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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 - January 01
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Ad Tech industry - Rubicon Project and Criteo articles by TC can be viewed here and
Smallcap Viewpoint 2015 by TC can be viewed here
SaaS industry article by TC can be viewed here
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2014 Performance -> Smallcap Growth +8% Vs. Russell 2000 +4%
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.
(contributed by TC) Graycell Advisors
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
Oct 13, 2014
Our 50% smallcap portfolio position was reduced further last week as we were stopped out of 4 more positions. The growing debate on the Federal Reserve's higher probablilty of a mid-2015 rate increase has unnerved the market. What investors are appearing to ignore is the struggling Eurozone economy, the slowing Chinese economy and the fragile Japanese economy. We feel strongly that the Federal Reserve will remove the bond-buying stimulus by end of this month, and thereafter enter in a period of extended pause as it does not raise interest rates in 2015, with perhaps a very small possibility in Q4-2015. We have minimized the volatility damage as we entered into a return preservation mode. We will recalibrate our position based on market conditions and opportunities. Graycell Advisors
Sep 29, 2014
We have not been replacing closed positions completely and are at 80% invested in both smallcap and midcap portfolios, reflecting a more cautious and calibrated approach for a multitude of reasons, with the divergence between smallcap and largecap indexes being one of the pause-inducing reasons. Graycell Advisors
Aug 25, 2014
The large indexes continue to hold ground and hover near highs. Nonetheless, there is a certain lassitude creeping into the market, demonstrated by the lack of volume. This can be explained perhaps to a meaningful extent by the typical August exit of investors to bask in the last few weeks of Summer sunshine. We're not of the view that because the market has not corrected 10% in the last 35 months, when median duration is 10 months since WWII, that it's a reason for the market to slide. Nonetheless, the absence of vigor in the steady highs and the global economic concerns relating to China, Japan, Eurozone should provide for pause and more scrutiny of data come September. More disconcerting to us is the dichotomy between the performance of our smallcap benchmark (Russell 2000) and the larger indexes (S&P 500, Nasdaq). The S&P Smallcap 600 Index trades at 26 times reported profit, not suggesting a risk flight. But nonetheless this ongoing diversion can be a precursor to shrinking risk appetite, and the first sector to be affected will always be the more-speculative smallcap sector. Thus Russell 2000 trails the Nasdaq and S&P500 materially this year. We are not fully invested in our smallcap portfolio at this time. Graycell Advisors
May 27, 2014
The stock market has begin to show a bit of improving appetite for risk, as demonstrated by the performance last week of the smallcap segment, as well as the technology and biotech sectors. These are still initial signs, and further progress needs to be made before a new rising trend may emerge from what has been a market with a 3-months downward bias. It must be noted that this period of 3-months has been the longest period of consolidation over the past 15 months, after a similar duration pull-back in Oct/Nov 2012. A benign interest rate environment for an economy that is steady but neither too hot nor too cold, can continue to provide the underpinning for a renewed market advance in the months ahead. At this time we are raising our invested level in the portfolios. Graycell Advisors
May 12, 2014
There is a certain unease in the market. The economic growth is steady, interest environment is undisturbed, and earnings have been generally not disappointing. About two-thirds of the S&P 500 companies have outperformed on earnings estimates and nearly half on the revenue estimates. No wonder the S&P 500 return still remains positive for the year, and the index is about 20-points away from a new high. Yet at the same time the technology and biotech stocks, which have been leading the momentum, have had sharp declines. Industry leadership is rotating and Oil was the sector of choice for much of April and early May. That leadership sector suffered this past week. Economically-sensitive cyclical stocks are doing well, like Auto Parts. But rising markets require leadership or at least stronger participation from high-risk sectors like technology, biotechnology, oil, and not just cyclicals and defensive durables. It's a market situation which is looking for the next crisis. The market is consolidating and it's not a bad situation after strong 2013 returns. At this time we remain prudently cautious and around 50% invested in our portfolios, and will further calibrate our outlook based on market conditions. Graycell Advisors
April 21, 2014
The market showed constructive action over the past two weeks. After declining ~10% on the Nasdaq and Russell indexes, the market inched higher past week. A retest may occur. At this time, the market is taking the events occurring in the Eurasian theater in its stride, perhaps even factoring in somewhat a ratcheting up of additional sanctions on further incursions by the Russian forces. Nonetheless, this issue remains a wildcard with potential for raising volatility. Earnings season is in full swing. The earnings appear to be providing some floor to the market. A pullback has allowed stocks to consolidate. We have raised our portfolio invested level meaningfully at this time, though not fully invested, and remain watchful. Graycell Advisors
March 31, 2014
The market shows signs of stress and fatigue. Judging by the recent past, the markets have remained resilient and this could be once again one of the shallow ~5% pull-backs we have witnessed. The sharp swings hurt our model because of our loss-limit approach. Consequently, we will pause for a more favorable environment to be fully-invested. At this time, we remain partially invested in smallcap and midcap portfolios. Graycell Advisors
March 24, 2014
The market is reflecting the risk from a shift in the yield curve expectations, based on recent comments by Fed Chairwoman Janet Yellen suggesting rates will begin to rise from 0% sometime in second-half of 2015. That's a long time from now. But risk calculations are highly sensitive to interest rate expectations. The stock market did witness a sharp pullback in one of the high-risk/high-reward sectors of the market - biotech. We remain cautious on Russian designs, the potential for escalation in that theater, and the recalibration of the yield curve expectations. Nonetheless, the overall economic picture remains steady. We remain watchful and invested at this time. Graycell Advisors
March 19, 2014
