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 A headline in The Telegraph today: "Hedge funds hammered in one of worst years on record." As many of you know we at PivotPoint Advisors fancy ourselves as a type of hedge fund for normal people. Hedge funds try to protect your capital without giving up the ability to make a good return. If the market is down 50%, their objective isn't to only be down 45% and brag about 5% outperformance. They don't ever want to lose money even if the market is having another horrific year. The kicker though, is even with the focus of not losing money, they desire is to never limit the potential upside return. CD's guarantee you won't lose money but they also limit your upside return. Unfortunately you need to have over a million dollars if you want to invest in one. We have this same objective, but our minimums (or lack thereof) suit the common investor. I wrote a white paper earlier in the year comparing the hedge fund investment objective with that of the mutual fund's asset allocation and diversification. if interested you can find a copy of that paper here. The article in The Telegraph goes on to say "the Hedge fund managers have been hammered by volatile markets that have more often been dictated by political calls in the eurozone than company fundamentals." We all have seen the volatility in the market this year. It has given more false signals than an airline has late flights (humor inserted here). It has been very difficult keeping positive account values while the market does nothing but tell us lies. The good news is that even through one of the most difficult years in the history of hedge funds, we've managed to protect the capital in our accounts from large draw downs while keeping volatility to a minimum. I've said numerous times that a time will come when it is much easier to make money. We want to have our accounts intact when that opportunity arises. Our Moderately Aggressive model vs the S&P 500 index is below updated through Dec. 19th. 
I remember as we neared the end of 1999. The market was the highest it had ever been, y2k was coming which we never experienced before and we were entering a new decade. The beginning of the prior 4 decades were recessionary. Even though many were piling money into tech stocks due to the huge returns that year, we began moving to safety. Hindsight being perfect, 2000 nd 2001 were very difficult years. 2012 gives me the same feeling as 2000 did. We will see if my feelings come true.
I hope you all had a very Merry Christmas and wish you a Happy New Year!
Have a great day!!
John Norquay CEO PivotPoint Advisors |
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Tuesday, December 27, 2011
The Year In Review
Monday, December 19, 2011
If Hindsight Is Perfect . . .
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 Since the market took the 20% drop in Late July and early August this year, it has pretty much stayed range bound. Every time we get signs it wants to begin a new direction, those signs soon break down and we must adjust. This is exactly what we have been experiencing these last couple weeks. The market moved up hard off a bottom, took a break and acted like it wanted to begin a new longer leg up. Unfortunately it turned out to be false and moved back down. Although this can be frustrating to money managers like ourselves, we've been through it so many times before that we know to simply get back on the sidelines and be patient. These sideways markets always work themselves out and choose their ultimate direction. Our job is to have all our assets intact when that occurs. If hindsight is perfect, then the volatiliy indicator for the S&P 500 index (the VIX) may be hinting as to what is going to happen next. Without boring you with charts, the VIX, over the last two years or so, has been very good at telling us which direction may be next for the market. Don't take this as the Gospel, but according to the VIX (NOT VIXen, Santa's reindeer) the market will be choosing down as its next longer term move. If I were going to refute this piece of market evidence, I would look for positive signs within our economy that are strong enough to overshadow. In reality, at this point, I would be looking for something in Europe's economy to refute the VIX evidence. Unfortunately I can't find anything on either side of the ocean that would be a strong enough positive. Everyone has been looking for a Santa rally over the last week or so. It hasn't happened. The only thing that has happened is indecision at all cycle time frames. When price patterns form triangles, it indicates indecision in the market. Take a peek in the Briefing Room and you will quickly see triangles in all three cyles at the top of the page. In fact, since I'm not writing this briefing until Monday afternoon, I have the convenience of looking backward. the 1.2% beating the S&P is taking today shows me that at least the shorter term cycles have decidedly turned negative. I mentioned a week or two ago that some of the countries in Europe were going to try borrowing money and chances were they wouldn't be successful. Success being defined as borrowing at a cost that was affordable. As it turns out, they were highly unsuccessful. This is a sign to me that the deal put together is not much of a deal afterall. The action of the market is substantiating my thoughts. I'm happy we are out of this market for the time being. If something changes we will be sure to let you know. If I don't see you or talk to you between now and Christmas, then Merry Christmas to you and yours. May God bless you with a happy new year.
