2012 Investment Preview
Last year we predicted that 2011 would hold some days of pessimism and panic. What we did not predict is that those gloomy times would encompass almost the entire period of August through December, with some days or weeks of relief thrown in for good measure. It seemed almost everyday there was talk of this country or that defaulting, of currencies collapsing, and of financial systems cracking. And then … they did not.

Corporations prospered in terms of profitability. Consumers kept up purchases. Emerging economies kept on building capacity and consuming raw materials. Inflation stayed low. But always there was the overhang — of debt, political concerns, tax policy, deficit reduction. In the end, the optimists and pessimists fought to a virtual draw, with the S&P 500 unchanged for the year.

Not only was volatility high in late summer and fall but the correlations among stocks, how they moved together, was unusually high. It almost did not matter in what you invested, it only mattered how much you had invested. This period of high correlations, increased volatility, and the so-called “risk on, risk off” dynamic appears to be coming to an end. As 2011 drew to a close, what stocks you owned started to matter again. Patterns became discernible as to what was working and what was not.

At year’s end, you could almost hear world investors exhale. After all that 2011 threw at them, including the Japanese earthquake and tsunami, European crises, and U.S. political dysfunction, the economy appeared to be stabilizing in the world's biggest economy, the United States, and that led to the U.S. having one of the best performing stock markets.

What worked best in 2011 was a diversified portfolio of cash generating investments that were attractively priced, cash to provide ballast and ammunition during particularly stressful times, and a portion of industrial and materials stocks that could rise along with the emerging economies of Asia and South America. This was the general strategy of Arrival Capital, as we continue to adhere to our value investing philosophy, along with a commitment to be opportunistic and at times contrarian when circumstances warrant.

It was by no means an easy year, or a magnificently profitable one, but we believe we steered our clients through a tumultuous year with capital intact and ready to take advantage of what may just be better economic times ahead.

For those who think value investing cannot keep up with in and out trading, 2011 was a lesson in the difficulty in trading an up and down market. Headlines from Europe and Asia, often in the middle of our night, moved stocks around before our markets even opened and set the tone for the day once our markets did begin to trade. The market moves themselves often were predicated on unknowable and unpredictable press releases and quotes from obscure foreign officials. All of this made trading a fool’s gold for even the savviest investor.

So Arrival Capital will stick with an approach that has left clients in good stead for almost ten years. We have lived to invest another day and another year, hopefully one with less drama, more predictability, and more chances to invest wisely for ourselves and our families.

Happy New Year!
- posted by Jay @ 10:50 AM

 
2011 Second Half Preview
If March comes in like a lion and goes out like a lamb, June came in like a bear and went out like a bull, at least as far as the stock market was concerned. As it has so many times since it bottomed in March 2009, the stock market turned out to be a good place to invest just when things seemed gloomiest. This time it was an economic “soft patch” and recurring problems with Greek government debt that caused the anxiety and trepidation. Stocks fell week after week in May and June, and yet...things did not collapse, the 2008 or even spring 2010 script did not sickeningly repeat itself.

What to make of financial markets that once again pulled out of descent before significant damage was done? The word resiliency comes to mind. And maybe this is how it is supposed to be. After all, the investments we make, at least here at Arrival Capital, are in real financial entities with hard assets or valuable brands and know how. Investments in firms like these should not veer up or down depending on the whims or nervousness of investors focused on factors having almost nothing to do with the inherent value of enterprises in which we invest.

As conditions normalize even if still not quite “normal”, selloffs become opportunities to make investments in valuable entities that have come down in price due to exogenous events. But value remains unaffected, indeed value becomes enhanced and chances for meaningful profit increase as the prices of pre-selected and already researched stocks come down.

That is opportunistic investing merged with value oriented investment analysis. A recent case in point is Nike (NKE). Back in March the company reported a less than stellar quarter but indicated that future orders remained brisk. On a whole list of metrics, the stock and company appeared fundamentally sound. Yet the stock sold off hard. We soon after began buying this iconic brand in the high 70’s for clients. Because of the fundamental value of Nike, the company’s stock did not fall any lower as the market in general began its sell-off in May. This is value investing providing a margin of safety against tougher investment climates. Cheap but valuable things tend not to go much lower. Next, in late June, Nike reported a terrific quarter highlighting the tremendous power of this global company. The stock price quickly made it back to its all-time high in the low 90’s. This is value investing harvesting the appreciation that takes place when real value is finally appreciated in the marketplace (it usually takes a little longer than three months.)

