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A $100,000 portfolio growing to over $1 million in 3 years, powered by our model portfolio performance and the miracle of compounding. Is that possible? Yes, we did it! You will learn about it as you read further.
As you read the commentary below, please note that in MAY 2009 we stopped publishing the Small Cap Growth Portfolio and the Midcap/Largecap Growth Portfolio; the S&P 500 Growth Portfolio was stopped in OCTOBER 2007. The S&P 500 portfolio was a proof-of-concept portfolio to demonstrate that one can pick stocks within the 500 stocks of S&P500 and significantly outperform the S&P500 index. Our methodology and stock-picking worked and just like the Small Cap Growth and the SMID Smallcap/Midcap portfolios, the Model S&P 500 Growth portfolio outperformed the index handsomely over 2+years of its existence. The Smallcap Growth and SMID Growth were stopped in 2009 due to logistical and personal reasons.
We have resumed publishing the Smallcap Growth Portfolio since Jan 2012, and our methodology continues to demonstrate that with strict discipline it is possible to significantly outperform benchmark indexes in most market situations. The SMID Growth was resumed on Jan 2013 till Oct 2014.
Performance is greatly influenced by the stage of economic cycle. The opportunities earlier in a new economic cycle are significantly more than in the later stages. However, we believe and have demonstrated that the opportunity to significantly outperform the market indexes is present in all stages of the economic cycle.
The performance of our model portfolios has been strong, significantly outperforming the respective benchmark indices as well as the stated objective of the particular model portfolio. Stock market performance means rate of return on investment. However, the numerous ways that the investment returns are calculated can significantly affect the final outcome and lead to inappropriate claims and a distorted picture for investors. It is our belief that “Unless you Commit, you Cannot Count.” So investments on which returns are calculated must be explicitly part of a recommended weighted portfolio and not simply appear on a ranking list of 50 or 100 stocks. Similarly it should be disclosed if the returns are being annualized or are they actual returns; whether Margin is being used to leverage up the capital base and enhance returns or is the capital limited to cash capital only and no margin; whether the gains are being reinvested thus increasing the size of the investment or not reinvested; whether the returns are risk-adjusted or not, etc. We have tried to be clear and transparent about how we calculate the performance.
Our Performance is the rate of return on the Initial Portfolio investment made at the beginning of the year. The difference between what you start the year with and what you end the year with is your annual Return. We calculate the performance weekly and update it along with our portfolios. The performance table below shows our return on a $100,000 Model Portfolio. The gains from prior year and gains during the current year are NOT re-invested.
WEEKLY MARKET COMMENTARY
| 2015 - August 24
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2015 Performance -> Smallcap Growth +13% Vs. Russell 2000 -4%
The markets have rapidly descended into a correction for a few key indexes, as concerns have mounted regarding the timing of the Federal Reserve rate hike and its global implications particularly for emerging markets, the slow-down in the Chinese economy, and a meltdown in the commodities prices led by oil.
The central player on the global stage when it comes to economic and monetary policy remains the Federal Reserve. We had postulated at the beginning of the year and reiterated at the beginning of the second quarter, that the best strategy for investors is to remain on the sidelines toward the end of the second quarter and much of the third quarter as the Fed's decision cycle reaches a climax in the September/October timeframe.
Consequently, our portfolio subscribers have been in Cash or holding minimal positions during this volatile period. The current weak environment will be punctuated with sharp, snapback rallies. We will recalibrate our portfolio to take advantage of such opportunities within an acceptable risk framework.
As we had outlined in the initial reports, we believe a turnaround shall occur in the October/November timeframe, post a potential change in Fed policy. The first rate increase is important, and once investors realize the shallow curve of rises thereafter, the market will be judged more on its fundamentals which shall support a rise.
In the end, the US economy is the only major one to show consistent growth without major stress points. At this time, we continue with our investment strategy laid out at the beginning of the year, and will modify, if required, based on emerging data points. We remain in cash.
Small Cap Viewpoint for 2015
April 01, 2015
The small caps had a relatively better first quarter compared to their larger market cap peers. As we had noted in our earlier commentary on January 1, 2015, small caps are poised to outperform in the first quarter and for the year, based on economic and policy reasons.
With the first quarter behind us, the small cap gauge Russell 2000 index, after over a year of relative sub-par performance, not only kept pace but outperformed the larger indexes. The Russell 2000 closed the quarter with a 4% gain compared to a 3.5% gain for Nasdaq Composite and a subdued 0.4% gain for S&P 500.
Nonetheless, going forward the investment landscape is tricky and counter-intuitive as the financial markets encounter a highly unique situation.