Have a great day!!
John Norquay CEO PivotPoint Advisors |
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Tuesday, December 13, 2011
on
When Things Fall Apart
Today I am posting a guest article from Charles Hugh Smith. Charles is a sought after financial columnist whose works are published in most of the major publications. I am on the same wave-length as him with the current market, so I thought I would share his thoughts.
The global "shadow" banking system is unraveling, with dire consequences for financial assets and failed policies.
As I type, the morning injection of hopium crack into the market's veins is already wearing off. We are still in the desperation stage, as central bank manipulators and Central State apparatchiks are rushing around in a panicky search for some new supply of "sugar" intervention to prop up what has been unsustainable since 2007.
The manipulations have one ironic accomplishment: the resulting crash will be larger and more chaotic than the one in 2008 because the faith that State/central bank interventions are limitless magic will have been irrevocably lost.
The big meetings in Europe last Thursday and Friday had one major outcome. Germany won. This means that there won't be any big money being printed by the European Central Bank and that the countries that are in trouble are just going to have to suck it up, learn from their mistakes and get stronger. In other words, we will see some major vomiting with the flu bug that comes from the major amounts of tightening that will have to occur.
Boy do I feel like a pessimist!! But like I always say, the good news is. . . I don't have to be right!!
We're not used to things falling apart, and so our first reaction is disorientation. What we've been trained to expect by constant intervention in supposedly "open" markets is that Central States and central banks will "save the day" with a new intervention: an interest rate cut, a new round of money-printing, emergency loans, new bailout funds, the list has been almost endless since the initial evidence of the Great Unraveling appeared in 2007.
So when official interventions are announced to great fanfare and then fail to goose the market, we're disoriented. John Hussman neatly summarized the insanity of a market propped up only by constant official manipulation: We represent the Lollipop Guild:
Frankly, I am concerned that Wall Street is becoming little more than a glorified crack house. Day after day, the sole focus of Wall Street is on more sugar, stronger sugar, Big Bazookas of sugar, unlimited sugar, and anything that will get somebody to deliver the sugar faster. This is like offering a lollipop to quiet down a 2-year old throwing a tantrum, and expecting that the result will be fewer tantrums.What we have increasingly observed over the past decade is nothing but the gradual destruction of the ability of the financial markets to allocate capital for the benefit of future growth. By preventing the natural discipline of the markets to impose losses on poor stewards of capital, and to impose interest rates high enough to force debtors to allocate the capital usefully, the world's policy makers are increasingly wrecking the prospects for long-term economic growth.
The problem with depending on intervention "sugar" for sustenance is that the market slowly loses its sensitivity to the mechanisms of control (insulin), and at some point the sugar no longer generates a response. We are very close to that point now, as the expected "grand EU treaty agreement" is duly issued as expected and global markets are holding their breath, hoping that some new intervention will keep the teetering financial system from falling over the edge.
This is desperation. In market after market, participants don't really have any faith in the future resilience of the fundamentals which supposedly underpin global markets; rather, they are desperately hoping the next intervention will work better than the last one. But like insulin insensitivity, the market is on a one-way slide: every intervention works its magic for a shorter period of time, and markets respond with increasing torpor to the "fix."
The next phase is chaos, as participants finally grasp that interventions will no longer save them. Then the mad rush to the exits (selling) will begin, and many will be trampled, as the bid will disappear across entire spectra of assets.
We should recall that nothing fundamental has changed since 2007. Here are two fundamentals of many which haven't changed at all: wealth is still concentrated:
and the global financial system is still overleveraged and over-indebted, meaning that every decline in asset valuation triggers a "reverse wealth effect."
and the global financial system is still overleveraged and over-indebted, meaning that every decline in asset valuation triggers a "reverse wealth effect."The manipulations have one ironic accomplishment: the resulting crash will be larger and more chaotic than the one in 2008 because the faith that State/central bank interventions are limitless magic will have been irrevocably lost.