The heart of Arrival Capital’s approach is to build a diversified portfolio of positions that can act like Nike has recently. Buy good value at cheap prices. Put in place that inherent downside protection yet set the stage for meaningful appreciation as value is recognized and enhanced. Complement a value-oriented portfolio with positions anticipating economic and/or global trends in areas like commodities, currencies and/or interest rates, and we have what we believe are cost effective, prudent yet powerful portfolios that can withstand the test of time and changing economic conditions to produce real wealth for our clients.

The second half of 2011 is bound to have it setbacks, bouts of pessimism and maybe even a day or two of panic. But the underlying resiliency of the economy should continue to form a foundation upon which productive people and businesses worldwide can continue to create value. Arrival Capital will be there to capture some of that value for our clients.
- posted by Jay @ 9:01 AM

 
Q2 2011 Preview -- Spring Forward
Unrest throughout the Mideast and a brutal earthquake in Japan, followed by radioactive contamination in large swaths of that country (the world’s 3rd largest economy) would not seem to be a good recipe for building confidence in the world’s economic recovery. Yet these significant and, in the case of Japan, terrible events, which caused the world’s financial markets to bend but not break in mid-March, showed that economic confidence and fundamentals are getting stronger, as evidenced by the stock market’s snapback rally into the beginning of April.

Employment in the United States continues to grow, as do corporate profits and government tax revenue. Putting all this together, one can make the case that the stock market and the economy are returning to some semblance of normality, with winners and losers, ups and downs, but not the omnipresent fear of disaster that seemed to permeate finance for the past four years.

As markets shake off this “cost of fear”, investors should more than ever focus on identifying emerging trends, undervalued companies and special situations. Approach will matter more than simply putting cash to work when the coast is clear and pulling your chips back when trouble is brewing.

Arrival Capital’s approach remains grounded in value investing and contrarian analysis, always underpinned by a thesis on where the world is going in terms of trends and societal changes. This approach has kept clients in a mix of material and industrial stocks, buoyed by the growth of emerging economies, select healthcare companies riding a demographic wave, and select tech, retail and financial companies that are cheap based on profits, revenue and the value of brands and/or future prospects.

Investing once again looks to becoming a process of research, timing and putting together a portfolio that can withstand surprises but also capitalize on getting enough things right about the economy as a whole and specific companies and investment areas to drive up net worth.

At Arrival, we strive to see the forest and the trees. The macro and the micro of the investing world. We need to protect our clients from the threat of inflation and a falling dollar, and do so through investments in commodities, and those companies deriving their revenue and profits from foreign sources. We also need to guard against a slowing economy, and do this with investment in quality dividend paying stocks, sound bonds and, yes, cold hard cash that can provide a margin of safety for a portfolio and provide capital to take advantage of often temporary market or stock dislocations.

We look for individual companies that are selling at attractive prices based upon their cash generating powers, asset value and/or the likelihood that another company might eventually want to buy them out, as happened to one of our favorite stocks last year, J. Crew.

All of the above is not some secret sauce or algorithm. It is simply the function of an investment process combined with an outlook, based upon research and observation. It is this process that Arrival Capital seeks to offer its clients, in tough times and good times, in the cold of winter and through a hopeful spring.
- posted by Jay @ 2:37 PM

 
Q1 2011 Mid-Quarter Update — The Muddle Through World
Over the past three plus years a lot of things have gone wrong with the world economy. There has been a sub-prime mortgage crisis that ballooned into a full-blown financial and banking crisis and panic. There has been a deep, painful recession and a recovery lacking in vibrancy and job growth. There was a spike in oil prices and subsequent collapse. Let us also not forget a still simmering sovereign debt crisis in Europe and a crisis seemingly in waiting over the debt of U.S. states and perhaps the federal government itself.

As these problems have come and only partially been defused, financial markets have bounced back strongly, back to levels of the summer of 2008, before the crisis as a whole manifested itself in full fright.
As investors striving to know where things are going, it is well we ask how did markets recover and climb despite the litany of economic woes still plaguing us? Arrival Capital’s answer is a combination of the resiliency of the American economic system or, to be more precise, in the productivity and industriousness of American and world businessman, workers, entrepreneurs, and managers. Drilling down to its core, the world economy did not collapse because every day people get up and make things, create products others need or want, and the multiplication of these efforts a million or even billion times over kept the world going. Beyond the sheer industriousness of market participants, another reason for recovery is that long term trends such as the development and industrialization of heretofore underperforming and underdeveloped areas of the world, notably China, Brazil, India and others were slowed but not stopped. As soon as the world economy was stabilized, long term trends picked up again, and with these long term trends came growth in the demand for and a pick up in prices of many types of commodities, from energy and copper to silver and gold.

