will give us a clearer picture as to how much of a contraction occurred in August if a contraction occurred at all.

Against this difficult backdrop, our portfolios performed reasonably well.  Performance varies depending on individual circumstances, but in general conservatively invested clients performed particularly well and actually earned positive returns for the month.  Clients invested in more aggressive asset allocation and stock-picking strategies had a more difficult time in August; however, they did benefit from a conscious decision to preserve cash at the beginning of the month and invest incrementally as stocks fell. 

Across all of the portfolios, clients still hold a large amount of cash by conventional standards.   I continue to feel comfortable with this position as we enter September, which historically is one of the most volatile months for equity returns.  I feel that each of my clients has enough capital invested to benefit if stocks rise, while at the same time has enough cash to take advantage if the market falls.  With this allocation, I hope clients can sleep well knowing that if markets continue to retreat, they stand to benefit from the opportunity to purchase at bargain prices.  I’ll be monitoring the situation closely.

Scott Krisiloff, CFA

Opinions voiced in the letter should not be viewed as a recommendation of any specific investment.  Past performance is not a guarantee or reliable indicator of future results.  Investing is subject to risk including loss of principal.  Investors should consider the suitability of any investment strategy within the context of their personal portfolio.

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