Boy do I feel like a pessimist!! But like I always say, the good news is. . . I don't have to be right!!
Monday, December 5, 2011
False Bravado?
France and Germany in yet another meeting
We have had one heck of an uptick in the market this last week. The market gapped up on both Monday and Wednesday and again this morning (Monday). I had mentioned last week that we may expect a bounce after all the selling that went on the two prior weeks, but expected nothing to THIS magnitude.
I'm sure most of you have heard that the major central banks of the world got together and provided "Easy Dollars" for cash strapped Europe. Why would OUR Fed help bailout Europe you may ask? Well, MarketWatch financial reporter Jon Markman reported last week "There were persistent rumors that a major French bank was on the verge of going bankrupt and that common financial transactions were on the verge of a total halt."
Remember back in 2008 when Bear Stearns and Lehman went out of business while at the same time Freddie and Fannie were taken over by the Gov't (and just a few weeks ago MF Global went BK)? All these banks / financial firms (as well as others who were bailed out) were leveraged 45+ to 1. What does that mean? Basically that for each dollar they had as an asset - such as a savings account, checking account, loan, etc, - they had borrowed $45 to make other investments. When you owe $45 for every $1 you have on the books, if ANYTHING goes wrong with the $45 investment, it sends your $1 into turmoil. This is the current scenario with the major banks in Europe. They invested a lot of their $45 into loans to countries like Greece, Italy, Spain and Portugal. And anyone who can read knows those investments aren't going so well.
Anyone know what mark to market means? You might say who cares, but it is huge. If you bought a stock for $45 per share and it is only worth $20 per share today, would you want to know about it? There are a lot of people who stopped opening their 401k statements in the last recession who might say NO, but savvy investors want to know. Mark to market means to report the current value of an investment on a daily basis. The loans for these European countries are still on the books for the full $45 even though they might only be worth half. Since they don't have to mark to market - report today's true value - they can run around with their head in the sand until someone forces their hand. These easy dollar loans allow them to keep their head in the sand for another day or two - like giving a junkie a fix instead of sending him to rehab.
Europe can't get institutional investors to lend them money, so they are trying to get it from our Federal Banks. The institutional investors remember 2008 and how even money market funds were frozen. They want to avoid living that again. The European Cental Bank won't print money because of Germany, but that won't stop ours from printing.
Gaps: Gaps can occur when something unusual happens in the market. The gaps I'm referring to occur over night. If the market closes at $1,000 and opens the next morning at $1,100, there is a $100 gap. You can't buy in the morning at $1,000 or $1,025 or $1,050. If you want to buy it must be at the gapped up price of $1,100. There is a saying in technical analysis that gaps are always filled back in. When a gap occurs to the upside, if you are patient and hold on, the price will come back to pre-gap levels.
This last week, we had such artificial steroids added to the markets, they did nothing but go straight up without allowing any low risk entries. The first gap hit its head on resistance and the second gap went through the ceiling and to unsustainable highs for the short term. The big question? Will these market steroids build a foundation to a sustainable recovery or will they wear off quickly and find ourselves filling the gaps on the way back to the lows of a week ago? Time will tell, but headlines this afternoon said that the S&P has put the major european countries on watch that they could be downgraded based upon results of meetings this week. France could lose two notches which would be a disaster.
Europe is still moving our market tremendously giving our markets volatility beyond belief. Visit the briefing room to see how we are viewing the current market movements and what we are doing about it.
Those of you who are lucky enough to watch Badger and Packer football heard during both games how they were similar to heavy weight bouts. Maybe this is a new Fox sports term, but one I would quickly add to watching the bulls and the bears. This is one heavy weight bout that is exciting to watch. One of these days, the bull or bear will win and it will become much easier to make money.