But despite the industriousness of people and the mega-trend of a developing world, things are still not quite right. The scope of imbalances, inequities, and distortions that caused the financial crisis and recession and have since been mutated and spit out by the crisis and its government sponsored remedies has simply been too great to allow things to return to normal. And so we are in what can be called the muddle through world. Things are getting better, companies are generating profits, the system has stabilized; and yet the unemployment rate is too high, inflation threatens, state and national finances are on the brink. Investors flinch at a hint of bad news, looking over our shoulders at a crisis still too close for comfort.

How to invest in such a muddle through world? Keep identifying the long term trends — developing world growth, the aging of the rich world, the emergence of riveting personal technologies — and invest in these trends through the best values you can find. Prepare not only for the worst, but for the not so great — such as 5% inflation, $100 oil, 9% unemployment. Finally, keep an eye on the tails, those less probable but still possible scenarios such as another dip into recession, hyper-inflation, sovereign debt defaults, and buy some insurance through high quality, dividend producing stocks, commodities, and inflation protected assets.

Arrival Capital aims to help our clients navigate this sea of economic uncertainty by looking forward and looking back, knowing where we have been and planning a course though the unknown times ahead to a brighter horizon that is out there somewhere.
- posted by Jay @ 3:48 PM

 
October 2010 Investment Outlook — Storing Our Wealth
2010 has been a year of pronounced ups and downs in the stock market, with the whole investment world seemingly putting “risk on” or taking “risk off” simultaneously, leading to most stocks moving in tandem with one another. This can be frustrating to investors when all stock prices suddenly fall. For investors with a longer term time horizon, however, this year’s market sell-offs in the spring and late summer provided opportunities to buy high quality companies at very cheap prices as measured by metrics such as price to earnings and sales ratios, and price to the cash flow an investment is likely to generate in the next few years.

Arrival Capital chose these times to put client cash to work and grab high quality invest-ments to build out client portfolios that can both withstand the turbulent times we may see ahead yet be in a position to meaningfully appreciate in months such as September, which saw stock averages climb more than 8%.

It is tempting to use a sports metaphor and say that a diversified portfolio of high quality stocks, many with steady dividends and low levels of debt, allows us to play offense and defense. But let’s go a little deeper and consider why we invest.

Obviously, we want to earn a re-turn on our savings that can grow over time. Further, we would like the growth of our savings to exceed levels of inflation in the economy, so that we can maintain the purchasing power of our saved dollars. It used to be that the interest rate on savings accounts was one key number we kept in mind, while another was what the expected return was on other potential places for our savings such as investing in the bond and stock markets. But this relatively simple task has grown much more complicated in the last few years.

For one thing, more than ever be-fore in our lifetimes, we need to be concerned with the return of our savings when we need them not just the return on our savings. We now question the safety of the institutions we trust with our funds. As bond investors, we need to be cognizant of the financial health of those to which we lend money, even the state or cities from which we buy municipal bonds. Apart from safety, the re-cent global economic upheavals have made the old reliable savings account a virtual non-starter as an acceptable savings vehicle given minimal yields of 0.5% or less.

We also need to be concerned even with the future value of the currency we hold (dollars for most of us) in a time of money printing (quantitative easing) and competitive currency debasement. Hence the importance of gold and other precious metals (and the companies that mine them) to creating a safer portfolio.

With all these different variables, saving and investing has become a game of chess and not checkers. Like it or not, as savers and investors, we make decisions constantly as to the types of risk we are taking with our savings — stock market moves, interest rate levels, currency values, inflation rates, commodity costs. More than ever, Arrival Capital is focused on helping you answer these questions about risk, reward and the future of our savings. We continue to believe that the right mix of stocks can be a good store of your personal wealth and a cornerstone of an effective investment plan. The devil will always be in the details, but our goal remains to put your savings in the best possible places in an ever changing and complex world.
- posted by Jay @ 2:39 PM

 
2010 Begins -- Investment Thoughts
A calendar year is a slightly peculiar way to assess investment strategy. After all, our financial needs — retirement, college education, a new home — require years of saving and investment. Trends and themes we may see for investing, such as the rise of developing markets, the aging of America, the mobile technological revolution, all will take more than one or two calendar years to play out. Yet we are bound by convention to assess how we performed in a specific calendar year and make predictions for the coming twelve months.

