• Market Overview

2013 4th Quarter Overview

2013 4th QuarterWalking in Tall Cotton

To borrow the colloquial southern phrase, the stock market was in “tall cotton” for 2013. Just as southern farmers in the 1800s became prosperous and lived on “easy street” when their cotton grew tall, so did investors in the stock market for all of last year. Equities rose in illustrious fashion to support the idea that I have been writing about that there is no alternative to the returns of the stock market. (See earlier reports of the TINA principle on our website.) The 32.2% total return for the S&P 500 was the best annual return since 1997. Furthermore, “tall cotton” also grew steadily throughout the year. The largest correction last year was in May and it amounted to only 6%. Corrections in 2010 and 2012 were over 15%.

The relentless rise of the stock market happened despite a mediocre performance from the overall economy and from collective corporate profits that make up the indexes. For the full year 2013, US economic GDP growth was 1.8%. This growth is expected to accelerate to 3% in 2014 but this estimate assumes a robust increase in consumer spending. Early reports from retailers make this assumption doubtful. (Source: US Department of Commerce GDP data) Corporate profits growth for the S&P 500 was 11% for 2013 but a consensus among forecasters is for profit growth to slip to 8% in 2014. The point here is that this background is hardly supportive of another year for the running of the bulls.

A prevailing story throughout last year culminated recently this January. Just after the New Year, the Federal Reserve finally announced a taper. This amounts to a reduction of monthly asset purchases by the Federal Reserve. The taper is interpreted as the beginning of the end of the government economic assistance program, QE3. For the better part of last year, investors waited dreadfully for the taper to begin. It was believed that the stock market would sell off immediately when the taper was instituted. In fact, this did not happen as stocks took it in stride and have barely budged.

We avoided any business calamities in 2013. We endured some heated congressional arguments as well as a brief government shutdown in October, but this storm dissipated with relatively little effect on the stock market.

The condition of “tall cotton” does have some marked negative implications. There is always the threat that we have come too far and too fast. Stock prices might be extended and need time for economic fundamentals to catch up. However, these concerns can be tempered if “tall cotton” stays around for a while. This would give investors time to sell before the next downturn.
Ode to The Chairman

Every generation or so, we are graced by a public servant that defines the goodness of what a public servant is ideally supposed to do. We have all benefited substantially from the contribution of Federal Reserve Chairman Ben Shalom Bernanke, who was originally appointed by President George W. Bush in 2006. Chairman Ben will leave his post at the Fed on January 31. He will have served eight years of service worthy of the highest acclaim that we could bestow on a public official.

“Gentle” Ben inherited the unhealthy economic condition that was born out of the real estate bubble. Shortly after taking the helm, he found himself in a harsh ecomomic storm as our country careened towards a financial crisis.

Remaining largely above the political fray in 2008, Chairman Ben navigated a banking system on the brink of disaster and he constructed a financial rescue package using financial alchemy that had never before been used. During this time, he faced severe criticism both then and now for these policies. At a recent Brookings Institute interview, Mr. Bernanke said congress was split over his TARP proposal. “50% said no and 50% said hell no”. It is remarkable that Mr. Bernanke never got to enjoy public acknowledgement for his assiduous and prescient work. Rather, he withstood harsh public rebuke from congress and from within the Presidential Cabinet.

If we were to reflect on Mr. Bernanke’s critics, one of the few things in life that gets better with age is the joy that you get from being able to say, “I told you so”. Surely Gentle Ben largely has this satisfaction today.

The fun thing about Mr. Bernanke was that through all of the heated debate and our trudgingly slow economic recovery, you always had the feeling that Mr. Bernanke knew more than everyone else. If you doubted his ideas would work, he would knowingly smile. What doubters failed to account for was that he was the “smartest man in the room.” He had better data than congress and other economists. Ben Bernanke could legitimately make the claim that Jack Nicholson did in a “Few Good Men,” when he cried out in the courtroom, “You want me on that wall. You need me on that wall!”
Peregrine Returns and Strategy

Our Equity Composite rose 6.37% for the fourth quarter and finished 2013 up 19.37%. Our balanced composite gained 3.70% for the quarter and 8.98% for the year. That was a pretty low return compared to the S&P500 but it was expected since our bonds were a major drag to these portfolios. In the fourth quarter, the condition of our balanced accounts improved noticeably since bond values held steady for the quarter and our stock returns flourished.

Twitter has been a successful investment so far. We invested in this stock for our clients on the same day as the IPO in early November. Initially, the stock dropped over the first month. Since then, it has recovered and has posted a nice gain. We continue to favor social media stocks like Facebook, LinkedIn, and Google. In addition, we are always examining Tesla, Apple, Netflix, and Stratasys for strategic entry points. The biotechnology stocks had a lull in the fourth quarter. This year has started with a bang as breakthrough trial and test results make this sector very promising for investors. We plan to invest in many of these disease treating companies this year.

Dan Botti
Portfolio Manager
1/22/14

Past performance is no guarantee of future results. Investment management involves the possibility of losses. Significant general stock market moves up and down can influence the performance of client portfolios. Composite returns are based on client portfolios of over $100,000. Not all clients are included in the composites. All returns include the reinvestment of dividends. All returns are net of fees. Composite returns are derived from aggregated, time-weighted returns for clients of Peregrine Asset Advisers. Individual client returns can deviate from the composite returns. While Peregrine uses the S&P 500 as a benchmark, Peregrine does not attempt to mimic the structure of this index. Individual client portfolios vary. The number of securities held also varies per client.

Do you have questions or would you like to know more, contact Dan Botti.

Overview Archive

 
*Past Performance is no guarantee of future results. Investment management involves the possibility of losses. Significant general stock market moves up and down can influence the performance of client portfolios. Composite returns are based on client portfolios of over $100,000. Not all clients are included in the composites. All returns include the reinvestment of dividends. All returns are net of fees. Composite returns are derived from aggregated, time weighted returns for clients of Peregrine Asset Advisers. Individual client returns can deviate from the composite returns. While Peregrine uses the S&P 500 as a benchmark, Peregrine does not attempt to mimic the structure of this index. Individual client portfolios vary. The number of stock positions also varies per client.