Avondale October 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,

Needless to say, September was another extremely difficult month for investors. The S&P 500 fell 7.18%, the 5^th straight monthly loss for the stock market.  During this 5-month period, the S&P 500 has lost 17% of its value, which (as shown below) is the second worst monthly losing streak since 1957.  The good news is that since 1957, there have only been 6 other times that the S&P 500 has fallen for 5+ straight months.  Only twice has that streak extended beyond the 5^th month.  That’s not to say that the streak wont extend this time, but at least the odds are in our favor for a positive bounce in October.

Longest S&P 500 Losing Streaks

	# Of Months	% Decline
January 1974-September 1974	9	-34.86%
January 1973-June 1973	6	-11.68%
April 1981-September 1981	5	-14.57%
May 1966-September 1966	5	-15.92%
June 1990-October 1990	5	-15.84%
November 2007-March 2008	5	-14.63%
May 2011-Present	5	-17.03%

As I wrote last month, I have tried to remain defensively positioned as the economic tone has continued to worsen.  In September, I made very few new investments and maintained the large cash position that I mentioned in previous letters.  While this has not been enough to generate positive returns, the strategy has helped to diminish some of the pain of the falling market.  I also believe this continues to position us well to capitalize on a further pullback. 

Unfortunately, this positive decision has been offset by some negative ones, which hampered returns.  In particular the European financial disorder sparked a strong dollar rally against foreign currencies.  This affected our investments because I have had a bias toward a weak dollar and higher interest rates.  Each client’s portfolio reflects this view to some degree, and as a result most portfolios felt a drag from this positioning.  I don’t believe that the situation yet warrants a change in strategy, but of course I continue to monitor closely and am constantly challenging my assumptions.  Thinking with a long-term perspective though, I strongly believe that interest rates remain well below the rate of inflation, which should continue to pressure the US dollar and support commodity prices.

Net-net, the positives and negatives balanced each other during the month.  While we continue to outperform our peers for the quarter, I don’t think there’s much cause for celebration given the negative returns.  Going forward, my goal is to sit tight until mid-October when there will hopefully be more clarity and reinvest some then.  Companies will report earnings over the coming weeks, and should provide insight on whether recession fears are valid.  Beyond October, I remain optimistic that markets will end the year higher than today’s levels.  Let’s hope I am proven right.

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.