By absolute measures, 2009 was a profitable year for investors who stayed invested through the troubled times of winter and were not shaken out by incessant fears that the rally of Spring was a market mirage destined to pull investors in and then cascade to lower lows. If there was any one thing that Arrival Capital was able to do for clients it was to keep then involved in the financial markets and not fall victim to the unrelenting fear and panic that gripped much of the financial world during the financial crisis’ darkest days.

Staying in the market was the one step required to re-build wealth. It almost did not matter what stocks were held, indeed, the riskiest, most leveraged companies were the ones that soared the most. Arrival Capital saw its mission in the later half of 2009 to find stocks that could go up in value as the crisis receded but had the cash flow and/or balance sheet strength to keep losses to a minimum in case the nascent recovery foundered. Value investing again being our touchstone to find opportunities where potential reward meaningfully outweighs the potential risk to precious client capital.

What then to expect in 2010? First, more of the same as asset values shrug off the last of the panic inspired sell-off of last winter. U.S. debt levels, incipient inflation, the dollar, unemployment, and corporate earnings will drive prices from day to day. A more longer term approach that we have developed is to figure out what economic and industry trends that existed before the credit crisis were victims of the crisis and which trends were momentarily arrested only to resume anew in late 2009.

For example the game of leverage that spurred real estate and related financing and building industries higher is gone forever as we knew it in 2007.

So too may be gone the bidding up of troubled but asset rich companies by private equity firms loaded up with cheap credit.

The growth of developing countries, however, appears to be resuming its upward trend, favoring investors who can figure out what these countries need to increase their development (energy, industrial products) and what the growing middle class in these countries will want to consume (brands). Another thing the financial crisis did not stop is the aging of America and much of the developed world. Drugs, medical devices, medical technology, all can be investment winners at the right price. Finally, technology continues to change our world and finding value oriented ways to participate in these changes will undoubtedly lead to meaningful investment returns.

Of course, times change, imperceptibly at first, and then, with benefit of hindsight, clearly. We cannot know the future, but we can calculate the probabilities of how things might change, for specific companies and the world at large. Here’s to a successful 2010.
- posted by Jay @ 4:00 PM

 
The New Investment Reality
As summer winds down you can sense the pick up in energy that we experience in our lives. The start of school or college, a new football season, the end of reruns on television, the best movies of the year, new product introductions — they all make September the “real” start of a new year much more than the often dreary month of January. If September is where the action is, it is often been a horrible month for stocks, including last year’s financial meltdown. A strange juxtaposition — new beginnings colored with economic uncertainty.

This September has been different. A nation recovering from recession has a little less energy to spare for the cultural renewal of autumn, yet the slow recovery of our economic confidence has made September a calm time in the financial markets, continuing a climb from the March lows, into a slowing but still upward recovery of values and net worth.

It has been my opinion that if we can get through October without any more unusual and violent economic disturbances, then the financial markets will have exited the panic and bounce phase and entered into a more stable time of evaluating the speed and durability of an economic recovery. It is during this period that stocks will move less as an indistinguishable asset class and more on the fundamentals and economics of each potential investment. Industry and company specifics and prospects will matter more than the questions of recession, depression and recovery we have been forced to confront for more than a year.

All this does not mean the process of investing and financial planning will get any easier. In fact, over the past year the one question has been depression or recession, and the one decision has been to own stocks or not. It mattered less what stocks you owned, more if you decided to stay in the market at all through the dark days of late winter. Arrival Capital fortunately decided to keep clients involved in the stock market, as it was our belief that all economic rules had not been re-written and that value still mattered. Even while we kept more cash as a buffer, almost all client accounts have bounced back strongly and fully participated in the market recovery.

Now the process becomes harder. What stocks to own becomes the key question. Once again, it will be important to have a thesis to build upon, a way at looking at the world and a way of looking at potential investments. Perspective, also, will once again matter. What is your time horizon, and how does this compare with our view of the changing economic conditions of the country and the world?

Our thesis is that long term trends will re-assert themselves. For example, the developing economies of Brazil, Russia, China and India will continue to drive the revenues and profits of resource and industrial companies, as well as select consumer businesses. The aging population of the developed world will continue to lead to opportunities in the healthcare space, with or without insurance reform. Other incipient trends will also appear over time. We will look at these trends with a value oriented, opportunistic mindset, only committing client capital when potential rewards exceed potential losses in a meaningful way.

So please enjoy the autumn and all that it brings. Remember that as a year winds down, new opportunities are around the corner. Arrival Capital is happy to lend a hand to help you grab those financial opportunities whenever and wherever they appear.
- posted by Jay @ 1:53 PM