The US currency has witnessed a strong and rapid rise versus a basket of key currencies based on the potential for rising US interest rates, and a deeper monetary policy loosening in the Eurozone region and Japan. In addition, in times of uncertainty the dollar remains a currency of choice, and we have witnessed intense uncertainty over the past six months in terms of the Ukraine-Russia crisis, and the oil meltdown. A surging US currency is a harder event to manage for larger cap companies which typically have a higher proportion of non-US revenues that are exposed to foreign exchange [FX] conversion risk, along with sluggish international growth in affected regions. Small caps generally tend to be much less exposed to such FX risk. In addition, the domestic economy is steady and growing relative to major global economies, which assists the small caps as well.
A major unknown remains the timing of the first rate increase. Economic data clearly indicates that the job market is recovering and growing steadily, while at the same time consumer spending has been lukewarm recently as demonstrated by the retail sales. We believe that the Federal Reserve will be cautious in shifting its policy to even take a longer wait-and-see approach, particularly as inflation, including wage inflation, is well within bounds. The Federal Reserve Chair Janet Yellen has clearly stated her predilection for the first rate increase to occur sometime this year. Consequently, our anticipation has moved forward from an early 2016 raise to one that can occur in late 2015 - during September or October meetings. We believe an expectation of a rate increase as early as the June 2015 meeting is fairly aggressive.
The market is dealing with a state which has been rarely encountered earlier. This is not a situation of a straight-forward 25 basis point rate increase, but is more nuanced as a major policy shift occurs after 7 years of a zero interest rate policy. The exceptional liquidity-driven monetary policies and their prolonged term, initiated to spur the economy from the Great Recession, were absolutely critical but have also distorted the traditional risk-reward framework. With zero interest rates, even a portion of the conservative risk-free money has sought returns by assuming risk through investing in equity markets, thus contributing to its rise. There exists a large demand for risk-free or low-risk investments with some return, as a rapidly growing number of baby-boomers are crossing the retirement age - nearly 10,000 every day. But thus far the zero-interest rate environment has not provided the traditional combination of security and interest income on deposits and related instruments. A shift in monetary policy or a clear indication of when it shall occur, will initiate or perhaps accelerate the shift of such risk-averse money from the financial markets.
One would suspect that there is also a propensity amongst the risk-averse investors to increase their savings rate to offset a zero-interest rate environment, as bank returns are very nominal and will remain so during the early term of a policy reset. The personal savings rate has inched higher during 2014, as per the Bureau of Labor Statistics, and reached 5.5% at the end of 2014. Although the data is volatile, the closing months of 2014 saw a spurt from 4.5% during October. Perhaps the savings at the gas pumps from the oil-meltdown briskly found their way to the bank accounts and stayed there, instead of fleeing into the cash-registers of retailers. This tendency appears to contribute towards keeping the brake pads for consumer spending rubbing the ground for now. Thus the economic cross-currents, with steady job growth combined with weaker spending and similar such contrasting examples, can bolster the case for a push-out of a rate increase beyond the June timeframe.
Prognosticating on the interest rate direction is an exercise that has potentially high-value, but unfortunately such forecasts mostly have a record of low-accuracy. With a high probability of an interest rate rise this year, barring some unforeseen economic issues, what is more important to understand is how the markets react post a rate increase. In our anticipation, besides an assuredly higher-volatility environment, it is challenging to predict the market reaction and the global implications this time around, along with the ripple effects thereof. Historical templates of market reaction to policy shift may not sync well with the current state. Perhaps it may just turn out that the thought of the medicine is worse than the medicine itself. We do not know yet.
However, it is important to realize that once the Fed achieves an interest rate policy shift, it can well-afford to wait till 2016 for further increases based on economic conditions. The Fed clearly recognizes that future adjustments will not be on a preset pattern. The risk of rapid rate increases is too high and clearly the Fed is well-aware of it. We shall most likely witness a 3 to 6 months prudent pause after the first rate increase.
Well, what does it all mean for the small cap segment of the stock market.
We anticipate second quarter to begin on a positive note as the mid-year rate hike consensus is pushed-out based on contrasting economic news. As we approach the mid-year, one would anticipate heightened volatility as rate increase expectations are factored in for the September and October timeframe. During this period of enhanced volatility, the small caps will not remain insulated. It may be a prudent step for small cap investors to be only partially invested or be on the sideline during this 4 to 5 months period from late June in the second quarter to early November in the fourth quarter. During this period, downside risk will remain elevated, particularly due to the uncertainty from unique circumstances, and a sharp correction will remain a legitimate possibility. Limited exposure to the market during the period will allow for a more thoughtful strategy after witnessing the ramifications of the first rate increase.
We anticipate a late fourth quarter rally, based on a stand-back Fed, following the first increase, leading to a shifting down of the median estimate of main rate by the Fed officials from their March expectation of 0.625% to 0.25%, and continued economic growth. This rise will be sufficient to keep indexes in positive territory for the year. Our expectation of small cap outperformance during 2015 remains unchanged.
Of course, markets have a way of writing their own narrative. None of this forecast may come true, and rates may not rise at all during 2015. Consequently, we will have to recalibrate our judgment as market conditions evolve.
