Arrival Capital -- Market Commentary
Tuesday, July 03, 2012
Q3 2012 Investment Update
It has been almost five years since the first stirrings of the financial crisis began. In that time financial markets have moved violently, first down, then up, though not back to the highest levels of 2007. Beyond market values something else changed five years ago — the faith investors had in the structure of markets and financial systems. Once this faith gets eroded, as it has, it is not easily rebuilt. Thus, even as economies and markets have stabilized, there is still an enduring fear of the abyss of a sudden collapse that has kept investors fearful and tentative, on the sidelines, or with a hair-trigger to pull out of stocks as soon as uncertainty hits.
In the first quarter of 2012, it looked like faith was returning in the structure and stability of the economy and financial markets. However, in the second quarter, fear and skepticism returned, first over the situation in Europe, then over economic slowdowns in emerging markets and here in the United States. Once again, investors shot first and asked questions later, as markets in the US fell almost 10%, only to rebound in the last few days and weeks of June. Clearly, market psychology remains fragile and this must continue to inform our decisions as we seek to build financial portfolios made to last and prosper over the long term.
It remains hard to be a sound investor with so many crosscurrents, political and economic, blowing across the investment landscape. Great sums of money swirl around like Spring twisters, alternatively picking up and throwing individual stocks forward or hurling them back down, seemingly without regard to fundamental value. An investor looking for value must keep their head down yet at the same time pick off investments selling for a fundamentally good value and place them in a well-diversified portfolio structured to preserve wealth to the extent possible in market storms yet generate wealth over the longer term. In 2012’s second quarter, energy stocks, for example, got cheaper even as the United States will almost undoubtedly move toward using its newly found and recoverable natural gas and oil deposits to promote energy independence. Energy stocks might ding short term performance but added to a long term portfolio promise inflation protection and an entry point to meaningful gains in the years ahead.
Industrial and certain technology stocks also declined in the second quarter, even as they have the cash, technical know-how and intellectual property to see them through tough times and come out on top in the end. It becomes a question of what price to pay for a company that should be worth so much more in the future, if only governments get their respective houses in order, or at least not be a drag on the enterprising instincts of the private economy.
Arrival Capital and its clients live in the real world, of course, and must invest according to what is going on now and not how we hope it will be in the future. That is why in addition to creating a portfolio of value based investments, we look for other ways to enhance stability to the extent possible. We have kept more cash then usual in client accounts to serve as ballast in a stormy environment as well as provide funds to invest as compelling opportunities arise. We also look beyond stocks, to bonds, REITs, MLPs, timber and certain commodity and international ETFs to provide further diversification to accounts and prepare for various macro-economic outcomes, such as high inflation, or a new recession.
Arrival remains ready to serve client financial needs in any environment. Please contact us at jay@arrivalcapital.com with any questions and have a terrific summer.