Vladimir Putin's message about lack of Russia's interest in breaking up Ukraine and in any further annexations, was soothing to the financial markets. The situation may not be resolved but the words suggested that Russia won't escalate matters further with additional annexations. Nonetheless, the situation may not be entirely controlled by Russia and it's not hard to imagine a situation where groups or militia can aggravate the situation. Furthermore, there is a risk of escalating sanctions and retaliation. The markets seemed to have shrugged off the Russian scenario for the time being based on faith in Putin's comments, and continue to focus on steady economic growth. Our investment models also take cue from the market, and we're consequently adding positions and have shifted towards a more fully invested posture. Graycell Advisors
March 17, 2014
The rapidly deteriorating situation in Eastern Europe is causing intense volatility that has caused a disproportionately high triggering of Stop-losses in our smallcap portfolio. As we had mentioned in our previous commentaries, the die has been cast. Russia has anchored down on its position, and even appears willing to double-down with additional incursions and annexations. The Western world will be forced to react in what will only be disruptive to global trade and financial markets. At this time we remain cautious and have reduced our market exposure meaningfully. The overarching economic trends have thus far remained favorable. But a prolonged environment of hostility, trade sanctions, and a cold-war like geo-political situation can accentuate investor anxiety and erode confidence. In our opinion, there is a greater probability of a curb on further stock market gains near-term. Nonetheless, we will be happy to change our viewpoint if the markets briskly overcome this heightened level of anxiety. Graycell Advisors
March 10, 2014
The Russian Gambit continues and the risk remains elevated for the situation to further exacerbate, particularly given the minimum provocation that may be required. The markets were resilient last week and inched up to multi-year and all-time highs. We remain cautious but invested, with strict stop-loss points to protect the downside as per our disciplined investment methodology. Graycell Advisors
March 03, 2014
It's not the economy or the Federal Reserve anymore that are causing investor anxiety. It's the Russians that are bubbling-up the brew in the Cauldron of Uncertainty. And Markets don't like Uncertainty. The broader ramifications on global trade of a tense situation in Eastern Europe can be substantial if events turn worse. Overall, the market fundamentals are favorable. But global uncertainty and risk from the "Russian Roulette" can cause substantial volatility, and cap the cycle of gains for the short-term - 1 to 3 months. Of course a quick resolution, howsoever unlikely an outcome at this time, can reset things back to the original course. For now, Alea Iacta Est - the die has been cast. In our opinion, the next events in the Euro-Russian theater have a higher probability of exacerbating the situation, rather than ameliorating it. If that's the case, then the associated risk still has to be factored into the market. Hopefully, the clouds of anxiety will dissipate on the horizon itself. Our portfolio turnover has been above usual thus far, due to company capital raising activities and market volatility, which has caused unusual triggering of Stop-losses. In light of developing situation, at this time we have taken a more cautious posture by reducing the portfolio exposure to 80%. Graycell Advisors
February 18, 2014
The financial markets have been acutely volatile over the past three weeks. The US stock market has intensely fluctuated, but not unusually so once framed in the context of a lengthy cycle of appreciation. A pullback and consolidation is painful but at this time not worrisome as a broader shift of a multi-year upward trend. As we had mentioned earlier, the stock market has to unhinge itself from the dose of additional stimulus and revalue on the basis of low interest rates, steady economic growth and company fundamentals. Earnings season has been overall favorable, with 70% of S&P 500 companies reporting better than expected earnings and over 50% better than expected revenues. We are not perturbed by the correction so far, and there exists many attractive possibilities. The volatility however has caused above average turnover in the portfolios, particularly around equity raises, only to see the stocks climb back much higher. At this time, we are 80% and 70% invested in our smallcap and midcap portfolios, respectively. Graycell Advisors
January 27, 2014
The market needed a reason to pullback after its relentless and consistent march to multi-year highs. The reason was a tremor in the emerging markets with weak fiscal balance sheets. The reason to trigger the volatility was important enough to deserve its own name - "The Emerging Market Contagion." A pullback always helps in curbing reckless enthusiasm, and allows investors to reassess the prospects. We feel the US economy is steady in its growth, and economic growth prospects is what the eventual market valuations have to be based on. In the meantime, the steady economic growth prospects on the horizon will encourage the Federal Reserve to accelerate the withdrawal of the monetary stimulus drip or tapering. Such withdrawal begins to constrict the easy money cycle worldwide predicated on over-easy monetary policy in the US. As money begins to find its way back to the stable growth markets - we would put US at the very top of this list - after fleeing the weaker emerging economies, it provides a further floor to the consolidation that can be experienced in the US markets. Of course, China remains a question mark. But it's hard to doubt an economy where the regime has proven to be adept at restraining any economic slowdown. At this time, we are prudently cautious but fully invested with continuing tight stop-loss limits. Graycell Advisors
January 02, 2014
The year 2013 will go down as a Year that brought the investor back into the market after a difficult prior decade. Smallcap benchmark Russell was up 37%, Nasdaq surged 38%, and the S&P 500 gained 30%. All statistics pointed to a very strong 2013. Strong trends don't change because the year changes. A benign Fed policy, steady economic growth, higher consumer spending and a better employment picture are underpinning the rise in financial markets. The sharp rise in valuations may suggest that the market is approaching a consolidation or a normal pullback phase. But the overall trend still points higher for 2014. Consistent investment returns are generated by being attuned to the market, and calibrating our opinion and positions based on market conditions. At this time, we remain fully invested in our portfolios. As we do at the beginning of every year, we close out all our incoming positions from prior year, and start fresh with current prices. This allows new subscribers and investors to invest in the model portfolio at the current prices. 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.