We ended last week with a small cap portfolio performance of 5% compared to Russell 2000 rise of 3%.
Small Cap Viewpoint for 2015
January 01, 2015
The small cap stocks put in a forceful effort in December, pushing decisively into positive territory for the year and assisting the lagging small cap Russell 2000 index to finally record an annual and all-time high. Broader indexes measuring the performance of larger caps had been recording annual highs months earlier. Rising small cap markets typically indicate a growing appetite for risk. A favorable disposition to assume speculative risk is an important prerequisite for small caps to even outpace the larger segment of the market.
Market volatility has been significant in the final months of last year, as speculation on interest rate policy and the sharp decline in oil prices enhanced market uncertainty. As economic growth indicators have strengthened further in December, so has the market’s confidence to overcome the systemic risk related hesitancy.
Nonetheless, an over 3% gain eked out by Russell 2000 in 2014, reflected a dichotomy of performance between small caps and large caps, which reported stronger gains for the year as reflected by the 11+% gain for S&P 500, and an over 13% gain for the Nasdaq index. Graycell’s small cap portfolio eked out an over 7+% gain to surpass the benchmark Russell, but still a relatively mild performance hurt by the volatility in the final months.
Heading into 2015, we feel small caps can catch-up on this performance gap and are positioned to outperform the large cap indexes. The oil price meltdown is behind us, and any further price changes in either direction is more likely to be incremental rather than abrupt and harsh. As unexpected volatility subsides, it allows small caps to outperform against the backdrop of continued strength in the US economy. Nonetheless after a rapid rise of the Russell 2000 index, we expect to encounter a period of consolidation in the early part of the first quarter, and thereafter small caps should outperform for remainder of the first quarter.
During the second quarter of the year, we believe the speculation of a rising interest rate environment in the second-half of the year should create a headwind as markets factor in a major shift in the position of the Federal Reserve. The run-up stretch to the resetting typically results in a highly volatile situation, even though interest rates will remain below normal long-term levels. As the market sits on this edge of uncertainty, it can affect small cap stocks as well along with the broader market. A quick pull-back and perhaps a correction can be set up during the second quarter.
Once a policy resetting increase is accomplished, or evidence mounts for a deferral to 2016, we believe fundamentals will ensure that indexes regain higher ground during the second-half.
It is our expectation that interest rates will remain unchanged for 2015, and the first increase shall occur in early 2016. Our deviation from the consensus is spurred by a global economy which lacks durable forward motion in key geographical regions – Eurozone, Japan and China. In addition, the global consumption slack and an oil-leading commodities slide exerts disinflationary forces which will provide significant flexibility for the Fed to choose a path of continued restraint. The downside of a premature increase is substantially profound, particularly if it stokes deflationary tendencies, compared to the downside of a delayed increase. It is relatively easier and less disruptive for the Federal Reserve to delay a change in policy stance out of an abundance of caution, and subsequently move higher at an initially faster pace, then it would be to retreat following a premature increase.
Small caps are better positioned in 2015 than larger caps, since they corrected deeper and consolidated longer during 2014, and are higher correlated to domestic economic growth compared to global growth. At the same time there are some key systemic risk events that are scheduled to occur this year, notably the interest rate policy and possible reverberations from a continually struggling Eurozone. Effective risk management and disciplined small cap investing, with shrewd selection, can deliver another outperforming year for the portfolio in a market that will be relatively frugal in its returns, we believe of 5% to 10%, compared to years past. This is our opinion at the beginning of the year, and we will calibrate our judgment as market conditions evolve.
Nov 03, 2014
T he month of October lived up to its reputation of being a highly volatile one. The larger indexes finally capitulated to mark a sharp correction, directionally matching the Russell 2000 which had been in a steady decline since September. Howsoever short-lived the decline was, it did mark the Correction threshold, which is a decline of at least 10%, with the Nasdaq at its lowest level correcting 11%, and the Russell 2000 down 14%. After a sharp correction, the even faster rise in the indexes was breathtaking as they regained all their losses and headed into positive territory recapturing the YTD gains prior to Correction. After many months the Russell 2000 entered positive territory, while the Nasdaq and S&P500 had chunkier gains of about 10% as October came to an end. The economic dynamics remain favorable from the interest-rate situation to the economic metrics, and geo-political concerns like ISIS, Ukraine and Ebola are on a simmer setting rather than a fast & furious one. We have raised our exposure to 60% and will further calibrate our level as the market situation warrants. Graycell Advisors View Archive...
Our investment philosophy is fairly simple. Minimize Losses and Maximize Returns, while using the power of compounding to further grow the portfolio over time. Sounds like common sense. But this philosophy is one of the hardest things to learn and practice in the investment process. In the near-daily pursuit of best possible returns and the heat-of-the-moment investment decisions, investors often willfully or unwittingly disregard the most common rules of investing. Often times in a hard situation, when emotions are running high, these rules are the first casualty.